Onto Innovation Inc (ONTO) 2005 Q3 法說會逐字稿

Good morning, and welcome to Nanometrics third quarter 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 different materially from these statements. Factors that could cause such differences include, but are not limited to, changes in demand for the Company's product, 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 Discussions and Analysis Section of Form 10-K for the 2004 fiscal year filed with the Securities and Exchange Commission.

Thank you for joining the conference call today. (OPERATOR INSTRUCTIONS). This morning's speakers include John Heaton, President and CEO, and Doug McCutcheon, Executive Vice President and CFO of Nanometrics. We will begin the conference call with Mr. John Heaton. Please proceed, sir.

Good morning, everyone. Thanks for calling in today. We will keep our comments brief and then open it up to questions to make sure everyone is comfortable with the details of our restatement, Q3 results and the information contained in this morning's press release.

As I commented on our last conference call in October, we see 2005 as a year of change and transition for Nanometrics. First, we are encouraged by indication for increased capital spending in 2006, and by the fact that some of Nanometrics' largest customers are the same companies that are leading that spending. We will also end this year well positioned to increase the penetration of both our core and newly introduced products with those customers.

Second, the ability for Nanometrics to enhance the control and visibility of our financial reporting has been significantly improved with the creation of a fortified team of Financial and Investor Relations professionals, led by our new CFO, Doug McCutcheon. Doug's team has successfully achieved the timely filing of our 10-Q, and the restatement is now behind us.

Third, we have made and are continuing to make many improvements in our business structure to improve our margins and create significant operating leverage. For instance, we sold our flat-panel display business, which had low gross margin and took focus away from our core market, semiconductors.

We reorganized our engineering team in order to reduce the cost of manufacturing and enhance product quality and reliability. We have restructured our service organization in order to keep spending flat while supporting more tools, which is the key driver towards bringing our blended gross margin closer to our product gross margin. Therefore, these three pieces of the puzzle, seeing encouraging signs from our customers, building a strong financial team, and making improvements to our business model come together to create a positive outlook for what our investors can expect from Nanometrics in the coming year.

With that, I will turn it over to Doug to discuss the financial results for the third quarter, as well as the details behind our restatement.

Yesterday we released our final third quarter fiscal year 2005 numbers, both in a press release and in the filing of our 10-Q with the SEC. First, I would like to review the third quarter numbers. Then I will compare and contrast what we had previously estimated the magnitude of the restatement to be and where it came out in the end.

Looking at the numbers, we had previously estimated revenues would be in the range of 14.0 to 14.5. They came in in the middle of that range at 14.2 million. Service revenues increased sequentially by 250K, and product revenues were down by about 4.8 million from the sequential second quarter.

In the gross margin area, we had indicated our margin would be approximately 38%, which the blended margin is. The product margin declined by 1.8 percentage points from 48.8 to 47. We had indicated this was expected because of onetime charges for both warranty and inventory reserves. Due to the increase in service revenues, with a corresponding slightly lower service cost, our services margin improved from a negative 18% to a negative 7%, on its way to the positive territory that John has referred to. So again blended margin, 38%.

We had indicated previously we thought expenses -- operating expenses -- would come in around 9.2 million. They actually were slightly lower at 9.0 million. R&D was at 3.3, down $365,000 sequentially, reflecting the reduced headcount. Sales and marketing, 2.4 million, down 450K sequentially, reflecting the lower revenue in the quarter and also lower headcount.

G&A at 3.3 million, up by about 948K in the sequential quarter, which we had previously talked about due to the dramatic increase in the cost associated with our SOX 404 compliance and also some heavy cost of our litigation in the patent infringement case. Those two items accounted for more than the increase in -- far more than the increase in the overall OpEx, so our core OpEx actually went down pretty significantly.

One other line on our P&L that is fairly different from historical is the other I&E line where we show a benefit of 270,000 versus a normal debit on that line. This is a combination of interest income and foreign exchange effects. With more cash in the bank, our interest income is up nicely. And due to the dollar strengthening against the yen, we did not have the kind of foreign exchange cost that we have had in the past. So a nice positive impact there. So the bottom line, we're showing a loss of $0.26 per share.

Turning back to the revenues to give you a little more color on the revenues. Quite a different pattern than normal. As you know, normally our stand-alone systems, or automated systems, make up something on the order of 60, 65%. This quarter stand-alone was 40% and integrated was 39%. Almost the same level of revenue for the two lines. Integrated chunking along right around the same level that it has for the last few quarters, with the -- and the stand-alone revenue coming down, as our principal major customer Samsung took a little breather of taking new systems or accepting new systems in the quarter.

You can see that when you turn to the geographic breakdown on the revenue. Our U.S. revenue, which reflects the integrated shipments to Applied Materials, even though they may go to other places in the world, was 55% of our revenue. Last quarter U.S. was only 22%. Japan this quarter, was 18% of revenue, down from 26% in the previous quarter. Korea was at 14.8% this quarter, down from 21%.

Turning to the balance sheet. We had indicated we had -- cash with cash and short-term equivalents would be at 46.5 million, and that is what the number is, 46.456. Our receivables came down in the quarter due to the trend in the revenue. Receivables were reduced by 5.8 million, and stand at 18.7. We also decreased our inventories by 1.5 million in the quarter. So they now stand at 23.9 million. So all in all, the third quarter numbers came in pretty much as we had indicated in our previous release.

Now turning to the restatement. In the 10-Q that we filed yesterday, there are a number of tables that refer to the elements of the restatement for the various periods. We have included a summary in the press release issued last evening. But I would like to just harken back to the estimate, or the preliminary announcement, that we had made on October 27. We had therein indicated that we believed the revenue decrease for the fiscal year of 2004 would be somewhere in the range of 600 to $900,000 and it came in at 764,000, right in the middle of the range.

We indicated that the revenue adjustment for the first six months of 2005 would be in the range of 200,000 to 400,000, and it came in at 275,000. And then we indicated the cost of product sales would be something up to $1 million. That came in at 368,000. And then also an additional item in sales expense was 331,000. So a total of about 700,000 for that adjustment. Again we feel quite pleased that our estimates proved to be reasonable and appropriate, and we have now gotten these restatements done.

I would like to add that the whole restatement effort is not quite completely over. We still have to -- but the heavy lifting is over, all the calculations are done. We still have to make the updated filings with the SEC. So over the next two to three weeks we will be completing those filings, which are the 10-KA for our fiscal 2004 and the two 10-QAs for each of the first two quarters of fiscal 2005.

On October 27, we provided our revenue guidance for the fourth quarter ending December 31, as being flat from the third quarter. Today we're reiterating that revenue guidance for the fourth quarter.

Operator, you may now poll for questions.

(OPERATOR INSTRUCTIONS). Avinash Kant of Adams Harkness.

I had a few questions. Could you also give us the EPS impact on the full year '04 and the first half of '05 due to the restatement?

Yes, I certainly can. And you'll see that in the press release. $0.03 for the six month period of '05, and $0.10 diluted, $0.11 basic for the full year '04.

Your SG&A was high of course this quarter. Now going forward, you're guiding for flat revenues. How should we think about earnings in the next quarter? If you could add -- maybe discuss some of the line items like R&D could maybe stay the same, and then how would SG&A really (ph)?

I don't want to get into trying to provide EPS guidance here, because as you know we just don't do that. But on a general basis, R&D should trend down slightly as the effect of the sale of the flat-panel business to Toho will come out in the current quarter. Sales and marketing should stay relatively constant. And G&A core will stay relatively constant, but of course the SOX work and the litigation is an unknown. SOX certainly will continue in the fourth quarter. And so far the litigation looks to be continuing at the same level in the fourth quarter. But that will have its ups and downs.

If I had to estimate -- I think you did talk about SOX and litigation contributed roughly how much -- almost $1 million in the current quarter?

That's correct.

Basically they could still remain the same, or you don't know if they will go down, right?

As of now it looks like they're staying the same.

Now about the SPD flat-panel display, the division that you sold, would you be able to disclose the terms and conditions of that? How much did you sell it for?

Yes, that agreement is filed with our 10-Q as of yesterday.

The share count seems to have come down a little bit. Was there any specific reason for that?

The share count will come down when you have a loss as opposed to having a profit because the options are not included in the number.

The numbers only impact -- nothing --?

Yes, we actually had an increase in share count during the quarter in the outstanding share count.

Of course, you don't talk about orders, but any trend there that you could point to? You did talk about Samsung taking a breather on the equipment side. But do you think they're coming back in the current quarter, because you have heard positive things in the industry in general?

This is John. Obviously, Q4 has two holidays in it, and our customers also are impacted by the holidays. We generally don't forecast strongly for fourth quarter, because there are so many days lost already to the holidays. I think you saw even a recent announcement as of yesterday of the Intel Micron joint venture. These are all more positive signs of customers of ours that are continuing to expand. So I think the horizon looks very bright for the semiconductor equipment space, and for a lot of our customers.

One final question, if I may. The overall exposure to memory still remains close to 70% or --?

Yes, that has not changed. That is true.

Jared Cohen of J.M. Cohen & Co.

Just more on the macroenvironment. With really the transition taking hold to 300 mm, how more important is -- and also let me add to that -- I guess with the projections for semiconductor capital equipment for next year is at least flat to maybe even up a little bit. But do you see the percentage going towards metrology going up next year relative to this year even and last?

Yes. I think we have been talking a little bit about this recently. If you go back and you do a comparison of CapEx spending for 2000 vs. 2005, and you look at the amount of dollars, those dollars that are being spent on process control, it is almost a 100% increase in the amount of spending on process control. We believe that because the process has become so complex, and because 300 mm fabs are fully automated that has really driven customers to increase the general usage of process control. So we believe that if you are involved in any sector of the semiconductor equipment space, that the metrology is probably a sweet spot right now.

How big would you say on an absolute sense is metrology right now? Does it represent about 3 or $400 million?

If you look at the overall capital spending, it is about 19% of the overall capital spending for 2005. The markets that we serve, I think our latest roll up according to Data Quest numbers on the order of $600 million.

(OPERATOR INSTRUCTIONS). J.D. Padgett of Founders Asset Management.

I was hoping you could update me on the flat-panel business -- when you're going to sell that? What the P&L impact might be?

Well the folks at Toho have already taken over operation of that business. And so we have in essence done a soft close, and the numbers are out of our numbers for the fourth quarter. We just haven't gotten paid for it yet. And the only reason we haven't gotten paid for it yet is we are waiting on the Internal Revenue Service to give a letter to Toho that permits them to avoid withholding tax. Everything else is fully done and in place, and just waiting on our friendly IRS.

As we said previously, the flat-panel display business for us had declined to the point where it was below 5% of our revenue for the first half of FY '05. And it was a money-losing business for us. So we see a margin improvement and -- at least the order of $500,000 out of the OpEx line.

500K there?

Right.

Okay. I would suspect then it also improves the gross margin structure of the business?

Correct.

And then when we look at your guidance for the fourth quarter of revenues flat, even know that is going away, I know that is not a big chunk of revenue, but I guess the implication is there excluding that the core business is growing revenue a little bit sequentially?

That would be a true statement.

I guess with that done we will see a meaningful improvement in the profitability of the business then, at least the deterioration in the loss?

We took a lot of costs out. That is for sure. We took 25 people out of the Company. And as we said before, we have been doing quite a bit of restructuring within the Company. It is hard for us to do a measure of what those things are actually going to turn out to be at the bottom line. Obviously, they will have an effect, and it is going to be positive effect.

That is 25 people in the core operation?

25 people out of the flat-panel display operation.

You're also doing some restructuring on the services side for the core business, right?

That's correct. Our headcount declined in the quarter from 319 to 305. And that did not include the Toho reduction. Then the Toho reduction occurred after the end of the quarter.

That is another 25 people?

Right.

Any new thoughts around how you would calibrate kind of breakeven revenue levels now?

Yes. We previously said we believe under the new structure that our breakeven level is in the low 17 million per quarter range.

(OPERATOR INSTRUCTIONS). Ray Cucocoh (ph) of WR Hambrick.

I had a couple of questions. And this is maybe directed more at John. John, can you give us some more color on the evolution of your relationship with Dell now that it has been a few months since they purchased the business -- the metrology business from ThermaWave?

There really is frankly no change. They continue, as they have in the past, supplying the census product that they bought from ThermaWave. We continue to ship product to them. We continue to work on strategic planning for new account penetration into the future. So I guess my answer to that is it is obviously a complex relationship, because they do have a metrology element within their company. But on the other hand, that product we believe is not as good as our product, and that we are really focused on metrology as a Company. And we believe, and I think many customers also believe, that we are the supplier to be with if you are going to be using integrated metrology products in the future. So therefore we think we're in pretty good position.

To what extent are you concerned, if it all, about this relationship with Telvay (ph)? They seem to have a reputation where they work with some of the suppliers, and then develop their own know how, and start coming up with their products, and then sort of terminate those relationships.

I think frankly they have had the opportunity to acquire metrology companies if they so desire to be in the metrology business. They could have not just procured the census product from ThermaWave, they could have procured the entire company. And frankly you can see the evaluation today of ThermaWave as a company, and it is pretty low. And I think the same thing is true for Nova. I think if they wanted to buy, or want to be involved in the metrology business, that the best method for entering it would probably be through acquisition.

Having said that, the reason that they -- and they have verbalized this to us as well -- is that the reason they bought the census product was continuation of supply. That there was great uncertainty about the future of ThermaWave, therefore they felt compelled to make that acquisition to get the continuation of supply.

I don't think that it is still clear today that Tokyo Electron is interested in entering the metrology business. It is certainly, as you verbalized there, it is a threat. It is a possibility. Yet I think most of us in this business know that there are a number of companies like ours that are fairly nimble and technology oriented with a lot of IP, and it is not so easy to just enter and be successful. And I think ultimately Tokyo Electron is interested in selling process equipment, and that is their core business. And whatever suppliers are out there that can help them sell more process equipment, that is what they will do.

My second question was, John, could you give us some more color on the traction that Orion and Atlas might have gained in the September ending quarter?

You can see the revenues were down. They go in phases as these fabs come up. There are a number of systems that are shipped within a quarter -- large numbers usually, you know, between 2 and 10 systems into a fab. They come through in bubbles and you try to manage it in a way that doesn't confuse investors. But frankly the revenues have been down on the stand-alone because the fabs that were expanding were coming to the end of their expansion, or they were going through one of these digestion periods. But we don't see any change, frankly, in the acceptance or the adoption of our stand-alone systems. And the integrated has remained absolutely constant for three quarters this year.

My last question was at a macrolevel. I'm not sure if you can really comment on this, but I will give it a shot. Can you elaborate on the strategic direction you might be taking now that you have so much cash on the balance sheet? And having had the experience of all this technology, what are the parameters you would look at in expanding your revenue base, and how are you going to go about doing that?

We had a process that we ran here in the Company when we did try to do the August transaction. And as we have mentioned on numerous occasions, we learned quite a bit about the Company through that process. Fortunately, here we are today with, as you said, a good position financially and with a lot of potential candidates in the market out there.

Which criteria are the most important? I think it is very simple. It is topline and bottom line growth for us. And we will continue to evaluate people that come to us, or we go to, about growing together. We think that we have a strong channel to the customers. We have a great balance sheet. We have a very liquid stock. All these things translate into something that is of high-value to smaller companies, especially. We're going to continue, as we did with August, looking at candidates with the criteria number one being topline and bottom line revenue growth. And if we do those things, I think our shareholders will be very happy with us.

Do you have a preference of doing a merger of equals, or would you rather be an acquirer?

Topline and bottom line growth, that is our criteria.

(OPERATOR INSTRUCTIONS). At this time we have no further questions.

Thank everyone for calling in today, and we will see you at the end of the year. Thanks.

Bye, bye all.

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