萬機儀器 (MKSI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MKS Instruments first quarter earnings conference call on April 22, 2010. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to questions. (Operator Instructions) I will now hand the conference over to Mr. Ron Weigner. Please go ahead, sir.

Good morning, everyone. I am Ron Weigner, Vice President of Finance and Treasurer, and I am 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 after market close, we released our financial results for the first quarter of 2010. You can access this release at our website, www.mksinstruments.com. As a reminder, various remarks we 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 form 10-K 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. Now I will turn the call over to Leo.

Thanks, Ron. Good morning, everyone, and thank you for joining us on the call today. I will give an overview of the first quarter of 2010 as well as our outlook. Following me, Seth will review our financial results and guidance and then we'll open the call for your questions.

As we exited the second half of 2009, we reported seeing signs of rapid recovery in our business, and these conditions continued to accelerate in the first quarter of 2010. We saw substantial growth in many of the markets we serve, and I am pleased to report today that our first quarter revenue increased 33% to nearly $200 million which approaches our peak 2006 and 2007 quarterly revenue levels. I am also pleased to report that due to improved operating leverage and continued cost control, we achieved operating profit of approximately 22% and sequentially our non-GAAP earnings increased 87% to $0.58 per share. As a result of continued focus on working capital management, our cash and short-term investments net of debt increased $16.6 million to $275.5 million. As we have said on previous calls, we have taken a number of actions to improve our financial performance during both the downturn and this upturn and as a result we are pleased to report the strong level of performance for our first quarter, and are optimistic business will remain robust in 2010.

As I have communicated a number of times before, our broad technology portfolio opens opportunities for us in many advanced and growing markets including LEDs, medical, biofarm, environmental, thin films, solar and more. I am pleased to report this quarter we reached $75 million in sales to these additional markets, a 34% rise quarter-over-quarter, increasing even more than the fast ramping semiconductor segment. Our long-term goal is to achieve at least 15% compounded annual growth rate in these advanced and growing applications. Our strong growth in the quarter reflects our success in applying our technology portfolio in these markets, and now I will share some examples of our recent successes with you.

Let's start with the merging new market, light emitting diodes or LEDs, which are electronic components which produce light. Because they have high reliability, long life, and environmentally friendly benefits such as low power consumption, LEDs are experiencing rapid acceptance in solid state lighting of flat screen TV displays. This market is a great opportunity for us since LEDs are made using vacuum processes similar to semiconductor manufacturing, and many of our vacuum products including pressure and flow have been designed in on deposition equipment. Orders increased in first quarter for the fifth consecutive quarter. Recent industry forecasts project that 2010 will see a 53% surge in LED demand and a 30 plus percent compound annual growth rate through 2014.

Moving to medical related markets, our technologies are applied in a number of applications. The two largest of these are diagnostic imaging equipment and plasma based medical sterilization. In the quarter, we saw increases in sales to these markets driven primarily by increased demand for MRI equipment in North America and increased orders from medical sterilization instrument customers. We attribute these increases to the freeing up of hospital and medical budgets which may have been constrained during the recent economic crisis. Another recent medical application for our technology is the selection of our gas analyzers to monitor the ambient air in hospitals during low temperature sterilization of medical devices. Many modern medical devices as well as consumable medical supplies cannot be sterilized with steam or high temperatures due to potential damage from the heat. Instead, room temperature reactive gases are used for sterilization. These gases are hazardous, however, and must be monitored for safety. But monitoring is a challenge because they are difficult to measure using conventional equipment which often reports false alarms. We won this business because our analyzer technology easily and rapidly identifies the hazardous gases while filtering out other gases in the environment, minimizing false alarms. We continue to explore and find new applications in this broad medical market.

Now let me move to the solar market. We continue to view solar as a long-term growth market for us, but as many emerging markets order rates can be lumpy. As I reported on our previous call, solar customer activity was increasing in fourth quarter even though solar sales were down in 2009. In first quarter we began to see results from this ongoing customer activity. We had a significant increase in demand for our technologies resulting in solar sales increasing sequentially from $5.3 million to $15.7 million. This improvement was due to some general recovery in the solar market as well as additional sales to new customers and additional technology wins with existing customers.

For example, in the quarter both our RF and DC power products and our chamber cleaning products which automate the cleaning process and increase productivity were selected by major solar OEMs. We increased our solar sales in all geographic regions, especially to the growing Asian solar market. Recent solar forecasts project a 17% compound annual growth rate through 2014, and we continue to believe in the long-term opportunity for our technologies in this market.

We are also benefiting from the continuing recovery in the semiconductor market. Our efforts to identify new opportunities and provide technology solutions for leading edge semiconductor tools have resulted in increased opportunity across our product areas and our first quarter sales to semiconductor OEMs increased 37%. The semiconductor industry is always a challenge to forecast. However, many semi industry analysts are predicting that 2010 semiconductor capital spending could surpass 2009 by up to 75% or even more. And they are projecting healthy conditions to continue through at least 2012.

Front end utilization rates are expected to remain above 95% for all of 2010 indicating that chip production capacity is running tight. Based on these projections and our own business levels we expect to benefit from the healthy growth of the semiconductor industry through 2010 and beyond. These are just a few examples of the growing and technically advanced markets we serve, but they highlight the range of prospects we have. These additional markets expand our opportunity beyond our continued semiconductor focus more than doubling our total available market. If the global economy continues to recover as planned and the semiconductor market grows as forecast, we would expect these markets to continue to be an increase in proportion of our sales, further demonstrating our success in executing our diversification and growth strategy.

2010 forecast point to improved business conditions for the key markets that rely on our technologies. We are positioned to benefit from the growth of these markets. Based on these factors and current business levels, we estimate that our second quarter sales may range from $205 million to $220 million and at these volumes, our non-GAAP net earnings could range from $0.56 to $0.66 per share. At this point I will turn the call over to Seth who will discuss our financial results and expand on our guidance.

Thank you, Leo. Good morning, everyone. As a result of our continued rebound of sales to many of our advanced technology markets in the first quarter, we achieved better financial performance than our guidance for revenue, gross margin, and operating results. First quarter revenue increased 33% sequentially to $198.1 million. Gross margin increased to 44.7% as a result of increased volume, a more favorable product mix than expected, and improved manufacturing overhead leverage. Non-GAAP net earnings were $29.2 million or $0.58 per share representing a sequential increase of 87%. Even with these higher volumes, we continue to maintain tight control over our expenses and further improved our operating leverage in the quarter achieving operating profit of approximately 22% of sales. GAAP net income for the first quarter was also $0.58 per share and included a gain of approximately $700,000 on the sale of previously vacated facility.

We further increased our cash position as we continued to focus on managing accounts receivable day sales outstanding, improving inventory turns, and controlling costs. Cash and short-term investments net of debt increased $16.6 million to $275.5 million. Day sales outstanding were 62, and inventory turns improved to 3.5 turns. Capital additions for the quarter which includes additional manufacturing capacity for new opportunities and our growing analytical market were $3.3 million and depreciation expense was $3.2 million.

In the first quarter we recognized higher than expected shipments to the semiconductor market as well as to customers across a variety of additional advanced and growing markets. In the first quarter, sales to semiconductor OEMs increased 37% and sales to FABs increased 12% representing a combined increase to the overall semiconductor market of 32% sequentially. Sales to our additional advanced and growing markets increased 34% sequentially. As a result of our strategic focus, along with the continued improvement in the global economy, we are pleased to report that first quarter sales grew in these markets to over $75 million. This volume approaches our peak quarterly revenue levels of 2008. Our service business further increased during the quarter reflecting the higher tool utilization and increased requirements for spares, repairs, and training as customers return idle tools to production.

In the first quarter, sales to semiconductor OEMs were 52% of sales, and sales to semiconductor FABs were 10%. Sales to additional technology markets were 38% of sales. This percentage has increased when compared to our previous peak semiconductor years in 2007 and 2006 when our percentage of sales to these markets were only 32% and 30% respectively. This is further evidence of the success of our diversification and growth strategy.

Geographically, US sales increased 37% primarily as a result of increased sales to semiconductor and medical customers. Sales in Asia increased 34%, primarily as a result of strong solar and semiconductor sales. Sales in Europe increased 11%, primarily as a result of semiconductor and NG related sales. Sales in the US were 58% of total sales. Sales in Asia were 31%, and sales in Europe were 11%. Sales to our top 10 customers represented 49% of total sales. Sales to our largest customer, Applied Materials, represented 16% first quarter sales. Our head count as of March 31 increased to 2,481 compared to 2,178 as of December 31, reflecting increased manufacturing and service labor requirements.

Based on our recent order trends from the semiconductor capital equipment market and expectations that our additional advanced technology markets continue to grow, we expect our sales in the second quarter could range from $205 million to $220 million. Based upon this expected sales range, we expect our second quarter gross margin could range from 43.5% to 44.5% which includes the effect of annual wage and medical cost increases effective April 1. As expected, our operating expenses increased in the first quarter to $45.8 million. This primarily represented increased costs resulting from higher R&D project spending and increases in and timing of some employee fringe benefits.

We expect operating expenses to increase somewhat in the second quarter which also includes the effective annual wage in medical cost increases. Operating expenses could range from $47.3 million to $48.3 million. R&D expenses could range from $16.2 million to $16.6 million, and SG&A expenses could range from $31.1 million to $31.7 million. Amortization of intangible assets to the second quarter is estimated to be approximately $500,000. Net interest income for the second quarter is estimated to be approximately $100,000. For 2010 we expect our normalized non-GAAP tax rate to be approximately 32% which does not include the benefit of the expired Federal Research and Development tax credit. Given these assumptions, second quarter non-GAAP net earnings could range from $28.6 million to $33.7 million or $0.56 to $0.66 per share on approximately 51 million shares outstanding. GAAP net income could range from $28.1 million to $33.2 million or $0.55 to $0.65 per share. That concludes our discussion. We will now take your questions.

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

Good morning, guys. Thanks so much for taking the question and congratulations for the great results. Just a question about kind of if you can break down in the various product categories the lead times, the response times, are we at the point in the cycle where you think customers are worried about delivery times or has the supply chain just been able to respond so that the things haven't over heated in that regard like they might have in previous cycles? Thank you.

Thanks for your question, Jim. I think lead times are obviously a little bit longer for the products that we provide than typical, but I don't think things have been as emotional as other cycles. I think we mentioned on previous calls that the supply chain was tight for parts which is not unusual when you go through such a severe downturn and quite the recovery that we have all experienced. But I think if anything things are getting a little more comfortable in the supply chain, and we would expect lead times to become more normalized, so I don't think we have customers or supply chain that's over reacting, and I think some of the shorter cycle times and things like that and just the better discipline has helped that out. There are particular suppliers here and there where you have some trouble with delivery, but in general I think the supply chain is getting a little better than it was a quarter or two ago.

What would account for the supply chain maybe being better than it was a quarter or two ago?

I think if you look like us the number of people that have been added to get the output levels to the new levels. Things were down so low, spare parts were as you know stories about cannibalization, minimizing the orders of spare parts, all of that has sort of come back now to more normalized levels for that and I think ramping up you've got this time lapse from the time the business goes from a very low number to a much higher number to kind of fill the pipeline with both materials and people to produce some. I think in general equipment was probably not an issue and facility capacity was not an issue, but I think materials and people were probably the two issues that take some time to get back up to some normalized rate.

Terrific. Thanks so much.

You're welcome.

The next question comes from Krish Sankar from Bank of America. Please go ahead.

Thanks for taking my question. My first question was in the past early, in the ramp, you have inventory restocking portion that helped you have much stronger revenues in your OEM customers. Is it fair enough that is behind us at this point and your revenue should track OEM customer shipments on a 1:1 basis?

You know, I wish I was as good as I hoped I could always be in terms of understanding exactly where work in process inventories were in this supply chain, but I am in good company and not understanding that, I think, but I think in general what happens obviously is if you go to our customers, there is probably more equipment being built on the factory floor today than you saw a few quarters ago so obviously the whip levels have increased. I am not sure about the raw materials for everybody in the pipeline. We tend to turn raw materials pretty well I think throughout the pipeline or it's getting much better. So I don't think that's usually the issue. The issue is you fill the factory floors at these new rates with new whip levels, and so I think as you sort of flatten out growth or come to a more moderate growth you should have gotten some of that inventory caught up. You shouldn't have to build from the levels they're at two quarters ago to a much higher level, so theoretically at least you would think most of the build of inventory is behind us, but impossible to know by customer and how they manage their supply chain and everything else, but theoretically you would think that in a downturn, inventory shut off quickly, and in upturn inventories increase quickly just because that's how the systems work, but that doesn't mean that's what really happens. But theoretically I think you're right.

And it seems like you guys did about a little over $15 million in first quarter solar sales. It seems like most of the solar shipments seem to be front half loaded so I would like to get your view point on how you think solar system trends for the rest of this fiscal year?

As I mentioned in the call before the questions, our solar business tends to get lumpy, and part of that reason is, there is a number of customers who have projects at different times, and it certainly is not as mature an industry as sort of the semiconductor and display industry where you have some regular rates going on that kind of smooth out some of the quarter-to-quarter lumpiness, but in solar it gets lumpy, so delay of a project by one quarter could make the second half a real exciting quarter, so I don't know if I would say that it is front end loaded because we understand it that way. I think that we have some customers and we have some new customers that we had to get equipment out to quickly and primarily the new things were in Asia, but we also anticipate some additional orders later than the first quarter, and it depends on whether those customers hold the order rates. As I say they tend to be lumpy because their plans change very quickly, so for us we don't believe the solar shipments are over by any means. We think there is still a reasonably good year in solar for us.

My final question is you guys seem to be executing very well on your operating model at this point and generating cash. Any appetite for share buybacks at this time? Thank you.

That's something that the Board always examines, but I don't believe there is anything today we can comment on relative to that. Thank you. Thanks for the questions.

Thank you. The next question comes from C.J. Muse from Barclays. Please go ahead.

This is Shrini calling for C.J. Muse. Just wanted to know, how do you see the semicap trajectory over the rest of 2010 and what is your visibility like at this point?

We have given this information before to C.J. and the rest of the group here but our lead times are typically very short, so visibility for us directly is very short-term, so what we rely on is a lot of the public information that you either produce or people like yourselves produce, or what we hear on other calls as our customers announce their plans. To think that we're going to see 30%, 40% growth a quarter like we just saw, I don't think we're putting that in our plans, so I think that we would see things kind of moderate in the semi side. We're pretty excited about the global economies recovering and would expect as that continues to happen that we get some benefit in the other markets that we serve, so should semi sort of flatten out or grow at a lower rate, we would expect if the global economy keeps growing as its planned to be, we get some benefits on the other side to help offset some of that.

But more specifically do you see that first half will be around the same levels as second and the same levels as first half?

No idea right now. I guess we would be surprised if we saw any significant difference in the second half of the year.

And what about the adjustment to growth opportunities, especially the leading market, is that going to take off more in the second half?

We would expect that the other advance growing markets, and we have a lot of different opportunities in a lot of areas because the technology portfolio is so deep, so we see in all these markets I commented today there is upside opportunities in each of these. The timing varies because there is so many different markets, so if in the case of Krish's comment that will solar be a little slower in the second half, we don't know, we're not anticipating that but will medical be higher or LED be higher? I think in general we feel that these are growth markets, they don't quite have the cyclicality of the semiconductor industry that we have experienced, and when you have enough of them, hopefully you dampen sort of the effect of any one delay by one by something else picking up, so I think we would expect that these markets will be stronger as we keep going forward.

Thank you so much. Congratulations on a great quarter.

Thank you.

Thank you. The next question comes from Michael Burke from Canada Capital. Please go ahead.

Good morning, gentlemen. Nice quarter.

Thank you.

Just a couple things here. Coming back for the discussion around inventory in the supply chain and understanding the limited visibility you have there but for MKS specifically, do you think you can run sort of at these levels of inventory to service the 200 to 200 plus type range? What do you think you will need to effectively service that in terms of the lead times that you need to have for your customers?

Good question, Michael. I think our anticipation is that around the levels we're at if business was to remain at these levels and not dress increase significantly higher we're kind of in the right inventory range. As you know by part it varies, but overall I think we feel that we don't have this big drained pipeline in front of us that we're looking to fill, so I think it is reasonable, and I don't think we're sitting with anything that is so significant that we have got to bleed off quickly, so I think you're correct in sort of the answer is, yes, what you said is probably right. We're probably at a level that's reasonably close to the run rate we're at.

Okay. Great. And then I know I talked to you guys about you looked at every development program you had internally on an RY basis during the downturn and basically shook things out. As you look going forward here, where do you see yourself making the spending decisions if you can parse it by I am sure a lot is in the emerging technologies but where are you placing your investments for the future and how much do you think we need to see R&D increasing over the next year or two?

Good point. I think we did a very good job of analyzing all projects as we got into restructuring the spending in the downturn. We're using the same philosophy in the upturn. I think we're sitting down as a group looking at all projects, looking at which customers, which markets. The direct development investment in the other markets we're fortunate enough to be able to apply a lot of the technology we have in semi to these other markets. That doesn't mean we don't spend some level of R&D in modification or some sort of specialization for market, but we don't have to start from scratch or bet a large chunk of engineering dollars on doing something that may or may not happen, so I think in general we don't have to do a radical shift in R&D spending. We would expect to try to hold the line as much as possible in terms of R&D spending although we've added some this year. I think we commented in a few particular areas. We've increased our R&D budget.

In the terms of operating expenses, other than those that are sort of around medical benefits and wage increases, any head count pretty much has been in the R&D area, so the increase in operating expenses outside of sort of the wage increases and medical expenses or other fringe benefits, any head count change has been around R&D pretty much, so we have made some of the that investment in the last two quarters increasing R&D. I don't see a significant shift as we look forward for the next few quarters. Obviously we'll have to look again as we get towards the latter part of the year to see how 2011 looks and where we might want to dedicate that, but typically it has been balanced between semiconductor new applications and then modifications or specials or some adoption into another market, so I think nothing radical there in terms of changes you should expect.

Okay. Fair enough. Just to close the loop back to sort of the M&A thoughts and how you guys are looking at that and coming back to how you're looking at spending R&D, maybe you can just talk a little bit about sort of the criteria using to examine this and how much emphasis or weight do you place on kind of the R&D expected expenditures you'd have with the given acquisition versus the revenue level you think that's going to provide to you? Is there some balance you're looking there to try to hold the current model the Company is operating at or can you talk about how that looks for you guys as you examine the acquisition target?

I would say some of the major criteria, and I am not going to get into the details of the line items within a possible acquisition, but certainly our focus is around technology, so that's using one of the significant criteria. How do they add to the technology portfolio? Was it a strong well protected technology? The second would be how does it fit our business model in the sense of the returns we look at in investment overall not just the R&D but how does it look overall as far as accretive and how does it fit within our model? And how do we leverage either our sales channels and service channels and operations for this new business or can we leverage theirs in some cases for our business and other markets, so I think that's more around the criteria than just focusing on their R&D budget and spend and how we would hold the line.

Great. Thanks, guys.

You're welcome. Thank you.

Thank you. (Operator Instructions) There appear to be no further questions, sir. Please go ahead with any other points you wish to raise.

Thank you. Well the global economy is recovering, and we're benefiting from the resurgence of any of the advance markets which is depend on our technology. We're pleased to report the strong results for the quarter. It is a great start to the year. Second quarter should be another good quarter, and we're optimistic and look forward to a strong 2010. Again, thanks for joining us on the call this morning.

Ladies and gentlemen, this concludes the MKS Instruments first quarter earnings conference call. Thank you for participating. You may now disconnect.