萬機儀器 (MKSI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MKS Instruments, second quarter, 2012 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Seth Bagshaw, Vice President and Chief Financial Officer. Please go ahead.

Thank you, good morning, everyone. I'm Seth Bagshaw, Vice President and Chief Financial Officer and I'm joined this morning by Leo Berlinghieri, Chief Executive Officer and President. Thanks for joining our earnings conference call. Yesterday after market close, we released our financial results for the second quarter of 2012. You can access this release at our website, www.mksinstruments.com. As a reminder, the various remarks that we make about future expectations, plans and prospects for MKS, comprise forward looking statements.

Actual results may differ materially from those indicated by these forward looking statements. As a result the various important factors including those discussed in yesterday's press release and other recent press releases, and 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 the forward looking statements, it specifically disclaims any obligation to do. Any forward looking statements should not be relied upon as representing the Company's estimates or views, as of any date subsequent to today. Now, I'll turn the call over to Leo.

Thanks, Seth. Good morning, everyone, and thank you for joining us on the call today. I'll give a recap of the second quarter, as well as our outlook for the third quarter. Following me, Seth will go through the details of our quarterly results and guidance, and then we'll open the call for your questions. Sales for the second quarter of 2012 were $177 million, at the lower end of our guidance and down 7% from last quarter. Sales to the semiconductor market were down 7% sequentially to $116 million and were 65% of our revenue.

As expected, sales to the solar market were down 33% to $8 million. Sales to all other markets were essentially flat quarter over quarter, at approximately $53 million. Second quarter non-GAAP net earnings were better than expected at these volumes, and were $18.7 million or $0.35 per share. GAAP net income was $18.6 million, also $0.35 per share. Our net balance of cash in short and long term investments, net of debt, increased $38 million in the quarter to $623 million. Since last quarter, global economic conditions have continued to be unsettled, particularly in the US, Europe and China, and demand has softened across a number of our markets.

In the semiconductor market, fab utilization remains depressed as the industry absorbs record level tool shipments, and as an example recent reports indicate some foundry customers are pushing out their mid year capital additions to late this year or early in 2013. Our OEM customers have reduced their build schedules and our Q2 sales to semiconductor OEMs were down 11% to $88 million. Weakened customer confidence has reduced demand expectations for PCs and portable electronics. However, the Semiconductor Industry Association has reported that although lower than a year ago, chip sales have been increasing modestly over the past few months, and our sales directly to the semiconductor device manufacturers increased 7% sequentially in Q2 to $27 million. So far this quarter, many semiconductor OEMs have indicated they are seeing a pause in demand that began in Q2 and which will continue through Q3.

Some have indicated that a recovery may begin as early as Q4, or early in 2013. The intermediate and long term drivers for growth in the semiconductor equipment market, such as mobile device adoption and technology improvements, including 3D chips, UV lithography and 450 millimeter wafers, remain strong and create opportunities for MKS products. And we are gaining additional design wins every quarter. The recent Semicon West Trade Show brought numerous announcements about progress in 450 millimeter development, and solidifying the timeline for production. During the show, major device makers, research organizations, and government sponsors announced investment and collaboration to ensure continued progress to it's 450 millimeter commercialization. This quarter, I'm pleased to report that as part of our power products development road map, we are continuing to expand our collaborative engagements with major OEMs to develop a range of patented RF Power Generators, with superior pulsing capability for 3D chips and advanced etch applications on larger wafers.

Pulse RF is of great importance in these processes since it improves etch speed, uniformity, and control and helps limit plasma damage to device structures. This quarter, we also introduced two new series of mass flow controllers, which will support 450 millimeter semiconductor tools, as well as other non semiconductor applications. We continue to work with semiconductor OEMs as they implement the road map for sub20 nanometer device geometries. Lithography is the key element in patterning the wafer, but is a process step that traditionally had little to no content from MKS. As geometries are shrinking, OEMs are developing some lithography solutions, such as EUV that require vacuum, which creates a modest opportunity for MKS technologies. Including pressure measurement and control, gas flow delivery and control, vacuum sensors and other vacuum instrumentation products.

I'm pleased to report that due to our ability to control the pressure with minimal turbulence and improved process cleanliness, in Q2, we were selected to provide pressure control solutions for advanced tools under development by major laser and lithography OEMs. We also directly support the semiconductor device makers with a number of products such as ozone systems and gas analyzers, which have been developed for and are purchased directly by chip manufacturers. We continue to have success with our LIQUOZON dissolved ozone systems, which are used by semiconductor fabs, to clean and prepare wafers for processing. And in the quarter, we shipped multiple systems directly to fabs in the US and to Asia. In Q2, we also supplied ozone systems to upgrade an existing fab at a major foundry in Taiwan, where we were selected for our superior performance, reliability and lower cost of ownership.

We also had additional shipments of our gas analyzers directly to the fabs, as they work to optimize production and to improve yield. Also, in support of our long term growth objectives, we continued to strategically focus our business into other advanced markets where we can leverage our R&D and significant worldwide technical and operational infrastructure to a broader customer base. These markets include thin film coatings, solar cells, light emitting diodes, drug development and production, medical, biopharmaceutical, environmental, food and beverage, and other critical applications. Our ongoing strategy is to target and gain share in these other advanced and growing markets. And we are successful because similar to semiconductors, these markets have production processes that require high precision, utilize vacuum and gasses, and need a sophisticated level of instrumentation and control. Long term, our goal is to achieve a compound annual growth rate of at least 15% in these advanced markets.

Short term, however, many of these markets have been impacted by the current global uncertainty. While certain markets such as environmental have continued to remain healthy, LED and thin film applications remain depressed, and solar modules continue experience significant oversupply and pricing pressure, and are at the lowest levels we've seen since 2009. As anticipated and driven primarily by the decline in solar market, our total Q2 sales to all non semiconductor markets were $62 million, down 6% quarter over quarter. We anticipate that when the global economy recovers and inventories are consumed, the solar LED and thin film markets will rebound and would expect that business from our other advanced markets will likely return to our historical growth rates. In this call, I'd once again like to share some highlights of how we leverage our technologies and infrastructure to successfully address those additional markets.

This quarter, I'm pleased to report another major design win for our FTIR gas analyzers for engine emissions monitoring. Due to their superior stability and speed, a key Japanese emissions equipment manufacturer has selected our analyzers as the back bone of their new automotive emissions tester, displacing an incumbent Japanese supplier. We have had major success in the North American and European automotive markets and with this design win, we are positioned to serve the important Japanese automotive industry with our superior technology. In the temperature measurement market, another of our gas analysis products has been selected by a major thermal instrumentation company, to measure how a sample's weight changes with temperature. Although revenues for this product will be modest, it is an important non semiconductor win for MKS, since this type of measurement requires extreme precision, and because of its performance, our Cirrus gas analyzer was selected to replace their current technology. We anticipate that shipments will begin in the second half of the year.

In the second quarter, we also received a number of other design wins in both LED and thin film markets. As you may recall, thin film is a broad market which includes such diverse applications as flat panel displays, data storage, packaging, opthalmic coatings, architectural glass and more. This quarter we successfully displaced an incumbent flow competitor at a Chinese LED deposition toolmaker, with our new G series MFC's. In addition to performance and quality, this OEM selected MKS on their experience with our products and the strong support and relationship they have with MKS. We also had another design win for our flow products.

This one in Europe for eye glass coating application. Both of these flow design wins are the result of our continued investment in developing our flow products in technology. In the OLED market, which is being driven by the need for brighter displays for cell phones and other products, we continue to provide additional ozone products, as well as pressure and chamber clean products to both the OLED fabs and OLED2 OEM's. In the last call, I spoke about the lumpiness of the solar market. As expected and reflecting the continued softening in the solar market, sales to solar customers were down 33% to $8 million. Approximately 50% of these sales were to the large Chinese solar company we discussed in our April call.

The global economic uncertainty is impacting sales to nearly all of our served markets. Some semiconductor OEM's have predicted a Q4 semiconductor recovery, but other forecasters, a slower return. As I have previously described, when revenues begin to slow for our semiconductor OEM customers, the short term impact is that they adjust build rates and consume inventory, which can have a more pronounced and immediate impact on our sales to them. We began to see this impact in mid May and this near term effect that continued so far into Q3. That being said, over the long term, we have consistently demonstrated stronger revenue growth compared to the front end semiconductor process equipment market.

The current uncertainty calls for caution, as I've said before, one of the strengths of MKS is our ability to manage our business to maximize opportunity, yet minimize the impact of a lower revenue quarter on our profitability and cash flow generation. We have already taken steps to curtail discretionary spending, freeze hiring of nonessential positions, and other cost cutting measures. We will continue to closely monitor business conditions and will react to change accordingly. Given the current business levels, we anticipate that sales in the third quarter may range from $140 million to $160 million, and at these volumes, our non-GAAP net earnings could range from $0.14 to $0.27 per share. At this point, I'll turn the call over to Seth to discuss our results and expand on our guidance.

Thank you, Leo. First, I'll discuss the second quarter results before providing further details on our Q3 guidance. Revenue for the quarter was $177 million, a decrease of 7%, compared to Q1 2012 revenue of $191 million, and a 21% decrease from $224 million a year ago. Gross margin was 43.1% in the second quarter as compared to 43.9% in the first quarter. The sequential decrease in gross margin was primarily driven by lower volumes, but partially offset by favorable product mix, which contributed to gross margin exceeding our guidance.

Operating expenses were $49 million, compared to $50 million in the first quarter of 2012. The decrease in Q2 expenses was expected, as Q1 has traditionally higher employee related fringe costs, principally payroll related taxes that tend to be higher in the first quarter of the calendar year. Also included in Q1 was allowance for uncollectible accounts receivable from a declared bankruptcy of a Japanese customer. As business levels began to moderate in the quarter, we took additional steps to manage discretionary spending levels, and freeze nonessential personnel additions, as well as lower variable compensation. As a net result, operating expenses in the second quarter were below the low end of our guidance. As a result, the favorable product mix and lower operating expenses our net operating profit margin was 15.7% of sales, non-GAAP earnings were $18.7 million or $0.35 per share, compared to $22.9 million in the first quarter and $38.8 million in the second quarter of 2011.

GAAP net income was $18.6 million or also $0.35 per share. The tax rate for the quarter was 34%, and we expect that our full year effective tax rate will also be 34%, based upon the expected geographical mix of taxable income. Now, turning to the balance sheet, net cash investments increased by $38 million in the quarter to $623 million. Total book value, net of good will and intangibles, increased by $8 million to $873 million or $16.58 per share. In terms of working capital, day sales outstanding were 54 days compared to 63 days in the first quarter.

The decrease in day sales outstanding, driven by strong US customer collections focus and selected factoring of certain international accounts receivables. Inventory turns remain relatively unchanged at 2.8 times compared to 2.9 times in the first quarter. And total working capital increased by $10 million to $807 million. Capital additions for the quarter primarily related to facility upgrades in test and calibration equipment were $3.4 million, depreciation and amortization expenses were also $3.4 million and non cash stock compensation was $3.8 million. During the quarter, we paid a cash dividend of $7.9 million or $0.15 per share, and repurchased 44,000 shares for $1.2 million, an average price per share of approximately $28.

Now, I'll review in more detail the composition of revenues for the second quarter. Sales to semiconductor market were $116 million, a 7% decrease compared to the first quarter, and represented 65% of second quarter revenue. Within the semiconductor market, sales to semiconductor OEMs decreased 11% and comprised 50% of total sales. Sales to semiconductor fabs increased 7% in the quarter, and comprised 15% of total sales. Sales to the other advanced markets were down 6% from the first quarter of 2012 and were $62 million, and comprised 35% of total revenue. This decline was expected and driven by lower sales to the solar market which decreased by 33%, compared to the first quarter and were $8 million. The first quarter sales included a large shipment to a single customer in Japan while in the second quarter we shipped the remaining $5 million of a large order from a customer in China.

Sales to all other advanced markets were $53 million in the second quarter of 2012, compared to $54 million in the first quarter, were essentially flat. While some of these markets remained healthy, this was offset by continued softness in the thin film and LED markets. Geographically, sales in the US were 51% of total sales. Sales in Asia were 36% and sales in Europe were 13%. Sales to our top 10 customers comprise 44% of total sales, and sales to our largest customer, Applied Materials, represented 15% of second quarter sales.

Our head count as of June 30 was 2,428 or essentially flat compared to 2,423 as of March 31. Now, I'll turn to the third quarter, 2012 guidance. Based upon current business levels, we estimate that our sales in third quarter could range from $140 million to $160 million. Based upon this expected sales range, our Q3 gross margin could range from 42% to 43% reflecting these volumes and expected product mix. Q3 operating expenses are expected to range from $47 million to $48 million. In the third quarter, R&D expenses could range from $14.8 million to $15.2 million, and SG&A expenses could range from $32.2 million to $32.8 million.

In the third quarter, amortization of intangible assets expected to be approximately $100,000. And net interest income is estimated to be approximately $200,000. We expect our third quarter income tax rate to be approximately 34%, reflecting the anticipated geographical mix of taxable income. Given these assumptions, third quarter non-GAAP net earnings and GAAP net income could range from $7.5 million to $14.4 million, or $0.14 to $0.27 per share on approximately 53.5 million shares outstanding. This concludes our prepared remarks. I'll now open the call for questions.

(Operator Instructions) CJ Muse, Barclays.

First off, curious as you think about the down tick in revenues, is that going to be fairly similar in terms of the declines for semi and other or how should we think about the trajectory there?

CJ, I think with our guidance, we wouldn't expect to get a repeat order in the solar of that approximately half of the revenue for Q2. Where in that light solar customer, that was the finishing of the last of the two large orders that we have commented on for the several quarters. So that would be down and the semiconductor we essentially expect the other business to remain constant.

Okay. Just to follow up on the other side, it looks like if we annualize the embedded guide there for the first three quarters, it looks like you're tracking down about 20%, 22% for the year. Is that the kind of down tick we should assume or how would you want to characterize that?

Yes, I think you're asking about Q4 estimates, CJ?

Just trying to understand the other business and I guess the dynamic around the weakening macro and how that is impacting your other business.

So you're saying that if things remain constant for the fourth quarter what that total business would be, is that what you're asking? I mean --.

I guess, as you think about your business in the second half and knowing, what customers you're having dialogue with, what contracts you have coming up, how do you see that business trending? Should we track better than, what we're seeing GDP-wise, worse, how should we think about that?

I think with -- if the LED market picks up in the fourth quarter as some people have talked, we probably would see some business up. GAAP analysis has remained pretty strong. I think there are multiple things going on that would have an impact. I think with the uncertainty right now, we are seeing it be relatively flat for a quarter or two and we'll know more as we get closer to the fourth quarter.

Okay, great. Last question for me. On EUV, we've got nice shipments coming through in 2013, follow-on orders are being placed today with ASML, how should we think about the revenue contribution from that part of the market for you guys in '13,'14?

We haven't modeled exactly what those numbers are because it's not quite clear. Just recently there's been some clarification on the investments in EUV, but we have vacuum products there. It's a modest amount. It might be somewhere between $10 million and $25 million at this point that we could see per chamber, in an EUV process, but we need to see a little more things happening. Designs are still going on. But that would be sort of the opportunity at least.

Okay. Very helpful. Thank you.

Jim Covello, Goldman Sachs.

Hi. It's Mark Delaney calling for Jim Covello. Thanks very much for taking the questions. I guess to start I was hoping you could talk a little bit about the inventory? You mentioned your equipment OEM's were in the process of reducing inventory. So, where do you think your inventory levels at those customers will be in the third quarter? And maybe you can textualize that relative to where inventories were drawn down to in prior downturns?

Yes, Mark, I'm going to clarify the inventory comment to make sure it's clear what happens, because we usually comment on this most quarters. There are a couple of ways that our customers could reduce inventory. They could have an objective to reduce their overall inventory, have nothing to do with the business levels but just reducing inventory. That's what I'm not -- I'm not commenting about that kind of activity. What we're commenting about is that normally when you either go down in build rate as an OEM or go up, you now have work in process for a different level of business.

In this case it was a higher level of tool shipments per quarter than they have been talking about for the third quarter. So, immediately you have to consume that inventory. You don't need to bring more inventory in, but it's more part of the natural process of changes. When business comes back, we also see a rapid increase as they get that work in process inventory back up to the right level for that amount of tools in the quarter. So we just see it very quickly is what happens. If rates -- if everything that's been adjusted by the equipment companies remain exactly where they are, then that inventory adjustment for their whip and raw goods should happen pretty quickly, within a few months or a quarter or so. If it were to change again, then it would change again. So it's very dynamic to the build rates, but it should happen theoretically relatively quickly.

That's helpful. Thank you. Are there any differences between the orders you're seeing now from semi fabs versus the equipment company that make you think the business in semis overall, it's going to be a pick up in the fourth quarter like you said. Some have indicated or make you think it might be more 2013 like as you said was another possibility?

There would be no way to tell that. I wish we could tell that relative to that. But our fab business, our products that are typically a bit different than we sell to the equipment companies, we would view them as capital equipment items to the fabs themselves. And they tend to buy those relative to particular issues they're having in processing. It may have nothing to do with shipments from OEMs. But it also could be a shipment that was made by an OEM, and that gets up and running. Simultaneously they want to add a gas analyzer to it. So it doesn't correlate necessarily to that. The only thing we could possibly see and we don't really see any of this yet or don't anticipate any, is that service business, if utilization were to go down significantly, service business eventually goes down, but that has not been the case so far.

Got it. Thanks. And then last question from me, your cash generation has been very good, I think you give it $11 per share in net cash now. How are you thinking about managing the cash balance going forward? Any of the authorized on the buy back, are you looking at increasing that or are you looking at M&A, any detail you can provide that will be helpful?

Okay, maybe I'll touch on M&A and I'll let Seth talk about buy backs and dividends and other cash ideas. But, as stated earlier and previously on the M&A activity, we've been inquisitive. We have an appetite for M&A. I wouldn't judge the interest level or the effort based on the announcements. You look at a lot of things and I think we're fairly disciplined in that because of our ability to execute on the regular part of the business. I think we behave the same relative to M&A, so there's always M&A possibilities in the pipeline and part of the cash we've always stated is to satisfy that interest in doing M&A. And I'll let Seth comment a little bit more on stock buy back.

So, Mark, you're aware that a announcement back in July of 2011 on a share repurchase, that's -- there's no timeframe based on that but it's still in effect for $200 million. We have bought back some shares since then, looking at the opportunistic on the share repurchase, but that program is still in place and the Board reviews it on a regular basis. And then as you mentioned earlier or Leo did, we do have a cash dividend to shareholders which is a return of capital we put in place early in 2011. Again the Board reviews that level on a regular basis. So, between cash for M&A, cash for the share repurchase, ongoing dividend rate, that's kind of our use of cash looking forward.

Thank you.

Krish Sankar, Bank of America Merrill Lynch.

Leo, if you look at the inventory draw down or the whip draw down from our OEM customers and let's assume the scenario where orders do bounce back in Q4, would you start seeing your shipments pick up in tandem in Q4 or do you see a lag effect?

Kris, if it's order, I thought what I heard you saw if orders pick up in Q4? Normally there's a lag from orders to build plans to building product at OEMs. It usually happens quickly once they change their schedules if they're in the near term. So my guess is that order rates would increase their bill schedules at some point, whatever their lead time is on those orders they're committing. And then, as you know, we are a turns business. We would see that shortly before they need it. But, if their rates go up and their whip has to go up, we'll see that plus some. So, I know it's not an exact answer but there's normally a delay from orders to build rates and their shipments obviously you know. And then our lead times are relatively short, so they don't have to do something immediately if they're not building something for three or four months.

All right. And then a couple other short questions. In Q3, I noticed your SG&A is not going down a lot, is there something happening or do you guys have any shutdowns in Q3?

Did you say not or are?

It's not going down that much I would thought.

Well, it's trending down in Q3. And we have taken some steps to curtail discretionary spending but there hasn't been a wholesale reduction in the work force.

What I would count on is normally as the business goes up, our SG&A doesn't go up very much and as the business goes down on a temporary basis, it doesn't go down very much either. It's fairly stable. I think that one of the things you probably know about us is as we see even short term business trends, we take some temporary actions. And so, that's probably where you're seeing some of the reduction in SG&A are those temporary actions. But in general, the operating expenses don't change significantly on the upside or downside from a quarter or two's activity.

And do you guys have any shutdowns in Q3?

We've announced that we would have reduced work schedule.

Thank you.

Patrick Ho, Stifel Nicolaus.

Just going back to Semicon West and some of the announcements that came out particularly the one with ASML and Intel regarding the investment. Do you see any changes to your 450 millimeter investments? Do you have to accelerate some of those programs or do you believe that you're generally on track with where you're at?

Okay, some of the good things about the technology that we provide is normally as you go from size generation to size generation, everything does not get affected by it in terms of development needs or requirements of the product, so many of the same products that we sold in the 200 millimeter, we sell into 300 millimeter and we'll be able to sell those same products into 450 millimeter. There are some tweaks on some things. They're usually -- they may need a higher value version of something. They may need a more of them, they may need multiples of the same thing.

And the other aspect is that, I'll give you an example let's say for instance, chamber cleaning -- in-situ chamber cleaning, using our ASTRON product, certainly going from a 300 millimeter chamber to a 450 millimeter chamber, there is -- if you want to clean it at the same speed you need more atomic fluorine in the chamber to do that. So then you need an ASTRON that generates more atomic fluorine per minute. We already provide those for chambers like solar chambers and LCD chambers, which are already quick, pretty [live]. So, there's no need to run off and design a new ASTRON for 450 because we already have it for other applications that we already ship into. So, there may be some features and some additional development, but it's not a completely new development effort for us in terms of providing control instrumentation for 450. This gives us more opportunity but doesn't have too much of the R&D changes.

Right. Maybe just going to the finance side for a second on the gross margins, given the revenue decline projected for 3Q, your gross margins are actually holding up pretty well. I guess, what are some of the key variables there that are allowing it to stay at these current levels?

Yes, I think primarily it would be the product mix we're forecasting, and we had pretty good mix in Q2 which we continue in Q3 we believe. And then as mentioned before, we have made some short term actions to curtail some spending levels based on lower volumes. And then curtailed work schedules as well helps to some extent.

And I would say normally, larger customers, which tend to be more in the semiconductor space for us, probably get better pricing than smaller companies in other markets. As you have asked that question on calls in the past, this is a case where the larger customer semi OEM is slower in the quarter than the previous quarter, and the same thing happened in Q2. So they were a little better than we expected as well. But that has some contribution to that, I believe.

Thanks a lot, guys.

Dick Ryan, Dougherty.

Seth, you mentioned the buy back and I wasn't sure if the buy back is -- was initially stated at $200 million or where does it currently stand?

It was $200 million initially stated, no timeframe involved, that was back in July of 2011 and we used about only $7 million of that so far.

Okay.

$193 million still on the shelf here to use.

Okay. Leo I was looking back at past guidance, as you were going into last year's Q4 you were kind of looking at a similar sort of revenue, $145 million to $165 million, that was your initial guidance for last year's Q4. Can you kind of compare, contrast, kind of what you were thinking or looking at the market back then versus now? Does it have the same feel? Is there some differences? Can you kind of give us a little color on that?

Yes, I'm not sure you'd want my real answer on that in terms of that because I don't know what that would actually mean in terms of any real good information. What I've always said is as things turn down or up, to me, they always feel different and simultaneously the same. And so I think we -- I think the difference may be today is that we had gone from, if you remember, that was Q4. We had gone from a record Q2 to a projected down Q4, we had seen sometime in May or June of last year things slow down. And so we had lower numbers expected and things were continuing to deteriorate as we did the call in Q4 we had seen things continue to deteriorate. So, and no one at that time was talking about a pause or what was happening.

We just saw that business had deteriorated and the market had deteriorated. So it feels a little different from the standpoint of, this is the first quarter that we have seen anything substantial really, and people are talking about a pause. There are particular types of devices in the foundries where investment is being slowed down. I guess that's the different part of it. But from our view when we look at the revenue, we sort of take those same actions that we would normally do when things have been fairly good and then start to change downward. We take those first steps. We talk about discretionary spending, nonessential resources frozen, it's more difficult to replace somebody and we take other cost cutting actions that we talked about.

Okay. Thank you.

(Operator Instructions) Tom Diffely, DA Davidson.

Leo, another question on the inventory, is there a natural or a normal beta level that you have versus your OEM customers where, say a price is down 10% during the slowdown, you're down 12%?

I would say that if there is, I certainly haven't been able to calculate it, nor has anyone else in the Company. Reductions are really, they normally theoretically happen quickly and they vary by customer and where they put their attention and where they put their time. Just like our business units vary in how quickly they respond to things. So I couldn't put a correlation that they go down X and we go down X plus something else. But what I do know is they should consume material and make shipments some percentage without having to buy material from us for those shipments because the whip is larger or their raw material is larger. Exactly what the percents are I don't know.

And what about the dynamics at the end-user, at the fabs themselves? What do you see when things go down and pick up?

Well, I think initially if you looked at the fourth quarter, again, I'll go back to a third quarter, we still saw the fab projects. Remember, that our fab business is really two or three different kinds of businesses. One is service and repair and that's probably more related to almost like a consumable in a way. It's not a consumable but similar to consumables, if you run the fab you need to repair and calibrate and do things like that and service product. Then we have this capital equipment area, those tend to be more project based, and so a fab is either working on a particular tool or series of tools where they want to use an RGA gas analyzer to improve yield. And so, it's really based on the timing of that project for them.

It could be based on tools coming in but they're going to then buy some of those RGAs for or could be existing tools. And then we do some upgrade work and again that's -- upgrade is usually the priority of the fab and our ability to convince them that we have a solution that will save them some money. So they're not necessarily related to what's happening this quarter exactly with the equipment people. So far the business was up in Q2, that's a good sign, and we didn't model anything unusual for Q3 with them.

Okay. And then maybe just a quick one on the 450 millimeter, when we move from 300 to 450, have you at this point, quantified how that impacts your power gas vacuum systems? You mentioned earlier that sometimes it goes up. I was just wondering if there's any kind of a per tool estimate? You get a 1.3 times add or when you move up you have those fewer systems out there because they're more productive?

Yes, I guess we tend to look at it on a product by product basis and dollars to a product, not necessarily what happens to the tool, because as you know, we're not talking about production volumes next year, we're talking still five years out or so let's say, on average. At that point in time there's a lot of things to still calculate, what competitive positions did we gain, what new pieces need to be added as they start developing these. So I think it's tough to say today this is the volume that will happen. The other thing that if you go back to the 200 to 300 millimeter transition, a lot of people made that same comment. When you change over and get to a larger tool that has more output, you end up needing less components and eventually because there's less tools.

On the other hand, by the time we got from the beginning of 300 millimeter development, sort of like where we are in 450, to production volumes, there are already double the processing steps. And so there were that many more tools that were needed even though there was more output. So, I think it's hard to look at that today and say this is exactly what was going to happen. I think what we look at is for each product group, one of the products they sell into a 300 millimeter tool today, what's likely to happen in 450 millimeter, do we have those products available today, what do we need to do from an R&D standpoint? And which customers do we need to work more closely with the ensure we get designed in? That's where we put a lot of our effort.

Okay, that makes sense. Then we look at the solar market, obviously it's pretty good size, very, extremely lumpy. But how do you view what the potential opportunity is the number of other clients that you could potentially penetrate over the next few years?

Well, first of all, we have -- I don't know how many are totally still there, but there's some that are not. But we have more than 350 customers in solar. So I'm not sure there's a customer we forgot to see and work with. However, we never have every bit of their tool designed in. So I think there are opportunities, they're usually timing based on when they have to make a decision on a new tool. As you know, we get designed in and usually you're in for the life of the tool unless there's some issue that happens also in some cases for competitors.

So, unless there's an issue or a new tool design where we can provide some benefit, I don't think there's somebody out there that's like we just talked about the last several quarters. But we didn't know they were there, either, until they came about. So, I think our goal is to make sure we sell to everyone and then we look at the -- those customers that have what we believe the most potential to succeed in the marketplace, and we look at where we don't sell them something on their tool, and we work hard to get that business. So, there's nothing I can comment on today that says, yes, there's another $50 million out there because there are three customers we have no contact with. But we believe there's more opportunity with those customers than we do today.

Okay. Great. Thank you.

I'm showing no further questions at this time. I will now turn the call back over to Leo Berlinghieri for closing remarks.

Thank you. Although we are seeing a pause in the semiconductor OEM demand, the underlying market for semiconductors, especially high speed, low power, portable electronics remain sound. We continue to strengthen our competitive position with key semiconductor OEMs. And as I said, we're leveraging our investments in R&D and infrastructure in other advanced markets to execute our long term growth strategy. We continue to demonstrate the strength of our model and our ability to respond to dynamic business conditions while maintaining our technology leadership. We will continue to address the needs of the new and existing customers in both our core semiconductor market and in other advanced and growing markets we serve. We look forward to updating you again in October on the call, thank you for joining us on the call today, thank you, operator.

Thank you ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.