Onto Innovation Inc (ONTO) 2004 Q1 法說會逐字稿

Good morning and welcome to Nanometrics Q1 2004 financial results conference call. The following discussion may include forward-looking statements, regarding among other things Nanometrics future financial results, business performance and marketing conditions. These forward-looking statements are subject to risk 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 and demands of the company products, changes in the company's to ship its products in a timely manner, changes in business or economic condition, any additional risk 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 2003 filed with the Securities & 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 with Mr. John Heaton.

Hello and welcome to our Q1 '04 conference call. Before I review the quarter, I will 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 one, please go to our web page at nanometrics.com or call our main phone number at 408-435-9600 and ask the operator to send one to you. Paul?

Hi, thanks John and thanks for joining us today. I will start with the earnings announcement. Nanometrics announces financial results for the first quarter of 2004. Total revenues for the first quarter of 2004 were $13.7m, an increase of 10% from $12.4m in the fourth quarter of 2003 and an increase of 46% compared to $9.4m for the first quarter of 2003. The increase in first quarter revenues in 2004, compared to the first quarter of 2003 resulted from stronger demand for semiconductor process control equipment, particularly in the US and countries. Net loss in the first quarter of 2004 was $1.2m or $0.10 per diluted share compared to a net loss of $9.6m or $0.80 per diluted share for the same period last year. The net loss in the first quarter of 2003 includes a $6m charge to report evaluation allowance against deferred income tax assets as previously reported in the first quarter of 2003. The company's financial position continues to be strong with cash and short-term investments, totaling $24.1m.

Taking a look at sales by territory in the first quarter of 2004, they were as follows, and these numbers rounded, US was about 50% in sales, Japan about 30%, Korea and Taiwan were about 5% combined, and China was about 15% of product sales. Sales by product category in the first quarter of 2004 were as follows, and these numbers are also rounded, Automated systems about 35% of sales, integrated systems 45%, tabletop systems 5%, and service was about 15% of total net revenues. Our gross margin was 49% in the first quarter of 2004, the same as in the fourth quarter of 2003. R&D expenditures in the first quarter of 2004 were about 26% of total net revenues as the company continued to invest in the development of new products. SG&A was about 32% of total net revenues in the first quarter of 2004, which was down from 34% in the fourth quarter of 2003. Cash in short-term investments were down about $5.8m during the first quarter of 2004, which resulted primarily from the net loss for the quarter and also from higher accounts receivable, resulting from increased shipments as well as the timing in location of those shipments and from increased inventory, needed to support our ramp up in production during the quarter. Finally, as we said in the press release our financial position is strong with a cash balance at March 31, 2004 of $24m, and working capital of $59.1m. And with that I will turn it over to John.

Okay. Thanks for that Paul. In reviewing the quarter, I thought, we will quickly touch on some of the important points and numbers. On the revenue line we in fact did come in at the high end of our guidance, flat to up 10%, which was quite challenging under the circumstances. The accelerated demand for our systems combined with introducing two major products, left us in a difficult position in trying to accurately predict the revenue. Fortunately, we do control many of the key component manufacturing with our vertically integrated manufacturing and we maintained a favorable mix of inventory to meet that demand. Secondly, it's been clearly noted that even on higher revenue and flat margins we lost more money than last quarter. The explanation of why that happened is as follows. We ran the factory at a high overtime rate to meet the customer demands. Number two, we didn't have the cost savings operationally from shutdowns that we had in the fourth quarter. Number three, we had higher costs, support cost in engineering sales from the introduction and startup of the new products being installed in the field. Fourth, we had a 5% to 6% reduction in force which also added some cost in the quarter. Number five, interest and absorption were lower than last quarter as well.

The good news that we should now look forward to is our two new products are now running quite successfully in production fabs and the higher cost related to the advancement of these next generation products should be behind that. We believe that both margin and cost should improve starting this quarter. We are clearly a technology company that relies on new products to grow and we were able to improve those over the past few years. We now believe that we're starting to see the fruits of those labors with improvement in film thickness market share. Our intention during the downturn was to invest heavily in new products and technologies so that we could rise out of the downturn with a better market position in the primary markets we serve. Our metrics and current information available through competitors’ filings and conference calls indicate that we've in fact increased market share in film thickness metrology. This confirms our strategy and from all indications it looks like it will continue to grow as some of our competitors continue to fall behind from a performance standpoint.

Gross margins in the quarter were flat, quarter-over-quarter as we continue to ship some of the lower margin legacy equipment especially in the standalone market where it has the biggest impact. This is clearly visible as you connect the dots to our China fields that Paul mentioned in his remarks. As many of you know, margin is and always has been a primary focus area for the company and we are dedicated to improving this area. Our target remained high and we expect to see continuous improvement as we proceed into the year. Again, we've also invested heavily during the downturn in R&D and have now reached a point where we should start to see the R&D cost decrease as these projects reached completion and the products mature. I mentioned earlier that we've taken actions to the same by reducing headcount and we will maintain ongoing cost reduction programs. These benefits should be realized starting this quarter. On the Park side, there was a strong rise in integrated metrology system sales this quarter confirming our belief that integrated metrology systems are increasing in value to the customers and that they are tied to capacity purchases.

In fact, integrated metrology achieved two records for us in the company, both highest absolute dollars in the quarter and as a percentage of our overall revenue at 45%. It also tied a record for number of systems accepted during the quarter going back to the peak of the bubble in 2000. This should be a strong signal to the market that integrated metrology is starting to accelerate in terms of adoption, primarily driven by process complexity and tighter specifications on processes. These are strong trends that will only get stronger as customer drive towards 65 nm geometries. On the 300 mm front, our percentage of 300 mm tool is now approaching 50%, and we expect that to increase as a percentage in the coming quarters as more factories come online. We still see the integrated metrology, 300 mm, and flat panel display seems continuing to improve throughout the year. On the territories, since the integrated part of our business is all OEM based and our largest customer is US-based, we had a strong increase in US business, at least comparatively to previous quarters. Japan fell along traditional lines, but Korea and Taiwan lagged as we wait for acceptances and timing of orders. We have an important momentum with some of the premier semiconductor manufacturers in Japan and expect that our new product acceptance and positioning will increase in that territory.

We believe Korea will return to a more traditional percentages as the year goes on. FPD will continue to be a bigger percentage of revenue for Taiwan as product acceptances and fabs startups begin. China continues to be an important growing territory for us and was 15% of revenue during the quarter. Moving on to the revenue guidance and general outlook for our business, the overall customer environment is still quite positive from our perspective. We see a constant to improving order pattern in our three main product areas, those being standalone, integrated, and flat panel display metrology systems. For guidance, we should see an increase of between 10% and 20% in our revenues for Q2 over Q1 '04. Having gone through all those key highlights and comments, I will now 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 pick up your handset before pressing any number. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Your questions will be taken in the order that it is received. Please stand by for the first question. The first question comes from Jerry Fleming with WR Hambrecht. Please state your question.

Yes. Hi, John. Can you give us an idea on how much of the automated revenues this quarter came from flat panel?

From flat panel, none.

And that's just a function of the timing of acceptances?

And deliveries. As we have kind of mentioned here, flat panel was more loaded towards the back end of the year. Many of the new facilities that we've mentioned before in Taiwan are still in the construction phase. So, the second half of the year is where we see most of the revenue coming in. Though shipments have begun, it will take quite a bit of time after you get those things shipped and accepted. So, you know, we had not been forecasting necessarily flat panel to be in any one quarter, we are just saying for the overall year that we see improving business and improving order rate, certainly.

Okay. In terms of the integrated, you said you equaled your record unit shipments?

That's right. We had about 38 systems shipped in the quarter.

Okay.

Well, actually 38 recognized in the quarter.

And shipments are running at a higher rate than that?

Well, we don't track shipments and we don't generally talk about that on conference calls and such.

Okay. And the integrated being 45% of total revenues, is that of the $13.7m?

That's right.

So, that we can get the ASP.

Yes.

Is the mix swinging from the older generation tools to the new ones?

Well, now there are two parts to that. The first is, the older generation was significantly less money. So, from a unit number, I don't know they might be pretty close, but obviously the ASP on the newer units because of the added technologies and features, you know, it's significantly more money. So, if I look at the list here, it looks like it's probably half.

Does that continue to shift towards the new one?

Yes absolutely. Because, some of that was still 8-inch equipment. There are still some factories that are still in capacities for the 8-inch and have bought systems in the past and continue to invest in 8-inch equipment. So, some of those were 8-inch.

Okay. I'll come back with a follow-up in a while. Thanks.

Yes.

Thank you. The question comes from Raj Seth with SG Cowen. Mr. Seth, your line is live.

Yes. Hello, can you hear me?

Yes, we can.

This is Martin Teng calling for Raj Seth. Couple of quick questions. The first one is, do you expect any new OEM sign-ups?

Well, we don't -- and we've always, as we said before, we are working with all the different OEMs out there and trying to let people know when they become important, but, it's not about signing people up, it's about revenues. So, when we get to the point where the revenue is eminent on the company, then we will talk about the OEM at that time. It doesn't do us any good to talk about and create expectations for new OEMs that they're not, customers that are forecasting revenue for us.

Okay. Fair enough. What about the US, the growth in the US, you mentioned a lot of it was due to OEMs. Are you seeing growth in integrated metrology and specifically is it in CMP or is it in etch or something.

So, the primary driver for our integrated getting so much better this quarter, and with CMP we've had a resurgence in the demand primarily based on the new products that we introduced. We had some new features and capabilities that are clearly leading the market, and the customers recognize that and are asking for it. So, many of the new 300 millimeter facilities throughout the world, not just one, but a number of them throughout the world need to have this new machine, so that primarily drove the increase in the revenues for integrated.

So, are you saying that you are replacing a competitor at Applied in terms of the CMP?

Well, we don't really like to talk about the OEMs. All we can talk about is ourselves and how we feel competitively, and as I said, we believe that we had a substantial increase in our CMP shipments and we believe that we have a technology edge versus our competitor at this point and you've got to have to make your own conclusions about that and talk to the OEM's if you want to get that kind of share gains.

Okay. In terms of OPEX that you mentioned that R&D should come down going forward. How much should it decline?

Well, as I said we made a 5% to 6% reduction in the headcount here in the company and we've done that because -- two parts, that we've made substantial investments in R&D on new products and some of the increased headcount over the last couple of years have been to get those products to market. Now naturally as they come to market, you either bring new projects in, or you start to reduce your cost in your headcount. So we found that these products are going to drive the revenue for a long period of time and we don't need the same number of people, and so we've been resolving what we need to have versus what we do have and so therefore we've made appropriate reductions. Now what they are actually going to end up being from a actual cost standpoint, we are not allowed to give guidance in that way, but it was substantial reduction in engineering headcount primarily.

Okay, what about SG&A, should we model it going up slightly with revenues?

Yes, probably, we are going to have some increase in our cost related to Sarbanes-Oxley and the accounting increasers obviously as the regulatory implications start to hit companies now. There are pretty substantially cost centers, not value added but cost centers to companies and therefore we can expect some increase in SG&A. From the sales side, we haven't been increasing any of our sales costs though. And I think generally, what we can see is the fixed costs for sales and marketing for us is constant and it would fit scale with sales probably more than anything else.

Okay. Just one last question, the restructuring charge of $6m, where do you push the line to take it out from?

That was last year, that was 2003 first quarter and that was in the income tax provision line.

Okay, thank you very much.

Thank you, the next question comes from Scott Turtle with Turtle Investments.

Hi, can you just go through a couple of balance sheet items please? The cash was down $6m sequentially with a $1.2m operating loss, where is the balance of the cash used?

I mentioned that earlier there was a loss of course and then also as you can see our accounts receivable is higher, which resulted from increased shipments as well as the timing and location of those shipments and then in addition, we increased our inventory during the quarter, which we needed to support our ramp up in production.

Your days sales outstanding went from, I guess a 106 to 126 sequentially within the quarter, and you commented that your strongest customer business was in the United States?

Yes.

Can you address the days sales outstanding then?

I said that's the shipments was a combination of the timing of the shipments, meaning that lot of the shipments were towards the end of the quarter, and then in addition, the location of the shipments. We did have shipments to overseas and the payment terms are usually longer there.

Can you address the comment that you made about the Korean and Taiwanese business lagging the US business?

Scott, as we said you can see the revenue that is sitting on the balance sheet that will become above the -- what do you call-- the deferred revenue is systems that are there that are not accepted yet from SAB 101 standpoint, so what we are saying is that we've made substantial shipments of these new products and as we've said last quarter, we cannot predict when these systems are going to accepted. But there is a pretty substantial amount of new equipment out in the field right now and we are going to the process of getting acceptances and those are primarily in Korea. So when we say that the Korea should return to more traditional levels that's what were we are implying that and these are new systems going in to the new facilities, and that as soon as we get its acceptances we'll start to see more traditional revenue from that territory, and then from the Taiwan side as you see, the flat panel was down this quarter and we said that it's going to be more heavily loaded towards the end of the year because that's when the facilities are coming online. So, if we just -- overall for the year we still say that and still feel that those territories are fairly well balanced and there is some question of the timing of the orders.

One of the analyst earlier asked a question about -- you recognized 38 shipments, but there is more so that -- I am just trying to understand this, if the account receivables are higher and you have deferred on the balance sheet, you are going to recognize that in the account receivable will goes down in the next quarter.

Well, we give guidance in that way. What we just do is we get orders and we ship them and we recognize them when the customers accept them. And what we've said is, and this is what we have been saying since the fourth quarter, we have new products. And quite a bit of new products have gone to new customers and the SAB 101 rules are complex but fundamentally simple that if it's a new customer then they have to go through acceptance before you can recognize revenue or if it is a new product, even with an existing customer, has to go through this kind of acceptance. So we cannot predict, because the customer has to do their testing and we can't necessarily predict when that is going to be completed and they are going to sign off on it. So we have, we've said various systems, new systems, and new customers which makes the complex revenue guidance problem for us, which is what we said last quarter as well.

Okay, I'm new to your call. I apologize.

Yes. No problem.

Is there a standard time between when you ship and when they recognize, is this a long process before somebody tests the equipment?

It depends on the customer, it depends on the territory and it depends on the complexity of the system. Really, so it's -- that's why we have these challenging revenue guidance issues always. And it's you know common for all of the companies in the semiconductor equipment states. These systems are all complex and as you've seen what lot of profits that our customers are working with. They are all trying to resolve their performance what they need versus what they have and they know how to get time to make sure they get the rate equipment and them meet their specifications.

Did you offer a book-to-bill?

We do not give book-to-bill guidance. We're generally a turned business. So what that means is that we generally get the orders for the quarter, in the quarter and we are relatively short lead-time for our products. So, the book-to-bill, we don't think it's an important metric for our customers. We generally follow at least with the industry and/or better as generally been our trend for the last couple of years.

Thank you very much.

You are welcome.

Thank you. As a remainder ladies and gentlemen to any further questions, please press star one at this time. Our next question comes from Gerald Fleming with W.R. Hamberg.

John you talked in the past about your in-tool meteorology business and trying to move it to more of a direct sales model from OEM. What is the mix between the two these days just qualitatively?

Well, we've tried that number of occasions and many of our agreements are structured in a way where we have the ability to do that, but you know realistically if we really drill down into what the customer's desires are, it's a pretty practical approach that most customers have. They want to have fewer contact with suppliers. So if they are buying a process tool and metrology needs to be on that process tools, then they would generally prefer to deal with the process tool manufacture instead of having to deal with two suppliers. So, while we believe that the customers would benefit from a direct sale of the meteorology, we've seen a tremendous reluctance on the customers’ part to allow us to do that because it creates more paper work and more complexity in their relationship. And on top of that we've seen that the OEM's do incur costs of integrating the systems and they feel like they should be recouping the engineering expenses, so therefore they are strongly offering the systems to be included and to some extent create fear that if you don't buy it from them then there will some issues that come up. So I think we mix all things altogether, I think what the idea you have to really follow and what our goal has been is we're going to price our systems appropriately, we have a certain manufacturing cost, we have certain margin goals, and that's the way we're going to operate under the OEM premise. Now if the market wants to adopt an alternative method where we could sell directly, then that will be great for us. But we're not planning on that because we've seen too much reluctance on the customers part.

A follow-on on that and that is does this mean you are having to discount the tool more than you had hoped to a quarter or two back?

No. No. That's not part of the picture. As said, we take our costs and we apply our model and that's the pricing that we work with the OEM's on.

There's not been any discount, you know, our model is fixed and it was structured to be in OEM price, always. Now we had hoped that we would benefit from the direct-sale strategy, that would just clearly be upside from our model.

Okay, and one last question. Could you give us a status report on Atlas and how that's doing and what it's doing in terms of the mixed shifting away from, I guess, it was the 93,000 to the Atlas.

Right. We've pretty much shipped all of the 9,300 inventories that we had and we've converted now over to the Atlas product and we've had acceptances already, some of the first quarter revenue was Atlas. But we expect that to start to accelerate now as the machines get into that's what we're talking about when we talk about this deferred revenue that, you know, there is system shift and they have to go through pretty complex acceptance, and then after you get that first acceptance then you start to recognize on shipments. So, you know, it has gone very well. The performance has been as we expected and the customers were satisfied and we feel very positive about our performance relative to the competitors' actually.

Okay. Thank you.

Operator?

The next question comes for Edison with

Good morning.

Good morning.

I think in the past you guys have talked about a $13m to $14m type of break even level for the company. Given, you know, what it sounds like, were some potential one-time cost in the past quarter as well as the risk, do you still see that as a reasonable level going forward or has that moved up a little bit here?

It looks like we would anticipate being break even somewhere between we're now in about $14m based on the factors that John had discussed through, it's kind of one-time risk that we took.

Okay. Do you think that $13m to $14m odd break-even level still stands for the next quarter or will take sometime to get down to that?

Well the forecast was for the amount that would exceed $14m, so we'll see how what works out. We don't forecast actually the bottom line and we just forecast the top line. But as we've said, while these costs, we feel like the first quarter was more of a bump in the road that there were all these additional expenses for starting up this new equipment and try and ramp the factory up. But we've gotten through all those problems now and with the risk we think our costs have gone down and we believe that the mix of products now, as we go forward, is going to be favorable. So if we add any margin improvement and reduce fixed cost, then we think kind of where we're at is about break even. That's what we would kind of think. So a couple of points, the margin improvement and costs lower then we'll feel pretty good about that. So if you look at our guidance, which was 10% to 20% up and that certainly has to been expectation.

Okay great, and then just second more general question, as we shift towards or as the industry shift towards the more, towards 300 mm type products, just want to get your view point on the penetration of integrated metrology into different types of toolsets and traditionally things like penetration has been pretty high in CMP but not as high in other steps, just to want to get a progress report on just the penetration of integrated metrology in to a non-CMP type processes?

Yes. So obviously lot our up sight here has been in the CMP, CMP has been obviously as a main driver in the industry and we still see a lot of people, especially always new facilities buying lot of CMP equipments, so there obviously the biggest driver in the whole integrated states. But if we look out and we talk about, what things are we working on that are real drivers for customers, it's got be a litho area, litho being number one and probably etch being number two. There are certainly applications in etch where, pretty much every etch company now has to offer some sort of integrated for a few specific applications the polygate the STIs, may be transits, but I don't think that the adoption has been overwhelming because most of the current equipment has pretty good uniformity and that -- -what's happening about people with 60 nanometer kind of geometries and targets meeting to have that technology. Buy certainly unless there will, I think if we will have just couple of years and say what area is going to be the second biggest adopter of integrated has to be litho, because there are some many complex issues with geometry shrinks that and there are so many benefits of the integrated tool set, I think if, quite a lot people and one of the compilers taking about critical dimension and technology, is really is going to be a big deal for the litho process and patterning in general.

In the area, you know it can relatively slow recently and there is couple of customers that have adopted it, but we haven't seen the same kind of penetration that we had on DVD and CMP and has so, I think it is going to be kind of customers specific and will be turn in to lumpy, so as a customer believes in integrated for CVD, then they will adopted by that's- -- then lumpy in the past and I think it's going to continue to be lumpy. So,

Okay great, thanks guys.

You are welcome.

Thank you, the next question comes Dennis with Adams, Harkness and Hill.

Thank you. A couple of quick financial questions. I am curious, if you have any comments in terms of gross margin going forward, you talked about a couple of points of margin improvements possible. Any causes to your peak margin and where you might reach as a magnet?

When peter cycle is going to be and that will be easier for us to predict, but I think if we were get into the $20m revenue level than -- -- we have to expect that we are going to be in the high 50s. And about that if you get about $20m and that's one we really see above 60% gross margin, that's come into play, between chief and

Okay. So it sees about the a couple of percentage points going into Q2 that kind of things. Next question, shares outstanding, is that number going to change, may be yearly once term possible?

Paul. Okay, so the shares that we are using in the EPS calculation? Couldn't cross the diversion would increase, we haven't done a calculation, but it definitely will.

that's a sizeable, chances that, just a few percentage point on April few hundred thousand shares?

No, we haven't worked that, but I can tell you while we go up share.

Okay, and last in the tax rate, when should we start modeling a tax impact?

There will be one is to one profitable, and it's kind of hard at this point to predict how that will turn out, because we will have some potentially tax benefits to may or several tax expenses.

Okay, I guess even if your profitable covers the last three quarters of this years as that the case, would you be working a tax expense?

In think so, but the degree of it I am not sure at this point.

Yes we still -- because we operate a lot out of Japan and the operation is profitable in Japan, that we has is there, but in US as Paul we have been losing money for last couple of years and we have a lot to carry forwards, which we talked about last year, so that will certainly benefit and so we're going to be certainly at a little tax rate.

Okay. Very good thank you.

A final reminder ladies and gentlemen. If you there are any further questions please press star one at this time. If there are no further questions, I'll turn the conference back to Mr. Nolan.

Great, thanks very much for joining our conference call. We look forward to talking to you and reporting our results next quarter. 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.