萬機儀器 (MKSI) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MKS Instruments first quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 22nd, 2009.

I would now like to turn the conference over to Ron Weigner, Chief Financial Officer. Please go ahead, sir.

Good morning everyone. I'm Ron Weigner, Chief Financial Officer, and I'm joined this morning with Leo Berlinghieri, Chief Executive Officer, and President. Thank you for joining our earnings conference call. Earlier this morning, we released our financial results for the first quarter of 2009. You can access this release at our website, MKSinstruments.com. We need to remind you that various remarks we may make about future expectations, plans and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor provisions 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 discussed in today's press release and in the Company's annual report on Form 10-K, for the fiscal year ended December 31st, 2008, which is 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 obligation 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. Now, I'll turn the call over to Leo.

Thanks, Ron. Good morning, everyone, and thank you for joining us on the call this morning. I will give an overview of the first quarter and our outlook. Following me, Ron will review our financial results and guidance and then, we'll open the call for your questions. First quarter sales of $76.7 million were within the range of our guidance. Our GAAP loss of $0.34 per share and our non-GAAP loss of $0.23 per share were better than our revised guidance issued on April 2nd. The GAAP loss included special charges of $10.9 million, which were for severance related to reductions in workforce, and excess and obsolete inventory, including contractually obligated inventory purchases. These charges were partially offset by a first quarter 2009 discrete tax benefit. Ron will cover these in more detail later in the call.

In this challenging environment, we are continuing to focus on driving down our costs and breakeven. In the quarter, we implemented a restructuring and reductions in workforce of approximately 630 people, representing about 24% of the worldwide headcount. These cuts were made across all functions and levels within the Company and included some business realignment. These reductions were done after careful review of R&D investment and existing and planned development projects, giving consideration to both our ability to grow in diverse markets and our ability to respond to demand and innovation when the economy begins to recover.

As a result of these actions, we expect annual compensation related savings of approximately $40 million. We also temporarily reduced our cost with continued mandatory time off, as well as, continued reductions in compensation of directors, officers and certain employees. We are making further cuts in discretionary spending, as well as, planning increased mandatory time off in the second quarter. The savings from reductions in discretionary spending are approximately $12 million annually.

Everyone is hearing that the weaker world economy is impacting just about every business and we are no exception. For the first quarter 2009, our total sales declined 39% sequentially, which included a more substantial decrease of 49% in sales to the semiconductor market. In the first quarter, chip makers saw equipment utilization levels drop as low as 40%. This amount of unused equipment capacity resulted in lower spending for new wafer fab equipment. As a consequence, we saw a 46% decline quarter-over-quarter to sales to our semiconductor OEMs. The excess tool capacity meant that fab budgets for non-warranty repairs, spare parts, productivity enhancements and other upgrades were delayed or cancelled. Fabs attempted to minimize their cost and our sales directly to semiconductor fabs were down 55% and our service business also declined.

For the quarter, our service business decreased 29%. This is reflective of lower demand, which started in the fourth quarter of 2008, and continued through February. Beginning in March, our service business has shown some preliminary signs of improvement. The semiconductor market has experienced severe cycles before. During these downturns, our R&D focus is always on continuing product development and identifying opportunities to secure design wins on future production tools.

In the past quarter, a number of products have been selected for next generation tools. For example, our flow controllers, which precisely deliver gas to multiple zones in multiple chambers improved etch rate uniformity and lowered costs and were chosen for new etch tools. Because of their high speed and fast settling time, our valves were designed in for a new application on physical vapor deposition tools. Our ozone generators have been selected for major atomic layer deposition, next generation high K process development, where ozone is used for oxidation at the 45 and 32-nanometer technology nodes.

Worsening economic conditions have impacted the solar market as well and our sales in the quarter fell 54% sequentially. As we have said in the past, sales and shipments to solar customers can vary from quarter-to-quarter, as we are selling our products to both the solar OEMs and to fabs whose order patterns tend to be less consistent. However, we've begun to see deterioration in solar sales. Tightening credit has curtailed financing for some planned solar fabs and several customers have delayed their plans. A major solar fab customer, where our RF generators have been designed in, has notified us of a delay in their planned business requirements. But which may still have a positive impact on sales in the second half of the year. Given this and other recent customer input, as well as, the rapid decline of the global economic conditions, it's hard to predict what 2009 solar sales will be.

Looking longer term, industry growth projections for the solar market remain positive and our solar customers continue to focus on process development, efficiency improvements, yield and cost of ownership. We continue to work closely with leading solar OEMs and fabs to identify and secure design win opportunities. For example, in the first quarter we were selected to provide chamber clean generators for a major European OEM solar tool. These generators efficiently and rapidly clean the chamber in situ eliminating periodic manual cleaning. Several Asian and European OEMs selected our pressure control solutions, which provide higher precision and improved process control.

As we have demonstrated, our strategy is to diversify into other markets for long-term growth and to offset the cyclicality of the SEMI market. This strategy and our execution have broadened our served market and expanded our customer base. The deteriorating global economy, however, has impacted to varying degrees our sales to these other markets, which declined 28% sequentially. Excluding the semiconductor, solar and thin film sectors, the remaining of the markets, which represented 41% of total sales, declined 13%. Lessening the impact of the combined 49% decline in the semiconductor solar and thin film markets.

We continue to have success in penetrating other growing markets, such as alternative energy and clean technologies. We are attracting new customers from multiple MKS products for applications such as fuel cells, alternative energy, clean engine development and emissions testing. For example, we are expanding our success in engine development testing with another design win for diesel engine testing. Our multi-gas FTIR based gas analyzer was selected by a major European truck manufacturer for diesel engine development.

Another example of broadening penetration into other growing markets is into the food and beverage segment. While today it remains a smaller part of our business, in the past quarter one of the ranking companies in the world selected our multi varied analysis software to ensure quality and consistency of snack food production.

Another growth area in the food and beverage market is the ensuring of quality, safety and distribution of food across the globe. In this area our products are used in and being evaluated for various applications to protect and purify foods. We continue to identify new and growing applications for our products, which will provide growth opportunities for us and to offset the cyclicality of the semiconductor market. Our strategy is to leverage our technology breadth and innovation to provide process critical solutions to higher growth markets. Our long-term goal is to achieve 15% compounded annual growth in other markets.

These are uncertain times. We have seen some stabilization in our business over recent weeks and some semiconductor customers have suggested that the industry cycle may be bottoming. While this is encouraging, the magnitude and duration of the global economic crisis and the semiconductor downturn are still very uncertain. And our short lead times further limit our visibility. Given these conditions, we cannot predict when our semiconductor business and sales to other markets will improve. However, considering current levels of activity, we estimate the second quarter sales may range from 55 to $75 million. At these volumes, the net loss could range from $0.36 to $0.21 per share, based on 49.2 million shares outstanding. The non-GAAP net loss could range from $0.34 to $0.19 per share. We are focused on continuing to drive our cost down while supporting our customers in this difficult environment. At this point, I'll turn the call over to Ron who will discuss our financial results and expand on our guidance.

Thank you, Leo. First quarter sales decreased sequentially as a result of decreased sales to all markets. We incurred a first quarter GAAP net loss of $16.5 million or $0.34 per basic share. Included in the GAAP net loss were special charges totaling $10.9 million for severance costs related to our reduction in workforce and other special charges incurred in the quarter. Our non-GAAP net loss was $11 million, or $0.23 per share. Our GAAP and non-GAAP losses were better than our revised guidance, primarily as a result of significantly reduced spending late in the quarter, and a larger than anticipated income tax benefit. Turning to the detailed financial results, first quarter sales of $76.7 million decreased 39% compared to fourth quarter sales of $125.2 million. Sales to semiconductor OEMs decreased 46%. Sales to fabs decreased 55% and sales to other markets decreased 28%.

As Leo discussed, our solar sales decreased 54%, flat panel and data storage, 45% and sales to remaining markets, which represented 41% of our total sales decreased 13%. Service revenues decreased 29% but began to show improvement in March. In the first quarter, sales to semiconductor OEMs represented 31% of sales, sales to semiconductor fabs, 10%, and sales to all other markets, 59%. Geographically, sales decreased globally in both the US and Asia, sales decreased 44%. Sales in Europe decreased 33% and were somewhat (Inaudible) by sales to non-SEMI markets. Sales in the US were 50% of total sales. Sales in Asia were 29%. And sales in Europe were 21%. Sales to our top 10 customers were 30% of total sales. Sales to our largest customer, Applied Materials, decreased 70% sequentially and represented 8% of first quarter sales. Sales to contract manufacturers of applied and other semiconductor OEMs also decreased 70%. Sales to Applied Materials were 84% less than Q1 2008.

During the first quarter and early in the second quarter, we took actions to restructure and reduce our worldwide headcount by 24% to approximately 2,000 employees, which resulted in an annual cost savings of approximately $40 million. Our headcount as of March 31st was 2,092 employees. During the quarter, we aggressively took actions to curtail spending in all areas. Actions taken to reduce costs include mandatory time off, continued wage reductions for directors, officers and certain other employees, a wage freeze, reductions in engineering and IT project spending, as well as, reductions in all other expense categories.

Excluding the special charges for excess and obsolete inventory, the pro forma non-GAAP gross margin for the quarter was 30.6%, compared to 39.6% in the fourth quarter. The reduction in margin in the first quarter is mainly related to lower volume, unfavorable product mix, and excess capacity, which was somewhat offset by a 12% reduction in overhead spending. As a result of our cost reduction initiatives, operating expenses decreased 12% sequentially. R&D expense decreased to $15.5 million. And SG&A expenses decreased to $28.5 million. Our tax rate excluding the $6.4 million discrete benefit was 42% or 13% higher than our expected rate for the quarter of 29%. The increased benefit was due to a change in our worldwide distribution of losses to higher tax countries.

Our non-GAAP net loss, which excluded amortization acquired intangibles and other items was $11 million or $0.23 per share on 49 million shares outstanding, compared to net earnings of $100,000 or breakeven on 48.7 million shares in the fourth quarter of 2008. As previously mentioned, our GAAP results are -- our GAAP results included special charges.

In addition to the charge for severance costs, special charges included a $12.9 million charge related to excess and obsolete inventory as a result of lower forecasted sales volume. This was partially offset by a reduction in taxes of $6.4 million as a result of the completion of a recent tax audit. Cash used for operations was $5.8 million for the quarter. Cash and investments net of debt decreased $14.6 million, primarily due to our net loss. Days sales outstanding were 68 days in the first quarter, compared to 62 in the prior quarter. The increase in days sales outstanding is primarily a result of a higher percentage of normally slower paying customers and slower payments in general.

Increased inventory decreased $5 million, which excludes a special charge for excess and obsolete inventory and inventory turns were 2.1 times. As we have taken steps to conserve cash, capital expenditures during the quarter totaled $1.6 million compared to an average of $3.7 million per quarter for 2008. Depreciation expense for the quarter totaled $3.7 million. In the second quarter, we expect that our normalized quarterly non-GAAP net operating income breakeven level, which excludes temporary cost reductions, could be approximately $116 million. And our non-GAAP net operating cash breakeven would be approximately $103 million.

In addition, we have implemented additional temporary reductions, such as mandatory time off, wage reductions and certain other temporary cost savings measures that will further reduce our second quarter non-GAAP net operating income breakeven level and our non-GAAP net operating cash breakeven level to approximately $106 million and $94 million respectively.

We will continue to review and take actions to reduce all areas of spending, reduce purchase material costs, reduce warranty costs and lower manufacturing costs. Looking longer term, we are evaluating additional opportunities that will reduce our breakeven, such as further consolidations of function and facilities, and reduction of information technology operating systems costs.

As Leo said, we currently anticipate that second quarter sales could range from 55 to $75 million. We anticipate that the gross margin could range from approximately 20% to 31% at these sales volumes. We expect that operating expenses could decrease approximately 9% sequentially. R&D expenses could be approximately 12% lower and could range from $13.3 million to $13.9 million. And SG&A expenses could be approximately 8% lower and could range from $26 million to $26.6 million. Amortization of acquired intangible assets is estimated at $1.7 million.

Debt interest income for the quarter is estimated to be approximately $600,000. And based on a revised forecast for 2009, we expect that our tax rate for 2009 and the second quarter could be approximately 41%. Given these assumptions, second quarter non-GAAP net losses could range from $16.6 million to $9.4 million or $0.34 to $0.19 per share on approximately 49.2 million shares outstanding. Second quarter GAAP net loss could range from 17.7 million to 10.5 million or $0.36 to $0.21 per diluted share. This concludes our discussion and we now take your questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

Good morning. Thanks so much for taking the question. You had commented about the short lead times kind of impacting the visibility. In a scenario where your customers started to see orders -- your SEMI equipment customers specifically, started to see orders increase in the June quarter, presumably for shipments in the September quarter, how long do you think it would be before MKS saw that in the semiconductor segment on the revenue line.

Good morning, Jim. Thanks for the question. I guess I would expect maybe no more than a couple of months offset from their shipments. Their cycle times and lead times have been pretty short. And then, I guess, you'd have to net out what the inventory position in at those customers. They're got to factor that in. If they are at a point that whatever they get for orders they have to buy, their not reconfiguring or they're not having any material already available, then it would probably affect us. I would think a couple of months before shipment. Just be a good estimate.

Okay. And then, you talked about some of the services activity or spare parts activity and what other signs would you be looking for to get a little more incremental confidence that those orders from the semi-equipment OEMs would come through.

I guess their announcement that they're seeing their business increase would be one. I think seeing consistency in the service business. You know, we're all looking for any glimmer of opportunity or any good news and so when you see a month or a five or six weeks of something, you don't know whether it's repetitive trend or what's going to happen, I guess.

So seeing that continue, I think would be a good sign. If utilization's been down and spare parts and service have been down, it says we've gotten -- if that continues the trend being back to normal levels, I would say that's a very positive sign. Usually after that, typically productivity enhancements and things like that are next and then maybe capital after that.

Terrific. Thanks so much. Good luck.

You're welcome. Thanks.

Thank you. Our next question comes from the line of Chris [Zenkar] with Banc of America. Please go ahead.

Hi, it's actually Brett Hodess. Good morning, guys. Can you -- on some of the non-SEMI businesses, which are also down in the quarter, but dominant part of the business in the near term. Can you talk about what the visibility and lead times are in that business versus the SEMI business? Are they as low as short?

Yes, good morning, Brett. Thanks. The visibility is very similar. You know, I think that typically the visibility is based on our lead times and a lot of those other businesses, a lot of those other markets tend to be, again, more project related. I think that any large segment tends to have OEMs in it and they sort of follow the market segment, where we have so many other diversified markets, we tend to pick up business. There are a number of projects. So if it's a lighting fab, they're retooling for maybe LED type lighting. We get some business out of it. May not get business the next year, if they're not retooling again and somebody else is retooling.

So I would think part of the issue is that we have products that have relatively short lead times and I think those customers are under the same severe constraints of where are they going to spend their money, where are they going to invest and who is going to buy whatever they're selling. So I don't think there's -- we get any more visibility in those other markets. Maybe on a case by case basis, we might have it but not enough to give a prediction for the overall 41% of those other business.

All right. And then a follow-on for Ron. When you look at the difference between the ongoing breakeven, if you will, and the breakeven values that you have with the temporary steps, how long do you think after we start to see a revenue recovery would you start to add back the costs between the temporary and the permanent cost structure? Would it happen quickly? Immediately? Or would it -- ?

No, I think, Brett, obviously, we'll have to look at what we expect the future trend in revenue to be and I would expect that we would add some of it back gradually and certainly we would want to get to at least above breakeven before we started to do that. And so I think we would do it gradually as we got above breakeven.

Okay. Great. Thank you.

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

Hi. Yes, good morning, everyone. Thanks for taking my call. The guidance for revenue in 2Q is 55 to $75 million. Could you give us a ballpark feel for what end markets could be stronger or weaker relative to the first quarter?

Hi, Tim. This is Leo. It's a good question. I think it's impossible to give you exactly what that is because, again, with many of the products in sort of that two-week lead time range, we don't even know what orders are in yet that will cover the quarter, right? So we're going to have to book orders over the next -- at least the next seven or eight weeks that will ship within the quarter and predictability is just not there. So -- and that wouldn't be unusual.

I mean, we could look at a major segment or whether SEMI was going to be up or solar was going to be up but excluding those two pieces, I don't expect we could give you an idea of what particular market. Because a lot of these are much smaller disbursed markets.

Okay. And on your solar business, could you give us an idea, I mean, to the degree you know, how much of your sales are into customers that manufacture thin film equipment versus crystalline?

We don't get orders that way, but I mean, I think the comments we've made in the past is the thin film opportunity is roughly three or four times the crystalline silicon but obviously, there is a lot more crystalline silicon production going on.

I would say at least today, what I mean by today is excluding the future, what it has been. I mean, the significant growth that you saw in the past year has been around the thin film opportunities. A lot of RF generators, RGAs, the traditional vacuum products used both in thin film and cystalline and silicon, atomic generators for chamber clean, those three big items alone were a pretty significant part of the growth last year, in addition to sort of the vacuum related products. So I would say in the past, the past year or so, the thin film was a much bigger part of the total, but I don't have an exact answer for you.

Okay. Great, thanks, Leo.

You're welcome.

Thank you. (Operator Instructions). And at this time, there are no further questions in the queue.

Okay. Well, first of all, thanks for joining us on the call this morning. Optimism is certainly in short supply, while the semiconductor and global economic downturn continues pretty much unabated. But the turnaround will happen and because of our market diversification and focus on innovation and design ins, while controlling costs and returning to profitability, I think MKS will be in a stronger position to benefit from the rebound as it occurs. And thanks again for joining us on the call.

Thank you, ladies and gentlemen, this concludes the MKS Instruments first quarter earnings conference call. If would you like to listen to a replay of today's conference, please dial 303-590-3000, followed by pass code 11129318. ACT would like to thank you for your participation. You may now disconnect.