Novanta Inc (NOVTU) 2007 Q3 法說會逐字稿

Good morning, my name is Latricia, and I will be your conference operator today. At this time I would like to welcome everyone to the GSI's third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Ruddy, you may begin your conference.

Thank you, Operator. Good morning, everybody. Thanks for attending our third quarter 2007 conference call. The call is being broadcast live on the internet 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 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 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. First let me begin by quickly reviewing GSI's product positioning for any listeners that are new to the call. Our Precision Technology segment, which generates approximately 60% of our revenue, sells to equipment manufacturers and markets such as electronic, medical and industrial manufacturing. This segment is diversified. It's made up of six main product lines and those product lines are encoders, scanners, printed circuit board drill heads, lasers, medical printers and optics. Our Semiconductor Systems segment, and this segment generates about 40% of our revenue, manufacturers end user capital equipment for the production of memory and high performance analog devices. This segment is comprised of three main product lines those are WaferRepair, WaferTrim and WaferMark. I would now like to turn the call over to Dr. Sergio Edelstein.

Thank you, Ray. Good morning, everybody, and thank you for attending our call. I would like to start by summarizing our progress this quarter in the execution of our growth strategy. Three key areas of focus for us are new products, Asia, and infrastructure integration. Towards our first goal we are aggressively pursuing new product launches and market expansion. We have several innovative new products under development and have recently launched our new lines of Mercury II encoders and Lightning Scanners, which I've been discussing at these calls and we anticipate will drive growth in our Precision Technology sector. This quarter we secured 13 new customer evaluations for Mercury II encoders and three new design wins. For the Lightning Scanner, we have 19 new customer orders in Q3 and four converted to new design wins. During the quarter we also shipped and received customer acceptance of two large WaferRepair orders, including one for our newest green-laser technology.

Just after the quarter, we also received both a $7 million order and a $10 million letter of intent from an Asian customer for a memory repair delivery. We anticipate continued strong demand in this area for the balance of the year. Our second strategic goal is to strengthen and expand our presence in Asia. This quarter we completed the majority of the UK manufacturing transition to our facility in [Suzhou], China. This move puts us closer to the fastest-growing segment of our market. We are now successfully manufacturing a larger volume of products in Suzhou at a higher margin. We have a small amount of restructuring charges remaining and expect to conclude the program on time and within budget during the fourth quarter. Our third strategic goal is to migrate our Company's operational infrastructure towards an integrated platform. This entails the implementation of a common set of business processes and consolidation of some of our facilities.

We're planning a consolidation of our three facilities in Massachusetts during 2008, with efficiencies and cost benefits expected next year. We posted strong financial results this quarter. Companywide revenue grew by 15% over Q2 of '07 to $84 million, driven primarily by semiconductor equipment sales. Our backlog at the end of the quarter, at $89 million, is the third highest level we have seen over the last 12 quarters. Our bookings last quarter were $75.1 million and cash increased by $9 million to $162 million. We are very pleased with these results and we continue to expect solid demand in the electronics and semiconductor markets in the next quarter. With that, let me turn the call over to Bob.

Thank you, Sergio. As noted in our press release, total Company bookings for the third quarter were $75.1 million and the book-to-bill ratio was 0.89. This is about the mid point of our historical book-to-bill range for the third quarter, which is typically a seasonally soft quarter. WaferTrim bookings trended sharply up but both WaferRepair and WaferMark bookings were lower. As Sergio mentioned, we are off to a good start in Q4 having recently announced a $7 million follow on order from a customer in Asia for our M550 systems and a $10 million follow on letter of intent, also from a customer in Asia, for M550 systems. We will be operating at production capacity until the end of the year for WaferRepair and WaferMark systems. Precision Technology bookings were about 8% higher then 2Q levels, after growing 12% sequentially from Q1 to Q2. On a year-to-date basis encoder and printed circuit board drill heads are delivering very strong double digit growth.

We expect to see an improvement in the laser business in 2008 by both upgrading our distribution channel in Asia and margin improvements from our relocation of production to China. Further, we will be introducing our fiber laser product, currently scheduled on a limited basis, in the second half of 2008. Third quarter revenues totaled $84 million and EPS, including restructuring charges of $2 million, was $0.18 per share, at the high end of our increased guided range. Revenues of $36.6 million in the Semiconductor segment were 35% higher sequentially and third quarter revenues in the Precision Technology segment were 3% higher sequentially. Our deferred revenue balance stood at $13.1 million compared to $15.3 million at the end of the second quarter. We believe that approximately 80% of the revenue deferrals at the end of Q3 will be recorded as revenue in Q4. This is normal as the new product and customer cycle progresses. Total Company gross profit at 41.3% was up 0.6 points sequentially.

Precision Technology segment gross profit was 39.2%, an improvement of 0.8 points, largely due to product mix. And systems gross profit at 41.5%, was 1.1 points lower then the second quarter, also largely due to product and customer mix. Operating expenses, excluding restructuring charges, totaled $24.6 million. This was essentially equal to the second quarter level. Operating profits, excluding restructuring charges, totaled $10.1 million or 12% of sales. Operating profits for the third quarter included $0.8 million of equity compensation expense. Net earnings on a GAAP basis were $7.8 million or $0.18 per diluted share, at the high end of our most recent guided range and more then double the $3.3 million or $0.08 per diluted share in the previous quarter. Net cash provided by operating activities totaled $8.1 million and our cash and cash equivalents balance grew $9 million to $162 million at the end of the third quarter.

During the third quarter, we also repurchased 171,000 shares of stock at a total cost of $1.7 million. Now turning to guidance. Fourth quarter revenue is expected to be in the range of $80 million to $84 million. We expect our gross margin rates to approximate 40% to 41% during the fourth quarter and operating expenses, excluding restructuring charges, to approximate $24 million to $25 million. Including anticipated fourth quarter restructuring charges in the range of $0.8 million to $1.2 million, we expect fully diluted earnings per share to be in the range of $0.13 to $0.17. Please note that GSI provides GAAP based guidance including restructuring charges. I will now turn the call back to Ray.

Operator, I think we're ready for the questions and answer session.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chuck Murphy with Sidoti & Company.

Good morning, guy.

Hi, Chuck.

First question regarding the Precision Technology business. If you were to kind of go back and do a pro forma number, excluding the products that have been discontinued over the past few quarters, what would the revenue growth be on a year-over-year basis?

Well, I haven't done that analysis, Chuck, so -- but, it probably would be relatively flat on a year-over-year basis. As you know, we had a soft first quarter of this year and we've made progress in the second and again in the third quarter, but I think what we've said in the past is we hope to get back up to the '06 levels by the end of the year and the product exits had some impact but I would say it was maybe somewhere between $2 million and $3 million.

My other question is with regard to the WaferRepair systems. Sounds like you're still pretty positive on the outlook for them. Just wondering, given that the backlog's a bit lower, was there a situation where you may have borrowed some of the fourth quarter sales in the third quarter?

No, I don't think so, Chuck. Again, our outlook and visibility goes through Q4 and maybe the early part, very early part of next year, and we don't see us borrowing from next quarter. I think we see continued strength. Of course, within the typical quarter to quarter variability we see that business continuing at approximately the current level of demand in the short-term.

Chuck, if I could just add to that. I think what happened in the third quarter is when we had our conference call last quarter, we talked about one particular set of acceptances that we thought were going to either happen at the end of the third quarter or possibly in the fourth and we thought that would drive our revenues one way or the other. As it turned out, and as you know these things can be difficult to predict, we got acceptance for a different set of units that we thought was going to be a fourth quarter item but the one that we thought might happen in the third quarter actually has slipped to the fourth. So, it wasn't -- I don't think I would put it in the category of taking business from Q4 into Q3. I think it was just a swing between customer acceptances.

Okay, thank you. That's all I had.

Your next question is from Colin McArdle, Needham & Co.

Morning, guys, thanks for taking my questions. I actually have a couple follow-ups on the Semiconductor side. You mentioned in the prepared remarks that's seasonally this is a weak quarter. Is that true?

On a bookings basis is normally is.

On a bookings basis. Is that more exaggerated in Repair versus Trim or is it kind of consistent through all three segments?

I would say it's generally consistent through all of the segments, the Trim business seems to be the most unpredictable for us.

Okay. Okay. And then you mentioned gaining traction with the green-laser product. I was wondering how many customers are evaluating that? Is there any way to think about initial metrics for that gaining traction?

Yes, with the metric that we track is -- first of all the percent of repair systems we sell that in are in the 5XX versus the earlier products and the transition to the new product has happened quite rapidly throughout the year and the vast majority of the products we have that we're shipping now are 5XX products and within that, the percentage of systems that's are green continues to grow steadily and what that correlates to is the number of customers that start to migrate to the next generation of devices, because green is required for the tighter pitch links in the next generation of memory.

Right.

So as customers start to move in that direction they start by doing technology buys, evaluate the technology and as they adopt the technology, then we see increased revenue from that technology. And so we've been seeing overall an increase in that regard.

Okay. And then you mentioned that production is pretty much at full capacity across the Semiconductor segments? Is that correct?

For the WaferRepair and WaferMark products.

WaferRepair and Mark. Okay. And then if I were to look at consolidated gross margins, is that low 40% range probably a baseline as we look into '08 and is there any upside as China comes online and is that the real opportunity for improvement in gross margin?

We have several initiatives going on in the Company to improve our gross margin. Certainly, we are positioned to start to see increased benefits from our transfer to China in the early part of '08. And I mentioned the consolidation of some of our operations and increased efficiencies across our -- the way we run our factories. So there will be -- we believe we have opportunities, no question, to improve our margins and we will be implementing all of these initiatives and see the improvement over time but certainly the one you mentioned in China is a clear one short-term that we will start to see benefits soon.

And could that add two, three, 400 basis points to gross margin or do you not want to speculate?.

I think what we said in the past, that on average on a total Company basis, it would add a point and a half.

Okay. Thanks guys, very much.

Thank you.

Your next question comes from Jeffrey Lin, Global Crown Capital.

Good morning, I just have one quick question. How much in newly deferred revenue do expect to see in Q4?

How much new deferred revenue?

Right.

I don't think we anticipate a substantive amount of new deferred revenue in Q4. I think, as you probably know, the deferred revenue comes from new products sold to existing or new customers or existing products sold to new customers and as we have worked through the M550 product in particular over the last couple of quarters, I think we have demonstrated acceptance at pretty much across the customer landscape and will have done so by the end of Q4. So I think our revenue profile is going to revert back to a more normal recording of revenue on shipment as opposed to waiting for acceptance, other then possibly in Japan.

All right, that's good to hear, thank you.

Your next question is from [Tom Glaugis], Graham Partners.

Hi, guys. Just want to make sure I understood clearly, on the -- I'm excited about the new products. On Mercury II and the Lightning Scanners, where are we in terms of them rolling out in terms of revenue? Do you guys start shipping -- get a take on where we are with this.

We missed the last portion of the last sentence, you were breaking up there.

Sorry I had my volume down. I'm interested in where we are in terms of the rollout of Mercury II and the Scanners?

We launched that product in the last several quarters and as you know in that sector in the Company where we have a lot of our growth opportunities it's an OEM-type of model. So we go through a steady adoption cycle in which we get designed into systems that's are designed and ramped by our customers. So, where as in the Systems business we have a few customers, in the Precision Technology segment we have hundreds of customers. So when we launch a product, we work with several dozen customers and we work with them to get our Precision Technology products, such as the Lightning Scanners and the Mercury encoders, designed into their new next generation products. So we will see the revenue impact our top-line as they ramp those products. So it's a process that typically can take from one to two years and a lot of it depends on the timing and volume of our customers' rollout plans.

So, the key for us is to get the evaluations going and the design wins and to gauge the customer acceptance. I think what I find encouraging is that these two products have been very well received and there is a lot of interest in doing evaluations, which means that technology provides a value and it fulfills a need and that there are several customers informing us that they've designed the product into their new products. So as they start to ramp, we will see the extra revenue coming from those wins.

But right now we're still living off of the older versions for the most part? Is there any revenue from the two products yet? I know they're getting designed in, so I'm just kind of trying to understand where we ared in this.

We're starting and we've been reporting some design wins in the past several quarters and those are beginning to bring new revenue. We're getting a lot more aggressive now about new product introductions, which will drive growth. But, of course, this won't happen from one quarter to the next, but we anticipate that it will happen. And in the past the revenue derived from new products was a relatively small percentage of our total revenue in that sector and we were living, to a large extent, off of old products. As we scored the design wins, we're starting to see the revenue from new products beginning to increase and that, of course, will accelerate the number of customers increase and as they ramp their shipments.

Okay. Then on China, where are we on that? How close are we to getting the cost savings?

We've been getting steady cost savings already. What we did there is we basically spent money building an inventory of products to tie us over during the transition. Then we shipped a significant number of pieces of equipment out to China. We install them and we hired and trained the people to run them in China. In the meantime, we have been shipping off of the inventory we built and relying, to a large extent, to outsource suppliers, to whom, of course, we pay a premium for their profits. So we anticipate that in the near future, in the next quarter and two quarters, that the China operation, which is beginning to come online, starts to ship in volume and we discontinue our reliance on older inventory and outsource suppliers, that that's going to bring some additional benefits in our margins.

But you're still doing dual facilities on the (inaudible)?

No, we've discontinued the production of the components that we were making with the equipment we have shipped to China in the UK. We've discontinued that and we're relying on inventory and suppliers and we're starting to ship out of China now.

Okay. Thank you.

Sure.

At this time there are no further questions. Are there any closing remarks?

Thank you for the call and look forward to seeing you for the fourth quarter call. Thank you.

Thank you for participating in today's GSI's third quarter earnings conference call. You may now disconnect.