Novanta Inc (NOVT) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to the GSI Group First Quarter 2006 earnings results conference call. As a reminder, this call is being recorded. At this time, I’d like to turn the call over to the Director of Investor Relations, Mr. Ray Reddy.

Thank you, Operator. Good morning. Thank you for attending our first quarter conference call. This conference call is being broadcast live over the Internet in listen-only mode at gsig.com. Charles Winston, CEO, and Bob Bowen, CFO, join us this morning.

The following presentation will include forward looking statements within the meaning of the federal securities laws, including statements about the company’s expected sales performance, operating results, financial conditions, and business strategy. These statements are subject to a number of risk and uncertainties, including those detailed in the company’s press release, issued yesterday in its 10K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes that differ materially from those projected in the forward-looking statements, and assumptions may change over time.

Please remember that these statements speak only as of today’s date, and that you should not place undue reliance on them. You are encouraged to review the written risk factors set forth in GSI’s SEC filings carefully before making any investment decisions. In addition, please note that this call is being recorded by GSI and is copyrighted material. It cannot be re-recorded or re-broadcast without the company’s express permission, and your participation implies consent to our taping. GSI will not be updating a recording of this call.

First, let me begin by quickly reviewing GSI’s product positioning for any new listeners. Our business can be divided into two main parts. Our systems business provides end-user manufacturing equipment that enables the production of semi-conductor chips. This segment generates between a third and half our revenue.

Our OEM business is diversified and much less cyclical than our semi-conductor business. It is comprised of six product lines that earned about $180 million in 2005. Our largest product line is slight over 40 million annually, and the smallest is less than 10 million.

This business includes both precision motion products where high accuracy motioning and positioning is required, such as data storage, PCB production, ophthalmology and robotics, and lasers for precision industrial and electronic applications. With that, I’ll turn the call over to our CEO, Charles Winston.

Good morning. Listeners today can find our press release on the wire from last night.

Today, I will do three things during the call. First, provide the background to our performance in the first quarter, describe the current business situation, and provide guidance for the second quarter.

First, we are pleased with the results for the first quarter. Revenue grew $11 million to $76 million, as guided. Gross margin’s at 41%, or 6 points higher than the same quarter a year ago.

The segments of the semi-conductor markets we serve continue to show recovery. Revenue increased to $31 million for the quarter in this sector. This included business from all three major product lines, with both new and existing customers for our Wafer Repair systems.

Based on both first quarter orders received and current quotation activity, Wafer Trim’s semi-conductor market segment is recovering.

Our OEM business, including lasers, grew to $47 million, or 6% over the same quarter last year. It generated $5.6 million, or twice the level of income from operations compared to one year ago.

Gross margins, at 41%, is 6 points higher than a year ago. This is because of increased sales volume, product mix, and more efficient operations.

Our systems segment, gross margins at 41%, is 6 points higher than a year ago, mostly due to volume. OEM margins, where we had the largest gains from efficiency, is 5 points higher. Our quarter end backlog is $79 million. Booking is $71 million, for a book to bill ratio of 0.9.

We deliberately increased R&D during the quarter by an additional $1 million, as we prepared for the launch of several new products later this year.

While investing more in R&D, we continue to improve our operating leverage. Our systems and OEM businesses each contributed over $5.5 million in operating income. While revenue increased 17% since the first quarter of last year, net income jumped to $5.1 million. Earnings per share for the quarter is $0.12 for diluted shares versus break-even during the same period a year ago.

Now, looking at our markets, the business situation continues to improve. For Wafer Repair systems, which are critical tools used in the production of MAND, Flash, and D-RAM memory chips, our growth depends on gaining market share at both new and existing customers, and the overall market growth for memory chips, which is based strongly on the demand for electronic products.

In recent discussions with our key customers, they expressed strong optimism about the next few years as they continue to add capacity and change design rules.

While the addition of capital equipment will fluctuate quarter to quarter, our customers are confident in the upward overall trends.

One leading chipmaker stated that the first quarter demand came from increased memory in personal computers, with a 6% sequential increase in the average amount of memory. Further, they expected average personal computer memory would increase an additional 14% in Q2 to meet the growing needs from new PC operating systems.

At the end of the year, they believe the average personal computer will require as much as 40% more memory than today.

They also noted overall quarterly D-RAM bit memory growth of 13%, and MAND bit growth at 26%.

Their 2006 growth rate estimates for D-RAM and MAND bit growth are 40% and 141% respectively.

Bit growth drives investment in capital equipment such as our.

We also continue to gain market share. We are now qualified at four of the eight chipmakers we targeted to win business. We received orders from two and had bids at others.

By the way, at existing customers, we’re also winning market share. We currently have over $10 million in back-log for our next generation green laser systems. Sales of Wafer Trim systems also continue to improve. These systems are critical to the manufacture of high performance analog chips, and are used in applications such as anti-lock brakes, air bags, and electronic power management.

Initial signs of the recovery were in February when we received a $6 million order. We are also in the final stages of another order for over $7 million for our new model N-350 system, which was designed with speed and accuracy to continue our success in this market.

In addition to these orders, quotation levels for Wafer Trim remain strong, up over two-and-a-half times the level of the fourth quarter, and we note that back-end utilization rates are reported to be quite high at this time from our customers.

Our OEM businesses continue to show stable growth and high profitability, and our outlook remains positive as we continue to be involved in and win new long-term design wins.

Specifically, the PCB cycle remains strong, due to both increased demands for printed circuit boards and our ability to win market share. We believe our technology lead in high-speed drills has allowed us to win an additional 6% market share since the beginning of the year.

Based on these observations, our revenue guidance for the first quarter is between $78 million and $82 million. We anticipate earnings per share to be in the range of $0.15 to $0.18.

Now, Bob and I open the call to questions from you.

Operator?

Thank you, sir. (Operator Instructions) Our first question comes from Jed Dorsheimer.

Hi, great quarter, guys. Just a couple of questions here. Chuck, jumped on the call a little bit late, so I apologize if you’ve already gone over this. Your book-to-bill ratio of 0.9, it’s a bit lower, certainly lower than the last quarter. I was wondering if you could provide some additional color on why the big drop from basically 1.4 to 0.9? Then, what type of order activities have you seen since the quarter has closed? Thanks.

Hey, Jed, how are you doing?

Good.

As I mentioned in the remarks, I think you missed, we do see fluctuations quarter to quarter, and coming in, remember we had a very strong-looking quarter in the fourth quarter. Some of that, as I mentioned during our last conference call, contained business that would grow into Q2, and with some orders that went Q1 and Q2 because we got them late in the quarter. We got some of those orders in December.

So it’s not unexpected that had those orders rolled over, we would’ve seen more bookings in Q1, and lower bookings in Q4 of last year. So we’re always going to see, because of the lumping issue -- you get a $6 million order containing four or five systems -- you’re always going to see that kind of lumpiness and we can’t deal with it, but we remain confident. Nino Federico, who runs that business for us, and I travel to Asia a few weeks back and we met with all the key customers, and we found them very optimistic, very up-beat, and they’re looking out over the next two to three years as they’re building large fabs and adding a lot of capacity.

So the key customers, we feel very confident that we’re not going to see this business just do a wing-over and fall off the edge of the world, so I’m not terribly worried if we see things go up above one and down below one based on the conversations that we continue to have with them.

Sure, so since the quarter has closed, has your activity increased, where you’re at similar level to that of Q1 currently?

It’s increased, and the activity, the quote activity remains high, so both of those are good signs, and all the conversations -- we talk with these folks weekly, if not daily, in some cases, so things are still -- we see no overall change in the business environment and the attitude, and that’s more important, because those are early signs. Before the orders stop, you see the pessimism starting to creep in and the optimism fade out. We’re not seeing any of that right now, and you know, I continue to maintain the posture I’ve had for the last four years, and that is we are seeing structural change in the industry, where we’re not going to see the wild up’s and down’s, and the big declines and the big ups. I think we’re going to see less amplitude in the up’s and down’s and shorter periodicity in the cycles.

Then, just moving to the Wafer Trim business. Congratulations on what looks like -- maybe it’s a little premature, but it looks like you’re about to close a $7 million order there. I was curious, if we compare what’s occurring right now, the business that you’re seeing now, we’ve seen a couple of orders over the past couple quarters here, and that of 2004 when I think Maxxum represented 10% of your total sales. Are you seeing similar trends? In other words, when business turned on in the ’04 timeframe, were the order levels of these $6 million and $7 million type of levels, or was it more of $15 million to $20 million type of orders that just overwhelmed and pushed out lead times?

That’s a good question. You know, I’m just flipping back through my little note sheet here, and basically, we had one really strong quarter back in the second quarter of ’04 that business was up around the $24 million level for Wafer Trim, and then that carried through for several quarters. We’re not seeing that right now.

What we’re seeing is a nice steady pace of the $6 million, $7 million rate of run on orders coming in, which is more like a quarter’s worth to a quarter-and-a-half’s worth, you know, 90 to 120-day kind of routine. That’s a safer way to go and we’re seeing more activity from multiple customers, as opposed to one guy taking the big lead and then everybody else being way behind.

So I guess at this point, do you feel confident, given that memory cap-ex is sort of front-end loaded for this year, do you feel confident that the Wafer Trim business is going to be enough, or that you can take enough market share in the memory repair from some of the tier two and tier three players that we’ll be able to see sequential growth in that systems business this year?

Hidden in there is an assumption that memory for some reason is going to slow down, the memory repair, and I don’t see it that way, based on face-to-face visits with our key customers and with new customers that we’re trying to get business from and are getting business from.

I came away a few weeks ago with the distinct feeling that we’re going to see a back-end memory purchase -- purchase of memory equipment for the back-end -- continue to be good for quite some time into the future as they use up capacity that’s already in place on the front-end.

So it’s always going to be a little bit of fluctuation quarter to quarter, not too worried about that, but I don’t see it, as I said before, falling apart, and I see Wafer Trim picking up nicely, and I’m hoping it just won’t super-heat and get into these $25 million in one quarter. I like it when it’s coming in in a more manageable way, and that means it will continue for several more quarters as opposed to sharp up and down. I think we’re seeing a lot of that now. There’s a lot more deliberation going on in putting equipment online.

Great, last question then I’ll pass it on. We’re all going to miss you here. I was wondering if there’s any update on the board as far as a successor to you, Chuck, and any sort of visibility on timing of that announcement? Have they found a candidate? Just an update there, thanks.

Well, thank you for the kind words. The search is going on. They’re narrowing it down to a shorter list of candidates now and they’re getting some very, very highly qualified people, including internal candidates, and some outside candidates, so the board is doing a very good job, very deliberate, very thorough, and I think everybody will be pleased with the candidate chosen. Other than that, I need to warn you, Jed, I’m taking up race-car driving when I retire. I’m going to skip barber school. So you’ll see me in the car right alongside, but I’ll wave as I pass you.

All right.

Next we’ll here from Jim Ricchiuti with Needham & Company.

Hi, good morning. Chuck, can I ask another couple of questions on the systems business? How would you characterize the Wafer mark business in the quarter? What kind of visibility do you have in that going forward?

That’s a good questions. Wafer marks continuing at a nice steady pace. We haven’t seen any fall-off. In fact, we’re getting some orders for equipment for fabs that are going to open shortly. So very positive. Some of our customers have fabs on the drawing boards that they’re going to be bringing online for the next year-and-a-half, and they’re all going to require, a Wafer Mark is the first tool they need.

If we look at the systems business, it sounds like, in terms of the visibility that you see out there, maybe more visibility in Wafer Repair, you’re seeing a nice pick-up in activity in Wafer Trim. On some of the other areas, like Wafer Mark and the PCB, less visibility but it sounds like your pretty positive with what you see out there. Is that a fair characterization?

It is, it is. Across the board, we’re seeing a nice performance for just about every product line in each segment of our business, so we’re pleased with it. We’re not complacent. We’re out there trying to get more business every day, finding new customers, both in OEM as well as in the systems business. But I’d say overall, we’re king of tracking the world economy and the fact that things are good all around right now, and people are buying things.

Do you have any 10% customers in the quarter?

Not that I know of, off the top of my head.

Okay. Just shifting over to the precision component area. Any color on what you’re seeing in that market? Maybe focus more on what Micro-E’s been doing. It sounds like, I would assume Westwind’s having a -- business conditions sound pretty good there, but I’m wondering if you could talk a little bit about what’s going on in Micro-E in terms of both existing and new wins.

You’re right, Westwind -- I’ll pick up thread, Jim. Westwind is doing well. I think it’s a combination of things. One, there’s a transition taking place in drill speeds from about 160K to 200,000 RPM, and we’re strong there, so as we move up to higher speeds, and we recently introduce our 300,000 RPM, and we have a 250,000 RPM out there as well, so as we move to the higher speeds, which require greater technology, we tend to get a stronger market position and that’s what’s going on right now, so we pick up some market share points. But the industry overall is strong.

I was just in Shanghai a few weeks ago at a big MCPCA show, where all the equipment manufactures for printed circuit boards were displaying their equipment, and of course, you know, China is the hotbed now where all the manufacturing of boards or the largest percentage of boards is being manufactured. It was a very, very busy show, lots of people there, and lots of equipment on display, and a lot of those vendors that were selling drilling equipment had our spindles proudly on display in their equipment. So that was very good news.

We are seeing a nice strong order pattern in Westwind business. Micro-E’s doing well. It’s fairly steady business. We haven’t seen any abatement. Their key market is data storage, and we haven’t seen any abatement in there. That’s going along nicely because the number of drives being made continues to be increase.

Okay, and your R&D, how should we think about your R&D going forward over the balance of the year? It had a pretty big increase sequentially. Should we assume that R&D’s going to be moving up from these levels?

I think the R&D numbers for the year are going to be about the same percent of sales as they were in ’05. We’ve got some high expenditures early in the year because we have new products coming out in the second half, but they will abate somewhat as we go through the year.

Thanks, Bob. Just on the tax rate going forward?

Tax rate was about 32% in the quarter. For the year, we expect the way we see things right now, it’s likely to be a couple of points lower. We do have some projects that we’re working on. It’s a little bit early to put them into numbers, but we would hope that would further depress the tax rate.

Bob, do you think it could be somewhere around the 30% area for the year?

Yes.

Okay, and is that a rate, 30% to 32% for ’07 as well?

I haven’t really looked closely at ’07, but…

Okay, fair enough.

I don’t see why it would change substantively.

Okay, thanks very much. Congratulations on the quarter.

Thanks, Jim.

Our next question comes from Stuart Muter with RBC Capital Markets

Thank you for taking my question. Good morning. I guess a couple of questions for Chuck. Since the last quarter report, the D-RAM market has improved and MAND is maybe a little bit softer than expected. Has that modified your view on the memory opportunity this year? I guess that’s my first question.

No, you know, for us, it really doesn’t matter. We sat there with a couple of large customers, and they’re using the equipment ambidextrously. They’re using it. Our equipment goes on manufacturing of either MAND or D-RAM, so when I ask what their thoughts were on this slight increase, or oversupply of a couple of months that was reported in NAND flash, they said it really doesn’t matter to us if it goes over, if there’s too much NAND flash, so we switch over and build D-RAM. It bleeds off in a short period of time anyway. They’re not worried about that. I really don’t spend an awful lot of time worrying about it either, Stuart.

Okay, great. Gross margins have been improved nicely. Do you expect continued improvement from the OEM business? Could you help us quantify at what revenue levels could we see maybe gross margins at 44% or 45%?

We do expect our margins to improve in the OEM business. I think as you know, Stuart, we’re shifting some production to China, and those benefits just began to show at the end of the first quarter. I think we’re see more benefit in the second quarter and throughout the year as a result of that work. We’re also always continually looking at the supply chain, and for opportunities for lower cost supply for improved margin rate. So I do expect our margin rates to improve as we go through the year.

I would just add to Bob’s comments that we have been working, we opened a plant in China last year. Officially, the dedication was November, but we started some production in October, and we’re ramping that up in two ways. One, we’re increasing the volume on the initial products that we’re building there, but we’re also adding new products each quarter to that production as they gain more capability and more expertise.

So the training goes on every quarter to bring new products in there. So I would say as we progress through this year, we will see some impact in the reduction of costs of goods for our OEM products that are being built there, and then that will roll up to the net improvement in gross margins. I think we’ll see more of that in the second half of the year, because the volumes are fairly low coming into the year, but as they ramp up, we’re now up to about 113 people working there, and that’s from a dozen people a year ago.

I believe we’ll see some impact in the second half of the year.

Excellent, thank you.

Next we’re hear from Susan Streeter with Sprott Securities.

Thanks very much. I just have one question, Chuck, as it relates to the Wafer Trim business. I might have misunderstood your comments, but you were referencing the breadth of customers. My understanding was that business is fairly concentrated. Is that what you were referring to when you talked about the breadth of customers, or to the memory repair business?

No, you have that right, Susan. I was referring to the fact that even though that it is a very concentrated number of customers, there’s only a handful in the world who do this work, we’re seeing more order activity and quotation activity across more of that base, that limited base, compared to two years ago when the bulk of the orders came from a single customer.

Can you just elaborate on, is there a qualification process? How have you been able to broaden out your targeted customer base there?

No, we’ve always had those customers, and we have gained one or two smaller customers, but there’s not a large supply of customers. The number of customers is in the 4, 5 level, but they’re all good players and sometimes some take the lead and run out, as what happened in 2004. One customer got the jump on a power management chip and took a lot of business for us, and that was good -- that was very good -- but they dominated and the business was much less from everybody else. This time around, we’re seeing quotation activity and orders coming in from multiple customers with discussions going on at several more customers, so even though we’re only talking about 4 or 5 or 6 customers, it’s not 20 or 30, but we’re seeing discussions going on with all of them.

Now, that being said, we are qualifying a new product, the M350, which replaces our older model M310 that’s been a real warhorse. It’s been around for 15 years now, and is a standard in the industry that everybody relies on.

The M350 can do everything faster and more accurate for the customer, so we’ve got several customers qualifying it now. We’re in discussions for a multi-unit order that I mentioned for the M350, and that will be really the inauguration of the product into the marketplace, but it is testing out very well on site of customers.

In the meantime, we are receiving repeat orders for the M310.

Okay, great, and is that order that you’re testing the M350 for, that’s not finalized, so it wouldn’t be in the backlog number at this stage?

The order’s not in the backlog. We’re in discussions on the terms and conditions, but the customer definitely has qualified the M350, has bought one already, and has it online working in the factory, making parts, and wants to buy multiple units now. We have the P.O., we’re just talking about the terms and conditions on it right now.

Okay, great, thank you.

It’s not in backlog.

Thanks.

Our next question comes from Gene Holmstead with Caris & Company.

Good morning. I noticed that the gross margin was down sequentially yet on higher revenue. Could you address that?

Yes, there’s basically a couple of things that drove that 4Q to 1Q. One was in 4Q, we had some sales of older product line demo units that had been amortized, so we got basically full margin rates on those sales.

Then secondly, our production levels were somewhat higher in the fourth quarter than the first, which also had an impact on the gross margin rates.

I also noticed that the share count jumped roughly 500,000 sequentially.

Right, that’s basically option exercises.

Do you expect similar jumps in the share count later this year?

I don’t really have an expectation. Several of the executives have 10D5 programs. I don’t know what their individual triggers are.

Do you have a share buyback program in place, and have you bought any on that recently?

We have announced a share buyback in the fourth quarter of last year. We have not made any purchases yet.

Do your numbers on the income statement include options expenses?

We don’t have any options expenses based on options that have been granted to date. They were accelerated at the end of last year in order to avoid any P&L impact.

I noticed that you were impacted by roughly $700,000 in foreign exchange affects. Are you doing any hedging and do you expect foreign exchange to drag on earnings later this year?

We don’t have any hedging contracts currently in place. We did have one large hedge instrument close in the first quarter, related to a Japanese loan that had been made some time ago, which drove the biggest piece of that loss. We for the most part try and hedge our exposure naturally. I don’t expect to have much in the way of foreign gains or losses in the balance of the year. We may choose to hedge some of our Yen receivables going forward.

That’s it, thanks a lot.

Thank you. Gentlemen, there are no further question. If I may turn the conference back over to you.

Thanks very much for attending our earnings call. We’ll see you next quarter.

That does conclude the conference for today. Thank you for your participation. You may now disconnect.