Semitool Inc. F4Q08 (Qtr End 9/30/08) Earnings Call Transcript

Nov.11.08 | About: Semitool Inc. (SMTL)

Semitool Inc. (SMTL) F4Q08 Earnings Call November 11, 2008 5:00 PM ET

Executives

Raymon F. Thompson – Chief Executive Officer

Larry Murphy – President and Chief Operating Officer

Larry Viano – Vice President and Chief Financial Officer

Geoff High – Pfeiffer High Investor Relations

Analysts

Edwin Mok – Needham and Company

Matt Petkun – D. A. Davidson and Company

Elliott Glazer – du Pasquier

Neil Gagnon – Gagnon Securities

Operator

(Operator Instructions) I would now like to turn the call over to Geoff High of Pfeiffer High Investor Relations.

Geoff High

Welcome to Semitool's fourth fiscal quarter conference call. Presenting on behalf of the company will be Chairman and Chief Executive Officer Ray Thompson, President and Chief Operating Officer Larry Murphy and Vice President and Chief Financial Officer Larry Viano.

I would like to remind everyone that the matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in Semitool's filings with the Securities and Exchange Commission.

The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. Semitool assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today's call will be available at semitool.com for 90 days after the call. In addition, a telephone replay will be made available for 48 hours beginning approximately two hours after the conclusion of this call. Details for listening to today's call or webcast are available in today's news release.

With that I will now turn the call over to Ray Thompson.

Raymon Thompson

As you no doubt are aware the volatility associated with our industry is in full bloom. Nevertheless as you see in today's earnings release Semitool delivered double-digit growth, revenue and earnings for both the fourth quarter and our fiscal year. In light of the current spending environment we are battening down the hatches on the cost side of the business, and I want to assure you that management is committed to shape our company to ride out this business cycle while at the same time capturing the current and future opportunities that may match up with our corer strengths.

We expect to emerge from this period a stronger company especially when you consider our current development initiatives. Our demo units are performing extremely well in the field and are meeting or exceeding the customer expectations for reliability, yield and productivity and this is totally consistent with all of the Raider platforms that are being deployed in high volume production environments.

Our initiatives in porous silicon for the solar sector are on track. We are exploring new initiatives in die stacking for wafer level packaging. Our relationship with Applied Materials is delivering real benefits to both companies and I am particularly pleased with the level of cooperation and commitment by both of our management teams. This relationship is being well received by our customers and it has positioned us for solid gains in market share as we enter the next spending cycle.

With all we have going on in the development prompt and the steps we have taken to reduce costs, I remain as optimistic as ever about Semitool's prospects for long range success. Larry Viano will now provide you with some color in our financial results and then Larry Murphy will address some operational highlights.

Larry Viano

As Ray mentioned we reported solid financial growth during fiscal 2008. Revenue and net income during the year were up by 11 and 15% respectively. The results include a mark-to-market adjustment of our Aviza stock holdings by $900,000. With respect to tool revenue composition during fiscal 2008, approximately 81% came from Raider sales, 19% came from batch tools. Geographically 31% of sales came from North America during the fiscal year while 23% came from Europe and 46% were generated in Asia.

To maintain our financial strength, we have taken steps to adjust our cost structure to match anticipated revenue levels. We reduced our expenses by approximately $2.5 million during the first quarter of fiscal 2009 and we expect these cuts to provide roughly $6 million in quarterly savings on an ongoing basis.

To break that down, cuts in operations will generate savings of $800,000 in the first quarter and $1.7 million on a quarterly basis going forward. Reductions in R&D will generate two months savings of $500,000 and $1.2 million quarterly. Cuts at SG&A will reduce first quarter expenses by $1.2 million and will save us $3.1 million on a quarterly basis.

As a result of these cuts we have lowered our breakeven point to approximately $45 million and we expect substantial additional cuts to SG&A. Subsequent to the close of the fiscal year we have increased our cash position to $22 million through the collection of receivables. Our forecast shows that our cash position will be adequate to meet our needs for the coming fiscal year. We are comfortable with the collectability of our remaining receivables and have not had a need to increase our allowance for doubtful accounts.

With respect to guidance, we expect first quarter revenue to be in the range of $42 to $47 million and we expect to report a first quarter loss of between $0.07 and $0.04 per share. First quarter shipments are expected to range from $52 to $54 million. For fiscal 2009, we are currently expecting revenue to be in the range of $170 to $220 million.

Our tax rate for the fiscal year could vary from a provision of 22% to a benefit of 45% depending upon our earnings or loss position. CapEx for fiscal '09 will range between $1 to $3 million; however, most of these additions will not require future cash outlay.

I will now turn the call over to Larry Murphy, who will provide you with some operational highlights.

Larry Murphy

Along with obvious challenges, these market downturns open the door for device manufacturers to strengthen their production platforms and prepare for the next surge in spending. This obviously represents an important opportunity for Semitool as well and we are working to position the company for market share gains and advance to the next spending cycle.

We are very active in the emerging TSV market. This quarter we will be shipping Raider plating tools for this application to two different memory manufacturers. We also recently signed a joint development partnership for 3X and TueX copper interconnect with two major manufacturers of both [D-rem] and flash. These programs have significant commercial potential for Semitool.

As most of you know, one of our long-time customers is forming a new foundry company with significant investment expected in the coming year. Another key customer of ours has recently formed a joint venture in Taiwan with substantial investments anticipated next year as well.

Our affiliation with Applied Materials is an important component in our strategy for driving our leading technology and cost of ownership positions resulting in greater market share and as Ray stated, this partnership is going very well. Along with our collective efforts on copper interconnect we have also imitated work with AMET and TSV. We're optimistic that these and other initiatives will position us for significant growth over the long-term.

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Edwin Mok – Needham and Company.

Edwin Mok – Needham and Company

The first question regarding the cost reduction, there was a press release or there was some news about you guys laying off around 100 people starting from yesterday. Is that the only thing you guys do on a cost reduction or is other stuff you are doing to reduce your costs?

Larry Murphy

No, there's other things we're doing, Edwin. There's been pay cuts for a number of people. There's mandatory time off. There's reduction of overtime and we will be reducing non-essential travel as far as unless it's customer related and there'll be other things we're looking at, too.

Edwin Mok – Needham and Company

On your press release you mentioned there was a booking cancellation at one of your gas customer, I guess they canceled a project there. I was wondering given how tough it is in the memory sector right now and you guys have some exposure in that sector, any risks for your current backlog in terms of cancellation? Can you guys quantify that or maybe put some color on that?

Larry Murphy

Well, there's always risk obviously, Edwin. Right now on the memory side of that we're looking for orders to be quite honest with you and we're expecting to get some. So, we don't expect any cancellation on the memory side of that business right now, but we have to wait and see how that plays our.

Edwin Mok – Needham and Company

In terms of your next year guidance, I'm just curious actually you guys probably like any semi cap company has a part of your business that is in service and spare, right? Bake into that $170 to $220 million, I was wondering how do you guys model your spare and service into next year and based on my model I think you guys have around $30 million plus of spare and service. Is that a reasonable number to look at going forward?

Larry Murphy

No, that's low, Edwin. It'd be a little bit above $40 million.

Edwin Mok – Needham and Company

And you expect that to be flattish, grow or decline in the coming year?

Larry Murphy

I think it'll be fairly flattish.

Edwin Mok – Needham and Company

In terms of wafer level packaging that has been quite a strong market this year. I was wondering if you guys have any kind of visibility or any kind of color in that end market. How do you guys view that and do you expect growth or decline in coming year and what would be the driver for either way?

Larry Murphy

I guess it’s a little early to tell. Right now the biggest opportunity in that particular space is the [Gestacki]. There's a lot of development and actually some production going on in that space that'll happen in 2009 and we expect actually significant growth probably in the second half of the year, some modest growth probably in the first half in that space.

The traditional, the bump in the wafer level packaging, it's kind of all over the board right now. I think its too early to say what's going to happen as far as next year. Our model shows it growing again in the second half of the year over the first half, so down maybe a little bit in the first half with some growth in the second half.

Operator

Your next question comes from Matt Petkun – D. A. Davidson and Company.

Matt Petkun – D. A. Davidson and Company

First Larry Viano, the Aviza charge was that captured in the Q4 interest and other income expense line?

Larry Viano

It was.

Matt Petkun – D. A. Davidson and Company

So, going forward given where your capital structure lies, what are you expecting in interest and other expense for the December quarter, ballpark?

Larry Murphy

We've got it modeled in about a gain of about $100,000. It's tough to call right now, Matt, because of currency fluctuations and so it's pretty volatile.

Matt Petkun – D. A. Davidson and Company

The gross margin was exceptional and back towards historic Semitool expectations in Q4. What's going on there, and obviously we don't intend to straight line that type of number through next year, but help us understand the upside in gross margin in Q4.

Larry Murphy

Well, it was definitely a product mix and there was a fair number of 10% that came in that have 100% margin attached to them but a lot of it was driven by good Raiders going out at a good margin to customers.

Matt Petkun – D. A. Davidson and Company

I haven't had a chance to run through, you gave a fair amount of data on exactly where the cost cuts are going to be coming from, but when you said that you were expecting a roughly $45 million breakeven, Larry, roughly what type of gross margin is that assuming?

Larry Viano

That's in the mid, high 40's.

Matt Petkun – D. A. Davidson and Company

Mr. Murphy, you mentioned the large historic customer returning. I'm wondering I would have expected kind of in the midpoint you guys were talking about an 18% decline in sales next year and that was obviously after a better than industry average 2008, but are you thinking that some of the orders are revenues from that customer come in more in the September and December time period and therefore won't have as much of an impact on fiscal year results for '09?

Larry Murphy

Exactly, I think that still has to play out but we're looking probably our Q4 when we'll start seeing revenue from that.

Matt Petkun – D. A. Davidson and Company

So, maybe just in this case the 18% who knows what the industry is going to look like overall, but it looks like you're going to be capturing the heart for your fiscal year of the economic downturn in Q1, 2 and maybe even Q3.

Larry Murphy

Certainly one and two I think we'll see some improvement in three.

Operator

Your next question comes from Elliott Glazer – du Pasquier.

Elliott Glazer – du Pasquier

Can you give us some color on the relationship, the partnership with Applied Materials? Whatever terms you've made public, is any money changing hands, when did it start and give us some additional details about how it works concerning copper interconnect and the TSV, please?

Larry Murphy

Sure. We actually formed a partnership just under a year ago. It was December of 2007. And the technology relationship focused on copper integration, focused primarily at the memory manufacturers, everything from PVD through CMP and obviously with that process in between being ECD. So it's really a driving technology, cost of ownership. We have a tool that we placed at the main technology center with all of our capabilities, everything from direct on bear, [C-learn] enhancements, all of our greatest technology.

We have our own people running the tool. We own the tool, both from a process and a service standpoint. We operate it. We do demos for customers there. We do development and we take the data set we get off that tool and we market that around the world basically. And AMET does the same thing. So it's really a technology relationship. There is no money changing hands and that's a similar relationship we'll be doing with the TSV as well.

Elliott Glazer – du Pasquier

So basically, you both have the same technology and each individual sales force tries to sell each company's machines to each company's customer base. Is that how it works?

Larry Murphy

Well I might have misunderstood you but we – our technology that we have in there is a different process than AMET technology. AMET does PVD, and we do the subsequent step called ECD and then there would be a subsequent step called CMP. They sell their CMP tools and their PVD tools themselves and service them themselves, and we sell and service our ECD tool. But we integrate the cost of ownership and the technology together at the main technology center and also do demos for customers there.

Elliott Glazer – du Pasquier

So the benefit to Semitool is the overhead. You're using their overhead at their center.

Larry Murphy

Yes, the integration, their metrology, obviously we'd learn a lot more about the effects of our process both upstream and downstream, which can help us drive improved cost of ownership, improve yield for our customers, which in the memory sector it's very, very important. So there's a myriad of advantages.

The other thing is with doing demos on copper there's a queue time and if a customer's shipping us a demo wafer, it'll take several days to get there. If we do that at the main technology center, we can do it in hours, which give us much better performing demonstration for our customer.

Elliott Glazer – du Pasquier

What's in it for Applied Materials?

Larry Murphy

I think they get the same advantage; they're getting state-of-the-art plating expertise from us that allows them to optimize their PVD and CMP processes fundamentally.

Elliott Glazer – du Pasquier

Do you see this evolving over the next year or two into something bigger, more involved relationship between two companies?

Raymon Thompson

Yes.

Elliott Glazer – du Pasquier

Can I ask a follow-up question that has nothing to do with this? I've been an analyst for 40 years and I've never seen business in every industry I follow fall off a cliff worldwide. In most industries I follow, everyone says they're sitting with three months of inventories and business has just stopped.

Can you give us some color on what you're hearing from your clients on a worldwide basis, what they think is going on and what would tend to improve aggregate demand three months or six months out? Any kind of color you have, any opinions you have, guesses you have, I think, would be appreciated by your audience.

Raymon Thompson

We were at International Trade Partners conference last week in Hawaii and there's a lot of concern. It's pretty quiet out there but there are a few bright spots, particularly in our industry. And just one of the other reasons we're so optimistic relative to where we probably should be, Elliott, is we're pretty darn well lined up with a key part of it, which is the packaging and assembly. 3D packaging of die leads to a whole raft of new product opportunities, involvement of devices in areas that are not being used at all.

One small example that was presented is a Bluetooth kind of – or where – the word I'm looking for is for devices compute – or communicate with each other. Communicate within – that are – within three or four or five or six inches. In other words, where we have printed circuit boards that are wired together, that will no longer be at some point. They'll just communicate with each other on a very localized basis. It's kind of a dumb example but it does lead you to realize that there's a whole lot of things out there yet that are a byproduct the result of, particularly of the stacking and bringing various responsibilities together in the same die.

And we're nicely situated for that. It's one of the reasons I – we've done well this last year in fact, is very key to that. It's sober. It's – you've got to agree, it's not a – it's a time for managements to be very objective and serious about their sizing of the company and what they've got in the way of people and expenses to make sure that we can afford it.

It's very important for us that Semitool to be that way. I want you to know that we realize that the nice thing about a downturn is that it does produce cash. The bad thing about it is that you don't want to use that cash. You've got to – that's your reserve for whatever happens, which of course is unknown. So we're very protective of that. Does that help at all?

Elliott Glazer – du Pasquier

I'd like to add that again, I've been an analyst for 40 years, I've been through these types of things before, and my experience is that customers, they really want to see that cash on your balance sheet. They really want the assurance that they're dealing with a company that's going to be there tomorrow. Is that something you're experiencing now, that customers are looking at your balance sheet and getting some comfort from your degree of cash?

Raymon Thompson

Let me say that our business is not quite so oriented that way. If our product is robust and delivering processes that are very strong, that's far more influential in your relationship with them towards the future. They don't need your cash and in fact, in my history, back when I owned the company through '95, there were a lot of times where I didn't have the cash and they put up the money. We delivered a good product and so they were happy to do so.

I just think our industry is – if we were a much broader market, bigger market, then I would say you'd be right, Elliott, but for our particular little sector of specialized equipment, it's not – it's on the list of priority, but it's not that high.

Operator

Your next question comes from Neil Gagnon – Gagnon Securities.

Neil Gagnon – Gagnon Securities

Gentlemen, can you chat more about the cash collected after the quarter and what we might be looking at in the way of receivables and inventory balances at mid-year?

Larry Viano

We noticed a slow down of collections right prior to year-end. I think other companies are keeping their cash for their balance sheets but a fair amount came in right afterwards. We're projecting that our cash balance should remain pretty close to where it is right now throughout the year. Inventories will drop, as far as drop dramatically; they probably won't drop dramatically for a couple of quarters.

Neil Gagnon – Gagnon Securities

On that, Larry, on this inventory, how much of that number is demos roughly?

Larry Viano

Let me see here, hang on, around – in net though, I think net is around about $9 million.

Neil Gagnon – Gagnon Securities

Nine million and on your account you gave a number after year end, I think, did you say $22 million?

Larry Viano

It was $22 million, yes.

Neil Gagnon – Gagnon Securities

Is that – did you pay down any short-term debt or is it just $22 million?

Larry Viano

No, we were completely out of the line so it was $22 million.

Neil Gagnon – Gagnon Securities

So it was $22 million and you've paid the line back?

Larry Murphy

Yes.

Operator

(Operator Instructions). We have a follow-up question from Edwin Mok – Needham and Company.

Edwin Mok – Needham and Company

Can I ask a question, kind of follow-up question on the spare part, did – actually did that revenue grew this past quarter, this past year, I'm sorry.

Larry Murphy

Not much, Edwin. Not a whole lot, no.

Edwin Mok – Needham and Company

I see, so kind of flattish. And then the second question is, are you sure revenue is around 46%? I think that's lower than historical level right? Is that just because of Asian customer are pulling back in terms their –

Larry Murphy

Well it's higher than our historical because we've done a better job of penetrating Asia.

Edwin Mok – Needham and Company

Finally, in terms of kind of copper into memory opportunity, that has been talked about by you guys and other companies. Given the high-tech division in memory sector, do you guys see maybe a slower ramp on those opportunities in the coming year? Is that baked into your guidance performance in the coming year?

Larry Murphy

Absolutely, that's all definitely slowed down and that's definitely baked into the forecast. And actually in some cases, it's to our advantage, Edwin, because we – some – in a couple locations we just put a tool in a few months ago. So getting it qualified and becoming a POR, having that extra time to do that has actually been beneficial for us for capturing market shares so while it's painful for all of us in the down market, it gave us more time to prove what our tools could do.

Operator

(Operator Instructions). Your next question is a follow-up from Matt Petkun – D. A. Davidson and Company.

Matt Petkun – D. A. Davidson and Company

Larry Viano, just a quick follow-up. The loss that you're projecting for Q1 of $0.04 to $0.07, does that include restructuring charges?

Larry Viano

It does.

Matt Petkun – D. A. Davidson and Company

And from a cash perspective, what are you expecting those charges to be, do you know right now?

Larry Viano

Right around a $1 million.

Matt Petkun – D. A. Davidson and Company

That's including that number so that kind of helps us get a sense of how you really are reducing the overall OpEx.

Larry Viano

Yes.

Raymon Thompson

We've got a way to go yet; we've still got some things to do on that.

Matt Petkun – D. A. Davidson and Company

Well why don't you – we can just raise the top line instead, Ray.

Raymon Thompson

I'd like to see both actually.

Operator

At this time there are no further questions. I would now like to turn the call back over to Ray Thompson.

Raymon Thompson

Well, thank you all for once again joining us and while there's no question that we're in challenging times, we nonetheless believe that the increase in productivity and the yield results that our products bring to the industry is more important than ever as our customers are seeking to remain competitive in their various sectors.

And so with respect to this company in particular, your management is, and believe we have good reason to be, optimistic even in the face of the times. So we look forward to talking with you here in a few months. Stay tuned.

Operator

That concludes today's conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!