Ultra Clean Holdings Inc (UCTT) 2011 Q3 法說會逐字稿

Good afternoon. My name is Kathryn and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology third-quarter financial results 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) Joining us today is Mr. Casey Eichler, Chief Financial Officer and Mr. Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Eichler. Sir, you may begin your conference.

Thank you and welcome to our third-quarter financial results conference call. With me today is Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer. I will begin by presenting some financial results for our third quarter and Clarence will follow with business remarks about the quarter.

A few moments ago we issued a press release reporting financial results for the third quarter ended September 30, 2011. The press release can be accessed from the investor relations section of Ultra Clean's website, along with the information for the tape delay and replay of the live webcast at UCT.com. Together with our recently issued press release, this conference call enables the Company to comply with FCC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the fourth quarter of fiscal 2011. Investors should note that only the CEO and CFO are authorized to provide company guidance. If at any time after this call we communicate any material changes in guidance, it is our intent that such updates will be done a officially via public forum, such as a press release, or publicly announce conference call.

The matters that we discussed today include forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995, related to matters including our future financial performance, our product orders and shipments, and industry growth. Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission. The Company disclaims any obligation to publicly update or revise any such forward-looking statements or reflected events or circumstances occur after this call.

Now, here are the third quarter results. Revenue for the third quarter was $105.3 million or a decrease of 21% from the prior quarter and a decrease of 11% when compared to the same period a year ago. Semiconductor revenue for the third quarter was $69.7 million or 66% of total revenue while non-semiconductor revenue was $35.6 million or 34% of total revenue for the quarter. When compared to the third quarter of 2010, semiconductor revenue declined 27% and non-semiconductor revenue grew 54%. Revenue outside the US was 28% in the quarter compared to 31% in the prior quarter and 30% the same period a year ago. Gas delivery systems represented 58% of revenue in the quarter compared with 56% in the second quarter and 52% in the same period a year ago.

Gross margin for the third quarter decreased to 12.2% compared to 14.2% in the second quarter and 14.5% in the same period a year ago due to the decline in revenue during the quarter. Operating expenses were $8.5 million or 8.1% a decrease of approximately $1 million from the prior quarter. Our operating expenses as a percent of revenue should be approximately 9% to 10% for the fourth quarter due to declining revenue. Our operating income was $4.3 million or 4.1% before interest expense and income taxes compared to an operating income of $9.5 million or 7.1% in the second quarter and $8.5 million or 7.2% in the same period a year ago.

An income tax expense of $880,000 was recorded in the third quarter. The tax rate for the fourth quarter should be modeled at 24%. We continue to optimize our global corporate structure to increase operational efficiency and balance our effective tax rate. As we come to the end of our fiscal year, we will also be reviewing the valuation allowance related to deferred tax assets. We will update you in our fourth quarter earnings call.

Third quarter net income was $3.2 million or $0.14 per share. This compares to net income of $7 million or $0.30 per share in the second quarter and net income of $6.7 million or $0.29 per share in the same period a year ago. The fully diluted share count was down slightly from the second quarter at $23.2 million. Non-cash charges for the third quarter were $1.1 million related to FAS 123R and $813,000 related to depreciation and amortization.

With the forecast decline in our revenue, we continue to lower our net income breakeven. We are committed to staying profitable in the current business environment. We recognize that during the last unprecedented downturn at the end of 2008 and the beginning of 2009 we were required to make expense decisions that limited our ability to react to the corresponding sharp upturn. Today, we have the strongest balance sheet in our 20-year history and we are focused on reducing our expenses while retaining our ability to maximize our margins as the overall market recovers. Currently, our net income break even is approximately $75 million in cash break even is approximately $60 million. If the business environment continues to decline, which we don't believe it will, we have already identified actions to continue to remain profitable.

Turning to the balance sheet. Cash was at an all-time high of $37.9 million, an increase of $200,000 from the prior quarter. Cash net of third-party debt was $12.3 million, an increase of $900,000 during the period. We will continue to strengthen our balance sheet in the fourth quarter by increasing our cash position by approximately $10 million. As our cash position improves, we will invest in our business and look at opportunities to expand through acquisitions.

Accounts receivable was $47.7 million, down approximately $10.1 million from the second quarter. Days sales outstanding at the end of the third quarter increased to 41 days from 39 days at the end of the second quarter. Accounts payable of $26.9 million decreased approximately $22 million. Days payable outstanding at the end of the third quarter decreased to 26 days from 38 days at the end of the second quarter. As our outlook declined, we reduced our purchasing to match the anticipated manufacturing levels in Q4. We would anticipate accounts payable to remain relatively flat and accounts receivable to decline in Q4.

Net income was $59.3 million, a decrease of $10.6 million over the prior quarter. Inventory levels declined more than 10% during the third quarter of 2011. We will continue to reduce our inventory and would anticipate another 10% reduction in the fourth quarter. Now, Clarence will discuss operating highlights for the third quarter. Clarence?

Thanks, Casey. Coming off of record revenues and profitability in the second quarter of 2011, the third quarter of 2011 was very challenging and the fourth quarter will be even more so. In the third quarter, most of our decline in revenue was associated with weakening demand for semiconductor equipment-related subsystems. I am pleased that we were still able to achieve the low end of our quarterly revenue and earnings per share guidance despite continued slowing and demand throughout the quarter.

In the fourth quarter, we anticipate further reductions in demand from our semiconductor equipment and high brightness LED customers. On the positive side, our balance sheet is the strongest it has ever been and our cash level at $37.9 million, is also at an all-time high and projected to grow significantly higher in the fourth quarter. Also, despite the dramatic declines in revenue associated with this industry-wide slowdown, we expect to remain profitable in Q4 and based on the visibility we currently have, it appears that demand from our customers is stabilizing.

I will now review highlights of our activities for the third quarter. We have stated in previous quarters that our biggest near-term growth opportunity is in the high brightness LED market. During the third quarter, UCT shipped multiple orders for LED related gas delivery systems to multiple customers for a total of $15.8 million in revenue, up from $14.6 million during Q2 and $11.3 million in Q1. However, as our third quarter unfolded, our customers began to see a decline in demand within the MOCVD market. In addition, even though UCT is primarily supporting newest generation technology builds, our customers found themselves in a significant over-inventory situation. This has led to a dramatically reduced demand for MOCVD-related gas delivery systems in our fourth quarter. Because of the demand decreases and over inventory situation, we currently anticipate approximately $2 million in LED-related gas delivery ship and during the fourth quarter of 2011. Although the decline in the LED forecast is disappointing, UCT continues to build its position with our customers and we believe they will have the over inventory issue resolved by the middle of Q1 2012.

During the third quarter, revenue from our Asian manufacturing operations decreased from 31% of total UCT revenue in Q2 to 28% in Q3. This was primarily due to the significant decline in our semiconductor business, which is a higher percentage of our manufacturing in Asia than the US. We anticipate continued ramping of production in our new Singapore facility during 2012. Over the long-term, we expect the migration of manufacturing to Asia to continue as it is consistent with the long-term plans of several of our major customers to migrate more of their supply chain to Asia.

1 of UCT's key strategic initiatives has been to increase the overall percentage of revenue coming from the non- semiconductor portions of our business. About two-and-a-half years ago, we announced that we would be taking over about all of the US systems manufacturing for FEI Corporation based in Hillsboro, Oregon. It was an exciting opportunity to combine leading design capabilities with a world-class manufacturing partner. We came into the FEI facility as a hosted manufacturing partner and made significant improvements to the manufacturing capabilities while cutting total cost and reducing capital requirements.

As a result, last year we were proud to receive the 2010 Manufacturing Partner of the Year award from FEI, but in an ever-changing business environment, all companies have to review their strategic objectives. As a result of such a review, we were disappointed to be informed by FEI of their intention to bring their US manufacturing back under their management. It will take several quarters to transition the manufacturing back to FEI and during this transition we will continue to partner with them to ensure that the progress made over the last few years will not be lost. We are disappointed in FEI's decision but we are confident in the long-term trends towards outsourcing and we are also confident that we will find other outsourcing partners.

I'd now like to shift to our guidance for the fourth quarter of 2011. In the fourth quarter, we anticipate a 24% to 28% decline in overall revenue with a majority of the decline occurring in the high brightness LED markets. As a result, we are projecting a decrease in revenue and EPS. Our revenue guidance for the fourth quarter is $75 million to $80 million with earnings per share in the range of $0.00 to $0.02. As stated by Casey, we also anticipate our inventory levels to fall approximately 10% during the quarter, thereby creating significantly more positive cash flow.

We have already started taking the necessary actions to realign our cost structure with these new levels of demand. However, at the same time, under our new operations leadership, we are restructuring many of our business systems and processes and as a company we have consciously made the decision to not make head count reductions within certain departments. This will ensure that UCT is prepared to respond quickly and efficiently during the next industry ramp.

In summary, during the third quarter of 2011, UCT saw a decline in semiconductor demand quarter-over-quarter. Our balance sheet is the strongest it has ever been and we are in an excellent cash position compared to the last industry slowdown. We anticipate that we will build even more cash during the fourth quarter. While the fourth quarter will be very challenging for UCT, we expect to remain profitable despite a greater than 40% revenue decline due to slowing industry demand during the last 2 quarters.

Looking forward, we are excited about further growth in Asia and anticipate an increase in significant new business opportunities there in 2012. In closing, why we anticipate continued industry-wide reductions in demand during Q4, we are beginning to see a stabilizing of longer-term demand beginning in Q1 and we remain very confident in our long-term strategic direction.

With that, Operator, we would now like to open the call for questions.

(Operator Instructions) Your first question comes from the line of Edwin Mok.

Thanks for taking my question. Hi, Casey. Hi, Clarence. The first question I have relates to semi-equipment business. I was wondering baked in to your guidance how much roughly in terms of sequential decline do you expect in the December quarter and one of your peers talked about last week that they believe the customer is actually buying below their own demand. Do you agree with that view or do you have anything you can share around that?

Sure. All right. This is Clarence. On the semiconductor equipment decline, for us it looks to be about 10% in the fourth quarter. As I said, overall we are going to decline 24% to 28% but about 10% of that should be semiconductor related. And, yes, as we were trying to imply in the script, we are seeing some increases in the order rates right now and we do expect that to materialize into stronger orders in Q1.

Great. Very, very helpful there. Related to the LED, you talked about it declining partially because customer is basically working down their own inventory, right? I was just wondering, do you have a view about run rate, revenue run rate you expect your customer to run at? And you mentioned on your prepared remarks that you expect your customer to work through the inventory by middle of the first quarter, so do we expect to get back to that comp run rate in the second quarter? Is that how we should think about that?

Again, Edwin, first of all in terms of what the overall demand is going to be, obviously I don't have any real visibility in to that other than what we read from the analysts and I hear most of the analysts now projecting that 2012 could be down by as much as 50% from 2011. Our expectation again, we are primarily focused on a new business opportunity, so typically we are not supplying as many of the older generation products. So we would, based on what our customers are starting to tell us, is that they do anticipate consuming most of their existing inventory from us by the middle of Q1, so by the end of Q1 we would anticipate our revenue starting to return to more normalized levels with them.

I see. So loss of $15.8 million revenue that you have in the September quarter, is that a good comp gauge in terms of possible run rate that these customers could be running at?

Yes, I would expect some time next year to be back to those run rates. I don't know if it is going to be Q1 or Q2 or what their run rates are near term, but that's what we would expect to be, at that rate or higher.

Great. And then just quickly on this FEI transition. Can you clarify, is it going to be -- are you going to have lower level business FEI until third quarter of next year or how do we think about that? And do you guys supply subsystem to that business if they completely transition out, would you expect to see at least some subsystems business on that?

Sure. In terms of the timing, I can't talk about the timing because we are in discussions about that but it will be several quarters. We do have a contract, a long-term contract, and it does have a wind-down period associated with that so we are in discussion with that as we speak. I thought it was important though to let people know what was going on just to keep everybody aware. We do supply some other subsystems to FEI and so there will be some small component of business that remains, but our expectation is that the majority of the business will revert to FEI.

I see. Great. Very helpful there. And then two questions on the financials for you Casey. First one is if I take your comment about operating expense and the implied gross margin kind of in the 10% to 11% range, is that how we should think about that and that sounds like it all come from just low revenue, is that correct?

Yes. I said was 9% to 10% for the fourth quarter because of the lower revenue and we have taken, as you saw, $1 million out of that cost in Q3 and so we are going to still stay focused on all operating areas, including operating expense, but with the revenue down so significantly, that would be a good place to think of it.

I see. Great. And then lastly -- oh, by the way, good job on working down you're working capital. Actually came back down quite a bit over the last quarter. I'm just curious, do you have a -- count days of inventory -- minimum level of days inventory you think you can operate in. Assuming that let's say worst-case scenario will play out and things remain tough for a few quarters, do you foresee further reduction in inventory and accounts receivable or is it at the level you expect to get to by the end of the fourth quarter?

No. I think we've been working with the operations team and Gino on looking at our inventory levels as we go forward and I would anticipate you will be able to see us not only reduce inventory more but also run at a leaner inventory level even as things ramp back up, but we are still working on that and spending time we are making sure we are tightening up returns business, tightening up cycle times, et cetera. I would think we could get some more efficiency there as well past that quarter.

Edwin, this is Clarence. One of the things I mentioned in my prepared remarks is that we are making significant improvements in business and process changes with our new operational leadership. One of those relates to inventory control and minimizing inventory. So we think there's a lot that can be done to further reduce inventory. In the depths of the trough in 2009, our inventories were under $40 million. So we think that with some inefficient operational execution we can start approaching some of those numbers.

Sounds great. That's all I have. Thank you.

You're welcome. Operator?

Jay Deahna, your line is open.

Good afternoon. This is Jay Deahna. First question. What percentage of revenue was FEI in the third quarter?

We don't specifically call out the revenue but FEI obviously was about the same contributor as they have been in past quarters.

Overall, it's about $30 million in revenue, so it's about 7% customer.

Historically, yes.

Okay. If the MOCVD OEM market declines by 50% in 2012 versus 2011, so I don't know what that would be, 400 units or something, I can't remember what it was this year, in light of the fact that for example [Viko] reported today and they said roughly half of their sales in the third quarter at MOCVD were [Max Brite] and one would think that next year a higher percentage of their declining sales would be Max Brite versus their older tools. So the question is, if the MOCVD market in 2012 gets cut in half in total given your profile at the leading edge, would UCT's full year high brightness LED gas delivery subsystem revenue be higher in 2012 than it was in 2011?

Obviously, Jay this is Clarence, what we are trying to do is project here. We are primarily supporting new technologies, leading edge products with our customers and the high brightness LED market, MOCVD market. So as the adoption of the newer tools occurs, we are going to be a significant beneficiary from that. We would obviously expect our overall revenue to be greater in 2012 than in 2011 for the high brightness LED market.

Okay. So part of that is mix, correct, because you are more to leading edge, but the other part of it is that my research suggests that a pretty big chunk of your 2011 LED revenue came from one customer whereas is it possible that you could have a broadening out of the customer base that can help that process for you next year?

Again, Jay, what we have said is we are supporting multiple customers and multiple products, but we do tend to be heavily focused towards one customer right now. It would make sense that we might be able to expand that customer base and obviously we are focused primarily on the newest generation technology. So, we still view the high brightness LED market has a very significant growth opportunity for UCT. Obviously, the inventory related situation has put a damper on that, but we are still very confident in that from a long-term perspective. They are all very committed to outsourcing.

In one of your responses to Edwin's question, he was asking about run rates for LED revenues, trying to compare it off the third quarter run rate and what not and your response said yes that's a run rate we are looking to get back to next year but we don't know that will happen in 1Q or 2Q. The concept that your customers will be cleaning up inventory until the middle of 1Q, the concept that you could even contemplate approaching that level in 1Q is intriguing to me because it suggests that you're expecting a pretty decent uptick in demand for your LED gas systems in the second half of the first quarter.

If I said that, Jay, I misspoke. I don't think I said that but if I did, we do not expect a recovery of any significant -- there will be some recovery in Q1, but we would expect the majority of the recovery to occur in Q2 and beyond.

Right. Okay. Generally speaking, there has been a lot of talk in the research wires and what not and company earnings release is about a pickup in 2X nanometer tool demand like the (inaudible) and some news about Samsung potentially picking up CapEx in the early part of next year and [FSI] International talked about that when they reported last week. So do you think that if there is a pickup in semiconductor equipment demand in 1Q that your customers will be through their inventory adjustments of components in 4Q that you could come up with that a little bit if that happens?

Yes, again, we do tend to be the tip of the tail of the dog. We do get -- when a downturn occurs our customers do consume inventory for a while and then we see a bigger whiplash effect on the upside. We would expect to see -- obviously we are not giving Q1 guidance but we are hearing rumors (audio cut out) increasing in Q1 and we think by then our customers will have consumed whatever inventory they may have with the exception of the high brightness LED customers and we expect them to consume that by the end of Q1. So, we -- the current downturn that we see right now is nothing compared to what we saw in 2009. This seems to be a much more traditional kind of downturn where we get hit by 30% to 40% on the downside and then start to regroup and recover in a very strong fashion, so that's what we anticipate.

Okay. Then two other topics real quickly here. As an investor, my view is that the biggest disappointment for UCT in the last cycle was a couple missed quarters but, worse, under performance in margins relative to the stated objective was before the cycle. Obviously [Gino] is on board now, he is two quarters in. I'm just wondering what is your confidence level that the execution is going to be more consistent in the next cycle and that your margins are going to be significantly better?

Well, two things that we talked about, one of them is tangible is that you can already see is our inventory control situation and obviously our balance sheet structuring and so you are already starting to see some of the impact that he has had in terms of controlling our inventory and bringing down -- improving our balance sheet situation. The second that I talked about is limitations on reductions in headcount and restructuring certain organizations to be in a better position to recover when the industry starts to recover, so I think we are cognizant of some of the challenges that we faced last time and we think we probably cut too deep last time.

It was hard to, at that time, know how bad things were going to get but, in retrospect, we probably should have been a little more careful about how we structured the position to go forward. So I think this time with Gino's guidance and help we are being much more cautious in how we structure ourselves and what actions we take near-term to make sure that we are in a stronger position to perform well from a financial standpoint as we go forward. Do you want to add anything, Casey?

No I think that's right, absolutely

Companies like yours, supply chain management is obviously very critical, especially as you are doing full systems versus subsystems, and when you push and pull happening at the end of the quarter, changes in configurations, changes in customer mix and what not, supply chain management is obviously very critical. I see on your website that there is some supply chain job openings, including a director level, so is supply chain management somewhere where there is low hanging fruit or somewhere where there is significant opportunities to get consistently better?

I think certainly that is one of those areas, as Clarence mentioned, investments to make sure that we can take advantage of some of the opportunities we should have as the cycle moves forward. That would be one good example of where we thought we needed to really strengthen our organization and we have somebody leading that area that we had here for about a year now and now we are starting to make sure that that individual has the resources and we are already seeing some throughput from that, but I think we've got a ways we can go and there are a couple open positions there as you referenced.

All right. And then the last question is you mentioned something about as you build up your cash position looking to enhance the future growth of the Company through internal investments and possibly acquisitions. So on the acquisition side, do you have a short list of candidates that something could happen in the not-too-distant future or is that more of just a generic strategic comment from there?

We have had a list of candidates that have been active probably over the last year so we continue to see opportunities there and continue to be active in pursuing them. We have gone through and profiled what we are looking for and there are opportunities out there. I can't commit or comment on anything would be near-term, but there are an active list of opportunities that we are considering.

Great. Thank you.

You're welcome, Jay.

Operator?

(Inaudible) your line is open.

Yes. So, it sounds like you would expect your semiconductor equipment related revenue to perhaps start growing again in Q1? Is that how we should interpret your comments?

Yes, (inaudible), this is Clarence. Again, there is all the caveats that go along with that. This industry is subject to change without notice. Clearly, what we are seeing now gives us greater confidence in what we are hearing from our customers in terms of order placement is giving us greater confidence that, yes, Q1 should be an up quarter on the semiconductor capital equipment side for UCT.

How did the medical equipment outsourcing business do this last quarter and what is the prognosis for growth there?

It continues to do well. Our customer, Intuitive Surgical, has had a very good quarter and we make 100% of their patient side robots so as they do well we will do well. They continue to get qualified on more procedures and so that's very good and I believe they are continuing to get qualified in other countries. So that has been a very good stable source of revenue. Actually, our revenues from our non-semiconductor customers actually went up a little bit last quarter. All of the -- it was a completely uniform, but all of our decline last quarter were was associated with our semiconductor customers. Okay. Did you say you could potentially add about $10 million in terms of cash to the balance sheet by the end of Q4?

Yes.

Okay great. Thank you. And then just a final question. What is the reason FEIC pulled the business back in to in-house manufacturing? Can you sort of give us some sense for what happened there?

Yes. Again, ultimately, they will have to explain to you their reasoning but our interpretation of it is fundamentally management change and then an associated change in strategy. They have changed their operations, their senior operations management team. The leadership there has changed and I think the individuals that were very strongly committed to outsourcing and had a positive experience with that are no longer at FEI and I think the new operational leadership is not as enamored with the outsourcing philosophy. I think it's basically a personal preference on their part.

Thank you.

You're welcome. Operator?

Your line is open.

Hi, Casey. Hi, Clarence. Two questions. First, if you look at calendar 2012 run rate, how should we think about your non-semi business for 2012 and what needs to happen for you to hit that 15% gross margin level? And then I have a follow-up.

Sure. Again, we don't give guidance out in to next year but obviously in some of the markets like LED, as an example, we would have to see a return to growth in those markets that would help us grow outside of the semi business. From a margin standpoint, I think two things or three things are going to be key there. One is obviously higher revenue and a return to growth in revenue. Number two is another quarter or two seasoning of some of the initiatives that the operations team and Gino have in place and that they are partnering with us on and financed to kind of drive forward. And, finally, continued growth in Asia will also help drive the margin performance as well, so those are probably the three key things that need to happen.

As a follow-up, how should we think about your division from Asia in 2012 compared to 2011?

I think it's going to continue to grow. We have been hanging in the high 20s, low 30s this year and we are continuing to see customers interested in moving more and more of their business with us and qualifying to get it manufactured not only in China but in Singapore. So I think you will continue to see that concentration grow over 2012.

I think what we've said before, [Jugadesh], is that we would expect in the next two or three years more than 50% of our revenue to be coming from our Asian manufacturing locations. So, if you say we're 30% exiting this year, you would expect to be in the high 30s, approaching 40% by the end of next year and then closer to 50% by the following year.

Thank you. That's all I have.

Thanks.

(Operator Instructions) Your next question comes from the line of Dick Ryan.

Good afternoon, guys. As a follow-up to the Asian question, Casey, is any contribution of that coming from LED at this point or do you anticipate that in 2012?

There is some contribution in the LED business and I would anticipate that to continue in 2012.

It's a very small right now though. The majority -- by far the majority of our LED revenue is coming out of the US, so we expect that to increase throughout the year again. Ultimately, we would expected to follow a similar pattern semiconductor equipment where at some point more than 50% of that will be manufactured in Asia.

Okay. Is there any seasonality to the FEI business?

Dick, again, this is Clarence. I don't think there's much seasonality to the FEI business. They really support some of the fabs so it's based on capacity utilization. They also support research in general and I think that tends to depend on various governmental or budgets.

It doesn't sound like there's one instance indicates a trend, but do you have any other contracts coming up for renewal with any of your other key customers here over the next six or months or so?

No we do not. We do have contract renewals, excuse me, but the contract renewals we have right now are primarily with our semiconductor equipment customers. All of those are very entrenched in outsourcing. I think from an FEI perspective, this was a fairly new direction for them and I guess from their perspective it did not work out. All of our other customers we feel very confident are committed to a long-term outsourcing strategy.

What does the pipeline look like for new business opportunities to bring it into the non-semi side?

I think were likely to add some additional solar customers and we are also looking at potential medical customers but, unfortunately, the solar demand is also pretty low right now, but these are good times to generate new business opportunities. When business is slow, that's when our customers and their engineering teams have more time to look at new products and more time to look at more outsourcing. So, this generally tends to be a good time for us to plan our seed corn.

Okay. Anything else other than those two segments, solar and medical?

I would say those are the two. Obviously the high brightness LED we are ready talked about that extensively, but those I think those are the three greatest near-term growth opportunities for us.

Okay. Thank you.

You're welcome.

You have a follow-up question from the line of Edwin Mok.

Thanks for taking my question. A quick question on the flat-panel display market, how has that progressed in the last quarter and how do you see that coming along in the coming quarter?

It actually went up significantly last quarter, but it is still only a couple percent of revenue. It is kind of bouncing along at relatively a couple percent, 2%, 3% of overall revenue. Our relationships there are pretty good but that market seems slow right now. So, as you know, we do have one newer customers there, Orbotech, and our relationship continues to be good there. But -- well, I do not want to talk about any individual company's demand but overall the flat-panel market seems to be a little bit slow right now.

Great. Go ahead.

For us it's been relatively flat, around 2% to 3% of our revenue.

Great that's the color I'm looking for. Lastly on the semi cap side. I'm wondering, when we listen to one of your peers they talk about business slowing down pretty dramatically in the fourth quarter for them, and you talked about 4Q semi cap being down roughly around 10%. Is that because you start to see some order coming back as you suggested on your comment that give you confidence that it is only down 10% or is it just based on your order books right now. Can you reconcile that?

I was going to say, based off of Clarence's comment earlier, we will tend to see this earlier than most so our move from Q2 to Q3 was probably much stronger, I don't know who you are referring to, but probably much stronger than some of the people in the industry. With the balance over the two quarters we are probably going to be about where everybody is over the balance of the two quarters as well. It also depends on if they have any backlog in their business on the front end versus ours being a turns business.

And they may have consumed some inventory in Q3 that is already gone in Q4. We are pretty comfortable with the numbers that we've given based on what we are seeing from our customers. So I would not speculate that some of that is drop ins yet, but we certainly are being led to believe that toward the end of Q4 and the beginning of Q1 that there will be some new order demand or increases in order demand.

Great. That was helpful. Thanks that's all I have.

You're welcome.

(Operator Instructions) There are no further questions at this time.

All right, Operator, I appreciate it and I appreciate everyone's attendance. As always, we look forward to being able to communicate with you through conferences, et cetera, over the quarter and appreciate your attendance today.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.