Onto Innovation Inc (ONTO) 2003 Q3 法說會逐字稿

Good morning, and welcome to the Nanometrics Third Quarter 2003 Financial Results 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, 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 the 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.

Thank you very much, Catherine. Hello, and welcome to our Q3 '03 conference call. Before I review the quarter and update our business, I want Paul Nolan, our CFO, to read the news release and highlight some of the financials. As usual, if you don't have a copy of the release and would like it, please go to our web page at Nanometrics.com, or call our main phone, at 408-435-9600, and ask the operator to send it to you. With that, I'll turn it over to Paul.

OK, thanks, John. I'll start off with the earnings release for the third quarter. Total net revenues for the third quarter of 2003 were $10.1M, an increase of 4% compared to the second quarter of 2003 and an increase of 18% from the third quarter of 2002. The increase in revenues during the third quarter of 2003 resulted from increased demand for semiconductor process control metrology equipment, particularly in the U.S. and Pacific Rim countries. Net loss in the third quarter of 2003 was $3M, or 25 cents per diluted share, compared to a net loss of $1.8M, or 15 cents per diluted share for the same period last year. For the nine months ended September 30th, 2003, Nanometrics' total net revenues were $29.2M, an increase of 17% compared to $25M for the same period in 2002. The net loss for the first nine months of 2003 was $16.7M, or $1.39 per diluted share, compared to a net loss of $5.1M, or 43 cents per diluted share for the same period in 2002. The net loss for the first nine 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 $30M, and working capital of $59.9M.

Taking a look at sales by territory in the third quarter of 2003, they were as follows, and these numbers are rounded. The U.S. was about 25%, Japan was about 20%, Korea, 15%, and Taiwan, about 40% of product sales. Sales by product category in the third quarter of 2003, and these are also rounded, were as follows -- automated systems were about 65%, integrated systems, about 15%, tabletop systems, about 5%, and service was about 15% of total net revenues. Our gross margin was 41% in the third quarter of 2003, up from 34% in the second quarter of 2003, primarily as a result of product mix and some cost reduction efforts during the third quarter. R&D expenditures in the third quarter of 2003 were about 33% of total net revenues, as the company continued to invest in the development of new products. SG&A was about 39% of total net revenues in the third quarter of 2003, which was down slightly from 40% in the second quarter of 2003, and finally, as we said in the press release, our financial position is strong, with cash at September 30th of $30M and working capital of $59.9M. And with that, I'll hand it over to John.

OK, thanks, Paul. Today I'd like to focus my comments into three areas -- review of the quarter, general business trends, and then finally our guidance. After that, we'll take questions.

So when looking at the quarter, one would certainly need to start with the integrated part of our business, because it changed so dramatically over the second quarter. As we mentioned in our last quarterly conference call, our shipments of next generation 9010 integrated metrology systems have begun. This system was three years in the making and marks a new level of performance and technology for including metrology in OEM process tools.

The most exciting aspect of this system is that it has functionality that allows a common system to be used in CMP, CVD, etched, and litho areas of the fab. It also moves us clearly ahead of our competition in both technology and productivity. We have shipped this new toolset to multiple OEMs, both new and existing, and can report that things are going very well. The integrations are scheduled to be installed at important 300 millimeter end customers before the end of calendar '03. We'll be talking more about this system and the new OEMs as we start to recognize revenue this quarter and next. No revenue from these shipments are included in our third quarter. Please see our recent press announcement about the details of the technology, should you have any questions, or you may also refer to our web page.

Another highlight for our third quarter was the relative quarter to quarter increase in shipments of our integrated metrology unit on established platforms, up from 5% to 15% of product revenues. It's clear to us that this OEM business is highly dependent on capacity and when we saw a return to spending on 300 millimeter capacity, we saw a quick jump in demand. Another important trend is that the demand showed a territorial expansion from the U.S. and Europeans to Japan and Taiwan, starting to incorporate the technologies.

We also introduced a new stand-alone system in the quarter that incorporates these integrated modules. This new ultra-high throughput system gives customers that don't have the integrated modules on the process tools a chance to incorporate closed loop control and get comfortable with the technology. We see it as a transition tool that can also be used in conjunction with our advanced networking to set up other integrated modules in the fab.

Moving to our financial performance and highlighting that, we're pleased with the fact that we continue to maintain a strong cash position throughout the year, and the quarter, at $30M, even in the face of operational losses. Our margins also improved sequentially through cost-cutting measures, and a more favorable mix of products, mainly to newer, 300 millimeter systems, which accounted for 47% of product revenues. We will continue our efforts to control costs and use shutdowns in conjunction with the upcoming holiday schedule.

Looking at the overall business environment, it's becoming clear as we go through earnings season that customers are still cautious in moves to quickly expand capacity. As has been widely reported, there are capital projects that have begun, and those have had a positive effect on Nanometrics' order pattern, but there needs to be more. Most equipment companies are reporting improvements in outlooks, but there's poor consistency in results and comments. One could conclude that his caused by a lack of general breadth in the current expansion. One commonly sees that order intake during initial phase of an upturn is dependent on products and territorial positioning within those few expanding companies. In our view, in our own markets, little has changed. Nanometrics continues to be well-positioned in both stand-alone and integrated businesses, mostly in Asia. We are actively participating in many evaluations and believe that our products stack up very well. This doesn't mean that we can't improve and we'll continue to invest in technologies that create leadership and value for our customers.

During the quarter, we also haven't seen any substantial changes or product announcements from our competitors. We hope, as most do, that the overall economy continues to improve and our customers become more aggressive in expansion plans, and if they do, we hope to get a greater share of the markets we serve during the cycle.

Finally, I want to give some guidance on what investors might expect from us in the fourth and final quarter of 2003. There is little doubt that we entered this quarter with a better overall market then we entered the third. We also have to keep in mind that we are in the middle of an important product transition and that revenue recognition policies sometimes make it difficult to predict actual revenues. With that said, we will guide for flat to up 10% revenues being a general range for the fourth quarter of '03. With that, I'll open it up to questions. Catherine?

[Operator Instructions] Our first question comes from Stuart Muter. Please state your question.

Good morning. A couple of questions. First of all, could you help us out with maybe some, if not quantitative comments, some qualitative comments on opex and gross margins for Q4, and also, other income looked up in Q3. What would that look like in Q4? And then I've got a couple of product questions for John.

We don't typically forecast margins and operating expenses, but as John mentioned in his comments, you know, we would continue to try to keep costs down during that period.

With regard to your follow-up question, which was-- can you repeat it for me?

Other income looked up a little bit in Q3, relative to, say, Q1 and Q2.

Yeah, that was primarily as a result of favorable exchange rate activity in Japan, primarily, during the quarter, and you know, we can't predict what that may be in the fourth quarter.

Fair enough. And a couple of questions for John, if I can sneak 'em in. One, how was flat panel revenues in Q3, as a percentage?

Flat panel were 21% of product revenues.

And how do you see the tone of business for flat panel in Q4?

It's about the same. The forecast has been strong throughout the year. We've been shipping a few systems per quarter. We kind of see that going forward, you know, at relative to kind of flat rates. I think what happens is we see, on a territorial basis, kind of an expansion going on, and they rotate around. Recently it's been Taiwan. That'll probably go back to Korea again, and then finally probably over back into Japan, so that's the kind of rotation we've seen recently from the order pattern.

Great. And on the universal defect inspection tool, how's the adoption going there?

It's been going good. Well, we've had the systems, the customers have been very positive on the feedback. There's been, I think, in general, there's a lack of acknowledgement of-- especially backside contamination problems in the marketplace, as people have transition to 300 millimeter. They've had so many other important issues in the fab that they really haven't been focusing on backside wafer contamination, which is the primary application for the UDI. And I think now that we're starting to see customers start to work on improving the yields for 300 millimeter, you're starting to see the attention to the details, and that brings the backside contamination issue to the forefront. There's also been some really good articles recently by some of our competitors, highlighting this as a major problem, which, you know, in general, brings the market up on it being a problem, which, you know, in turn helps us. So what we've seen is, you know, since-- especially since some of these articles have come out, that there's been a greater awareness on the customer base, and therefore greater desire to have our systems. So right now, we're building some production units to ship to customers for beta testing.

That sounds good. Are you getting any requests for edge inspections?

We haven't really had a lot of requests. I mean, the system does do edge inspection and has been something that people have talked about, but we haven't seen nearly the awareness of the edge as we have for the backside, in general.

OK, thanks, John.

All right.

Thank you. Our next question comes from Gerry Fleming. Please state your question.

Yeah, hi, John.

Hi.

The integrated metrology number growing from 5% to 15%, that's all the OEM business to Applied? Is that correct?

Yes.

OK, then as you talk about the new applications that we're going to hear about in the coming quarter, are those tools all being shipped directly to the end user?

No. Most of the initial shipments of the new product are going straight from the OEM to the customers, for obvious reasons, that they've been doing the integration work in their factories and they ship the tools to them, you know, because they're kind of beta-ing-- beta the system to the customer. So what we see in general is, you know, we have agreements with all of these new OEMs, especially, that we can sell direct, but we probably won't see that until they start to get the initial shipments in the fab, and the customer comfortable with the technology, so I'd probably, you know, would expect to see that kind of move to selling some direct, more next year.

OK, so the initial sales will be to the OEM-- to the equipment tool suppliers. That means that the U.S. revenues will increase?

That's correct, although we do have some-- at least a couple of systems that are going direct in the fourth quarter, so--

OK, are all of the OEMs U.S.-based?

No.

Japanese-based?

Primarily Japanese-based. You know, there's two-- there's two main areas in the world of equipment suppliers. There's the U.S. and there's Japan, and you know, our goal has been, as we talked about over the past year, especially during this downturn, that, you know, having a single OEM partner, while it strategically makes a lot of sense, from a business perspective, there's not enough market there to maintain, you know, the kind of revenues during a downturn. So what we needed, and what our focus has been, is to try to broaden our market to more OEMs so that when you're in a downturn and you have a customer expands, the likelihood that you're going to get business from every expansion in the market is improved. So our primary goals has been to capture the number one and number two in the markets that we serve. And that's what our goal has been and that's what we're working towards.

OK, and lastly, the new 9010 universal tool, what's the ASP on that, relative to the Applied systems, ballpark?

It's significantly higher because there's greater functionality. You know, our primary system that we've been shipping to our current OEM partners were a visible reflectometer. That's changed pretty dramatically with this tool. It incorporates UV technology and also the optical CD technology, so if you wrap these all together, you know, there's a significant change in the performance that we're delivering to the customer, so that's reflected in the price. At the same time, there's different flavors of the system that go out. I mean, in some cases, we actually, you know, package the unit inside of a cabinet so that they can bolt it on to the front of a process tool, makes the integration very simple. And then other customers, you know, prefer to have it in the OEM version, which is just the raw stage unit, so you know, the ASP, you know, is going to vary, but I think it's reasonable to expect that it's going to be, you know, probably 30% higher than our previous generation tools for 300 millimeters.

And will you be selling to all the applications you mentioned -- CMP, CVD, etch, and litho?

Yes.

OK, thanks.

Yep.

Your next question comes from Mike O'Brien. Please state your question.

Yeah, hi, John. Just a couple of quick questions. Sticking with the new integrated tools, the revenue recognition on those -- will that be when the tools ship, when the process tool ships to the chip company, or when there's final signoff at the fab?

It depends. I don't think any of them are dependent on the fab customer accepting. All of them are between us and the OEM, so what we do is we establish a specification upfront, we deliver to it, they usually have 30 days to kind of test it to that specification, and they therefore are billed. So, you know, we don't in general wait for customer acceptance on our current OEMs or on our future OEMs. That's not the way we kind of run it.

OK, so is the swing factor for revenue for flat to up 10 really predicated on this-- on how many of the new integrated tools get accepted, or is also some swing in the automated side?

It's everything, pretty much. As we said in the prepared comments, you know, we want into the third quarter, you know, it was a pretty horrible summer, and there wasn't a lot of activity and we didn't have a lot of solid leads for the third quarter. As you know, we're a turns business. Now, we go into the fourth quarter and we see obviously a significantly improved market and a lot of the customers that we've maintained over a number of years are also the ones that are expanding. But the number of systems that we're going to get in these fabs is the question at the moment, so, you know, the guidance is for automated an integrated, and we just don't know what the final numbers are going to be, and what's going to get accepted in that period of time, because it could be that some will fall into the first quarter, and that's really where the swing is.

OK, and can you just give me an idea on orders for the quarter?

We don't give any guidance for quarters, unfortunately. Sorry.

Not even-- can you say you're either above or below the industry book to bill?

Well, we don't track in that way, as I said. We don't generally work from a backlog. We're a turns business, as we have been for-- since I've been here, 13 years. We get the orders in general within the quarter and ship within the quarter, and we don't track the book to bill like most companies do.

OK. And can I just get an idea on the-- I missed the revenue by region. I apologize for that. If you could just repeat that, Paul?

Sure, no problem. In the U.S., it was about 25%. Japan, was about 20% of sales. Korea, about 15%. And Taiwan, about 40%.

Thanks.

Thank you. Our next question comes from Cristina Osmena. Please state your question.

Hi. I just wanted to revisit your gross margins. What do you think your incremental gross margins are, going forward? You've had a pretty good increase sequentially.

Again, we don't project gross margins, but what I would say is that as we're able to build more product and ship, clearly we're able to absorb more overhead and so forth, and you know, our-- we have more fixed costs than we have in the past, especially with the addition of the machine shop, so there is going to be some leverage effect, as the sales go up, in terms of improving the gross margin.

OK. What are your current break-even revenues?

Probably in the $13M to $14M range, probably, assuming we get our gross margin up into the 50% range.

OK. And are you working on trying to bring that down, or are you just going to keep it there?

Well, it has been brought down recently. As we've said before, we've reduced headcount in the third quarter somewhat, we've been reducing costs, and you know, for us, the break-even was very much dependent on this vertical integration strategy that we had. As you know, we absorbed a lot of new headcount here in Milpitas, and until we were shipping product from those people, you know, we were just absorbing overhead without any benefit. So now that we've got this trigger mechanism here in the third quarter, where we started to ship the products that we're actually producing here in the company, we'll start to see, you know, that break even number look much better, because we're absorbing those costs into real products.

OK. Now moving on to your products, did you ship any Metros this quarter?

Yes. Metro was 8%.

OK. So I guess it would be safe to say that your stand-alone [synsome] metrology to semiconductor was probably around flattish?

Flattish -- I didn't look at that.

What was the question again? I didn't get it. Can you repeat it, Cristina.

The automated systems were flat.

Yes, your stand-alone--

Well, our quarter, let's see, if we look at the automated systems were 62% of our revenue, and the year is 63%, so we're about where we have been historically, 60% to 70%. That's where we've always fallen, historically.

OK. And a good component of that was flat panel display, and then you had overlay, so--

Yeah.

All right, I think it looks like it's flattish.

Now, I wanted to move on to- I wanted to ask you about the Korean region. You have a pretty good position in that region, given that you are now the second source supplier of choice, and you know, the leading customer there had a big capacity expansion this quarter, or at least they're ordering for it. Did you participate in that, and what's your sense of how that-- the timing of metrology orders happened in conjunction with that capacity expansion?

Well, there's two expansions going on at the big company in Korea. There's phase II of their line 12 and then there's line 13, and we've-- we were involved in line 12 and believe that we'll participate in both those expansions, and that's what I was trying to explain to Mike, that, you know, we don't know what the actual percentages are going to be, what the number of systems are going to be at this point. The orders will be, you know, placed before the end of the year, with shipment early in Q1.

OK.

That's the timing for us.

Would it be safe to say that metrology tends to be ordered a little bit later than the process equipment? Is that how we should view it?

Historically, that's been true, because we've had a shorter lead time than most process tool companies. I'm not sure if that's true today, because you know, most of these big process tool companies have been running at pretty low capacity and can probably scale up pretty quickly. On the other hand, I don't really know for sure. But it certainly has been the historical trend, that they get their orders first, they get the big parts of the budgets done, and then they start moving down to the metrology focus.

OK. And also, your depreciation, capex, and headcount?

The headcount was about 307, and capital expenditures, somewhere between $100,000 and $200,000, and depreciation in the $400,000 to $500,000 range.

OK, thank you.

[Operator Instructions] If there are no further questions, I'll turn the conference back over to John Heaton.

Great. Thank you very much. I appreciate everybody coming to our conference call here today, and this will be the last call of the calendar year, and we look forward to the new year, 2004. Thanks for calling in today.

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