萬機儀器 (MKSI) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MKS Instruments fourth quarter earnings conference call. (Operator Instructions). This conference is being recorded today, Wednesday, February 4th, 2009.

I would now like to turn the conference over to Jonna Manes, Director of Investor Relations. Please go ahead, ma'am.

Thanks, Brandy. Good morning, and thank you for joining our earnings conference call. Earlier this morning, we released our financial results for the fourth quarter of 2008. You can access this release at our website, www. mksinstruments.com. As a reminder, various remarks that we may make about future expectations, plans and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995, Section 27-A of the Securities Act, and Section 21-E of the Securities Exchange Act. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those accessed in today's press release and in the Company's Annual Report on Form 10-K for the fiscal year ended December 31st, 2007, and most recent quarterly report on Form 10-Q, which are on file with the SEC.

In addition, these forward-looking statements represent the Company's expectations only as of today. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligations to do so. Any forward-looking statements should not be relied upon as representing the Company's estimates or views as of any date subsequent to today. And now I'll turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thanks, Jonna, and good morning everyone. Thank you for joining us on the call this morning. I'll give an overview of the fourth quarter, the year and our outlook. Ron Weigner, our Chief Financial Officer, will review our financial results and guidance, and then we'll open the call for your questions. Fourth quarter results were slightly better than our revised guidance issued on December 23rd. We generated $125 million in sales and break-even profitability on a non-GAAP basis. We saw a sharper than expected drop in sales to semiconductor OEMs, as spending for semiconductor capital equipment declined in a rapidly weakening global economy. While our total sales declined 21% quarter over quarter, sales to these OEMs declined 34%.

In this uncertain and challenging environment, we continue to take actions to lower our costs. We continued to reduce head count, took six days of shutdown in addition to the holidays, and further reduced nonessential spending. Ron will discuss these fourth quarter actions later in the call. Sales to the fabs increased 6% quarter over quarter, primarily for spares and room ionization systems to reduce airborne contamination and reduce yield in a major fab expansion. After three strong quarters, our non-semiconductor business was not immune to turmoil in the global economy, and sales to non-semiconductor markets declined 15% quarter over quarter. Non-semi business represented 50% of fourth quarter sales. Our technology is essential in many applications, and our strategy is to leverage our technology breadth and leadership in high growth markets such as solar, and provide process critical technology in these and other markets.

Solar is a growing and evolving market with opportunities to leverage more of our technology portfolio. For example, after gaining a key design win early in the year, in the fourth quarter we provided DC power generators for our solar manufacturer's thin film solar process. This is the same manufacturer that selected our residual gas analyzers for process monitoring after preventative maintenance to avoid costly troubleshooting. We generated record solar sales in the third quarter, and our fourth quarter solar sales were a little lower at $14 million. We also saw modest growth in sales to key medical equipment customers in the quarter.

Now, turning to the results for the year, sales declined to $647 million on sharply lower demand for semiconductor capital equipment, and non-GAAP earnings were $0.82 per share. 2008 was a challenging year for semiconductor capital equipment, as turmoil in financial markets accelerated a cyclical industry downturn. However, in a year where some analysts are estimating a decline of as much as 30% in semiconductor capital equipment spending, our total sales declined 17% year-over-year. Our focus on high growth markets and success at diversifying our business mitigated the impact of the downturn on MKS. While sales to the semiconductor market declined 31% year-over-year, sales to other markets increased 11%. Our long-term goal is to achieve a 15% compounded annual growth rate in non-semiconductor markets. As these sales grew to $280 million in 2008 from $149 million in 2005, we are exceeding our goal with a 23% compounded annual growth rate.

Solar is one of our fastest growing markets, as shown by the fact that our solar sales almost tripled year-over-year to reach a record $49 million. As we continue to penetrate this market in 2008, we doubled our solar customer base to over 120 customers. In addition to a broad customer base, our technology leadership and product performance is driving growth in solar, as demonstrated by design wins with RF and DC Power Systems, reactive gas generators, residual gas analyzers and our pressure flow and vacuum management technologies. We also set a record in our service business, which extends across all markets. Service includes repairs to a large install base and service contracts, but not spares.

We invested in additional service capability, as our install base increased, and our service business grew 20% year-over-year to $86 million. As the semiconductor market declined, we took actions to reduce our costs; and as the economy weakened, we cut costs further. In the second half of the year, we implemented a 10% global workforce reduction and reduced our operating expenses, including taking shutdowns, reducing nonessential spending, as well as reducing executive officers' salaries and board members' fees. Maintaining a strong cash position is important in difficult times. We generated $90 million in cash from operations and ended the year with $260 million in cash and investments net of debt.

In summary, the fourth quarter and year were challenging for MKS. As we enter 2009, global economic uncertainty is prolonging a steep downturn in the semiconductor capital equipment spending, and there is greater uncertainty about the business outlook in the non-semiconductor markets as well. In addition, our visibility is quite limited as a turns business with short lead times. In this environment, we estimate first quarter sales could range from 75 to $95 million. We are working to drive down our costs to align more closely with the expected lower business levels.

In January, we reduced our global workforce again for a total reduction of approximately 20% since the end of June 2008. In addition, we expanded our salary reduction program, and we will take a week shutdown in the first quarter. The business environment may remain challenging for some time. Excluding shutdowns and other temporary cost reduction actions, our goal is to reduce our non-GAAP net operating cash income breakeven to approximately $110 million and our non-GAAP net operating income breakeven to $123 million as we exit the second quarter. Looking longer term, we are evaluating further opportunities to reduce our breakeven, and Ron will provide details later in the call. We cannot predict when semiconductor capital equipment spending will rebound and some analysts are forecasting that spending may decline 40 to 50% in 2009.

While we continue to focus on gaining share at semiconductor OEMs and fabs, we expect that our business diversification will continue to reduce the impact of a prolonged industry downturn on MKS. We see opportunities to build on successes. We currently expect our solar sales to grow in 2009, based on continued strong orders from major solar customers in Asia. We also expect to benefit longer term as the solar market gradually transitions to thin film processes to reduce cost per watt. We can leverage more technology in thin film processes such as amorphous silicon, where our dollar opportunity is three to four times higher than in crystalline silicon processes. There are opportunities in other markets and applications. For example, our infrared gas analysis technology is used to analyze greenhouse gas emissions from diesel engines and automobiles, as well as off-road construction equipment. This business could benefit as tougher environmental emission standards take effect, and as investments in roads and bridges is implemented to bolster the US economy.

We have discussed how we adapted our gas analysis technology to win a Homeland Security contract to detect and analyze chemical warfare agents in various environments. There may be additional opportunities for this application. Our business diversification provides some stability in a downturn, and our technology portfolio expands our opportunities in diverse markets. In addition to solar and environmental monitoring processes, we provide solutions for medical, pharmaceutical and analytical markets, aerospace and defense applications, government labs, and industrial processes that require precise process control and monitoring to improve yield and reduce costs.

MKS is well-positioned in our core markets, and we continue to execute our diversification strategy. We have a strong cash position and tight cost controls in place. We will expect more challenges ahead. We also expect to emerge from this downturn even stronger. Now I'll turn the call over to Ron to discuss our financial results and expand on our guidance.

Thank you, Leo, and good morning, everyone. 2008 sales of $647 million were 17% less than 2007 sales of $780 million. Our sales to the semiconductor market dropped 31%; but this decline was somewhat mitigated by an 11% increase in sales to other markets, primarily from increased sales to the solar market. Primarily as a result of lower volume and higher R&D, our 2008 non-GAAP net earnings decreased 57% to $41.4 million, or $0.82 per diluted share, compared to $95.6 million or $1.67 per diluted share in 2007. GAAP earnings includes special charges of net $11.3 million for an intangible impairment above normal charges for excess and obsolete inventory, discreet tax items and adjustments, a one-time foreign exchange gain, and amortization of intangibles. GAAP net income decreased 65% to $30.1 million or $0.59 per diluted share, compared to $86.4 million or $1.51 per diluted share in 2007.

Early in the year, we increased our spending to support development of products for next generation tools and for other markets. In the second half of the year, as the semiconductor industry continued to decline, we initiated actions to reduce R&D and SG&A expense. As the semiconductor market continued to soften even below our original expectations, fourth quarter sales declined 21% to $125.2 million compared to third quarter sales of $157.4 million. Sequentially, sales to semiconductor OEMs declined 34%, sales to semiconductor fabs increased 6%, and sales to other markets decreased 15%, primarily as a result of slightly lower sales to the solar market and reduced sales to the flat panel market and a variety of other markets. The sequential modest reduction sales to the solar market primarily reflects the variation in ordering patterns from our solar customers. In the fourth quarter, sales to semi OEMs represented 36% of sales, and sales to the semi fabs was 14% of sales, and sales to other markets, 50% of sales.

Geographically, fourth quarter sales in the United States decreased 18%, primarily as a result of decline in sales to semi OEMs. Sales to Asia decreased 18%, primarily due to lower sales to solar OEMs and solar customers. Sales in Europe decreased 33% as a result of lower sales to semi OEMs and sales to other markets. Sales in the US represented 55% of sales, Asia, 32%, and Europe, 13%. Sales to our top 10 customers were 34% of total sales compared to 35% in the third quarter. Sales to our largest customer, Applied Materials, was 16% of sales compared to 18% of total sales in the third quarter. Sales to contract manufacturers of Applied and other semi OEMs decreased 43% sequentially and represented 2% of total sales. Fourth quarter gross margin decreased to 35.6% compared to 40% in the third quarter. Excluding the above-normal charge for excess and obsolete inventory, the pro forma non-GAAP gross margin for the fourth quarter would have been 39.6%. The reduction in margin in the fourth quarter related primarily to volume, but was partially offset by favorable foreign exchange costs and favorable product mix.

In the third quarter, we took actions to reduce our head count approximately 5%; and in the fourth quarter, we took action to reduce our head count an additional 5%. And in these two quarters, we took mandatory time off and continued to curtail all nonessential spending. R&D expense decreased sequentially by $250,000 compared to $19.5 million in the third quarter, and SG&A expense decreased $2.9 million sequentially to $30.5 million, which included the effect of favorable foreign exchange costs and lower costs for professional fees. In the fourth quarter, our non-GAAP earnings, which exclude amortization of acquired intangible assets and special charges, was break-even compared to earnings of $8.9 million, or $0.18 per diluted share in the third quarter of 2008. This decrease in earnings is primarily attributable to a lower sales volume, which was offset by favorable foreign exchange, product mix, and lower operating expenses.

The non-GAAP tax rate for the fourth quarter is not meaningful because year end adjustments to tax expense distort the tax rate because of the small amount of income. The actual non-GAAP tax rate for 2008 was 29%. Fourth quarter GAAP taxes reflect the benefit of the retroactive R&D tax credit and other discreet items and adjustments. This quarter, in addition to the amortization of intangibles, the fourth quarter GAAP loss of $6.3 million includes a $5 million for the above-normal excess and obsolete inventory costs and a $6.1 million write-off of intangible assets resulting from a lower range -- a lower long-range product forecast for certain fab-related products. As I mentioned, in the second half, we decreased our workforce by 10% to 2,631 people worldwide. We continued to generate cash from operations, which totaled $28.4 million for the quarter and $89.8 million for the year.

Cash and investments increased by $22 million in the fourth quarter to $260 million net of debt. In order to conserve -- be conservative with our cash in these uncertain times, we did not repurchase any shares of common stock during the quarter. Day sales outstanding increased slightly to 62 days in the fourth quarter from 60 days in the third quarter, and inventory turns decreased to 2.5 times from 2.7 times. Capital expenditures of $5.1 million in the quarter were primarily for lease hold improvements in Japan to facilitate a consolidation of facilities and IT hardware to reduce systems operating costs in the future, and for the year were $14.6 million. Depreciation totaled $3.8 million for the quarter and $14.5 million for the year. We expect capital expenditures for 2009 will be reduced and could range from 7 to $9 million. Although it is more difficult to predict business levels in this uncertain environment, we are estimating that first quarter sales could range from 75 to $95 million.

At the end of January, we implemented a workforce reduction of approximately 10% to 2,370 employees. This represents an annual compensation savings of approximately $19 million. We are planning to take a one-week shutdown during the quarter. Selected employees were asked to take a 5% wage reduction. Officers and directors were asked to take additional wage reductions, which now total between 10 and 20%, and we are continuing to watch and curtail all non-critical spending. First quarter gross margin, which is primarily impacted by lower volume, product mix, and temporary overcapacity, could range from 26% to 31%. Reduction in R&D expenses primarily is related to our reduction in force, lower consulting and reduced project material costs, and could range from $16.7 million to $17.1 million. SG&A expenses could increase $900,000 sequentially and range from $31 million to $31.8 million. In the first quarter, savings are expected to be offset by less favorable foreign exchanges and normalized estimates for professional fees compared to the fourth quarter.

A special charge for costs associated with our reduction in force is estimated at $2.5 million. amortization of acquired intangible assets is estimated at $1.7 million. Net interest income for the first quarter is estimated to be approximately $1 million. We estimate that our normalized tax rate for 2009 could be 29%. However, because of the uncertainty of our 2009 results, our actual rate could vary significantly. Given these assumptions, our first quarter non-GAAP net loss could range from $12.5 million to $19.9 million or $0.25 to $0.40 per share on approximately $49.8 million shares outstanding. Our first quarter GAAP net loss could range from $15.4 million to $22.9 million, or $0.31 to $0.46 per share. Even though our expected sales level in the first quarter will be below our net operating cash breakeven level, we expect our first quarter free cash flow will be positive and could range from 9 to $12 million.

Looking ahead to the second quarter, and assuming the full effect of actions we took in the first quarter as well as other actions we plan to take in the second quarter, we believe that it is possible that our non-GAAP net operating cash break-even in the second quarter could be approximately $112 million, and our non-GAAP net operating break-even could be approximately $125 million. Our goal is to reach a quarterly non-GAAP cash operating income break-even level of $108 million and a non-GAAP net operating income break-even of $123 million as we exit the second quarter. The operating break-even level excludes the benefit of mandatory time off, wage reductions, and certain other temporary cost savings measures.

We will continue to review and take action to reduce all areas of spending, reduced purchase materials costs and warranty costs; and looking longer term, we are evaluating further opportunities to reduce our break-even, such as consolidation of functions, consolidation of facilities, reduction of information technology operating systems costs, and further transfer of manufacturing to low cost countries. This concludes our discussion, and now we'll be able to take some of your questions.

Operator?

Thank you. (Operator Instructions). And our first question comes from the line of Brett Hodess with Merrill Lynch. Please go ahead.

Good morning, Leo and Ron. How are you doing?

Great.

Good, thank you.

Good. Listen, couple of questions. First, I've got -- when you look at -- you commented earlier about solar could grow this year, and I was wondering if you could -- and it sounds like that's going to be driven by thin film -- but I was wondering if you could -- if you have any size that you think it's going to grow to or rate you think it's going to grow at this year?

Brett, this is Leo. Thanks. I think at this point, it's not quite as clear. I think obviously there have been discussions about the credit market tightening, and would that have an impact. We haven't really seen that yet. We're scrutinizing -- we got 120 customers, many of them new. We're looking at each of those and how they seem to be faring. On the other side of it, the order rates still look pretty good, and we've had some good success in the past several months and so we're still positive on it; and then the current administration seems to be focused on alternative energy and solar being a piece of it. So that could give us a boost if there's some investment or credits in that area. So I think -- I would like to give you more color, but right now it's a little difficult to do that. But I think we're still expecting the business would grow.

Okay, and on the semi side, do you think that your customers' inventory are pretty low now so that your business sort of matches whatever they are seeing in shipments? Or do you think that they are -- are they in a process do you think of taking down their inventories lower given the harsh landscape? How do you see that side?

Well, I think the same benefit we get on the upturn -- every time their rates go down, you know, at least the theory is that there's an inventory consumption and they don't need to buy as much to cover the shipments. And I would say over the last couple of quarters, they keep announcing further expectation of reduction quarter to quarter and so, you know, for me I believe we're still in that process. So I would expect at some point in time, even if things don't change drastically, we get some benefit out of that. So again, with the idea that each time they drop their rates, there should be some additional consumption of inventory, and it takes a while to do that, just like it takes us a while to do that. But then we get some benefit out of it. So I think we're still in that mode somewhat.

One last one for Ron. Ron, if you look at the cost reductions that you've been making over the last couple quarters and going into this quarter and in 2Q, can you sort of -- do you have a feeling for us to categorize how much of the cost reductions are temporary things, you know, like the shutdown days, salary reductions and things like that, versus sort of what percentage is more permanent structural changes so that we can sort of judge what the, you know, what the leverage will be as we come back out of the downturn in terms of what will add back really quickly and what will stay low?

Yes, I mean what -- what we were saying is, you know, exiting the second quarter, we've expected our breakeven to be -- our goal is to hit a breakeven level of about 123 million. And that would exclude any time off and some other things that we are doing that are lowering the current breakeven level. Those other items could have an effect maybe of 3 to 4 million reduction in the -- in that 123 million if we continue those actions.

Below that.

Below that.

Okay.

So, you know, and even at that 123 million, Brett, that would probabl -- you know, you get a gross margin maybe around the 38% range, which would mean that the operating expenses would be in the 47 million range if you did that based on that calculation. But obviously, we're going to look at ways to continue to reduce our operating expenses and reduce our gross margin.

I understand. Thank you.

Thank you. Our next question comes from the line of Jay Deahna with JP Morgan. Please go ahead.

Thank you very much, and good morning. The first question is, given the severity of this downturn, as you look across your various businesses, do you see any smaller competitors that perhaps might be on the ropes? It's my understanding that some of the big semi conductor OEMs are starting to classify their suppliers in different buckets based on risk of them potentially going under, and I'm wondering if you're seeing any opportunities to gain shares as a result of that, or if you're starting to get inquiries of your big customers because of weakness or potential bankruptcy at some of your competitors.

I would say that we have seen some indication of what you described. We've had some opportunities to quote some additional business that was shared with other suppliers. You know, I think that -- I haven't seen it at a panic level or anything like that, but there's some indication. And I think as you said, sort of the customer base of us is -- in the semi side, at least -- is spending a lot of time looking at their supply base, looking at risk in it. And obviously, with our cash position and the way we manage the business, we become even more attractive in this environment. So -- and we're -- in all of these product areas, we're typically the number one choice or number two in the market from market standpoint, so it puts us healthy cash position, healthy business position compared to a lot, and then we're also preferred by their customers, and so that helps us out. But we have seen some indication, although I wouldn't call it a large amount of concern at this point in terms of actually people going under or getting lots of opportunities. But we're starting to see those opportunities.

I see. And on your solar business, you indicated that if there is growth in the business this year, which right now you think there might be, you indicated a concept that you have some upside from some new customers and also that it might be driven -- the growth might be driven by some customers in Asia. You made those comments earlier in the call.

Correct.

Could you put a little more detail into that? I mean, in terms of Asia, are we talking thin film, [C side], both? And in terms of new people, are some of these meaningful companies, or are they all --

I would say the biggest opportunity is in thin film. I think we talked about one of those companies, and I can't give a lot of detail because it's critical I don't. But we talked about one of those companies, and that is -- I think we're -- we expect that will be very sizable, and we don't expect any change in schedule or forecast for that. And then we're still seeing new business in those areas, both in thin film and Crystalline silicon, so -- in Asia. So it's new accounts for us, new business opportunities for us that I would say we didn't see a year ago that are happening towards the end of our last year that gives us some of that optimism for 2009.

And then last question is, on some of your emerging thin film opportunities, are these companies that are essentially creating their own lines for panel production as opposed to buying lines from an equipment supplier?

That would probably be a good guess.

Okay, thank you.

So some of that is definitely in that area. It's like the old semiconductor days where you do have some solar panel fabs who strictly buy equipment from equipment companies, and then you have some that feel they are at a proprietary stage in what they do and are building their own equipment. So that kind of makes it like the old days. And we have experience with that, so that's very positive for us; and a lot of these companies come from the semiconductor industry, even the fabs. So the people that we're talking to at very high levels know who we are and have had experience, you know, not only using our products for power, but, you know, but atomic fluorine generators in semi and flat panel and are saying, "we think we can utilize this in the solar piece". So that's why we have some optimism, especially for 2009 and beyond.

And the last question, Leo, is you once told me that your business with the customers that you just identified -- in other words, the ones that essentially use the old semi model, kind of like for solar and build their own kind of toolset -- you once told me that your revenue opportunity with those customers tends to be a little bit better than it is with the quote, unquote, arms dealers, because they tent to work with more suppliers. Is that still the case?

Did you mean revenue or did you mean margin? You said revenue. I wasn't sure what you --

Well, if you could illuminate on both that would be great.

Okay. I guess from the margin, it would be based on each customer, I think. And it depends on exactly, you know, what they are transitioning from, what costs and what benefits they get. But from a revenue standpoint, I think the comment I made was referring to 2008 when I said if we achieved that 40 to $50 million number -- we had a lot of people in the industry telling us who would be that largest customer. And I said don't be surprised if it's not an OEM that would be our largest customer during that time. I was really referring to that. There's some sizable opportunities with the fabs that buy equipment, but I think in the long run, it's the equipment companies -- they will transition as well, like semi; so I think in the short run, we could absolutely see a higher total revenue. But I wouldn't call it a revenue per fab opportunity. I would just say the orders that we were expecting and we were getting designed into, I just had strong feelings that 2008 or early 2009, the orders -- the largest customers could be a fab as opposed to an OEM, which you typically would think of.

Right, thank you.

You're welcome.

Thank you. Our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

Hi, this is [Kay Cutlerski] for Jim Covello. Quick question on your services business. What was the business in Q4? And just as you think about your guidance for Q1, how much of the Q1 revenues do you guys expect to come from the services part of the business?

Yes, well, our service revenue in Q4 was about $20 million; and, you know, as Leo said, it's kind of questionable what's going to happen to our service business in 2009. It depends on fab spending and their capacity and so forth. But I think in general, we would anticipate that at least our service business could remain relatively flat. I think maybe it could be affected by some of the decrease in spending in fabs. Difficult to tell.

Yes, I think the key that's very difficult to tell right now is the utilization. As the utilization goes down, the need to get -- the consumption of either consumables or spares go down. So right now, obviously, you know that utilization is extremely low, and really they are investing almost nothing in new tools based on what we've heard the equipment companies that have reported. So we're going to see some impact of that. It's hard to tell exactly what that is, how quickly they are in terms of shutting off the spigot and in changing their rate. Sometimes it takes a while for the procurement systems to catch up with what's going on in the fab. But we would expect some impact to the service business based on utilization being, you know, 40, 50% lower than it was maybe a year ago at this time.

I mean, what's your sense in terms of utilization rates for, you know, Q1 versus where you were in Q4?

No idea, but I can't imagine it's getting better. I thought it was horrible in Q4 from the data that I had seen. I had seen that in some -- you know, whether it's foundries or -- I think it was foundries that I saw at 30s. I can't imagine it's getting better in Q1. So, you know, that versus 80 or 90 last year says that that's a big reduction in consumption, and I think that's one of the reasons why our guidance, you know, would reflect where it is today.

Okay, and then just a quick question on the solar business as well. You know, you guys mentioned your expectation that it's going to grow year-over-year. Do you expect growth on a quarterly basis throughout the year, or is the expectation that we sort of take a dip in the first half and then it comes back in the second half of the year?

Well, I think for us it's a little different, and I'm going to refer back to a couple of comments that Jay mentioned in terms of we're selling to the OEMs and we're selling to the fabs. And sometimes these orders are more project-based. So we could get a significant order with significant shipments in one quarter having nothing to do with sort of the general solar market, but due to our penetration with that customer in the market and their timing of a project. So I still believe that solar activity is a bit lumpy compared to sort of the semi conductor. Now, you could argue in this environment that semi's pretty lumpy, too; but normally in a growing environment, semi has a lot of good things running on all cylinders. I think in solar, even when it's running on all cylinders it tends to be lumpy, because you have OEMs and you have end users and you have more project-oriented things. Any time have you more project-oriented things, you tend to get a big lump and then you may not repeat it in the next quarter.

Yes. And I mean, know you guys have a very diversified base in solar, but have you seen at all this quarter meaningful pushouts of projects from your customers, or is that something you have not really seen yet?

Have not seen yet. That was why we commented that based on sort of where we've seen orders from customers in Asia, especially, that we were pretty optimistic still. Obviously that can change; but right now we're still optimistic about growth in 2009 and we don't base it on a first half -- you know, recovery back half. We're seeing it strong right now. That's really all I can comment on. And our lead times are short enough so that they are not placing orders now for next year. They are placing them for relatively soon in terms of shipments to begin.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from the line of C.J. Muse of Barclays Capital. Please go ahead.

Yes, good morning. Thank you for taking my question. I guess first question on the non-OEM semi side of your business, that's held up pretty well for you guys -- I guess running around 18 to 22 million over the last four to six quarters. And I guess the question here is how much of that is due to kind of one-off projects that you've seen? And I guess if that's the case, what should we be looking for for that business in 2009? And if it's not one-off, then I guess that would suggest that that business, if it ran at concurrent levels, that it would be roughly 10% down year-over-year? So any help on that line item would be very helpful.

Okay. It's a little tricky, because I would say there are four components to that business. And I'll see if I can remember all four, but I know there are four. In service and repair -- and there's these one-offs, what I would call more upgrades or productivity solutions, and then there's capital equipment-type items that we sell. So there's four different ways that we look at it. I would expect the capital equipment side to be hit as severe as most of the capital equipment sides to be hit. I would expect the repairs to be hit less; but as utilization is low, you know, they will need repairs less frequently. The same thing with spares. And then upgrades -- the one-offs, you can argue that when things -- utilization is down, how much incentive do people have to upgrade equipment for higher productivity and yields?

On the other hand, they are always challenged by shrinks and new processes and they are pulling in new devices into a fab for business. So I don't know if the upgrades will change that much. They typically have more opportunity that qualify them, but I don't know how quickly they will deploy multiple sets on multiple tools. So, you know, I think best guess is that it's -- the -- it's going to go down with the rest of the semi; but I would agree with you, probably doesn't go down at the same rate as the OEM. So if the OEMs are down 40, 50% year-over-year --,I don't even want to guess at a number what it is, because I can't guess what the utilization rate will be, but it will go down.

Sure, okay. Helpful. I guess turning to the LCD side of things, can you share with us what the revenues were in calendar '08?

I don't think we report down at that -- we have -- we don't report at that level of detail on the LCD.

Okay.

I think -- I was going to ask you what LCD business at this point, but obviously -- I think overall, it might have been up slightly year-over-year, primarily due to a strong first quarter -- or first half of the year even. But I think that it was almost nonexistent in the second half of the year. So overall, the numbers were slightly up year-over-year. But I think if you look at where we are today, don't expect much -- we're not going to see a drop -- if LCD business is almost nothing in '09, as many people are talking about, you're not going to see a significant change from the fourth quarter for that content because it didn't exist in the fourth quarter as well.

Sure. I guess what I'm trying to get at is you talked about solar growing year-over-year in calendar '09. When you think about your non-semi business excluding solar, how should we think about the growth rate there?

Okay. Well, LCD is a relatively small piece of that 280 million, just -- It might be 1% to 2% of that, or 3. You know, somewhere in that 2 to 3% range when it's reasonably good. Might be a little higher in the real good times and lower on the more difficult times in that market. But -- so that's not going to drive -- that information won't help you create a model or get an idea of what's happening. I think it's very uncertain. We saw the drop in the fourth quarter of the non-semi business, and that was even with sort of the solar business holding up; and so I really don't know.

I don't know how deep this, you know, economic crunch will affect -- we're seeing it worldwide. I think Ron reported sort of the Germany number -- or Europe numbers. And you know, when that's down that usually tells you it's in a lot of different market areas. And so I -- it's hard to tell whether that's -- I couldn't even guess what that would be; but we haven't -- I don't think anyone in this business has been able to put a plan together for '09, and we're really trying to put our hands around, you know, Q1 at this point, and that's what we're capable of doing. But I would expect it's going to be impacted downward, other than maybe the solar business.

Okay. That's helpful. And I guess last two questions. Ron, you talk about 29% tax rate as the best guess for '09. Is that what we should assume, or is that what's embedded in your guide for Q1?

That's what's in our guide for Q1, and I would assume that for the full year. As I said, it could vary significantly because it will depend on the geographic distribution of sales, which we're not sure what they are going to be yet.

Sure. And then on the EPS guide, you alluded to some one-time charges in the March quarter. Is that embedded in the guide, or have you pulled that out?

The guidance for non-GAAP does not include any special charges.

Right.

So the special charge, like for the reduction in force, would not be included in the non-GAAP guidance, but it's included in the GAAP guidance.

Sounds good. Thank you.

Thank you. Our next question comes from the line of Tim Summers with Wunderlich Securities. Please go ahead.

Hey, good morning, guys. Ron -- or Leo, on the solar business, you mentioned you had about 49 million in revenue in '08 and 120 customers. Is that a situation where it's the 80/20 rule? 20% of the customers generate 80% of the revenue?

I haven't been able to break Prado's Law in a long time. I would think it fits into that range where -- the only thing that's interesting in the smaller customer sets, and I mentioned this before, they usually need more help. I think the larger customers want to have a large supply base and they want to have multiple sources, because the risk is high for them and they have sort of the capability at the procurement level and commodity management level; but I think in the smaller customers, they don't have that type of resource available to them. So the portfolio we have of products and technologies becomes very attractive to them. So what I've seen in semi -- and I'm expecting we're going to see the same thing, and we have seen it in some of the non-semi in the solar area -- is that I expect we get more content per tool or more opportunities, because they are not looking to -- they don't have this established supply base and we can come in and offer them a lot.

They have a hard time just getting what they need in, and it's a challenge for them to build the fabs that they are building and the tools they are building. So I would -- I expect the 80/20 will hold true, but I would expect that like semi, we'll have higher level of content on, depending on the kind of tool, on some of the second tier OEMs because they can utilize a supplier like MKS as sort of a one-stop shop.

Okay, and just the second question is you're guiding for revenues in the first quarter to be down roughly 30, 35% quarter over quarter, but you're only taking a one-week shutdown. Can you help us reconcile the delta between the revenue and only a 6 or 7% decline in working hours per quarter?

Well, don't forget, in addition to that, we reduced our headcount 10% in the first quarter.

So the first quarter has less resources than we had in the second quarter and we're still maintaining a shutdown. Right.

Got it.

But as I said, you know, the gross margin does -- the guidance I gave, Tim, did include that there would be -- could be some inefficiencies when we -- if we get down to those low levels of shipments. Because it's difficult to size your direct labor that quickly.

Right, exactly. All right, thanks, guys.

Thank you. And at this time, we have no further questions in the queue.

Okay. Well, thank you very much for joining us on the call this morning and for your questions. As you can imagine, it's a very challenging environment, and we're focused on reducing costs without risking growth opportunities in the key markets that we discussed. And thanks for your continued interest in MKS as we move ahead, continue to execute on these strategies. This concludes our comments.

Thank you. Ladies and gentlemen, this concludes the MKS Instruments fourth quarter earnings conference call. You may now disconnect. Thank you for using ACT Teleconferencing.