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Zygo (NASDAQ:ZIGO)

Q3 2013 Earnings Call

May 09, 2013 5:00 pm ET

Executives

John P. Jordan - Chief Financial Officer, Vice President and Treasurer

Chris L. Koliopoulos - Chairman, Chief Executive Officer and President

Analysts

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Zygo Corporation's Fiscal 2013 Third Quarter's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded May 9, 2013. I will now turn the conference over to Mr. John P. Jordan, Vice President, Chief Financial Officer and Treasurer of Zygo Corporation. Mr. Jordan, please go ahead.

John P. Jordan

Thank you, Jason. Good afternoon. I'm John Jordan, Vice President, Chief Financial Officer and Treasurer of Zygo Corporation. Thank you for joining us for the Zygo Corporation Third Quarter Fiscal 2013 Earnings Conference Call.

On the call with us today is Dr. Chris Koliopoulos, President and Chief Executive Officer of Zygo Corporation. The press release containing Zygo Corporation's third quarter results was published today at 4 p.m. It is also available on our website at www.zygo.com.

I will turn the call over to Dr. Koliopoulos to discuss the results of the quarter, but before doing so, I'd like to remind you that today's call may contain forward-looking statements, which may include statements about our financial position, business strategy, plans, anticipated growth rates, market acceptance, objectives of management for future operations and other statements that are not historic facts.

Forward-looking statements can be identified by the use of words of -- by use of words such as anticipate, believe, estimate, expect, intend, plans, strategy, project, should and other words of similar meaning in connection with the discussion of future operating or financial performance. These forward-looking statements represent our predictions and expectations as to future events, which we believe are reasonable and are based on reasonable assumptions.

However, numerous risks and uncertainties can cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information about some of these risks and uncertainties can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our report on Form 10-K for the fiscal year ended June 30, 2012, filed September 13, 2012. We assume no obligation to revise or update any forward-looking statements.

Now I would like to turn the call over to our President and Chief Executive Officer, Dr. Chris Koliopoulos. Chris?

Chris L. Koliopoulos

Thank you, John. Good afternoon, everyone, and thank you for joining our third quarter 2013 earnings conference call. We are pleased to report our third quarter and first 9 months of fiscal year 2013 results and discuss our business activities and some of the highlights of our quarter during the call today.

Third quarter revenue of $34.5 million was essentially the same as second quarter revenue and 10% lower than revenue for the third quarter of fiscal 2012. Optical Systems Division revenue decreased 7%, and Metrology Solutions Division revenue was 12% less than the prior year quarter.

The well-publicized continuing weakness in the semiconductor sector, combined with budgetary and government funding uncertainties, has had a dampening effect on bookings and business activity until recently. During the past 2 quarters, customers have deferred orders that we had anticipated and also continue to defer shipments of certain orders in backlog. Note, though, although customers have pushed out orders and shipments, there are no cancellations of orders.

With regard to revenue levels, we normally record a healthy percentage of metrology instrument bookings in the same quarter they are shipped. During the last 2 quarters, we have not seen the level of those orders that we typically expect.

That trough in revenues appears to be behind us, and Zygo's strong core fundamentals have sustained the company's profitability through this period. The foundation we've created of a strong portfolio of intellectual property, improved operational fundamentals and our broad product lines and customer base helped maintain margins at a reasonable level and deliver profitable results during a challenging period.

At the end of Q3, we received significant orders to bring bookings for the quarter to $50.2 million, with a book-to-bill ratio of 1.46:1. That represented an increase of 18% over the $42.8 million bookings in second quarter, which had also increased 15% over the first quarter. This improving trend in orders, with year-to-date bookings of $130 million, indicate a book-to-bill ratio of 1.19:1 for the year thus far.

The strong bookings built our backlog at March 31 to $89 million, and further order strength in this quarter is continuing to build backlog. The improving bookings are an indication of the traction we're getting with orders on several new product fronts. The combination of our deep capabilities in optics design and strengthened development of metrology systems introduces us to opportunities in a broad range of industries, and the increased number of higher-value quotations and bookings reflect that.

We have extended both our optical test interferometer and profiler lines across a broader range of capabilities and price points to open more markets and expand our footprint into broader industrial and optical production markets. These products are being very well received in the market and contributed to a near-record third quarter bookings and record backlog.

Additionally, several years of our internal research efforts have resulted in precision positioning sensing systems that, together with our advanced metrology systems, will support the development of 450-millimeter wafer tool components for OEM manufacturers in the early stages of development of this technology.

We have seen indications of early-stage capacity expansions in the back-end advanced semiconductor packaging. Cost of ownership benefits of Zygo's high throughput 3D technology positions us to win business in this fast-growing segment of the semiconductor sector with IDMs and OSAPs.

Our continuing focus on innovation and driving leading-edge technology will enable us to continue to expand our product offerings and further penetrate broader markets and help sustain bookings and revenue growth during the rest of fiscal 2013 and beyond.

Our expansion in Tucson, designed to provide the capacity for growth and development and manufacturing and reduce the cost of optics and mechanical components of electro-optics and optics assemblies, is also going well. The transition of all Zygo operations in Tucson to that renovated 110,000 square foot facility is anticipated to be complete early in our fiscal 2014.

As we mentioned last quarter, we have increased our footprint in Taiwan and have also added floorspace to the existing new operations there to address the market for 3D metrology and inspection of substrates in electronic packaging and to provide local customer service and support. We expect the expanded Taiwan operation to make a significant contribution to future bookings and revenue in these sectors.

The new Taiwan subsidiary will function as a sales, service and manufacturing facility. All in all, although revenues have been flat during these last 2 quarters, we are pleased at the improving bookings trend and anticipate that Q4 revenue will improve over Q3. We expect to finish the fiscal year on an improving trend and continue that trend as we enter fiscal 2014.

The anticipated recovery in the semiconductor sector and the expansion into advanced packaging, combined with the broad product offerings in our core markets, should provide support for an improved fiscal 2014.

And now I will call -- turn the call over to John to discuss the financial results in more detail. John?

John P. Jordan

Thank you, Chris, and again, good afternoon, everyone. As Chris reported, revenue in the quarter was $34.5 million, flat with second quarter and about 10% less than revenue of $38.5 million in the same quarter last year.

Similar to the previous quarter, although bookings were very healthy in the quarter and continued at a healthy rate into this quarter, pushouts in timing of the shipments in backlog caused shipments and revenue in the quarter to be lower.

Metrology revenue was 62% of total revenue in the quarter, and optics revenue was 38%, similar to the third quarter of last fiscal year with metrology at 63% of the total revenue and optics at 37% in that quarter.

Revenue for the first 9 months of fiscal 2013 was $109.4 million versus $122.5 million in the first months of -- first 9 months of fiscal 2012, an 11% decrease.

Metrology revenue for the first 9 months of fiscal 2013 represented 63% of total revenue, and optics revenue was 37%, compared to the prior year period with metrology at 65% and optics at 37% of the total revenue in the first 9 months of fiscal 2012.

Operating income in the quarter was $900,000, an operating margin of 2.6%, versus $6.7 million or 17.5% of revenues in last year's Q3 and $2.2 million or 6.4% of revenue in the prior quarter. Decreased revenue and the resulting volume effect on cost absorption in gross margin, together with somewhat higher operating costs, primarily R&D and engineering, caused the operating margin decrease.

Operating income for the first 9 months of fiscal 2013 was $7.5 million, an operating margin of 6.9% versus $22.3 million or 18.2% of revenue of last year's first 9 months. Decreased revenue and gross margin and higher R&D and engineering costs were the main drivers of the decrease.

Net income for the third quarter was $1.4 million or $0.07 per diluted share compared to $5.4 million or $0.29 per diluted share for the third quarter of fiscal 2012. Net income for the first 9 months of fiscal 2013 was $5.3 million or $0.28 per diluted share, compared to net income of $18.1 million or $0.97 per diluted share in the first 9 months of fiscal 2012.

Gross margin for the quarter was 42 -- 44.2%, 10 basis points better than the prior quarter on a lower revenue base and 6.3 percentage points lower than the prior year Q3 margin. The lower margin was due to the effect of a change in product mix in both segments and lower overhead absorption from the lower revenue.

Operating expenses in the quarter were $14.4 million or 41.6% of revenue, versus $12.7 million and 33.1% of revenue in Q3 of last year and $13.1 million or 37.7% of revenue in the previous quarter. The increases from the prior year quarter were primarily due to the additional R&D costs. Increase from the prior quarter was due to the increased R&D costs and increased personnel costs, typical at the beginning of the new calendar year.

As Chris discussed, bookings for the quarter of $50.2 million were 18% higher than last quarter, which was 15% higher than Q1. At the end of the quarter, the company's backlog was $88.9 million, increased from $73.2 million at the end of the second quarter and from $76.8 million at March 31, 2012.

We define backlog as those noncancelable orders received that are scheduled for delivery within 12 months. From time to time, we receive orders with delivery dates beyond 12 months. The value of deliveries scheduled beyond 12 months is not included in backlog.

Cash on hand at March 31, 2013, increased $2.6 million to $79.9 million from December 31 and was $4.2 million less than at June 30, 2012. Cash generated from operations for the quarter was $3.8 million and was $5.4 million for the first 9 months.

Significant items of cash use during the 9 months were CapEx spending of $4.3 million, primarily to improve optics manufacturing and coating capabilities; purchase of the minority interest in our German joint venture for $3.2 million; and payment of earned dividends to our joint venture partners of $1.7 million.

Accounts receivable at March 31 remained flat with the June 30, 2012 balance and was $8.1 million higher than the March 31, 2012 balance, resulting in days sales outstanding at March 31 of 82. The balance was somewhat higher than would be indicated by the low revenue of the quarter due to significant billings on long-term contracts that were collected on April 1. If the receivable balance were adjusted for those collections, DSO would be 66 days compared to 63 days at June 30 and 53 days at March 31, 2012.

Inventories of $30.7 million increased $2.9 million from the beginning of the fiscal year, primarily due to early purchases and build required for shipment scheduled for the fourth quarter. The tax provision in the quarter was a benefit of $890,000 as a result of the current quarter effect and the catch-up from reinstatement of the U.S. federal R&D tax credit in January, retroactive to 2012.

That concludes the prepared portion of our remarks. Operator, you may now solicit questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Robert Kirkpatrick from Cardinal Cap.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

Could you please talk a little bit about what makes you believe that we are at a trough and kind of expand upon some of your earlier remarks?

Chris L. Koliopoulos

Well, we believe that we have seen the effects of the lower bookings rates that we've seen in the early -- the late part of our last fiscal year and early part of this fiscal year, which affected revenue in the last 2 quarters. We also have noted that during those last 2 quarters, our -- what we call our booked and shipped products that we're able to ship certain products within -- of our instruments within 2 to 4 weeks of delivery of receipt of order, that those represent a certain amount of revenue within a given quarter. Because of the fiscal cliff, sequestration, uncertainties in the marketplace, we've seen a pause during those -- that time period from our customer base, our typical customer base that would normally place orders that we would then be able to ship and have net increases in our revenue lines. So we're seeing changes in those booking rates, and that's why we believe, along with our strong bookings for the quarter, which represented a high mark for Zygo through all its 43 years of quarterly bookings, that, that bodes well for the future.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

And while I understand how bookings flow through to revenues for the most part, the optimism that you're expressing extends into the future bookings as well. And so I believe you've mentioned that you have continued to see further strength continuing into this quarter so far. Is that correct?

Chris L. Koliopoulos

Yes, we have seen increasing backlog so far. But within a quarter, you have to understand that the timing of shipments versus the bookings may skew the absolute value of that backlog a little bit as we build up inventory to ship. And I don't know if you can make any claims of that. I also want to note that the bookings rate of this last quarter may not be indicative of future high bookings rates, as we've stated is that what we're seeing in some of these early orders for 450-millimeter is based on early development stage of 450-millimeter tool sets. And we believe that capacity, then, purchases will be then happening at a future time and not a follow-on from this period. So we've indicated that these increased bookings in the semiconductor sector are not capacity driven but are really technology driven.

Robert Benjamin Kirkpatrick - Cardinal Capital Management, L.L.C.

And in past years -- or past cycles, how long has the cycle been between the development sale and the capacity sale?

Chris L. Koliopoulos

Well, I don't know if I can really answer that and be applicable to this 450-millimeter tool set. The industry is rapidly in need of cost reductions in the fabrication of next-generation line nodes. So the ever drive of Moore's law is pushing the industry to go to 450-millimeter as well as invest in EUV lithography.

Operator

[Operator Instructions] There appear to be no further questions at this time. So I'd like to turn the call back over to you, Mr. Jordan.

John P. Jordan

Okay, Jason. Thank you very much. This was a tough quarter, but it appears that no one has any further questions. We appreciate your participation in the call, and we look forward to discussing our next quarterly earnings report. Thank you, all.

Chris L. Koliopoulos

Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. And we thank you for your participation and ask that you please disconnect your line.

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