Zygo Corporation F4Q08 (06/30/08) Earnings Conference Call

| About: Zygo Corporation (ZIGO)

Zygo Corporation (NASDAQ:ZIGO)

F4Q08 Earnings Call

August 14, 2008 6:00 pm ET

Executives

Walter A. Shephard - Chief Financial Officer, Vice President of Finance, and Treasurer

J. Bruce Robinson - Chairman and Chief Executive Officer

James R. Northup - President, Metrology Solutions Division

John M. Stack - President, Optical Solutions Division

Analysts

Darice Liu - Maxim Group

Andrew Abrams - Avian Securities

Operator

Welcome to the Zygo Corporation fourth quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Walter Shephard, Chief Financial Officer.

Walter A. Shephard

I want to thank you for joining us tonight for our fourth quarter and fiscal 2008 conference call. Before I turn the conference call over to Bruce Robinson, Zyco’s Chairman and CEO, I would like to read the following forward-looking statement.

All statements, other than statements of historical facts, that are made during this call regarding our financial position, business strategy, plans, anticipated growth rates, market acceptance and objectives of management for future operations are forward-looking statements. Forward-looking statements are intended to provide management's current expectations, or plans for the future operating, and financial performance based upon information currently available and assumptions currently believed to be valid.

Forward-looking statements can be identified by the use of the words such as, "anticipate," "believe," "estimate," "expect," "intend," "plan," "strategy," "project," and other words of similar meaning in connection with the discussion of future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as the result of certain factors.

Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending of our customers, fluctuation in net sales to our major customers, manufacturing and supplier risks, dependence on timing and market acceptance of new product development, rapid technological and market change, risk in international operations, dependence on proprietary technology and key personnel, length of the sales cycle, environmental regulation, investment portfolio returns and fluctuations in our stock price.

Further information on potential factors that could affect Zygo Corporation's business is described in our reports on file with the Securities and Exchange Commission, including in our Form 10-K for the fiscal year ended June 30, 2007.

Now I’d like to turn the call over to Bruce.

J. Bruce Robinson

Fiscal 2008 was a positive year for our instrument and optics businesses. With sales up 17% and 9% respectively over fiscal 2007. Other highlights included the acquisition of the assets of Solvision, Inc. which exceeded our target for orders in the fourth quarter, their first quarter of operations coming out of receiver ship.

Also, our China joint venture was initiated in the latter half of 2008 and will begin shipments of local product in this quarter. We anticipate increased margins and revenues over time as we develop local solutions for the China market. Our optics development center has successfully qualified eyeline lithography optics that are currently being integrated at the system level in Asia. As asian manufacturers continue to grow capabilities outside of Japan, we view this as a long-term growth opportunity.

Our optics division has also named the directed source for helmet mounted displays on the US Air Force Fast Jet Trainer Program. And finally, with the support of a number of dedicated employees we delivered a record number of optics to the National Emissions Facility at fiscal 2008 and are now positioned to commence production for the Commissary at LA and at [? Inaudible ?{04:46}] facility in France.

In the semiconductor initiative, we have two installed UniFire-7900 products in the semi-backend of the line and one of the data storage industry. Trials at these two customers are nearing the end of evaluation for insertion in high volume manufacturing. We are being told that our CD and overlay performance are best of breed for challenging with in-dye litho-metrology. The SEMICON West in July, we announced the introduction of AFC, our advanced film capability, which adds small spectroscopic ellipsometry of film thickness and characterization to our semi platforms. The combination of film thickness and topography is very important to CMP process control. And we believe we’ll be able to match incumbent but slower techniques and provide more accurate results at a fraction of the cost of ownership. We’re in the process of demonstrating these capabilities.

Unfortunately, the semiconductor industry is in the path of a cyclical downturn and this adversity affected our results in fiscal 2008. Cap ex spending in 2008 dropped over 40% for litho tools, reducing our stage metrology revenue by $25 million year on year. We also experienced a $10.5 million decrease in our display product revenue over fiscal 2007. As Cap ex spending did not recover until late in fiscal 2008, this $35.5 million revenue shortfall could only partially be offset by the growth in the core business, thereby adversely affecting profit. Cap ex spending in semiconductor is not expected to recover in the first half of this fiscal year. With this in mind, we implemented two restructuring programs in 2008, mainly directed to the OEM stage metrology product line. The good news for Zygo is the recent public announcement that Nikon has captured the 193 emerging business for Intel. This may well better balance the market shares split between Nikon and ASML in 193 tools, thereby providing us with some up sight in the latter half of fiscal 2009. It may also provide momentum for Nikon as they must have demonstrated solid performance to capture this business. Also our fiscal 2009 has started with a strong $20 million backlog in display, which will positively affect results this year as we begin recognizing revenue in our first quarter.

We are continuing to make progress on our growth initiatives in anticipation of gaining traction in high volume manufacturing of the evaluation trials. We have a strong balance sheet and are looking forward to an uptake in semiconductor cap ex spending that would support the growth we have had in our instruments and optics businesses in the non-semi markets.

We enter 2009 with optimism and a firm backlog but also a guarded outlook on the possibility of a semiconductor recovery in time to influence our second half. Our goal must be to ensure success in our growth strategies in 2009, such that solar profitability is once again a part of our core. I will now turn the call back to Walter.

Walter A. Shephard

As reported in our press release, orders for the quarter were $40.5 million. Of the orders received, 79% was from our Metrology Division with the balance in our Optics Division. Within the Metrology Division, entrance bookings has continued to have strong performance with orders of $18 million received in Q4 and almost $65 million for the full year.

Our Displays Solutions Group booked $5 million of orders in the quarter and over $20 million for fiscal ‘08, as Bruce mentioned, into fiscal ‘09 with a strong backlog of over $20 million.

Our Vision System Group booked over $3 million of orders in their first full quarter as part of Zygo. Backlog at the end of the year was $72.3 million, which was virtually the same amount as when we began the fiscal year.

Sales for the quarter just over $48 million. Canon continues to be our largest customer. Canon put 21% of our revenue in the fourth quarter and 19% for the full fiscal year. For the quarter, this breaks down into 16% Canon consumed sales and 5% sales for Canon distribution. For the entire year, these figures break down into 14% for Canon consumed and 5% for distribution.

Our Metrology Division accounted for 66% of the revenue in Q4 with the Optics Division for the remainder of the sales. This is basically the same percentage of the full year breakdown between the two divisions. Backed by a strong order rate, the Instrument Group led the way within the Metrology Division in terms of sales, accounting for 63% of the division’s revenues. Within the Optics Division, the optical components business had a strong quarter with revenue of almost $10 million. Reflecting Bruce’s comments, as to the record number of optics that have been shipped.

By gross profit margins showed continued improvement climbed to 44.5%. Healthy margins in the Instrument and Optical Component Group led the way. For the year, our gross profit margin came in at just under 41%, which reflected a substantial improvement from the 35% we reported in Q1.

Our operating expenses rose to $19.3 million, reflecting the full quarter expenses of our Solvision acquisition, cost related to the Q4 layoff, and an increase in RD&E and sales and marketing costs related to our semiconductor initiatives, as well as, higher than normal commission expenses.

Cash, cash equivalents and marketable securities were $51 million at the end of the fiscal year. This is a decline of $19 million during the year. However, with this decline includes the use of $20 million for the stock buyback program and $5 million for the Solvision acquisition. This results in a net gain of $6 million.

Our DSO at the end of the quarter stood at 57 days, which is a slight decrease from last quarter but a slight rise from the end of last year when the DSO was 55 days. Overall, our receivables remain in excellent shape.

Our inventories continue to decline with a balance of just over $37 million. This represents a decline of 13% from when these levels stood at the beginning of the fiscal year. As we pointed out throughout the year, we have been keeping a close focus on our inventory levels.

As we mentioned in our press release, in fiscal ‘09 we expect our sales to grow an excess of 10%, primarily due to the Displayed Solution and Visions Systems Group within our Metrology Division. We are also anticipating that on average for the full fiscal year, gross profit margins will be similar to our fourth quarter performance. Operating expenses will be in a range of $68-69 million with the bulk of the increase over fiscal ‘08 expenses being attributed to the full impact of the division’s Systems Group. And finally, we are forecasting a tax rate of approximately 37%.

We’ll now open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Darice Liu with Maxim Group.

Darice Liu - Maxim Group

Starting off my usual question about the semi tools, you mentioned that trials were ending for two semi customers and one data storage company. Can you talk about when we should start seeing those results materialize in bookings and revenue?

J. Bruce Robinson

Yes, I have Jim Northup with us today who’s President of the Metrology Group and John Stack, who’s President of the Optics Group and I’ll let Jim respond to that, Darice.

James R. Northup

Yes, we actually have two systems in one customer and one system in another. Both of those evaluations are very near the end. We’re estimating certainly within a month or two. Try not to be too specific there but we’re expecting the answers pretty shortly. In one case we would expect almost immediate bookings coming off of the HBM selections. In the other case we would expect that to be spread out a little bit over time. So, we’re looking for some impact in the Q1/Q2 timeframe.

Darice Liu - Maxim Group

And then in terms of, just generally for both, the front end the line and backend the line activity in the field, can you talk about any type of new customer activity or interest within the products?

James R. Northup

I would say we’re operating along the same path we were on. We have a few engagements. We continue to be pleased because our engagements are with top-tier semiconductor companies. We have one significant front end of the line engagement that we put a lot of energy in. We have a second front end of the line engagement and the rest of our activity is backend of the line. But we don’t have any additional ones to report at this time.

Darice Liu - Maxim Group

Fair enough. And then, I guess in terms of a bigger picture question regarding the semi industry, though we’ve heard from the top two players, Applied Materials and Tokyo Electron, guiding for semi order increase end of September quarter. I know that list is a little bit different. What are you seeing from a near-term aspect for your semi bookings?

James R. Northup

I think that those types of companies like Applied or supply into process tools have a little bit earlier cycle than we do. That’s positive news if they see uptakes in September. Then I would say we’ll probably see them about four months later. And so maybe the second half, we might see semi come back.

Darice Liu - Maxim Group

Are you hearing that in terms of the billings forecast from your litho customers?

J. Bruce Robinson

As you know, one of our major customers has not introduced their 193 at this particular point in time and the other customer does not give us a lot of visibility that far out.

Darice Liu - Maxim Group

Okay, fair enough. And then in terms of display, there’s a lot of concern in the field. We all know that cap ex will be up in this calendar year but it looks like cap ex will be down in calendar ‘09. Are you seeing any order push outs or order plans being changed because you are hearing that a lot of panel makers are hurting right now?

James R. Northup

No, we’re not seeing any push out activity. We obviously have very strong bookings in the second half of our fiscal ‘08, which led to a very big backlog. We’re still seeing bookings activities in Q1. Obviously, Applied Materials came out with some information expecting somewhat of a slowdown in the short-term, as they have a pause waiting for G10. We’re on a little bit different cycle than them. So, we’re watching but we kind of have our 2009 pretty well secured with backlog and we see some recently good activity on the bookings side for fiscal 2009.

Operator

Our next question comes from the line of Andrew Abrams with Avian Securities.

Andrew Abrams - Avian Securities

I was just trying to get a characterization of where your business is generally now. I’m assuming, as you’ve mentioned that the semi business suppose to pick up, if it does, in ‘09, it’s going to be in the backend of your year. And the displays business seems to, basically, move along fairly steadily, at least for the first half and maybe the second half too, depending on how bookings come in. What about the optical business and where that’s going to be over the next two or three quarters? Maybe you can kind of paint the picture for where you think that’s going to be.

J. Bruce Robinson

Sure, we’ll let John answer that question.

John M. Stack

Well, as Bruce said on the components business, we are transitioning over to large customers such as the French and we are also working hard to get into the final contracts with our government, partner L3 for the HMD product. So we see good pickup there. In addition, we are continuing to add on customers to our medical line and are engaged with a customer right now that we hope to finalize contract negotiations in Q1. So, across our various markets we see certain levels of growth happening throughout the year.

Andrew Abrams - Avian Securities

And on the medical line, are we going to actually see an announcement or is it just something that we’ll never know until you’re actually producing?

John M. Stack

No, you’ll see an announcement but at this point in time, we’re not in a position to be able to state that yet. But we anticipate, hopefully, in Q1 after we finalize negotiations.

Andrew Abrams - Avian Securities

And on the L3 contracts, what stage are those in? You’re a sub on L3, is that correct?

John M. Stack

Yes, what’s happened with the L3 contracts is that those L3 and Zyco had been named as directed sources by the US Air Force. And what that fundamentally means is that provided the government uses the funding that they have available, we would be sole sourced on that but that has to wait until, again, later on in Q1 when that funding is released.

Andrew Abrams - Avian Securities

Oh, okay, so it’s a funding issue. It’s no longer anything that has to do with choice?

John M. Stack

Correct. As the directed source, you are pre-named on the contracts.

Operator

At this time, there are no further questions.

J. Bruce Robinson

It seems like much of it’s very clear in our responses so we thank you for your attendance. We appreciate you being here and we look forward again to the next quarter. Thank you very much.

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