Novanta Inc (NOVT) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 GSI Lumonics earnings conference call. My name is Jennifer, and I will be your coordinator today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Charles Winston, President and Chief Executive Officer. Pleased proceed, sir.

Thank you, Jennifer. Good evening and thank you for attending our second-quarter conference call. This call is being broadcast live over the Internet in a listen-only mode at www.firstcallevents.com on the specific URL detailed in our press release. Tom Swain, our Vice President and Chief Financial Officer, is joining me this evening.

Before proceeding however, I must mention that certain remarks made during this call may constitute forward-looking statements. These statements are based on management's beliefs, assumptions and current information. As such they are subject to risks, uncertainties and changes. Our Safe Harbor statement that can be found on any of our financial press releases available on our Web site applies to the call.

We're pleased to report continued improvements in revenues and profitability for this quarter. Our strategic repositioning of the company played a significant role in these results. Also, we have the benefit of improving market conditions. Sales were up 89 percent over the same period last year. Earnings per diluted share were 28 cents for the second quarter compared to a loss of 9 cents in the same period last year. Orders were $93.7 million, including the backlog from MicroE. Orders show an increase of 120 percent over the same period last year. Backlog was $101 million, an increase of 41 percent from the same period last year.

Overall we continue to experience broad market recovery. Based on the limited visibility of just one quarter, we believe the cycle has fundamental strength. We are seeing deliberate paced pattern of deliveries with more rational spending than in previous cycles. We're also seeing the benefits of our strategic acquisitions. These acquisitions are providing complementary technologies and products that are expanding our range of offerings in multiple niche markets. The acquisitions are also contributing significantly to our revenue growth.

Laser systems, which is focused on the semiconductor and electronic production, sales were $36.4 million this quarter compared with $19.1 million in the same period last year, an increase of 91 percent. All product lines experienced strong order activity led by the ongoing demand for wafer processing equipment. Silicon suppliers and integrated circuit fabs continue to add capacity as evidenced by the increase in both wafer repair and wafer marking sales.

Sales of wafer marking and WaferTrim equipment were strong, and we maintain market share in wafer repair for new technology buys. We have significant new account penetration in Asia this quarter for our wafer repair systems. Our die marking equipment increased account penetration. These sales activities resulted from market demand for flat-panel displays. Our electronics industry equipment business kept the same high level of activity as in prior quarters.

While visibility still remains approximately 90 days, at this time we see order activity continuing into the third quarter. Therefore, we are not anticipating a slowdown in the sales for this segment of our business anytime in the near future. Laser segment sales were $11.9 million this quarter compared with $8.6 million in the same period last year, an increase of 38 percent.

It was another strong shipment quarter across a broad range of margin applications. Regionally we saw the largest sales growth in Asia Pacific, while sales in Europe continued to be good. Sales into light industrial and semiconductor applications were solid throughout the quarter. The order activity in semiconductor sector reflected the global growth in this industry.

Business sector outlook in the laser segment is positive. However, as with the systems group, visibility continues to be within the range of one quarter. Precision Components generated $41.9 million of sales in Q2 compared with $17.6 million during the same period last year. Sales from Westwind and MicroE, which was acquired in mid-May, contributed significantly. Sales were (inaudible) across a broad range of niche markets including medical, light industrial, aerospace and electronic applications.

In the electronics market, Westwind's PCB drilling spindles experienced strong demand from continued growth of PCB production, while MicroE encoder sales continued firm in the data storage sector. IT upgrades and new consumer electronic products are continuing to drive demand.

Also, all other keys segments including medical, industrial and measurement markets were ahead of last year's sales. This strong new account development for MicroE product line is expected to support continued growth in revenues into the future.

On a percentage basis, China continues to be a strong growth region for us. We are well positioned there due to our market penetration in the region and our acquired Westwind location in Suzhou.

Our second quarter in 2004 showed the strength of our strategic direction for the company and its continuing success with our customers. You may recall that three years ago we divested a number of noncore business units accounting for approximately $100 million in revenues, which we converted into approximately the same amount of cash. Two years ago we restructured the company to a lower breakeven point with a focus on three business segments in which we operate and report today.

A year ago we began our program directed at acquiring enabling component technologies. While the general market recovery, specifically in the semiconductor sector, has contributed significantly to our improved performance, our acquisitions of the precision motion, control and rotary motion technologies are providing both present growth, as well as providing the building blocks for our future growth.

We have expanded our capabilities, added to our diversity of component products and opened new opportunities for technology synergies which we believe will develop in the near future. In the quarters to come, our focus will remain on achieving our business objectives to enhance value for our shareholders.

Now here is Tom with details on these and other financial highlights.

Thanks, Chuck. This quarter we are continuing to see the results of our successful acquisition strategy and focus on operations improvement and working capital management. Particularly noteworthy this quarter is the cash generated from operations of 12.6 million compared to only 1 million in the same quarter last year.

On a year-to-date basis, we have generated 19.1 million from operations compared to only 1/10 of a million last year. This improvement has been primarily the result of profitability and reduced days sales outstanding and receivables. Days sales outstanding were 64 for the quarter compared to 86 in the same quarter last year, while inventory turns were 3.4 versus 2.8 in the same period last year.

Net cash, cash equivalents and marketable securities totaled 72.1 million at the end of the quarter and are net of the 55 million purchase price for MicroE executed this quarter. Cash flow generation is a vital component of our continuing acquisition strategy to drive above-average growth.

Our gross margins increased to 42 percent this quarter compared to 35 percent for the same period last year and to 39.7 percent last quarter. The increase in margins is primarily attributed to the favorable impact of the MicroE acquisition and sale of previously reserved inventory. Our business model target for gross margins has been increased to 45 percent from 44 percent based on expected gradual improvement in margins from a long-term shift in product mix and cost reduction programs. This target should be viewed as a long-term projection over several quarters and not necessarily achieved on a steady sequential basis.

Looking at gross margins on a business segment basis, laser systems improved over the same quarter last year from 32.9 percent to 43.4 percent and reflects primarily increased volume, sale of previously reserved inventory and market recovery for certain products.

Sequentially the margin for laser systems decreased from 45.4 percent last quarter to 43.4 percent this quarter due to the shift in product mix. It should be noted that product mix will impact margins on a quarter to quarter basis. The gross margin for the laser segment is 31.4 percent for the quarter as compared to 31.9 percent in the same period last year. Multiple factors contributed to this slight decrease, as well as the improvement from 28.1 percent in the first quarter of 2004. The expected margin impact from price increases implemented to offset exchange rate movement will not be fully realized until the fourth quarter of 2004.

Gross margin for the Components business is 39.7 percent for the quarter compared to 39.5 percent in the same quarter last year. Although the margin shift is small, there were many impacting factors including more favorable margins from MicroE products, lower margins for Westwind products and a heavier mix of lower margin internal sales.

On a consolidated basis, research and development expenses have increased to 6 million, which is 7.1 percent of sales as compared to 3.5 million or 7.9 percent of sales during the same period last year. While the pace of R&D spending has increased, it has not done so at the same rate as revenue. MicroE and Westwind added 1 million, while the laser systems segment R&D spending increased 51 percent or (inaudible) 8/10 a million over last year.

In our target business model, we have adjusted the expectation for average annual R&D expenses to 9 percent of revenues, reflecting all of our recent acquisitions.

Selling, general and administrative expenses increased to 14.5 million or 17.1 percent of revenues comparted to 13.2 or 29.5 percent in the same quarter last year. Most of the increase is attributed to acquisitions, which are partially outset by lower spending particularly in corporate SG&A. This quarter's result is in line with the expectations for SG&A as a percentage of sales in our business model.

Operating results include a charge of (inaudible) million for the acquired in process research and development of MicroE. Amortization for the quarter of 1.2 million includes .4 million for MicroE. On a full quarter basis, the MicroE amortization is estimated to be (inaudible) million per quarter. This amount is based on a preliminary valuation of the intangibles from MicroE acquisition and is subject to change.

In Q2 we adjusted our expected 2004 annual income tax rate to 10 percent resulting in a Q2 rate of 10.7 percent of pre-tax income. We expect to return to a normal rate in the 35 to 40 percent range in fiscal 2005.

In summary, our overall profitability and cash flow are on a steady course of improvement as we continue to focus on operations, particularly in the laser and Components segments. And now I turn the comments over to Chuck.

As Tom mentioned, we expect to continue the improvement in performance in all business segments. At this time, Tom and I are available to answer your questions. Jennifer, will you please proceed with the questions?

(OPERATOR INSTRUCTIONS). David Hodgson, Orion Securities.

Thank you very much. A couple of questions. I know you provided what percentage of the backlog was MicroE and Westwind. Can you also provide what the revenue impact was from MicroE and Westwind in the quarter?

We don't break down by product line within the Components group.

Okay. Are you seeing accelerating revenues for both of those acquisitions?

Well, we just had MicroE in this quarter, and it is fully additive as a result of the acquisition. There was a 10-K -- excuse me, 8-K that was filed that provided full detail on the MicroE acquisition. And Westwind has been slightly up from quarter to quarter.

Okay. Secondly --

That has always give out at this point.

Secondly, you mentioned some of the gross margin benefit in systems related to selling systems that had been written off in previous quarters. Is this the first quarter where you have seen this benefit? Can you quantify the benefit, and will there be additional benefits in the coming quarter or quarters?

We have estimated the benefit at about .5 percent, and it was basically inventory that was considered access that we had written off that has now been sold in systems in the recent quarter. I think we are probably coming to the end of those types of recoveries.

Lastly, on a sequential basis, how much of the 5 million improvement in Components segment income was related to MicroE? Was it about half of it?

Again, we do not break it down by Components, but it was a substantial portion of the improvement, yes.

Okay, great. Lastly, any guidance on gross margins for Q3?

We don't provide specific guidance on margins, but we don't expect any particular change. They are 1 to 2 percent range you know this quarter.

It might be up or down within a percent over the next quarter because you have product mix issues, David, and also timing issues.

Great. Good luck.

Brian Piccioni, BMO Nesbitt Burns.

Well, a number of the questions that I had were already asked, but I would like to go back to your earlier comments when you said that the cycle has fundamental strength. Of course, I would imagine that there are multiple cycles going on associated with both the semiconductor industry, electronics and the overall economy. Were you directing those comments to any particular cycle or just overall?

Pretty much overall because we are seeing a good flow of orders across the board. We have not seen any significant slowdown. The customers are still giving us this 90 day order cycle, but they are continuing to indicate that the rate at which business is going right now should continue because they are not seeing any fundamental change. Again, it is just back to in the electronic and semiconductor world a lot of the devices that we have talked about before such as the digital cameras, the new cellphones with the video and the new PDAs that have come out. But a driver is starting to be the flat-panel display for home use. So that is driving it. And we are not seeing any -- none of our customers are saying we are looking at a slowdown. In fact, they are continuing to tell us the their business is looking good and acknowledging that we should continue to be prepared to go on the pace we are at.

We don't anticipate. Our fundamental plan, our game plan right now is we are not looking for any significant slowdown in the business. We're anticipating there could be some ups and downs of a few percent, 4 or 5 percent quarter to quarter as we go forward. We don't see major increases in sales as compared with this year versus last year. So we are sensing that we are maybe reaching a plateau for which we will continue to go along at the current rate or slightly up, slightly down from it. For the quarter coming up, the Q3 that we are in now, seems to be on track with slightly improving revenues from the current quarter Q2.

Okay. So just as a point of clarification, your plateau you are referring to was a revenue plateau basically?

Yes.

It is a little bit hard to sort out and I am sure it's hard for you guys to sort out as well sometimes the sales that you make are often destined to a different geographic location from the location of the invoice. But is there any sense given the facts changes or temporary I believe facts changes associated with accelerated depreciation, is there any sense that that is providing an incentive or a material incentive given the end use for maybe some of your customers to retool due to the affiliated tax benefit?

Well, I would think to the extent the sales are in the U.S. it would, but I would say our systems sales are probably largely overseas. Roughly 40 to 50 percent of our market is U.S.-based, and it would just be our Components as well as our products lined up in generally capital equipment. So to the extent that becomes a driver, but it is hard to identify the impact.

The capital equipment business, most of our systems are being sold overseas into Taiwan, Japan, Korea, some there onto China. There is a portion that goes into the U.S., but that is not going to be driven by tax consequences. It is more driven by a fundamental demand for capacity.

Oh, sure. It is a marginal impact if anything. I would not think that somebody would say good. We are getting a little bit of a tax rebate. Let's spend a few hundred thousand dollars on a new piece of equipment. Absolutely.

A good portion of our Components and laser business is sold into North America, but again that is going to OEM so it is not going to be driven by tax benefits.

Okay. Thank you. That is all for now.

That is a good question by the way. You made us think about it.

Jed Dorsheimer, Adams Harkness.

Congratulations on a great quarter. A couple of questions for you if I could. First of all, just going back to I think one of the first questions, it looks like even excluding MicroE, you did see sequential growth in your Components business, is that correct?

Yes, mostly I would say the internal revenue was the major driver.

And looking out, I know you don't give specific guidance, but just with respect to directionally, would you expect to see continued growth in the Components excluding MicroE?

Yes. If we take out MicroE, it is Westwind and our basic Components business. I would say they will have growth. Again, it's hard to say because a lot of this is lumpy, and when you average it together, it comes out okay. But it's just hard to say period to period over the long-term yes. (multiple speakers). Quarter to quarter I cannot say specifically.

Over the next several quarters, the answer should be yes. Coming into the third quarter, historically the third quarter for our base Components business, excluding MicroE, has been a little slower on the basis that a lot of the OEM customers take plant closings, do their inventory, do their fixing up stuff during August. So there could be a little bit of a slow period in August, which might affect the Q3. Q4 is generally pretty strong. On into next year, we see good prospects for growth due to design wins that we had, and then MicroE on top of that should really benefit the whole segment.

Great and just on that same point, could you talk about the seasonality that you are seeing or what you have seen thus far? Historically I think Q3 is one of your weaker quarters just given the seasonality of your end markets. Maybe you could just talk about what you have seen so far? And also with respect to leadtimes, are you seeing an expansion or contraction? Maybe you could elaborate on that please.

We're not seeing any dramatic change in leadtimes to work your questions backwards. We are not seeing anything significant there. In fact, these people still continue to want things faster, and we continue to press on our suppliers to get faster delivery because that is irrespective of the level of orders. It's just everybody wants shorter cycle time. So that is fundamentally being built into our business to improve that in the operations every single quarter, and we have been doing that to go.

The other part of your question was, the seasonality is generally third quarter is a little bit weaker. The systems piece of our business, however, just the growth here year-over-year and even quarter-over-quarter, the orders are very strong. You see we came in with a very strong backlog, and what we've always indicated to you is most of the backlog we have been getting is shippable within the coming quarter to two quarters. We don't have backlog going out beyond that very much any way.

So the systems portion of our business is kind of -- the mantle of the industry is overshadowing any typical slowdown in the quarter. Components business, however, does typically sees some slowdown. We're not aware of the level of it. It should not be terribly large. In fact, I cannot even to you whether it's actually going to happen in this Q3, but it is typically there. The laser business seems to be doing fairly steady business, and does not seem to be seeing too much of an impact at this moment on Q3, which it usually does see.

Great. Tom, just a couple of very quick financial questions, sort of housekeeping. One, I noticed did you say that the SG&A or excuse me R&D longer-term is 9 percent?

Yes.

So that is a revision from your previous long-term expectation of 10 percent?

Yes, that is a result of looking at our acquisitions and the spending rates that we are going to have under all the businesses that we currently have. We expect it will average 90 percent across the board.

Great. And just doing the math here, based upon your comments, you are pretty much -- next quarter implies that you are pretty much at your gross -- adding in the additional 1. -- or 1 million of the MicroE, if you do ship that backlog into an 8.5 million, which I think you have said before. You're basically at your 43 -- close to 43.5, 43.9 long-term gross margin of 44. Are you updating the long-term margins at this point?

Well, I did say we updated the margins to 45 percent.

I did not catch that.

I don't -- I would not expect that to be moving that fast, but again it tends to be a little lumpy. I am not sure it might have a little impact in the third quarter depending on mix, and that is something that is always with us quarter to quarter. But it keeps it in a range of 1 to 2 percent generally.

The quarter to quarter could go up or down by .5 point because you move up 2 percentage points, you get a mix shift the next quarter might be back by .5 point or up by .5 point. But over the longer-term looking out four or five quarters, our target is to get to 45 percent. That is why we've put this revision in place, and again we upped our spending on -- we took our spending on R&D to the 9 percent level, and overall an improvement on the bottom line op income.

Great. I will pass it on. Thank you.

Deepak Chopra, National Bank Financial.

I was wondering if you could talk about the linearity through the Q2 and how does it look so far in the first five or six weeks of Q3 here?

Well, so far so good. We have not seen anything significantly change. That is why we're feeling pretty good right now.

There is no real lumpiness in Q2 like where our June was -- it seems like some of the players out there are saying that June was a little bit weaker than April and May.

We have not seen that. We have not seen that.

Fair enough. Maybe just moving over to MicroE, in this past quarter, MicroE was only included for about six weeks of the total quarter?

Yes, that is correct.

And in terms of that six weeks, was it better than the run-rate you guys had stated previously in terms of how it performed the revenues?

Well, the run-rate was a little heavier distorted because they had heavier revenues in the last part of the quarter than the first part.

It wasn't based on a number of weeks. It would not be a fair split to use the revenue level to divide it. It actually had a little higher revenues.

Okay, fair enough. In terms of the OpEx, where should we take OpEx in the next quarter given we will get the full quarter of MicroE and the expected increases that you see?

Where do we peg operating expenses next quarter?

Yes, like where should we model those type of numbers toward?

I think you have got some pretty good details in the 8-K, and basically you add a half quarter in this quarter. So you could look at having a full quarter next quarter for the operating expenses, and then you've got to adjust for the amortization. There is a half a quarter. There is 400,000 of amortization, and at this time, we are estimating at 800,000 next time.

And the other distortion this quarter is we wrote off 430,000 of in process research and development that you will not have as an expense next quarter. So those are the adjustments you should take into account. The rest of the change will be just across the board, and we don't have any particular drivers one way or the other.

Okay. And one last question maybe in terms of capacity utilization or maybe even the ramp-up. Are you guys starting to bump up into limit internally? Are we going to need to see some more spending on CapEx to meet the demand that you are seeing in the next several quarters?

We're not anticipating anything at this time.

Okay. One last question. Is the company doing any hiring right now at this point?

I would say on a very selective and limited basis replacements. There is more in the systems group for the production area I would call variable type positions but not anything significant.

Most of the hiring we're doing is at the Westwind and also in the systems business, and it has been really bringing onboard temporary workforce to do certain work because we don't want to add to our permanent fixed cost base. It is mostly variable hourly folks on a temp basis.

Great quarter. Thank you, guys.

Jim Ricchiuti, Needham & Co..

I wonder if you could just comment briefly on the order trends thus far in the quarter in July? It sounds like the second quarter was pretty even in terms of bookings. How was the strength in July?

So far so good, Jim. To be honest with you, we just have not seen any fundamental shift. There is always the week-to-week where one week gets too much and then the next week you get a whole bunch, and we have not seen an awful lot of change.

You mentioned the systems business. You cited a couple of areas of strength. I wonder if you could just comment on the memory repair product line, how that performed in the quarter?

Memory repair performed well. As I mentioned in my remarks, we held our market share position on the new technology buys, and we've gotten some penetration into some new accounts there.

Okay, great. As you look at the business, it sounds like you could see a plateauing maybe coming off a little bit in some quarters and possibly up a little bit in other quarters over the near-term. But what I am trying to understand, is that coming from you and you internally of some of the end markets that ultimately these products and systems are showing into? Are you customers giving you any sense of maybe not specific orders looking out a couple of quarters, but just general plans?

I would say it's more our own internal analysis of the situation saying that we believe capacity levels are going to run at about where they are. We're watching our customers running at 92, 94 percent capacity utilization on systems, and we are continuing to buy equipment for expansion into the new technology levels with shrinks going on, 300 millimeter transitions taking place. Flat-panel displays ramping up is going to be again a good driver for circuit production, printed circuit board production, component, chip component, as well as DRAM.

So what we are sensing when we put it altogether and try to build a mosaic out of it, we are sensing that there won't be dramatic increases over the current run-rate levels for orders coming in compared with last year because we have seen a dramatic increase year-over-year. But we are sensing that it is going to continue, so we are kind of envisioning a plateau. We are building our business model going forward for the next year around this thing, maintaining a nice steady level at somewhere in the range we are at right now -- $36, $38, $40 million range -- moving a couple of million one way or the other quarter to quarter. But we are not planning on any nice edge fall off the cliff kind of thing because our customers are telling us from that point of view don't plan on things drying up quickly.

Okay. I wondered if you would comment a little bit on the integration of MicroE, how it is performing and where you stand with that in terms of potentially also some synergies with Westwind?

Good question. One of the things that has happened very pleasantly is MicroE has just neatly melded into the whole company. There are a number of technology interfaces where the MicroE engineers and the Westwind engineers have identified with their marketing respective marketing folks ways of putting the product technologies together to create a better product platform at a higher value level for the customer, and the same thing has happened in moving MicroE technology together with our basic scanner technology in the Components group in Billerica.

So we are seeing some nice opportunities to put the technologies together to build a more value-added platform that our customers can design into their products. It would be more of a subsystem level platform than a basic Components level where you take an encoder and put it together with a spinner or a scanner to do something more value-added to the customer.

In addition, I would point out that Ray Sansouci, who was the President and CEO for MicroE, has assumed responsibility now for the scanner and precision optics group within our Components business. So he has taken charge of that as effective the end of May and is operating in the role to again build this into a more unified business unit, putting the engineering teams working together. That has been really very well received on both sides of the aisle. I would say the aisle has pretty much disappeared at this point.

Okay. And would we begin to see these, some of these newer subsystem level products being introduced toward the end of this year? Is that more of a contributor to '05?

I think it is going to be more into the middle part of '05 before we see these things getting out there. Of course, the gestation cycle has to get designed in and you get some design wins. So they may not contribute heavily in '05 either, but I believe we should see good impact in '06 for sure based on the time that it takes. You have a three to six-month design cycle to put things together. You build a prototype, get that into the hands of several of your key accounts. They start looking at it, playing with it, and they design that into their Next Generation product. They are not going to go back and design it into a product that is already in production. For the most part, that rarely happens.

Also just a final question here, it looks like we could see your cash business starting to build nicely again over the balance of this year. You've clearly made some nice acquisitions over the past year. Can you talk a little bit about the level of acquisition activity?

Well, it is not going to be as paced as it was last year where we did four acquisitions in 12 months when you look at May to May, but we still have some very interesting technology areas that we're interested in pursuing and we have some good candidate companies there that we are looking at, and again, as usual, you never know the timing. You may go on a date for a year and never get kissed, and then again it maybe a kiss on the first date. You don't know.

But we do have ideas of what we want. We know the technology that will fit in here like we did with the rotary motion and the precision motion control and the laser stuff that we did. I think there's some really good play to have, but as I mentioned to you once before, prices have firmed up a little bit, and that is to be expected. So we are not going to go out and just throw money at anything. We want to buy things at the right price and we will be patient.

Tom, real quickly, is there any way you can give us an apples-to-apples bookings number say for this June quarter, excluding MicroE versus the March quarter?

We don't really break down the bookings by product line. We just have some information we provided in the 8-K which gives you an idea of the revenues for MicroE. I think that is -- you can kind of deduce it from that.

Okay.

Daniel Kim, Paradigm Capital.

I want to go back to the MicroE if I could. I guess last week upon closing the acquisition I believe you said MicroE's backlog was running at 8.5 million, and you disclosed in your press release a 36.9 million backlog. I would presume -- roughly if you presume 8.5 that that came from MicroE, the balance coming from Westwind. So we are looking at sort of a $28 million range for Westwind in terms of backlog. How would that compare to sequentially your year-over-year for a company that is running $8 or $9 million a quarter when you acquired them?

How would it --?

The backlog for Westwind seems kind of high relative to its run-rate currently.

Yes. Westwind came in. They had a very strong quarter in orders, and when we acquired them in December of last year, we picked up an unusually large backlog in an acquisition. MicroE has probably been a little more representative. They were in a very strong up cycle, and they had a very strong orders quarter in Q4 of last year for Westwind that was not necessarily representative.

Okay. So this is more of a blip with a longer delivery cycle than normal?

No, I don't think so. I think it is a matter we picked up what would probably be considered a reasonable backlog at approximately where they have been running, and then their order rate has been consistent with the shipping rate.

Okay. I believe the business at Westwind has been picking up. Correct me if I wrong, did you add a shift a little while ago, and are you going to add a third? Can you talk about that at all?

Well, Westwind went through a fairly dramatic ramp-up that started at the time it was going on in the quarter that we purchased them. I think they had essentially completed the ramp-up in the first quarter. They were getting orders faster than shipments, and now this quarter they have sequentially each quarter been doing a little better, and it is largely a matter of shipments catching up with the orders rate. But they should be at this point fully staffed. They are using a lot of contract temporaries to meet the volume.

Okay. MicroE was stated to be hopefully accretive by the first full quarter upon acquisition.

Actually it was accretive at the quarter.

That was my question. Are there any more payments with regards to the recent acquisitions? Any further profitability payouts or anything in that regard coming up?

No. Everything was -- you have the usual contingencies, but there is no payment based on profitability or performance. No purchase price has been disclosed.

God, Daniel, we can pay them anymore.

And with regards to recent acquisitions -- Microware and Westwind -- I was wondering if you can touch upon any potential new business opportunities between the two or if anything with regards to product overlap that has generated any new market opportunities for you guys?

Well, that was where I was making my remarks, Daniel, earlier about the synergies and the technologies and the products putting MicroE encoder technology precision motion control with the Westwind high-speed spindle and also with our own optical scanner devices that we have had for years and creating a much higher accuracy, much higher precision control motion in both cases which brings a lot more value to the customer because it allows them to do things they could not do before. I think that is -- we had our eye on that apple up in the tree when we were doing the series of acquisitions we have done, and it will take as I mentioned in my earlier comments, to answer a question, it will take a little bit of time to get from here, which we know it can be done technically, the design teams are now formed, jointly between the organizations and working together jointly with their marketing people. But by the time you get the product in the hands of the customer, I think a serious impact will be in the '06 timeframe.

In the meantime, the current products that have been brought to us and the technologies, those customers are continuing to buy those products, and we see good strength there looking out over the next several quarters.

Okay, great. One final question for Tom. The adjusted tax rate will return to your statutory rate in '05. Based on your run-rate and where your earnings are, do you have a better sense of at what particular quarter you will hit that full tax rate?

I think we will be at the full tax rate in the first quarter of fiscal 2005. There may be -- the way it looks it is probably going to balance out this year with a 10 percent tax rate. It will probably be pretty well taken care of any deferred tax assets that we have not utilized. So that will put us in the position of being at the full rate beginning of next year.

Todd Coupland, CIBC World Markets.

I just want to talk a little bit about the semiconductor market and wondering what leading indicator you guys are watching in terms of rollover? I was specifically interested in your comments on I guess the front and the back-end and if you're seen any relative strengths or weaknesses through the various product categories?

Well, pretty much across the board. The wafer marking equipment is being driven nicely by conversion over to 300 millimeter. It is a technology. That conversion seems to be moving along very nicely. I have not seen any slowdown in the orders for that. In addition on the wafer marking piece, we are seeing an increased interest level and order level in the CSP 200, which is a die marking product.

So the WaferTrim system had very very good strength through the quarter. In fact, as you saw, we announced a week ago another order for $6 million worth of equipment in WaferTrim. So pretty much across the board good business.

Chuck, (technical difficulty)--

Todd, are you still there? Hello, operator?

One moment. Pardon the interruption.

I thin we lost Todd Coupland. We did not lose him. We know where he is, but he is not on the line.

Mr. Coupland?

Can you hear me okay? Great. Sorry about that. How do you guys reconcile then all this concern about bookings growth in the second half of the year? I don't know if it is universal, but there is certainly a significant expectation that things are slowing down. And in a way, you guys are somewhat confirming that by saying your revenue, while it is not slowing down, it is plateauing. I mean eventually quarter to quarter comparisons are, in fact, slowing down -- just the math. So how do you reconcile all of these I guess different perspectives?

Well, we are taking them as a sign that because of the deliberate pace at which orders have been given to us, 90-day windows and people not running wild in the streets building all kinds of fads and leaving them, you know greenfield fabs being left half empty and not built out, that has not happened in the cycle that we can tell.

Again, it gets back to a conversation you and I had a while back, and that is that this cycle is influenced more heavily by a restructuring that took place in the industry where you have a fewer number of chip buyers, a fewer number of chipmakers, a fewer number of CapEx suppliers both in the front end and in the back end because of the consolidations that to place in the three years of down business that we had. So I think it is a more sober, more transparent business environment right now, and it is harder to get away with double, triple bookings because anybody who does that is just hurting themselves in the long run. I think it's a more sober environment, and therefore, our anticipation based on everything we are hearing from our customers in terms of don't slowdown, don't lay people off, don't reduce your inventory so you cannot deliver.

We have also, of course, as you know done a lot of outsourcing and improved our cycle time so that we can deliver in a much shorter time period than ever before. So all these things really go towards my belief that while orders and shipments won't increase dramatically year-over-year forever, I think we're at a plateau or reaching a plateau period shortly here where the sequential quarter-to-quarter growth will be flat, but looking back against last year will still be an improvement, and that's not all bad. If we can get nice plateaued sales in the systems business, for example, for the next four or five quarters, it gives us a chance to really work on the fine-tuning of the margins without a lot of mix shift going on.

But I think there are still some good opportunities for growing some revenues there. As I was mentioning, the die marking seems to be finally catching on after five years of hoping and praying and lighting candles, and we have a lot of interest in it. We have taken some good orders recently for marketing die on the wafer. So that should be somewhat of a mitigating factor as well.

A couple of other questions. The target model that you're putting out there now, margins and expense levels, it sounds like those are probably exit rate '05 objectives at this point. Am I reading that correctly?

It will probably be longer-term to bring everything in line with the target. These things have to be quite flexible too because the next acquisition could cause a shift in it. This is how we see it after we go through several quarters of improvements in margins, and we will be improving margins at the same time we will be increasing R&D expenses to get up to that level. I think we look at the SG&A. We have pretty much arrived and we are set there. The point is our actions are going to have to be focused on margin improvement. That will be the key focus to get to those numbers.

Okay. Great. Just finally, with very few acquisitions in your short-term sights, have you contemplated either a share buyback or perhaps a special dividend for a portion of the cash that is on your books? Your thoughts on that.

No, we have not. I believe we are in the right cash position now that if something does come to fruition in the near future, we have the right amount money to take it on without having to go to the equity markets, and we are certainly not going to go to the debt markets to buy something.

There are no further questions at this time. I will turn it back to you for your closing remarks.

Okay, well one more time, Tom and I would like to thank you for your interest in our company and support, and we look forward to delivering even better results to you next quarter. Thank you and have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.