Onto Innovation Inc (ONTO) 2005 Q2 法說會逐字稿

Good morning, and welcome to the Nanometrics Q2 2005 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 materially from these statements. Factors that could cause such differences include, but are not limited to changes in demand for the company's products, changes in the company's ability to ship its products in a timely manner, changes in business or economic conditions, and the additional risks and uncertainties set forth in the related press release, and in the management's discussion and analysis section of the form 10-K for the 2004 fiscal year, 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. (Operator Instructions). We will begin the conference call with Mr. John Heaton. Please proceed, sir.

Thanks, Bill, and thank you all for joining Nanometrics' Q2 '05 Conference Call. Before I launch into my prepared remarks, I would like to introduce Paul Nolan, our CFO, to highlight certain aspects of the quarter and also read the press release.

Okay, thanks John. Welcome everybody. I'll start out with the press release. Nanometrics announces a profitable second quarter for 2005. Total revenues for the second quarter of 2005 were $18.8 million, an increase of 16% compared to the second quarter of 2004. The increase in revenues during the second quarter of 2005 compared to the same period in 2004 resulted from increased demand for Nanometrics' semiconductor process control metrology equipment, particularly in Taiwan.

Net income in the second quarter of 2005 was $4.7 million, or $0.35 per diluted share, compared to a net income of $1.3 million or $0.10 per diluted share, for the same period last year. The second quarter results include receipt of a merger termination fee in the amount of $8.3 million in connection with the termination of Nanometrics' merger agreement with August Technology Corporation. The second quarter results also included a $2.2 million charge for an asset impairment of certain assets in Nanometrics' Japanese operation.

For the six months ending July 2, 2005, total net revenues were $42.3 million, an increase of 42% from the same period in 2004. Net income for the first six months of 2005 was $7.3 million, or $0.55 per diluted share, compared to a net income of $90,000 or $0.01 per diluted share for the same period last year. Nanometrics' financial position continues to be strong, with cash and short-term investments totaling $45.2 million.

Now taking a look at sales by territory in 2005, they were as follows. The US was 20%, Japan 26%, Korea 22%, Taiwan 26%, and the rest of the world was about 6% of product sales. Sales by product category in the second quarter of 2005 were as follows. Automated systems 52%, integrated systems 31%, tabletop systems 5%, and service was about 12% of total net revenues. Moving onto our gross margin, while our product gross margin was 50% in the second quarter of 2005, our total gross margin was only 42%, primarily because of our high service costs during the quarter.

R&D expenditures in the second quarter 2005 were about 19% of total net revenue. S G&A of about $2.4 million or 28% of total net revenue in the second quarter in 2005. G&A alone increased about $1 million compared to the second quarter of 2004. This increase resulted primarily from higher regulatory compliance expenses, which we believe may continue through the remainder of the year.

Head count in the second quarter of 2005 was 319. Depreciation was approximately $500,000, and there were no capital expenditures during the quarter. Our cash balance increased by about $14 million during the quarter, primarily as a result of lower levels of accounts receivable, as well as the receipt of $8.3 million merger termination fee. Finally, as we said in the press release, our financial position is strong, with a cash balance of $45.2 million and working capital of $80.5 million at the end of the second quarter of 2005. And with that, I'll hand it over to John.

Great. Thanks Paul. I want to start off today's call by focusing some of the high points of the quarter. Obviously, the conclusion of our deal with August Technology has to top the list of important points. As you all know, Nanometrics and August Technology had fought vigorously over the six month period to consummate our deal to merge two high quality companies. The merger was terminated when it became clear that a successful outcome was unlikely and Nanometrics reluctantly accepted the breakup fee. Regardless of that outcome, we wish August Technology and all of their employees the best for future success.

At Nanometrics, we remain firmly committed to future growth and increased shareholder value. We will continue our plan of organic product development and growth through acquisition. We leave the transaction with renewed emphasis on product quality, reliability and corporate efficiency. This emphasis will be an ongoing theme for our company as the industry continues to evolve and mature. Going through the merger process helped us to sharpen our focus on what we must do to take our company to the next level, and we are committed to executing against our plan in driving the company to new heights.

We leave the second quarter with over $45 million in cash, a 50% increase over last quarter, due in large measure to the termination of our merger. Revenues increased 16% year over year, which puts our revenue more than 40% ahead of last year's record year.

Gross margins continue to lag at lower than expected levels, as we add higher fixed costs and recognize revenue on lower margin products during the quarter. Customer support costs still exceed those of our prior years, as we expand our support group in important customer sites and deal with ongoing product issues. Our goal is to lower these costs as the year progresses next year and to improve overall customer satisfaction by increasing our efficiency through implementation of a computerized customer relationship management, or CRM process and procedure.

Moving on to the products, the second quarter continues to shine for our integrated metrology line with a total of 37 units being sold. We remain convinced that integrated metrology will continue to grow in adoption, and we intend to lead that effort. Standalone film thickness systems remain the backbone for the company though, however.

Our performance was hampered by shipment delays and push-outs by our customers. We had no cancellations during the quarter, and only one major delay, which was a fab-based decision.

Another milestone for our product offerings was the first sale of our 300 millimeter overlay product called the Orion. We have worked for a number of years on overlay registration with the intention to bring a competitive product to bear on the market in 300 millimeter. We have now achieved acceptance of our product, developed around our corporate atlas platform and engineered with a strong team in Korea. The significance there is that we can now offer a common platform that delivers film thickness, optical critical dimension and now overlay.

We intend to launch this competitive overlay product into other territories beyond Korea in the coming quarters. We believe this will provide additional opportunities for revenue growth in the market for overlay, reported by Dataquest, is approximately $140 million in 2005 and expected to grow by over 5% in the next four years.

On the balance sheet side, and as highlighted in the last quarter's earnings call, our Japanese flat panel display business has not performed up to expectations. In light of the projected forecast, we were forced to reassess the value of the Japanese assets. Under FAS 144, companies need to assess the recoverability of asset when the events become known to them, which would indicate potential impairment. We evaluated the estimated future cash flow of certain asset groups in our Japanese operations and determined estimated future cash flows would be insufficient to recover the care and value of those assets.

Accordingly, we recorded an asset impairment charge of $2.2 million during the quarter. Management is committed to take appropriate actions to resolve cost issues in this area and expect reduction to such in Q3. From a legal side, we are proceeding with our patent litigation with Nova Instruments of Israel but have no update on the details at this time.

Finally, let me speak to guidance going forward. Our business continues to progress in positive ways, but the road ahead presents several challenges and uncertainties. We expect revenues for Q3 to be down 10 to 20% as compared with the second quarter.

We don't anticipate any significant changes to the cost structure, although we do see the G&A for the S-Ox compliance potentially going up and probably the third quarter being the highest level for us in the quarters for this year. But we are certainly committed to taking action to reduce costs through shutdowns and head count reductions.

In closing, I would say that our company is performing well in a challenging and changing environment. We have emerged from our intended merger with greater knowledge and resources. We now will continue to work with trying to improve our financial performance and future growth potential while complying with the ongoing compliance issues of being a publicly-traded company. With all that said, I'll open up to questions. Operator?

Thank you very much, sir. (Operator Instructions). Our first question will come from the line of Mr. Stuart Muter of RBC Capital Markets. Please proceed sir.

Yes, thank you. Good morning, Paul and John. A couple of quick questions. First for Paul, without the two one-time items, the impairment charge and the merger termination fee, would you guys have been profitable? Or can you tell me what the EPS would have been?

Well, we took a look at it, and there are various items that we also have to adjust if those were to come out. And we took a look at that, and it looked like we would have had a slight loss, about $500,000 perhaps, during the quarter.

Okay, and do you expect to be profitable in Q3?

That's a really good question. So as I said in the prepared remarks, our intention is to look at the overall company's operations and where we are at the forecast and make the proper adjustments. We've already implemented some shutdowns in the quarter to reduce some of that fixed cost.

We're going to look at it closely. Like I said, also in the prepared remarks, our intention now is we've exited the merger termination with a kind of renewed sense of number one, getting our S-Ox compliance work, which is going to be at its peak here in the third quarter. And then secondly, we're looking at the operations and how we do our business throughout the world and making appropriate adjustments. But we haven't determined what those will be yet, so we can't give you that guidance.

Fair enough. And a question on the product front for you, John. You guys have done a great job gaining share in C&P on integrated. Where do you think the next big application is? Is it OCD or is it around the litho cell, if you could provide some color on what you think comes next, that would be very helpful.

Okay, so as you rightly said, C&P has been a big victory for us, especially in the 300 millimeter area. And as we've been saying for some period of time now, we think litho is where the real R&D dollars and the future challenges are going to remain. So, our focus has been primarily around optical critical dimension, the OCD and the lithocluster in the lithography area. So I think we believe today that the litho cell is the number one opportunity for integrated metrology going forward.

Having said that, we also kind of believe that if you have OCD in the track, and you don't have overlay, then you're still kind of a one-armed bandit, and we feel like ultimately to have the total adoption and the metrology required to keep the litho cell running, you're going to need to have overlay as well.

So, that was one of the intentions that we had with developing our 300 millimeter overlay product, which could also be adopted into a track system. So, bottom line is, yes, we do believe that the next big opportunity is lithography, and our intention is to penetrate that area. We've had a couple of installations within this current quarter on new tracks, and we fully expect to have penetration grow over periods of time.

And John, do you think they'll be penetration, meaningful penetration at 65 nanometers?

Yes, 65 and 45. I mean, it's 65 and 45 both.

Excellent, thanks very much.

Thanks.

Thank you very much. Ladies and gentleman, your next question comes from the line of Avinash Kant of Adams Harkness. Please proceed.

Good morning. This is Steven Kandel on behalf of Abernash. I have two quick questions. The first is would you be able to give us the percentage of revenue derived from 300 millimeter in the quarter?

Okay, do we have that broken down that way? You didn't break it down that way did you, John?

Yes, but you can see it's probably 75.

Yes, it's probably 75%.

About 75?

Yes.

Great and the second question is how much was memory as a percentage of revenue in the current quarter? And how is demand looking?

Cell memory is also a big part of it, as you saw our revenues from Korea, which Paul broke down; I think 20 or 25% and also in Taiwan. Those were primarily memory companies, so that was pretty much half of the revenue for the company. So, it's probably even greater than that, but it's, let's just say, off the top of our head, it's half of the revenues are memory-related. And how has demand looked?

Well, at the end you saw there was a precipitous drop at the end of Q3, which was somewhat surprising by those push outs, and they were standalone systems, which grossly affected our ability to achieve our numbers. And as we go into the third quarter, we started to see in the last couple of weeks some demand starting to come back into the company again.

So, there was like a period of about a month there where things got very soft, and we were kind of wondering what's going on around the semicon timeframe, and since then it seems like orders picking up, and the forecast is starting to solidify.

The other thing I would say is that it feels to us like we are in a bit of a lull, but at the end of the year, end of Q4, early Q1 is where we see the large number of shipments to some of these new fabs that'll be coming on line that we expect to get orders for. So the future, even though we're in kind of a downturn here from our company and a revenue standpoint, we see very good signs towards the end of the year and early next year.

Fantastic, thank you.

Yes.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Martin Teng of SG Cowen. Please proceed.

Yes, thank you very much. A quick question in your pro forma guidance you gave about a loss of $0.04. What kind of a tax rate assumption are you using for your charges?

What's the tax rate assumption that we're using?

It was about 2.5% in the US, for the US income.

So, when you adjust for your-obviously, you have a gain of $8.3 million and then you have charges of $2.2 million, so the net gain is about $6 million. If I were to adjust that to take it out your GAAP numbers, should I use the marginal tax rate of what, 40%?

No, we have a pretty complicated tax structure because we have a lot of NOL carry forwards and various tax credits. And so with the fee that we received this year, that ate into a lot of the NOLs and into the credits. When you back that out, the remaining income or loss, you get a different result. So, it's pretty hard to give a pat answer as to what rate you use. But, as you can see, even with the fee in there, we still have a very low tax rate for the year of about 2.5% or 3% in the US, for US income. So, if you were to back that out, we still have some foreign taxes and some AMT tax in the US. So, we're down now to about a 2% rate without the termination fee.

So what other adjustments should I take in order to get to the pro forma EPS that you guided to?

Well, those costs are spread all over. This is John. That was Quentin Wright, by the way, answering some of those questions for you, Martin. There is some cost spread related to bonus programs throughout the company that get divided over different aspects of the company. So that's why we gave you guys kind of a number because it's too difficult to go into a line by line analysis and --

Sure.

-- it's a one-time event anyway. So, it's really too complicated to go over here on the phone. And if you want to talk about it kind of off line, that would be easier probably.

Sure, that would be great. Then my second question is in regard to the cost structures. Do you expect the cost of service to come down in Q3?

That's not easy -- that's not an easy question. There's two areas where I don't feel like there will be reductions in costs on the short-term. The first is going to be in the G&A number because the S-Ox work, that's not going to be reduced because obviously we're driving hard to get compliance. And the second area is in the service. We are still in the process of fulfilling a lot of customer demand throughout the world. We've put a number of new engineers in different facilities, and this quarter is going to be too early to really assess the head count or the cost in service.

And as I mentioned also on the call, we're going to be rolling out a whole new customer relationship management account penetration and management tool that is going to help us ultimately reduce and improve the process and get a better visibility into what's going on with our customers, and that's going to drive expenses in that area.

So I would not look for reductions in service costs or in G&A. But I do expect reductions in the engineering area, R&D area, and also in the sales area because we're taking about a lower sales level. So those would be the two areas I would look for improvements.

In that, the OpEx should be flat for Q3 and Q4, right?

That's probably a good thought.And I would expect in Q4 we'll start to see more significant improvements.

Okay, thank you very much.

Thank you very much, sir. (Operator Instructions). Our next question comes from the line of Ray Hukreiah(ph) from Handbreit(ph). Please proceed.

Thank you, and good morning gentlemen. I actually have three questions. The first one is, this is on the service side. We've seen service margins to the negative for the past four quarters. What should we be thinking of in terms of the normalized service gross margin and when do you expect to be able to hit that number?

Well, we don't forecast gross margin for service. What we have is a cost structure that is implemented throughout the world through head count and inventory and usage of that. And then we have demand by customers for service that is payable post warranty.

So, what we have generally seen is and is what we've kind of been describing is kind of reliability-related, product-related issues that have occurred over the past year that have forced us to increase our head count and a lot of the costs are driving that service cost higher.

So their usage of parts and the increased head count and travel and expenses related to that has hurt our service margins. We expect ultimately to get back to kind of the $2 million cost structure for service. And right now I think we are running at 2.7 or so, 2.6 or 2.7. So we are probably like 40% lower -- 20% lower than where it is right now.

That's very helpful. And my second question was around your revenue, guidance been down 10-20%. Could you give us a sense of what are the major drivers of the down forecast? Is it primarily from standalone or integrated? Where is the bulk of that decline going to come from, from your view?

Yes, it's mostly the standalone, because the stand-alone has the biggest impact on us. If there's any light part of the forecast, it's in the standalone business. We've -- the last few quarters have had big bulk shipments to large customers, and the question in our minds is going to be whether these shipments will occur at the end of the third quarter or into the fourth quarter. So, therefore, that's really driving a big shift in the revenue guidance. So it's standalone.

Okay. And the last question was could you give us an idea as to what are the long-term prospects in terms of your relationship with TEL given the recent acquisition in terms of its integrated metrology business? Thank you.

So, that's another great question and extremely complex. It's not really clear exactly what our relationship will be with TEL into the future. I can tell you today that we have an excellent relationship, a very close relationship, that we do have complete compatibility with Tokyo Electron Software offering from the Timbre Group, and we are fully integrated onto their etched system, and we have been working with them on a track for some time.

And as I said earlier in my comments, that we are now doing installations, and we expect to have penetrations into the future. And whether we will ultimately be the supplier for, or -- the class one supplier for track, I think is an open question, and it will depend on the performance of our current systems that are out there and also what the market wants to see. They did go through and we were rightly informed by them that they will be purchasing those assets from Therma-Wave, and they felt like the reason they had to do that was continuation of supply. And there was questions about the survivability of that product line at the other companies.

So, they felt obligated to have that continuation of supply for their customers. Now whether they will move that product forward for the development -- to expand it to do other applications is an open question, and I don't think it's been decided by them yet.

Thank you, John.

Thank you very much, sir. (Operator Instructions). At this time, we have no further questions. I will turn the call over to our management team for any closing remarks they may have.

Great. Well thank you all for dialing in today on our call, and we look forward to speaking with you with better results in the future. Thanks very much.

Thank you very much, sir, and thank you ladies and gentlemen for your participation in today's conference call. This concludes the presentation, and you may now disconnect. Have a good day.