Novanta Inc (NOVTU) 2007 Q2 法說會逐字稿

Good morning, my name's Shawntel and I will be your conference facilitator today. At this time, I would like to welcome everyone to the GSI's second quarter earnings call.

(OPERATOR INSTRUCTIONS)

Thank you. Mr. Ruddy, you may begin your conference.

Thanks, operator. Good morning, everybody, thanks for attending our second quarter 2007 conference call. Just to remind you, this call is being broadcast live on the Internet in listen-only mode at www.gsig.com.

So today we have Dr. Sergio Edelstein, President and CEO, and Bob Bowen, Vice President and CFO, joining us this morning.

Before we begin, the following presentation will include forward-looking statements within the meaning of the Federal Securities laws. These include statements about the Company's expected sales performance, operating results, financial condition, and business strategy.

Our statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release, issued yesterday, and in our 10-K and other filings with the SEC 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.

In addition, please note that our call is being recorded by GSI and is copyrighted material. It cannot be re-recorded or rebroadcast without the Company's expressed permission and your participation implies consent to our taping. GSI will not be updating the recording of the call, either.

First, before we get into the numbers, let me begin by quickly reviewing GSI's product positioning for any listeners.

Our Precision Technology segment generates about 60% of our revenue. We sell to equipment manufacturers in markets like electronic, medical and industrial manufacturing.

The Precision Technology segment is highly diversified. It's made up of six main product lines that we'll refer to on the call as encoders, scanners, printed circuit boards, spindles, lasers, medical printers and optics.

Our Semiconductor Systems segment, second segment, generates about 40% of our revenue and manufacturers end user capital equipment for production of memory and high-performance analog devices. This segment is composed of three main product lines, WaferRepair, WaferTrim, and WaferMark.

With that, I'd now like to turn the call over to Dr. Sergio Edelstein.

Thank you, Ray. Good morning, everyone, and thanks for attending our call. We're pleased with our orders and with our results this quarter. Company-wide bookings grew by 16% over Q1 of '07, to $89.5 million.

Our Precision Technology bookings strengthened, particularly in the encoder business, and Semiconductor Systems made steady progress in new customer wins and orders.

We're entering the third quarter with a healthy backlog of $98 million, and we also completed an accretive acquisition, a beryllium optics manufacturer with facilities in Taunton, England, that complements and strengthens one of our key businesses.

Our Precision Technologies segment had a solid quarter, with bookings up 12% sequentially, with much of that growth in our encoder and printed circuit board drill businesses.

In the quarter, we secured 12 new customer evaluations for Mercury II encoders. For the Lightning Scanners, we have 21 new customer orders in Q2 and five customers converted to new design wins.

As I emphasized at our Analyst Day, the Mercury II encoder and Lightning Scanners will be two key drivers for organic growth in Precision Technology.

The market strength in our Semiconductor sector and progress with our new product introductions drove bookings levels up 21% sequentially. WaferMark was our strongest product line in Q2, with orders tripling from the previous quarter.

The continued buildout of 300 millimeter wafer fabs is furthering this trend, including a larger order from an existing customer in Japan.

In WaferRepair, we signed a large new customer in Taiwan for a multi-system order for our new M550 product and received another multi-system order from an existing customer in Taiwan.

Overall, our outlook remains positive, as we see continued strength in our markets, particularly in the electronics and semiconductor segments. With that, I will now turn the call over to Bob.

Thank you, Sergio. As noted in our press release, total Company bookings for the second quarter were $89.5 million, a 16% increase from the first quarter.

Our book-to-bill ratio was 1.22, the third consecutive quarter of 1.0 or above, and the backlog totaled $98.1 million.

Semiconductor bookings increased 21% sequentially, due to record WaferMark orders and strong WaferRepair orders, including a multi-system order from a Taiwanese customer.

Precision Technology bookings increased 12% from the first quarter. Encoder and printed circuit board spindles were both very strong.

Second quarter revenues totaled $73.1 million, above the mid-point of our guided range. Revenues of $27.1 million in the Semiconductor segment were 15% lower sequentially.

However, the deferred revenue balance grew to $15.3 million, and was slightly above our expected range of $12 million to $15 million.

We believe that approximately 70% of the revenue deferrals at the end of Q2 will be recorded as revenue in Q3.

We also expect there will be new deferrals in Q3 and that the deferred revenue balance at the end of Q3 will be somewhat higher than it was at the end of Q2, in the range of $2 million to $3 million.

Second quarter revenues in the Precision Technology segment were 8% higher, sequentially. The increase was driven by encoders and printed circuit board spindles.

We were pleased to see the strong improvement from the slow start at the beginning of the year, and we believe we will see continued growth.

Total Company gross profit at 40.7% was up one point sequentially. Our gross profit rate improvement was driven by higher revenues and gross margin rates in encoders, WaferMark, and PCB drill spindles.

Operating expenses, excluding restructuring charges, totaled $24.3 million. This was approximately $1 million lower than the first quarter, excluding restructuring charges and the $2 million P&L benefit of a legal settlement.

We believe that operating expenses, excluding restructuring charges, will be appropriately $25 million in each of the next two quarters, slightly higher than the second quarter, due to the addition of the Thales Optronics business and lower reimbursements related to our aerospace R&D program.

Our restructuring program in the UK is on plan, and we expect to have completed the manufacturing transition to China by the end of the year.

Operating profits, excluding restructuring charges, totaled $5.3 million, or 7.3% of sales. Operating profits for the second quarter included $700,000 of equity compensation expense, compared to $300,000 in the first quarter and $100,000 in the second quarter last year.

Other income and expense improved, due to the higher interest income and lower foreign currency losses. As noted in our press release, the effective tax rate was 39%, up from 35% in the first quarter.

For the most part, the increase in rate in both quarters is due to the restructuring charges in the UK, which are not being tax effective. We believe this increased rate will be temporary in nature.

Net cash provided by operating activities totaled $6.1 million and our cash and cash equivalents balance grew $5 million to $152 million, after using $3 million for the Optronics acquisition.

The one change I want to highlight on our balance sheet is related to the increase in deferred revenue, with the offset being an increase in accounts receivable. This largely explains the higher accounts receivable balance compared to the end of the first quarter.

During the second quarter, we repurchased 29,000 shares of stock for a total cost of around $300,000. Now turning to guidance.

Third quarter revenue is expected to be in the range of $77 million to $82 million. The range of our revenue guidance is somewhat broader than it was for the second quarter.

We have the acceptance and revenue of several units at one customer anticipated for late in the quarter. Depending upon customer timing, acceptance of revenue could slip to Q4.

We will either have none of these units in our Q3 revenue, or all of them, so our expectation is that we will be either at the high end or the low end, depending upon how this particular situation unfolds.

We expect our gross margin rates to be slightly higher than the second quarter, and operating expenses, excluding restructuring charges, to approximate $25 million.

Including anticipated third quarter restructuring charges in the range of $1.7 million to $1.9 million, we expect fully diluted earnings per share to be in the range of $0.09 to $0.13.

Please note that GSI provides GAAP-based guidance, including restructuring charges. This contrasts to some analysts' models that exclude restructuring charges.

Therefore, for clarity, I want to point out that if we were to exclude restructuring charges in our guidance, like some analysts do, it would have a positive effect of approximately $0.04 per share in the third quarter.

I will now turn the call back to Ray.

Operator, I think we're prepared for questions at this time.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of [Andy Paranda] with Needham & Company.

Hi, good morning, gentlemen. Just a couple of very quick questions. First, how does the bookings pipeline look in the Semiconductor business?

Specifically, what are you seeing from your DRAM customers? Do you see any improvement in activities in customers in other areas of the semiconductor space?

Well, I think as we tried to indicate in our prepared comments, we think the markets for the products that we're offering in the Semiconductor area, particularly WaferMark and WaferRepair, continue to be positive.

We don't provide forward guidance, as a matter of policy with regard to bookings, but the inputs that we are getting from customers have been positive.

And how would you characterize orders in the Precision Technology area, and when would you expect to be converting some of your recent design wins into revenues?

The Precision Technology, as we indicated, had a slow start at the beginning of the year. The second quarter was much stronger than the first.

We think that's going to continue into the second half and I think I would expect our second half activity in the Precision Technology segment to be up in the high single digit level relative to the first have.

Can you provide an update on the expansion of your Chinese manufacturing operation, and then with your expanded presence in China, to what extent are you seeing new customers in China?

Excuse me, could you repeat the second part of the quarter?

Sure. With your expanded presence in China, to what extent are you seeing increased business from local customers in China?

To the first part of the question, we are implementing a very rapid expansion of our manufacturing operation in China.

At this point in time, most of our Company-wide hiring is in Asia, and particularly in China. We have a strong team there. We are already manufacturing an increasing portion, particularly of our Precision Technology products there and we continued to do more of that.

And, as Bob mentioned, the plan to implement the expansion, the execution of that plan is on track. We are increasing our focus in Asia.

As we mentioned before, this activity is primarily related to proximity to our growing customer base. The percentage of our sales in Asia is increasing very rapidly, and a lot of our new opportunities are in China.

And we are seeing that the result of this activity is a closer proximity to our customers, with which those opportunities reside. So I'm very positive on our outlook for growth in Asia, and particularly in China.

One more quick question, related to the acquisition front. How actively are you pursuing acquisitions, and can you provide any color on the type of acquisitions that you're looking at?

Yes, we're looking for acquisitions that complement our product lines, particularly those that help us strengthen our market position in our key products in which we have the biggest opportunities to grow.

And the one we just completed that we mentioned is in that category. The top priority that we look at for acquisitions is the strategic fit with our businesses and the ability to add value to the acquired business.

We're very active in this area and we're in discussions with a number of companies to explore opportunities like the one we just realized.

Great. Thank you very much. I'll jump back in the queue.

Thank you.

Our next question comes from the line of Chuck Murphy with Sidoti & Company.

Good morning, guys

Hi, Chuck.

I may have missed it before, but did Thales contribute anything to sales in the second quarter?

Yes, they did. We closed the transaction toward the end of the quarter. It was about $250,000.

And you mentioned as far as the strength for Precision Technology that encoders and spindles were sources of strength. What do you think is driving customers' purchases of those pieces of equipment?

I think there's overall strength in the electronics segment, into which both of those businesses sell. There's higher demand. And we're also gaining ground at a few key customers where we had a lower market share before. So a lot of the activity has to do with new products we've released recently.

As you know, our encoder product line also sells into the data storage industry and we're seeing strong demand in that segment, as well.

Okay. And kind of he same thing for semiconductors. Are customers buying equipment to add capacity? Are they upgrading? What's driving their decisions, as well?

Some of them are capacity buys, but we're seeing more and more technology buys as many of the customers are beginning to qualify new designs with tighter fuse pitches on their wafers and that's driving demand for our next-generation products that can handle the smaller features on the wafers.

Okay. All right, thank you.

Thank you.

Your next question comes from the line of Jeffrey Lin of Global Crown Capital.

Hi, good morning. Most of my questions have been answered. Just one quick one. I was wondering if you could comment on the progress of your green memory repair system versus the IR, and, if possible, if you could quantify somehow the penetration rate of that.

The portion of our sales that is IR versus green varies from quarter to quarter, but the trend overall is that the percent of our business that's green WaferRepair products tends to increase, and the reason for that is, as I mentioned on the previous question, in the answer to the previous question, we are seeing more and more customers who are now limited in their roadmaps by the fuse pitches.

And, as they go to tighter pitches, they are starting to move away from IR and start to evaluate next-generation technologies to get good yields at tighter pitches. And, as we've mentioned before, our green laser technology is providing a very good answer to that technical challenge and that's driving the increased demand and the relatively larger percentage of those systems in our sales mix.

Okay, and one more. I know you commented on your progress on the move to China, but I didn't catch -- I think you previously mentioned that you should see gross margin improvements by early 2008, or late 2007. Any updates on that?

Yes, I think the gross margin improvement is anticipated to begin in early 2008. The manufacturing ramp up in China is expected to really take some speed during the fourth quarter, so I think most of the benefits are early 2008 benefits.

Okay, thank you.

Your next question comes from the line of [Nano Naskarnik] with [Chip Investor Group].

Hi, good morning. Can you please give some color on bookings in the Precision Technologies segment, what areas? You said encoders and spindles were strong, where you saw less demand, can you give some color?

I think where we had the weakest demand was in our thermal printer line, which is largely related to a shutdown of one of the facilities of one of our key customers.

The shutdown is unrelated to our product, but that has put a damper on bookings levels in that particular product line for 2007. Or until such time as that plant is expected to come back online, which is around April of 2008.

Okay, and regarding gross margins, again, you did very well with the Semiconductor Systems, but your Precision Technology gross margins were lower in the second quarter. Can you give some explanation and do you see that improving in the current quarter?

Lower in the second quarter --

Like your historic normal. You run that around 40%, don't you?

Yes, they were lower in the second quarter than they've been last year. They were up about 2.5 points, I think, from Q1, and we do expect to see that to continue to expand as we go through the year.

So we're gaining some ground and the softness in the thermal printer line contributed to that reduced rate in the first and second quarter.

Okay, and regarding your backlog, can you give some details? Is the mix similar to your current revenue split between Semiconductor and Precision Technology?

The mix is about 50%-50%.

Okay, so it's more heavily weighted towards Semiconductor Systems.

That's correct. Slightly more heavily weighted toward Semiconductor Systems than the average. It's normally a 60%-40% and the backlog is about a 50%-50%.

Just as I think you probably know, the deferred revenue is included as part of the backlog. So the increase in the deferred revenue tends to tip it toward the semiconductor side.

Okay, and in the WaferRepair segment, are you seeing demand primarily for DRAMs or is it also for NAND? Can you give some color?

Well, we sell into both segments, and we see strong demand from customers that have traditionally bought our products for both, but the percent is higher for DRAM and it's typically a technology that's used more intensely in DRAM. And so that's where a larger percentage of the demand lies.

Okay, and your machines are switchable between the two device types, right? DRAMs and NAND?

Yes, it's the same product that can be used for both.

Okay, all right. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of [Tom Kaladis] with Graham Partners.

Hi. It's Tom Kaladis. I'm a relatively new shareholder. The expense level of $25 million, I'm assuming that it includes amortization for the next quarters, right?

Yes.

Okay. Can you remind me how big the Thales business is?

It's a mid-single digit annual revenue level.

Mid-single digit in millions, obviously.

Yes.

And what does that add -- that's for the scanner business, right?

Yes, it's a very unique technology that consists in the ability to manufacture very high precision parts and optics made out of beryllium. These are some key components that are used particularly in high-end scanning products that differentiate their ability to operate very fast, high speeds, high performance. So we believe it gives us a significant edge in scanning.

We also sell these type of components, obviously beyond our use for our own scanners. And we see growth potential for other applications, as well.

And I've sensed a very high level of optimism around Mercury II encoders, but I don't know as much about the new scanner, Lightning. Can you give me some color? I know you're giving us the number of customers and design wins.

I'm confused when you give the orders and design wins. Can you just give me an idea of sort of how the momentum is building on that side?

We typically participate in projects in which a customer is looking for scanners, particularly because they are designing new systems that require the next level of performance. So we sell scanners to systems integrators, people who build systems in which the scanner is a key component.

So they go through a design cycle in which they design in our scanners and we typically get the best opportunities in the more demanding applications, the high-end applications in which higher speed, higher precision, are necessary, such as for example in printed circuit board drilling, where you have to steer laser beams at very, very high speed with a very, very high level of precision for the high-end applications.

Some are the medical applications and so forth. This is where this acquisition is going to help us. When we talk about orders, it means that a customer has typically bought a number of them so that they can start the design cycle and the testing.

When we talk about a design win, it's at the end of that process, when we get approved, so that when they start ramping the shipments of their systems, then they will start to buy our scanners or components in general in high volume. And that's where we see the benefits on the revenue.

And this cycle can take anywhere from six months to 18 months, depending on the timing in that cycle.

Okay, and, obviously, the carryover, the deferred revenues, is entirely semiconductor related?

Yes, yes, that's correct.

Okay, thank you.

Your next question comes from the line of [Joel Jackson] with Bank of Montreal Capital.

Markets. Hi, it's Joel, here for Brian Piccioni. I just had a couple questions for you. There was a bit of a jump in the accounts receivable. Was here any particular reason for that?

Yes, that's the offset to the increase in deferred revenue.

Also, the $25 million of operating expenses. You said it included amortization of intangibles. Is it also including the restructuring cost, or is that separate?

That's separate.

A bit of a different question here is it seems to be like a bit of an apparent shift, or at least a rumored shift, by a lot of major semiconductor companies like AMD and ST Micro to like a fab-light or asset-light model. Just wondering what your feelings on that were and the impact on your business?

I'm aware of that trend. We don't see any negative impact of that on our business. The systems our customers buy from us are mission critical.

Memory, and particularly DRAM wafers coming out of the front end of the line yield very few, if any, chips before they undergo wafer repair through tools like ours. So they are truly mission critical.

So once they scale up their operations, they have to basically count on these systems to be able to achieve the yields that they need.

So they typically get factored into the back end of the line operations in these fabs, along with test equipment and so forth, and we don't see the models for the design and logistics for those operations changing, certainly in the short term.

Thank you.

You're welcome.

You have a follow-up question from Tom Kaladis with Graham Partners.

Yes, I have two more questions. One is, can you remind me of what you guys are moving to China again? Which products?

The major operation there is initially for the printed circuit board drills, and we're starting to manufacture some lasers and laser components, as well.

Okay. And then in the area of lasers, what are you guys going to do to strengthen that? It seems to me out of all the pieces of the Company that's one I'm just wondering more about, or how is it doing?

Yes, we're focusing on shifting the emphasis for that operation and the focus in China is part of that. We have our differentiation for laser sources lie largely in medium to low-power industrial applications, in which we have very good technology.

A lot of those applications have moved to Asia, and the fact that we have been Western-based, we've had operations mostly in the UK and in the U.S. have caused us to miss some of the opportunities in Asia and particularly in China.

So we're going after those opportunities now and this newly released fiber laser that we have is the next step in the roadmap to be able to address those applications in Asia, and particularly in China.

Okay, great, yes, because I'm hoping you guys can improve the laser business a little bit. Thank you.

You're welcome.

At this time, there are no further question. Mr. Ruddy, are there any closing remarks?

Thank you for joining the call. I just want to remind investors that we will be presenting at the Canaccord Adams conference in Boston on Thursday, August 9th, at two-thirty p.m.. Other than that, hope to see you on the next call. Thanks so much.

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