Onto Innovation Inc (ONTO) 2002 Q4 法說會逐字稿

Good morning, and welcome to the Nanometrics Fourth Quarter and Fiscal Year 2002 Earnings Conference Call. The following discussion may include forward-looking statements regarding, among other things, Nanometrics future financial results, business performance and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ, and such differences could be material.

Factors that could cause such differences include but are not limited to changes in demands for the company's products, changes in the company's ability to ship its products in a timely manner, changes in business or economic conditions, and the additional risks and uncertainties set forth in management's discussions and analysis of results of operations contained in the company's annual report on Form 10K for the fiscal year ended December 2001, filed with the Securities and Exchange Commission. Thank you for joining the conference call.

This morning's speakers include John Heaton, President and CEO, and Paul Nolan, Vice President and CFO of Nanometrics. A q-and-a session will be held at the end of the call. Until that time, all participants will be in a listen-only mode. We will begin the conference call with Mr. John Heaton. Please go ahead, sir.

Actually, we'll start off with Paul reading the announcement and giving his comments on the financials. After that, I'll come back and give you some scripted comments. Paul?

Okay, thanks. Thank you for joining us. We'll start off with the press release. Total revenues for the fourth quarter of 2002 were $9.7m, an increase of 14%, compared to the third quarter of 2002, and an increase of 18% compared to the fourth quarter of 2001. The increase in fourth quarter sales in 2002 resulted from stronger demand for semi-conductor process control metrology equipment, primarily in the Pacific Rim countries.

The net loss in the fourth quarter of 2002 was $3.2m, or $0.27 per diluted share, compared to a net loss of $1.8m or $0.15 per diluted share for the same period last year. The loss in the fourth quarter of 2002 included a one-time goodwill impairment charge of $1.077m, which was determined from the company's annual impairment test in accordance with SFAS 142. There was no goodwill impairment charge in 2001.

For the year ended December 31st 2002, Nanometrics' revenues decreased 27%, to $34.7m, compared to revenues of $47.6m in 2001. Net loss for the year ended December 31, 2002 with $8.3m, or a loss of $0.70 per diluted share, compared to a net income of $960,000 or an income of $0.08 per diluted share in 2001. The company's financial position continues to be strong, with cash and equivalents and short-term investments of $36.9m, and working capital of $73.9m.

The investment in R&D increased from $10.8m in 2001 to $13.8m in 2002. I have some comments, and we'll start by taking a look at the sales by territory in the fourth quarter of 2002. They were as follow, and these numbers are rounded. In the US, it was about 20% of sales. In Japan, 30%. Korea, 10%. Taiwan, 30%. The rest of the world was about 10% of product.

Sales by product category in the fourth quarter of 2002 were also rounded, and were as follow: Automated systems, about 60% of sales. Integrated systems, about 10%. Tabletop also about 10%. Service was roughly 20% of total net revenues.

Our gross margin was 41% in the fourth quarter of 2002, compared to 45% gross margin in the third quarter of 2002. The lower margin resulted primarily from less absorption of overhead, some inventory cleanup that we did at year-end, and from start-up costs from our new machine shop during the quarter.

R&D expenditures in the fourth quarter of 2002 were about 37% of total net revenues, as the company continued to invest in the development of new products. SG&A was about 49% of total net revenue for the fourth quarter of 2002.

In addition, as mentioned in the press release, we had a one-time goodwill impairment charge in the amount of $1.077 in the fourth quarter. There is no more goodwill left on our balance sheet.

As we said in the press release, our financial position is strong, with cash of $36.9m. Working capital $73.9m. It's important to note that the decrease in our cash balance from the third quarter of 2002 was only about $550,000.

In 2003, we hope to see favorable impact on our cash balance from the continued reduction in our inventory levels, as well as from tax refunds expected during the year, as a result of carried-back provisions.

With that, I'll hand it over to John.

Great. Thanks, Paul. Hello to all, and thanks for joining our fourth quarter 2002 conference call. My scripted comments today will review some of the highlights of 2002, and then move to areas that might require further clarification from our Q4 announcement. After that, we'll look into the crystal ball and give some guidance for our business, as well as the next fiscal quarter. After that, we'll open it up to questions, as long as the system works, of course, as compared to last quarter.

As anyone can plainly see, 2002 was a tough year both for semi-conductor manufacturers as well as equipment companies. Nanometrics being part of the tech community also suffered with a year-over-year decline of 27%.

Even with reduction of revenue and poor general business climate, Nanometrics has continued to improve both the technology offerings and fundamental business infrastructure. Our belief is that this investment will pay off for our investors when the recovery does occur. Fundamentally, there is no doubt that our new integrated and standalone technology serve as a symbol of reinvigorated emotion within our company for what we do. That is to build metrology systems that provide more than just economical and reliable solutions. This demonstrates our passion to succeed. If we can add that special ingredient to what we do, whether in the case of designing, engineering, assembling and marketing metrology, we will be inspired. We will innovate and we will have a shot at success, and maybe even steal the show.

The passion may not only be purely an exercise in proving the influence of aesthetics. Passion can and does solve many business issues, while still generating profit and capturing market share, as could any company with the right stuff in their market segment.

The penalty is, if you can't, you can probably expect to slowly wither away or become irrelevant, which is what we think we see from some competitors and other under-capitalized companies during this prolonged downturn. Our commitment should be clear to our investors and competitors, as we substantially increase our R&D investment year-over-year. We intend to continue the program that will produce profits, while closely monitoring the health of our industry, and be ready to reduce that investment should the situation dictate.

As we have announced in previous conference calls and press releases, 2002 brought some exciting new technologies in defect detection, surface profiling, and optical-critical dimension to Nanometrics. We have also made major improvements to our standalone and integrated film-thickness product lines. We believe these products, which have helped contribute to our current order level, will be the major source of growth for us in the years to come.

I continue to repeat the lesson most companies have learned in prior downturns. Those that don't continue to invest in R&D, and introduce new products, miss major opportunities for profit and share gains in the upturns. We don't intend to miss that. Our strategy continues to be, "Offer the customer a portfolio of integrated and standalone products that work together transparently and bring real value."

Drilling down into the Q4 announcement, the positives I draw from the fourth quarter results are that we were able to increase our revenues quarter-to-quarter and year-to-year. We continued to invest in our most important R&D programs, and at the same time reduced our cash burn rate to around a $500,000.

Another positive is the reduction in our inventory levels, as we continue to ship product and receive acceptance on evaluation systems. We expect the inventories to continue on this trend, and strive to keep these levels in line with our business prospects. We believe we are doing all the right things for the long-term, while maintaining a strong balance sheet. A balance that is difficult to achieve in most companies our size.

The negatives are few, but we certainly want to discuss them openly. First, there was a decrease in gross margins. I have heard mentioned by numerous other companies and analysts that customers are putting pressure on selling price, and that is leading to decreased margins. We haven't seen unusual pricing pressure related to pricing, and our margins suffered more from internal sources, as Paul mentioned in his remarks, than external. We expect improvement going forward, probably back to the prior quarter levels.

Our business has always been highly competitive, and there is no change, today. We intend to continue our cost-cutting measures of previous quarters by implementing scheduled shut-downs and have also recently initiated a pay freeze.

The other disappointment was related to the goodwill write-down. Obviously the new accounting rules and our current extremely low market capitalization triggered a charge that had to be taken. This item is out of our control, and is a function of the many changes to accounting we have all experienced over the past two years. This move, as Paul mentioned, has also resulted in retiring all goodwill left on our books.

Lastly, I want to make some comments about the integrated business in the quarter and the year. There has been no change to our overall view and belief that integrated metrology will be a major source of revenue for Nanometrics during the next capacity ramp. The unfortunate aspect for us today is since there are so few systems shipping, the impression left is that the trend has not gained any traction, and won't be important into the future.

As most of you know, Nanometrics is a leader in integrated metrology. Most, not some of our R&D dollars are begin spent building products that meet our many OEM customers' requirements. The activity with these OEMs has not slowed, at all. Even in the face of this horrible downturn, so as much as we want to show tremendous gains in integrated metrology, we must all continue to wait until the upturn gathers some momentum.

Moving on to the current business outlook. Our view today should not be a surprise to anyone. Our industry is still mirrored in a prolonged downturn, and there is no sure visibility into a recovery; only hope. There seems to be a small group of customers, mostly based in Asia, that spend, while the vast majority wait on the sidelines. I'm happy to announce that Nanometrics continues to receive orders, and believes that we can maintain revenues at the current levels next quarter. As a company, we have been fortunate to have customers that believe in their own futures and are willing to spend to improve them by purchasing our equipment.

Lastly, I also want to highlight to investors many changes to our website. Many updates have been made, so you can get regular email updates on announcements by registering there. Also, as part of the Sarbanes-Oxley regulations of Nanometrics business ethics, and a statement of those. Also, insider trading data is now available in more of a real-time basis on our website, so I hope everyone has a chance to get on the investor relations part of our website, as well as viewing our products, there. It's been vastly upgraded.

With that, I'll open it up to questions and hope the system works this time. Operator?

Thank you, sir. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any number. Should you have a question, please press *1 on your pushbutton telephone. If you wish to withdraw your question, please press *2. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Glen Yeung with Salomon Smith Barney. Please state your question.

Thanks. Hi, John. Hi, Paul. I wanted to ask you a little bit about the SG&A line. It's a pretty high number. I want to know what ability you have to bring that down, looking forward.

Some of the details of it involved our high commission expense, just because of the profile of our sales during the quarter. There was some travel activity and just growth in sales. And activity with customers, too. Then also we had higher audit and legal-type expenses for various reasons. One of them is because of the new rules.

Are you expecting that number to fall back into the more $3m-plus range a quarter versus the high 4s?

Glen, it's going to be hard to say. As you know, the [Sarvane], actually the 404, is going to require a lot more auditing fees going forward. We've been warned over and over again one of the side-effects of the legislation that's come down recently-there has to be a whole new control system developed within the company, documented within the company, and then audited and tested by outsiders. We've been warned by a number of the auditing firms around the valley here. Everybody that's publicly traded will have to go through a substantial increase in accounting fees. Today we don't know what those are. As Paul said, there were a few higher legal bills. Plus we did a lot more intellectual property type work in the fourth quarter. All these things contributed to higher SG&A. But we don't necessarily believe that it's going to go down substantially. We think that there's probably going to be a new level of overhead costs related to the rules and legislation going on in Congress.

Right. I also wanted to talk about the inventory. I saw that you did bring that down. How much of the inventory now are final systems for which you are awaiting acceptance?

You mean SAB101 deferred revenue type business?

But that would not be reflecting the inventory, would it?

Yes. That's part of our inventory. So you're right. When you look at the deferred revenue line, those systems eventually will become revenue, and they'll come out of inventory. Some of the deferred revenue is related to service contracts, but a fair amount of it is related to shipments of systems that just haven't been accepted for SAB101.

Okay. So you're still sitting on something like $20m to $23m of inventory beyond that. Any chance that there's a write-off coming there?

No. We, on a continuous basis, scrub the inventory to test the viability of it. Obviously, that's an item that many companies are using the opportunity here during the downturn to take the write-off in inventory. We have continuously gone back and looked at those. Obviously when things are bad, the timing is obviously right for looking at your looking at your business, to see what things are viable and what are not. We believe absolutely that the inventory we have today is viably useful and will be sold. We can't frivolously write it down just because it's a convenience based on the market. We have to really look at the inventory, make quality judgments about it, and then go forward from there.

Fair enough. Then one other thought on OCD. Any updates there, particularly with respect to Thermal Wave's announcement with Tokyo Electron in the middle of December?

Okay. Our understanding of what the announcement by the competitors was. Tokyo Electron has established a procedure or process whereby they are going to have three different tiers of metrology companies that are qualified for the track. Tier 1, tier 2 and tier 3. They start off with a number of companies that they're working with, and actually they've been historical companies. They've been working with Census / Thermal Wave, with Rudolf and all these companies for the last couple of years. So it's not necessarily new information. It's just that they have a process now whereby they're qualifying and certifying those suppliers. From our standpoint of OCD, we believe absolutely that we have the best OCD system on the market. It's one that actually works. We still hear continuous comments from customers about our competitors, and the viability of their technologies. We have our system in production, and I think you're going to see some announcements here over the next couple quarters from customers who are actually seeing tremendous productivity gains by using Nanometric OCD in their production area. I'm not just talking about a few percent improvement in profit. I'm talking about dramatic improvement in process.

From our perspective, the customers that are aggressively adopting sub 130-nanometer geometry will adopt OCD for both litho- and for edge-applications. There's no doubt about that.

I look forward to hearing about it. Thanks, John.

Yes.

Thank you. Our next question comes from Michael OBrien with SoundView Technology Group. Please state your question.

Hi, John.

Hi.

Just a couple quick questions. First of all, on integrated. Is that more your customers working down inventories? And would you expect them to come back and have to replenish them over the next few quarters?

We saw some of that, there's no doubt, the past couple of quarters. AMAT who is our partner today, has been working off inventory. They've obviously been going through their own scrubbing of inventory, and they're trying to drive all their numbers down, I think. We've seen a lot of retirement of equipment [over and applied]. So even though we believe that the inventories now are extremely low, it's very difficult for us to get good visibility into what they actually have.

What we generally do when we ship systems to them, they're for an end-user customer. But it's very hard for us to actually get that information from Applied. They don't necessarily tell us that all the time. Sometimes it's a guessing game for us.

Do you get forecasts from them? For builds? And how have those changed over the last month or so?

We get forecasts from them. We get some forecasts from some groups. We have three different integrations, right now. One's [CMP], one's [CVD] and one's [Etch]. We get forecasts from some of them. They're difficult, and I think it's difficult for them to forecast, in many cases. So I don't necessarily base a lot of our business around their forecasts. We generally try to work from the orders we actually get, and the visibility into when they believe they're going to give us orders.

The activity's been, I think, constant and level. That's the best characterization. We don't believe there's a lot of equipment going out to the field. So therefore, we're not shipping a lot of systems. The aggressive 300mm folks continue to integrate our product. It's actually kind of interesting. We're seeing a much broader adoption. If you had asked me a year ago beyond the USA how many companies are actually really implementing integrated metrology, there were very few companies outside the US who were actually implementing it. But now, we can see in Japan and Korea and Taiwan, all three territories now are broadly all adopting the integrated film thickness, for certain. That's a change from the past.

Okay, great. And cash burn? You expect that to stay in this $500,000 or so range?

We can't predict. It's impossible for us to predict. All we're saying is we're continuing to ship products. Our visibility into this quarter and next quarter is not bad. We continue to see business. We're not taking a bunch of inventory in, so it has to be that our inventory will go down. That improves your cash. Then as Paul mentioned, we will have some tax carry forward the next couple of quarters that will in essence improve our cash position, because that will be coming back on the balance sheet in a real cash way.

Did Paul quantify those, or did I miss it?

No. I didn't quantify.

Can you?

No, because we haven't finished our tax returns. But we know it'll be fairly significant.

Okay. Where's break-even, right now?

It looks like it's probably in the $11m to $12m range, per quarter.

What kind of gross margins would you expect at the $11m to 12m range?

I don't now. We haven't forecasted that.

It's got to be an $11m to $12m kind of revenue level, based on our historical gross margins. That's where he hits the break-even number, obviously. Not at this 41% gross margin, which we ended up with this quarter. As Paul also mentioned in the conference call, or in his statements, there are a lot of things that happen in the fourth quarter that have negative effects on the gross margin. It wasn't that we weren't getting a good selling price. It was that there was a lot of labor in the quarter. Even though we had shut-downs and the holidays. There was still a lot of labor, working on some important projects. As we've transitioned over to our new ERP system, and as we go through and learn more about it, our first full year in the ERP system and going through and cleaning out things that were kind of carried over from the previous systems, I think it's all part of the learning. Now we feel much better about where our costs will be from a gross margin standpoint, going forward. As I said in my comments, also, we haven't seen any significant price erosion at all, really.

Yes, I am a little curious on that part of it. Is it just part of these start-up costs having to do with the machine shop that are going to go away that are going to get you back up a few points? You said you thought you could get back to the September level in the March quarter?

Yes. It's not one thing. It's a lot-it's a combination. Obviously, when we have these very low revenue levels, little things have a big impact. Like the SG&A number. If we were at much higher revenue levels, maybe things wouldn't look so disproportionate. Our margins wouldn't look so bad if we were in the $15m to $20m range. So little things make a big difference when you're really at low tide.

I guess maybe I misheard you. I thought you'd said that the March quarter, you thought gross margins could get back up to the September level.

Yes.

That would be on a flat revenue number.

Yes. As I said, we've been doing a lot of housecleaning. We've transitioned into our new system as we go and look at how things are being costed out and opened work orders and all these kinds of things...as we go through and clean things up through our first full year, we have great visibility now of what's going on with this new system. I think it takes time to learn. Now we really feel like we're getting this thing down, and we want to do the housekeeping as part of the year-end.

So we scrub the inventory again and look at really dirty details of inventory and where costs are at. We put those costs where they have to go. Unfortunately, in the quarter it looks like our margins were hurt. But we don't expect that going forward. It's not necessarily a labor-only or machine shop; it's a lot of things. That's why I said at these levels, it makes it look bad, but we don't believe it's an indication of where our gross margins actually are.

Okay. Thanks.

Thank you. Our next question comes from Martin Teng with Needham and Company. Please state your company.

Yes, hi. This is Martin Teng for Christina Osmena. Just a couple quick questions. Do you have any CAPEX depreciation numbers?

Yes. For the quarter, it was probably around the $600,000 range.

For CAPEX?

I'm sorry. I thought you said depreciation. About $50,000.

$50,000 for depreciation?

Let's try it again. CAPEX is $50,000 and depreciation was about $600,000.

And your number of employees?

About 300 or so.

Do you give any guidance, orders backlogs?

No. As part of our 10K, we will have the year-end backlog reported with 10K.

Yes, but what is your feeling of the sales for the March quarter? Is it going to be flat?

That's what I said in my comments. We believe we can maintain the current revenue levels. We don't do forecasts on EPS and such. The best we can do, being a turns business, is to have visibility into what we think our base revenues are going to be. Business seems to be good enough for us that we can maintain our current level, which is up from the third quarter.

You said there were a lot of customers from Pacific Rim driving sales. Could you give us a little bit more? Like what kind of customers are buying?

Well it's no big secret. I think the DRAM folks are the ones that are spending. We have certainly over a long period of time had a lot of strength in Korea and Japan. I think if you look at the breakdown in our quarter, approximately 30% of our revenue came from Japan. We also had a good quarter, if you look at the revenue for our four quarter specifically, it broke down pretty close to where we've been over the year. The US was about a quarter. Europe is very small. Korea was 13%. Taiwan was 27%. Japan 29%. Then the others were 7%. So you can see our strength remains Taiwan, Japan, Korea, as a company. US is really a small part of our business. Many of the DRAM folks are based in Korea, Taiwan and Japan. Those are the areas we have strength in. That's where we're seeing strength in our business.

One other question. I didn't really catch your product breakdown. Was it 60% automation?

That's right; 60% automated systems. Ten percent of the sales were integrated. Tabletop sales were about 10% and service was roughly 20%.

Okay. Thank you very much.

Thank you. Our next question comes from Stuart Muter with Adams Harkness and Hill, Inc. Please state your question.

Good morning. I have a couple of questions. One, John, could you provide us with an update on the macro defects inspection product?

We don't characterize it a macro defect product. The product name is "Universal Defect Inspection." When we introduced the technology, what we introduced were the dark field type system. We introduced it at SemiCon West last year. We've been evaluating a number of applications or problems that customers have and are looking for the best fit for the technology. Obviously, our company is focused on making integrated systems. The reason that we developed the technology is that customers were asking us to develop a lower-cost detection method that would monitor on an ongoing basis their process tools. We've been looking at a number of different applications that customers find compelling, in order to solve their problems. As we go now, we're finding that we've been extending the technology, and improving the technology, changing the system configuration pretty substantially. We expect to have the system actually at customer sites within the next one to two quarters. A number of systems for a number of different applications.

Great. Any changes on the OEM front with integrated metrology?

I said that before. We only talk about new OEMs when we believe that it becomes important. When folks like yourself can make some sort of prediction about revenue. Until the product is integrated and introduced in the field, we don't feel that it's important enough to necessarily go out and announce it to the public. I know that it creates false expectations. We want to give you information about OEMs that you can hang your hat on. To date, we are working as I said before with a large number of OEMs now. There's a strong trend to have integrated for [Litho], for [Etch], for [CMT] and for [CBD]. We expect to participate in a big way in all of those markets.

All of the players in there we believe at some point will have to integrate a Nanometrics product. We're working with many of them. At some levels, it's planning. At some levels, it's final work, we've already integrated on, and they're talking to customers. When we feel that it's something we can forecast revenue for, when it's going to be an important piece of information, we're going to let everybody know at the same time.

Excellent. Thanks, very much.

Okay.

Thank you. As a reminder, should anyone have any further questions, please press *1 on your pushbutton telephone at this time. Our final question comes from Gerald Fleming with Fahnestock and Company, Inc. Please state your question.

Yes. Hi, John. You had a relatively good profit report in your service business, this time. Could you tell me whether that's sustainable or whether that's just sort of the way the numbers sorted out? And where are service revenues likely to go in the future?

It's unpredictable with service revenue. The only thing I can tell you is there seems to be sort of a break-even level for service. If we get service sales above about $1.3m, that seems to be our break-even level for service. The main purpose of service for us is to service the customers. It's not an area that we target for profitability, although we certainly enjoyed having a profitable quarter, there. We're there and the service group is there to support customers.

In general, are you seeing a trend to more service revenues?

Last couple of quarters there have been.

Yes. It seems like many of the systems we've shipped over the past couple years run out of warranty, now. I think it's probably more of an effect of people not buying equipment. The systems get older and they've got a lot of hours on them. Therefore, the service goes up.

In the first year or two when we were shipping a lot of product, there was no revenue from that service, because there's a one-to-two year warranty, depending on the customer and the application. Those things are running out of warranty, they're getting older, people are trying to stretch the equipment out as long as they can. They seem to have budgets for keeping their fast-going-not necessarily buying new equipment.

One other question. That is, you apparently only had 10% of your revenues from Korea in the quarter. Yet a lot of other companies have been reporting a fair amount of order strength out of the Korean sector. Were your orders from Korea a good bit stronger than that?

We have done very well in Korea. I think it's just a question of timing. All the manufacturers in Korea are customers of ours. As I said, we have a substantial organization there with close customer ties. We've won a lot of business there over the last couple years through very hard work and collaboration with the customer. We're seeing that pay off now in orders. I think it's just a question of when we recognize the revenue. If they continue spending the way they are.

I was recently over at the SemiCon Korea show, and the Korean economy is doing quite well. Samsung's making a lot of money. I think in general, there's a pretty substantial, bullish outlook in Korea. Since we believe we do have a good position there, we're going to benefit from that in this calendar year of 2003.

Is that mostly automated systems, or also standalone?

It's standalone and integrated. It's both. Obviously, because the systems are 300mm and because automated systems do command a much higher price if you look at it from a revenue standpoint, they'll be a much higher revenue for us from the fully-automated tools than it will be from the integrated.

As I said, the change we're seeing in Korea is that customers are now adopting integrated. That was not true last year. There's definitely a mindset change of customers throughout Asia.

Great. Thanks, John.

If there are no further questions, I would like to turn the conference back to Mr. Heaton for closing comments.

Okay. Well thanks very much for coming in today. If we have any further updates for you, we'll use regular press announcements, and as I said, go onto our website and register if you need to get updated. The best way is direct to your e-mail box. Thanks for calling, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.