Onto Innovation Inc (ONTO) 2003 Q1 法說會逐字稿

--Nanometrics Q1 2003 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 demand 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 discussion and analysis of results of operations contained in the company's annual report on form 10K, for the fiscal year ended December, 2002, 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&A session will be held at the end of the call. Until that time, all participants will be on a listen-only mode. We will begin the conference call with Mr. John Heaton. Please go ahead, sir.

Thanks very much, operator. Hello, and thanks again for joining our first quarter 2003 conference call. Before I get started with my comments and thoughts, I wanted to let Paul read the announcement and make his comments on some of the details. If you have not received a copy of the announcement, you can go to our website, at www.Nanometrics.com, or call us directly at the company. I also wanted to take this opportunity to highlight the fact that we recently published our 10K and annual report. These documents do an excellent job of describing our business strategy, markets, and risks. I encourage all of you to download it from the web or request a copy from the company directly. Paul?

Thanks, John, and thanks for joining us today. I'll start with the announcement that we sent out this morning. Total revenues for the first quarter of 2003 were $9.4m, a decrease of 4% from $9.7m in the fourth quarter of 2002, and an increase of 17% compared to $8.0m for the first quarter of 2002. The increase in first quarter revenues in 2003 compared to the first quarter of 2002 resulted from stronger demand for semiconductor process control equipment, particularly in the U.S. and Pacific Rim countries. The net loss in the first quarter was $9.6m, or 80 cents per diluted share, compared to a net loss of $1.5m, or 13 cents per diluted share, for the same period last year. The net loss from the first quarter of 2003 included a $6.0m charge to record a valuation allowance against deferred income tax assets. The company's financial position continues to be strong, with cash and short-term investments totaling $32.7m.

Taking a look at sales by territory in the first quarter of 2003, there were as follows, and these numbers are rounded -- the U.S. was 25%, Japan was 15%, Korea was 40%, and Taiwan was about 20% of product sales. Sales by product category in the first quarter of 2003, and these are also rounded, were as follows. Automated systems, about 60%, integrated systems, 10%, tabletop systems, 10%, and service was about 20% of total net revenue. Our gross margin was 41% in the first quarter of 2003, the same gross margin as in the fourth quarter of 2002. R&D expenditures in the first quarter of 2003 were about 36% of total net revenues, as the company continued to invest in the development of new products. SG&A was about 44% of total net revenues in the first quarter of 2003.

The $6m charge to record evaluation allowance against deferred income tax assets that we referred to in the press release was suggested by our auditors, who were concerned about its future recoverability based on the past losses, as well as poor visibility on future sales in this difficult market environment.

Finally, as we said in the press release, our financial position continues to be strong, with a cash balance, as of March 31st, 2003, of $32.7m, and working capital of $65.6m. With that, I'll turn over the discussion to John.

OK, thanks, Paul. So my prepared comments today will focus on the important events of the quarter, as well as update you where we stand in the business in general. After that, we will give some general guidance and then open it up to questions.

Paul broke down the sales by territory, and product type, and since there was little change to the trends for us, I'll fill in the color on the shipments by answering any questions that might come up at the end of the call. Probably the only thing that we would want to highlight that's significantly different would be that Korea was a larger percentage of our revenue this quarter, primarily based on our stand-alone system shipments into that territory. As you all know, there's been a large DRAM manufacturer in Korea, and our position in that territory has been strong. As that territory continued to invest, Nanometrics benefited, and we saw that reflected in our quarterly revenues.

The general takeaways from quarter have to be that our revenue level is still low, as it has been for a little over a year now, because of a continued lack of semiconductor industry investment. Second, our relative losses continue, based on our strategy, longer-term, to continue our investments in new technologies. Third, our cash position continues to be strong. And lastly, that accounting policies and practices have accounted for additional non-cash losses for a second straight quarter.

The biggest issue in the quarter has to be the $6m charge we took and accounted for most of our net loss. The details are that standards accounting practices dictate that we constantly evaluate assets against current business conditions and market value. Last quarter, we evaluated our goodwill, based on market conditions, and found that there needed to be adjustment, which we took then. This quarter, in consultation with our auditors and based on current industry forecasts, it was deemed appropriate that we take our deferred income tax asset and write it down. While we would like to forecast a return to profitability soon, and start to utilize some of the asset, we also must rely on industry groups and general economic indicators to base our future projections. Unfortunately, these indicators have been recently generally negative and therefore we decided to write down the asset.

The way it works, just for informational purposes, is that quarter by quarter, we have been setting aside these carry-forward income tax provisions, so as we accumulate losses, quarter to quarter, this asset shows up on the balance sheet, and therefore, as I said, the number became rather large and the prospects for significant profits on the short term especially, just weren't there, so it was decided that we probably should just write that down.

Another area I want to discuss was the gross margin number. Nanometrics has been proud of the fact that we have historically achieved better than average gross margins, based on strategic initiatives and overall product outsourcing. A few years ago, we made a strategic change, to vertically integrate some of our Integrated Metrology products, and that has some negative effects on the gross margin performance during times when the production is underutilized or just starting up.

The intention of such a strategy is very positive; better controlled costs and improves product performance, which we still believe will occur. In fact, we have now moved from engineering to production manufacturing in this area, and intend to start shipments of some of the exciting new products this quarter. This should help relieve some of the drag on our margin, as it starts to spread some of the costs over these new products. The choice was simple for us as a company -- organically grow through innovative technology and strategic manufacturing. We hope that the last two years of effort and investment would now start to provide a better level of product and financial performance.

While it's important to discuss the details of the numbers, we also would like to continue to keep our investors focused on positive trends that we see, and also reiterate our long-term strategies. We have stated that we intend to lead a trend to move Metrology closer to the customer's wafers by incorporating Metrology into the process tools. There continues to be mounting evidence that integrating Metrology into the process tool will improve profit capabilities, as well as reduce scrap. This has been evident over the last year, especially in the etch area, where our Optical Critical Dimension System continues to gain acceptance. We believe there will be more such integrations in the coming months, and we will report to you as they occur.

From the overall business perspective, our market position within both stand-alone and integrated remains relatively unchanged. We continue to maintain a constant stream of demos, evaluations, and sales leads, which is confirmation that customers are still investing and are interested in our equipment.

The recent Dataquest market share results indicate that we have continued to maintain our share within the market, as many of our competitors have faltered.

Other positive signs for our overall business are that we expect that during the current quarter, we will ship some of our new products to end-user customers. We have focused our efforts on products that can generate revenue as quickly as possible in markets that are growing, even during this downturn. Examples of these new products will be a new flat panel display measurement system and integrated systems, focused on copper and 65 to 90 nanometer lithography processes. While we can't predict the timing of acceptance, we hope to record revenues from these new products over the next few quarters, some sooner than others.

Our technology focus and development continues to be in the areas that are critical for our customers to reach new levels of productivity. Some examples will be in the lithography area, where we perform measurements of critical dimensions, overlay, and backside wafer inspection. All of these advanced technologies are critical in taking the next step in the evaluation of geometry shrinks.

In the etch area, our primary focus is on critical dimension and APC, to improve transistor gate performance, as well as STI. In the area of [copper demsene] we are using built thickness to improve the oxide CMP process as well as OCD for oxide trench measurement characterization. We also are now measuring customer's copper CMP wafers to help characterize [vishing], erosion, and residual metals. All of these technologies will be required as customers move forward with expansion in the coming years.

Moving on, finally, to the current business outlook, we are continuing to take a positive, cautious-- well, we are continuing to take a cautious view on any sizable, sustained recovery. While we are positive about the high-tech industry in general, and its long-term outlook, we must also deal with the current uncertainties. Demand is still an issue, and we don't see any substantial change in our revenues this quarter. So we will guide for flat revenues, with a plus or minus 5% being a general range.

We have also taken steps to lower our costs by adding additional shutdown days to the current quarter and elimination of certain positions within the company.

With that, I'll open up to questions, operator.

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

Our first question comes from Gerry Fleming with Fahnestock & Company. Please state your question.

John, I didn't get the mix between automated-- or automated and integrated systems?

Oh, as far as the various product lines?

Yes.

Automated systems for the quarter, about 60% of sales, integrated about 10%, tabletop, about 10%, and service was about 20% of sales.

OK, thanks. And there have been some customers out there who have been looking at possibly buying Integrated Metrology Tools from you to put on platforms other than the [Merimasa] and the [Producer]. Have you made any sales directly to chip companies, and can you give us any sort of-- or do anything to illuminate what machines they might be going on to?

It's a good question, and we've talked a little bit about it in the past, and our policy, you know, and the reason why we haven't talked about other platforms, has been that-- has not been really a material event. So the way we gauge announcements is, is it material or is it not?

As you know, we have been interested, especially recently, in providing a more direct channel to the customers, in order to make the trend of moving metrology into the process tool more affordable to the end-user. I think that's especially important during, you know, kind of difficult economic times. People want to be able to try it, but they don't necessarily have the big budgets that they have when people are doing capacity expansions. So yes, there has been a lot of interest. We've seen the desire on the customer's part recently here. We expect that we will be shipping directly to end-user customers other platforms, either this quarter or the next quarter. It's going to be kind of a timing issue, based on fulfilling our production area in the back for these new products. And that's what I was trying to allude to, in my prepared comments.

You know, we have been working for the past, almost three years now, on a vertical integration strategy, developing technologies to improve the systems from both a price and performance standpoint, and we expect that we have finally now gotten to the point where we can actually start to ship these things to real customers on both an OEM and end-user perspective, so we expect that to start this quarter and continue on to the next quarter.

OK, thanks.

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

Oh, excuse me, I'm sorry, it's Christina Osmena with Needham & Company. I was confused by the name called out. Could you please give us a breakout of your automated revenues by flat panel display, overlay, and thin film?

Flat panel display was probably about $500,000 or so in sales during the quarter. Overlay, there weren't any recorded during the first quarter. And what was the other one you asked about, OCD?

And then the thin film, the stand-alone thin film? And then- and OCD.

You can back into the difference. The other thing was the OCD, which represented about $300,000 or so during the quarter.

Right. And the breakout in the-- between 200 and 300 millimeter?

300 millimeter was about $2.5m during the quarter, of products.

OK. And would it be safe to say that you shipped nine Integrated Metrology Systems?

Yes.

And what do you think-- you know, if you take out the charge for the income taxes, you're-- you're pretty much coming in line with expectations. What do you think break-even levels are going to be, now that your revenues are pretty much, you know, staying at consistent levels and you're lowering costs?

Well that's-- obviously, I think we talked about this in the last quarter. I think we're around $12m in order to break even. But again, our assumption has always been that our current revenue levels are based on our current product that we've been shipping, and as I tried to explain here, we've been experiencing a lot of drag on our margins, related to this vertical integration strategy, and those costs, you know, have not been applied to products that we're shipping. So, starting this quarter, we're going to start to realize, you know, an improvement in the gross margin with obviously will improve our break-even level, and also should contribute to new revenue streams for the company. I mean, we're talking about product shipments that, you know, are not products that we currently have, so therefore represent a relative new revenues for the company.

OK, so it's coming down, but not quite certain what level it's coming down to?

Exactly.

OK. Now could you go over with us maybe what areas of your balance sheet, you know, what-- which assets you're-- asset categories you're most comfortable with, and I guess maybe you might talk specifically about the level of inventories and if, you know, we might potentially a write-down there, and then also give us a break down of the property, plant, and equipment, and what you think the true value would be in that category?

The true value is what you see in the statements. And then in terms of the inventory, there's no write down that we know of. And as you can see, in fact, we've been using up the inventory as planned.

OK.

That's obviously, you know, a hot topic, you know, in today's business environment, and you know, we're very careful, and there's a lot of scrutiny being paid to all of our assets, which is what has led to people to go back and really scrub through both inventories and any kind of assets on the books, which we, you know, always take a very conservative approach to. And you know, as we see things, we adjust them, and you know, as valuations are made, throughout the course of a business year, you know, we look at these things and you know, draw conclusions about, you know, what their relative value is. But today, we believe that all of our assets are valid and useful and we deal with things on a real-time basis, when we do realize that that has changed. So, we don't see a lot of risk. Obviously the inventory number is the biggest risk, because it's the biggest number on the balance sheet, but you know, we've never had a significant inventory write down here in the company. We're constantly scrubbing the inventory to verify its usefulness, and feel that, you know, over the long term, these things, you know, maintain their value.

Oh, OK, so let me kind of ask kind of a follow-on on that one, all right? You haven't had an inventory write down since the downturn has taken place. And since then, you know, you've had a lot of new products that you've developed. So, could you just explain to us why, you know, these inventories, which have probably been on the books for quite some time, and you know, reflect products that are probably older, would not, you know, would not be written down?

Well, I think that's the great part of our business. Since we are a relatively old company, 28 years, I believe, something like that now, we have products and product that we've made greater than 10 years ago, that we still sell, and I think another, actually, a benefit of this inventory of, in some cases, older equipment is that as you've seen the Chinese territory start to become more of a player in semiconductor equipment, their strategy has been more towards trailing edge technology, and if you go beyond the SMIC and GSMC, there's a lot of other facilities in China that are opportunities for older equipment, and I think also gives us some ability to sell this inventory, still making money off it, for people who don't have the tremendous budgets for our top-of-the-line equipment. So I still maintain that these are current products, they are not obsolete products, even though we're developing new products in the company, we're not necessarily obsoleting older technology. In general, our idea is to, you know, improve the technology to enable some new capability, but not necessarily obsoleting older technology.

For instance, our new vertically integrated/integrated system is primarily a 300 millimeter system. So, all of the 200 millimeter things that we offer today are still, you know, top-of-the-line kind of products, that you know, we maintain and will be maintaining for the years to come.

OK. All right, well moving on to the property, plant, and equipment, how much of that $49.5m is-- reflects the facility in, I believe, in [Milpita]?

About $35m to $40m, roughly.

And that was purchased in the year 2000, is that correct?

Yes.

So what do you think the current market value is of that facility?

What it's recorded on the books as.

OK, thank you.

Thank you. Our next question comes from [Jeff Schrader] with MS Capital. Please state your question.

Good morning, gentlemen. I was wondering if you could give us a little color into what happened in the cost of service within the quarter? I mean, we had a revenue increase of about maybe, you know, a little under $800,000, and cost of service seems to almost jump in line with that. Wouldn't that be a little bit higher margin business for you, in terms of the service side?

So in the comparison, you can see that the-- there was an increase in the service revenue over the first quarter of 2002. And then your point was that the cost of service went up by, it looks like, a little over $600,000.

Almost comparable to your gain. I mean, not much--

Yeah, there's a little differential, but the main reason is, of course, that there are the costs of the materials themselves, and also we've had over time, we've increased somewhat the support of the products. We really haven't looked at the service area ever as being simply a way for us to make extra profit. It really is there to support our product sales and our reputation and so forth, so you know, we're more focused there on making sure that we have the support the customers need.

So more of a quality control?

Yeah.

OK. And could you also give a little color on the increase in accounts receivables on the year-over-year, in terms of the sales, and then adding up of the deferred revenue change year-over-year? It just doesn't-- it still seems like it's a bit greater in terms of the increase, year-over-year, on accounts receivable?

The increase on accounts receivable, oh, from the $9m at the end of the year, you mean?

Yeah, at the end of year, I apologize, sir. Yes.

Yeah, OK. The increase really there has to do with two factors. One is the timing of the shipments -- the later we ship in the quarter, the less likely we are to have the receivables come in as payments. And the other issues are sort of territorial. When we ship to certain areas in the Far East, the payment cycle times are just longer there.

So it's just a little bit of a lag, and we should probably see that come down over the next quarter?

I don't know. It depends on, again, the timing and the location of where we make the sales.

OK. What also is the company's projected long-term growth rate? You talked a little bit about having a solid long-term projected future, but what's the company's projected long-term growth rate at this time?

Well, we don't generally give forecasts for growth rates. You know, generally, you know, we look at the industry growth rates that different forecasting organizations, you know, are good at. You know, we, in general, are trying to address different technology areas. As you know, 90% of our revenues today is still film thickness related, and we've worked very hard over the last few years, as we have grown, to try to reinvest, you know, some of the profits that we derived in the previous years and some of the capital to reinvest in the company to address different markets. Some of those markets being this new optical CD technology in the new copper Metrology area, as well as inspection areas. So, I mean, it's very difficult for us to give you any kind of projection, because we don't really have a great idea of what the market is going to do. In general, though, you know, our goal has always been, you know, a 20% compound annual growth rate over five years, that kind of a--

OK, well, that certainly helps. Just one last question and I'll get out of the queue here. If you could back out - back into EBITDA from operating loss for us, what was EBITDA in the quarter?

I don't know, I didn't analyze that.

OK, well maybe I'll get back to you guys after the call and we can talk about that. Thank you, gentlemen.

Thanks.

Our next question comes from Stuart Muter with Adams, Harkness & Hill. Please state your question.

Good morning, gentlemen. A couple of questions. First, John, you mention in your remarks, and you've said this a couple of times, on calls, about going to a more direct model, focusing on end users. With Integrated Metrology somewhat immature, you know, are there any obstacles to that, and I'm thinking along the lines of standards or something like that?

Well, what we have seen and what we have tried to promote in new suppliers is, and I think that you're going to see this over the next few months, especially as we get closer to Semicon, that what people are going to do is create a port, an Integrated Metrology port, that multiple suppliers can hook up to. I think the idea of, you know, having a single supplier and having a tightly integrated is a more extensively solution from a customer's perspective, that, you know, customers want choices, customers, you know, have their own desires about what kind of Metrology is important to them. So therefore, I think most of the OEMs now, have agreed that the best method for them going forward is to either have a direct channel, where they buy our product and resell it, or to also allow the Metrology company to sell directly. And that's what you're going to see, as we start to roll out, especially these new products. It's really been our primary focus, especially on our newer products, because you know, we designed the newer products to be easier to integrate for the OEMs and therefore easier for us to do a direct sell. In our previous generation systems, you know, they are relatively complicated and a lot of packaging requirements.

One of the primary focuses of our new system was to reduce the amount of packaging. If you reduce the amount of packaging, you make it easier for the OEM, you know, to make a simple kit. It doesn't need to be the complex level of integration that's occurred in the past. So we believe that's going to play out better over a longer term than, a more complicated system that requires a long digestion by the OEMs to do the integration.

John, what's the status of people working on a semi standard for these interfaces?

No, we haven't seen that. We've seen, you know, I think any company that wants to control their own destiny, there's not necessarily a trend, probably because KLA is not interested in promoting a trend of standards. I think in general, Metrology companies have not necessarily been open to the idea of standards, and that it's been true for front ends. You know, with the [Bolst] interface. But if you get kind of beyond that, where it's not such a standard thing, I mean, there really is no one Metrology system that, you know, you'd like to have on every piece of [process] equipment. Therefore, I think the desire and the motivation for creating a standard is just not there.

OK, and a question for Paul -- in terms of gross margin improvement, are we talking about a couple of percentage points, or can you help quantify what you think the improvement will be in the current quarter?

No, we can't quantify it, because as John mentioned, you know, there's a timing issue as to when the new products may kick and show up in the income statement. We'll just have to see.

Fair enough. Thank you.

Our next question comes from Martin Teng with Needham & Company. Please state your question.

Hello. Just a couple of accounting questions. I need to know what's your CAPEX for the quarter?

It was about $50,000.

And your headcount?

316.

And depreciation -- how much was that?

Pardon?

Depreciation?

About $500,000 for the quarter.

$500,000. Also, you mentioned that most of your integrated systems are related to etch systems, is that right?

No, it was fairly balanced, etch and film thickness, primarily being CBD-oriented.

OK, thank you very much.

Thank you. As a reminder, should anyone have any questions, please press star one on your push button telephone at this time. Our next question comes from Mike O'Brien with Soundview Technology Group. Please state your question.

Yeah, hi, John.

Hi.

Just tell me, on this coming quarter, flat revenues, does Samsung or does Korea go away, and what region do you see a pick-up to get to flat revenues?

Oh, that's a good question. Some of the shipments for this coming quarter, flat panel displays, as I mentioned, we're going to shipping some of our new products for flat panel display, so that's going to be primarily a Japanese phenomenon. Also, you know, our integrated sales for the quarter, so that'll be U.S. Beyond that-- yeah, there will be some stuff in Korea as well, looking at the forecast here. It's not necessarily going away, but you know, we have a number of customers there in Korea, and when you do sell a stand-alone system into those territories, you know, it has a big percentage impact on our level of revenues right now.

OK, great. And on the integrated, you just mentioned that integrated is stronger. Can you give me an idea of the-- is that new product penetration, or are you seeing, you know, Applied come back and start to refill its shelves, from an inventory perspective?

I think it's just generally some of the 300-millimeter customers, primarily, are continuing to buy equipment for their fabs. It's both, you know, CBD, CNP, and OCD, but I think OCD is certainly, you know, getting stronger over time. There's been a number of customers that have achieved pretty amazing performance when they promote a trimming process within their facilities. You know, we believe that it's going to be one of the key enables for the 90-nanometer process transition. There's not a lot of doubt about that, and I think people are waking up to the realities of that. So, you know, it's kind of balanced. It's not necessarily any one area that is the strongest. You know, OCD continues to gain. The CBD customers that we do have, that are using our systems, continue to invest, and will be receiving new equipment this quarter. So, those are, you know, positive things from a forecast standpoint.

And you know, many of the other equipment companies that have announced are still looking for capital spending plans, you know, 5% is probably the high end. Flat. Not many have said down, which would say that there's going to be-- would have to be a fairly sharp increase in the second half. Do you have any thoughts on what you think capital spending for the full year is?

I don't, you know, have a lot of visibility into the customers. I did do a lot of traveling in the first quarter. I was in China, I was in Taiwan, I was in Japan, I was in Korea, and I was in Europe. In general, I would still say that most of the customers, you know, are still planning expansions and are still doing pretty significant technology transitions, and you know, fortunately or unfortunately, we're at low revenue levels, so I don't think it's too big of a deal for us to be able to kind of maintain our low levels right now, because customers still continue to invest in all those areas and we participate in all those areas.

But second half of the year, you know, I think the realities are that, you know, there needs to be facilities to put these fabs in, and in order for those to happen quickly, you know, the buildings need to be built, and we still haven't seen a tremendous amount of new buildings, so there's some plans, and hopefully those plans will continue. I think the economy should improve as the year goes on. That's generally what the forecasts, as we get closer to Christmas and the consumer device, you know, electronic devices, start to sell again, the channel will start to dry up, and there's going to be probably significant capacity shortfalls from customers. So then I think starts to ignite again. That's generally the feeling that, you know, we have from customers and other people.

OK. My final question -- headcount reduction, what kind of percentage, or numbers?

We're not necessarily going after a percentage. You know, what we've tried to do is try to our best to not interfere with these new products, because obviously the new products are going to drive our revenues and right now is a very important time -- it's actually the critical time for us to get these things kind of finished and into the field and through the customer's acceptances, so we can't really forecast, you know, any kind of a significant headcount reduction. You know, we're continuing to add shutdown days and we've looked closely at all the different programs and we're constantly monitoring and scrubbing them, and if we find any ways to kind of save money, we're going to do that.

OK, thank you.

OK.

Our next question comes from Martin Teng with Needham & Company. Please state your question.

Hi, it's Christina Osmena. Just a quick question here -- did you have any OCD sales that were stand-alone, or were all of them integrated?

They're all integrated, yeah.

OK, thank you.

As a final reminder, ladies and gentlemen, should you have a question, please press star, followed by one, at this time. Gentlemen, I am showing no further questions.

OK, well, I'd thank everybody for listening in today on the conference call and look forward to the next quarter's results, which should be around the Semicon timeframe. So thank you very much.

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