FSI International F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

Dec.18.07 | About: FSI International, (FSII)

FSIInternational, Inc. (NASDAQ:FSII)

F1Q08Earnings Call

December18, 2007 4:30 pm ET


Donald S. Mitchell –Chairman, CEO

Patricia M. Hollister – CFO

Benno G. Sand – Executive V.P. Business Development, IR


ChristianSchwab – Craig-Hallum Group LLC

ClintMorrison – Feltl & Co.


(Operator Instructions) Now I would like to turn themeeting over to Mr. Benno Sand, sir you may begin.

Benno Sand

Good afternoon and welcome to the FSI International first quarter conferencecall. With me today is Don Mitchell, Chairman and Chief Executive Officer andPat Hollister, Chief Financial Officer. We will have a telephonic replay ofthis conference call available for the next several days. That phone number is866-395-7237. Investors also have the opportunity to listen to the conferencecall over the Internet through CCDN Individual Investors Center.A webcast replay of this call will be available shortly after the call iscompleted and remains available for 30 days.

In compliance with Regulation FD we have provided advance notice of thiscall and that this call is publically available. Under the Securities ReformAct Safe Harbor Provision we will be making forward-looking statements duringthis conference call including expected second quarter fiscal 2008 financialperformance. Actual results may differ materially from those projected in theforward-looking statements. As you know, these statements involve various risksand uncertainties. Please refer to our press release from this afternoon and toour recently filed SEC documents including the latest 10-K annual report inwhich we discuss risk factors that could affect these forward-looking statements.

To begin the call today Don will provide a brief summary of first quarterperformance and his views on the industry. Pat will then provide a moredetailed review of first quarter financial results and second quarterexpectations, followed by Don’s review of recent accomplishments and ourstrategic focus going forward. We will all be available for questions at theend of the call. Now let me turn the call over to Don.

Donald Mitchell

Thank you Benno. Good afternoon everyone. Our first quarter orders werebelow the guidance range we provided reflecting the continued weak industryconditions as customers remained cautious going into their seasonally slowperiod and were assessing their capacity requirements for next year. Overall,we’re pleased with our improved financial performance and how the costreduction programs which we implemented during the second half of fiscal 2007are contributing to the company’s overall performance.

Net orders for the first quarter were $15 million as compared to $34.1 millionin the prior year comparable period and $21.4 million last quarter. Our firstquarter order shortfall from guidance can be attributed to seasonally lowerorders for spare parts and customer initiated 200mm product order delays.

First quarter 2008 revenues were $22.4 million as compared to $37.7 millionfor the same period in fiscal ’07 and $19.9 million level last quarterrepresenting a 12% quarter over quarter increase. We expect revenues toincrease sequentially again in the second quarter of 2008.

First quarter fiscal 2008 shipments were $20.7 million as compared to $42.2million for the same period in 2007 and $21.9 million last quarter. As aresult, quarter-end backlog and deferred revenue was $13.4 million at the endof the first quarter as compared to $21 million at the end of fiscal 2007.

Our fiscal 2008 first quarter net loss was $2.1 million or $0.07 per shareas compared to a net income of $1.9 million or $0.06 per share in the prioryear first quarter and a net loss of $6.5 million or $0.21 last quarter.

We expect to report between a $1 million loss and break-even next quarter.Our internal goal remains to manage the company to be profitable for thequarter and for the fiscal year. Leading industry analysts recently revised itssemiconductor demand forecast for calendar 2007 and 2008. They now predict thedemand for semiconductors will increase approximately 2.9% in calendar ’07 fromthe $263 billion calendar 2006 level. The increase is being driven by memoryand microprocessor device demand. The same analyst is forecasting a 6.2%increase in demand for semiconductor devices in calendar 2008.

Total equipment spending in calendar ’07 is expected to increaseapproximately 6.8% when compared to the $42 billion 2006 level as forecasted byDataquest. In general, analysts have a mixed view on calendar ’08 forecastedtotal equipment spending ranging from a 15% to 20% decline to a modestincrease. Dataquest is currently forecasting the total equipment spending willdecline 9.9% in calendar ’08 as compared to ’07. However, given the precipitousdrop in total monthly worldwide equipment orders during the first half ofcalendar ’07 we expect modest quarter over quarter growth in industry spendingbeginning in calendar 2008. Device manufacturers are continuing to manage theircapacity increases very carefully. They remain cautious toward placing neworders and are asking equipment manufacturers like FSI to shorten our equipmentdelivery lead times. We expect this trend to continue into 2008.

Now I’ll turn the call over to Pat for a more detailed review of firstquarter financial results and to provide our expectations for the secondquarter of fiscal 2008. Pat?

Patricia Hollister

Thank you Don. Good afternoon. International customers representedapproximately 85% of sales in the first quarter of fiscal 2008 as compared to75% of sales in the prior year comparable period. Approximately 66% of firstquarter 2008 orders were from international customers as compared to 68% oforders in the prior year comparable period. We anticipate that orders frominternational customers will represent more than 75% of second quarter orders.

Our gross profit margins will fluctuate from quarter to quarter and year toyear depending on the international domestic sales mix and product mix. Otherfactors that can impact gross margins include our current manufacturingcapacity utilization and the competitive pricing environment.

The first quarter gross margin was 38.3% of sales as compared to 42.9% inthe prior year comparable quarter and 36.7% in the fourth quarter of fiscal2007. Fiscal 2008 first quarter gross margins were primarily impacted by highsales mix of our lower margin Magellan product.

SG&A expenses were $6.7 million in the first quarter of fiscal 2008 ascompared to $8.7 million in the first quarter last year and $8.4 million lastquarter. The quarter over quarter decrease is primarily attributed to the costreduction programs that were implemented last fiscal year. Fiscal 2007 fourthquarter SG&A expenses including $700,000 of severance costs.

First quarter 2008 ER&D expenses were $4.3 million as compared to $6million in the first quarter of fiscal 2007 and $5.8 million last quarter. Thequarter over quarter decrease is primarily attributed to the cost reductionprograms that were implemented during the second half of fiscal 2007. Fiscal2007 fourth quarter ER&D expenses included $400,000 of severance costs. Themajority of our ER&D investment is focused on expanding the applicationscapabilities of our products, supporting customer evaluations and continuousimprovement programs.

We are now accounting for investment in MSSI under the cost method. In thefirst quarter of 2007 we recorded equity and earnings from our affiliates of$160,000. Now I will briefly discuss the changes in key balance sheet itemsfrom the end of fiscal 2007 to the end of the first quarter of 2008.

Our cash, restricted cash, cash equivalents and marketable securitiesrepresented $23 million of our total assets at the end of the first quarter ascompared to $24.5 million at the end of 2007. During the quarter, we usedapproximately $1.2 million of cash in operations. The company’s accountsreceivable were $20.8 million at the end of the first quarter as compared to$17.6 million at the end of the prior fiscal year. First quarter increaseprimarily relates to the timing of shipments as compared to the fourth quarterof 2007. Our inventory was $25.4 million at the end of the first quarter ascompared to $29.6 million at the end of the prior fiscal year. The decreasereflects a successful inventory management initiative we implemented duringfiscal 2007. Our headcount including contract employees at the end of the firstquarter was 407 as compared to 429 at the end of fiscal 2007. Given the currentindustry environment, we are closely evaluating all staffing additions. Givenour current backlog of deferred revenue and expected second quarter orders wehave limited visibility with respect to the second quarter revenues. Again,keep in mind that a portion of the expected revenue is subject to eitherreceiving purchase orders or obtaining timely acceptance from our customers.

We expect second quarter 2008 orders to be between $23 million and $26million. We expect second quarter revenues to be between $23 million and $25million. In order to achieve this revenue level we are required to gainacceptance for a system that is now being qualified by a customer and obtainseveral system orders that can be shipped and recognized as revenue in thesecond quarter. Gross profit margins are expected to be between 46% and 48% ofrevenue primarily due to a product mix shift as compared to the first quarterof fiscal 2008. We expect SG&A expenses to range from $7 million to $7.2million as we continue to focus on managing these costs. We expect ER&Dexpenses to range from $4.7 million to $4.9 million. This reflects theengineering resources required to support evaluation tool placement and our[Orion Single Wafer Wet] and other development initiatives.

Interest and other income should come in between $200,000 to $300,000 givenour current cash position. Assuming that we can achieve the guidance I justprovided we expect to report between break-even and a $1 million net loss inthe second quarter of fiscal 2008. We anticipate capital expenditures to beless than $800,000 in the second quarter as we place another Orion System inour Kaska lab. We expect depreciation and amortization expense to run between$1 million and $1.1 million for the second quarter. At the expected run rateswe anticipate using less than $1 million of cash for operations in the secondquarter of 2008 as we continue to manage inventory turns and our AR day’s salesoutstanding.

Now Don will provide you with a brief review of the first quarteraccomplishments and strategies going forward.

Donald Mitchell

Thank you Pat. Despite the anticipated near term industry softness our orderpipeline which is a compilation of all order opportunities that we can identifyfor the next 12 months remains at a relatively high level. However with severalleading customers delaying order placements last quarter and weak demand for200mm products the past few quarters, we believe it is prudent to remaincautious as we enter calendar 2008. In the first quarter we again made progresson our core initiative to gain process tool of record status with one or moreof our flagship products at the top spenders in the semiconductor industry. Ourenhanced [Viper] technology continues to gain momentum as customers run demosand implement the process in production. Recently we announced that the Vipertechnology has been adapted for several additional film removal steps. Over thelong term we expect these steps to contribute to incremental revenue ascustomers qualify them in production.

In addition during the first quarter we gained acceptance of our Magellansystem from another new customer. We are anticipating an increase in unit salesfor our Antares platform in fiscal ’08 as compared to the prior year as devicemanufacturers ramp their 65 nanometer production and continue the qualificationof products for 45 nanometer applications. Our second quarter order guidanceassumes orders for several Antares tools and we anticipate additional ordersand evaluation placements as the year progresses.

From a development perspective, we’re making progress on qualifying variousapplications for our new [Orion Single Wafer Wet System]. We now have an eightchamber system going through marathon tests and are assembling modules forshipment in calendar ’08. We continue to conduct customer demos in ourlaboratory for the initial applications while the product that was placed at aEuropean site as part of a joint development program continues to demonstrateexcellent process capability. During 2008 we’ll measure our performance basedupon winning additional process tool of record status with the top spenders,expanding our presence at memory manufacturers and by successfully entering theSingle Wafer Wet segment with the launch of our Orion product.

Finally we’re focused on delivering improved financial performance in 2008.So now Pat, Benno and I will be happy to take any questions.

Question-And-Answer Session


Our first question comes from Christian Schwab – Craig-Hallum Group LLC

Christian Schwab – Craig-Hallum GroupLLC

Don, what specifically is driving the increased order momentum in Q2 from$15 million back up to $23 million to $26 million? I heard you mention that youexpected a few orders for the Antares in Q2, but can you give us any other specificsfor such a momentum increase?

Donald Mitchell

Yes Christian, if you look back at our bookings per quarter since we’ve beenin this industry downturn starting in the second quarter of ’07 we are running$19 million to $20 million, same with the third quarter. The fourth quarter weare up to $21 million. This last quarter was kind of an anomaly down at $15million. So if you look at the orders that were pushed we had about $1 millionshortfall on spares this last quarter and I think that’s because of theindustry softness; people just aren’t spending money and they’re reducing theamount of preventative maintenance that they do on the hardware. That’s whatour customers are telling us. Coupled with about a $2.5 million to $3 millionof 200mm Legacy orders that were pushed, we expect some of those orders thatwere pushed in bookings to reoccur in this next quarter, so that makes up partof that delta. In addition to that, we’ve got some repeat orders both frommemory houses as well as [logic] houses for both our Zeta and our Antares platformthat require quick turns.

Christian Schwab – Craig-Hallum GroupLLC

Great and then as we – is your belief on equipment spending for yourproducts then still that you expect that to gradually improve each quarterthroughout calendar 2008?

Donald Mitchell

Yeah, the Dataquest numbers aside, Dataquest is always predicting revenueand of course the booking, the revenue that occurs generally three to sixmonths after the bookings, we tracked bookings for the worldwide [SEMS] reportswhich are a measurement of surface conditioning bookings and if you look at thetrough in bookings that we’re currently in, it would suggest that we’re runningabout a $1.6 billion a year annual run rate or bookings for surfaceconditioning equipment. That’s a contrast to last year when the industryrecorded $2.3 billion. So you can see it’s significantly below. Even if ’08 isgoing to be softer than ’07 and ’07 is forecasted to come in about $2 billionwe have to grow the industry, we have to grow bookings from a $1.6 billion runrate to close that gap. So we see a slow recovery coming back.

Christian Schwab – Craig-Hallum GroupLLC

Great. And then, I just want to make sure I heard you correctly; we doexpect to be profitable operationally this year, which I think would be thefirst time since 2004?

Donald Mitchell

That’s our goal certainly.

Christian Schwab – Craig-Hallum GroupLLC

And then one of your competitors was recently bought, can you give us anupdate on, does that change any of the dynamics of any potential mergers foryour company?

Donald Mitchell

Not necessarily. It certainly doesn’t change our operating strategyChristian. We were aware that the two parties were in discussion for someperiod of time. The acquiring party has tried to enter the space. I don’t thinkthey’ve been particularly successful with it, at least they haven’t recordedrevenues that we’re aware of for the tools that they have and so they boughtone of the leading cleaning companies. So it’s not really consolidation, it’san acquisition. We’re not participating in that particular space that isdominated by the company that was acquired. We will be entering that space nextyear so nothing has changed in terms of our strategy.

Christian Schwab – Craig-Hallum GroupLLC

Right so entering the Single Wafer Wet product and then filling out all ofthe cleaning products may or may not make you more attractive to somebody else?

Donald Mitchell

It may or may not.

Christian Schwab – Craig-Hallum GroupLLC

Okay and then lastly do you think the worst is behind you yet?

Donald Mitchell

Well in terms of bookings we believe we’re in the low right now. So giventhe traction that we’ve got with new customers in Asia, given the traction thatwe’ve got on the memory side of the house now which is contributing in a verymeaningful way on the order front, and given that we’ve continued to expand theapplications at the new [wins] in Asia, yeah we think that most of the heavyhauling is behind us given that the industry is in it’s bottom right now.

Christian Schwab – Craig-Hallum GroupLLC

Fabulous, thank you.


Your next question comes from Clint Morrison – Feltl & Co.

Clint Morrison – Feltl & Co.

Hey guys I think you indicated on your own new guidance that you needed to –revenue recently qualified system, are you referring to the Magellan that yousaid was just accepted at a customer?

Donald Mitchell

No, the Magellan that was accepted at the customer, the revenue was alreadyrecognized in Q1. In Q2 we have additional demos out in the field and in Q2 oneof them are due.

Clint Morrison – Feltl & Co.

Okay, is that a Magellan you’re referring to?

Donald Mitchell

No it’s not.

Clint Morrison – Feltl & Co.

Okay, and then my other question is your inventories obviously came waydown, is that a sustainable number? It’s the lowest you’ve had in a long time;can you really maintain that, especially given the kind of revenue you’relooking for in the next quarter?

Patricia Hollister

Clint obviously we’ll continue to manage our inventory and try to keep it ata lower level however you know, we will continue to look forward as far aspotential orders, etc and manage it that way.

Clint Morrison – Feltl & Co.

Okay so I guess what I’m hearing is as you’re obviously looking for revenueto kind of pick up a little bit moving forward, your inventories will probablybe moving up a little bit also?

Patricia Hollister

Yes, we may have to invest in inventory.

Clint Morrison – Feltl & Co.

Okay. Thanks that’s all I needed.

Donald Mitchell

Given that there are no questions I want to thank you for your support andfor participation in 2007. We wish you and your families and of course yourcolleagues a happy holiday season and a prosperous and joyous new year. Thanksfor participating on the call. We look forward to talking to you again in Marchor seeing you at the Needham Investor Conference which will occur in New York City in early January. Thank you all.

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