Semitool F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

Feb. 7.08 | About: Semitool Inc. (SMTL)

Semitool (SMTL) F1Q08 Earnings Call January 31, 2008 5:00 PM ET

Executives

Geoff High - Pfeiffer High Investor Relations, Inc.

Raymond F. Thompson - Chairman and Chief Executive Officer

Larry A. Viano - Chief Financial Officer, Vice President, Principal Accounting Officer

Larry E. Murphy - President and Chief Operating Officer

Analysts

Gavin Duffy - Broadpoint Capital

Matt Petkun - D.A. Davidson

Bill Derrick - Ryderwood Capital

Neil Gagnon - Gagnon Securities

Robert Toomey - E.K. Riley Investments

Graham Tanaka - Tanaka Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Semitool Earnings Conference Call. My name is Antoine and I’ll be you coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to Mr. Geoff High of Pfeiffer High Investor Relations.

Geoff High

Thanks, Antoine. Good afternoon, and welcome to Semitool’s Fiscal First 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 the 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 Securities and Exchange Commission.

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 subsequent events.

A webcast replay of today’s call will be available at semitool.com for 90 day; in addition, a telephone replay will be made available for 48 hours beginning approximately two hours after the conclusion of this 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.

Raymond F. Thompson

Thank you, Geoff. Those of you who have followed Semitool over the years know that periods of market turbulence have frequently brought new opportunities for Semitool and we believe that you need to look no further than our continued bookings growth through these last few quarters to see my point.

The opportunistic approach of our sales organization and the expanding breadth of our customer base have positioned Semitool for this continued progress, particularly in Japan and Asia, even in the face of uncertainty for the broader marketplace.

Since we provided you with a couple of recent updates on our progress, we are going to keep our opening remarks brief and we want to get right to your questions. So at this time I’ll turn the call over to Larry Viano. He’ll provide you some color on our financial results, and then Larry Murphy will give you some color on what’s going on operationally.

Larry A. Viano

Thanks, Ray. On a 12-month basis, approximately 77% of our revenue was generated from Raider sales while 23% came from batch tools. Geographically, 39% of sales came from North America; 37% came from Europe and 24% were in Asia.

Gross margins approached our target level of 50% and were benefited by 170 basis points for the one million shares of Aviza stock we received in exchange for certain Thermal related patents and hardware. Additional revenue streams are possible from this sale.

SG&A expenses increased to 38% of sales. The increase was largely a result of higher labor costs. These include increased stock compensation expense, reflecting our move away from stock options in favor of restricted share awards which will be less dilutive.

In this first issuance, we elected to immediately vest 20% of our employees’ restricted shares where normally they will be expensed at 5% per quarter. We also removed the employee pay freeze and eliminated prior salary reductions. Finally our costs of foreign labor also increased due to weakness in the dollar.

The first quarter also was impacted by $700,000 in audit and tax related expenses as year-end audit costs can no longer be accrued throughout the year.

Looking at our balance sheet, cash came in at $12.4 million and is adequate to meet anticipated needs. The increase in receivables reflects higher shipments in the last two quarters and the increase in inventories reflects expanding production levels.

Our tax rate was 36% and is projected to remain at this level throughout the year unless Congress re-enacts the R&D tax credit.

Turning to guidance, we expect second quarter revenue in the range of $59 to $61 million and second quarter EPS in the range of $0.06 to $0.08. Shipments for the quarter are expected to range from $60 to $62 million.

Now I’ll turn the call over to Larry Murphy.

Larry E. Murphy

Thanks, Larry. If you listened to our recent presentation in New York or read the press release we issued on our bookings growth, you are aware of the significant progress we are making on several fronts.

Many of our achievements continue to come in Asia where we are gaining additional market share for our copper plating and FEOL cleaning tools. During the first quarter nearly 50% of our total tool orders came out of Asia.

Adding to our optimism is a recent surge in demand that has come from the advanced packaging sector. This is another area where we expect strong growth thanks to the efficiencies and cost benefits the Raider platform has been delivering to packaging customers.

A notable new packaging application Thru-Silicon-Via for chip stacking, is gaining strong interest for graphics drivers and memory applications. Our early entry into this segment combined with our strategic partnership in the EMC-3D Consortium, are creating a number of interesting new business opportunities for Semitool.

A key component of our long-term growth strategy has been to capture process-of-record opportunities with the leading capital spenders in the semiconductor industry. Our bookings growth in recent quarters reflects the progress we are making against this objective. And now we’re ready to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Gavin Duffy - Broadpoint Capital.

Gavin Duffy - Broadpoint Capital

Obviously the guidance is great; most people are guiding down, you are guiding north of 20% growth. Also with the increase in shipping backlog does that give you any confidence that the March quarter is not just the one pop-up quarter? Because obviously I don’t think you’ve had this shipping backlog in awhile.

Raymond Thompson

We do have a fair amount of confidence that this is going to continue, because we’re looking at not only what we’ve booked already, but we’re currently booking in this quarter and what our forecasts look like.

Gavin Duffy - Broadpoint Capital

Can you maybe just briefly touch on the competitive landscape now. It is changing in wafer cleaning space? You see Lam Research buy some market share. Is there anything different going on there?

Raymond Thompson

I think you’ll see continued consolidation, Gavin, but the results of the Lam acquisition of SEZ, we haven’t really seen any results of that in the marketplace yet. Probably won’t see much for that until that acquisition’s complete in, I think it’s in April or something like that.

But I think you will see some shake out. I think there’s about 11 players in the world right now that do cleaning in the semiconductor cap equipment space. And I wouldn’t be surprised if that number didn’t drop in half in the next three or four years.

Gavin Duffy - Broadpoint Capital

Just the last question, how do you see your revenue mix by the end of the year? Obviously the 50% bookings in Asia, but Asia is just 24% of last quarter. So how would you see that breaking out by year end?

Raymond Thompson

That was 24% on a trailing 12-month basis, Gavin, so it has moved towards Asia significantly, and that wasn’t bookings number. That was sales. Just to add a little color there, Gavin, we expect over half of our bookings this year to come out of the Asian market which will be the first time for us.

Operator

Your next question comes from the line of Matt Petkun - D.A. Davidson.

Matt Petkun - D.A. Davidson

Larry Viano, you commented on the license of the thermal technology to Aviza. Where were those shares recognized in the income statement?

Larry A. Viano

They would have been on the top line. But there was also cost of sales related to that. More than just patents, there was also some hardware.

Matt Petkun - D.A. Davidson

But you’d say that that’s less than $2 million of the top line?

Larry A. Viano

Yes, it was, yes.

Matt Petkun - D.A. Davidson

Doesn’t this represent a bit of a shortfall from your expectations for Q4 in general, just from a revenue perspective?

Larry A. Viano

It was a little shorter than what we were modeling at the start of the quarter, and it basically came down to one tool again.

Matt Petkun - D.A. Davidson

Then on the cost side of the equation, SG&A was up more than we had anticipated. Some of that you said was more related to the audit expense, I believe. Where do you see this line item trending next quarter and how do you see the gross margins falling? Because the gross margins were a nice upside surprise, at least to my estimates for this quarter.

Larry A. Viano

Yes, we expect margins will probably hang in there pretty close to where they were this quarter, maybe down a little bit but not a whole lot. And that $700,000 per audit costs, that will be reduced in half probably next quarter for ongoing audit fees. So that won’t hit us, but the employment costs will continue to hit, that I talked about.

Matt Petkun - D.A. Davidson

And are there meaningful commission increases just as a result of the almost $10 million increase in sales you expect for next quarter?

Larry A. Viano

Next quarter, we do expect a spike in commissions, yes.

Matt Petkun - D.A. Davidson

How would you characterize your happiness with the cost structure in general? I have to be honest that I find it to be a little bit disappointing. I think you could be earning a little bit more than you are. And obviously, you’re in a growth phase. We all believe you are capturing market share, but I think there’s also, given what everybody else is dealing with in this environment, probably some reason to be prudent on the cost structure, as well.

Larry A. Viano

We agree.

Matt Petkun - D.A. Davidson

So, should you be more profitable at $60 million or is this the target model?

Larry A. Viano

No, this is not the target model. We think that we want to expand the top line more and we think we’ll get significant leverage from the levels that we’re at right now. But because of the new customers that we’re penetrating and whatnot, we are having to place more people around the world in strategic locations and in higher levels in order to secure this business.

Matt Petkun - D.A. Davidson

And then, Larry Murphy, even since you presented in January, there’s been some incremental pessimism, some order delays, push-outs and even cancellations within your customer base.

Mostly on the memory side, customers like Qmonda, but in general, do you feel that any part of your shipment back log is at risk or do you feel the numbers that are in the back log have been pretty well scrubbed?

Larry E. Murphy

I think they have been pretty well scrubbed. We obviously keep a close tab on that kind of thing. One of the things, if you saw some recent articles written by Qmonda, since you mentioned them, they talked about they’re accelerating their technology to 58 nanometer by September next year. All those type of trends help us, to be quite frank.

So we haven’t had customers push tools out, we haven’t had customers push bookings out and usually when they place the order, they want it tomorrow, so we feel pretty good about where we’re at.

The trends in the industry, why they’re not buying capacity, they’re trying to accelerate technology nodes and I think that’s going to favor us over the year. And we’ll see how it plays out.

Matt Petkun - D.A. Davidson

Then the commentary you made about the pickup in the packaging business. Was that in your December order book or are you seeing that more in the March order book?

Larry E. Murphy

In the March order book. And we saw a little bit in the December, but we’re seeing a lot of activity going on this quarter.

Operator

Your next question comes from the line of Bill Derrick - Ryderwood Capital.

Bill Derrick - Ryderwood Capital

I would like to revisit a comment that was made in one of the presentations. Did you say you accelerated vesting of some options for some employees?

Larry A. Viano

Not options. We moved from options to restricted stock awards. And typically we have it so that they get expensed at 5% a quarter for five years for the award. That’s how they vest. But for this first round we did allow them to vest at 20%, a full year’s worth.

Bill Derrick - Ryderwood Capital

And why did you do that?

Larry A. Viano

We felt it was prudent because of where we were with our business. We kept wage increases down for pretty much the entire year of 2007.

Bill Derrick - Ryderwood Capital

So it was an employee retention strategy?

Raymond Thompson

Correct.

Bill Derrick - Ryderwood Capital

Okay, and it was well received, I take it?

Larry A. Viano

Yes.

Raymond Thompson

Yes.

Operator

Your next question comes from Neil Gagnon - Gagnon Securities.

Neil Gagnon - Gagnon Securities

What’s your sense, in your various customers that you’ve had success with, about moving from technology buys to production?

Raymond Thompson

Some have already started that process and that really depends on how quickly they fan out the nodes. Let’s say for example you become processor of record of a 75 nanometer customer. It will go to their R&D and then through their development and then it starts into production. And so we’re at different phases with a lot of different customers in that.

But some of our key plants we’ve put in place over a year ago, in some places two year ago, are moving into production as we speak. And we are starting to see that in our uptick in some of our bookings.

Neil Gagnon - Gagnon Securities

Is that some of the trajectory or timeframe that we should anticipate go forward? Meaning that it takes about two years from getting a beta tool into a customer in a technology buy situation and then two years out you should anticipate a full blown production tool set orders?

Raymond Thompson

Yes, there’s no generic rule for that but that’s not a bad benchmark as a guess. A lot of it depends on, like right now, they are starting to accelerate some of their technology nodes and that will shorten that cycle. Usually when they’re just trying to ramp capacity that tends to lengthen that cycle. So right now it’s a time where that cycle should come down and it will be probably less than a year and a half type of thing.

Neil Gagnon - Gagnon Securities

Okay, and you’re starting to see that shrinking occur on your front-end-of-line cleans ? Since your comp was about, I think you probably said about two years ahead of where you are on front-end-of-line cleans, do you feel confident that that window is shrinking given that people are focused more on technology buys right now?

Raymond Thompson

Yes.

Operator

Your next question comes from the line of Robert Toomey - E.K. Riley Investments.

Robert Toomey - E.K. Riley Investments

Larry Viano, can you tell us how many Raiders you shipped in the quarter?

Larry A. Viano

It looks like 17.

Robert Toomey - E.K. Riley Investments

17?

Larry A. Viano

Yes.

Robert Toomey - E.K. Riley Investments

I’d also like to get a better understanding of the impact on revenue and cost of goods sold. You talked about 170 basis point benefit at the gross margin line from the Aviza stock. Can you explain a little bit better what that was for me?

Larry A. Viano

We sold some equipment to Aviza and some patent rights for one million shares of their stock. So we had pretty good margin in that. It was greater than 50%.

Robert Toomey - E.K. Riley Investments

So as someone said earlier, your gross margin is overstated to the extent that that was a non-recurring item?

Larry A. Viano

Yes, except for the accounting has us put it in the top line as normal business, but that’s the reason why I separated that out in the text, is to let you know what it would have been without that. So our margins would have still been very strong. They wouldn’t have been quite as strong as what we reported.

Robert Toomey - E.K. Riley Investments

What would they have been, Larry? Without it? About 47%?

Larry A. Viano

48%.

Robert Toomey - E.K. Riley Investments

And then could you just take a second and go through, I didn’t quite get all the details on the costs that you were talking about, some of the higher employee costs via the impact of the dollar. Can you give a little more detail on some of those costs that affected the quarter?

Larry A. Viano

A lot of our local costs are in local currency, and especially the Japanese yen during the quarter moved against us. So, our local expenses were up quite a bit. So, it’s not only the labor but other local expenses that we have in our outside offices moved significantly during the quarter. It was less than a half a cent a share, but it was still a fair amount.

The other thing is, like I said, we removed the wage freeze for employees during the quarter and we accelerated the restricted share awards. That will be less expensive on the balance sheet in the long run, though. When you compare it to options.

Robert Toomey - E.K. Riley Investments

So, over the long run that will have a positive impact on the margin?

Larry A. Viano

That has a slight impact on margin. A lot of that’s below the line.

Robert Toomey - E.K. Riley Investments

Can you, just for my benefit, update us on the relationship with Applied Materials?

Larry E. Murphy

We are working with Applied Materials for copper interconnect using their PVD capabilities and their CMP and we’re in the middle of that with our ECDs. We’ll be placing a very advanced plating tool into their Maydan Technology Center in Santa Clara at mid to late March.

And we’ll be working on integration schemes and focused really on the memory sector. Right now, over the next 18 months or so, most of the memory manufacturers will be moving to copper that haven’t done it already, and we want to capture that opportunity.

And our joint development program with AMAT I think ensures both companies of a chance to capture our own fair share. So, we’re looking forward to it; the relationship is good and we think it’s going to benefit both companies both near-term and long-term.

Robert Toomey - E.K. Riley Investments

Okay, have you been able to quantify at all the addressable opportunity in memory?

Larry E. Murphy

Yes we have, it’s very, very large. We were talking at the top, capital spenders in the world there’s Samsung, Heinicke, there’s Toshiba, Powerchip, Qmonda, one after another. And most of those are still using aluminum as their metal of choice for interconnect material. So when they all move to copper, it’s going to be a very huge opportunity.

Robert Toomey - E.K. Riley Investments

And who do you think you’d be competing with most as that opportunity unfolds?

Larry E. Murphy

There’s only one competitor for us in that space, and it’s Novellus.

Robert Toomey - E.K. Riley Investments

And then one last question, you said you shipped 17 Raiders in the quarter; orders improved in the quarter. Can you tell us a little bit about the top three applications for where those Raiders are going at the moment?

Raymond Thompson

Yes, they’re going to copper damascene, they’re going to wafer-level packaging and they’re going to FEOL applications.

Operator

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

Graham Tanaka - Tanaka Capital

I know we just saw you just recently here in New York but I was wondering what has happened lately in terms of the trends, and you’ve got some great charts you’ve shown on process tool record and process of record and development tools technology, and I am just wondering if that has continued.

Things seem to be slowing down just in the last few weeks in the industry in the end markets and in semi-cap equipment orders. So I’m just wondering if you’ve seen that slowdown hit or are you still benefiting from this move to proceeding down the ramp of PORs?

Raymond Thompson

There’s a couple of ways to answer that question. First of all, we’re seeing the industry slow down, no doubt about that, we’ve been seeing that for at least 90 days now, maybe even longer.

Our position that we see is consistent with what we talked to you back in New York. We still see our specific tool sets still are very important for the needs of the customers going forward and we still feel good about where we’re at right now.

Graham Tanaka - Tanaka Capital

So if you look out to your next six to nine months, have you had to meter back your expectations?

Raymond Thompson

No.

Graham Tanaka - Tanaka Capital

And the reason being new technology and move to smaller geometries?

Raymond Thompson

Exactly.

Larry A. Viano

Also, there’s quite a cost savings incentive for our customer to keep thinking about these Raider tools. There’s some significant feedback in them.

Graham Tanaka - Tanaka Capital

Aviza – I really don’t know much about that. What was the reason for doing this? This is a little bit unusual in terms of a little bit of a quid pro quo type of deal.

Larry E. Murphy

Basically we developed some thermal technology and that’s Aviza’s sweet spot and it’s out of what we normally do so we thought it was a good way to sell the technology.

Graham Tanaka - Tanaka Capital

And so the ownership of that company is what percent of that company?

Raymond Thompson

It’s about 4%.

Operator

Your next question is a follow up question from the line of Neil Gagnon – Gagnon Securities.

Neil Gagnon – Gagnon Securities

I want to follow up on the AMAT relationship. It really sounds like it could be something significant for both parties at hand. However, there have been historical points in times where people have done partnerships with Applied Materials, where they found out that at the end of the day, they gave up more than what they got from the larger vendor.

So, how can you ensure that your IP and more importantly, secret sauce, for lack of a better word, is protected from that partnership?

Raymond Thompson

I think first of all, we have quite a bit of IP file up to date. And that’s one thing. I think the other thing is you’ve got to watch the behavior of the partner and they’re been behaving extremely positive and very, very supportive of this process and obviously that’s something you’ve always got to keep an eye on, no matter who your partner is.

So we feel good about what we have in place from a contractual agreement, etcetera, and just the behavior of them and their management team. They’re very amenable, very great guys to work with and we expect that going forward. But we do have contracts in place as well.

Neil Gagnon – Gagnon Securities

Will there be a joint sales effort and how will that go relative to economics for Semitool?

Raymond Thompson

It won’t be a joint sales effort. They’ll sell their products; we’ll sell ours. They’ll service their products; we’ll service ours. Most of the work will really be on the development of the next-generation devices, or low-cost options for the customers out there. That’s going to be the focus of the relationship.

Obviously, we’ll be presenting similar data sets or the same data sets off the integrated tool sets, and so there will be some indirect selling that will go on from our standpoint about their PVD and PNP and about our ECD from their standpoint. There will be some cross-talk there obviously.

Neil Gagnon – Gagnon Securities

And finally, with regards to the copper transition at the memory houses, obviously a very large Korean memory house has accelerated it I believe by six months into the first quarter. How long, given the history of transition of technologies do other people, be it the Taiwanese, be it the Japanese, to transition to new technologies do you anticipate that to occur?

So what I’m trying to ask is, as soon as this large Korean manufacturer moves down that path, how long does it take for the others to follow?

Raymond Thompson

I think it just depends on when they need to, what technology they’re at and when the need to incorporate it. From our perspective it seems like about the 50 nanometer node is where the switchover has to happen to move to copper. So it depends on when they make that switch.

And then, it obviously depends on where they’re getting their technology from as well. So, if the Korean customer that you’re talking about, the Korean manufacturer’s transit is moving their technology to Taiwan it’s probably a year down the road would be my guess.

Operator

Your next question comes from the line of Gavin Duffy - Broadpoint Capital.

Gavin Duffy - Broadpoint Capital

I just want to clarify something from Larry Viano. You talked about gross margins holding around the level from December. Are we talking with or without Aviza benefits to gross margins? The 48%.

Larry A. Viano

We think they’ll be a little bit below where they are with Aviza.

Gavin Duffy - Broadpoint Capital

So a little bit below the 50% you just did?

Larry A. Viano

Yes.

Operator

There are no further questions at this time. I would now like to turn the call back over to Ray Thompson for any closing remarks.

Raymond F. Thompson

Thanks for joining us again on today’s call. We do have a lot of things on our plate, and we still have a lot of activity going even though the marketplace isn’t all that exciting necessarily. As Murphy mentioned, the Thru-Via and packaging area’s very good for us. We have even some other off-the-wall things going that’s keeping us busy, and that have good margins attached to them as well. So, as always stay tuned.

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