Cascade Microtech's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: Cascade Microtech, (CSCD)

Cascade Microtech, Inc. (NASDAQ:CSCD)

Q4 2013 Results Earnings Call

February 5, 2014 5:00 PM ET

Executives

Jeff Killian - Chief Financial Officer

Michael Burger - President and CEO

Analysts

Evan Richert - Sidoti and Company

Dennis Van Zelfden - Brazos Research

Bob Lynch - Punch & Associates Investment Management

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Cascade Microtech Inc. Earnings Conference Call. My name is Chantelle, and I will be your operator for today’s call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jeff Killian. Please proceed, sir.

Jeff Killian

Thank you. Welcome everyone to Cascade Microtech’s fourth quarter 2013 earnings release conference call. We are pleased you could join us today.

Before we begin, you should all be aware that we shall be commenting today on our business outlook and we will make other forward-looking statements based on our current expectations.

Words such as expect, anticipate, intends, plans, believes, sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements.

All of our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. I’d refer you to the press release we issued earlier today for description of factors that could cause actual results to differ materially from those forecasts.

The forward-looking statements we make today speak only as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

Information provided in the materials included adjusted EBITDA which is a non-GAAP financial measure. Please refer to our non-GAAP financial measures which are included in our press release that was made available earlier today. You can find the reconciliation to this measure in our press release or online at our website.

With me on the call today is our President and Chief Executive Officer, Michael Burger. This call will begin with prepared remarks and then we’ll open the call for your questions.

With that said, I will now turn the call over to Michael Burger, who will provide opening remarks.

Michael Burger

Thanks Jeff. Thank you for joining our call. Before we review our fourth quarter results, let me update you on several key points related to our business in 2013. We set a record for annual revenue in 2013, which totaled $120 million and represents a 6% increase over 2012. As a result, we outperformed the semiconductor capital equipment market, which contracted by 13% during the same period according semi.

Our revenue was accelerated by $5 million from acquisitions, which were closed in the second half of 2013. Despite market conditions, our systems business grew 7% year-on-year, setting a new record, totaling $79.2 million.

In 2013, our new product introductions included Smart 150, CM300 and APS200TESLA systems. These new products generated $7 million of revenue in 2013, of which $3 million were reported in the fourth quarter.

This new product adoption demonstrates our alignment with our customer’s roadmap. We outperformed this market in part because of our focus on the front-end engineering segment, which support new product and new process development.

Our systems product portfolio serves a broad market from entry level manual Probes to highly advanced applications. We continue to enjoy a relatively large percentage of this market segment.

Our systems offering were enhanced through the addition of the Reliability Test Products which acquired from Aetrium in August. Since the acquisition our quarterly revenue has surpassed the historical levels of 2011 and 2012. These products accelerate our systems strategy of growth from integrated measurement solutions.

With the acquisition of ATT Systems on October 1st, we have executed on a critical component of our strategy. ATT Systems adds the new product portfolio to our system segment offering, while providing long-term benefits to our organic products with the integration of ATT Thermal Systems into our existing probing systems.

Together, RTP and ATT Systems generated $5 million of revenue in 2013 for Cascade Microtech. Due to the timing of the acquisitions $4.9 million of the $5 million was generated in our fourth quarter. ATT and RTP Systems performed very well posting strong results for our traditionally strong quarter. Both businesses were accretive in the quarter and integration for both companies is on schedule.

Combining Cascade Microtech customers, channels, products and engineering resources with these strategic acquisitions, positions the company for ongoing success. These new products will be integrated into our Systems segment and will not be reported on separately going forward.

Turning to the Probes segment, we set an annual record of $40.8 million. This represents a 6% growth year-on-year, driven primarily by our production probes business that grew 13%, while our engineering probes revenue declined 4% for the same period.

Both our engineering and production probe product lines are closely aligned with the wireless consumer demand. With this close alignment, certain customers will deploy engineering probes initially and move to our production probes as the products gain traction in our marketplace.

Our Probes are supporting the adoption of LTE technologies and other high-speed communication standards such as 802.11ac, which are driving incremental test at the wafer levels.

In 2013, we continued to achieve breakthroughs with our technology and industry partners. As evidenced through our joint development efforts with imec where through the use of our new CM300 probe station together with our Rocking Beam Interposer technology, we’ve enabled the probing of 25 microns diameter micro-bumps. This breakthrough is clearly paving the way for successful probing of 3-D stacked integrated circuits.

As a leader in our field in 2013, we held our second annual users conference. This event was sponsored in incorporation with Keysight, Celadon, Keithley, Maury Microwave and Gore. This conference represents our continued effort to expand the discussions between our customers and Cascade.

Turning to our financials, on a consolidated basis, we posted a positive book-to-bill ratio for 2013 and we ended the year with a record quarterly booking number of $38.9 million, which represents a quarterly book-to-bill of 1.14 to 1.

All product lines posted a positive book-to-bill for the quarter, which reflects strength of our product portfolios together with our position in the market. Based on our progress, we’ve enhanced our success model with a 50% gross margin target and a 20% adjusted EBITDAS target.

Comparing our 2013 financial results to our success model, we improved revenue and gross margins as we executed on our new product introductions and closed strategic acquisitions. Our annual gross margins improved to 46%, up from 44% in 2012. Our annual adjusted EBITDAS totaled $15.8 million or 13% of revenue.

On a quarterly basis, adjusting for acquisition-related charges, our gross margins were 46.9% and our adjusted EBITDAS achieved 15.2% of revenue or $5.2 million.

I will ask Jeff to provide further details of our financial results, which includes the release of the tax valuation allowance that we’ve discussed in past conference calls.

Jeff Killian

Thanks, Michael. I'll begin with a review of the income statement for the fourth quarter ended December 31, 2013. As a brief reminder, Cascade Microtech reports revenue and gross margins in two segments. Our Systems segment includes stations, our largest product line as well as our RTP and ATT Systems products. The other segment is Probes, which includes two product lines, engineering probes and production probes.

Total revenue for the fourth quarter of 2013 was $34 million, an increase of 20.7% compared to $28.2 million for the third quarter of 2013, and an increase of 12.1% compared to $30.4 million in the fourth quarter of 2012. We achieve the low end of our revenue guidance for the fourth quarter, which was $34 million to $38 million.

Revenue for our Systems segment for the fourth quarter of 2013 totaled a record of $24.2 million, an increase of 38.2% compared to $17.5 million for the third quarter 2013, and an increase of 16.5% compared to the previous record of $20.7 million for the fourth quarter of 2012. The fourth quarter of 2013 includes revenue of $4.9 million related to the recent acquisitions of RTP and ATT Systems.

Revenue for our Probe segment for the fourth quarter of ‘13 totaled $9.9 million, a decrease of 7.9% compared to the record revenue of $10.7 million for the third quarter of 2013, but an increase year-on-year of 2.4% compared to $9.6 million for the fourth quarter of 2012.

Revenues from Engineering Probe products for the fourth quarter 2013 totaled $4.3 million compared to $4.2 million for the third quarter of 2013, and $4.3 million for the fourth quarter of 2012. Revenues from Production Probes products in the fourth quarter of 2013 totaled $5.6 million, a seasonal decrease of 13.5% compared to $6.5 million in the third quarter of 2013, and increase year-on-year of 6.5% when compared to $5.3 million for the fourth quarter of 2012.

Bookings in the fourth quarter did a record of $38.9 million, which resulted in a book-to-bill ratio for the fourth quarter of 1.14 to 1 and positions us well going into 2014. Our overall gross margin for the fourth quarter of 2013 was 45.5% compared to 47.6% in the third quarter of 2013 and 43% in the fourth quarter of 2012.

Gross margins in the fourth quarter of 2013 was negatively impacted by inventory and other charges related to recent acquisitions of approximately $0.5 million or 1.4% of total revenue and by the mix of our system segment compared to the third quarter of 2013. Before the acquisition-related charges, gross margins would have been 46.9%.

Gross margins for our system segment in the fourth quarter of 2013 was 42.3% compared to 42.7% in the third quarter of ‘13, and 38.9% in the fourth quarter of 2012. As previously mentioned, gross margin in the fourth quarter of ‘13 was negatively impacted by inventory charges related to recent acquisitions of approximately $0.5 million or 2% of system’s revenue. Before the acquisition-related charges, gross margins would have been 44.3%, up 5.4% from the same quarter in 2012.

Gross margin for our probe segment in the fourth quarter of 2013 was 53.3%, compared to 55.6% in the third quarter of 2013 and 51.9% in the fourth quarter of 2012. Margins in the fourth quarter were negatively impacted by overall decrease in sales volume when compared to the third quarter of 2013. Going forward, we anticipate approximately $0.2 million of gross margin impact due to acquisition-related charges as a result of stepped up in inventory that will be recognized as the products are sold.

Total operating expense for the fourth quarter was $13.3 million which is an increase of $1.4 million compared to the third quarter of 2013 and increase of $2.5 million compared to the fourth quarter of 2012. Operating expenses in the fourth quarter were negatively impacted by acquisition and restructuring cost of $0.4 million. The fourth quarter was also impacted by $1.8 million in operating expenses related to RTP and ATT system acquisition which includes amortization of purchase intangibles of $0.6 million.

Income from operations in the fourth quarter was $2.2 million, an increase of $0.6 million compared to $1.6 million in the third quarter of 2013 and a decrease of $0.1 million compared to $2.3 million in the fourth quarter of 2012. The fourth quarter included total acquisition related and restructuring charges of $0.9 million and incremental amortization expenses related to acquisition of $0.6 million.

Significant ongoing non-cash expenses in the fourth quarter are as follows, depreciation expense was $874,000, amortization expense was $787,000 and stock-based compensation expense was $399,000. These non-cash items totaled $2.1 million in the fourth quarter of 2013 compared to $1.5 million in both the third quarter of 2013 and the fourth quarter of 2012.

Income tax expense for the fourth quarter was a benefit of $6.6 million. This benefit was primarily the result of releasing the valuation allowance on certain deferred tax assets. Going forward due to the release of the valuation allowance, our estimated tax rate on a consolidated basis will be in the range of 33% to 35% and our deferred tax asset should cover our US taxes on a cash basis through portion of the half of 2014.

Net income for the fourth quarter of 2013 was $8.8 million or $0.53 per diluted share, compared to $1.7 million or $0.11 per diluted share in the third quarter of 2013 and $1.7 million or $0.12 per diluted share in the fourth quarter of 2012.

Our earnings guidance for the fourth quarter was $0.17 to $0.21 before the effects of acquisition related cost, restructuring and tangible amortization from ATT Systems acquisition, taxes and foreign exchange. As previously noted, the fourth quarter 2013 includes total restructuring and acquisition related expenses of $0.9 million or $0.05 per share, intangible amortization related to ATT Systems of $0.6 million or $0.03 per share and a tax benefit of $6.6 million or $0.40 per share. After adjusting our GAAP EPS for these items, we achieved $0.21 per share, which meets the upper end of our earnings guidance.

Adjusted EBITDA which we defined as operating income plus depreciation, amortization, stock-based compensation, and certain expenses, such as restructuring and acquisition related costs, which we do not believe are representative of our ongoing operating performance was $5.2 million for the fourth quarter of 2013 compared to $3.7 million for the third quarter of 2013 and $3.8 million for the fourth quarter of 2012.

We are very pleased overall with the improved financial performance of the fourth quarter of 2013, compared to both the prior quarter of 2013 and the same period of the prior year.

Turning to the balance sheet, cash, restricted cash, and investments at December 31, 2013 totaled $22.5 million, a decrease of $9.7 million compared to $32.2 million at September 30, 2013. The fourth quarter includes $11.3 million used for the acquisition of ATT Systems offset partially by cash flows generated by operating activities of $1.9 million. Fixed asset additions were $0.6 million in the fourth quarter of 2013.

Let me return the call to Michael for our financial outlook and remaining prepared comments.

Michael Burger

Thanks, Jeff. In summary, Cascade Microtech posted a strong year and a strong fourth quarter for 2013, which includes record revenues and bookings. Adjusted earnings met the upper end of guidance. We successfully promoted our new products, which generated significant revenue. Through our technology and industry partnerships, we continue to achieve technology breakthroughs, which continue to support our customers’ future requirements. RTP and ATT System acquisitions accelerate our product roadmap, expands our served available market, and were accretive in the fourth quarter. I am very pleased with our progress as well as our prospects for 2014 and beyond.

Cascade Microtech is the clear leader in delivering on-wafer probing solutions to the engineering communities. We have technologies, product roadmaps, and global support infrastructure to deliver what customers need and value. With nearly 100 field and service professionals located globally, we are positioned to support new product installations, as well as our installed base of over 8,000 systems.

We believe our focus on the engineering side of the Systems market, together with select forays into the production market, has demonstrated our business will grow faster than the industry’s expectations.

Based upon industry seasonality and assuming consistent foreign currency rates, we are projecting revenue for the first quarter of 2014 to be in the range of $31 million to $34 million with an adjusted EBITDAs in the range of $3 million to $5 million. We continue to be very excited about Cascade Microtech’s future as we march towards our 20% adjusted EBITDAS success model.

Before I close, I want to update you on an upcoming change in our Board of Directors. After 22 years of service to Cascade Microtech, Dr. Paul Carlson has announced his plans to retire from our Board at the upcoming shareholders' meeting currently scheduled for May.

Dr. Carlson has been instrumental in supporting our progress over our company's history. In addition to his Board responsibilities, he has stepped into Senior Leadership roles when needed as he had been Cascade's interim President and Chief Executive Officer in the past. We want to sincerely thank Dr. Carlson, for all his contributions to our organization as he will be missed. We wish the best to him. Thank you, Paul.

Once again, thank you for attending our conference call. And I'll now return the call to our operator, to field your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Evan Richert of Sidoti and Company. Please proceed.

Evan Richert - Sidoti and Company

Hey, guys. Congrats on the quarter.

Michael Burger

Thanks, Evan.

Jeff Killian

Thanks, Evan.

Evan Richert - Sidoti and Company

Yeah, you talked in the past about some issues in the sales cycle, I was wondering if you can provide a little color on that?

Michael Burger

Yeah, when business slowed down even though many of our customers continued to invest in R&D and R&D capital, it kind of slows the capital approval cycle. We're actually seeing that go away. It seems that we've got some momentum and so we think that the sales cycle actually right now seems to be relatively robust and therefore shorter than it has been traditionally.

And that's kind of an indication for us. We very rarely have a -- have a product that a customer needs that doesn't get purchased. It tends to get pushed out because they can't get the capital signed off, but that's less of an issue today.

Evan Richert - Sidoti and Company

Sure. And then as far as gross margins, I mean obviously products, you know the way products are broken down obviously drives that quarter-to-quarter. I was just wondering if you could touch more generally though on the pricing you're seeing across both product segments, any trends there?

Michael Burger

Nothing different than the last quarter. We have seen -- you know, we introduced the smart 150 family which is a low end manual prober. And we did that frankly to kind of address the lower end of the systems business. The adoption of that product has been tremendous.

And I think so -- I think it's well-positioned for us and so arguably I think there is still institutions and research groups and primarily universities, and even high schools in some cases that are reacting positively to this product. So I think we fulfill the niche on the low end of the pricing spectrum.

On the ultra high end like the CM300, we have actually a lot of new feature function benefit over what we had traditional offered and pricing has not been an issue in that realm. So on a system side, we're feeling pretty good about it.

As we continue to grow our production probes business, there's always pressure on the production probes pricing but we're in a unique position and that we've got some technology to differentiate that. So we've been able to kind of hold the relatively steady line and as a result our margins reflect that. So there's always pressure in the probes world, but we've been able to, I think differentiate ourselves.

Evan Richert - Sidoti and Company

Sure. And then as far as your investments in R&D, are you looking to add further to the low-end side of the market?

Michael Burger

No, I think we're well positioned. I think the new products that we've got are relatively new. So we've got a lot of legs. And no, I think our focus will be more around adding more value like the RTP acquisition did. You know adding test and measurement capabilities to our stations. And so we're looking at doing that as well as more software et cetera, et cetera. So we're really focused on really kind of moving up scale.

Evan Richert - Sidoti and Company

Okay, great. And then the revenue guidance was strong. I just wondered if you had any -- received any kind of commentary from customers internationally, any hesitancy outside the U.S., any geographic trends do you want to comment on?

Michael Burger

What is amazing is actually in Q4, our business was almost a third between North America, Asia and Europe, which is uncanny for us. I’ve never seen that well divided. It seems with Europe, at least from our perspective, Europe is back on, after what I will consider is a relatively weak year.

North America looks very strong and of course Asia continues to be the driver. So, I’m very bullish actually. It seems that in general, the overall semiconductor capital equipment market is robust. And everything we bred from the analyst attracted seem to say that it’s going to, it leads to the 2014’s data.

Jeff Killian

And I think that, Michael, to that point, our book-to-bill ratio on a record quarter of 1.14 supports that as well.

Evan Richert - Sidoti and Company

Okay. Great. And then just one last question, any plans to add a Board Member to replace Dr. Carlson?

Michael Burger

Absolutely. Yes.

Evan Richert - Sidoti and Company

Okay.

Michael Burger

We’re in the process of interviewing as we speak.

Evan Richert - Sidoti and Company

Okay. Great. That’s it from me. Thanks.

Michael Burger

Thank you, Evan. Thanks for your interest.

Operator

(Operator Instructions) Your next question comes from the line of Dennis Van Zelfden of Brazos Research. Please proceed.

Dennis Van Zelfden - Brazos Research

Good afternoon, gentlemen.

Michael Burger

Hey Dennis, how are you?

Dennis Van Zelfden - Brazos Research

I’m great. If I were to subtract the $4.9 million contributed by the acquisitions in the fourth quarter, I get a revenue for the quarter that is a little bit less than last year. Is that what you were expecting and why the slight decline?

Michael Burger

Yeah. We were expecting it and in fact that’s obviously from a range perspective, that’s what we’re at. We think that the Systems business overall, the market was down pretty substantial in the year. The market, I think, we said in our script, about 13% down year-on-year. We did better than that. We’re effectively flat. But from a historical perspective, our historical product line that we did get a little bit acceleration at the end of 2012 and we didn’t see that in 2013. So we did expect what part of the forecast enhanced the range.

Dennis Van Zelfden - Brazos Research

Okay. All right. Jeff, I guess this one’s for you. The 200,000 in upcoming -- step-up in accounting I think, is that all going to occur in the second quarter?

Jeff Killian

No, not all of it, we will have some more flex through based upon order rate in Q1 and some of that stepped-up inventory is within demonstrated inventory at our customers, which may take some time before it flips and flow through our P&L.

Dennis Van Zelfden - Brazos Research

Okay. But that would be the maximum hit so to speak in all of 2014?

Jeff Killian

That’s correct. It will all flow through in ’14.

Michael Burger

Yeah, we’ve got pretty much all the dirt behind us on behalf of the acquisitions.

Jeff Killian

And what happened is our acquisitions exceeded expectations and so more of the inventory stepped-up, moved out in Q4, so it’s only 200,000 going forward.

Dennis Van Zelfden - Brazos Research

Okay. I think I already your head said Q2. I was thinking, we were already in Q2, never mind.

Michael Burger

We are still trying to leave first quarter, Dennis.

Dennis Van Zelfden - Brazos Research

Okay. Let’s see, regarding -- Jeff, regarding the individual line items on the income statement in terms of expenses, the R&D, the SG&A, the depreciation, amortization, so on and so forth. Whatever they came out to in the fourth quarter, are those about the run rates we should see in 2014 on a quarterly basis?

Jeff Killian

Yes, it’s a good question, thanks. So, on operating expenses, remember in the fourth quarter, there is about $0.4 million of M&A expenses.

Dennis Van Zelfden - Brazos Research

Yes, excluding that, excluding the restructuring.

Jeff Killian

Yeah. And in the rest of it, would be primarily $1.2 million from the ATT and RTT acquisition plus $600,000 of the amortizations from the acquisitions will be in our run rate. I think the biggest variable based upon that run rate is going to be our R&D opportunities.

Michael Burger

And project expenditure?

Jeff Killian

Yes, for the R&D. And so as you know from 2012 and 2013 that can vary from $400,000 to $500,000 a quarter based upon project timing.

Dennis Van Zelfden - Brazos Research

Okay. Last question, do you expect to reach your goal of 50% gross profit margin and the 20% EBITDA margin in at least one quarter in 2014?

Jeff Killian

I think to give you -- I think to commit to that, but we have a line of scientist, a lot of other things have to line up, but I think it is possible Dennis, but I am not going to comment to it.

Dennis Van Zelfden - Brazos Research

Okay, but would you say maybe for 2014 -- I am not trying to get you say something you are not comfortable with, but would you get there on an annual basis for the year in 2015?

Jeff Killian

That’s our goal.

Dennis Van Zelfden - Brazos Research

Okay. Fair enough. Thanks, guys. Good luck.

Jeff Killian

You are welcome.

Operator

Your next question comes from the line of Bob Lynch of Punch & Associates Investment Management. Please proceed.

Bob Lynch - Punch & Associates Investment Management

Hey, guys, how is it going? Good quarter.

Michael Burger

Hey bob, how are you?

Bob Lynch - Punch & Associates Investment Management

Good. Just a quick question, could you guys explain, I guess, a little bit more the Tesla power semiconductor device, kind of general, at least, I am just kind of -- you know just the general overview of what that does and…

Michael Burger

Sure, it’s a production focused machine. So it’s actually the way to think about it, it’s a 100% automated. It is driven -- frankly the product is really built around safety. You are applying extremely high voltage and/or extremely high current on to the wafer, and so you want to be able to isolate the operator from these, what would be considered in many cases extremely dangerous voltages and currents. And we are able to do that. We are able to create that safety barrier if you will and still produce and step through a wafer relatively high speed. So it actually has automation safety. And from a technical prospective, the ability to test at very voltage and high current, we employ some really unique technologies that allow us to do that. And so not many people could do this with wafer and hence the interest around the product. I don’t know if that’s helpful to your question?

Bob Lynch - Punch & Associates Investment Management

Yes, that’s helpful. Thanks a lot, guys.

Michael Burger

You are welcome. Thank you, Bob.

Operator

At this time, there are no additional questions in the queue and I would like to turn the call back over for closing remarks. Please proceed.

Michael Burger

I really appreciate everyone’s time and attention. As you can tell, we are really excited and look forward to talking to you about Q1. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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Cascade Microtech, Inc. (CSCD): Q4 EPS of $0.53 Revenue of $34M (+12.0% Y/Y) misses by $2M.