Onto Innovation Inc (ONTO) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Nanometrics Third Quarter conference call. At this time for opening remarks, I would like to turn the conference over to Mr. John Heaton. Please go ahead, sir.

Hello and welcome to our Q3'04 conference call. Before I review the quarter and update our business, I want Paul Nolan, our CFO to read the news releases and some of the highlights of the financials. As usual, if you don't have a copy of the release and would like one, please go to our Website at nanometrics.com or call our main line at 408-435-9600 and ask the operator to listen to you. Paul?

Okay, thanks John. I will start up by reading the forward-looking statements comment. The 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, 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 product in the 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 10-K, for the fiscal year ended December 2003, filed with the Securities and Exchange Commission.

This is the release now that we send out today. Nanometrics announces increased sales and profits for the third quarter of 2004. Total net revenues for the third quarter of 2004 were $20.2 million, an increase of 25 percent compared to the second quarter of 2004, and an increase of 100 percent from the third quarter of 2003. The increase in revenues during the third quarter of 2004 resulted from increased sales with the Company's advanced 300 mm wafer measurement equipment. Significant sales increases were experienced in both the US and Asia.

Net income in the third quarter of 2004 was $2.6 million or 20 cents per diluted share, compared to a net loss of $3 million or 25 cents loss per diluted share for the same period last year. For the 9 months ended, October 2, 2004, Nanometrics' total net revenues were $50.1 million, an increase of 72 percent from the same period in 2003. Net income for the first 9 months of 2004 was $2.7 million or 20 cents per diluted share, compared to a net loss of $6 million or $1.39 loss per diluted share for the same period in 2003. The net loss for the first 9 months of 2003, includes $6 million charge to record evaluation allowance against deferred income tax assets. The Company's financial position continues to be strong with cash and short-term investments, totaling $30.6 million and working capital of $64.5 million. Now taking a look at the sales by territory in the third quarter of 2004, they were as follows.

The US was about 27 percent, Japan was about 27 percent, Korea about 19 percent, and Taiwan and China combined for about 27 percent of product sales. The sales by product category in the third quarter of 2004 were as follows. Automated systems 63 percent, integrated systems 24 percent, tabletop systems about 4 percent, and service was about 9 percent of total net revenues. Our gross margin was 52 percent in the third quarter of 2004, compared to 53 percent in the second quarter of 2004. Our product gross margin however was 58 percent in the third quarter of 2004, unchanged from the second quarter of 2004. R&D expenditures in the third quarter of 2004 were about 17 percent of total net revenues, as the Company continued to invest in the development of new products. SG&A was about 21 percent of total net revenues in the third quarter of 2004, which was down from 27 percent in the second quarter of 2004. Cash and short-term investments increased by $3.7 million during the third quarter of 2004.

And finally as we said in the press release, our financial position is strong with a cash balance of $30.6 million and working capital of $64.5 million, at the end of the third quarter of 2004. And with that, I will hand it over to John.

Great, thanks Paul. On this extremely important Election Day, I am happy to have the chance to review another profitable quarter here at Nanometrics. We are hoping as election goes as well as our quarter did. Many of you may be wondering why we decided to give such short notice and report on such an eventful day. We feel it's our responsibility to every shareholder to inform them of our performance as soon as those results become final. In the case of this quarter, our review was completed yesterday and we wanted to report these excellent results ASAP. We all feel very fortunate that our customers continue to entrust their current and future metrology needs with Nanometrics and hopes to repay them with excellent performance. While some quarters seem to drag on forever, this quarter really seemed to fly by. Today, I am going to touch on a few of the important details and then open it up to questions.

On the revenue line, this was our 6th quarter of increasing revenues up 25 percent sequentially, and up 100 percent from last year, which easily exceeded our guidance of 5 to 15 percent. I can't recall a quarter with as strong an increase in many years of the Company. Again, one can see our revenue ramp outpacing our peers and confirms our belief that our market share continues to improve. Can there be any doubt now who is number 2 in the film thickness market?

We feel that our product and corporate position in Korea and Japan has really helped to maintain a continuous flow of orders as important and key customers continue to spend. While the revenue was up significantly, we must say that we were not thrilled about the overall gross margin. We would have expected greater margin performance on this sales level, but the mix of products and new product startup's cost continue to pressure that margin. We hope to be better in the future and we will strive to do so. There wasn't any significant changes to our spending although our engineering expense was slightly higher caused by ongoing new product development. This is not a trend we expect to see continue and hope to get the absolute number down below the $3 million level.

Continuing on to the balance sheet, 2 trends I want to mention, that are the increase in cash and the reduction of inventory. Obviously, we are shipping at high levels and the inventory parts have started to go down. While all of our manufacturing people constantly ask that we have everything on the shelf so they can build systems quickly, there is a careful balance that must be maintained to hedge against future cyclicality. Our current mode is to be as conservative as possible in purchasing inventory and continue to use what we have. We are also successfully converting some demonstration equipment at customer's site into revenue as the system starts to achieve the required performance, which lowers our inventory number.

Our cash has now increased over $30 million, which is reassuring and protect Nano and its shareholders from uncertainty into the future. There were no major changes to our sales by territory as it would remain active in all areas of the world with Japan and Korea really being the strength of our business. We recently opened a large and convenient office in the greater Tokyo area to better support our customers in this particular territory. It demonstrates to our customers the commitment we have to this important area.

On the product side, our Integrated and Standalone products continue to perform well in the market for both film thickness and critical dimensions, much becoming unified. It seems to us that unless you have a proven field capability in the market like ours, the likelihood of giving any major film thickness business is greatly reduced. Our Integrated Metrology product called the 9010 continues to do well on the CLP area as we are now into stage 2 of product improvement. We have recently achieved amazing throughput and reliability improvements with our OEM, CLP partners that our competitors will find challenging and we expect to continue to raise the bars on these key metrics.

We continue to believe that we have the leading IM product in the market today and we think our presence in 300 millimeter is dominating. We hope to see that reflected in the Dataquest numbers next year. We also introduced a new version of our common Standalone platform system in the quarter, the Atlas, with a new option for handling masks. This system called the Atlas-M introduced at the BACUS conference will address a smaller but important area within the equipment space for both film thickness and critical dimension on those masks. We expect to receive revenue recognition in early 2005 for system shift over the next quarter or so. The mask area is a very exciting area that these days and we expect to see our technology bring valuable information to mask users that can be achieved on no other system. Stand by to see some of these key enablers over the coming year.

One can see how this system very much fits with our overall strategy of process control in the patterning process, which is the key area for fab -- over the coming years. One can envision a Nanometrics process control solution from the development labs on maps with the Atlas-M, and then carry it through to development areas on wafers with the Atlas, and then finally on full production wafers with our 9010 solution on track and etch. We believe our tool set provides tremendous value to customers for providing data, consistency, and recipe development as common platforms and programs can be shared between these systems. It really makes the transition in the production of new processes and technologies more seamless, which makes the transfer of these processes and technologies into production faster which in turn makes our customers more money.

More important and positive news for Nanometrics beyond the financial statements and products is related to our new auditors, BDO Seidman. As many of you might be aware, our relationship with our previous auditors ended after many years. Management and our audit committee engaged this top-notch firm, and we have now completed the review of this quarter's financials. We feel quite satisfied to have the new team on board, and look forward to years of mutual success. Operationally, we are consistently -- constantly examining our business opportunities and cost structures. We strive to have a high-performance Company with the best people, but understand that this business is quite difficult. During the winter months, we will use the holiday periods to continue to reduce our cost with periodic shutdowns and will constantly reexamine our headcount.

Finishing off my prepared remarks, I would like to discuss the revenue guidance, and general outlook for our business. The overall customer environment has changed dramatically since our last conference call with a strong tilt towards cautiousness. Regardless of the negative environment, we still have a significant base of customers that want to buy Nanometrics equipment, and we are continuing our story of growth through new product introductions and market share gains. We've had no push outs or cancellations this quarter but fully understand that no company is an island and anything can happen. Nevertheless, our forecast remains strong and we are counting on a good close to the year. For guidance, we think a flat to up 10 percent in our revenues for Q4 over Q3 is achievable. With this revenue level, we can expect an excellent year for the Company on the eve of our 30th year in business, which should give our employees a reason to celebrate. Having gone through all of those key highlights, and comments, I will now open it up to questions.

(OPERATOR INSTRUCTIONS). Avinash Kant, Adam Harkness.

Very good quarter. A few questions in fact. Did you, by any chance, break down the percentage of business from 200 and 300? Do you do that?

We didn't do that. May be, Paul, did you do that?

Well, let's say 300 might have been about $9 million wafer sales from the quarter.

So, it looks like about 60 percent of our product sales probably.

And would you be able to tell us what was the percentage of sales to one of your largest customers? Did you have more than --?

We don't break that down in that way. We've never given any kind of numbers or guidance on who our customers are beyond what we've put in the 10-K.

But any greater than 10 percent customers this quarter? How many?

Well, we have, as you all know, AMAT is our biggest customer. So, a lot of the great percentage of the integrated sales go to AMAT.

But, like we said, we don't break it down. I think there is certainly confidentiality, and as well as competitive information that just I don't think it helps the investor, and probably is not useful for the investor.

And then you are talking about the guidance of being flat to up 10 percent, how should we be thinking about the margins and the cost at this point?

Well, if it was flat, then we expect to see about the same that we are at right now. We are -- like I said in the call, we are going to continue to try to run our cost down some because we've still -- we are not really thrilled about where we ended up operationally. So, we are going try to use the holidays to reduce some of the overhead costs. And if we don't feel like we are making enough improvements -- something that we're going to look at -- headcount reductions in order to get more efficient. I think it's a question of efficiency for us and I think we are still tuning the company up to get what we need to get and from the product margin side, it's always difficult for us to forecast because there is a tremendous mix of products that we have, and it depends on whether it's an older product 8 inch or, whether it's a 300 mm product. So, it becomes very difficult to forecast. So, our guidance -- we expect to be kind of where we are right now and --

And should we be modeling the same kind of taxes that we had this quarter?

Yes I think so.

Okay and one final question of course. Could you please give us the CapEx, depreciation, and the headcount?

The headcount's about 304. There were no capital expenditures during the quarter and depreciation runs in the $400,000 to $500,000 range per quarter.

(OPERATORS INSTRUCTION) Martin Teng, SG Cowen

Congratulation on the great quarter. Couple of questions. Obviously the IM market -- IM revenues came down a little and I guess with the reason is with the OEM. Do you think that the trend is to go down maybe again in December and March?

We have -- I think it's flattish -- I mean what we've kind of seen as we got up to kind of a certain level and there's a number of facilities being built, and we support those facilities and we kind of going into the future now still see a number of strong 300mm accounts coming online. So, I expect flattish -- I don't think anything significantly up or down either way.

Okay and also last quarter you gave the percentage of Overlay was about 3 percent. Do you have any numbers for us this quarter for Overlay versus ACMP?

Percent? It was 8 percent actually.

It was 8 percent in Q2?

No, in Q3.

Okay. Another question is could you talk a little but about the TEL collaboration that you have? When do you expect the revenues to come out from that joint venture?

It's not a joint venture. What it is on a most simple level is that the TEL folks offer a software solution from measuring critical dimensions. It’s called ODP and number of customers have asked us to work together to make our systems compatible. So in essence what you can do is to have a Nanometrics hardware solution combined with a Timbre TEL software solution. So, what that means is we want people to understand that if they were to buy or purchase a Nanometrics hardware solution that they could add in a Timbre TEL Software Solution to that in order to make the data consistency one of the comments I made in the conference call here, in the prepared remarks was people like to see a software that they are used to using and have a data consistency and so to some extend you can say -- the hardware becomes not so important to that particular customer because their primary interface is the software. So, we thought it was like a important thing for us to be able to align ourselves with them especially since -- if you look at the overall market and the patterning they dominate in the track space and -- for us to make our systems compatible with their software makes perfect sense into the future as track becomes a bigger market for the critical dimensions.

Do you think that is the '05, '06 event when that kind of a technology for track starts to ramp.

Yes.

Okay. One last question if I may, you said that the tax guidance is supposed to be flattish or do you think is the percentage of percentage flattish?

I don't understand the question. So, you are saying -- our revenue guidance was --

Right. I was referring to the tax guidance. There was a question from Avinash and your answer was the tax is supposed to be flattish.

Yes. So, we would expect kind of the same tax level.

Sales tax level on the percentage basis or among absolute basis,

Percentage.

(OPERATORS INSTRUCTIONS). Greg - Deephaven

Congratulations on the good result. Could you talk a little bit about the -- booking strengths recently, is book to bill straight above 1 for you guys and along with that backlog, is your backlog continuing to grow here?

We don't report booking for backlog because we don't think that it generally gives investors for our Company at least the tremendous amount of information about how we are doing. We profile ourselves as a company. We generally get the orders for the quarter, within the quarter. So it's not fair I think to investors to talk about book to bill for us because we think it can give a negative impression or too positive impression depending on which day you are to give that guidance. So we try to use the metrics for us to give you information about how we are doing for the revenue line. But in general, my comments would be that -- as I have said in the comments, I think our Company is doing well that we have good visibility into the customers that we have today and we have a strong belief that the Company will continue to grow and that our customers are going to continue to order. So we still feel pretty optimistic although I understand that the general market has an incredible level of cautiousness. It is difficult for us to know for sure whether it's because we have these really good customers or because we are taking market share or its customers converting from other suppliers to us. So I guess what we will do is let that play itself out overtime with the market share numbers next year. But we still believe we are growing whether it's due to the market share or because we have really good customers, I am not sure of it. We still feel very good about forecasts.

Okay. And could you elaborate a little bit on Japan, any kind of color you can give me in terms of what types of customers there are in Japan? If this -- is it more in the OEM sides, is it more with end-device makers and other device maker, your customers are more logic or memory oriented?

So it's -- it's a great mix of all of those, which is fortunate for us. I think we do have pretty good penetration in Japan on the memory side and recently on the logic side. But our strength as a company has to be characterized as more strongly associated with memory. And then OEM, so if you look at those 2 primary areas those are the biggest strength to the Company although we start to see a lot more penetration into logic folks because of the CD metrology really being the patterning, making the biggest difference for logic folks in shrinking those devices being a key thing for us. We really see that as a area where we are going to do well over the next couple of years.

And one last question, is there -- have you broken out your business at all by looking at -- other film makers will talk about, what percentage of your business is DRAM or memory oriented versus foundry or logic?

No, we haven't. Because it's -- as you can understand it, difficult for us to give out the guidance or give out that kind of a breakdown because so much of our business is OEM now. Anyhow, a third of our business is OEM and that goes to varying customers. And we don't always know who it is? So for us to give inaccurate information would not be fair. So I would say, in general, for our Standalone business we are heavily leveraged on memory and especially in the Korea and the Japanese markets.

Martin Teng, SG Cowen.

Just a quick question, one follow up on the memory part of the business. Korean revenues came down, Japan went up. What kind of visibility do you have in terms of the memory business and also is the Standalone business driven largely by 300 millimeter fab build?

Yes. It's all 300 millimeter. I mean, I think all of our DRAM folks are 300 millimeter and the visibility has been very good. I mean, I think it's -- everyone is well aware of the expansion going on Korea for memory and those customers are good customers of ours. So we feel like we have pretty good visibility because, as we have said in the past, Japan and Korea seem to be more strategic and less quarterly market driven and when they put their capital plans in place they move forward regardless of what's happening in on a quarter-to-quarter or a day-by-day basis, which we see sometimes in the companies especially in Taiwan.

So on the given year basis, how fast do you think the Standalone business should grow -- in '05.

Well, I think the Company -- what the market is going to be like in '05, I can tell you that maybe -- again, I'll just go back to it, we still believe that we are offering a very compelling, stand-alone platform that we are number 2 in the marketplace. I think that there is a tremendous amount of momentum that our sales people feel. There are ongoing evaluations for new fab construction for the first half of '05. So, if we maintain our current customers and we can gather a couple of new accounts that will convert from their current suppliers over to us in '05, then I can expect a nice piece of roast for the Company. So is it reasonable to think that the market could be flatter down and we could be up? I think it is very reasonable to expect that if we can win some of these new shootouts.

And gentlemen, it appears there are no further questions at this time.

Okay. Well, thanks very much for listening to our Q3 conference call and we look forward to updating you on our year-end results. Thanks very much.

And that concludes today's teleconference and we thank you all for joining us.