Onto Innovation Inc (ONTO) 2003 Q2 法說會逐字稿

Good morning and welcome to Nanometrics Q2 2003 Earnings Conference Call. Following discussions 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 and 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 it products in a timely manner, changes in business or economic conditions, and the addition of risks and uncertainties set forth in management's discussion and analysis of results of operations contained in the company's annual report on Form 10-K 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 in a listen-only mode. We will begin the conference call Mr. John Heaton, please go ahead Sir.

Great. Hello and thanks for joining our second quarter 2003 conference call. Before I get started with my comments, I want to let Paul read the announcements and make his comments on some of the details he feels are important. If you have not received the copy of the announcement today, you can go to our website at nanometrics.com or call us directly and you can have a fax out here. Paul go ahead.

Okay, thanks John and welcome everybody. I will read the announcement to you first. Nanometrics announce its financial results for the second quarter of 2003. Total net revenues for the second quarter of 2003 were $9.7m, an increase of 4% compared to $9.4m in the first quarter of 2003, and an increase of 16% compared to the second quarter of 2002. The increase in revenues during the second quarter of 2002 compared to the same period, I am sorry, in 2003 compared to the same period in 2002 resulted from increased demand for semiconductor process control metrology equipment and flat panel display metrology equipment particularly in Pacific Rim countries. The net loss in the second quarter of 2003 was $4.1m or 34 cents per diluted share compared to a net loss of $1.7m or 14 cents per diluted share for the same period last year. For the six-months ended June 30, 2003, total net revenues were $19.1m, an increase of 16% from the same period in 2002. The net loss for the first 6 months of 2003 was $13.7m or $1.14 per diluted share compared to a net loss of $3.2m or 28 cents per diluted share for the same period last year. The net loss for the first 6 months of 2003 included a $6m 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 $30.7m and working capital of $61.7m.

Now taking a look at the sales by territory in the second quarter of 2003, they were as follows and these numbers are rounded; U.S. was 20%, Japan was 30%, Korea 30%, and Taiwan was about 20% of product sales. Sales by product category in the second quarter of 2003 and these are also rounded were as follows; automated systems were about 70%, integrated systems about 5% tabletop systems, 5% and service was about 20% of total net revenues. Our gross margin was 34% in the second quarter of 2003, down from 41% in the first quarter of 2003 primarily as a result of higher unabsorbed overhead and lower pricing in some older products. R&D expenditures in the second 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 40% of total net revenues in the second quarter of 2003, which was down from 44% in the first quarter of 2003.

During the second quarter of 2003, we reduced our inventory by about $1.4m and since the beginning of 2003 we've brought our inventory down by a total of about $2.9m to the decrease of about 11%. Finally, as we said in the press release our financial position is strong with cash at June 30, 2003 of $30.7m and working capital of $61.7m. With that I'll turn it over to John.

Great. So my comments today, as in past conference calls, will focus on the important events of the quarter as well as update you on where we stand in the business in general. After that we will give some guidance, general guidance and then open up to question. The first takeaway from the second quarter is that we ended up about where we thought we would be. Simply we met our revenue guidance from the last conference call and as the semiconductor equipment business continues to be challenging. The second takeaway is our relative losses continue, which is somewhat based on our longer-term strategy to continue our investment in new technology and gain market share. Third, our cash position continues to be strong. Having said all that, our results in general are following historical trends with the obvious exception of the low gross margin for this quarter, which contributed to a greater loss than we had anticipated. The dropping gross margin can be attributed to a number of factors it's pretty obvious to most in our industry that service maintains a lower overall margin and product sales and Nanometrics is no different, so as the contribution from service goes up our overall margin go down.

In addition, to the service we also had a mix of product shipments that included mostly older lower margin products. On top of those things, we also had the lower absorption cost over a smaller product base, which generally follows with depressed product revenue levels. Lastly, we did have some upgrade business that historically hurts margins as well as general pricing pressure from customers. Put these things all together and you end up with a pretty poor gross margin, disappointing but not something we expect to continue to any great degree going forward. Our business model is an always has been designed for good gross margins we just need the general environment to improve. Suppose that if I take away from some of those older products and upgrade shipment is that we had set an internal goal of decreasing our inventory to both offset our anticipated cash losses as well as drive down the procedure risk with carrying a larger inventory. We succeeded with that, but it certainly hurt gross margins. Moving away from last quarters revenue details and reviewing some of the last quarters conference call comments, I highlighted the plan to start the shipment of our next generation integrated and standalone platforms.

The current update is our systems are now in production with orders in place and shipment scheduled. Early results from the technologies and basic platforms are quite encouraging. We expect shipments to multiple existing and new customers in this quarter and we'll be making announcements appropriately. Territorially, our product sales pretty much fell along traditional percentages so no real changes there. On the competitive front we don’t see any significant changes by our competitors or their products during the last quarter. The [semicon] west show which was poorly attended by customers though our no new products introductions that would change our view on the competitive landscape. We remain highly competitive in both standalone and integrated metrology product areas and will continue to innovate and introduce compelling technologies throughout the downturn.

Our applications crew is also extremely busy with customer [demos] and sample analysis, which gives us great confidence about our business when the upturn comes. Going forward, the challenge for Nanometrics will be one of SAB revenue recognition and timing of shipments, overlaid on a challenging overall business environment. What that means is we will be shipping new models to new and existing customers. Under SAB rules a shipment can only recognized upon final acceptance. I think many of you are also aware of the special situation that also exists in Japan, related to revenue recognition. In general it takes longer, some times one or two quarters longer to get revenue recognition there. So our real challenge for Q3 is going to be keeping our SAB -- revenue level up high enough to curtail greater losses. The good news in [inaudible] in that story is that our new products are designed for greater margin actually start to absorb some of the vertical integration cost that I spoke of last quarter and over the last past couple of years. It also indicates that there is interest in our new products with new customers which should translate into improvements going forward.

Moving on to the current business outlook as the visibility continues to be weak. We are continuing to take a cautious view on any sizeable sustained recovery. While there are many positive signs of customer projects going forward, we continue to see few actual orders being placed. Demand is still an issue and we don’t see any improvement in our Q3 revenue. So we will guide for flat to down, 20% being a general range. As I said the SAB issue will be challenging in the quarter. We will also continue to take steps through lower cost by adding additional shutdown days to the quarter and eliminate certain non-critical positions within the company. So with that I'll open it up to questions, operator.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone please pickup the handset before pressing any numbers. 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 that it is received. Please standby for your first question.

First question comes from Jerry Fleming (ph) of Fahnestock (ph). Please state your question.

Yes, Fahnestock & Company. John, can you give us a sort of qualitative feel for orders and shipments as opposed to revenues in the quarter just ended, and also any thoughts you might have along the lines of what those numbers are likely to do next quarter since because of SAB 101, shipments are probably a lot easier to call than revenues, so you can give just give a rough guidance on shipments?

Yes actually, that is a good question. And in general right now I have to say that our shipments are up. I don't have it quantitatively in front of me, but there are certainly, -- if we go into our production flow and look at the products that are going to be going to customers especially in Japan, during this quarter, you know, it's up from where we have been for the last few quarters. As I said, you know, the issue is always in Japan. You know, the first thing is that are going in there is a new piece of equipment; they have generally a longer-term acceptance criteria and then generally the transfer of title takes longer in Japan. So there is always this trailing problem with the revenues. But you know, the good news is, as I was trying to explain in my comments, is that we do have some really excellent products now the 300-millimeter. We are getting new customers for 300-millimeter that we have never had traditionally in the past. That's somewhat based on some of our competitors' difficulties in the markets and somewhat based on our product performance. But, you know, however, we are getting them, you know, the bottom line is that Nanometrics is certainly taking a, you know, a strong second position in the film thickness business and we kind of see that in the customer base. So they are all lined to, you know, bring in a good second supplier. So that's what we are seeing.

Since SAB 101 doesn't really rear its head in the OEM part of the business where do you see that business going in the next quarter? I know from being at the show that applied looks like it's finally going to release the transform to production and, you know, if you could give us a little bit of insight on the outlook for integrated both at applied and with other [houses]?

Yes, so, you know, I can't speak about applied, but what I'll say about the SAB for the OEM's is -- and as I've said in the past year, you know, we have been intensively working on especially the new platform for our integrated technology. And that sys-- those systems will be shipping this quarter. Now, all of those new systems and new customers are still following the SAB rule. So we -- although you can say well it hasn't any affect on our prior business with established products with applied. If we shipped a customer a new product regardless of whether we shipped them older products in the past or not we have to wait until they get the final acceptance, which you know, generally takes 30 days after, you know, we install it. So, our anticipation is that you know, as I said, we're going to be shipping numerous new systems to not only end-users but to OEMs, multiple OEMs and those are going to be suffering from the same SAB recognition problems.

Okay. Thanks.

Okay.

Thank you. Our next question comes from Stuart Muter (ph) of Adams, Harkness & Hill. Please state your question.

Good morning. Paul, is it possible to get some operating expense guidance for Q3?

No, we are not going to give any guidance on that other than to, you know, amplify John's comment earlier that you know, we may be working with [inaudible] when we mainly want to cut that. So you can see obviously that we are working in that area since we did decline from last quarter.

Okay and a question for John, could you provide an update on the Overlay --diffraction-based Overlay product.

Okay, so the update is that we have been working on a new technology for about the past, year and half or two. One of the issues that comes up when you are talking about new technology is that you don't want to go up and talk to customers, and put people in a liability situation about the new technology as related to -- inside your trading information, so our strategy was you know this is an important technology going forward with incredible precision and we felt like it's important to make the market aware that there is a new technology available though that the issue is going to be going forward that these new technology requires special targets. It doesn't use the traditional box-in-a-box overlay target and the lead time for giving targets printed on product mass is much longer than it would be for just selling a traditional piece of equipment into an established market.

So, I think if you, for instance, were to offer a new aerial imaging system then you could expect revenue from that on the short term because there are must available on customer's [basis] today. But when you are talking about a new technology, we are working with customers. People have our targets now. They are going to be printing that. We have the system now available to and we would plan on shipping it this quarter and next. So the number of customers, leading edge 65 nanometer type technologies, in the next couple of quarters, we'll be shipping systems to them for measuring those targets and we have already done the printing. We know that it works; we have results on the critical layers and were highly confident that there will be number of adaptors for the technology, but it will probably won't happen until the 65 nanometer nodes.

Okay thanks very much.

You are welcome.

Our next question comes from Christina Osmena (ph)of Needham and Company. Please state your question.

Hi, you'd some good sales into the flat panel display market in the past. Could you give us an update on what you are doing there and how much of revenues you'd be shifting into that and how many units you ship there and basically what are your plans also for developing that market and what does the competition looks like.

Okay, so the flat panel market, the rate has been very good for us for a number of years. Our subsidiary in Japan manufactures a newest generation flat panel display system. It was the significant part of our standalone shipments where revenue recognition in the second quarter, just like the SAB issue, the [inaudible] shipped those units into other territories being Taiwan and Korea and we still believe we have on the order of 80-90% of that market. We introduced a brand new machine in the second quarter, which now includes spectroscopic ellipsometry (ph) and spectroscopic reflectometry (ph). So, we now believe that we have kind of one tool that will fulfill all the customers' requirements in modern flat panel display manufacturing. Though, it has been good for us, it continues to be kind of a good piece of diversification for us and reuse the technology that we inhouse. So, and what's our plan for developing into the future, well you know the market for film thickness and flat panel as I said, even though we have a large percentage of it, the market is relatively small. So we don’t put a major emphasis on development into that area because there is not a lot of film thickness demand in the flat panel display area. So if there were -- obviously the customers are going through a transition right now, especially in Korea to even larger panels on the order of 2 meters x 2 meters, and as that starts to occur we are going to continue to develop products for that area and hopefully our future plan would, obviously, take some of the technologies that we've been developing in semiconductor and try to extend them over to flat panel in order to increase our general product revenues and penetration in the flat panel.

But where are the flat panels? What percentage of your automated systems is flat panel, John?

Well, we didn’t look at it that way but in terms of our total sales it was about 30% during the quarter.

Okay great. What is the unit opportunity for fab?

Generally two per fab, sometimes three.

Also you were talking a little bit about 300 millimeter, but what percentage of your revenue is 300 millimeter?

Well, this quarter it was only about 10%. It was about $1m roughly -- 300 millimeter and it was about 13% of total product sales.

Okay. And I mean there are a number of large projects that are, you know, in the semiconductor markets that are getting ready to really start ordering or have begun to order now. Are you bidding on any of that business?

Well we've been strong as you can see from our revenue base in Korea and in Japan for a long period of time. So as the customers in those territories expand, we will do very well. There's no doubt, you know. All of the customers in Korea are our customers. There is none that aren't our customers there. And we had tremendous success especially the last year in Japan, broadening the customer base there. So, we feel very good about those territories expanding and extending and we had success in China. And so as that territory also expands and gets money for capital equipment and we'll see revenues improved there.

Okay. And finally a couple of housekeeping questions. What kind of tax rate are you expecting for the rest of the year and then going into the next year? And then your depreciation, CAPEX, and headcounts?

Well on the tax rate it's going to be essentially where it is now, zero, until we turn around and start showing profitability. We basically have -- we can't take a tax benefit. So, there's not going to be a pick up there for a while. And what were the other questions?

Depreciation, CAPEX, and headcount?

Headcount was about 310 during the quarter. Capital expenditure is about $500,000. And depreciation was in the $400,000-500,000 range.

$400,000-500,000. Okay. And what's your breakeven?

Breakeven -- I think in the past we said its, you know, kind of in the $12m range -- maybe $12m per quarter.

Thank you.

Okay.

Thank you. Our next question comes from Mike O’Brien (ph.) of SoundView (ph). Please state your question.

Mike O’Brien: Yeah. Hi good morning John. Just tell me a little bit more on the delay from the SAB one-to-one revenues shipments, you said are increasing -- orders I assume were also increasing?

Orders are increasing. A lot of the shipments go out initially on demo. So you can’t necessarily say that they are orders. You know, they’re -- sometimes they are the [inaudible] that are put in place in order to evaluate and then they convert that PO (ph.) into a value PO. So I don't think it's fair to say that, you know, we have this order backlog, but I think it's fair to say that we have a shift in backlog.

Mike O’Brien: Okay. So -- it's a lot of new [inaudible] that you are putting out there in field?

Exactly.

Mike O’Brien: Okay. Gross margins -- they shouldn't stay down -- do they stay down at these levels for the September quarter? You know, when can they start getting back up into the 40s?

Well, as I said, you know one of our primary goal this year because we had a lot of commentary about the inventory levels and people's concern about it. So, you know, we made a conscious effort to go out there and discount the 8-inch equipment that we had in stock here in the company and demo equipments. So we turned a lot of that around, you know, in order to drive the revenue number down. The margins improving going forward are going to be totally based on the project that we all are hearing about right now. So as our shipment of 300-millimeter equipment -- as our shipments of integrated products start to ramp back up, then you will see the margins improve. So -- and also we see a revenue recognition of the new products that we will be shipping this quarter, there is no doubt that it's going to go back up to where we traditionally have been or better.

Mike O’Brien: And what -- Paul what's the gross -- you said the top line range for breakeven -- what kind of gross margin would you be assuming on that?

Well, it's kind of hard to measure with the task the way we usually do because as you know we are doing more work in-house, but it obviously is at this point somewhere in the 40% to maybe 50% range. I don't have an exact number for you.

Mike O’Brien: Assuming it would have to be closer to that 50% range -- do you think that's right.

Yeah, that's right.

Mike O’Brien: Okay. In the -- may be just a little bit more on the integrated. Do you -- are you seeing any signs of that of that side of the business improving, John?

Has it been improving? Our CMP business has been horrible for a long period of time for this entire year. The CVD business kind of goes along, as the customers that have adopted integrated for CVD expands and, you know, those orders will expand with those and it sound likes, you know, that some of the things that we are hearing right now from some of those folks is that they do have spending plans for the next six months. Obviously, the OCD on the transformer, even though it has been a released to production we haven't seen a tremendous amount of demand for the product, so you know it's not really clear how much that's going to drive our revenue, but as I said before, you know, these new products are also going to some new customers, so we do expect and plan on our integrated sales going up because we are going to have a broader base of the customers, you know, OEM's and end users.

Mike O’Brien: Yes, and actually I want to go back one more time on the [SAB101] issue. So we should now be modeling a big snap back in revenue for the December quarter based on the -- this one sounds like some of the stuff is going to be consisting a [inaudible] and it may take more like six or nine months in turn.

I don't go with that assumption, I mean, it's possible that's true, it might not snap back, but it depends on some of the acceleration in some of these projects that you are hearing about. We do have pretty good penetration into Korea, and we have a lot of products there already, we have products in Taiwan and as well as products accelerate, and those are all 300 mm, those folks are finding money and seems to be spending so those things are going to be pretty immediate.

Mike O’Brien: Okay, so they had to be?

The projects go forward and, you know, the orders get placed and get shipped.

Mike O’Brien: The bid have to be in your orders this quarter?

In this quarter and even in -- yes, pretty short delivery times right now. If we mean realistically, you know, we're building a bunch of equipments still on the floor with anticipation that we're going to get orders, so then the only missing element here is that those hardcopy POs come in, and you know we're getting a lot of talk as you already knows from customers about spending and anticipation and letters of enhance, so those things are kind of coming in. So we expect, you know, this year we'll be shifting those units to current customers and therefore we should see things snap back somewhat.

Mike O’Brien: Okay, thanks.

Alright.

Ladies and gentlemen it's a reminder, should you have the questions please press "" "1" on pushbutton telephone. If there are no further questions I will now turn the conference back to Mr. John Heaton and Mr. Paul Nolan.

Okay. Thanks very much for joining the conference call today, and we look forward to update you on next quarter's progress, one quarter from now. Thanks 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.