萬機儀器 (MKSI) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MKS Instruments third-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions). I would now like to turn the conference over to Ron Weigner; go ahead, sir.

Good morning, everyone; I'm Ron Weigner, Vice President of Finance and Treasurer, 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 after market close, we released our financial results for the quarter -- for the third quarter. You can access this release at our website, www.MKSInstruments.com. As 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 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 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 will 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 third quarter of 2010 as well as our outlook. Following me, Seth will review our financial results and guidance, and then we will open the call for your questions.

I am pleased to report that in the third quarter our business remained strong. We once again achieved record revenue with sales of $221.3 million. Our non-GAAP earnings per share increased 9% to $0.72 per share, primarily as a result of favorable gross margin, lower operating expenses and favorable foreign exchange. GAAP net income was $38.6 million, or $0.76 per share. Our cash and short- and long-term investments net of debt increased $36.9 million to $347.3 million.

This quarter, our sales to the semiconductor market were $141 million, or 64% of total revenue. Although down slightly this quarter, our semiconductor revenue is tracking at a record pace and above prior peak, outperforming the recovery of our served semiconductor market. We attribute this performance to an increase in demand for our broad and differentiated technology portfolio, which supports the industry's need for increased process control as critical semiconductor dimensions shrink.

In the advanced markets we target outside of semiconductor, we set another record this quarter, attaining revenue of $81 million, or 36% of our business. Our sales to these emerging markets continues to increase as shown by our achieving a compounded annual growth rate of 16% over the last seven-year period. And we anticipate that these markets will continue to grow and will represent an even larger portion of our revenue.

The way that we are succeeding in these markets is by solving process problems and leveraging these solutions into further design wins. As a result of developing our broad technology portfolio, focusing on our customer base and building a large global infrastructure of sales, applications and support people, we are able to leverage these resources with both new and existing customers.

The process usually starts with solving a specific problem at a customer with one of our products. After the initial success, typically we have the opportunity to solve other application challenges or replace competitor products, resulting in further opportunities for more of our products. Our long-term goal is to achieve at least a 15% compounded annual growth rate in these advanced technology markets, and they continue to be a key component of our growth strategy.

To provide some additional color on multiple growth opportunities this quarter, I will once again highlight a few successful applications of our technologies. Starting with the solar -- starting with solar, recent industry forecasts project that the 2010 to 2014 compounded annual growth rate will be in excess of 30%, which is supported by capacity expansion announcements from numerous solar customers and which we believe will provide significant growth for our technologies.

We continue to capture new solar customers and gain additional share for our products, especially in the rapidly expanding Asia market. Concurrent with our earnings release yesterday was the announcement of a record $20 million order from a major thin-film solar customer in China. This was the largest order booked in the history of MKS. This major customer selected MKS RF power supplies and matching networks for their thin-film solar deposition tools.

Keys to winning this order were our newly designed advanced power supply technology with its superior power conversion efficiency and high reliability and our strong local presence in China, including our highly skilled applications engineering team. This customer ordered a number of vacuum-related instruments from us as well, leveraging more of our product portfolio to meet their needs.

This initial order is for two solar fabs which are currently under construction in China. Initial deliveries are scheduled to start late in 2010 and ramp in the first half of 2011. This is an exciting opportunity for MKS, since we expect the same customer to expand capacity further in 2011.

Third-quarter orders to the solar market in Europe were also strong. Multiple OEMs placed orders for various technologies, including chamber clean, flow, pressure, vacuum and gas analysis for their solar tools, and solar orders in Europe region were double the levels of Q1 and Q2.

Another growing area is in consumer electronic devices with displays like iPhones, smart-pads, e-readers, etc., which have seen increased proliferation over the last year or so. These require bright, clear displays, and many MKS products are needed in their manufacture. A major industry analyst is forecasting that the display equipment market will expand by more than 60% this year and will continue to grow in 2011, driven by increasing consumer demand.

With display demand up, production capability is critical. Earlier this year, a major Korean display manufacturer found that air leaks in their processing tools were reducing their yield. Our applications team helped identify the problem, and this quarter the customer selected our gas analyzers as the only viable means to identify air leaks in their display tools. As a result, we received a significant order for our gas analyzers this quarter, and there is potential follow-on orders in early 2011.

This same customer also ordered multiple dissolved ozone systems, which are used to clean their advanced OLED displays during the manufacturing process. Shipments are expected to begin late in Q4 and continue into 2011. A second order is also expected in 2011. This, again, is an example of providing a technology solution in one specific area and then leveraging it to expand our share in the fab and on the tools.

Another example I would like to highlight is in the growing pharmaceutical and biopharmaceutical markets, where drug development and production are becoming more and more complex. In this market, stringent process control, repeatable manufacturing and traceability as well as regulatory compliance are essential.

Here, MKS offers a broad range of products to measure and control pressures, manage flows, analyze gases and optimize processes. In addition, our multivariate analysis software is used to monitor, analyze and optimize the many interrelated manufacturing variables to ensure process control during both development and production.

In the third quarter, we received a pilot order from one of the world's largest generic pharmaceutical manufacturers for our multivariate analysis software to monitor and optimize multiple process variables in their drug manufacturing process. Additional objects ranging from quality through online analysis are planned to be deployed globally and five additional pilot locations have been identified for 2011.

In the semi market, we had new design wins with multiple customers on numerous tools. One of these design wins was with the world's leading semiconductor equipment company for its newest CVD system that incorporates a number of our products, including remote plasma, capacitance monometers, effluent management and valves.

We also had another significant success in Asia in the quarter. This competitive win was from a Japanese OEM who selected our control products to manage temperature on their resist processing tools. Our controllers provide exceptional multi-zone temperature control, enabling this customer to increase both the yield and the processing speed on their tools. This is a new application with a new customer for our control products, and we believe it represents expanded opportunity for MKS.

While the semi-market has had an exceptional year so far in 2010, the forecasts for 2011 are varied and changing frequently. However, at this point, we're seeing no significant variation in demand from the semi market. Equally important for us are the other emerging markets we serve, where our sales increased nearly 3% in Q3, reaching 36% of total revenues. We anticipate that as the global economy continues its recovery in Q4 and beyond, we will continue to see growth in these markets.

Based on this, we estimate that our first-quarter (sic - see Press Release) sales may range from $215 million to $230 million, and at this volume our non-GAAP net earnings can range from $0.62 to $0.73 per share.

At this point I will turn the call over to Seth to discuss our financial results and expand on our guidance.

Thank you, Leo, and good morning, everyone. Continuing the strength we have seen in 2010, third-quarter sales to both our advanced technology and semiconductor markets remained strong at $221.3 million, and non-GAAP earnings per share increased 9% sequentially to $0.72 per share. Results for the quarter were affected by a favorable gross margin, lower operating expenses and favorable foreign exchange benefits.

Gross margin was slightly better than we expected due to a more favorable product mix and a favorable impact of foreign exchange. The decrease in operating expenses was primarily related to lower project spending due to the timing of certain engineering and IT projects, lower fringe-related expenses and other lower than normal costs.

Operating expenses were also reduced by approximately $1.1 million of favorable foreign exchange. We expect to return to more normalized spending levels in the fourth quarter.

Our net operating profit was approximately 25% of sales. GAAP net income for the third quarter was $38.6 million or $0.76 per share and included $2 million or $0.04 per share of income from discontinued operations net of taxes.

Cash and short- and long-term investments net of debt increased $36.9 million to $347.3 million. Days sales outstanding were 63, and inventory turns were 3.2. Capital additions for the quarter, primarily related to our new expanded facility in Korea as well as additional manufacturing and test equipment, were $4.8 million, and depreciation expense was $3.2 million.

In the third quarter we had a slight decrease of 1% in sales to the semiconductor market, which was offset by a 3% increase in sales to our other markets. Third-quarter sales to semiconductor OEMs decreased 3%. Sales to semiconductor fabs increased 7%.

As a result of new design wins and continued improvement in our additional markets, we are very pleased to report that third-quarter sales reached another new quarterly record at $81 million, and for the nine months grew over 70% compared to the nine months of 2009. In the third quarter, sales to semiconductor OEMs were 53% of sales, and sales to semiconductor fabs were 11%. Sales to additional technology markets were 36% of sales.

Geographically, US sales decreased 2%, sales in Asia decreased 1%, and sales in Europe increased 14%, primarily as a result of sales to semiconductor and solar customers. Sales in the US were 57% of total sales. Sales in Asia were 32%, and sales in Europe were 11%.

Sales to our top 10 customers represented 46% of total sales. Sales to our largest customer, Applied Materials, represented 16% of third-quarter sales.

Our headcount as of September 30 increased slightly to 2602 compared to 2574 as of June 30, primarily reflecting increased manufacturing and labor requirements.

Based upon current business levels, we expect that our sales in the fourth quarter could range from $215 million to $230 million. Based upon this expected sales range, our Q4 gross margin could range from 43.5% to 44.5%. Q4 operating expenses are expected to reflect more normalized quarterly spending and could range from $46.1 million to $47.1 million. In the fourth quarter R&D expenses could range from $15.5 million to $15.9 million, and SG&A expenses could range from $30.6 million to $31.2 million.

Amortization of intangible assets for the fourth quarter is estimated to be approximately $300,000 and net interest income for the fourth quarter is estimated to be approximately $100,000.

For 2010 we expect our normalized non-GAAP tax rate to be approximately 33%, which does not include the benefit of the expired federal research and development tax credit. Given these assumptions, fourth-quarter non-GAAP net earnings could range from $31.5 million to $37.4 million or $0.62 to $0.73 per share on approximately 51 million shares outstanding. GAAP net income in the fourth quarter could range from $31.3 million to $37.2 million or $0.61 to $0.73 per share.

Assuming a midpoint of our fourth-quarter guidance, we expect 2010 sales would be approximately $855 million and non-GAAP earnings per share could be approximately $2.62 per share. Assuming no significant changes in working capital requirements and including expected receipt of a $26 million income tax refund, we could have net cash and investments of approximately $400 million at the end of the year or approximately $7.80 per share and a tangible book value of approximately $13.50 per share.

This concludes our discussion. We will now take your questions.

(Operator instructions). Krish Sankar, Banc of America/Merrill Lynch.

Thanks for taking my question. Leo, a couple of them -- number one -- could you give qualitatively the directionality of the different segments in December -- semiconductor, flat-panel, solar and others?

What was number two?

And, number two was, if you look at over the last couple of quarters, your semi OEM customers -- they have been having sequential growth in shipments, but your revenues have been flattish. So in an environment where your customers could see flat to down shipments, what does it mean for revenues for MKSI?

As far as -- we typically don't break every segment down, but I could just give you some color on what we see right now. Obviously, the solar activity remains very strong. I think semi stable, meaning it could be up a little, down a little. I think we were catching up with delinquency, so that may be why you are suggesting that it was strong -- while their revenue was going up -- remember also, revenue recognition for the equipment companies are different.

So when they report revenue, there's always a delay factor, and the same thing happens on the upturn. As business increases for them, as their shipments increase, we see the revenue immediately as they receive the product or at shipment. They have some level of revenue recognition. So that may be part of the difference that you are seeing. I can't comment on it too much more.

There's also -- we've always talked about there's a natural pipeline build of inventory as they put more tools on the factory floor, so you do get the benefit of the whip that increases on the factory floor. And so as things stabilize, they don't need to increase that whip. I don't see at this time anything significant as their revenues slow down a bit because I'm not sure it's a significant change to the shipping numbers and demand numbers that we receive from them at this time.

On the -- you commented on solar. I think we've had about seven or eight phenomenal growth quarters in LED, and I would -- I think at this point in time, I don't know if we would see the same kind of growth in the next quarter or two based on that. There are all kinds of expectations. It looks like a great growth story over the next several years, but at least we've had two really good years of quarter-to-quarter growth, and I would expect a little stabilization on that.

I don't know how long that would last. And we continue to see good growth in the medical side of the business; it's been strong. And I think -- is there anything else, in any other areas that you would like me to comment on?

No, that's good, thank you.

Jim Covello, Goldman Sachs.

Hi, this is Kate Kotlarsky for Jim Covello; thank you for taking the question. I wanted to ask, on the solar order that you guys just announced, it sounds like the shipments will start at the end of this year. Would you be able to give us a sense as to what kind of revenues we might expect for Q1 from the solar order?

I think you should probably expect that the majority of that order will ship in Q1. And we announced the size of the order at $20 million, I believe.

Yes, thanks very much for that, and my other question is on the cash. You guys have a very healthy cash balance today. Any thoughts of returning that cash to shareholders or any potential M&A we can think about in the near-term?

As you probably know, before the downturn, everybody was talking about what are you doing with cash. During the downturn, nobody ever asked me about cash. They are beginning to ask again, and the Board is constantly reviewing that. I think we'd consider all the different avenues.

You know, we have been acquisitive; we have used cash in some acquisitions. We've done a buyback in the past. The potential is for dividends. So I think I'm not ready to comment on any particular direction, but those would probably be the likely considerations today.

Okay, maybe if you had to think of the various things that you mentioned, maybe in order of what you think is maybe most likely or what you would prefer and what's least likely. Any comments on that?

I would say stay tuned for that. We'll let you know.

Okay, great, thanks so much.

C.J. Muse, Barclays Capital.

First question -- and I know that the drop sequentially is almost de minimis for semis. But considering the kind of feedback we got from Lam and last night that their shipments were up Q3-Q4, probably flattish Q1, I guess I'm a little bit surprised that that's down a little bit.

So can you help me understand in terms of whether there's some inventory out there, or is it specific customer mix? And I guess, then, looking forward, what your view is for Q4, Q1, Q2 and what kind of visibility you have there on the semi side.

Let me first reiterate what we always do, which is most of our business is a turns business, so visibility is sort of limited in terms of real visibility in the current quarter. So I think you understand that. But we always -- we look at more of the external data as well as customer input, much beyond a quarter.

And I think a couple of factors is that we sell to pretty much every single equipment company. So one announcement doesn't necessarily -- I guess if the announcement represented 80% of our business, it might have a significant impact to say, why doesn't that match up? But if you're talking about every equipment company in front-end processing equipment uses our products on their tool. So let's wait until hear what everybody says. But in general, we see things stabilizing.

We also, during the quarter or during several quarters, we put stocking programs in. That has an impact to a demand in a quarter where they may have bought in advance. We put a stocking program in. It means they have to utilize the inventory they have.

So it's more than just one factor to look at. And I think when we look at the overall factor, we see a little more stabilization, as we said in Q3 and Q4, and we don't have a lot of visibility beyond that. But we are not getting any significant change indication yet.

Okay, and in terms of the range for the top line, where do you see that volatility coming from? Is that semis or non-semi-related?

Can you clarify that a bit?

Yes, the $15 million top-line range for December, is that -- the upside or downside; would that come from semi's or non-semi's?

Honestly, I would suspect the upside would come from non-semis. But when you look at the number of products we ship to all of these customers, as I mentioned, and what they are -- when they buy something, when they place an order, when they need it, it doesn't all relate to exactly what the market is doing that month or that quarter. So I think, when you are looking at that range, it's just that many products with that many customers and a range that we believe we are comfortable with.

Sure, and a final question for me, and you did say earlier you don't have that much visibility. But I'll ask a question and see what you are comfortable saying. Looking at 2011, how should we think about the moving parts there? So on the semi side, if I were to tell you CapEx was flat or down 10%, what do you think your business would do, cognizant of whether there's any sort of inventory in the channel?

And then second part of that question is for the non-semi side, the moving parts there and whether or not reaching your growth CAGR over a multi-year period of 15% is achievable in 2011.

Our goal is at least 15% compounded annual growth rate. As Seth mentioned, through three quarters we had a 70% growth rate after a difficult 2009 with the global economic situation. So it's hard to imagine that every year will be exactly the same growth rate of 15%. So there could be stronger years and weaker.

I think, if the economy remains strong, then we have some opportunities for it to be higher than the 15%. If it doesn't remain strong, maybe that's a difference. I think so far, in semi again, limited visibility. We are not seeing anything that significant in terms of information we're getting. And the forecasters seem to be -- there's quite a range between the forecasters, so people that do this for a living.

We make product and ship it for a living. We don't make forecasts for a living. Even the forecasters are varied. So right now, the message seems to be flattening out, maybe down a little, and we would expect that the non-semi business will remain strong and maybe offset that.

Edwin Mok, Needham & Company.

-- questions. So I guess we'd sort of go back to semi. So, first of all, one of your logic customers (inaudible) has a foundation (inaudible) manufacturing to Singapore this year. Did that cause an inventory built ahead of that, and subsequently, a [re]-inventory burn at this point that may have some impact (inaudible)?

Yes, you are correct in them moving to Singapore. A lot of it is just transitioning material from one location to another location as they wind down. I don't know if, in the transition, there's any -- I don't know of anything significant that would have an inventory build. We weren't asked to do anything significant. So I don't see anything unusual there.

There's always -- companies always take good, prudent risk measures when they're doing a transition. But I don't think -- you are not seeing a shift where 100% of a business goes from one place to another, so it does that gradually. So I don't see a huge change in the inventory; either we build or gets consumed. As I said, you usually do a few products at a time or subassemblies, and you do that gradually. So I don't expect anything unusual there.

Great, and then just maybe commenting overall in terms of the inventory of your customer on the semi side. Do you see that trending at a reasonable level right now? You think that's a little high? And how do you think that could potentially impact your [crucial difference]?

Sure, it's probably not much different than my view in general. First of all, let me say that the equipment companies have gotten better at having either them managing inventory or us managing inventory year over year over year. So if you went back years ago, I think it would be more inventory today in the pipeline in their factories between us and them than there is today.

If rates remain stable, what I know is they probably shouldn't build inventory. If rates don't go down, then they probably shouldn't drop inventory. If that were to change significantly in either direction, then I think you'll see more whip changes either up or down. But if it's minimal, then I wouldn't expect to see much of that.

A lot of customers are on just-in-time programs, where we as suppliers ship fast. And so I think they don't have to store as much inventory. It works better for everybody in the supply chain because we get the real demand, and even during a ramp we get to see the real demand. So I don't see anything at customers that I would be really concerned about at this time. Like I said, as long as the rates remained relatively flat, they probably won't change their whip situation, which is really what drives the inventory.

And then on the solar order, I guess a two-fold question. One is, on the press release, you guys mentioned, you guys won both the RF side, as well as the vacuum. Any way you can quantify how much of the $20 million was which side? Is it 50-50, is it more RF, vacuum?

And the second thing is, that looked like a pretty sizeable order from one solo customer, and also there's a number of them that are [still doing] capacity. Any other large opportunity like that on the pipeline that you guys are looking at, and any way you can quantify the number [of assembly] you are looking at, or that just size potential in the coming year?

First of all, I think that we can cover both of those. First of all, the solar order -- I think you can imagine that RF and match has a significant ASP versus some of the pressure products. So let's leave it as a very large percentage of that business is RF and match. So I think that will give you some color on that.

As far as getting into specifics, please remember that all of these are competitive activities. So I wouldn't want to give anything too specific, but I will say that over the last five or six years we've gone from about 30 solar customers to probably approaching 300 or more. I can't even keep track of the growth in the number of customers and the names of those customers.

What I can say is that it appears that, more often than not, we are starting to see opportunities for larger orders from some of these customers, especially in Asia, where there seems to be some significant support from the local governments and an effort to be a leader in the solar market, solar industry. And in those areas, we are seeing opportunities for big numbers.

It's exciting to us. I hope it continues, and I hope we can keep announcing in the future these big wins. But we feel very positive in that area because we've gained those customers, have a good infrastructure to support them. So far, in all the competitive activities we've seemed to go away happy that we got the order. And we are going to just keep fighting for every order with those customers. We hope they keep looking as big as they have looked so far.

My last question is just on LED. How much was that, in terms of your business (inaudible) and how you look at that market.

With LED I'll say that we don't break them out as a separate group. But we have all of -- we have business with all of the major equipment companies in LED, and then obviously some activity directly with the manufacturers. We seem to be picking up more business with some of the newer companies.

We've had good success with probably a couple of the major companies, and we are picking up more and more success with some of the second-tier players, which I've always mentioned that the second-tier players we focus a lot on because of the product portfolio we have, often, they are looking for help across a number of parts. They have less procurement resources, and we are able to support them.

And China has been a big opportunity for us. So I think, in general, I can say that it was probably in the neighborhood back eight quarters ago of less than a couple of million dollars of revenue in a quarter, and it's probably -- it's probably under 5 -- total for the year will be well under 5% of the total business. But even that's a significant number from under $2 million, two years ago.

Great, that's all I have, thank you.

(Operator instructions) Michael Bertz, Kennedy Capital.

Just one thing to follow on about the solar questions. Looking into next year, clearly a lot of opportunities and more dollar content for you guys on the thin-film side. But what are you seeing in terms of what your customers or where you see, I guess, volume of opportunities, whether it's crystalline silicon or thin-film, and how do you see that balancing over the course of 2011?

Well, as you said, so far there have been some big, big wins in actually both crystalline and on thin-film. This one happens to be a thin-film, but we also had some great opportunities and some wins in power and other products. We sell the Vacuum Products in those environments. Power is still used in that environment. DC is often used. We've had some success. ASTRON is for cleaning gas analysis products, for managing the process.

So we've been happy when either of those markets continue to grow, and I think it has been, like I say, even more exciting with some of the thin-film growth. But good opportunity in both areas, and as customers transition to how do they get more yield out of these processes.

A few years ago, it was -- get me parts so I can build a tool to ship something to my customers on a panel. And today, they are beginning to look at how do I get more yield and throughput. We always love those situations, because then we have a chance with the product portfolio, after we sold them a DC power supply or an RF and match, to come back again and sell them an ASTRON for chamber clean or gas analysis for improving their process yields.

So I don't think there's -- we have any -- one way or the other view, I think we just see, all of those customers seem to be investing right now. And there are some that we still see as good opportunities that have talked about investing in 2011 that didn't invest this year. So we are expecting it to be a good year.

And then the second question, just on your internal inventory, up a little bit more quarter to quarter than volumes would suggest. What's the composition? Are you seeing that for anything specific or are you seeing evidence of a trend or something happening there that you're going to be working that through? And how would we expect inventories to look maybe in Q4?

I'll let Seth comment on that one.

Yes, I would think the Q4 inventory should be relatively flat to Q3. Some of the build is really due to the order we just announced this week. There's been some other upticks in inventory rates to certain customers, which we are funding that this quarter. It's really primarily about the order rate, the $20 million RF order we got.

Thank you, you may continue with any closing remarks.

Okay, well, the world economy continues its recovery. This certainly benefits both the semiconductor industry as well as the other advanced markets we serve. Analyst projections for the semi market are mixed, but at this point, as I said earlier, we see a relatively stable picture.

We are focusing on fully supporting the semiconductor market and increasing our emerging technology markets and maintaining the efficiencies we've implemented in the business, and we are optimistic about the many opportunities ahead of us in growing the business. Thank you for joining us on the call this morning and your interest in MKS.

Ladies and gentlemen, this concludes the MKS Instruments third-quarter earnings conference call. Thank you for your participation. You may now disconnect.