Novanta Inc (NOVTU) 2005 Q4 法說會逐字稿

Welcome to the GSI Group fourth quarter 2005 earnings results conference call. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Ray Ruddy, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and thank you for attending our conference call. This call is being broadcast live over the internet in listen-only mode at GSIG.com. Charles Winston, our CEO, and Bob Bowen, Chief Financial Officer 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 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 in 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 forward-looking statement's and assumptions may change over time.

Please remember that the statements spoken today are 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 rebroadcast with out the Company's express permission, and your participation implies consent to our taping. GSI will not be updating the recording of this call.

First, let me begin by quickly reviewing GSI's product positioning for any new listeners. Our 14 leading brands can be categorized into three major product segments that we report on. They are: Precision Motion, Lasers and Laser Systems. Our Precision Motion segment supplies products and applications where high accuracy motion and position is requiring such as ophthalmology and robotic surgery. Our lasers are used in medical manufacturing and electronic applications. Lastly, our laser systems are employed in semiconductor, chip manufacturing, and test applications throughout the world.

With that, I'll turn the call over to Charles Winston.

Good morning. This news from today can find news from our press release last night on the wire. We have a lot to talk about this morning.

Let us begin by welcoming our new Chief Financial Officer, Bob Bowen, who joined GSI in December. Bob served in several senior financial positions at General Electric Corporation for over 20 years. Most recently he was the Chief Financial Officer of Cytyc Corporation. Bob replaces Tom Swain, who is working on several special projects for Bob over the next year and a half, as Tom moves into retirement. This allows for an orderly transition at the top of our financial position in our company. I thank Tom for his many contributions during the 10 years we have worked together and I wish Tom all the best.

Since the numbers are in the press release, I will not spend much time reciting them. Instead, I will do three things during this call. First, provide the background for our performance in 2005, with particular attention to the fourth quarter. Then, describe the market conditions by segments and end with guidance for the first quarter 2006. Finally, Bob and I will be pleased to take your questions.

Let's start with the full year 2005 compared with 2004. The decline in revenue by almost $69 million from $330 million the year before consists of the following elements: More than half of the decline, or $42 million, was the absence of capital spending by our mixed-signal high performance analog customers. Wafer repair, which was slow in the first half but gained strength at year end declined by approximately $14 million due to market conditions. Sales of spindles to the printed circuit board market declined by about $12 million while sales for encoders for Micro-E increased by approximately $8 million, due to a full-year versus a partial-year the prior year. That was caused by the timing of the acquisition.

We were pleased that our strategy to increase our Precision Motion group's revenue through earlier acquisitions gave our business critical mass. This allowed us to remain profitable throughout the semiconductor down-turn in 2005. Looking at the fourth quarter, revenue is up 6% from the third quarter. The main driver here was our systems group that posted sequential revenue increase of 37% driven by the memory repair of system sales. Gross margins for the Company continued on an upward trend to 42.9%, increasing 3.5 points sequentially.

Our backlog increased to 84 million, while the book-to-bill ratio was 1.37 times. Bookings were up 50% from the last quarter. And quote activity continues strong. We have continued to improve operating leverage with pretax income of 8.3%, up 3.5 points from the prior quarter. Earnings per share was $0.10 per diluted share, compared with $0.05 in the third quarter, mostly due to volume. Cash, cash equivalents and short-term marketable securities during the quarter increased by $2.6 million. Now, add to that, $6 million from the recent sale in January of an unused facility, and we currently have over $100 million in cash, and no debt.

As we commented during our third quarter conference call, our systems business, the semiconductor cycle appears to have reached bottom and in the fourth quarter we converted many of the orders that we told you we were bidding on into either revenue or backlog. While sales of our Wafer Marker systems strengthened during the quarter, memory repair systems drove the business in the fourth quarter. Memory repair tools are critical to the production of both NAND, flash and DRAM memory chips. This business will be driven by increased capacity, technology change, to 90-nanometer, and our market penetration.

Capacity-driven demand can best be appreciated from the main themes in the recent consumer electronics show in Las Vegas. Large flat-panel screens already require significant amounts of memory, the trend for even larger flat panel screens creates even greater memory requirements. Chip-makers are also publicly reporting they expect NAND flash memories used in iPods and other handheld game players, to triple during 2006. It is still a market that is five times smaller than the DRAM market, but its growth appears rapid.

Another factor, Microsoft's new Vista operating system, requires double the memory, from 256 to 512 megs of memory for PCs, but one gig is recommended. According to industry analysts, demand like this drove back-end chip equipment utilization to 91% in December, a level which typically begins a cycle of capital investment. As reported in our last two calls, we are also becoming qualified as a supplier to a segment of the memory repair market previously unserved by GSI. This segment consists of eight perspective chip makers that together can offer approximately 40% of DRAM chips produced world wide.

As we successfully qualify at each prospect we're allowed to bid on their business. To date we have received technical qualification from three of these prospects, including one that is substantial. We received an initial order from one, which was announced in January, and we have been asked to bid at three others. We expect competitive wins to ramp up during 2006. Our mixed-signal systems are critical tools used to manufacture chips that are used in automotive applications such as anti-lock brakes, airbags and fuel control, as well as for power management in portable electronic devices.

As we have said before, this market has been dormant, but lately, signs are increasingly positive. With the recent order that we received in December, consistent with this, we are pleased to announce that we have very recently received another order from our mixed-signal systems in excess of $6 million for the second quarter. Some of our larger mixed-signal customers reported bookings up 10% sequentially, another possible sign that things may be picking up earlier than expected.

One leading mixed-signal customer announced back-end utilization is at 75%, just 10 points below the level that usually triggers capital spending. They also forecasted an overall 135 million in capital spending for 2006, of which only 55 million is being spent in the first half. Because of this, we believe spending is more likely to happen in our space as we go through the year.

In the fourth quarter, Precision Motion revenue was down slightly, about 3% from the prior quarter, as guided, because we completed a thermal printer contract during the fourth quarter. We also saw the usual seasonal decline in data storage from products manufactured for the holiday season. The major positive shift in Precision Motion going forward, is coming from the initial stages of a PCB upgrade cycle. Certain customers are replacing our older and slower PCB drills with our new higher-speed drills used to produce multi-layered printed circuit boards that are going into the next generation of laptops and all portable electronics. Currently we are the only company manufacturing drills at these required speeds.

We now see at least two quarters of strength in this product line. We believe that Precision Motion revenue will grow at a more consistent 4 to 6% annually, with less volatility than our systems segment. So looking forward, we expect strong demand for memory repair systems and PCB spindles to continue to grow, in line with the fourth quarter performance. And we anticipate a recovery this year in our mixed-signal systems segment.

With that in mind, our revenue guidance for the first quarter is between 70 and $75 million for revenue, mainly due to the improvement in memory repair and PCB markets. Because of the absence of non-recovering favorable adjustments, gross margins should be approximately 41%, plus or minus one point, depending upon product mix. We anticipate earnings per share to be in the range of between $0.09 and $0.11.

We now open the call to questions for Bob and I.

Thank you. [OPERATOR INSTRUCTIONS]. We'll go first to Jed Dorsheimer of Canaccord Adams Investments.

Congratulations on the quarter.

Thank you, Jed.

Couple questions. I guess, first, to start off, the backlog of $84 million, congratulations, by the way, there. I assume that's as of 12/31, and just given the fact we're at two-thirds of the way through Q1, and you're talking about some, this additional greater than $6 million contract, could you provide any color on what the current backlog level is like?

No.

Perhaps asked a different way, then. What I'm getting at is visibility, and in the past you've really been limited to about three months, particularly in the systems business. I was curious what your current visibility is at this point in time.

That's a very good question, Jed, and the visibility is really not much more than one quarter at this point, although it is starting to look like more into a quarter and a half, but really our customers are very positive and upbeat and we're taking more of our guidance from their very optimistic outlook, and but nobody is really committing orders anymore more than one quarter out, so backlog is not what we look at anymore, it is the actual order bookings coming in on a basis, and when they want them shipped is usually within one quarter of getting that receipt.

Got you. So given that, it would make the 70 to 75 million seem rather conservative. Am I missing something? Or are you assuming any type of push-out?

No, we're not assuming any push-outs, but some of the orders we're getting now are actually being scheduled into Q2. They're not all for Q1. Obviously we're midway through the quarter, so the order we just got is mostly a Q2 business.

Got you. All right. Thanks for that clarification. Chuck, looking at the systems business in particular, if we look at the past cycles, it seems to me that it was really driven, in particular, by two products, your trim and your marking business. And looking at that business just over time, it would seem that it sort of peaks around 140, 150 million, and then is bottomed around 80 million, give or take 10 million. Now that you're taking share with existing customers in the memory repair and your qualifying new customers, how do you look at this business? Is this sort of 180, 110 million type of peak trough, or any additional color there?

Well, we're not putting any ranges on that, but we do believe that in the memory business we will do better this time around than we did in 2004, 2005 was a slow-down obviously for everyone. But interestingly enough, in the memory business, our bookings or were actually higher in 2005 than they were in 2004, driven by a lot of bookings in the last quarter of the year, because of the first half of the year was fairly slow.

So that gave us great encouragement that recovery in the memory business, plus taking--getting qualified at additional accounts where we were not there, if you recall, in 2004, we were only qualified at three accounts, we now expect to be qualified at much more than that, so, yes, I would believe that we should be considerably better in memory during 2006 than we did in 2004, because of the recovery and gaining more customers. But the real unknown is this mixed-signal business, and that we're getting very, very, very optimistic about it because of the conversations going on about it with our customers there and their confidence in things picking up this year. So if that comes in as strong as it did in 2004, yeah, you're pretty well on target there.

You led me right to my next question, which is looking at the trim business in the past typically you've seen the signs of when this is turning on is, you know, a smaller order and then maybe a quarter later, a larger order with your customers utilization rates above 90%. And when we look at the order that you saw in the beginning of December, and now today's order that you just announced, and the fact that it's looking at Maxim Linear ADI, TI and the utilization rates, they appear to be above 90%. So, you know, what are your thoughts on this business turning? I know you're saying optimistic but are you confident, last quarter you went out and you said that you were--you believed that you saw the trough of the semi-cycle. Are you in a position to say that you do believe this business is now coming back in the trim?

The timing is always an uncertainty, whether it is--we're starting to see earlier signs than we thought. We were counting more on second half before we see the pickup but we're starting to see indications now that first half could be a little brighter than we thought. But I am optimistic, but again this is a business that turns on and off so fast, it is truly the definition, if you go to Webster's International Dictionary and look under cycles, you will see mixed-signal business in there as the definition.

Because the memory business is not anywhere near as cyclical as this is, and the memory, I have greater confidence that we'll see nice steady growth throughout the year for the reasons I mentioned. But when this business turns on, it goes on full-switch. It is very digital, even though it is an analog business, it really is digital, forgive my bad pun, but the point being that, when it comes, it really comes in strong for four to six quarters and we make a lot of money.

Sure. So one last question and I'll pass it on. So looking at the last cycle of the, the 146 million that you did in '04, roughly in that range--I don't have the number in front of me--the mixed-signal portion, what portion did that represent for you?

Well, as you know, we don't break out product line detail, but it was a significant portion and I think you can calculate that by just looking at 2004 versus 2005 and see the biggest piece that was out and my remarks I did mention that about $42 million worth of business disappeared in the 2005, due to mixed-signal. So if that comes back as strong this year, we would expect to see all of that coming back.

Wonderful. I'll pass it on and let somebody ask some questions. Thanks and congratulations, again.

Thank you, Jed.

We'll go to Jim Ricchiuti of Needham & Company.

Morning, Chuck.

Good morning, Jim. How are you?

Good. Did you say the order you booked, subsequent order of mixed signal was that from a second customer? I may have missed that.

No, we didn't comment who it came from. And as you know, our policy is not to identify customers or even say same customers.

Okay. But so at this point it's possible it's still the same customer?

That's possible, yes.

Okay. Just with respect to the comment you paid about the PCB business, and I think you alluded to, you know, saying that there's a couple of quarters of visibility there. That's a little surprising. Just given that that business typically doesn't have a great deal of visibility, can you comment on what you're seeing in that area?

We're seeing a good strong order intake that began in the middle of the fourth quarter and is continuing through till today, and it seems to be that it will continue for some time into at least through this quarter and the orders are being booked now one quarter out, so a lot of stuff that we booked in Q4 was for Q1 and rolling into Q2 and stuff that we're booking now is for this quarter and rolling into Q2 and early part of Q3, so it's a little bit more confidence in the equipment-makers that their equipment is going to be needed, and that's because of technology change-over over more complex boards, 3 or 4-layer boards and lot smaller hole sizes and a lot of this is being driven, as I said earlier, by new equipment for PCs, all kinds of telecom stuff. So the outlook there is a lot more positive, so looking for two quarters, that's good, but I usually don't expect anymore than that.

Okay. And on the component side of the business, do you expect to see a pickup, seasonal pickup, some of the data storage customers, our is that something you see more toward Q2?

We would see that more toward Q2 and on into Q3 as they prepare to get a lot of the equipment out on the shelves for the September through December sales.

Okay. And just shifting gears again to the laser business, can you elaborate a little bit on what's happening in that area? Revenues were down sequentially now for, I guess, the second quarter in a row. And can you talk a little bit about the operating loss in that business, was there something unusual that contributed to that operating loss?

No, the--there's nothing unusual in the operating loss numbers. It is basically a reflection of volume. The business is taking steps to adjust accordingly, and I--and we have a new line, JK line, it was introduced in the second half of last year and we're hoping that that is going to get more traction than it has to date.

Okay. Bob, should we assume that you'll probably be in a loss position in Q1 in that business as you go through the product transition and subsequent changes to the business?

I do not believe we'll be in a loss position.

Okay. I think we'll make progress relative to the fourth-quarter results. Okay. And on the tax rate, what should we assume for '06?

We've got for planning purposes the tax rate we're looking at is 37 to 38% basically most of our earnings are in the U.S. and that's pretty much the combined federal and state statutory rate. There are some things that we are looking at, that could potentially improve that rate, but frankly, I just haven't had enough time to spend in the tax area to get substantively comfortable enough to--to provide tax-rate guidance that would be more favorable than that at this time.

Okay. Thank very much.

We'll go next to Todd Coupland from CIBC.

Good morning.

Hey, Todd.

Couple lines of questioning. Let's start with the semiconductor market. Could you give us an idea on what you think the size of the WaferTrim market was in 2004, and what you think the size was in 2005?

Well in 2005 it was pretty close to zero.

And what would it have been in 2004?

Have we previously given out?

No we really don't have any input to give you on that, because this is starting to tell you the product line reporting.

I'm not asking for your specific--I mean, do you have 100% of the market? Is there no independent view on the size of that market?

There is no independent view, but we do know that the accounts where we are serving, because they're using lasers as a tool in their production, we are the dominant supplier.

Okay.

In terms of--Todd, in terms of--I think Charles mentioned in the script that the change year-over-year in revenues in that area was about $42 million.

Right. Got it. Second question. Can you give us any rough timeline on how long you think the memory repair system will be working us through the market share shift, if you will, that's going on? How long is that going to take to play out?

We expect that that will take the better part of this year as we get qualified, we get initial order, and then the customer will gradually get more comfortable with us as a vendor, you know, the equipment is going to work very well, we believe, but they have to also get comfortable with us as a company that can provide the service, the response time, the spare parts, the applications support, all the customer support requirements and they're not going to jump in and give us a lot of business until they're very comfortable with that.

That usually takes a couple of quarters to work through any issues with a customer and then they start to give you more and more of their business. So initially you might get one unit out of five being bought. You hope the next time around when they come back two quarters later, and they buy another five units you hope at that point you get two out of the 5. That is the way it works. You win their confidence by performing once the technical qualifications are passed. We're talking about working our way up the market share gains through the full four quarters of this year, and intend to end the year somewhere in the 40% or better of the market share being ours.

Okay. And are you able to size the sort of UV green laser systems repair market?

Well, we won't comment on UV. We don't believe that's a real factor anymore. We believe that green is a very, very good product. It is technically qualified at a number of accounts now and in production on the floor for, oh, since June at one of our major accounts and they're very happy with it. So we've had a number of customers with serious interest in proceeding forward with Green because it can go into the next several generations of language shrinks.

Okay. Secondly, you put a target model out there for the Company. Could you just remind us of that, and does that still make sense with the business mix that you see?

I'll answer the question backwards. It still makes sense to us of the model was based on achieving several sequential quarters of $80 million each of revenues, or better, to get to an annualized $320 million run rate. Achieving that would be at 45% gross margins and approximately 17% pretax operating income, since we believe we have a good handle on our period expenses, and we're growing our margins very nicely in the components business through a number of cost reduction efforts in the materials area and moving into a plant in China recently that we hope will start to contribute later this year as we move in, and the volume recovery in semi is the biggest piece. With that, we have a lot of upside. We hope to get the entire Company into the 45% range when we achieve that revenue run rate of 80 million per quarter, we believe that is doable sometime in the fourth quarter of this year would be our goal to get there.

Okay. Should your business see any seasonality in Q3, or will these share gains tend to--tend to mute normal seasonality?

That's a tough question, Todd, because if the mixed-signal business ramps up the way it did in 2003 and '04, it will overshadow the seasonality effect of plant shutdowns in the August time frame, which typically makes Q3 a slower period. And also to your point, if we gain some more market share, yeah, that could offset it very nicely.

Okay. Last question. Any near-term updates on what you might do with the cash? Thanks a lot.

Well, we're always looking for investment in the terms of acquisitions. It's, as you know, we've been very selective in the kind of businesses that we're interested in. They're driven by looking at unique technologies where there is a very unique position by a particular company, because they own a technology that either nobody or very few players have, and they have a dominant position in their market. And the technology fits synergistically with our current suite of technologies. So we're kind of very picky about what we do, and we're not too anxious to go out and spend the money. We're being very cautious about looking around for the right investment.

Okay. Great. Thanks a lot, guys.

Thank you, Todd.

We'll go next to Stuart Muter of RBC Capital Markets.

My question is on the flash. The recent reports on flash is that there is a buildup of inventory and the prices are going down faster than expected. And we believe that at this downward trend in demand, probably the investment in flash memory can not continue the pace it has in the December quarter, or even Q1. What are your thoughts on that? Do you see a substantial slow-down in Q2, Q3?

No.

So you think that you can maintain this kind of order rate, if not grow down flash supplies.

I can only go from my historical evidence, and that is going back several cycles to the early '90's when the DRAM prices were starting to fall. The companies who gain market share and who did very well, Samsung was not a major player then. Today they own over 90% of DRAM markets because they made significant investments in technology development and production equipment and they drove the prices down. The goal is to drive prices down and create more volume. As prices for DRAMs went down from $25 to $2.50, in a several-year period in the '90s, volumes grew dramatically because you could put them into lots of devices you couldn't afford to put them in before. You won't put a $25 chip into a $100 consumer goods item like an iPod. But you will put a $2.50 chip in there.

So the fact that prices go down are not all bad for us. In fact, the last cycle that we went through in DRAMs, as I mentioned, it was good for us because it drove volumes up and we don't really worry about the price of the chips. We really are interested in unit volume production. The more the volume go up, the more capacity buys take place. So that's what we look for. And as NAND flash comes down from $60 to $20 to $5, that's good news because they'll put those chips into more and more devices and they'll go into the billions of production instead of hundreds of millions. So I don't worry about it that way.

I have a different view than you do, apparently, about the spending. Now, what will happen, I would guess, is that it will be consolidation and shake-out and some players won't be able to stay in the game, as what happened in the DRAM business, where you go from, you know, 40 suppliers down to a dozen. But the number of chips being produced today in DRAMs, far exceeds that produced 10 years ago. I think you would agree, would you not?

We're not arguing with the secular trend, we see there will be price decline and unit growth. This comment is more that the price decline was faster than expected and there is an inventory buildup. So while secular growth is intact in the near term, we see some--we see some might be some correction, and that's what my question was pointed at. So let me ask a slightly different question. When would you see if there was a--if Samson decided to slow down line 15 expansion or line 14, say line 15, for example, and wafer fab equipment starts seeing their order pushed out, when do you--when will you see that kind of fact? Will that be later than wafer fab companies or will it be before that?

If they were to slow down, we would see it immediately.

Okay. You will be the first one to know.

Well, I might be--you might be first and I might be second. I'm not going to budge in line with you. I think we'll see it immediately. It has been the way. They don't want to place the orders for expensive equipment, so they will tell us immediately they're not going to place orders. But we don't see that today, and it's very difficult to read day by day, but for the long term we know companies like Samsung and the other large players in the field are moving very, very aggressively toward building long-term positions, and they don't worry about what is going to happen in the next two or three months. In other words, their capital spending takes into account eroding the price of the chips.

Right. So that, then, I have a different question on the WaferMark. Is most of those--most of your machine go to the wafer supplier or semiconductor companies?

They go to both.

Can you split in terms of percent approximately just a ballpark?

No, I couldn't do that. I don't have that information.

Okay. So how do you--does that business grow proportionately to the wafer starts, number of wafers card, or--

It's fairly--fairly much tied to the number of wafer starts and especially driven by the 300-millimeter starts. And fabs, as new fabs are coming on line.

And we're hearing there is a pretty tight supply of wafers right now and does that impact you in any way, or rather companies changing their plans based on, say, talk about like [inaudible - accent] and wafer prices going up, how does that play into your market? I'm having a hard time making the correlation?

I-- I think we're getting down a rabbit hole now. You're into a fine structure that we don't get into. We're not seeing the impact on that. We're seeing, it's driven more by fabs coming online and wafer starts going up, and that's about all. And the fact that there is a constraint on silicon supply is going to affect the price of the wafers of the raw material. But they still have to be online producing.

Right.

Every wafer has to be marked at least once, and a majority of the wafers have to be marked a second time after they do a back-grinding, lapping and polishing and they have to remove the back side and mark them again. So it is a piece of equipment that absolutely has to be there, even though you don't run this equipment at 100% utilization. Quite often it will be sitting idle. But when you have a batch of wafers going through, you may need two units running side by side full speed and full capacity, and then they'll both go idle while there is no wafers being marked, but you've got to have it because it is a bottleneck.

Right. Yeah. Actually, you're right, I didn't pose the question properly. My question is more that does that create a--does that create a lumpiness on your order because of that, but I'll just pass on that question. Thanks. Thanks a lot.

Thank you.

We'll go next to Brian Piccioni of BMO Nesbitt Burns

Most of my questions have been answered so far, but going back to the tax rate, it took quite a dip in the fourth quarter, was there any particular reason for that, or is it just, the natural variability, because your tax rate has been all over the map for the past few years?

Yes, it has been all over the map, and one of my goals is to try to see how we can change that. In the fourth quarter specifically, we had some book to return to provision adjustments largely related to the U.K. and we had some adjustments for costs largely in Asia that we did not previously believe would be tax-affected and concluded that they would be. And that's what drove the rate down for the most part in Q4.

Okay. Thank you.

We'll go next to Susan Streeter of Sprott Securities.

Thanks, good morning. Just a question with with respect to Charles in your opening remarks you mentioned a completion of a printed thermal contract had they accounted for the slight dip on the Precision Motion side. Can you elaborate a little bit on that?

Well, the thermal printer business is a nice steady business for us over many, many years. It's for the medical companies, as you know, medical equipment suppliers, diagnostic equipment, and goes into cardiac programmers and patient-care monitoring systems and defibrillators, external defibrillation equipment, and those things come in two, three-year waves where they'll design a new product, our new printer will go into that, and then they'll build it up get it out into the marketplace and then it slows down and drops off. And so another one comes on from another customer or the same customer.

So there is a little bit of pause some occasionally where we'll see the business slow down in a particular quarter as we complete a contract. You might complete it early in the quarter, so the rest of the quarter you don't have revenues from that particular contract, and then following quarter others are kicking in. But overall it tends to run at a fairly steady rate plus or minus several million dollars in a given year and the timing of that slow-down is fairly well known to us, because you know when the contracts are going to expire, but we can't, you know, adjust to make it in the Q3 or Q4. It's going to happen when the contract ends. So it is not a major problem.

Okay. The bookings are not business were up what, 23% roughly sequentially?

Right.

Was there any area or product area that would show particular strength, or were things just generally stronger across the board?

Yeah, in the overall components business it was the spindles business, the PCB drilling spindles, bookings came in very strong there and are maintaining good strength as we go through Q1. So the nice part about the components business is there are a lot of products and there are very diverse markets, as you know, we're spread out into all kinds of markets as you've seen from the charts we've gone through in the past, Susan, and it's totally different than the semiconductor market where we're dealing with a handful of customers and only a couple of products, three major products driving the business, all in one market and s handful of customers that we work with in the components business we're dealing with several hundred customers at any given time, all of which are a couple of million dollars type of business.

Right, right. Thank you. And lastly, on Westwind and the transfer of production capacity into China, can you give us a bit of update on that.

Yes, we opened the new facility, we officially dedicated it in early November, but it was online actually producing product in October. So our first real quarter of production out of that facility in China was in Q4, at a very modest rate of volume in terms of contribution of revenues, and therefore impact on margins are not really felt yet, but as we go through this year, each quarter we'll be ramping up and producing more volume out of there. So as we move through the quarters, we expect to see the improvement in the gross margins due to the lower cost of manufacturing there and it's primarily for the spindles business at this point and we will be be doing other products online there like lasers and couple of component products.

Okay. Great.

We'll go next to [Stephen Player of Soleil Group.]

I had a couple of questions regarding the systems business and the margins we're seeing there. It looks like you--you--you posted a gross margins 47.4% up about 1200 bps on 6.7 million increase in sales. Now, I guess I'm wondering if this is related to the conversion to revenue of from the demo/flash evall tools you talked about last quarter, or is there something else going on here?

In the fourth quarter we did have some conversions of equipment that had been previously been amortized so the rate was higher than it otherwise would be on a normalized basis.

Okay. Okay. And then so kind of going into Q1, I mean, in your press release you're noting that bookings are up--going up--are up 116% on the systems side. What does--what is that implying on the GM side? Do you see that gross margin going up even further or kind of being offset by the demo tools?

Well, I think the increased volume is going to be a positive for the grows margin rate but the absence of the demo tools obviously is going to be a negative. We generally don't talk about guidance at the--at the segment level.

Okay. Okay. And then I guess kind of back-calculating some of the--back-calculating some of the items on the OpPex line, it seems like over the past couple of years your OpPex in laser systems has been relatively stable, but then, maybe I'm miscalculating something here, but then it seems like it lifted up a little bit higher in the fourth quarter? Is this anything unusual or anything to be worried about?

I don't think it's anything and usual or anything to be worried about.

Okay.

I think some of that reflects some additional expenses involved with some new products coming online, but there is nothing unusual. I wouldn't expect to see anything significant change there.

Okay. And then I guess last question is, I guess looking at the growth--quarter to quarter growth in laser systems, you were up about 6.5 million, 6.7 million with and then kind of trying to translate that into regional--regional sales--regional revenue. You have Japan flat and Asia-Pacific only up about 8.8. So if I can read into that, can we assume that growth from lasers is coming from non-Asia or non-Asia-Pacific or some other product mix going on?

Well, we have an unusual situation. A couple of our customers are in Asia but the actual orders and invoices are in the U.S. They have U.S. subsidiaries and they prefer to do it in U.S. dollars, so they don't have to go through currency conversions up and back. So it's a little unusual, but some of those sales get reported in the U.S. but they're actually, the equipment is installed in Asia.

Okay. Okay.

It's--we're required under SEC reporting to report them where the invoices were shipped.

Okay. Okay. That's all I had. And congratulations on a great quarter.

Thank you very much.

We'll go next to Jim Ricchiuti of Needham & Company.

Bob, quick question on option expense, can you talk about how we should think about that going forward?

As you know, we put out a press release in the fourth quarter that the Board had accelerated options, so that we wouldn't take that expense this year for all the options that were outstanding at that point. We did place restrictions, also, on the holders of the options; most of the employees, some direct, so they couldn't sell the options prior to the date at which they ordinarily vested or followed the 123R guidelines.

We don't expect to see that, Jim.

Terrific. And then, Chuck, I wonder if you would comment on--and you may not be at this point be ready to, but just what your impression is of the possible impact in the competitive landscape from the proposed sale of Excel to Coherent on your optical scanner business.

I don't think--we actually haven't had much time to think about that. We just heard about it the same time you did, late yesterday. But I don't think overall that will have any significant impact. We're doing a good job of regaining market share because, as you know, I reported a year ago that we had lost some business at some favored accounts because we weren't producing the quality.

We let our quality get out of control, and we now put it back into position. We have some new products coming along, good quality, we're regaining the confidence of these customers and we've been seeing a nice steady pickup in our business there. So I don't expect that the change of ownership of CTI, Excel, will be much of an influencing factor. The customers are more interested in having the supply, the assurety of quality on the supply, reliability of delivery, and new products in the pipeline.

Okay. How is the overall tone of that business?

It's good. It's been picking up and getting even more positive because we've been doing the things that we should have been doing all along but we kind of lost sight of for a little bit and we're back on track there, and I met with a couple of larger customers, and one of whom is back in full swing, and another one is coming back on line with us, so I feel good about that business overall.

Good. Congratulations on the quarter, by the way.

Thank you, Jim.

And at this time there are no further questions in the queue.

With that, Bob and I thank you very much for attending the call and look forward to having good news again in the next call. Bye, now.

And that concludes today's conference call. We thank you for your participation. You may disconnect at this time.