萬機儀器 (MKSI) 2009 Q4 法說會逐字稿

Welcome to the MKS Instruments fourth quarter conference call on the 4th of February 2010. Throughout today's presentation, participants will be in a listen-only mode. After the presentation there'll be an opportunity to ask questions. (Operator Instructions) I will now hand the call over to Mr. Ron Weigner. Please go ahead, Sir.

Good morning, everyone. I'm Ron Weigner, Vice President of Finance and Treasure. And I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President and Seth Bagshaw, Vice President and Chief Financial Officer. Thank you for joining our earnings conference call. Yesterday at market closed we released our financial results for the fourth quarter of 2009. You can access this release at our website, www.mksinstruments.com.

As a reminder, various remarks we may make about future expectations, plans and prospects for MKS constitute forward-looking statements. 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 most recent annual report on the form 10K and most recent quarterly report form 10Q which are on file with the SEC.

In addition to these forward-looking statements, represent the companies expectations, only as of today. While the Company may elect to update these forward-looking statements, it physically disclaims any obligation to do so. Any forward-looking statements shouldn't 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 today. I'll give an overview of the fourth quarter and full year for 2009, as well as our outlook. Following me, Ron will review our financial results and guidance. And then we'll open the call for your questions.

Looking at 2009, we saw a year with two dramatically different halves. The first half of the year was extremely challenging, due to the downturn in the overall economy and more specifically to our business. And therefore, we responded aggressively by making deep cost cuts and restructuring to reduce expenses. Even though revenue decreased 36% or $236 million, these reductions, along with strict working capital management resulted in essentially maintaining a flat net cash position for the year, and we were successful in minimizing our net loss to less than $3 million on a non-GAAP basis. Even though we took severe measures, we retained our capability for long-term growth and continued our strategy of market diversification. In the second half of the year, we began to see rapid improvement in the business conditions, which we expect to continue in 2010.

I'm pleased to report that this recovery accelerated in the fourth quarter, exceeding our expectations and bringing our fourth quarter sales to $149 million up 41% over the third quarter of 2009. This improvement was driven by significantly higher shipments to our semiconductor customers, which up by 60% and also to a recovery in non-semi-markets which increased 17% sequentially. Our non-GAAP net earnings benefited from higher margins resulting from higher volume and a favorable product mix and with $0.31 a share. Our GAAP net income was $0.30 per share.

The recovering semiconductor market is leading the present growth. And we are benefiting from the design wins we've discussed previously. Our efforts over downturn to identify leading edge semiconductor opportunities have resulted in increased business across all MKS products. Some recent highlights include the selection of our advanced controllers for Atomic Layer Deposition and implant tools in our gas analyzes for realtime process monitoring. In addition, our corrosion resistant and high cycle valves have begun shipping on new tools.

Fueled by the improved business conditions, semiconductor tool utilization rates are high as semiconductor device manufacturers push to maximize tool output. MKS provides numerous productivity solutions which enable semiconductor fabs to enhance their output and yield.

In the quarter, our ozone products were selected by another advanced DRam manufacturer to improve their production process and a major Asian foundry multiple gas analysis instruments for realtime automated production monitoring. Design ends and customer wins combined with higher utilization rates in the recovery in the semiconductor industry position MKS so benefit further in 2010. Our broad technology portfolio opens opportunities to us in many other advanced and growing markets such as thin film, LEDs, medical, bio farm, environmental, solar and more. While the global economic crisis constricted the growth of our non-semi-business, we were please to achieve a 17% increase in our non-semi-business in the fourth quarter. Confirming what we're hearing about the improving global economy, our long-term goal is to achieve 15% compounded annual growth rate and other advances applications.

Let me share with you some of our exciting growth opportunities. Light emitting diodes, LEDs are bright, have high reliability, long life and are environmentally friendly. Because of this, LEDs are gaining rapid acceptance in solid state lighting and flat screen TV displays. LEDs are made using vacuum processes similar to the semiconductor chip manufacturing.

At the recent 2010 consumer electronics show, every major TV manufacturer launched new LED-based TVs and shop announced that 50% of their TVs in 2010 would be LED-based. We're actively engaged in the dynamic growth of the LED market. We've achieved a number of design wins on LED tools which we're benefiting from today.

As a result, we realize sequential quarterly growth through the LED market throughout 2009. And due to this explosive growth, expect an even stronger 2010.

I talked a lot about ozone in recent calls. Ozone and sterilization applications is a promising opportunity for MKS, for biopharm food, beverage and other markets. Ozone aggressive cleaning capability and environmentally friendly disposal make ozone water treatment and sanitization low cost and green. We continue to make progress and gain recognition in the pharmaceutical manufacturing market with our ozone sanitation systems. And we have been invited to present a paper on our leading ozone disinfection technology at the upcoming Ultra Pure Water Pharma Conference. As we penetrate this growing market, you should expect to hear more about our activities in ozone.

Recent concerns about terrorism have put homeland security and public safety in the forefront of the news again. I spoke in the last call about our gas analyzers, which can detect minuet amounts of pollutants in engine emissions. We adapted this same analysis technology to detect and analyze chemical warfare agents in various environments. And our gas analyzers are being deployed in public spaces to detect bio hazards in the air. We recently received a significant follow-on order for gas analyzers which will be installed in buildings to help ensure public safety. Our technology has broad application in bio-hazard monitoring. And we'll leverage our success to date to expand our reach deeper into this high growth market.

Solar cell manufacturing uses the same types of vacuum equipment, reactive gas generators, power supplies and other products which we sell to the semiconductor and flat panel display markets. We continue to gain customers and increase share by working with new and existing customers to solve their problems. In the quarter, our reactive gas generators for chamber clean, RF power supplies, matching networks and pressure and control products were selected by a major PECVD solar tool manufacturer. Our solar business continues to be impacted by lower consumer subsidies in the over capacity of solar cells on the market.

Although the solar market is still lagging the rest of the recovery, industry equipment analysts predict a compounded annual growth rate of nearly 20% between now and 2014. These are just a few examples of the new applications we are pursuing, but they highlight the range of opportunities and demonstrate success in applying our technologies to these exciting high growth markets.

We expect to see continued growth in the semiconductor market in 2010 after enjoying a very positive uptick in sales in the past two quarters. We also expect that the improvement in the global economy, combined with our market diversification will result in increased sales to our non-semiconductor markets, fuelling additional growth in 2010. Based on these factors, and current customer activity, we anticipate that business in the first quarter of 2010 will continue to improve. We estimate that first quarter sales may range from $170 million to $190 million. And at these volumes, our non-GAAP net earnings could range from $0.36 to $0.49 per share.

While we are seeing improving conditions across many markets, we are committed to deliver better financial results throughout this cycle and beyond. Consequently, we are adding only those people in costs which are essential to support and grow the business. We are in the upside of a cycle but will continue to main cost control while leveraging increasing sales. 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. In the fourth quarter, similar to the third quarter, we achieved better performance than our original guidance for sales, operating results and cash flow, primarily as a result of strong demand from semiconductor OEMs as well as increased sales to other markets.

Fourth quarter revenue increased 41% sequentially to $149.3 million. We achieved non-GAAP earnings of $0.31 per share, which compared to our original guidance includes the benefit of higher gross margins due to increased volume, favorable product mix and more normalized tax rate. GAAP net income for the fourth quarter was $0.30 a share. Our quarterly operating break even for the fourth quarter, increased to $110 million from $101 million in the third quarter. This increase in break even was a result of our actions to eliminate mandatory time off as well as most temporary cost reduction measures.

Our cash position remains strong as we continue to focus on improving Accounts Receivable days sales outstanding, improving inventory turns, minimizing capital spending and controlling costs. Cash and short-term investments, net of debt, increased $9 million to $263.7 million. Days sales outstanding improved to 59 days and inventory turns improved to 2.9 turns. Capital expenditures for the quarter, which were primarily for tests and calibration equipment were $1.4 million and depreciation was $3.4 million.

In the fourth quarter, we recognized higher than expected shipments to semiconductor OEMs and increased business from customers in other markets such as light emitted diodes, gas analysis and medical. In the fourth quarter, sales to semiconductor OEMs increased 73%. Sales to fabs increased 23%. And our sales to all other markets which includes solar increased 17%.

Our solar business in the fourth quarter was $5.3 million and totaled $23.6 million for the year compared to $49 million for 2008. Our 2010 backlog, for solar customers, it's strong. And we believe our solar sales will increase in 2010 and will remain a growing global opportunity for us in the years ahead. Our service business remains steady, reflecting more normalized requirements from our service customers.

In the fourth quarter, sales to semiconductor OEMs represented 50% of sales. Sales to semiconductor fabs, 12%. And sales to other markets represented 38% of sales.

Geographically, US sales increased 47% primarily result of increased sales to semiconductor OEMs. Sales in Asia increased 40%, primarily as a result of strong semiconductor OEMs and fab sales. Sales to Europe increased 18%, primarily as a result to energy related sales. Sales in the US were 57% of total sales. Sales in Asia were 31 % and sales in Europe were 12%.

Sales to our top ten customers represented 43% of total sales. Sales to our largest customer applied materials represented 13% of fourth quarter sales.

Based on our recent order trends resulting from a stronger than expected semiconductor market and expectations that our other markets will continue to recover, we expect to see our sales increase in the first quarter and they could range from $170 to $190 million. Our headcount as of December 31st was 2,178 compared to 1,970 as of September 30th.

In order to provide capacity for increased production in the fourth quarter and going forward, in addition to working overtime, we are hiring additional temporary direct and indirect manufacturing personnel. Based on our expected sales range from $170 million to $190 million for the first quarter, we expect our gross margin could range from 42% to 43%. The projected marginal increase in gross margin from the fourth quarter is somewhat less than we would normally expect. This is due to higher than expected increase in sales of new products to semiconductor OEMs which we have not yet transitioned to our China manufacturing facility. A last time buy of a lower margin product, a more favorable mix in Q4, and increased fringe benefits. Future quarters should reflect improved variable margin.

We expect our operating expenses will increase in the first quarter. This represents increased costs resulting for more normalized engineering product spending, compared to lower spending in the fourth quarter, an increased cost of fringe benefits. We expect net operating expenses in the first quarter could range from $43.7 million to $44.7 million. R&D expenses could range from $14.9 million to $15.3 million and SG&A expensed could range from $28.8 million to $29.4 million. Amortization of acquired intangible assets for the first quarter is estimated to be at approximately $700,000. Net interest income for the first quarter is estimated to be approximately $200,000. For 2010, we expect our normalized non-GAAP tax rate could be approximately 32%, which doesn't include the benefit of the expired R&D tax credit. Given these assumptions, first quarter non GAAP net earnings could range from $18.3 million to $25.1 million or $0.36 to $0.49 per share on approximately 51 million shares outstanding. GAAP net income could range from $17.8 million to $24.6 million or $0.35 to $0.48 per share. This concludes our discussion and we'll now take your questions.

Thank you, sir.

(Operator Instructions) Our first question is from Jim Covello with Goldman Sachs. Please go ahead with the question.

Hey guys, good morning. Thanks so much for taking the question. Question is really on the semi-equipment side. And the question is how much of a difference are you seeing in the activity levels at your various OEM customers. Because one of the things I think is two big things that people are trying to wrestle with. One is why some folks shipments are up much more in the first half of the year versus others. And the second is the sustainability of these levels of shipments. And so, I guess really what we could ask you guys is how much of a difference are you seeing in the activity levels from your various customers? Thank you.

Hi Jim. This is Leo. Thanks for your question this morning. As of now we see no difference in the semiconductor side of the business from where it has been running for the last several months. So, I know everybody, it's hard to predict this industry, but we don't see anything significantly different in recent order patterns.

Are you seeing different things from different customers? Different OEM customers? Different activity levels or different growth levels from various OEM customers?

I would say that's true, but that would also reflect on their downside, how they depleted inventory, how much inventory? So it's hard to just pin it to what's happening to their business. Some of it is recovering, some of the inventory. They drained inventory is down quite a bit.

Thank you so much.

You're welcome.

Thank you. Our next question comes from Chris Sankar with Banc of America Merrill Lynch. Please go ahead with your question.

Good morning, this is Paul Thomas for Chris Sankar. Thanks for taking my questions. First up, congratulations on an excellent quarter in guidance. Kind of along those lines, do you think, you were just talking about inventory, are we past the restocking phase yet? Or do you think that's going to continue in 2Q for semiconductor OEMs?

Hi, Paul. I think, I'm not going to predict when we get to the endpoint of inventory, but was I say this. Certainly if you go back a couple quarters ago, there weren't many systems on the OEM factory floors. If you look today, I'm sure you'd see that's different. There's been a build-up of that.

However, if you ask the supply chain how they're doing getting device demands, I think you'll find inventories are getting tighter on electronic components. So, there's some inventory build-up. And I think some of this drive in the economy, global economy is having a high demand on some of the electronic components. And I think there's more discussion around components that are tight on inventory than in excess.

I'd say there's been some inventory build-up. It still seems like customers are screaming to get parts. You can imagine it's a challenge for everybody in this environment when you grow 40% after the downturn we've been through to be able to ship what everybody wants exactly when they want it. When it doesn't go out exactly when they want it, they're calling you asking for it. Usually if inventory's built up, you don't hear too much in that kind of situation.

Ok. Thanks for that. And then, of course this is a turns business. So, I know you don't have a lot of visibility, but you talked about growth through 2010 now. So looking into Q2, do you have any confidence, directionally where that will go? You think that will continue to be up from where you're projecting we're going to go in 1Q?

I think Paul, you said it best. We have very little visibility with the, being a turns business. But I do think the good reports in terms of the global economy, expecting to increase, we have good share, now, in non-semi-business. We keep growing that share. We've seen a down year in solar which is supposed to get better. So, I think the opportunity is there for things to continue to grow. We'll have to see as we get into this quarter more.

Okay, one last quick one. On the OpEx side. You gave guidance for 1Q. Do you think, 28% of sales, or so at the higher run rate now, is that going to be a good level? With all the temporary cost measures back in? Are we looking at a $48 million to $50 million type of OpEx later in the year?

No, I think we got it to about just a little over $44 million in OpEx and our goal would be to keep that pretty steady throughout the year.

Okay, all right, thanks a lot guys.

Thank you.

(Operator Instructions) Thank you, that appeared to be the last question. Please continue with any closing remarks.

Thank you. Well, thanks for joining us on the call this morning. Our core semiconductor market is recovering and is expected to continue to grow in the future. With the global economy improving in our strong position in a number of growing markets, MKS is well-positioned and optimistic for increased growth in 2010. Thanks again.

This now concludes the MKS Instruments fourth quarter earnings conference call. Thank you for participating. You may now disconnect.