Novanta Inc (NOVT) 2007 Q4 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today.

At this time, I would like to welcome everyone to GSI's fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS)

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

Thanks, operator.

Good morning, everybody. Thank you for attending our fourth quarter 2007 conference call. The call is being broadcast live on the Internet in listen-only at GSIG.com. Dr. Sergio Edelstein, President and CEO, and Bob Bowen, Vice President and CFO, join us this morning.

Before I begin, 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 risks and uncertainties, including those detailed in the Company's press release issued yesterday and its 10-K and other filings with the Securities and Exchange Commission that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Assumptions may change over time. Please remember that these statements speak only as of today's date, and GSI will not be updating them. You are encouraged to review the written risk factors and business information set forth in GSI's SEC filings carefully before making any investment decisions.

Let me begin by quickly reviewing GSI's product positioning for any new listeners.

Our precision technology segment generates approximately 60% of our revenue and sells to equipment manufacturers in markets such as electronic, medical and industrial manufacturing. The segment is diversified. It is made up of six main product lines, and those are encoders, scanners, high-speed air bearing spindles for the printed circuit board industry, lasers, medical printers and optical components.

Our semiconductor system segment, which generates about 40% of our revenue, manufactures end user capital equipment in the production of memory chips and high-performance analog devices. This segment is composed of three main product lines -- wafer repair, wafer trim and wafer mark.

I would now like to turn the call over to Dr. Sergio Edelstein.

Thank you, Ray. Good morning, everybody, and thank you for attending our call.

I will first summarize our quarterly results and then provide a progress update on the execution of our strategy.

In the fourth quarter of 2007, revenues grew 3% over the third quarter of 2007 to $86.5 million. Bookings increased 17% over Q3 of '07, to $87.5 million. Backlog at the end of the quarter grew to $90.1 (sic - see press release). The book-to-bill ratio was 1.0. Cash increased by $10 million to $172 million.

The strong revenue and bookings were driven primarily by our wafer repair and circuit board drill head product lines. I am particularly pleased by major orders from three of our encoder and scanner customers and by a win of our new memory repair product at a major Asian semiconductor customer.

Moving forward, we see continued strength for our encoder and scanning products, especially in data storage, and sales to some of our key industrial customers in Asia. We also see lower demand in the printed circuit board sector following record sales in the last quarter of 2007. The outlook for our system segment is mixed, with signs of weakness in the memory sector and particularly in some countries such as Taiwan.

I will now turn to our strategy. While we are a diversified company selling into multiple markets, most of our products share core technologies -- lasers and precision motion. A year and a half ago we have started to shift our focus on spending to a core subset of our markets, with the goal of creating a more concentrated business with the critical mass necessary to drive growth. This strategy entails both rapid new product introductions in the targeted markets, acquisitions and possible divestments. We have made good progress along this path, and I anticipate that progress will accelerate in 2008 on all fronts.

In the last year, we drove to market a set of new products, and the results are very positive. I am particularly pleased with the increasing level of adoption by our customers of our Mercury line of encoder products and our Lightning scanners. These products have a slower OEM adoption cycle, but I anticipate that their contribution to our results will accelerate this year.

In our encoder business, we're introducing multiple new family members of our new Mercury II tape encoder, including analog and digital in the head versions that we believe will substantially increase our available market. In our scanner business, we have been introducing new motors and expect this new line to be fully introduced by the end of Q2 of this year. Further, we are offering high-performance beryllium galvo mirrors from our new Taunton, U.K. facility, and we are introducing to the market integrated scanning subsystems. We have also gained ground in the memory market with our M5xx product, which was a significant contributor to our results last year.

We have additional new products in the development pipeline that we will drive to market this year. We plan to release the first versions of our new DC family of [full ray] spindles using proprietary ceramic shafts and a new fiber laser to extend our JK product line. We are pursuing opportunities to complement our internal efforts with acquisitions and partnerships that fit into our strategy and can help us strengthen and grow a more concentrated core. The key objective is to put our cash to work for our shareholders.

Finally, we continue in our aggressive drive to integrate our company and realize greater efficiencies across our businesses. I am pleased to report that we have completed the U.K.-China project we announced early last year, and we are currently executing on a plan to consolidate our three factories in the Boston area into a single facility. We have also made organizational changes to facilitate the integration of our infrastructure, to increase the focus and leverage on our supply chain and to step up our sales efforts of new precision technology products, particularly in Asia.

In sum, while some of our businesses have historically exhibited seasonal variability and cyclicality, I am confident as ever in our strategy and in our long-term prospects.

With that, I will now turn the call over to Bob.

Thank you.

As Sergio mentioned, total company bookings to the fourth quarter were $87.5 million, up 17% from the prior quarter. The book-to-bill ratio was 1.0, compared to the book-to-bill ratio in the third quarter of 0.89. Systems bookings were up 69% sequentially due to very strong memory repair bookings in the fourth quarter, including a multisystem $10 million order from a major Asian customer. Wafer trim bookings continued at about the quarterly pace they had been running at for all of 2007, and wafer mark had a good quarter.

Fourth quarter revenues totaled $86.5 million, up 3% from the prior quarter. Revenues of $38.8 million in the semiconductor segment were 6% higher sequentially due to strong sales of memory repair systems. Fourth quarter deferred revenue balance stood at $9.9 million, compared to $13.1 million at the end of Q3.

Precision technology revenues totaled $49.2 million, up 4% from the fourth quarter of 2006. We feel positive about this segment, with the exception of printed circuit board drills, where we are seeing cyclical market weakness, at least in the near term. Our encoder and scanner businesses continue to perform well. We are introducing product enhancements to the Mercury II encoder series and Lightning scanners, which should drive more sustainable growth over time. The medical printer business is poised to rebound off a soft 2007, and in lasers our development of a fiber laser is continuing. We are also looking at further streamlining of our U.K.-based laser business by focusing on higher growth, higher margin products.

Company-wide, gross profit margins of 38% were disappointing. There were some one-time items in the fourth quarter that lead us to believe that margin rates going forward will be higher at revenue levels equal to those in Q4.

Precision technology gross profit margin was 36.8%, 0.9 points lower than the fourth quarter of 2006. The lower rate was largely due to higher than normal revenue coming from an aerospace R&D project with very low gross margin rates. The project was concluded during the fourth quarter. Excluding this aerospace project, our precision technology margin rates increased slightly in Q4 2007 compared to Q4 2006.

Systems margins of 38.6% were lower sequentially as a result of memory repair revenue deferrals, customer and product mix. Without the revenue deferrals, margin rates would have been more in line with third quarter levels. Further, we believe going forward that the new multi-pulse series will allow ASPs to trend upward.

Operating expenses, excluding restructuring charges, totaled $25.2 million, up 2% from the third quarter, largely due to timing of expenditures, and down 7% from the prior year, with all categories lower. Operating profits, excluding restructuring charges, totaled $7.7 million, or 8.9% of sales, below last quarter's level for the reasons noted earlier. Operating profits for the fourth quarter included $0.7 million of equity compensation expense.

The fourth quarter tax rate of 46% was higher than the total 2007 yearly rate of 36%. During the fourth quarter there were several discrete adjustments, the most significant of which included adjustments made to deferred tax asset positions in Canada and Germany based primarily on currency changes and foreign tax rate changes. Going forward, we expect a normalized 35% tax rate, but quarterly fluctuations may happen.

Net earnings on a GAAP basis were $4.7 million, or $0.11 per diluted share.

Our cash and cash equivalents balance grew $10 million, to $171.7 million. During the fourth quarter, we repurchased 567,000 shares of GSI stock at a total cost $5.4 million. We also are announcing today a new $25 million stock repurchase program.

Now turning to guidance, we expect our first quarter 2008 precision technology segment revenue to be lower than Q4 2007 due to softness in printed circuit board drill shipments and about equal to the first quarter of 2007. We expect system revenues will be approximately 30% lower than Q4, mostly due to lower memory repair revenues. In total, first quarter revenue is expected to be in a range of $66 million to $72 million.

We expect our gross margin rates to be approximately 38%, plus or minus a point, roughly equal to the fourth quarter 2007 levels, but on lower volume. Operating expenses, excluding restructuring charges, are expected to be around $25 million. We expect fully diluted earnings per share to be in the range of $0.02 to $0.06, assuming a 35% tax rate.

I will now turn the call back to Ray.

Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from Joel Jackson, with BMO Capital Markets.

Yes, hi, it's Brian Piccioni here, not Joel Jackson, from BMO Capital Markets. Can you hear me okay?

Yes. Hi, Brian.

Given the level of bookings and backlogs that you reported, it's a little surprising to see your sales guidance being what it is. One would've expected a year-over-year improvement, although you could see sort of a sequential decline. Does this speak for the timing of business, or have you had some business deferred from your existing backlog?

We've had -- in the spindle business, there have been push-outs from the first quarter into the second quarter. Other than that, there have not been significant push-outs of existing backlog. The orders that we've received in the first quarter are for -- or in the fourth quarter, I'm sorry, are for delivery in part in Q1 and in part in Q2. And we also typically receive in Q4 a large order in our optics business, which is an annual order placed by a significant customer, which is for delivery over the course of a year. So I think as we see how our backlog unfolds, there is a lower level of shipments scheduled in the next 90 days, so to speak, than there has been historically, and that's largely due to the spindle business and, to a lesser extent, delivery schedule in Q1 and Q2 in the memory repair orders we receive.

And I guess to some extent the spindle business depends on the usage with which machines in the field are actually applied to, right? That the less they're being used, the less need for replacement spindles and this sort of thing?

Yes, the spindle business, Brian, correlates directly with the shipment of drilling machines into the printed circuit board industry, most of which is in Asia, some in Europe. And that business is slightly down, mostly due to one customer that has slowed down. And the outlook for that business is still mixed, with not a clear picture in sight in terms of visibility moving forward. But we had unusually strong sales in Q4, and there was a -- we are seeing a bit of a slowdown this quarter.

And in your guidance you kind of implied that there will be a restructuring charge, because you exclude -- in the sentence you mention excluding the restructuring. Can you quantify that at this time?

Yes, I am not sure we will have a restructuring charge in Q1. We could potentially have one later in the year.

I see. So you're basically hedging your bets, so that if you did, then this specifically excluded that.

That's correct.

Okay. And, finally, I've come across this I don't know how many times, but, man, your tax rate just moves all over the place, and it never seems to actually be what you expect it's going to be in terms of an average of 35%, but quarter to quarter you've got to have the most variable tax rate I've ever seen. Is that just the nature of your corporate structure, or is there some way that you could manage that?

Well, I think the days of managing the tax rate like you had done prior to the establishment of FIN 48 are pretty much over. And GSI has, for the size company it is and the history that it's had, has a very, very complicated tax architecture. And so we do have, and we've had over the years, losses in many countries. We've got deferred tax asset positions in a variety of countries around the world, and depending upon how we see our earnings in each of these countries going forward, those deferred tax positions get adjusted on a discrete basis from time to time. And we are doing our best to try and work through some of these legacy issues so that the rate can be more normalized, let us say. But I can't promise you that we've worked through all of the issues to date.

Okay. Thank you very much.

Thank you, Brian.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. I would now like to turn the call back over to Ray Ruddy for closing remarks.

Thanks very much. We expect to see you in April for the Q1 earnings call. Thank you.

This concludes today's GSI fourth quarter earnings conference call. You may now disconnect.