Novanta Inc (NOVTU) 2007 Q1 法說會逐字稿

Good morning and welcome to GSI's first quarter earnings conference call. Thank you.

Mr Ruddy, you may begin your conference.

Thank you, operator. Good morning, everybody. Thanks for attending our first quarter 2007 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, Vice President and 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 the forward-looking statements and assumptions may change over time. Please remember that these statements speak only as of today's date. You should not place undue reliance on them. You are encouraged to review 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 rerecorded or rebroadcast without 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 Precision Technology segment, which generates about 60% of our overall revenue, sells to equipment manufacturers in markets like electronic, medical and industrial manufacturing. This segment is highly diversified. It's made up of six product lines. They are encoders, scanners, printed circuit board drills, lasers, medical printers and optics. On the other side of our business, our Semiconductor System segment, which generates about 40% of our revenue, manufactures end-user capital equipment for production of memory and high-performance analog devices and semiconductor chips. This business is composed of three main product lines, WaferRepair, WaferTrim and WaferMark.

And before we begin the call, also, I would like to mention to possible investors and analysts that we are expecting to hold an analyst day on June 5th at the Boston Logan Hilton Airport Hotel. If you would like to attend the website gsig.com, you may register there. With that I would like to turn the call over to Dr. Sergio Edelstein.

Thank you, Ray. Good morning, everyone. I would like to begin by thanking everybody for attending our call. We closed a strong quarter with revenue above our guidance range and earnings per share on the high-end of the range. Total Company revenue in Q4 was $74.2 million and earnings per share was $0.08. Our bookings increased 8% over Q1 of '06 to $76.9 million. Our strong bookings reflect both continued market strength and progress with our new product introductions. I am pleased with the progress we are making beginning to turn earlier customer evaluations of our new products into production orders. In Precision Technology we secured 22 new customer evaluations for Mercury encoders and three earlier evaluations have been converted to design wins and one was a production order. With a Lightning scanner we have 31 new customer orders in Q1, two were converted to new design wins. Both the Mercury encoder and Lightning scanner will be key drivers for growth in this sector.

In the Semiconductor System sector we are continuing to drive penetration of our new M350 WaferTrim system. In Q1 we won orders from three new customers in Taiwan. This product's unique architecture is enabling us to serve a new subsegment of this market, offline trim. In WaferRepair we continue to have success with our green-laser technology. In the quarter we received a multi-system order from Inotera and a letter of intent for a multi-system order from another new customer. We continued to see robust demand in this segment. With that, I would like to turn the call over to Bob.

Thank you, Sergio. As noted in our press release, total Company bookings for the first quarter were $76.9 million and our book to bill ratio was 1.0. This was the second conservative quarter of a book to bill ratio of 1.0 or above. We believe the underlying business fundamentals for our markets remain positive. Semiconductor segment bookings increased 5% sequentially. And as anticipated, the increase was attributable to strong WaferRepair bookings, notably, the first time order from Inotera for the M550 green-laser systems. We expect the bookings levels in this segment will remain strong well into the second half of the year. Precision Technology segment's bookings decreased 6% from Q1 last year. Our optical scanning and encoder lines showed strong bookings, but weakness in the thermal printer and printed circuit board order levels led to the overall decline. This segment is behind our internal targets. We believe we can accelerate the growth levels anticipated in our optical scanner and encoder product lines, but it will take some time.

New products, like the Mercury encoder and Lightning scanner, will require time to move through the design-in phase and materialize into meaningful revenue. This is more likely a 2008 revenue event. Nonetheless, this anticipated revenue ramp, combined with the cost reduction improvements related to our manufacturing shift of UK operations to China, should result in very good earnings leverage over time. As Sergio noted, first quarter revenues of $74.2 million were above our guided range and diluted earnings per share of $0.08 were at the high-end of our guided range. First quarter revenues of $31.9 million in the Semiconductor segment were 7% lower sequentially and 2% higher than the first quarter of 2006. Additional Q1 system shipments totaling $4.3 million were not recorded as revenue during the first quarter. They will be recorded upon expected customer acceptance in the second quarter. This trend of increasing deferred revenue reflects the growing number of new system shipments to new customers. This is great news for GSI.

We have been undergoing lengthy customer evaluations, which are coming to fruition. Furthermore, we believe deferred revenue during the second quarter will climb to between $12 million to $15 million. And we expect the revenue from these second quarter shipments will be recorded in the third quarter. First quarter revenues in the Precision Technology segment were 7% lower compared to the first quarter of last year. The Precision Technology group has some ground to make up and we are optimistic that the potential opportunities available will be realized in the second half of this year. Total Company gross profit for the quarter was 40%. Our gross profit rate is highly influenced by product and customer mix, as well as volume levels. With our current efficiency initiatives underway, including the restructuring of our UK operations and the expansion of our China operations, we expect to receive a positive impact in early 2008. Semiconductor gross profit rates were 44%, up from 41% in the first quarter of 2006.

But Precision Technology gross profit rates at 36% declined from 40%, largely due to lower sales levels and to some extent product and customer mix. First quarter total Company operating expenses, including largely offsetting restructuring expenses and the benefits of a legal settlement, total $26 million compared to $27 million in the fourth quarter and $24 million in the first quarter of 2006. Of this, R&D expenses of $8 million were down 7% from the fourth quarter and SG&A expenses, excluding the benefit of a legal settlement, totaled $16 million, down 7% from the fourth quarter of 2006. Both of these expenses should track at approximately these levels for the balance of the year. We are continuing push our focus on the Asia/Pacific region, where the majority of our organic growth originates. We have incurred $2.4 million of restructuring costs in the first quarter out of a total planned amount for the year of $6.5 million to $7.5 million. The operational move is on track with our plans. The notification to UK personnel regarding work force reduction is complete and we are hiring personnel in China.

Operating profits, excluding restructuring charges, totaled $6 million or 8% of sales. Now turning to the balance sheet. Net working capital, consisting of receivables and inventories less accounts payables, totaled $114 million, essentially equal to year-end levels. Net cash provided by operating activities totaled $8 million and our cash and cash equivalents' balance grew $9 million to $147 million. During the first quarter we repurchased 50,000 shares of stock for a total cost of approximately $0.5 million. Now turning to guidance. Second quarter 2007 revenue is expected to be in the range of $72 million to $74 million. This revenue guidance excludes system shipments of new products or to new customers during the second quarter of approximately $12 million to $15 million that we expect that we will record as deferred revenue in the second quarter and expect to record as revenue in the third quarter. This revenue recognition methodology is normal for our industry. Including anticipated second quarter restructuring charges in the range of $1.7 million to $1.9 million, we expect fully diluted earnings per share to be in range of $0.07 to $0.09. I will now turn the call back to Ray.

Operator, we are red I for questions and answers, please.

(OPERATOR INSTRUCTIONS) Your first question comes from Jim Ricchiuti with Needham and Company.

Thank you. Question on the Precision Technology business. It would appear that you are seeing good design win activity and some of this is now beginning to shift into production, yet it sounds like that's more of a 08's story. I wonder if you could just talk a little bit about, to the extent you can talk about the applications for these products? And also, it appears that you're not assuming much of a recovery in that area in the second half of the year. Is that correct?

Yes, Jim, thank you for the question. The applications are typically in the high-end, very high resolution type of applications. For example, we are -- our high-end Lightning scanner, which provides very high speed and ease of integration with an all digital architecture, is being very well-received by systems integrators who need very high-performance. An example of an application like this would be laser drilling of printed circuit boards and other similar high-end applications that demand very, very high speed and precision. For the encoders, the applications are also high precision, high resolution demanding applications, such as semiconductor equipment where you need to control motions to a very, very high level of precision. So they are typically the high-end applications in the electronics segment.

And we have a few in industrial and medical applications as well. As you know, those products sell to a large number of industries and our customers for those applications count in the hundreds. We are in the early stages, to answer the second part of your question, we are in the early stages of driving these products. And we have been reporting on the progress for the last three quarters or so. And by now we have several dozen evaluations going and we are starting to receive the first production orders for some of these products.

Again, Sergio, in terms of improving in that business from a revenue stand, sounds like you potentially could see some modest improvement over the balance of the year but (Inaudible) calendar 08?

Yes, typical design cycles for these type of products are somewhere between 12 and 18 months. But it varies a lot from customer to customer. For example, the one production order we just got is a customer who evaluated one of these products in a few short months and had an urgent need for a high-end product that they couldn't find. And they designed it in very, very quickly. So we are bound to get a few of those. But we expect that all the design-ins to be completed late this year and the ramp to begin toward the end of this year and accelerating the early part of '08. That would be the typical cycle for these type of products.

And the margin improvement in that business, again, should occur with the ramp in these new products?

Yes, I think we will see steady margin improvement as we bring more new products that come with a higher margin to market and that begins to be a larger part of the mix. But also, with these cost reduction initiatives that Bob alluded to, where we're going to start to see improvements toward the end of this year and particularly starting early in '08.

Okay. And Bob, just a quick question. We should see the SG&A bounce back to the $16 million-plus level (Inaudible) the legal settlement was around $2 million?

That's correct.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from [Manios Natkarinian] with Silk Investor Group.

Hi, good morning and congratulations on reaching the high-end of revenue guidance for the March quarter.

Thank you.

Yes. Can you please elaborate, how was the WaferMark and WaferTrim business in the March quarter? And what are your expectations for the June quarter?

Well, I think as we mentioned, the -- on a bookings basis, the bookings levels in the Semiconductor System were driven largely by the WaferRepair segment. The WaferMark area continues to show good strength. WaferTrim, as we've indicated previously, has been weaker than it was last year. Overall, we expect the systems business to have a very -- another strong bookings quarter in 2Q. But we generally don't talk about forward looking bookings levels at the product line level.

Okay. And now that analog chip makers are beginning to do well again, do you think that will help you with WaferTrim?

Well, I guess we certainly hope it's going to help us with WaferTrim. WaferTrim is, of the three core product lines in the systems business, is the one that we have the least amount of visibility to. The customers tend to be -- to give us the least amount of advanced lead time and advanced information related to their purchasing decisions. So it's the area of the business that for us has the least visibility. But our plans, I think, to the extent that the analog business drives incremental purchasings for us, that would cause us to feel even more robust about this segment overall than we do today, because we think the WaferRepair side will continue to show strength and we are very pleased with how WaferMark is proceeding.

Okay. And you are expecting that semiconductor equipment sales will remain strong in the second half of 2007. What gives you that confidence? Is this based on customer inputs?

Well, to the extent we have visibility right now for the next couple of quarter, our customers continue to be very bullish in terms of their capital decisions. We do not have enough visibility toward the end of the year, but the outlook right now for the next couple of quarters, and especially in our case with the high level of deferred revenue that we have due to the new introductions, remains very robust.

Okay. If I may ask, for WaferRepair Systems, you mentioned Inotera and there was -- there's one other customer with whom you have letter of intent. Are there additional new customers for these new tools?

Well, as you know, we are gaining ground in that subsegment. We are not the number one supplier to the subsegment. And we've been steadily gaining ground. We are already pretty far ahead with several of our customers. But we have quite a bit of room to continue to grow our position at several remaining customers where we came in later. I expect that we can continue to expect that we will certainly drive further growth at several of the customers where we're still not enough strong a position.

Okay. And Sergio, can you discuss in some detail how your nine product lines that have available market of $1 billion, how that could expand from current available market to a significantly higher market opportunity?

Yes. All of our products serve, currently serve a million -- a market, that as you mentioned, is about $1 billion, which is part of about a $9 billion larger total market that -- many of which are adjacent to our markets in terms of sales channel or technologies or just the segment definition. So we are constantly looking at opportunities for us to move into new areas that are adjacent to the markets we serve currently. And we are doing that both through internal organic programs that we are funding, where we think we have a good opportunity to bring new product to market, and also, constantly looking at opportunities to grow into adjacent markets through acquisitions.

Okay. So keeping aside acquisition for a moment, just the organic growth, would that, if you could elaborate qualitatively or quantitatively, would that -- just to get a feel for 2007 and possibly 2008, would you expect that available market to expand by 10%, 20%? Is there something that you are shooting for, 50%, 100% type of expansion? Can you give some color?

Yes. We current -- even within the market we serve currently, the $1 billion market I mentioned, we have about a 30%, 30%, slightly above 30% combined market share for all of our businesses. So we have a significant opportunity to grow share in our currently served markets. And we are focusing on a few of the products where we have larger segments and not as strong a position where we're focusing the R&D spending to be able to bring innovative, differentiated products to market. So we certainly strive to achieve a majority market share position in the markets we serve. So we want to be number one in our key markets and we're not number one in all of our key markets now. So that's an area of primary focus for us right now. This, of course, will not happen from one quarter to the next. It's a process of continuously driving the new product development and introduction process. And we're beginning to do that. And in fact, we have been doing it for awhile and we're starting to see some early signs of success. And I expect that this will begin to accelerate later in the year and particularly in 2008.

Okay and finally, is there a seasonal effect that you see in the Precision Technology business?

I think -- a seasonal effect? Is that the question?

Yes. Yes. Like certain quarters of a calendar year are -- tend to be stronger compared to other quarters?

I think it's hard. It's been difficult for us to specifically analytically come to that conclusion. There are different areas of that segment. Different of the product lines have different rhythms to their business. The printed circuit board, a piece of that segment is a cyclical -- is the most cyclical of the businesses, but I would not say it is seasonal, necessarily, in nature. In some of the precision motion side of that business the second and third quarter tend to be stronger than the first and the fourth. But, I can't tell you that we found clear signals of obvious seasonality in that business.

Okay. How is the market for the new PCB drills you have introduced? And if I may ask, what are your revenue expectations in that subsegment for 2007?

The market for printed circuit board drills is steady right now. It's not strengthening, certainly. And we don't breakout revenue by product line, but I can say that that's one product that in which we are bringing some very innovative new technology and in which we can have a stronger position. So that's one of the products in which we expect to see growth and we're driving evaluations of our new products. So the curve you can expect for that product line is similar to what I mentioned in general for Precision Technology earlier in terms of adoption and growth from a timing point of view.

Okay. Very good. Thank you.

Your next question comes from [Jeffery Lynn] with Global Crown Capital.

Good morning and thank you for taking my questions. A few questions on deferred revenues. You've had $10 million of deferred revenues last quarter. So can you tell us how many were -- of that was recognized in the first quarter?

Yes, I -- I think we -- in the last call, we mentioned we would have about $10 million worth of deferred revenue that would shift from the first half into the second. I don't think that we said that we had $10 million of deferred revenue at the end of the fourth quarter. But to try and answer the essence of your question, I think, which is how much revenue shifted from the first quarter to the second on a net basis, it was about $2 million. So at the end of the year, we had about $2 million of deferred revenue. That balance grew to 4, about 4 at the end of the first quarter. And we expect it to grow again during the second quarter.

So how much of this do you expect to recognize in the second quarter, then, of the current balance?

Of the deferred revenue in -- of the first quarter deferred revenue amount, we expect all of it to be recognized in the second quarter.

So essentially your deferred revenue balance will grow by $8 million to $12 million?

We expect it to grow by 12 to 15.

How come you are going to recognize $4 million out of that?

That's right. So the gross shipments that will be deferred are in excess of that.

Right. Okay. Thank you. Secondly, I had a question on your gross margins in your Precision Technology segment. I apologize if I missed this, but you had a sequential decline. I was wondering if you could explain what happened there?

It is largely, as we indicated in our press release, it's largely due to the revenue declines in -- the softness in revenue in the printed circuit board and medical printer revenue levels. So most of the -- most of the compression of gross margin was due to lower volume levels.

Okay. And let's see. Lastly, regarding -- you mentioned you were driving growth at new customers and new memory repair product segments. At what timeframe can we expect to see some of this effects at new customers?

For memory repair, we are beginning to see that. We mentioned earlier multi-system orders from two new customers. One that we already announced and an additional one. So we continue to realize gains in our position in that segment. So that's already happening.

Okay. Thank you.

Your next question comes from [Bob Snell] with Telluride Asset Management.

Good morning, guys. You have done a good job of increasing your cash balance over the past couple of years. Can you explain to me with your stock what appears to be some pretty good relative evaluations, your ideas on more aggressive share repurchase, as well as what you think the optimum cash level for the Company is?

Well, we have an active approved share repurchase program that is in place. And it's been active this last quarter, as we announced. And of course, we don't announce when it's going to become active, but it has been in the past. And the program is still in place. And there is approved funds left in that program. As far as the cash, we don't target certain amounts for the level of cash. But we are aware that it presents us with an opportunity for growth. So we are prioritizing the opportunities for acquisitions in our space as the use for that cash.

I guess what appeared to me with the evaluation of your stock today and the cash flow that you guys continue to generate, even during some tougher periods in your business, that even through sort of some of the trough periods, you've become cash -- you stayed cash flow positive. It would appear that the returns for the cash on the balance sheet, even assuming some acquisitions, is still materially lower than the returns you could generate by purchasing shares at these prices. Could you sort of walk me through how you think about the math between those decisions?

Yes. I guess I understand what you're saying, but our desire, I think, is to grow the business and to engage on synergistic bolt-on acquisitions that we think over time will provide more return than simply the financial mechanics of repurchasing the stock. We do have a repurchase program in place. We think it's properly suits the business at this point in time, based on the strategy that we would like to unfold over the next 12 to 24 months. And so we don't simply look at the more simplistic mechanics of a return on stock purchase versus return on -- return on potential acquisitions as our strategic desires to grow the business over time.

What sort of size acquisitions are you contemplating. I guess, looking at your cash balance of -- approaching $150 million, it would appear that you have the financial flexibility to both materially repurchase shares and continue on a acquisition pass, assuming you are not talking about materially large acquisitions.

Well, we are looking at opportunities in all sizes, including some that are in excess of the level of cash that we have. I really believe that our Company is uniquely positioned to grow by acquisitions. The reason for that is that we are in a very large and fragmented space, where there are a large number of companies that have potential synergies with us. We have an opportunity to strengthen our market position by adding synergistic technologies. So we are very active in scouting these opportunities. And we would not want to undermine that possibility for the Company, which I think has very, very high potential. So we are spending this -- these first few quarters, particularly as I started my tenure with the Company three quarters ago, by very aggressively mapping out all the opportunities in this sector and going through them. And as we do that, we find that there may be a few that could materialize. And some of them are, like I said, in a very different, wide range of revenue levels for these opportunities.

What sort of cash hurdle rates would you use from a return perspective in the acquisitions that you are looking at? Have you publicly stated what type of returns you would need to be estimating for any sort of acquisition?

We basically evaluate these opportunities as we go through them by basically building a business plan that incorporates potential synergies. And then we look for internal rates of return that are in the double digits.

Can you remind me what's left under your current repurchase?

It's about $10.5 million.

Thank you.

Your last question comes from Joel Jackson with Bank of Montreal Capital.

Hi, thank you. It's Joel for Brian Piccioni. I apologize if you answered this before, but what was your share base compensation expense in Q-1? Hello?

Yes.

Can you hear me?

It's been $300,000.

About $300,000? Okay. Great. Thank you.

Any more questions, operator?

Your final question comes from Chuck Murphy with Sidoti & Co.

Good morning, guys,.

Hi, Chuck.

Just had a quick follow-up to the one about the repurchase. Did you say exactly how many shares you bought back in the quarter?

We said we repurchased approximately 50,000.

Okay. You said that there's 10 million left?

$10 million.

Okay. All right, that's all I had. Thanks. At this time there are no further questions, are there any closing remarks?

Yes, thank you very much. Hope to see as many of you investors as possible on our June 5th analyst day. Again, it's gsig.com to register for that. Thanks so much, see you later.

Thank you for participating in today's conference call. You may now disconnect.