萬機儀器 (MKSI) 2015 Q1 法說會逐字稿

I will now like to turn this conference over to Seth Bagshaw, Vice President and Chief Financial Officer. You may begin.

Thank you. Good morning, everyone. I'm Seth Bagshaw; Vice President and Chief Executive Officer and I'm joined this morning by Gerry Colella, our Chief Executive Officer and President. Thank you for joining our earnings conference call.

Yesterday aftermarket closed, we released our financial results for the first quarter of 2015. You can access this release at our website, www.mksinst.com.

As a reminder, various remarks 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 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.

Lastly, as a reminder, we are conducting analysts day in New York on June 3 and to inquire about invitation to our event please contact Clare McAdams at her contact information included in yesterday's press release.

Now I'll turn the call over to Gerry.

Thanks, Seth. Good morning, everyone, and thank you for joining us on the call today. As I typically do, I'd like to start with an overview of last quarter, and I'll provide a brief update on the project we've been making against our strategic initiatives as well as highlights of the quarter. And finally, I'll provide our outlook for the second quarter.

Following me, Seth will give further details on our financial results and then we'll open the call for your questions.

First quarter sales increased to $214 million at the high end of our guidance, up 5% from last quarter and up 4% from Q1 of last year. Non-GAAP earnings were $35.5 million, or $0.66 per share, up from $29 million in the fourth quarter. Semiconductor sales were a record $151 million, up 7% quarter over quarter, up slightly year-over-year, while sales through all the markets were up 2% and from the fourth quarter up 12% from quarter one 2014.

I'm proud of these strong financial results, which reflect the continued efforts of the MKS team to execute on our strategic initiatives as well as focus on our growing leadership position in semiconductor and other vacuum applications in various markets.

In the quarter, we announced a strategic acquisition of Precisive LLC, a company with a unique and patented optical gas analysis technology called tunable filter spectroscopy for environmental and process applications. This technology is superior to traditional gas analysis technologies for measuring heat content or BTUs. It is complementary to MKS' other environmental gas analysis technologies. This acquisition will allow MKS to target new applications such as natural gas processing, hydrocarbon processing, and other oil and gas segments which we estimate to be $200 million global market. We are excited about this latest acquisition that will allow us to continue to expand into new but complementary advanced markets.

We are also pleased that less than 12 months ago, we completed the acquisition of Granville-Phillips or GP, which propelled us to assume the leading growth position in indirect vacuum gauging and complemented our existing leadership in direct vacuum gauging.

As we've mentioned in previous calls, our goal was not to only acquire a strong brand, to also leverage our worldwide sales and distribution channel to accelerate growth in that business. As a result of our efforts, I am very pleased to report that this quarter was the highest quarter level the GP products in more than ten years. Furthermore, we have completed the integration work ahead of schedule and we continue to execute on our synergy targets.

Since I assume the CEO role, we have further emphasized monthly strategic and integration reviews of all of our acquisitions. These executive level reviews focus on the performance against our target objectives as well as the strategies to accelerate growth, achieve timely completion of critical integration activities. This process was instrumental in achieving the strong quarter performance to GP in only the third full quarter post-acquisition.

We are also seeing results from our 2012 acquisition of Plasmart, a Korean based leader in RF matching networks by leveraging our strong customer relationship and global and sales application, plasma products, which have strong penetration with pre-OEMS are also expanding into US OEMs in newer applications. We will continue to propagate this core competency, a strategic reviews on all future acquisitions.

Now let's turn to the core markets. I've spoken in earlier calls about our strategic initiative to capture additional opportunities in our core semiconductor business. The industry is facing several inflection points, including the shift from planar devices to 3D as well as the increased need for multi-patterning. As a result, the industry has adopted techniques which rely significantly on etch and deposition steps to continue to shrink critical dimension. Industry analysts project that from 2014 to 2019, the number of etch and deposition tools required will outpace industry by more than 15% further creating opportunities for MKS to do our strong exposure to these process steps.

For example, as critical dimensions continue to shrink to 20 nanometers and below conformal angstrom thick deposition is essential. Processes such as global CVD and atomic layer deposition or ALD are used to deposit these very thin layers. In ALD, oxidizing precursor is required for the process and ozone is a preferred oxidizer since it provides a number of advantages and throughput and film quality.

MKS ozone systems are the industry standard, beating our competitors due to our quality, reliability and system performance and we continue to supply ozone systems for ALD for a leading Korean chip manufacturer.

Additionally, MKS's next generation plasma products continue to be the products of choice in the latest CVD applications and will ramp along with a 16 nanometer node adoption and FinFET applications.

Hand-in-hand with depositing very thin films is the etching of minute features into them. Because the films are so thin, process control is critical. Our industry-leading Advanced Pulsing RF generators are designed to provide the precision control required to etch the fine lines in high-aspect ratio holes in leading edge 2D and 3D devices.

This quarter our Advanced Pulsing RF was selected for next generation etch tool at the leading etch OEM. In addition, our flow ration and pressure control products as well as our integrated heating and control solutions continue to be the products of choice at multiple etch OEMs.

These technologies provide accurate and precise control of process gases which are required for advanced etch. Both deposition and etch processes are benefiting from industry inflection points and MKS is well positioned across our product portfolio to support and benefit from these changes.

We are excited about the long-term growth potential to the semiconductor industry. Demand for chips continues to increase and the Internet of Things will accelerate and expand semiconductor use. Technology inflections are increasing capital intensity in the areas where we are strongly aligned and 3D integration in tightening requirements in the back end of the semiconductor market open further opportunities for our products. We have the deepest and broadest technology portfolio in the industry, and we will continue to support our customers as they develop tools and processes to address coming challenges.

MKS has a unique model compared to other subsystem suppliers. Both sending our leadership in core semiconductor market, we are also leveraging our technologies to other adjacent markets. These markets include medical, thin films, environmental, biopharmaceutical and pharmaceutical manufacturing, LEDs, solar, flat panels, and other diverse applications. I am proud to report that in Q1 sales to these markets increased for the sixth consecutive quarter.

It's been quite some time since I talked about our solar market but we are seeing signs of recovery in our solar business. During the quarter, we received a significant order from a major amorphous silicon solar product in China for RF products to support two additional 3-megawatt production lines. This equipment is in addition to the seven production lines using our RF products already in operation for this company in China. Amorphous silicon solar cell production is a mature technology and the cells are well suited to small portable applications.

Another type of thin from solar sell, Copper Indium Gallium Selenide or CIGS for short has higher efficiency in gaining acceptance in the market. This quarter a major US CIG solar supplier also placed a significant order for our DC power and MFC products for seven PVD modules to work with existing CIGS roll coated tools. These tools will ultimately also be put into production in China.

Coatings extend well beyond solar, and with its many end markets and applications continues to be an important part of our business. Coating applications include architectural glass, wearing protective coatings, packaging and many other diverse end uses. This quarter we received orders for RF power and matching products for an interesting new end application -- protective nano-coatings on portable consumers electronics.

This past quarter, we introduced high flow (inaudible) of MFCs for large-scale processes such as biopharmaceutical, heat treatment, spray coating, and other industrial applications. We are already seeing favorable acceptance and achieved our first design wins for these MFCs in the biopharmaceutical market as well as for industrial gas blending. We are pleased with the rapid acceptance of these new flow products and anticipate continued penetration of this reliable, cost-effective addition to our MFC portfolio.

Now I'd like to turn to our outlook for the second quarter. Recent reports for the semiconductor capital spending are mixed but continue to indicate a healthy market away fab equipment in 2015. Our near-term visibility indicates a continued positive business environment in both our semiconductor and other advanced markets for the second quarter, which we expect will be stronger in the same period last year. Based on these factors and looking at current business levels, we anticipate that sales in the second quarter may range from $200 million to $220 million at that these volumes are non-GAAP net earnings can range from $0.53 to $0.66 per share.

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

Thank you, Gerry. I'll first discuss our Q1 2015 financial results before providing further details on our Q2 2015 guidance. Revenue for the quarter was $214 million, an increase of 5%, compared to Q4 revenue of $203 million, an increase of 4% from $206 million a year ago. Our Q1 revenue was the higher end of our guidance range due to better anticipated sales in the semiconductor market and continued growth in other advanced markets which were up another 2% sequentially, and increased nearly 12%, compared to Q1 of 2014. Our gross margin was 45.4% above our expectations at the sales volume, primarily due to strong manufacturing utilization and related efficiencies. Non-GAAP operating expenses were $47.5 million is also favorable to our guidance range due to lower R&D, IT and other spending, a portion of which will move from Q1 to Q2.

GAAP operating expenses were $50 million, and included $1.7 million of amortization of intangible assets and $800,000 of restructuring costs. Restructuring costs relate to the strategic outsourcing of a select manufacturing operation in China to be completed in the second quarter. This will allow us to both improve our long-term cost structure and provide increased flexibility. Our non-GAAP operating margin was 23.1% of sales, which was ahead of our target model at these volumes as a result of the combined favorable impact of higher gross margins and lower spending levels just mentioned.

As we have discussed, in previous calls, we've been very focused in achieving continuous improvements in our operating model. The impact of these improvements is clearly reflected in our strong financial performance. While our sales increased 5% sequentially, our non-GAAP earnings per share increased 22%. When compared to the first quarter of 2014, on a 4% increase in revenue, our non-GAAP earnings per share increased almost 30%.

Although a portion of this performance was due to lower than normal operating costs in the first quarter, we have demonstrated strong operating leverage and are committed to drive further improvements.

Non-GAAP net earnings were $35.5 million or $0.66 per share, compared to $29.1 million in the fourth quarter and $27.2 million in the first quarter of 2014. Our non-GAAP tax rate was 29% as expected. GAAP net income was $33.8 million or $0.63 per share.

Now, turning to the balance sheet, cash investments decreased by $4 million in the quarter to $589 million or approximately $11.05 per share. Continued strong cash flows from operations were offset by the payment for the acquisition of Precisive for $10 million and a dividend to shareholders of $8.8 million, or $0.165 per share.

At the end of Q1, 52% of our cash and investments were in the US and the balance was located throughout our international operations. Total book value net of goodwill and intangibles was $856 million or $16.06 per share. In terms of working capital, day sales outstanding were 53 days at the end of the first quarter, compared to 48 days at the end of the fourth quarter. The inventory turns were 2.8, compared to 2.9 in the fourth quarter. Capital additions for the quarter were $2.5 million, depreciation and amortization expenses were $5.5 million, and non-cash stock compensation was $3.2 million.

Now we'll go over more detail regarding the composition of revenues for the first quarter. Sales to the semiconductor market were a record $151 million, an increase of 7%, compared to $142 million in Q4 and represented 71% of first quarter revenue. Sales to semiconductor OEMs increased [70%] sequentially and were $121 million or 57% of total revenue in sales to semiconductor fabs with $30 million, an increase of 5% compared to the fourth quarter and comprised 14% of total sales. Sales to our other advanced markets were $63 million, up 2% from the fourth quarter of 2014, and up nearly 12% from the first quarter of 2014. As Gerry mentioned, this increase was the sixth consecutive quarterly increase in revenue in our other advance markets.

Sales to these markets comprise 29% of total revenue in the quarter and can vary from quarter to quarter based upon specific customer projects. Geographically, sales in the US were 56% of total sales. Sales in Asia were 34%. And sales in Europe were 10% of total sales.

Sales to our top ten customers represented 51% of total sales. Sales to applied materials and land research comprised 17% and 12% of first quarter sales, respectively.

Our headcount at the end of the first quarter was 2,445, up from 2,371 at the end of the fourth quarter, primarily due to increased manufacturing requirements and investments in R&D and sales-related functions.

Now, I'll turn to Q2 2015 guidance. Based upon current big levels, we estimate that our sales in the second quarter could range from $200 million to $220 million, based upon this expected sales range, our Q2 non-GAAP gross margin could range from 44.5% to 45.5%, reflecting these volumes in expected product mix. Our GAAP gross margin could range from 45.7% to 46.6%, which reflects the estimated effects of the sales certain inventory previously reduced as net realizable value.

Q2 non-GAAP operating expenses could range from $49.5 million to $50.5 million. In the second quarter, R&D expenses could range from $16.6 million to $17 million, and SG&A expenses could range from $32.9 million to $33.5 million. The range of operating expenses in the second quarter includes normal merit increases, operating expenses related to the acquisition of Precisive in certain R&D and other project expenses that moved from Q2 into -- and from Q1 into Q2. As I mentioned in previous calls, the timing of these project expenses is dependent upon a variety of expenses and could vary from quarter to quarter.

In the second quarter amortization of intangible assets is expected to be approximately $1.7 million. Net interest income is estimated to be approximately $500,000. We expect our second quarter income tax rate to be approximately 29%, reflecting the anticipated geographical mix of taxable income. And given these assumptions, second quarter non-GAAP net earnings could range from $28.4 million to $35.6 million or $0.53 to $0.66 per share. And GAAP net income could range from $28.8 million to $36 million or $0.54 to $0.67 per share on approximately 53.7 million shares outstanding.

This concludes our prepared remarks. We'll now open the call for questions.

Thank you. (Operator Instructions) Krish Sankar, Bank of America.

Yes. Hi. Thanks for taking my question. I had two quick ones. First on the June quarter guidance the midpoint of your sales is down 2%, how does it split between semi and non-semi when you look at it sequentially?

Yes. I would say, Krish, so we would expect -- we don't really guide by markets as you know, just because the order rates come in as they come in and we don't really have the granularity by markets, but, yes, we've grown non-semi sequentially so I think if you assume it grows at roughly the same rate in the second quarter, but probably down 3% at midpoint, and it could be -- yes, 3% at midpoint.

Got it. Got it. That's really helpful. And then as a follow-up, in the March quarter, can you talk a little bit about how was the shipment linearity to your semi cap OEM customers?

It was very linear. You know, we have a lot of things in pull systems and [point] a few storage for customers. So we started being relatively linear as it had been. Yes. Sometimes there's a little bit of front end loading in the quarter. Some people like to prime -- the pipeline of inventory. But for the most part it was relatively linear.

And do you expect a similar trend in the June quarter as well or --

We haven't heard any indication to the contrary. Our view of the forecast -- discussion with customers are not leading us to believe anything different. You know, we've heard about a couple of CapEx cuts, but it was interesting because I read some other reports that said the same people had talked cutting their CapEx spending had only spent 18% after 25% of the year had already gone by, which would indicate either a leveling or a ramping over time if they were to spend the budget that remained.

So based on things we're seeing and things we're hearing, I'm not expecting to see anything materially different, but given our lead times that we have sometimes two to four weeks and a lot of things in pull systems, things can change, but we've heard -- things we've read tell us things should continue to be pretty solid for us.

Okay. Thanks, Gerry. Thank you.

You're welcome. You're welcome.

Patrick Ho, Stifel Nicolaus.

Thank you very much and congrats on a nice quarter. For either Gerry or Seth, in terms of your operating model, you obviously have done a lot better on the margin front than I think a lot of us have looked for. You talked about some of the internal improvements you're doing. Can you give a little mix in terms of -- or color in terms of the mix of how much the internal improvements that you've discussed have contributed versus, say, just kind of the pickup in revenues that we've seen over the last few quarters. How much of an impact are some of your internal operational activities now contributing to the strong margin profile that you delivered?

I think most of it is attributed, Patrick, to the internal work that we've done. When I took over as CEO, I looked at previous years where the profit did not -- didn't look as good as it should be compared to the revenue, and we put a profit and cash recovery team together with my direct reports and then past teams underneath them and we studied 12 to 15 different areas of the company that we needed to approach, whether it was increasing concentration in low-cost countries, restructuring the organization where the investment was now producing revenue or profitability, looking at the cost of materials. I mean, it was just a whole sundry of things that has a preponderance of them contributed to it.

And we're not done. We have a multiyear approach to this operating model. There are things that, as we talk about them -- yes, when -- as we approach them, we'll talk about them. We try to be conservative and not talk too far in advance with them but the preponderance of things were internally driven. And I'll leave it to Seth to give anything else he wanted to provide.

Yes. I was just going to add to that too is as you know Patrick, we updated the model three times in the last 13 or 15 months or so. And we've been pretty clear telling investors and analysts that we think that this -- we're not done with that model. We think there's more improvements to occur. There's always a cadence in our D&A. We think we can execute on things in the pipeline right now.

You saw in the past quarter, we've done some outsourcing for a certain -- a select function in China and that'll reduce our costs, we think, in 2016, and provide more flexibility in our variable cost structure. And, again, there's more things in the pipeline we're always looking into and executing on.

So I would say we have high beams on trying to always look ahead to be best in breed and continue to drive profit and improvements.

And that profit and cash recovery team is a standing team that meets every month, myself and my direct reports, continuing focus on tactical and strategic changes we need to do to assist ourselves and our customers, inclusive of coming out with more effectively cost and priced products for them.

Great. That's helpful. Maybe just going to the adjacent markets now, you mentioned in the past your ability to leverage your current product portfolio and technology to these adjacent markets. I guess what's the actual process on your end of the investment and kind of deciding what type of adjacent markets you want to enter, for example, I guess the environmental monitoring market you've talked about for the last several quarters. What's the process of you guys looking at your product portfolios and finding the right fits in some of these adjacent markets?

Well, some we're really fortunate that the technology that we already have is transferable. So as an example, that nice CIGs win was DC product that we had in our power products group, and so we'll look at the market, and again that's a lot of MOCVD type of equipment as it is with LED, so we'll look at the equipment, we'll look to see what type of applications we have in the semi. So what's really nice is a lot of the stuff that we've done in other markets and are doing is very little investment in R&D beyond what we invest for semi and what's also nice is that we're doing some investment now for these other markets and we're able to come back to the semiconductor market and offer them high technology at really nice price points.

We've also made a pretty big investment in the last year in business development and strategic marketing. We recognize that we know semi well and we know the market well, but, boy, there are other markets that we do well in but we need to find a better way to look at business development and strategic marketing, and that was one of the investments we made.

We made some cuts in our organization in Q1 of last year. We took some of those dollars and we put it into business development and strategic marketing, and we brought in some very well experienced people from large companies that have -- that that's all they've done in the past is look at markets and products and applications.

And then we look to see what type of R&D is needed, can we transfer the products we already have into those markets which most of the time we can, so it's kind of an inter-strategic process we've developed over the last year or so.

Jairam Nathan, Sidoti.

Hi. Thanks for taking my question. Just kind of following up on Patrick's question regarding the operating models. The operating you're going to -- you came in above the operating model for the first quarter, guidance for 2Q also seems to be kind of at least at the higher end of the operating model given the revenue. Is it time to kind of update it again? And how should we think about that.

Yes. I think what we -- thanks, Jairam. So again we've updated a couple, three times in the last 15 months. You know, as Jerry mentioned, we tend to want to make sure everything is locked in place before we update the model. We tend not to get ahead of ourselves on that. So we don't have an update right now but I would anticipate end of the year, if things continue down this path, we would then update the model going forward as well. And as a number of other activities, like I mentioned before we're working on which I think will hopefully impact the model going forward as well.

And another question on adjacent markets. I know you mentioned solar is kind of strengthening. And between LED and solar, right, you had close to a 100 million I believe in the past, like how is that trending today and what are your thoughts there?

Well, I think the solar will continue to be a nice market for us and hopefully we'll see continued strength there. I think the LED is still moving along at a nice pace but not compelling. The thing I'm excited about though, is our position with the Chinese OEMs in the LED space.

There are several there that we're working very closely with, which we have from the beginning of their business and so if that business comes back, it will be in China, and it will be with Chinese OEMs and we expect that we would see that come back nicely. But right now it's just moving along at a relatively decent pace, but nothing compelling. Solar looks very positive right now.

Okay, thank you. I'll follow ahead.

You're welcome.

Welcome.

Tom Diffely, D.A. Davidson.

Yes. Thank you. Good morning. So I guess looking at solar, you talked about the big order in the quarter. In general for solar, they're pretty big lumpy orders. How does the revenue typically run out of that?

You mean once we get an order, when does it become revenue?

Yes, is it an order for the next year you get quarterly pieces of revenue?

It's pretty lumpy orders, and I said they're good size, a multimillion dollars type cuts in these orders and of course we don't give guidance beyond the current quarter, but I expect the orders we get in this quarter would certainly shift in 2015.

Okay. And then Seth, you talked about how some of the expenses or I guess operating expenses like R&D and IT were moved from the first quarter to the second quarter, but it looks like your second quarter guidance is fairly flat in R&D. I'm wondering if there was something else going on there?

Yes, so what happened in the second quarter, Tom, is in the U.S. we do wage increases effective April 1st, so there is uptick on that as well. And then there is some variability on kind of how the product spending will occur. So it can bounce around quarter to quarter. Also in the first quarter we tend to have a little higher fringe costs because of all the FICA, the U.S. taxes, they tend to peak in Q1 and come down in Q2. So that's, when you mix that all together, that's why you see the guidance for the second quarter.

Okay. I guess from your earlier comments, I thought it would have been a little higher than it was.

Yes, I think the fringe is offsetting it so the fringe will peak in Q1 is typical of what we see in the first quarter of a calendar year as the offset.

All right. And then you've talked how this is a record quarter for semi's. I'm wondering if you back out GP and maybe a couple of small acquisitions, how close are we to peak revenue levels right now?

I would say we would be pretty comparable, not that far off. I would say GP, you know, typically GP will do about $3 million in a quarter for semi. And I don't have that exact data for the first quarter but if you assume it's roughly where it is in Q1, you're talking 151 is again the high, 140s, 148.

And then when you look at the nice momentum you have in the MFC's for the biomarket, how much redesign work was there, once you had this semiconductor rated MFC, to move to that market?

It was a fair amount of -- I mean, rapid development. I'm really proud of the group the MFC group. They really understand rapid product development and so you have to get into footprint and flow rates, but I mean, the base designs are there so it's actually modifying what we have, improving -- increasing the flow rate and there is internal components that make that difference, changing the footprint, so the fundamentals of MFC design are relatively consistent, but there was a fair amount of reconfiguring that had to be done, but done very, very quickly.

We've come out in the last year and a half, two years, we've come out with multiple sets of MFCs that have gained some pretty good adoption inside and out of semi, both in terms of their technical capability in the cost price point, and the fact that we could come out with this high series and automatically get acceptance of biopharmaceutical manufacturing in industry, and book already is a real tribute to that group for how they've adopted rapid engineering and we're very proud of that.

It's a nice business. We think the MFC business in non-semi applications is a very nice business for us.

And then on the similar topic, when you look at the gas analysis for the environmental and natural gas markets, you said it was maybe a $200 million market over time, how do you think that rolls out for someone like you?

Well, it's still relatively new for us. You know, we're still in the -- we bought a company with booking rates and customers, and we're doing some deeper dive in terms of where that plays out for us, but their products have used in ethylene production, it looks at [carbon] composition in ethylene, it's also looking at monitoring acetylene in other chemical species. It's involved in the heating content on the pipelines of our natural gas processing.

So there is lots of opportunity there and the other thing is, we have business with our other products in oil exploration and that used to be a nice part of MKS business in the past as well, so the fact that we can now bring the MKS name and brand along with this technology gives the customers more confidence with a sizable company coming to market that we'll be around and can support their needs. So I'm not sure how quickly the $200 million market becomes all ours but we certainly are at the beginning stages of planning for that.

Okay. And I assume you'll spend a significant amount of time at analyst meeting on these adjacent markets?

Yes.

Great. Well, thank you. Talk to you soon.

You're welcome. Bye.

(Operator Instructions). Jim Covello, Goldman Sachs.

Hi. This is Chelsea Jurman on behalf of Jim. Thanks for taking the question. You mentioned in your opening comments that semi sales are now at a record, so can you talk a little bit more about how you think about the sustainability of the CapEx cycle and what your current visibility is toward some of your biggest customers?

Well, you know, again there is all kinds of numbers being thrown around lately and adjustment to the CapEx, flat, plus 2% to 5%. One of the things that we do see and we believe in though, is the mix shifts into Etch and dep is a very positive situation. So even if there were a flattening or a slower growth, the fact that there is more Etch and dep consistent, which is significant for MKS, is very positive.

So I'm feeling pretty comfortable that we'll still see solid business through the year. And again, as 3D NAND becomes more engrained, Intel has talked about migrating to that, we still have the [indiscernible] Phase II fab that is constructed, going to be filled out rather, the micron business that's talked about 3D NAND, it all is very positive in the long run for us.

But our short term view, our lead times are very short, we're in pull systems with customers. So it's really hot. We don't go into quarter with a large backlog and that's good. We can respond to it. That's probably what makes us important to our customers. But we haven't heard anything to say that the business is going to shift materially one way or the other. It seems steady state right now.

Obviously one of our second largest customer was fairly optimistic a couple days ago on the 2015 spending and we have a lot of exposure with that customer as well. So I think that's quite positive. And then also, coming back to a comment or a question that Tom had previously, we've increased our TAM in the last several years so Granville-Phillips puts more exposure in semi and non-semi for us and then back in 2012 we acquired a very nice company in Korea called Plasmart which actually creates additional TAM growth for us in semi as well.

So even though we've hit record revenues in the last quarter, there is more TAM to be leveraged going forward. So, again we're pretty happy about that as well.

And then just as a follow-up, in terms of gross margin coming in significantly higher in 1Q, it looks like you haven't seen those levels since about 2011 and now it's coming back down a little bit in 2Q. Can you just talk about what drove the hire gross margin and then what's driving the decline quarter over quarter?

Yes, sure. So as Jerry mentioned and I mentioned previously, we're not the same company we were back in 2011, so we've done a lot of things to really become more efficient. So I would say the biggest impact on our margins now versus back in 2011 is the fact we've made, again, a lot of improvements on our operating performance. So that's really the lion's share of what's driving it and then when you look at sort of the Q2 versus Q1, it's really volume driven, Chelsea, quite honestly.

Got it. Thanks for the color.

Yes.

Thank you. I'm showing no further questions at this time. I'd like to hand call back over to Jerry Colella for any closing remarks.

Thank you. We are very pleased with our strong start to 2015. We are leveraging our market leadership and focused acquisition activity within the semiconductor industry and are benefiting from positive long term secular growth trends driving higher capital intensity. Other advanced markets also continue to demonstrate continued growth and we have further expanded our product offerings into these markets with recent acquisitions.

We will continue to drive improvements in our operating performance, deploy capital to generate shareholder value by disciplined M&A opportunities and manage our business to achieve sustainable and profitable growth. We look forward to updating you on our continued progress in our investor and analyst event in June in New York. Thank you for joining us on the call today.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.