Semitool Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

Nov. 5.09 | About: Semitool Inc. (SMTL)

Semitool Inc. (SMTL) F4Q09 (Qtr End 09/30/09) Earnings Call October 5, 2009 5:00 PM ET

Executives

Geoff High - IR, Pfeiffer High

Ray Thompson - Chairman and CEO

Larry Viano - VP and CFO

Larry Murphy - President and COO

Analysts

Edwin Mok - Needham & Company

Matthew Petkun - D. A. Davidson & Company

Graham Tanaka - Tanaka Capital Management

Kelly Anderson - Sidoti & Company

Operator

At this time, I would like to welcome everyone to the fourth quarter Earnings Call. (Operator instructions) Thank you. I would now like to turn the call over to Mr. Geoff High of Pfeiffer High Investor Relations. Sir, you may begin your conference.

Geoff High

Good afternoon, and welcome to Semitool's fourth 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 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 SEC.

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 the 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 the 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. Ray?

Ray Thompson

Thank you, Geoff. Back in the first quarter when the capital equipment market was essentially in frozen, we told you about the steps we were taking to increase Semitool's market share in Asia and capture process of record opportunities with the world's leading device manufactures.

Our $72 million in fourth quarter bookings the third best quarterly performance in company history validates this strategic effort as well as the strength of our product offerings.

Larry Murphy will provide you with some details on our fourth quarter achievements. But first, Larry Viano will review our financial performance. Larry?

Larry Viano

Thanks, Ray. I will start with a review of our revenue composition for fiscal 2009. Approximately 80% of tool revenue was generated by Raider sale, while the balance came from batch tools. By region 44% of the sales came out of Asia, 30% came out of Europe and 26% came from North America.

Looking at expenses; fourth quarter SG&A was $10.6 million down 44% from $19 million in the fourth quarter last year. As a percentage of revenue SG&A was 22% compared with 32% than last years fourth quarter. Fourth quarter R&D expenses were $5.5 million a decline of 36% versus $8.6 million in the same quarter last year. As a percentage of revenue R&D expense are 12% versus 14% in last years fourth quarter.

Turning to our balance sheet. We closed the year with $44.6 million in cash, our working capital is a $125 million. Receivables are $44.3 million up from $28.2 million at the end of the third quarter, while inventories were at $65.8 million down from $74 million at the end of Q3. Our tax rate for the year was 38% before discreet tax items.

With respect to guidance, we anticipate first quarter revenue will be in the range of 47 to $50 million and we are expecting first quarter earnings per share of between $0.07 and $0.09. First quarter shipments are expected to range from $47 million to $50 million. We are currently expecting revenue for fiscal 2010 between $190 million and $210 million.

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

Larry Murphy

Thanks, Larry. Approximately 90% of our fourth quarter tool bookings came as follow-on orders. As many of our customers were addressing new (inaudible) that have been built around our Raider platform.

Demand was especially strong from the Packaging segment, which generated bookings of 19 tools during the quarter including an eight tool order from a single customer. Advance packaging applications associated with these orders include plain, resist strip and metal etch.

Semitool strength and copper damascene also fueled booking activity, including a multi tool follow-on order from a major memory device manufacture in Asia. Our progress in emerging solar markets resulted in an order for our first high volume production tool designed specifically for the solar industry.

The fourth quarter brought a sharp rebound in demand for our batch tools. In fact Q4 order volume from this product line is nearly double the level achieved in the prior three quarters combined. The few orders we established during fiscal 2009 has significantly or later a potential revenue ceiling. With the broad spectrum on new business opportunities and our strong balance sheet, we are very optimistic about our future business prospects.

We are now ready to take questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Edwin Mok, Needham & Company.

Edwin Mok - Needham & Company

So let me first start with the packaging side, our (inaudible) is very strong. Can I ask you if any of that is related to TSP or is it more on expanding existing packaging technology like bumping and stuff like that?

Larry Murphy

Edwin, yeah that's -- there were some related TSD with a by far of the majority of it was advanced packaging, bumping redistribution layers, things like that, that free packaging as well. But a little bit of TSD, the most was data and the packaging area.

Edwin Mok - Needham & Company

Okay, great. That was very helpful. Do you expect the strength to continue in terms of your bookings point of view or do you think it is more a one quarter event or how do you go to…

Larry Murphy

Well, you know those things have to play out, but the market, the uptick in the market we saw last quarter you know the general trend is still there, there is still a lot of activity out there. Most of our activity as you know that was in Asia last quarter and we expect that to continue. We are somewhat granular in our nature so depends how (inaudible) get the order December 31 or January 1 the quarter falls in, but we feel pretty optimistic about 2010 and going forward from there.

Edwin Mok - Needham & Company

Great. Good color there and just quickly on TSD. I understand you guys have a partnership applied on this plating equipment and practically it’s hard to sell module meaning you know they try to sell a whole line of product. Are you guys benefiting from that strategy, because I know they have done that before and they consider doing that for TSD market?

Larry Murphy

Not so much in that strategy, but we certainly benefit from that relationship. We have a great technology partnership from them on TSD as well as copper damascene. And really understand the integration everything from barrier seed in the PVD space to our plating follow-on whether CMP has definitely been advantages in the market space. So they're going to [financially] outstanding partner we expect that continuing going forward. So we haven’t done any packaging if you will, for the product lines like you said that we said we have sold and services are as separately somewhat (inaudible) as is done.

Edwin Mok - Needham & Company

Great, that was helpful and then just two quick questions for Larry Viano. One is gross margins will (inaudible) drop a little bit sequentially. Can you explain why?

Larry Viano

Yeah. It was related to a sales mix and also we upped our reserves a little bit higher this quarter than we have for inventories?

Edwin Mok - Needham & Company

I think so increase reserves as well there. Great. And then just quickly on operating expense as your business has improved obviously it looks like guidance for next year was just even a high revenue level right from even in current quarter level. How do we look at operating expense? Do we expect some temporary expense to come back and if so how much do we think OpEx could rise to?

Larry Viano

Well. It's going to back some, but we expect it that well net margins should approach 10%.

Edwin Mok - Needham & Company

Okay. I think net margin, great. And then sorry, you said just on the gross margin when you say mix is it partially due to the fact that you have higher batch orders I guess and I guess shipment delayed to that this quarters [at all]?

Larry Viano

There is a little bit of that but it's just depending upon the type of tools, wafer level packaging, there is usually a little bit lower margin there, then there is on [undamaging] and clean.

Edwin Mok - Needham & Company

Great, I have two more sorry if you will. First one is on spares, do we see a recovery in spare business in this past quarter and how do we look at that?

Larry Viano

Yeah. A little bit, but not back to normal levels.

Edwin Mok - Needham & Company

Great. That was helpful. And then finally on solar. I understand that’s the batch wafer texturing tool. Do we expect that to ship or do we expect to see revenue in the coming quarter or how do you look at that and is there any kind of color on the follow-on orders maybe?

Larry Viano

That one actually isn’t a batch texturing tool Edwin, that’s a as poor [ph] sorting tool targeted for high volume manufacturing that that will probably, it wont revenue until the second half of 2010.

Edwin Mok - Needham & Company

And then can I ask a follow-up regarding batch texturing tool, how is that progressing?

Larry Viano

Its progressing fairly well, we are doing quite a bit of demo and development work in that area. We think we have a potential offering that we can definitely generate revenue in this fiscal-year.

Edwin Mok - Needham & Company

I see so its target for 2010, then?

Larry Viano

Yes.

Operator

Your next question comes from the line of Matt Petkun with D. A. Davidson & Company

Matthew Petkun - D. A. Davidson & Company

Little bit more, Larry Viano just on the gross margin. So you up the reserves a little bit this quarter. Are there certain elements of your inventories that you’re more concerned about or are you seeing increased pricing pressure?

Larry Viano

Well, Matt. When you go through a period of downturn, you [UCs] goes down and the computer that spits out the numbers just naturally spits out higher numbers because fewer parts are being used. So we are going to take that look it over and make some judgment on it, but we did up reserves more in this quarter that we normally do.

Matthew Petkun - D. A. Davidson & Company

Okay. And could you give us a little bit of a sense of what you are looking for from margin next quarter?

Larry Viano

We expect margins to go up at least a couple of percentage points next quarter.

Matthew Petkun - D. A. Davidson & Company

Okay. And…

Larry Viano

33.

Matthew Petkun - D. A. Davidson & Company

I ask you this all the time and I think it’s a good problem to have, you guys are seeing more follow-on orders, you are getting involved with a lot more customers and you are really competing head-to-head with some of the big guys out there. What do you see as your long-term target gross margin it’s historically been 50%. Is that still reasonable or is there something we’ve seen in the packaging market and just the market as a whole that says that you need to be a little bit lower.

Larry Murphy

So, we think that’s still reasonable, as what affects that solar battery may have on that we don’t really know at this point. But we don’t think that they will effect a much downward pressure on margin. So, we are still expecting to have 50 or 50 plus margins.

Matthew Petkun - D. A. Davidson & Company

Okay. And then you’d mentioned so on battery. I am assuming the guidance you gave for fiscal ‘10 is trying not to assume anything for those two businesses?

Larry Murphy

There is a little but not a lot.

Matthew Petkun - D. A. Davidson & Company

Yeah, other than the existing orders in hand.

Larry Murphy

Yes, yes.

Matthew Petkun - D. A. Davidson & Company

That leads me to my final question. For you again Viano. I don’t know anybody who is giving guidance for next year none of your customers, none of your competitors, yes you have a September ending year, are you crazy given guidance in this environment and what do you see that others don’t?

Larry Viano

Well, you know, Matthew this is a fifth time I benefit the six and I think I have been right we’re in, wrong too with the last year being the biggest disaster, because of the economics. But we feel we’ve got decent insight into where we think we’re going to be for this year.

Matthew Petkun - D. A. Davidson & Company

Okay. And obviously there is a desire although none of us have done it yet to annualize your most recent quarter’s revenues or bookings and your guidance doesn’t reflect that. So would you consider this guidance your best guess, but there is a reason to believe that you could exceed that if the market conditions were stronger or I guess maybe what I need to know is …

Larry Viano

Definitely, is where we see it now. If there is economic disaster again, if you go down, but we feel reasonably good about our projections at this point.

Matthew Petkun - D. A. Davidson & Company

Okay. Great.

Larry Murphy

Some of the upsides should be how quick TSD accelerates forward. What several customers on advanced packaging side expected to accelerate some of their programs, so there is definitely some upside but you know we shared what we see, fundamentally.

Matthew Petkun - D. A. Davidson & Company

Have you done anything recently on TSD in like with Panasonic, they are ramping up some staff?

Larry Murphy

I really can't speak specifically about our customers, but I we'd say we were pretty successful in Asia up to this point.

Operator

Your next question comes from the line of Graham Tanaka with Tanaka Capital Management.

Graham Tanaka - Tanaka Capital Management

Just a little more on the guidance for next year, what are you using for kind of macro assumptions for the year and for, just sort of industry shipments. I am just trying to figure out how much of this is as really Semitool specific since we do have a pretty good feel for some of these product initiatives and how much of it is going to be benefiting from whatever percent rise you can [still get] in CapEx?

Larry Viano

Well Graham, we really go through a forecast tool-by-tool customer-by-customer and then we just still that down and that's how we come up to our forecast. So it’s not really based on any other metrics. So this is what we see out there with our customers.

Graham Tanaka - Tanaka Capital Management

So then I was just curious what your view is on what semi cap spending will be during next calendar year (inaudible) from ground level?

Larry Viano

Well, we think in certain areas its going to stay fairly strong, TSD wafer level packaging and in the…

Larry Murphy

The markets we’re in Graham if you look at the -- we feel really the next three years is a compounded annual growth rates of over 30%, in all three respect the markets you know we see that type of expectation in 2010 over 2009, obviously it has play out but so we have more visibility in our segment not unnecessary that the entire semi cap spending but the places we partake looks pretty good over the next couple of years.

Graham Tanaka - Tanaka Capital Management

In terms of incremental margins, I'm just trying to get a feel for what your margins did and it looks like your incremental margins in the June to the September quarter were lower than the actual reported gross margins, did I get that right? If you had $16 million increase in revenue sequentially.

Larry Murphy

I said gross margins did decline and that's because of some product mix and because of increasing the amount that we put into reserves.

Graham Tanaka - Tanaka Capital Management

The increase in reserves is a one-time yearend thing.

Larry Murphy

Well. In this industry there is no one-time thing. So you got ups and downs. And, when you go through a downturn, reserves are going to go up.

Graham Tanaka - Tanaka Capital Management

How much roughly in dollars is it. Are we tracking three or four million?

Larry Murphy

No. It wasn't that much, less than that.

Graham Tanaka - Tanaka Capital Management

So then by my just rough calculation you had about a 30% gross margin on the incremental sales maybe one or two million might be from reserves, you should had another couple of million more gross profits it's just less than 30. Is that about right, if its rest of that was mix?

Larry Viano

Yes, like I say we expect margins to go up as volume goes up. A fair amount of it too is you just under applied over it. It just becomes a period expense and gets expensed out.

Operator

You next question comes from the line of Kelly Anderson with Sidoti & Company.

Kelly Anderson - Sidoti & Company

I am going to start with Larry Viano here. Could you give us the cash flow from operations and CapEx for the quarter?

Larry Viano

Yes. Let's see cash flow for operating activity is 1.3 million, CapEx was 42,000.

Kelly Anderson - Sidoti & Company

Then in terms of the balance sheet, I’m glad to see that inventory levels are edging down still, if the sales volumes kind of remain at this run rate would it fair to assume that receivables are going to remain at these sort of elevated level?

Larry Viano

Receivables are going to spike up and it just depends up on what direction revenues go but the way we project they should level off as we go forward.

Kelly Anderson - Sidoti & Company

In terms of the guidance for 2010, it looks pretty consistent with the projected end market growth rate that you gave at your Analyst Day, but not entirely consistent with the bookings number that you reported for the quarter. I think what I have seen with a lot of the backend guys is they’re sort of taking a very conservative approach because they are worried that may be the sharp spike in advanced packaging, spending is going to slowdown. Is it fair to say that that’s sorts of baked into your assumption for 2010?

Larry Viano

Well, the final year account probably the crystal ball gets but, this is where we see at this point and like I say things could change as we go forward.

Kelly Anderson - Sidoti & Company

Then shifting over to you Larry Murphy, if I may, obviously you guys have done a tremendous job growing your share in Asia. You have always been very strong in the memory market but not maybe so much in the foundry space. Is there any way you could sort of update us on how that share gain kind of breaks out among the different types of manufacturers.

Larry Murphy

I think your assessment is pretty accurate there. We’ve be making inroads in the foundry space in Asia the fifth place there we had very little business with two or three year ago. It continues to become more important on copper damascene specifically we made some inroads there, actually as well as in the packaging side. So the foundries that are doing the packaging work, we are considerable and a very important customer of ours. They all don’t do packaging work but once they do we are well penetrated in. As you know, one of our biggest historical customers is now a foundry. So that certainly increased our market share tremendously in that foundry space. So that’s obviously becomes more, more important market for us. But we are making good progress not just in Asia.

Kelly Anderson - Sidoti & Company

Okay, great. And do you guys have any updates on how your progress has been in the LAD market?

Larry Murphy

The LAD market is a place we’ve been actually partaking in for a few years now. Our progress is I would say about the same as it has been, we’ve penetrated three of the top five LAD manufacturers in our surface prep applications and we are looking from other applications there as well.

Kelly Anderson - Sidoti & Company

Okay, has there been any change in the status of the front-end clean market?

Larry Murphy

No change in the status there, we have several engagements with customers around the world, development program, JDPs, but nothing here to report.

Operator

(Operator Instructions). There are no further questions at this time, do you have any closing remarks.

Larry Murphy

I want to thank you all for joining our conference call and we are still very excited about the turnaround in the marketplace especially the growth opportunities that match up particular to our products and especially with the direction of future technologies such as solar and the packaging area. We believe that's a great time to be in this business still. Stay tuned.

Geoff High

That's the end of our comments.

Operator

Thank you. And now with closing remarks, we’re going to Ray.

Ray Thompson

We're all finished. Thank you very much.

Operator

This concludes today's conference. You may now disconnect.

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