BRKS is now filing its Conference Calls on Edgar...
Operator: Good morning everyone and welcome to the Brooks Automation Fiscal 2004
First Quarter Earnings Release conference call. Today's call is being
recorded. At this time, for opening remarks and introductions I'd like to
turn the call over to Mr. Mark Chung, Director of Investor Relations.
Please go ahead sir.
... [forward looking statement warning]
Bob Therrien: Thanks Mark. Good morning and let me start by wishing everyone a
great 2004. We finished calendar year 2003 with 341.3 million in revenues,
which represents modest growth over calendar year 2002. When the final
market data tally is finished for calendar year 2003, I believe Brooks will
once again be the worldwide leader in semi conductor automation for the
third consecutive year and will have gained market share over our nearest
competitor.
The reason for last year's performance in the difficult environment comes
down to one single fact. We are a focused company. Our goal is to be the
premier semi conductor automation company in the world. Our focused
strategy together with the company's strong fundamentals should lead to
rewarding results in 2004 and beyond. We believe in the long-term Brooks
will thrive in the semi conductor automation business via our software
information and control based strategy which is key in transforming
mechanization into intelligent automation. Our relentless development
testing and learning about customer fab and tool behaviors has resulted in
our company knowing more about its customers and prospects than any of our
competitors do. That adds up to a powerful competitive advantage.
The December quarter revenues for Brooks were 82.6 million, an increase of
one percent over the preceding quarter revenues of 81.7 million. This was
in line with guidance of 82 million. But we did much better than guidance
-- where we did much better than guidance was on the bookings. Bookings for
the December quarter were 127 million, an increase of 53 percent over the
preceding quarter bookings versus our October 2003 guidance of up 10
percent. This
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amount is the most that we have ever booked in one-quarter at Brooks
surpassing the previous high of 124 million set in March 2001.
The order momentum at the end of the December quarter was much stronger
than anyone expected, driven primarily by our OEM and factory hardware
business. Specifically a DRAM manufacturer pulled in its schedule and
created strong demand in the tail end of the quarter for the capital
equipment sector. Forecasting our business in this environment is tricky at
best, since approximately half of our business in on the fab side, and
those orders are lumpy and mostly binary. As a result, our March quarter
bookings will be flat to up, based on a few major swing deals that will
determine the final number. So even with some fluctuations in our bookings
from quarter to quarter, we expect to see continued strong demand
throughout the coming year.
In our previous earnings conference call at the end of October, most
preliminary estimates for capital expenditures or cap ex growth for 2004
where in the range of 15 to 20 percent growth your over year. At the recent
ISS conference in early January, some industry followers had increased
their forecasts for 2004 cap ex spending anywhere in the range of 32
percent to 50 percent your over year growth. We are planning on industry
capital spending this year to grow at the lower end of the range, which is
healthy as it may prolong the ongoing expansion into 2005. Because our
(drisk) market at 300 mm wafer size is more than 2X of what it is at 200 mm
wafer size and with the industry moving its incremental cap ex spending to
the larger size, we believe we are positioned to outgrow the capital
equipment industry in 2004. Brooks is facing two challenges. Like other
suppliers, we will need to ramp production sharply in the current quarter
and Ed Grady will provide more details on that effort.
Our second challenge is ongoing. While financial leverage will yield a
return to profitability in the current quarter, I am still not fully
satisfied with our cost structure, and we will continue to focus on driving
down costs even as we ramp shipments. Restructuring and integration issues
are behind us. Improving operating efficiencies will be ongoing. What you
will now begin to see is the
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leverage in our business model up. The hard work we did in consolidating
facilities and reducing headcount up the will yield a rapid return to
profitability. We have built a strong sustainable business model here at
Brooks.
The fact remains that the semi conductor industry is cyclical,
unpredictable and extremely competitive. It has always been an important
principle in our industry that a company needs to have size and critical
mass from its global presence to its technology and product lines to its
balance sheet in order to not merely survive, but with driving this market.
In closing, let me comment on the 2004 outlook. Our view of the economy and
the semi conductor industry is not meaningfully different from the
consensus, however we don't build a business model and the operating budget
based solely on the macro economic forecasts. Rather, we build it company
by company, based on our view of what we believe we can win compared with
what customers are presenting as market opportunities. Our largest
automation market opportunity continues to be the OEM to automation
segment. Referencing Dataquest December 2003 automation forecasts, that
market segment is expected to double in the next two years, twice the
growth rate of the individual end-user fab hardware or fab software
automation market segment.
In the March quarter, our revenues should increase at least 45 percent over
the December quarter to the range of 120 to 125 million. This will allow us
to surpass the historical peak revenues for the company of 112 million in
the March 2001 quarter. Bob Woodbury will provide more details on the
financial outlook, but let me had that I am pleased that after a prolonged
downtrend and a lot of hard work to achieve efficiency Brooks should be
back to being profitable in the coming March quarter.
Now I will turn the call over to Ed Grady. Ed?
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Ed Grady: Thanks Bob. Management team continues to make progress on our plan
to restore profitability. As we discussed in the past several quarters the
company has been focused on consolidation, rightsizing fixed cost, product
rationalization and organizational alignment. I'd like to note that in
fiscal Q1 there were no additional charges for restructuring, signaling
that we are substantially complete with the integration and consolidation
plan we started last year. We're continuing to see the results of our tough
decisions and diligent efforts in the financial results. As business
conditions change, we'll continue to look for ways to become more
efficient.
This past quarter represents a turning point for the company. As Bob
stated, the December quarter saw a radical shift in the market, as shown in
the 53 percent increase of bookings to $127 million, representing a record
bookings quarter for the company. We're experiencing the highest level of
quoting activity in the company's history. We are very proud our
responsiveness of our sales force. As stated last quarter, we're driving
for key metrics; gross margins, inventory, fixed costs and headcount. Let
me update you on each of these metrics separately.
For gross margins, reflect for a moment the company has demonstrated five
consecutive quarters of improved gross margins. In Q1, gross margins were
essentially at the level we forecasted that they would be one year ago. As
we discussed last quarter, we are focused on five key areas for
improvement. First, reduction in materials costs; second, improving
efficiency of direct labor through accelerated deployment of demand flow
manufacturing and in our consolidated manufacturing facility. Third,
reduction in manufacturing overhead. Fourth, outsourcing of commodity
components and legacy and of life product, and fifth, value engineering or
cost reduction redesign. These five key focus areas are having a positive
impact and we'll continue to contribute throughout the year.
For example, gross margins are improving on the hardware products, as
material costs reductions, cost reduced designs, and reduced overhead kick
in. The only negative in the hardware gross margins is the impact of the 27
percent increase in exchange rate on products
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produced in our (Jena) Germany facility that are shipped outside of Europe.
We've taken remedial action to mitigate the impact of these exchange rate
changes. Additionally, we are consolidating the independent software and
solution delivery organizations into one organization under (Joe Bellini),
and believe the new model will improve gross margins on future software
automation projects. This past quarter's 37 percent composite gross margin
performance is a 3.5 percent increase from Q4 last year and demonstrates
we're making strong progress. Inventory; our inventory was up about $10
million, driven by increased width in response to the increased production
demand for shipments in Q2, and also finished goods at customers. We are
working very hard to hold inventory levels flat as the business grows over
the next several quarters.
In fixed cost, the fixed costs were slightly up, driven by restoration of
wages and increased sales and marketing expense. As the business ramps, we
expect to address a competitive wage issues and incremental investments in
R&D to support designing (wins) and new product introductions. We expect to
be able to offset most of the cost increases with other organizational
efficiencies, such as cost reductions from our hubs strategy for back
office overseas operations and continued reductions in G&A costs.
Additionally, we expect the inauguration of our India software development
operation that will result in fixed cost reductions throughout the year.
In headcount, in the quarter, headcount and fixed costs was reduced by
approximately 30 people. However, overall headcount increased from 1878 to
approximately 1900 people, driven by direct labor additions as we ramped
manufacturing operations in preparation for Q2 shipments. While we remain
focused on cost containment and improved efficiency in our operations, the
shift to rapid growth in the market has required that we shift gears and
focus on expansion of operations to meet customer demands.
Even with the dramatic increase in demand, we've been able to respond and
around our capacity. Lead-times have been contained, ran prettiness
analysis of our supply chain shows that we have enough capacity in place
with only a few areas of concern. The results are starting to show. In a
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survey with several of our key OEM customers in December and January, each
customer qualitatively stated that Brooks was keeping up with the ramped
better than almost all other automation suppliers. This demonstrates that
our commitment to in-house manufacturing and operational excellence has
been quarter out business and is the accurate model in a cyclical high mix
low-volume customized product business.
In some rate I feel very positive about our continued progress and their
outlook going forward into 2004. Industry growth could top 35 percent this
year, and we expect automation will grow at a premium. Brooks as a company
is highly focused on delivering results. The 2004 is shaping up to be a
great opportunity for the revitalized Brooks organization. With the
broadest portfolio automation products and services in the semiconductor
automation industry, we're looking forward to the next several quarters to
demonstrate what we can do.
Now I'll ask Michael Pippins to give us a look at products and the market.
(Michael)?
Michael Pippins: Thank you, Ed. Today I'll review out three product groups and
discuss our view of the market. I'll start with the OEM business. The OEM
revenue in Q1 was up 10 percent to 41.6 million, as compared to 37.8
million in Q4. Bookings for OEM products accelerated aggressively in late
November and throughout December. While we don't breakout bookings by
segment, Q1 OEM bookings were the highest in the company's history and were
up by more than 60 percent as compared to the last quarter. The driver
behind such strong order growth is our penetration into 14 of the top 15
equipment manufacturers as compared to only four of the top 15 in calendar
year 2000. We are also benefiting from a secular trend towards outsourcing
automation systems as compared to modules.
Our revenue per OEM tool increases by more than 2x when we sell systems,
and this is also fueling the strong booking growth. Systems are more of a
backlog business than modules, which are primarily take turns business.
This is one reason why our record orders did not drive more
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aggressive OEM revenue in Q1. Our OEM systems revenue is expected to grow
in Q2 by more than 100 percent. We believe that our operational strategy of
in-house manufacturing is the best solution for OEM system outsourcing.
Remember, OEM systems require many modifications for each fab customer.
Operationally, this means that virtually every system is different.
Engineering must be closely coupled with operations to rapidly make these
changes without increasing lead times beyond a reasonable window. Thus far
into this ramp, we have received high marks from our systems and module
customers for our ability to keep up with their demands. Our ability to
ramp is differentiating us from the competition and this will also fuel
additional market share growth.
Moving to factory hardware, factory hardware revenue was down 19 percent in
Q1 to 18.8 million, as compared to 23 million in Q4. This business is
largely SAB 101 based with revenue recognition upon acceptance at the fab,
which occurs approximately two quarters after the PO. We believe our
bookings market share bottomed in June of 2003 prior to the introduction of
our new one fab AMHS system. However, since we introduced a new system in
July, our market share has grown. Orders were up in the September quarter,
and Q1 was at record booking quarter for us in the factory hardware
business. Bookings in the December quarter increased by over 80 percent as
compared to Q4. During Q1 we won four AMHS deals, two 300 mm and two 200 mm
projects.
We announced in Q1 that our one fab AMHS system was selected for any 300 mm
fab. This was a highly competitive project and we were selected based on
the technical performance of our new system and the competitive price.
Installation is well under way and initial feedback from the customer is
very positive. We also won a 300 mm fab expansion project in Q1 with
portions of our one fab system. In terms of 200 mm, it's important to
remember that PRI had significant market share in 200 mm (fabs). While we
believe very few new 200 mm (fabs) will be built, there will be a lot of
investment in retooling and expanding 200 mm (fabs). This will drive out
200 mm AMHS business. It's also important to note that virtually all
expansions go to the original AMHS
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supplier at a reasonable price and margin. During Q1 we also won to
lithography automation wins in Japan. We enjoy winning factory hardware
orders in Japan because our three major competitors are located there. If
we can win in Japan, it means that our offering is required by the customer
and that our competitors cannot offer a solution that is reasonably close.
The factory hardware pipeline looks very good. We are bidding on four 300
mm AMHS deals. These orders are large and the timing is difficult to
forecast. In Q1, we won several big deals and the bookings were clearly
above guidance. For Q2, we have given you a broad booking range because the
size and timing of these big factory hardware deals is difficult to
project.
Moving to software, software revenue was up for percent to 21.2 million in
Q1 as compared to 20.3 million in Q4. The order pipeline for software looks
very strong with five 300 mm projects active. The majority of these 300 mm
projects are targeted for the second half of 2004 and early 2005, which
leads us to believe that this cycle will continue into 2005. In terms of
the flat-panel display business, our new fab project database includes nine
large substrate projects for calendar 2004. We are currently negotiating
software contracts for several of these projects.
During Q1 we also won significant flat-panel OEM business with our HX 7000
flat-panel display cluster tool platform, which is produced in our Korean
operations.
Moving to the 300 mm market, 16 300 mm (fabs) took delivery of equipment in
calendar year 2003. Of these, seven were new (fabs) and nine were
expansions. One year ago, it in our January 2003 call, we forecast 16
(fabs) for 2003, so we are pleased with the relative accuracy of our fab
forecast data. We are now tracking 24 300 mm projects for calendar year
2004. Twelve of these are new (fabs), 12 are expansions. Remember, the big
investment is in the first phase of the new fab, so we should baseline
seven new (fabs) in 2003 to twelve new (fabs) in 2004. It's going to be a
good year for 300 mm.
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In summary, were harvesting over 60 designing wins in the last year in our
OEM business, many of which come from the top 14 of the top 15 OEMs. Our
OEM business is well-positioned for the Q1 transition from modules to
systems, and we are extending our market leading position in OEM
automation. We are the world's largest software product company in semi
conductor and our extensive knowledge in 300 mm and our growing experience
in flat-panel will increase our leading position. Software orders are
expected to be strong in Q2.
Our AMHS market share bottomed in June of 2003. Our new one fab AMHS system
is gaining market acceptance and Q1 orders were greater than 90 percent
from the previous quarter. However, we are not confused. Our mission in
this cycle is to maximize portability, not just grow market share. While we
have made progress, we still have work to do and still have significant
leverage in the second half of 2004.
(Bob)?
Bob Woodbury: Thanks (Michael). It's been the practice of the company to report
pro forma financial results defined as net income before amortization of
acquired intangible assets and other charges. Management believes that
presenting the Company's operating results before taking into account such
charges provide useful information to aid in understanding ongoing and
recurring operations. The gap net operating loss for the quarter was 8.9
million or a loss of 23 cents per share. The pro forma net loss for the
quarter was $7 million or loss of 18 cents per share. This compares to our
guidance of 20 to 25 percent loss per share.
The loss in the quarter is one cent less than Q4 03, despite restoring
wages to our workforce and providing a tax provision. Revenue has been
previously discussed, was $82.5 million and on a geographic basis, North
America was 57 percent, Asia 24 percent and Europe 19 percent. And revenue
had a slightly favorable mix of OEMs in software products. The pro forma
gross margin percentage was 36.9 percent for the quarter. This was about
our guidance of 35 percent, help
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slightly by the mix, which accounted for about one percent of the change.
Factory overhead absorption was also a margin contributor as production
capacity became more fully utilized. We are starting to realize the
benefits of consolidation our manufacturing sites in implementing more
efficient operations, as Ed discussed.
We continue to focus on these areas and have targeted product cost
reductions which we hope to start to realize in the second half of the
year.
On a pro forma basis, Q1 R&D was 15.8 million and SG NA was 19.3 million
for a total op ex of 35.1 million. This represents an increase of about $2
million from the last quarter. As I stated before, we reinstated previous
wage cuts to many folks this quarter, which was our widest component of the
increase. Operating expense was above our guidance by about $1 million
partially due to some incremental sales marketing spending and also the
fact that we took some costs out later in the quarter than anticipated. The
cost increase was not attributable to increases in infrastructure, and
we're still very focused on our spending rates.
As I will get into when we discuss guidance, don't be surprised if you see
op ex growing at the rate of one to one-and-a-half million per quarter the
next few quarters, primarily due to the fact that we have introduced some
variable comp plans into the business as we return to profitability.
Additionally, we are investing in our software business in India which
ultimately will reduce and development costs, as Ed described.
We're still looking to further reduce SG & A costs to help offset these
increases. Back office functions throughout the world are being centralized
regionally, where we think we can get more efficiency from a cost and
customer service basis. Our focus is to optimize the operating leverage in
our business model and find ways to run the company more efficiently.
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The pro forma loss from operations for Q1 was $4.6 million. During the
quarter we (had 0.4) million in net interest expense. The tax provision was
$1 million, primarily resulting to withholding taxes on foreign
jurisdictions. Cash, cash equivalents and marketable securities at the end
of the quarter was 313 million. The company did complete its equity
offering in early December, generating proceeds of approximately $124
million. Cash used from operations for the quarter was about $10 million,
principally due to the semiannual interest payment of four million as well
as cash restructuring costs of five million. Our DSOs were 70 days during
the quarter. We're getting closure on many of the issues I've been
promising for the last several quarters. It may fluctuate a little quarter
to quarter, but I still believe high sixty-day DSOs is where the company
should be.
Inventory on the balance sheet grew by $10 million, of which two-and-a-half
million relates to foreign exchange, another to one-and-one-half relates to
a sorter order which will ship in Q2, and two million relates to our
recently announced one fab order. The balance of the increase was generally
Q2 ramped up production.
As Ed has stated, our headcount at the end of December was approximately
900 employees. The entire increase relates to direct labor. As I have said,
we have virtually completed at restructuring for the quarter and had no
restructuring charge. We are still reducing costs in our specific areas to
further improve our cost and efficiency, however, not as a result of any
major structural changes. We do expect a restructuring charge of about 1.5
million in Q2. For Q2, we expect revenues to be 100 to $125 million.
Margins will be flat to slightly up.
We're forecasting approximately 15 million of the revenue increase to be
related to the ST Micro contract, which I have said in the past has lower
than average margins due to the way the direct expenses get recognized.
This contract will yield just about 30 percent growth margin, which drives
our Q2 average down by almost two percent. The incremental revenue should
drop about 45 to 50 percent to the gross margin line, which helps mitigate
most of the lower margin on the
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ST project. This coupled with better mix in the December quarter leads me
to forecast flat to slightly up gross margins. Op ex should increase
slightly by one to one-and-one-half million, say to 36, 37 million.
Taxes are projected to increase slightly to 1.2 million. Our EPS should be
10 to 15 cents positive on a pro forma basis. Additional charges not on pro
forma are anticipated to be amortization of 950 K., deferred comp of 2.1
million and lastly about 1.5 million for restructuring, giving a gap EPS of
a penny 25 cents. I'll note that this should be the last deferred comp
charge for the company as these costs will be fully amortized. This is the
end of our repair remarks, I'd be happy to answer any question you may have
at this time.
Operator: Thank you, to ask a question today, simply press the star key followed
by the digit one on your touch-tone telephone. If you are using a
speakerphone, please release your mute function to allow your signal to
reach our equipment, and again, it is star one to ask a question. And we'll
go first to Timothy Arcuri with Deutsche Bank.
Timothy Arcuri: Hi guys, nice quarter. I had actually three questions. I guess
first of all (Bob), for you, Bob Woodbury for you, if we look at it to June
-- I know that you don't want to give guidance out to June, but if you look
at gross margin progression in to June, it you know sounds like the
business with ST is going to artificially suppress March margins, so what
kind of drop through should we expect going forward in to June and kind of
beyond? Should we see a pop in gross margins in June?
Bob Woodbury: Yes, you should. If -- you know, as I described, team, there's
probably -- if you had an apples to apples -- a normal mix, $120 million
quarter, how margins would be in the -- you know, just sub 40 percent. So
it'd be 38, 39 percent. So you know, as the momentum builds, with that type
of revenue, you should expect to see that.
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