Novanta Inc (NOVT) 2006 Q2 法說會逐字稿

Good morning, my name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the GSI Q2 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. [Operator Instructions]

I will now turn the call over to Ray Ruddy, Director of Investor Relations. Please go ahead sir.

Thank you, Kelly. Good morning, everybody. Thank you for attending our second quarter 2006 conference call. This call is being broadcast live over the Internet in listen-only mode at gsig.com. Dr. Sergio Edelstein, President and CEO and Bob Bowen, VP and CFO, join us this morning.

Before we begin, I’ll just read the safe harbor statement. 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 condition, 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 and in our 10K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ Muterially from those projected in the forward-looking statements made today, 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 Muterial. 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 the recording of this call.

So let me first begin by quickly reviewing GSI’s product positioning for any new listeners. Our business can be divided into two main parts. Our precision technology business which is about 60% of our revenue sells primarily to OEMs and is highly diversified across products, product technologies, served markets and customers. The primary markets being served are electronics, medical, and industrial manufacturing.

Our semi-conductor systems business, the other half, provides end user capital equipment that enables the production of primarily D-RAM, MAND, and mixed signal analog memory devices.

I will now turn the call over to our President and CEO, Dr. Sergio Edelstein.

Thank you, Ray. Good morning. Today I will provide a brief introduction to my background, our second quarter ’06 results, and some early thoughts about GSI Group.

I joined GSI Group about two weeks ago. I bring to the company 20 years of experience in the technology industry, including general management positions at both Applied Muterials and KLA-Tencor.

I decided to join GSI Group because of the strength and promise of the company’s technologies and its strong financial position. I believe GSI has businesses that are extremely well positioned and have excellent growth potential. I will focus on growth, especially driving those segments where the company is particularly well positioned to increase its market leadership.

We’re off to a good start in the first half of ’06. Our bookings level is at a record high of nearly $100 million. Year to date revenues are up 16%. And second quarter revenues are up 14% from this time last year. Our earnings per share in the first half of the year is more than triple the level of the same period last year.

I will now turn the call over to Bob who will provide more details, as well as, guidance for our third quarter.

Thank you, Sergio. This morning I will provide highlights on the second quarter results starting with bookings, revenue, and then operating expenses. I will end with guidance.

We are very pleased with the results for the quarter despite the fact that we had one large, multi-system sale that slipped into Q3. Bookings for the quarter totaled nearly 100 million, the highest bookings numbers since Q4 2000. Overall, our bookings levels were up 41% sequentially. And the second quarter’s book to bill ratio was 1.3. Our precision tech business had a 17% increase in bookings from the first quarter. This increase was attributed to strength across all product lines. Our semi-conductor system business bookings were up 82% sequentially, greater than any of the last 20 quarters. WaferRepair, WaferTrim, and WaferMark product lines were all very strong.

Whole company revenue for the quarter was 76.4 million, an increase of 14% compared to the second quarter of 2005. And year to date revenues have increased 16%. Our precision technology business had revenues of 50.4 million, an increase of 11% from the second quarter 2005. Year to date precision technology revenues at 97.4 million were up 8% from 2005.

Growth in these segments has generally been driven by an improved business climate and our focus on product quality and customer responsiveness. Going forward we believe our growth will also be driven by new product introductions. These businesses accounted for approximately 60% of revenues in the first and second quarter.

Our semi-conductor systems business recorded revenues of 29 million, an increase of 22% from Q2 last year. Year to date revenues at 6.3 million are up 32%. Memory repair and Wafer marking system sales have both been strong performers in the first half. And we have also seen a resurgence of WaferTrim orders and revenues from what was a pretty lackluster year in 2005.

Total company gross margin rates at 42.4% were up a point from last year due to increased volume and improved productivity. Year to date gross margin rates are up over three points from the same period in 2005. Operating expenses in the second quarter -- second quarter R&D expenditures at 7.4 million were up 16% from the same quarter last year and on a year to date basis.

We expect our investment in new product development to remain around 10% of sales for the balance of the year. SG&A cost were up 5% sequentially in the quarter and on a year to date basis were flat as compared to 2005.

Operating profits at 7.9 million were 10% of sales and up 72% from the prior year, reflecting strong operating leverage on the 14% increase in revenues. On a year to date basis, operating profits at 15.3 or 10% of sales were up 311% on a 16% increase in revenues.

Fully diluted earnings per share for the quarter were $0.15 in line with our guidance. And on a year to date basis were $0.27, both up strongly from 2005. We finished the quarter with $115 million of cash and cash equivalents after repurchasing 381,000 shares in our buy back program.

Looking forward, our precision technology business growth rate has been improving. And we believe this trend will continue. Our existing customers are buying more because of the general economy and because of our quality and on-time delivery focus. As we broaden our lines of enabling technology products, our existing customers are looking for more of what we can do. For example, we are actively introducing our optical scanning product to our OEM customers for their design use. Second, we continue to penetrate existing customer accounts in our expanding and new geographic markets including Asia. The growth is a result of investments that we have made in sales, marketing, and manufacturing in these regions. New customers in China and Korea and new applications are contributing to this growth.

Additionally our future growth will be driven by several new products that we just introduced. The most significant is a high performance motion feedback platform that broadens the number of applications and increases the size of the available market from 30 million to, at least, 100 million over time.

Turning to the outlook for our semi-conductor systems business, booking levels appear at or near a high in the short term while longer term trends remain solid. We take this view for the following reasons.

We continue to win share at new and existing customers. And we are currently gauged at several prospects who are evaluating our WaferRepair System, because of its ability to process next generation fuse pitches.

There are eight major D-RAM manufacturers. We have WaferRepair machines in production at five of the eight. We are qualified in an additional account, but have no orders yet. And we are qualifying at the two remaining accounts.

In addition there are six major overflow houses. Five are customers and one is qualifying. In short, we are well positioned for future bid competitiveness.

We continue to develop our next generation WaferRepair System which will improve accuracy and throughput. We believe this next generation system will position us to continue to advance future market share gains.

From our overall systems business perspective, we are seeing strong quote activity particularly in the Mixed Signal and WaferMark product lines. In the WaferRepair product line, we expect order activity to be slower in Q3 as we believe some excess capacity is building in the WaferRepair market. We have reflected this in our overall 2Q -- we have reflected in our overall 2Q ending backlog of 92.7 million the cancellation of a WaferRepair order recorded in Q4 2005.

With all these facts in mind, our overall company revenue guidance for the third quarter is between $77 and $83 million and we anticipate earnings per share, assuming a tax rate of approximately 30%, to be in the range of $0.13 to $0.17.

We now open the call to questions and answers.

Operator?

[Operator Instructions]. The first question comes from Brian Piccioni.

Hi there. Can you hear me? There’s no confirming beep, so I think we are all deeply troubled as result when we hit *1. Welcome aboard Dr. Edelstein.

Thank you.

I’d like to ask two questions. The first question has to do, I guess, with the tax rate. It’s been rather difficult to figure what your tax rate is going to be from quarter to quarter. In the past six quarters it’s ranged from 11% to 37% despite profitability and nothing else sort of out of the order. I am sort of curious as to why it’s so unusually variable and if you expect it to sort of stabilize at any particular level in the future.

Yeah, this is Bob. I’ll take that. Our tax rate has been more volatile than we would like it to be looking back three or four quarters ago. In the first quarter it was 32%. And in the second quarter it was 27%. And we’ve guided to 30%.

When we look at our rate for the year, I guess I would say the base rate that we anticipate for the year is about 30%. There are from quarter to quarter sometimes discrete items that occur that can cause the rate to move one way or the other. And I’ll give you a for example.

We are and we plan actually to do a fair amount of work during the third quarter in this area, but we are working on a tax project. We made it to the extraterritorial income tax deduction that, when complete, we would hope would reduce our tax rate part of which would be recorded as a discrete item. And so there are things like that that do occur. And sometimes based on our deferred tax position and the related valuational ounces that we have the rate can more either up or down.

But my view is that based on our overall tax position, I would say the long term rate to expect is about 30%

OK, great. And in the conference call comments there was mention made of a WaferRepair unit order that had been cancelled that you had booked in Q4. Could you give us some sense as to the root of that cancellation? Was it simply that the client or the customer didn’t need it? Was there any reliability or other functional issues associated with that order? Do you still consider the possibility that you’ll be getting business from that customer in the future? That sort of stuff.

Yeah, Brian, this is Sergio. I will take that question. Yeah, the cancellation is related to the customers timeline and product mix on scheduling for orders. We do expect to continue to get orders and we are getting them. This has to do with the mix of their products.

OK. Thank you very much.

The next question comes from Jed Dorsheimer.

Hi. Thanks. And welcome, Sergio.

Thank you.

Just a couple questions. First let me say thanks for the refreshingly concise conference call. The first question has to do with the systems business. I was wondering. In your press release you talk about some of the next generation systems that you’re working on. I was wondering if you could elaborate. In the past we’ve heard about the use of the Green Laser and the Memory Repair Systems tools. Is there a change in strategy when you talk about next generation? Or is that the same strategy?

Hi, Jed, this is Sergio. First I’d like to thank you for your invitation to the conference. Regarding your question, we are not changing the strategy. We’re very pleased with the performance of our next generation Green product. We’re on track and we’re please with the continued penetration and market share gains in that product line.

Great. Could you elaborate on some of the dual processing capabilities of the machines and how you think that’s going to affect the market going forward? And is that a opportunity for you to, do you think, take additional market share?

Yeah, we do see an opportunity to continue to gain market share. We believe that the performance specs for our product have advantages for next generation devices including throughput advantages. So we are confident that we will continue to see the market share trends we’ve seen before.

The last question, Sergio, as we look at the Laser business, not the Laser Systems, but the Laser portion of your business, how should we think of that going forward in terms of market growth and the ability to actually increase profitability in that business?

Well I will initially be focusing on all the business and across the spectrum in both the precision technology part of the company and semi-conductor systems. Particularly driving those businesses where we can gain market leadership. I don’t want to single out any one of our product lines, but there’s several of them that have particularly well positioned for growth. We’re going to be focusing on those. And those will be the engines of growth for the company.

So the Laser group, should we look at that as a supportive role to the other groups or what are the growth dynamics in that particular unit?

Our laser products have both internal uses as well as an external market, of course. We do have some unique characteristics to that that we take advantage of while some of our other products internally. So we do have an advantage there and we also have some applications externally for which we have some solid markets for some of our lasers.

Great. I’ll pass it on. Thank you.

Your next question comes from Jim Ricchiuti with Needham & Company.

Yes, thank you. Good morning. I just wanted to follow up on some of the comments that you made on [inaudible] system business, particularly the resurgence you’re seeing in the analog and mix signal area. Sergio, I wonder if you could elaborate on that. Do you feel that that is sustainable over the next couple of quarters? Where are some of your customers adding capacity?

Well, we did have a very strong quarter for orders in that particular segment. Like everybody else we’re watching very closely the buying patterns moving forward. We -- some of the order patterns in that part of our company, as you know, are seasonal and very quarter to quarter. And on the other hand, we see continues growth on the precision technology side that has a more predictable growth pattern with less quarter to quarter variability.

OK. And in the -- on the memory side of business. You talked a little bit about a pause there. Is that a pause that you could see extending into Q4?

I’m not sure I would refer to it as a pause. And in the guidance we’re providing for next quarter, we are incorporating our best forecast right now of the aggregate that we see in total for all the businesses. But we certainly did have a particularly very strong quarter in that segment in Q2.

OK, fair enough. And I wonder if I could ask a question about the margin improvement you’ve seen in vision technology area. Where could we see margins go in this business? And was there anything unusual that perhaps contributed to the improvement you saw in the [inaudible]?

Yeah I would expect -- this is Bob -- that we would continue to see margin improvements on the precision technology side of the house. I think you may be aware that we’ve moved some production to China from our UK facilities. We have automated some of our production. And we continue to look for, in addition moving production to our own facility in China, improved outsourcing suppliers. And we -- the full effect of the China move really did not show in the first half of the year because of the timing of how the cost worked themselves through inventory. So I think we’re going to see better margin rates as we move forward as a result of that in the precision technology side of the house then what we’ve seen in the first two quarters of this year.

Did mix also -- sounds like mix also contributed product mix?

Well, product mix always contributes to the change in our margin rates. But there are some real underlying improvements going on.

OK. And then one final question if I may. Sergio, I realize it’s only two weeks. But I wonder just, given your background, the company in the past has talked about pursuing acquisitions. I wonder if you could maybe talk a little bit about the level of activity that you’re seeing out there in terms of acquisitions. Your background coming from the semi-conductor systems part of the market, does that signal any kind of a shift in terms of the company’s acquisition initiative? Thank you.

Yeah, any acquisition activities will be driven by the growth opportunities and will be completely unrelated to my personal background. I think there -- I see in my short tenure here so far very, very attractive opportunities for GSI Group to grow both in precision technology and semi-conductors.

And the approach will be, as it has been in the past, to look for those areas where our company is in a unique position to provide unique and differentiated solutions that will drive the growth. And we will do that both through internal development and innovation and acquisitions. I am fortunate to join a company that has a very strong balance sheet, as you know, and we do have cash in the bank. And so if and when the right opportunities come up, we will certainly pursue them both in precision technology and in semi-conductor systems.

OK. Thanks very much.

Your next question comes from Steven Sedmeyer with Joseph Gunnar.

Hi there. Just a couple quick questions. In recent conference calls you talked about increasing the share of the wafer repair market. I believe it was close to 30% and GSI was targeting close to the 40% by the end of the year. How are things progressing in that respect as far as market share gains go?

Steve, hi, this is Bob. First of all, thanks for picking up coverage. I think - - we’re very pleased with the position we have with the customer base in the wafer repair segment. As I mentioned, there are 8 major manufacturers and we have production machinery at 5 of them, we’re qualifying at the 6th and we have 2 more that we’re qualifying at. And then there are 6 major overflow manufacturers and we’ve got equipment at 5 of them and we’re qualifying at the 6th. So over time here, we have got ourselves well positioned in that market segment to be able to compete and win orders. It’s kind of hard to say, pick a specific time point as to what our share is going to be in a given quarter. Because to some extent, it depends who orders and when they order. But I think in general we have said that we expect to, over time, have 50% of this market. And I think that’s how we believe it’s going to unfold going forward.

Okay, great. Thank you. And you talked about a couple of new products in the precision motion side of the business. How has customer feedback been? And could you describe a little bit about, just real quick, what some of these products are?

Yeah, this is Sergio, I will take that question. Yeah, the products we’re releasing in precision technology are Mercury II which is a high performance encoder, and M Power, which is an integrated product that integrates mirrors, motors, and mounts. So we call it M Power. They are being very well received We see a lot of market opportunity. This is the market that Bob was referring to in the initial statement where we see an opportunity to expand our serve market and make very significant penetrations. I attended Semicon West my first week on the job and the team was doing demos and there were a lot of people showing a lot of interest and even ready to place orders. So we’re very excited about these products.

Okay, great. And just one last question. Dr. Edelstein, you’ve been on the job for just a couple weeks. Any major top down strategy? What key initiatives do you think GSI is going to take to grow the company? Just a major top down question, I just wanted to see if you had any thoughts on that.

Yeah, my initial thoughts on that are to build on the foundation that the company has. This company has grown at a very good pace over the years to a level where it’s a very profitable $300 million company with an extremely healthy balance sheet and a broad portfolio of technologies with windows into multiple markets. So I found that particularly attractive. The strategy will be to build on the legacy that I am fortunate to inherit from my predecessor, Charles Winston. I see a lot of promise in the precision technology business. It’s a business that’s a bit more complex but I’ve been spending quite a bit of my time looking at all the products and the technologies there and I believe GSI has very unique advantages in some of these mission critical components and I see very, very attractive growth opportunities there. Certainly on the semiconductor side we also have upside in that business, so the approach will be to build on the legacy that I’ve inherited. You ought to not expect any significant changes to the strategy. I think the company is on the right track and we will get very aggressive about growth, and as I said, both internally and through acquisitions when appropriate.

Great. Thank you very much.

Your next question comes from Susan Streeter with Sprott Securities. .

Thanks, good morning. Just a question related to the order you mentioned that flipped into Q3. I’m wondering I’m wondering if you can quantify the impact that had on your revenue in the quarter.

It was about $5 million revenue.

Okay, and you may have mentioned this, but was that on the laser, was that on the memory repair or on the wafer trim side?

Repair.

Memory repair?

Yes.

Thanks. And just secondly, the guidance range that you provided on the revenue front for the third quarter is a little bit wider than what you had sort of guided towards in the second quarter. Is that just reflective of the fact that you’ve seen such strong order activity in the systems business to date and it may not continue at that pace? Could you just sort of expand on that a bit for me?

Yeah. I think it’s just - - the third quarter guidance is a little bit different than the guidance that we provided in the second quarter in this context. We are basically in the third quarter, have assumed in our guidance I guess what I would say is for the most part an execution of the backlog. And we are not anticipating, at least in the guidance that we provided, the receipt of orders of any substance that we would ship in the third quarter. Now that’s not to say that it wouldn’t happen, but we decided to take that position with regard to the guidance in the third quarter. That’s a little bit different than the second quarter where we had very good reason to believe that this order that did slip into the third quarter would be received and shipped at the end of the second quarter. So I guess net net, I would say our guidance probably is a little bit more conservative in the second quarter than what it might have been in the second and that’s, I think, the reason for the expanded range.

Okay, that’s it. Thank you.

Your next question comes from Stuart Muter with RBC Capital Markets.

Thanks for taking my questions and welcome to Sergio. I guess first a question for Bob. With the tax rate efforts you’re going through, do you expect the tax rate in ’07 to be less than 2006?

Not from what I’ve seen to date. I expect about a 30% tax rate in ’07 as well.

Okay, that’s helpful. And then I guess a question for Sergio. What are you hearing from your memory customers that leads you to believe that bookings are near a high? Some more color on that would be helpful.

Hi, Stuart. Yeah, they are just sounding more cautious. I wouldn’t say for sure, but the buying in that sector in memory has been very strong. And just from having been spending quite a bit of time in that part of the business myself for several years, I think we want to be cautious about not being too optimistic about orders sustaining at the level that we’ve had in Q2 which has been very, very high. You know, we do see continued trend in revenue and I would not expect a dramatic dip. We’re just being cautious

Okay, that’s helpful. Welcome and thank you.

Thank you.

Your next question comes from Charles Murphy with Sidoti & Company.

Morning, guys. Most of my questions have already been answered. I still have a couple left for you. First, can you give an update on the share repurchase program being how large the cash balance is these days and kind of where the stock price is sitting?

We’ve got, I think, $115 million of cash and cash equivalents. We were active in buying shares in the second quarter. We purchased 381,000 shares, and I think we’ve got about $12 million left in the program that we announced in either late fourth quarter or early first quarter of this year, late fourth quarter.

And would you consider extending the program?

Well, yes. I think - - the program is still in effect, and when we believe it’s appropriate, we will be active.

And other question, kind of minor. I noticed that interest income and particularly interest expense looked like they jumped pretty significantly in the quarter. Any explanation for that?

We did have interest expense related to a VAT payment that had - - it was a late VAT payment that had gone back a few years that had accrued some expense on that we recorded in the second quarter.

And do you expect future quarters to be pretty similar or will it go back to the way it was last quarter kind of thing?

I expect the future - - I don’t expect - - I expect the net other income and expense numbers going forward to actually be somewhat higher than they’ve been in the second quarter.

Okay, great. Thank you.

Your next question comes from Todd Coupland with CIBC World Markets.

Good morning, everyone. Sergio, I was wondering if you could just talk to us about what your initial priorities are going to be over the next couple of quarters. Just lay that out for us.

Yeah, my priority will be to build on the plan from this year to start developing objectives, both financial and strategic, for our fiscal year ’07. So we would like to accelerate the growth of the company from what it’s been in prior years, so I will be focusing on a number of selected programs in both business segments to drive the growth in those. We will also be focusing on penetrations in Asia, so I will be spending quite a bit of my time on that as well. We see a lot of opportunities for both businesses in Asia. So that will be also part of my focus.

Okay. And secondly, one of the issues the GSI Group has faced is a rather dramatic discount valuation to its peer group and if I could make one observation, I think it partially due to the lower return on capital given the very sizable cash balances that the company has. And while it’s certainly important to have a healthy balance sheet, it seems like there is more cash on the balance sheet than has been required to run the business for the last several years. Do you have any initial thoughts on that?

Well yeah. We do have a significant amount of cash and I see that as an advantage. And we’re going to seize the right opportunity to make use of that cash. At that same time, I will want to make sure that if and when we make an investment, that we have strong feelings about the potential for growth and the synergy with our company to make sure that we put the cash to good use.

Okay. And then just lastly, when you look at the bookings and compare those customers’ issues to the customer that decided to cancel an order, are you concerned at all that you may see additional cancellations or is there some color you can provide us on the quality of the backlog?

Yeah. No, we at this point don’t see - - of course, the risk of cancellation always exists, so we can’t rule that out. But this particular issue here is very much customer specific. As I mentioned before, it has to do with their timing and mix, when they need what type of technology for the product mix that they happen to be manufacturing. I’m pretty confident that’s pretty much constrained to that particular issue for that customer and I wouldn’t see it as a sign of what may be happening beyond this particular customer at this point in time.

Okay, great. Good luck with everything. Thank you.

Your final question comes from Jed Dorsheimer with Cannacord Adams.

Hi, thanks, Just a follow up. The - - regarding the push out of the $5 million order as well as the cancellation. Was wondering if either were on the new Green process or both legacy IR processes? Thanks.

Hi, Jed, this is Sergio. We have from this customer, we get orders for both products and we will continue to get orders. The mix is shifting toward Green and we expect that to continue. And this particular issue is not related to that. It’s related to their, as I said before, is what type of machines they need at what time for the production mix that they have at a given point in time. We continue to see a shift toward Green and we expect that to continue.

Great, that’s very helpful. Thank you.

Well, if that’s all the questions, again, thank you for attending the Q2 earnings call and hope to see you on our Q3 earnings call. Thank you very much.

Thank you. This concludes today’s conference call. You may now disconnect.