萬機儀器 (MKSI) 2011 Q1 法說會逐字稿

Good day, 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 open for questions. (Operator Instructions)

This conference is being recorded today, Thursday, April 21, 2011. I would now like to turn the conference over to Vice President and Chief Financial Officer Seth Bagshaw. Please go ahead, sir.

Thank you. Good morning, everyone. I am Seth Bagshaw, Vice President and Chief Financial Officer, and I am joined this morning by Leo Berlinghieri, Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday, after market close, we released our financial results for the first quarter of 2011. You can access this release at our website, www.mksinstruments.com.

Before we begin, I have a quick calendar announcement. MKS will hold an analyst and investor meeting on Wednesday, June 15, 2011 concurrent with the Company's 50th anniversary. The meeting will be held in New York City at the NASDAQ market site in Times Square from approximately 10.00 AM until 1.00 PM.

We hope to see you at this meeting, and we will have a live webcast for anyone who won't be able to join us in person. Information about the webcast will be announced in a press release, and available on our website. Please contact Claire McAdams at Investor Relations with any additional questions at 530-265-9899.

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 yesterday's press release and the Company's most recent annual report on Form 10-K, 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.

Thinks, Seth. Good morning, everyone. Thank you for joining us on the call today. I will give an overview of the first quarter of 2011, as well as our outlook. Following me, Seth will review our financial results and guidance, and then we will open up the call for your questions. As we enter our 51st year, I am pleased to report that business continues to be strong, and in the first quarter we achieved record quarterly sales of $232 million, up 6% from Q4 2010 and up 21% from Q1 a year ago.

First quarter sales for the semiconductor market were comparable to Q4 at $136 million, representing 59% of the revenue. Sales to the solar market were up 97% to just over $30 million, as we shift the majority of the initial large order from our thin film solar customer in China. Sales to all other markets were $66 million, up 3% from last quarter.

Our non-GAAP earnings increased 11% to $38.2 million, or $0.73 per share, primarily as a result of increased volumes, favorable product mix and favorable foreign exchange. GAAP net income was $38 million or $0.73 per share.

As we previously reported, the Board of Directors authorized a quarterly cash dividend of $0.15 per share which was paid on March 18. Our cash and short- and long-term investments net of debt increased $47 million to $479 million. First, let me comment on Japan, where the recent earthquakes and tsunami in Japan, have been a serious human tragedy and our sympathy goes out to all who have been affected. Fortunately, our Japanese operations suffered no damage and are fully up and running.

From a supply standpoint, we made an assessment immediately and found that the impact to supply to be minimal, and continued monitoring of the supply chain has shown no significant issues. Most of our customers are operational and we are not anticipating any major impact on our business from this tragedy in Japan.

In the semiconductor market, our strategy is to outpace industry growth and our performance records speaks to our continued success in achieving this objective. As device geometries continue to shrink, semiconductor manufacturing is becoming increasingly more complicated with tighter and faster control of more processing steps.

In fact, the number of processing steps for today's leading edge 22 nm chip is double the number for the 90 nm chip. The combination of both more processing steps and the need for tighter process control has continued to open additional opportunities for our technologies per tool and per fab. As a critical enabler of these complex manufacturing processes, we work closely with semiconductor equipment, OEMs throughout the world as they design new tools and new process solutions for their customers.

In Q1, we had several new design wins for deposition, etch, resist processing, implant and other process tools. For example, our advanced pressure control system was selected for a sophisticated Atomic Layer Deposition, or ALD, tool at a leading OEM. At another OEM, our high accuracy flow verification was selected to ensure extremely precise delivery of processed gas to critical process chambers and CVD.

This quarter, we expanded on our recent success in resist processing temperature control with a new design win with a second customer. In addition to direct OEM sales, there are also times when our products are needed to increase the capability of existing installed tools.

In this quarter, our RF power supplies were selected by a major semiconductor device manufacturer to optimize performance on their current tools, as well as for their new tool orders. Underlying demand for semiconductor chips continues to grow. New devices such as smartphones and tablet computers are increasing in popularity, while existing electronic applications, including automobiles, communications, medical, energy, and many others are continuing their rebound from the recent recession. Growth in the electronics industry is projected to exceed 10% in 2011.

In the other advanced markets we served, we achieved another revenue record with $96 million in sales this quarter, up 21% sequentially, representing 41% of our total sales. Our strategy is to focus on advanced high growth markets where we can leverage our technologies and investments to drive further revenue growth.

We have demonstrated in the past, and our goal in going forward, is to achieve an average growth rate of at least 15% in these markets. These additional markets are characterized by advanced manufacturing processes, which like semiconductor, require high precision, utilize vacuum and gases, and require a sophisticated level of instrumentation and process control.

These markets include the manufacture of solar cells, light emitting diodes, or LEDs, thin film coatings and other critical processing applications. These markets provide exciting opportunities for MKS, and I would like to share a few examples of our recent successes.

In the solar market, each quarter we continue to gain new customers across the globe for many of our technologies. These solar manufacturers must continuously lower costs and improve productivity in order to be competitive without subsidies, and our products help achieve both of these objectives.

One example of this is in the thin film deposition process where the materials deposited on the solar cells end up coating the process chamber walls. Originally, the design of many solar deposition tools required that the system be taken out of production and disassembled for regular manual cleaning.

Today, more and more solar tool OEMs are designing in our chamber cleaning solution to maximize uptime and, therefore, increase the overall productivity of their tools. Many of the new solar customers and fabs are in Asia, where we continue to expand our customer base and leverage and grow our local presence to support these customers. In the first quarter, we saw significant demand for flow and other products from China solar OEMs for crystal and silicon deposition tools.

These customers tell us they have selected MKS because of our technical performance, reliability, and strong local presence and support. In recent calls, I have talked about the large orders we received from a major Chinese solar OEM for our power, pressure control and other products.

I am pleased to tell you that we completed delivery of the first quarter plan for these orders on schedule and the customer is planning to start solar panel production by the end of this month. The solar order we announced in February for this customer is now scheduled to ship in the second half of the year. Some reports indicate a possible near-term slowdown in the solar market, however, worldwide demand persists for clean energy sources and our customers are placing an increasing focus on productivity and process control.

These factors lead us to be optimistic about the industry's long-term growth and the increasing opportunities for MKS to sell into the solar market. In the LED market, we achieved a number of significant design wins this quarter from LED tool OEMs.

As I mentioned in the past, LEDs are made using vacuum processes and require many MKS technologies. LEDs are bright, have high reliability, long life and are environmentally friendly. Because of this, they have gained rapid acceptance in flat screen displays and are emerging as an energy efficient alternative for lighting applications.

Compound annual growth rate from 2010 - 2015 for LEDs in lighting is forecasted to exceed 25%. Historically, there were only a few LED tool manufacturers. Over the past year or so, however, a number of new tool OEMs have emerged in Asia, and I am pleased to say that we have been successful in winning business with both incumbent and new OEMs, including several important design wins in Asia. We have been selected to supply power, flow, and pressure control products for new LED deposition tools, and have entered into a three-year cooperation agreement with a major new tool OEM there.

Moving on to our analytical products, we continue to have success in environmental, life science and other applications with our water treatment, emissions and air monitoring instruments, analytical software and other products. In the quarter, we received another order for our batch online multi-varied analysis software. This is part of a multi-year deployment plan to ensure vaccine quality at a major pharmaceutical manufacturer.

As I mentioned in previous calls, we implemented new capability to manufacture large custom vacuum chambers. We added several new customers this quarter, bringing our customer count to over 20 for various applications, including thin film, coatings, medical, semiconductor, and high energy physics.

One area that we don't talk about very much, but which is still important to our business strategy, is our leading position (audio malfunction.)

Ladies and gentlemen, please continue to stand by, we are having technical difficulties at this time. Please continue to standby, our conference will resume momentarily. Ladies and gentlemen, please standby, we are experiencing technical difficulties. Once again, please standby and please do not disconnect.

This is Leo Berlinghieri again. Sorry for the technical difficulty on the call. I will try to pick it up from where I thought we left off. We had just talked about some of the applications in the environmental markets and physics.

This represents just a few examples of diverse applications for our technologies, which complement our core business with new opportunities in advanced and growing markets. As we have noted and demonstrated, we are committed to growing and diversifying our customers and market base. By successfully identifying new trends and applications in these other high-growth markets, we look forward to many growth opportunities ahead.

Looking at the next quarter, we reviewed business in both our semiconductor and other advanced markets. So far this year, the semiconductor market has remained strong. Recently, we have heard reports that some planned capacity additions may be delayed. However, at this point, we have not seen any significant change in demand from the semi market.

In the other markets we serve, we expect that the global economy will continue to grow and we will see continued strength in these markets. We estimate that our second quarter sales may range from $220 million to $240 million, and at this volume, our GAAP net earnings could range from $0.62 to $0.76 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. Good morning, again, everyone. I am pleased to report that in the first quarter we reached a new record for both revenue and non-GAAP net earnings. Revenue was $231.9 million, which was a 21% increase from $192.2 million in the first quarter of 2010, and a 6% increase sequentially from $219 million in the fourth quarter of 2010. Gross margin during the quarter was 45.9% compared to 44.4% in the fourth quarter of 2010.

The increase in gross margin percentage was primarily related to increased volume, favorable product mix and a favorable foreign exchange impact. Operating expenses were $49.6 million, up slightly from $48.7 million in the fourth quarter of 2010, primarily due to the timing of R&D project spending.

Our net operating profit in the quarter increased by over 200 basis points to 24.4% of sales, and non-GAAP earnings increased 11% to $38.2 million on a 6% of revenue growth rate. This improved AARPTI leverage is attributable to our continued cost control over higher volumes and the effect of the favorable gross margin discussed previously. GAAP net income for the first quarter was $38 million, or $0.73 per share.

The tax rate was 33%, up slightly due to geographical mix of taxable income. In the quarter, cash and investments net of debt increased by $47 million to $478.9 million, and included net cash received from stock option exercises and restricted stock issuances of $22.7 million, and a dividend payment of $7.8 million. In terms of working capital, days sales outstanding were 60 days, up slightly from Q4 due to the timing of revenue during the quarter, and inventory turns were 3.1.

Capital additions for the quarter, primarily related to test and calibration equipment, were $2.3 million, and depreciation expense was $2.9 million. Fourth quarter sales to the semiconductor market comparable to the fourth quarter at $136 million, representing 59% of revenue. Within the semiconductor market, sales to semiconductor OEMs were 49% of total sales, and sales to semiconductor fabs were 10% of total sales. Sales to the other advanced markets we target were up 21% from the fourth quarter of 2010 to $96 million, also a new quarterly record, and represented 41% of total revenue. Sales to the solar market were up 97%, just over $30 million, as we completed the planned first quarter shipments of the initial large solar order we announced late last year.

Sales to all of the markets was $66 million, up 3% sequentially from last quarter. Geographically, sales in the US were 48% of total sales, sales in Asia were 39%, and sales in Europe were 13%. Sales to our top ten customers represented 45% of total sales. Sales to our largest customer, Applied Materials, represented 14% of first quarter sales. Our headcount as of March 31 increased slightly to 2,726, compared to 2,673 as of December 31, primarily reflecting increased manufacturing labor requirements.

As Leo mentioned, the recent tragic natural disaster in Japan did not have a material impact on our financials finished results for the first quarter. We currently do not expect a material impact on estimated second quarter finished results, however, it is difficult to assess the impact for the remainder of 2011 due to the uncertainty with recovery. Our condolences and sympathies go out to all of those who are affected.

Based upon current business levels, we estimate that sales in the second quarter could range from $220 million to $240 million. Based upon this expected sales range, our Q2 gross margin could range from 44.5% to 45.5%, reflecting expected product mix and the expected annual wage increases effective in the second quarter.

Q2 operating expenses are expected to range from $49 million to $50 million. In the second quarter, R&D expenses could range from $16.3 million to $16.7 million and SG&A expenses could range from $32.7 million to $33.3 million.

Amortization of intangible assets and net interest income for the second quarter are both estimated to be approximately $300,000. For the remainder of 2011, we expect our normalized non-GAAP tax rate could be approximately 33%, reflecting the anticipated geographical mix of taxable income. Given these assumptions, second quarter non-GAAP net earnings could range from $32.9 million to $40.3 million, or $0.62 to $0.76 per share, on approximately 53 million shares outstanding. The GAAP net income in the second quarter could range from $32.7 million to $40.1 million, or $0.62 to $0.76 per share. This concludes our discussion, we will now take your questions.

Thank you. Ladies and gentlemen, at this time will begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Edwin Mok with Needham. Please go ahead.

Hi, thanks for taking my question. So, my question, I guess, relates to [semiconductor] business and on your guidance. Just curious, what is baked into your guidance on the semiconductor side. And just maybe your general commentary in terms of how you guys look at that business going beyond the coming June quarter?

Okay, well, Edwin, related to the guidance, probably where I'll give you most of the comment on since we don't give too much guidance beyond that, we would expect more semiconductor in the Q2 guidance. I think as we mentioned, we had the large solar order ship in Q1, the second portion of that order that we announced -- or the second order we announced, that is in the second half of the year, and so with the guidance being roughly the same as last quarter, a lot of the makeup is in the semiconductor business.

So we would expect to see higher numbers. I can't give you an exact percent, but it is probably somewhere in the 4% to 6% range, in that number. As far as long term, I think the best indicator for us is fab spending, and the equipment announcements. We have seen great announcements in January, we heard a couple of push-outs, and then yesterday we heard of additional spending. So I think the balance of the year is yet to be seen based on what actually happens.

I see. Very helpful. And then can you just remind us what is -- do we see a better margin or worse margin with a high mix of semiconductor business?

The margins don't vary a lot, it really depends on customers in the some of the markets have impact, but generally we might get a little better gross margin in some of the lower volume customers in some of the non-semi. But you also have a little higher selling expense because of the smaller customers. So, I think from an operating profit standpoint, we don't typically expect any significant differences.

Great. One last question, I'm sorry, on the semi side. In terms of (inaudible) lead time and customer inventory, where do you see that right now? Is lead time extending or improving? And then in terms of customer inventory, do you to see that as an area of concern for that?

I think that the inventory builds are usually during the ramps where we are seeing 25% - 30% quarter-to-quarter growth. We haven't seen that in the equipment companies for several quarters. So I think we expect that inventories at our customers are more normalized.

I see, great. That's all I have, thank you.

Thank you.

Thank you. And our next question comes from the line of Krish Sankar with Bank of America-Merrill Lynch. Please go ahead.

Yes, hi, thanks. Leo, a couple of questions. What is your flat panel revenue in the quarter and how do you look at that going forward for the year?

Flat -- I think I mentioned last quarter, our expectation on flat panel was a relatively slow start. We finished the last half of last year, I think, the flat panel was down and we were expecting it to be down for the first half of the year. We don't report specifically on flat panel, we put it into the thin film non-solar business. But it is usually in the few percent range. I mean, it's not more than 2% - 4% - 5% depending on whether it is up or down. And so we would expect that the first half of the year would be -- continue to be low, and there is some indications that maybe the second half of the year would have some recovery.

Got it, got it. All right. And then on the semiconductor side of the business, like [Liam] spoke about some push-outs on the shipment side. Have your OEM customers actually telegraphed you any push-outs or are you still going by the forecast they've given you from like [pre-Craig] days?

Since our business is a turns business we look at what they are asking for on a daily basis, and we look at sort of their short-term forecast. We haven't really seen anything change significantly in that.

Got it, got it. And then you kind of said that the inventory to customers is more normalized. So is it fair to view your shipments as pretty much tracking in line with the OEM shipments?

That is the sort of what I meant by normalized. So, normally in a ramp, they're probably filling their factory with tools and whips so you're providing inventory not only for their shipments but for building that whip up. I think when business goes up 5% - 10% we don't see huge swings in work in process inventory at our customers, and so we tend to look at what they buy will eventually, in a reasonable amount of time, leave their factory. So, that is true. That is what I mean by normalized.

All right.

That is what we see at this point.

Got it, got it. And you kind of mentioned about the LED tool agreements here, the agreement at the OEM. Is that for supplying all the components for the MOCVD tool or is it some of it?

I won't comment on the details of the agreement because we can't. But one of the newer LED OEMs in Asia is who we are referring to in terms of having a multi-year agreement, where they would like to work with us. And one of the objectives of that agreement is how we get more content on their tool. So, I don't think there's any guarantee that we will provide everything on that tool, but the spirit of the agreement is that we would have more opportunity to work with them to put more content on the tool.

Okay. Is there any way to quantify what is the dollar value for tools from a component standpoint depending, as you mean, you get all the components?

For an MOCVD tool?

That's right.

I don't have that today. Maybe in future presentations we can add that. I know we've have done it in solar, so maybe we can look at a -- if there is any such thing as a typical CVD tool, we will take a look at that

Thank you.

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

Yes, thank you, good morning. Thanks for taking my question. I guess, Leo, first question, just a point of clarification. Did I hear you correctly say that you expect your semi business to add 4 - 6 points of total revenues quarter-on-quarter?

What I said is that the large solar order that shipped in the first quarter, we won't be having that in the second quarter, and that yet the guidance is roughly the same. So you can assume that a good majority of the difference is in the semi business. So that is somewhere around 4% - 5%.

Okay. So the non-semi business should still come in at a relatively high level, kind of mid-80s, so higher than kind of what you were printing in the second half of calendar 2010?

We would still expect growth in that area. Although we have mentioned it is lumpy, it is not an industry-like semi that has lots of OEMs that are chugging out at a rate every day, so there tends to be some lumpiness in it. One of them is this solar order we're talking about. But in general, we would expect it to grow over the year, yes.

Sure. And then, I guess, when I look at kind of the run rate there, averaging about $90 million give or take in the first half of calendar 2011, do you expect growth on top of that with follow-on solar orders? Or how should we think about the contribution in the second half from the non-semi?

Good point. Probably don't have any definitive answer, but I can mention a few things we talked about last quarter. And that was, and what I just mentioned earlier today, the second order that we announced from that solar customer has moved to the second half of the year. There is still an expectation, as I mentioned last quarter, that they would have additional demand in orders sometime this year for shipments still expected to be in this year.

And, I guess, if you consider that plus the likelihood that LCD does get a little bit better, does that give you confidence today to sit here and say that you think second half is better than first half? Or still too early?

When all those orders come in it will give me a lot more confidence.

Sure. Okay. If I could follow up on the gross margin side, I think what you guys printed was the best gross margin ever for you guys. So, curious as to what -- was the mix driving that? Or was there something that is more longer term in terms of sustainability that we could track to this kind of higher number over time?

Yes, I will let Seth comment, but I know for last quarter there were three specific elements of it.

Yes, I would say, C.J., we had a good, mostly a good mix in Q1. We guided in the second quarter down a little bit in terms of the gross margin, but I think if you go back in time to the guides in Q2 is still a very good margin compared to historical margins of those volumes. So, Q1 was mix and foreign exchange and we think going forward the margins we guided to are more realistic at these volumes.

Perfect. And, I guess, last question, now that cash is continuing to accrue, you have announced the dividend, curious whether you start to think of other things to do there as that grows through this cycle?

I think that we are always looking at the best use of cash in terms of investment in the business, we have done buybacks, we have done acquisitions where we've used cash, and now we have done a dividend. So I think we will continue to looking, C.J., at the best use that we see in a particular period of time. But nothing to report at this point.

Excellent, thank you.

Thanks.

Thank you. (Operator Instructions) And our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

Hi, this is Mark Delaney calling for Jim Covello. Thanks for taking my question. I was wondering if you could maybe give us an update on your plans with OpEx? I know you guys mentioned wage increases taking effect in the June quarter, and have been putting some headcount in place for manufacturing. How should we expect that to trend in the second half of the year?

I think it will be relatively flattish, Mark. I wouldn't expect any major deviations quarter-to-quarter at these volumes. There is some lumpiness in R&D spending, some IT projects, but generally where we are right now I wouldn't expect a huge variation for the remainder of the year.

Okay. I was wondering if you guys could maybe give us an update on your market share trends at the semi equipment customers? I know you mentioned a lot of good design wins, wondering if that is all upside or if there's any areas you guys are seeing pressure?

I don't sense any different competitive pressure. I think probably the one that most people are dealing with is maybe a little different kind of pressure in Korea, where localization is the something that they seem to be strong and trying to implement or having the supply chain support them stronger in Korea. So, one way or the other there is a focus. But outside of Korea, don't think we see any different competitive activities going on.

Most of what we do is in areas where there are one or two legitimate suppliers, that are strong enough to go through upturns and downturns, can ramp at the rate the industry wants to ramp. And not that there aren't other suppliers, but in general, there are typically a few suppliers for each of these technologies and I don't see a lot of changes in the competitive landscape based on that.

Okay. That's helpful. Finally, I was wondering if you could maybe give us a rough approximation of the size of the LED business? I understand you guys don't break it out, but similar to flat panel, is it 2% - 5%, or how should we be thinking about the size of it?

Yes, I think probably in the 2% - 5% range would be fair.

Okay. Great. Thanks very much.

Hopefully, it will be bigger than that a few years from now as these new OEMs and the market acceptance of lighting is stronger, but for today I think that is fair.

Thank you.

(Operator Instructions) I am showing no further questions at this time. I will now turn the call back to management for any closing remarks you may have.

Well, thank you, and thanks for hanging in there with the technical problem we had. 2011 has started off well. The increasing need for process control opens additional prospects for us to grow faster than the semiconductor market.

We continue to be excited about our growth in opportunities in both semiconductor and other advanced technology markets we serve. Again, thank you for joining us on the call today, and we look forward to seeing many of you at our analyst and investor meeting in New York City on June 15.

Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 1-303-590-3030, using the access code 4425390. ACT would like to thank you for your participation. You may now disconnect.