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MKS Instruments, Inc. (NASDAQ:MKSI)

Q4 2008 Earnings Call

February 04, 2009, 08:30 am ET

Executives

Jonna Manes - Director, IR

Leo Berlinghieri - CEO and President

Ron Weigner - VP and CFO

Analysts

Brett Hodess - Merrill Lynch

Jay Deanha - JP Morgan

Kate Cuthlorksy - Goldman Sachs

C.J. Muse - Barclays Capital

Tim Summers - Wunderlich Securities

Operator

Good morning ladies and gentlemen thank you for standing by. Welcome to the MKS Instruments Fourth Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today Wednesday, February 4, 2009. I would like to turn the conference over to Ms. Jonna Manes, Director of Investor Relations; please go ahead ma'am.

Jonna Manes

Thanks, Randy, good morning and thank you for joining our earnings conference call. Earlier this morning we released our financial results for the fourth quarter of 2008. You can access this release at our website, www.mksinstruments.com.

As a reminder, various remarks that we may make about future expectations, plans and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in today's press release and in the company's annual report on Form 10-K for the fiscal year ended December 31, 2007 and most recent quarterly report on Form 10-Q, which are on file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company's estimates or views as of any date subsequent to today.

Now, I will turn the call over to Leo Berlinghieri, Chief Executive Officer, and President of MKS.

Leo Berlinghieri

Thanks Jonna and good morning everyone. Thank you for joining us on the call this morning. I will give an overview of the fourth quarter the year and our outlook, Ron Weigner, our Chief Financial Officer, who will review our financial results and guidance and then we will open the call for your questions.

Fourth quarter results were slightly better than our revised guidance issued on December 23rd we generated $125 million in sales and breakeven profitability on a non-GAAP basis.

We saw a sharper than expected drop in sales for semiconductor OEMs as spending for semiconductor capital equipment declined in a rapidly weakening global economy.

While our total sales declined 21% quarter-over-quarter sales to these OEMs declined 34%. In this uncertain and challenging environment we continue to take actions to lower our cost we continue to reduce headcount, took six days of shut down adjacent to the holidays and further reduced non-essential spending.

Ron, will discuss these fourth quarter actions later in the call. Sales to the Fabs increased 6% quarter-over-quarter primarily for spares in room ionization systems to reduce air borne contamination and increased yield in a major fab expansion.

After three strong quarters our non-semiconductor business was not immune to turmoil in the global economy. And sales to non-semiconductor markets declined 15% quarter-over-quarter.

Non-semi business represented 50% of fourth quarter sales. Our technology is essential in many applications and our strategy is to leverage our technology breath and leadership in high growth markets such as solar and provide process critical technology in these and other markets. Solar is a growing and evolving market with opportunities to leverage more of our technology portfolio. For example, after gaining a key design win earlier in the year, in the fourth quarter we provided DC power generators for a solar manufactures thin film solar process.

This is the same manufacturer that selected our Residual Gas Analysis for process monitoring after preventative maintenance to avoid costly troubleshooting. We generated record solar sales in the third quarter and our fourth quarter solar sales were little lower at $14 million. We also saw modest growth in sales to key medical equipment customers in the quarter.

Now turning to the results for the year. Sales declined to $647 million on sharply lower demand for semiconductor capital equipment, and non-GAAP earnings were $0.82 per share. 2008 was a challenging year for semiconductor capital equipment, as turmoil and financial markets accelerated a cyclical industry downturn.

However, in a year where semi analyst are estimating a decline of as much as 30% in semiconductor capital equipment spending, our total sales declined 17% year-over-year. Our focus on high growth markets and success at diversifying our business mitigated the impact of the downturn on MKS.

While sales to the semiconductor market declined 31% year-over-year. Sales to other markets increased 11%. Our long-term goal is to achieve a 15% compounded annual growth rate in non-semiconductor markets. As these sales grew to $280 million in 2008 from $149 million in 2005, we are exceeding our goal with a 23% compounded annual growth rate.

Solar is one of our fastest growing markets as shown by the fact that our solar sales almost tripled year-over-year to reach a record $49 million. As we continue to penetrate this market in 2008 we doubled our solar customer base to over 120 customers. In addition to a broad customer base our technology leadership and product performance is driving growth in solar as demonstrated by design wins with RF and DC power systems, reactive gas generators, Residual Gas Analysis and our pressure flow in vacuum management technologies. We also set a record in our service business which extends across all markets. Service includes repairs to a large install base and service contracts but not spares. We invested in additional service capability as our install based increased. And our service business grew 20% year-over-year to $86 million.

As the semiconductor market declined we took actions to reduce our cost and as the economy weakened, we cut cost further. In the second half of the year we implemented a 10% global workforce reduction and reduced our operating expenses, including taking shutdowns reducing non-essential spending as well as reducing executive officers’ salaries and board members’ fees.

Maintaining a strong cash position is important in difficult times. We generated $90 million in cash from operations, and end of the year with 260 million in cash and investments net of debt.

In summary, the fourth quarter end year we are challenging for MKS. As we entered 2009 global economic uncertainty is prolonging a step downturn in the semiconductor capital equipment spending. And there is greater uncertainty about the business outlook in the non-semiconductor markets as well.

In addition, our visibility is quite limited as a turns business with short lead times. In this environment, we estimate first quarter sales could range from $75 million to $95 million.

We are working to drive down our cost to align more closely with the expected lower business levels. In January, we reduced our global workforce again for a total reduction of approximately 20% since the end of June 2008. In addition, we expanded our salary reduction program, and we will take a week shutdown in the first quarter.

The business environment may remain challenging for sometime, excluding shutdowns and other temporary cost reduction actions. Our goal is to reduce our non-GAAP net operating cash income breakeven to approximately $110 million and our non-GAAP net operating income breakeven to $123 million as we exit the second quarter.

Looking longer term, we are evaluating further opportunities to reduce our breakeven. And Ron will provide details later in the call.

We cannot predict when semiconductor capital equipment spending will rebound and some analysts are forecasting that spending may decline 40% to 50% in 2009. While we continue to focus on gaining share at semiconductor OEMs and fabs, we expect that our business to (inaudible) will continue to reduce the impact of a prolong industry downturn on MKS.

We see opportunities to build on successes. We currently expect our solar sales to grow in 2009 based on continued strong orders from major solar customers in Asia. We also expect to benefit longer term as the solar market gradually transitions to thin film processes to reduce cost per watt. We can leverage more technology in thin film processes such as amorphous silicon where our dollar opportunity is three to four times higher than in crystal and silicon processes. There are opportunities in other markets and applications, for example, our infrared gas analysis technology is used to analyze green house green emissions from diesel engines non-mobiles as well off-road construction equipment. This business could benefit as tougher environmentally emission standard to take effect.

And as investments in roads and bridges is implemented to bolster the US economy. We have discussed how we have adopted our gas analysis technology to win a homeland security contract to detect and analyze chemical warfare agents in various environments. There maybe additional opportunities for this application. Our business diversification provides some stability in a downturn and our technology portfolio expands our opportunities in diverse markets.

In addition, to solar and environmental monitoring processes we provide solutions for medical, pharmaceutical, and analytical markets, aerospace and defense applications, government labs, and industrial processes that require precise process control and monitoring to improve yield and reduce cost. MKS is well positioned in our core markets and we continue to execute our diversification strategy. We have a strong cash position and tight cost controls in place. We will expect more challenges ahead. We also expect to emerge from this downturn even stronger.

Now I will turn the call over to Ron to discuss our financial results and expand on our guidance.

Ron Weigner

Thank you, Leo and good morning everyone. 2008 sales of $647 million were 17% less than 2007 sales of $780 million. Our sales for the semiconductor market dropped 31% but this decline was somewhat mitigated by an 11% increase in sales to other markets primarily from increased sales for the solar market. Primarily as a result of lower volume and higher R&D, our 2008 non-GAAP net earnings decreased 57% to $41.4 million or $0.82 per diluted share, compared to $95.6 million or $1.67 per diluted share in 2007.

GAAP earnings include special charges of net $11.3 million for an intangible impairment above normal charges for excess and obsolete inventory, discrete tax items and adjustments, a one-time foreign exchange gain and amortization of intangibles. GAAP net income decreased 65% to $30.1 million or $0.59 per diluted share, compare to $86.4 million or $1.51 per diluted share in 2007.

Early in the year, we increased our spending to support development of products for next generation tools and for other markets, and second half for the year as the semiconductor industry continue to decline we initiated actions to reduce R&D and SG&A expense. As the semiconductor market continue to soften even below our original expectations, fourth quarter sales declined 21% to $125.2 million compared to third quarter sales of $157.4 million. Sequentially, sales of semiconductor OEMs declined 34%, sales of semiconductor fabs increase 6% and sales for other markets decreased 15% primarily as a result of slightly lower sales to the solar market and reduced sales to the flat panel market in a variety of other markets.

The sequential modest reduction in sales for the solar market primarily reflects the variation in ordering patterns from our solar customers. In the fourth quarter sales the semi OEMs represented 36% of sales and sales to the semi-fab was 14% of sales and sales to other markets 50% of sales.

Geographically fourth quarter sales in the United States decreased 18% primarily as result of decline sales to semi-OEMs, sales to Asia decreased 18% primarily due to lower sales to semi-OEMs and solar customers.

Sales in Europe decreased 33% as result of lower sales to semi-OEMs and sales to other markets. Sales in US represented 55% of sales Asia 32% and Europe 13%.

Sales of our top 10 customers were 34% of total sales compared to 35% in the third quarter. Sales to our largest customer Applied Materials was 16% of sales compared to 18% of total sales in the third quarter.

Sales to contract manufactures of Applied and other semi-OEMs decreased 43% sequentially and represented 2% of total sales.

Fourth quarter gross margin decreased to 35.6% compared to 40% in the third quarter. Excluding the above normal charge for excess and obsolete inventory the pro-forma non-GAAP gross margin for the fourth quarter would have been 39.6%.

The reduction margin in the fourth quarter related primarily to volume but it was partially offset by favorable foreign exchange cost and favorable product mix.

In the third quarter we took actions to reduce our headcount approximately 5% and in the fourth quarter we took action to reduce our headcount an additional 5%. And in these two quarters we took mandatory time off and continued to curtail all non-essential spending.

R&D expense decreased sequentially by $250,000 compared to $19.5 million in the third quarter and SG&A expense decreased $2.9 million sequentially to $30.5 million which included the effect of favorable foreign exchange cost and lower cost for professional fees.

In the fourth quarter, our non-GAAP earnings which exclude amortization of acquired intangible assets and special charges was breakeven compared to earnings of $8.9 million or $0.18 per diluted share in the third quarter of 2008.

This decrease in earnings is primarily attributable to a lower sales volume which was offset favorable foreign exchange, product mix and lower operating expenses.

The non-GAAP tax rate for the fourth quarter is not meaningful because year end adjustments to tax expense distort the tax rate, because of the small amount of income. The actual non-GAAP tax rate for 2008 was 29%. Fourth quarter GAAP taxes reflect the benefit of the retroactive R&D tax credit and other discrete items and adjustments.

This quarter in addition to the amortization of intangibles, the fourth quarter GAAP loss of $6.3 million includes a $5 million for the above normal excess and obsolete inventory costs and a [$6.1 million] write-off of intangible assets resulting from a lower range long range product forecast for certain fab related products.

As I mentioned, in the second half we decreased our work force by 10% to 2,631 people worldwide. We continue to generate cash from operations which total $28.4 million for the quarter and $89.8 million for the year. Cash and investments increased by $22 million in the fourth quarter to $260 million net of debt.

In order to be conservative with our cash in these uncertain times, we did not repurchase any shares of common stock during the quarter.

Day sales outstanding increased slightly to 62 days in the fourth quarter from 60 days in the third quarter and inventory turns decreased to 2.5 times from 2.7 times.

Capital expenditure of $5.1 million in the quarter were primarily for leasehold improvements in Japan to facilitate a consolidation of facilities and IT hardware to reduce system's operating cost in the future and for the year were $14.6 million. Depreciation totaled $3.8 million for the quarter and $14.5 million for the year.

We expect capital expenditures for 2009 will be reduced and could range from $7 million to $9 million, although, it is more difficult to predict business levels in this uncertain environment. We are estimating that first quarter sales could range from $75 million to $95 million.

At the end of January, we implemented a workforce reduction of approximately 10% to 2,370 employees. This represents an annual compensation savings of approximately $19 million. We are planning to take one week shutdown during the quarter. Selected employees were asked to take a 5% wage reductions.

Officers and directors will ask to take additional wage reductions which now totaled between 10% and 20%. And we are continuing to watch and curtail all non-critical spending.

First quarter gross margin which is primarily impacted by the lower volume, product mix and temporary over capacity could range from 26% to 31%. Reduction in R&D expenses primarily is related to our reduction in force lower consulting and reduced project material cost and could range from $16.7 million to $17.1 million.

SG&A expenses could increase $900,000 sequentially and range from $31 million to $31.8 million.

In the first quarter, savings are expected to be offset by less favorable foreign exchange and normalized estimates for professional fees compared to the fourth quarter. A special charge for cost associated with our reduction force is estimated at $2.5 million. Amortization of acquired intangible assets is estimated at $1.7 million. Net interest income for the first quarter is estimated to be approximately $1 million.

We estimate that our normalized tax rate for 2009 could be 29%. However, because of the uncertainty of our 2009 results our actual rate could vary significantly.

Given these assumptions our first quarter non-GAAP net loss could range from $12.5 million to $19.9 million or $0.25 to $0.40 per share on approximately $49.8 million shares outstanding.

Our first quarter GAAP net loss could range from $15.4 million to $22.9 million or $0.31 to $0.46 per share. Even though our expected sales level in the first quarter will be below our net operating cash breakeven level. We expect our first quarter free cash flow will be positive and could range from $9 million to $12 million.

Looking ahead to the second quarter and assuming the full effect of actions we took in the first quarter as well as other actions we plan to take in the second quarter. We believe that it is possible that our non-GAAP net operating cash breakeven in the second quarter could be approximately $112 million, and our non-GAAP net operating breakeven could be approximately $125 million.

Our goal is to reach quarterly non-GAAP cash operating income breakeven level of $108 million in non-GAAP net operating income breakeven of $123 million as we exit the second quarter. The operating breakeven level excludes the benefit of mandatory time off, wage reductions and certain other temporary cost savings measures.

We will continue to review and take action to reduce all areas of spending, reduced purchase materials cost and warranty cost and looking longer term we are evaluating further opportunities to reduce our breakeven such as consolidation of functions consolidation of facilities reduction of information technology operating systems cost and further transfer of manufacturing to low cost countries.

This concludes our discussion and now we will be able to take some of your questions.

Jonna Manes

Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Brett Hodess with Merrill Lynch. Please go ahead.

Brett Hodess - Merrill Lynch

Good morning, Leo and Ron, how are you doing?

Leo Berlinghieri

Great.

Ron Weigner

Good thank you.

Brett Hodess - Merrill Lynch

Good, a couple questions first I have got when you look, you commented earlier about solar could grow this year, and I was wondering if you could, it sounds like that's going to be driven by thin film. But I was wondering if you could you have any size that you think it's going to grow to rate it is going to grow out this year?

Leo Berlinghieri

Brett, this is Leo, thanks I think at this point, it's not quite as clear I think obviously there have been discussions about the credit market tightening and would that have an impact. We haven’t really seen that yet. We are scrutinizing, we have got 120 customers, many of them new. We are looking at each of those and how they seem to be faring.

On the other side of it, the order rates still look pretty good and we have had some good success in the past several months. So, we are still positive on it and then the current administration seems to be focused on alternative energy and solar being a piece of it. So, that could give us a boost if there is some investment or credits in that area. So, I would like to give you more color, but right now it’s a little difficult to do that, but I think we are still expecting the business would grow.

Brett Hodess - Merrill Lynch

Okay. And on the semi side, do you think that your customers inventories are pretty low now so that your semi business matches whatever they are seeing in shipments? Or do you think that they are (inaudible) process? Do you think of taking down the inventories lower given the harsh landscape, how do you see that side?

Leo Berlinghieri

I think the same benefit we get on the upturn, every time their rates go down, at least the theory is that there is an inventory consumption and they don’t need to buy as much to cover the shipments and I would say over the last couple of quarters they keep announcing further expectation of reduction quarter-to-quarter. And so for me, I believe we are still in that process. So, I would expect that some point in time, even if things don’t change drastically we get some benefit out of that.

So, again with the idea that each time they drop their rates, there should be some additional consumption of inventory and it takes a while to do that, just like it takes us a while to do that. But, then we get some benefit out of it. So, we are still in that mode, somewhat.

Brett Hodess - Merrill Lynch

One last for Ron. Ron, if you look at the cost reductions that you have been making over the last couple of quarters, and going into this quarter in 2Q. Do you have a feeling for us to categorize how much of the cost reductions are temporary things like the shutdown days, salary reductions things like that versus so what percentages more prominent structural changes so that we can sort of judge what the leverage will be as we come back out of the downturn in terms of what we will add back fairly quickly and what will stay low?

Ron Weigner

Yes, what we were saying is exiting a second quarter. Our goal is to hit a breakeven level of about $123 million and that exclude any time-off and some other things that we are doing that are lowering the current breakeven level. Those other items have an affect maybe of $3 million to $4 million reduction in that $123 million if we continue those actions.

Leo Berlinghieri

Below that.

Ron Weigner

Below that. So, and even at that $123 million, Brett that would probably we get a gross margin maybe in around a 38% range, which would mean the operating expenses would be in the $47 million range if you did that based on that calculation.

Brett Hodess - Merrill Lynch

Got it.

Leo Berlinghieri

But obviously we are going to look at ways to continue to reduce our operating expenses and reduce our gross margin.

Brett Hodess - Merrill Lynch

Got it. I understand. Thank you.

Operator

Thank you. Our next question comes from the line of Jay Deanha with JP Morgan. Please go ahead.

Jay Deanha - JP Morgan

Thank you very much and good morning. The first question is given the severity in this downturn as you look across your various businesses, do you see any smaller competitors that perhaps might be on the ropes. It's my understanding that some of the big semiconductor OEMs are starting to classify their suppliers in different buckets based on risk they are potentially going under. And I am wondering if you are seeing any opportunities to gain shares as a result of that or you are starting to get inquiries from your big customer because it concern of weakness or potential bankruptcy in some of your competitors?

Leo Berlinghieri

I would say that we have seen some indication of what you described. We had some opportunities to quote some additional business that we shared with other suppliers. I think that I haven't seen it at a panic level or anything like that, but there is some indication. And I think as you said sort of a customer base of us is in the semi side at least, spending a lot of time looking at their supply base, looking at risk in it and obviously with our cash position in the way we manage the business we become even more attractive in this environment.

So, in all of these product areas we are typically the number one choice or number two in the market by market standpoint. So, it puts us healthy cash position, healthy business position compared to a lot and then we are also preferred by their customers and so that helps us up. But we have seen some indications although I wouldn’t call it a large amount of concern at this point in terms of actually people going under or getting lots of opportunities but we are starting to see those opportunities.

Jay Deanha - JP Morgan

I see. And on your solar business, you indicated that if there is growth in the business this year which right now you think there might be, you indicated a concept that you have some upside from some new customers and also that it might be driven, the growth might be driven by some customers in Asia, you made those comments earlier in the call.

Leo Berlinghieri

Correct.

Jay Deanha - JP Morgan

Could you put a little more detail into that, I mean, in terms of Asia we are talking thin film side both in terms of new people or some of these meaningful companies?

Leo Berlinghieri

I say the biggest opportunity is in thin film. I think we have talked about one of those companies and I can't give a lot of detail because it’s critical I don’t, but we talked about one of those companies and we expect that will be very sizable and we don’t expect any change in schedule a forecast for that. And then we are still seeing new business in those areas both in thin film and crystal and silicon in Asia. So, it’s a new accounts for us, new business opportunities for us that I would say we didn’t see a year ago, that are happening towards the end of our last year that gives us some of that optimism for 2009.

Jay Deanha - JP Morgan

Then last question is some of your emerging thin film opportunities, are these companies that are essentially creating their own lines for panel production as opposed to buying lines from equipments [wire]?

Leo Berlinghieri

That would probably be a good guess.

Jay Deanha - JP Morgan

Okay. Thank you.

Leo Berlinghieri

So, some of that is definitely in that area. Its like the old semiconductor days where you do have some solar panel fabs who strictly by equipment from equipment companies and then you have some that feel that are at proprietary stage and what they do and are building their own equipment. So, that kind of makes it like the old days and we have experience with that so that’s very positive for us. And a lot of these companies come from the semiconductor industry even the fabs, so the people that we are talking to at very high levels, know who we are, and had experienced, not only using our products for power but atomic flooring generators in semi and flat panel, and they are saying we think we can utilize this in the solar. So, that’s why we have some optimism especially for 2009 and beyond.

Jay Deanha - JP Morgan

And the last question, Leo, you once told me that your business with the customers that you just identified in other words to one that you essentially used the old semi model kind of like for solar and build their own kind of like for solar and build their own kind of tool set. You once told me that you grab an opportunity with those customers, it tends to be a little bit better than it is with the [critical] arms dealers because they tend to work with more suppliers. So, that’s still the case?

Leo Berlinghieri

Did you mean revenue or did you mean margin? You said revenue. I wasn’t sure what you said.

Jay Deanha - JP Morgan

Well, you could eliminate on both of it.

Leo Berlinghieri

Okay. I guess. From the margin, it would be based on each customer. And it depends on exactly what they are transitioning from what cost and what benefits they get. But from a revenue standpoint the comment I made was, referring to 2008, when I said if we achieved that $40 million to $50 million number, we had a lot of people in the industry telling us who would be that largest customer and I said, don’t be surprised, it's not an OEM that would be our largest customers during that time.

I was really referring to that. There is some sizeable opportunities with the fabs that buy equipment. But in the long run, it’s the equipment companies they will transition as well like semi. So, in the short run, we could absolutely see a higher total revenue. But I would not call it a revenue per fab opportunity. I would just say the orders that we were expecting and we were getting designed into, I just had strong feelings that 2008 or early 2009, the orders, the largest customers could be a fab as opposed to an OEM which you typically would think of.

Jay Deanha - JP Morgan

Alright. Thank you.

Leo Berlinghieri

You are welcome.

Operator

Thank you. Our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

Kate Cuthlorksy - Goldman Sachs

Hi, this is [Kate Cuthlorksy] for Jim Covello. Quick question on your services business, what was the business in Q4? And just as you think about your guidance for Q1, how much of the Q1 revenues do you guys expect to come from the services part of the business?

Ron Weigner

Our service revenue in Q4 was about $20 million. And as Leo said, its kind of questionable what's going to happen to our service business in 2009 depends on fab spending and their capacity and so forth. But I think in general we would anticipate that at least our service business could remain relatively flat. I think impacted by some of the decrease in spending of fabs, it's difficult to tell.

Leo Berlinghieri

Yes, I think that the key, it's very difficult to tell right now is the utilization. As the utilization goes down the need to get the consumption of either consumables or spares go down. So, right now obviously you know that utilization is extremely low and really they are investing almost nothing in new tools based on what we have heard the equipment companies that have reported.

So, we are going to see some impact of that, it's hard to tell exactly what that is. How quickly they are in terms of shutting off this picket and in changing their rates. Sometimes it takes a while for the procurement systems to catch up with what's going in the fab, but we would expect some impact to the service business based on utilization being 40%, 50% lower than it was may be year ago at this time.

Kate Cuthlorksy - Goldman Sachs

I mean what's your sense in terms of utilization rate for Q1 versus where you were in Q4?

Leo Berlinghieri

No idea, but I can't imagine it's getting better. I thought it was horrible in Q4 from the date that I had seen. I had seen that in some whether its foundries or I think it was foundries that I saw -- 30s. I can't imagine its getting better in Q1, so that versus 80 or 90 last year says that's big reduction in consumption and I think that's one of the reason why our guidance would reflect where it is today.

Kate Cuthlorksy - Goldman Sachs

Okay. And then just quick question on the solar business as well, you guys mentioned your expectation that is going to grow year-over-year, do you expect gross on a quarterly basis throughout the year or is the expectation that we sort of take a dip in the first half and then it comes back in the second half for the year?

Ron Weigner

I think for us it's a little different and I am going to refer back to couple of comments that Jay mentioned in terms of, we are selling to the OEMs and we are selling to the fabs. And sometimes these orders are more project base. So we could get a significant order with significant shipments in one quarter having nothing to do with sort of general solar market.

But due to our penetration with that customer in the market and their timing of the project. So I still believe that solar activity is a bit lumpy compared to sort of the semiconductor. Now you could argue that in this environment semi is pretty lumpy to but normally in a growing environment semi has a lot of good things running on all cylinders. I think in solar when its running on all cylinders it tends to be lumpy because you have OEMs and you have end users and you have more project oriented things. Anytime you have more project oriented things you tend to get a big lump and then you may not repeat it in the next quarter.

Kate Cuthlorksy - Goldman Sachs

Yes, I know you guys have a very diversified customer base in solar but have you seen at all this quarter meaningful push outs of project from your customers or is that something you haven't really seen yet?

Ron Weigner

I have not seen yet. That was why we commented that based on sort of where, we have seen orders from customers in Asia specially that we were pretty optimistic still. I mean, that obviously that can change but right now we are still optimistic about growth in 2009 and we do not had based it on a first half recovered back half where we are seeing strong right now.

That's really I like to comment on in. Our lead time is short enough, so that they are placing orders now for next year, they are placing them for relatively soon in terms of shipments to begin.

Kate Cuthlorksy - Goldman Sachs

Okay, thank you.

Leo Berlinghieri

You are welcome.

Operator

Thank you. Our next question comes from the line of C.J. Muse of Barclays Capital. Please go ahead.

C.J. Muse - Barclays Capital

Yes, good morning. Thank you for taking my question. I guess first question on the non-OEM semi side of your business that's held up pretty well for you guys I guess, running around $18 million to $22 million over the last four to six quarters, and I guess the question here is how much of that is due to kind of one off projects that you've seen and I guess if that's the case what should we be looking for that business in 2009. And if its not one off then I guess that would suggest that that business have been rented at concurrent levels that it would be roughly 10% down year-over-year. So any help on that line item would be very helpful?

Leo Berlinghieri

Okay. It's a little tricky because, I would say there are four components to that business and I will see if is could remember all four, but I know there are four. In service and repair and there is this one offs what I would call more upgrades or productivity solutions and then there is capital equipment type items that we sell.

So there is four different ways that we look at it. I would expect the capital equipment side to be hit as severe as most of the capital equipment sides to be hit. I would expect the repairs to be hit less but as utilization is low, they will need to be repaired less frequently, the same thing with spares and then upgrade the one-offs, you can argue that when utilization is down how much incentive do people have to upgrade equipment for high productivity in yields on the other hand, they are always challenged by shrinks and new processes and they are pulling in new devices into a fab for business.

So I do not know if the upgrades will change that much they typically have more opportunity to qualify them but I do not know how quickly they will deploy multiple sets on multiple tools.

So I think best guess that is going to go down with the rest of the semi but I would agree that the probably doesn’t go down at the same rate as the OEM. So the OEMs are down 40% to 50% year-over-year, I would only want to guess sort of number what because I can't guess what the utilization rate will be. But it will go down.

C.J. Muse - Barclays Capital

Sure. Okay, helpful. And just turning to the LCD side of things, can you share with us what the revenues were in calendar '08?

Leo Berlinghieri

I don’t think we report down with that, we don't report that level of detail in the LCD, I think, I was going ask you what LCD business at this point but obviously I think overall it might have been up slightly year-over-year, primarily due to a strong first quarter and first half of the year even. But I think it was almost non-existent in the second half of the year.

So, overall the numbers were slightly up year-over-year, but I think if you look at where we are today, do not expect much. We are not going to see a drop if LCD business, is almost nothing in '09 as many people are talking about. You're not going to see a significant change from the fourth quarter for that content because it did not exist in fourth quarter as well.

C.J. Muse - Barclays Capital

Sure. I guess I'm trying to get that is. You talked about solar growing year-over-year in calendar '09, when you think about your non-semi business excluding solar, how should we think about the growth rate there?

Leo Berlinghieri

Okay. LCD is a relatively small piece of that $280 million. So it might be 1% to 2% of that or 3%, somewhere in that 2% to 3% range when it is reasonably good might be a little higher in the real good times in the lower and the more difficult times in that market. But so that's not going to drive that information will not help you create a model or get an idea of what's happening, I thinks its very uncertain. We saw the drop in the fourth quarter of the non-semi business, and that was even with sort of the solar business holding up and so I really don't know. I do not know how deep this economic crunch will affect.

We are seeing it worldwide, I think Ron reported sort of the Germany numbers or Europe numbers and when that's down that usually tells you that it's in a lot of different market areas. And so it's hard to tell whether that's, I could not even guess what that would be but we have not, I do not think anyone of this business been able to put a plan together for '09. And we're really trying to put our hands around Q1 at this point and that's what we are capable of doing. But I would expect it's going to be impacted downward other than maybe the solar business.

C.J. Muse - Barclays Capital

Okay. It's helpful. I guess last two questions. Ron, you talked about 29% tax rate is the best guess for '09. Is that what we should assume or is that what's embedded in your guide for Q1?

Ron Weigner

That's what in your guide for Q1 and I would assume that for the full year. And I said it could vary significantly because it depends on the geographic distribution and sales which we are not sure what they are going to be.

C.J. Muse - Barclays Capital

Sure. And then on the EPS guide you, alluded to some one time charges in the March quarter, is that embedded in the guide or you pull that out?

Ron Weigner

The guidance for non-GAAP does not include any special charges. So special charge like for the reduction in force would not be included in the non-GAAP guidance, but it's included in the GAAP guidance.

C.J. Muse - Barclays Capital

Sounds good. Thank you.

Operator

Thank you. Our next question comes from the line of Tim Summers with Wunderlich Securities. Please go ahead.

Tim Summers - Wunderlich Securities

Hey, good morning, guys. Ron or Leo on the solar business you mentioned you had about $49 million in revenue in '08 and 120 customers. Is that a situation where is the 80-20 rule, 20% of the customers generate 80% of the revenue?

Leo Berlinghieri

I had been able to break Pareto's law in a long time. So, I would think it fits into that range where the only thing that's interesting in the smaller customer sets. I mentioned this before. They usually need more help. I think the larger customers want to have a large supply base and they want to have multiple sources, because the risk is high for them and they have sort of the capability at the procurement level and its commodity management level.

But I think in the smaller customers, they do not have that type of resource available to them. So the portfolio we have on products and technologies becomes very attractive to them.

So, what I have seen in semi and I am expecting we are going to see the same thing and we have seen it some of the non-semi in the solar area. Is that I expect we get more content per tool or more opportunities because they are not looking, they do not have this established supply base and we come in and offer them a lot. They have hard time just getting what they need in and it's a challenge for them to build the fabs but they are building on the tools they are building.

So, I would expect the 80-20 will hold true but I would expect that like semi we will have higher level of content on depending on the kind of tool on some of the second tier OEMs because they can utilize the supplier like MKS is sort of one stop shop.

Tim Summers - Wunderlich Securities

Okay. And just second question is, you are guiding for revenues in the first quarter to be down roughly 30%, 35% quarter-over-quarter but you are only taking a one week shutdown. Can you help us reconcile the delta between the revenue and only a 6% or 7% decline in working hours per quarter?

Leo Berlinghieri

Well don’t forget in addition to that we reduced our head count 10% in the first quarter.

Ron Weigner

So the first quarter has less resources, than we had in second quarter and we still maintaining shutdown.

Leo Berlinghieri

Right. Well, as I said, the gross margin does, the guidance I gave include that they could be some inefficiencies when if we get down to those low levels of shipments. Because it’s difficult to size, your direct labor that quickly.

Tim Summers - Wunderlich Securities

All right, exactly. All right, thanks guys.

Operator

Thank you and at this time we have no further questions in the queue.

Leo Berlinghieri

Okay. Well, thank you very much for joining us on the call this morning and for your questions. As you can imagine it's a very challenging environment and we are focused on reducing costs without risking growth opportunities in the key markets that we discussed. And thanks for your continued interest in MKS as we move ahead continue to execute on these strategies. This concludes our comments.

Operator

Thank you ladies and gentlemen. This concludes the MKS Instruments fourth quarter earnings conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.

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Source: MKS Instruments, Inc. Q4 2008 Earnings Call Transcript
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