Onto Innovation Inc (ONTO) 2007 Q1 法說會逐字稿

Good afternoon and welcome to Nanometrics' First Quarter 2007 Financial Results Conference Call. The speakers for today include Bruce Rhine, CEO and Quentin Wright, Chief Accounting Officer of Nanometrics. [Operator Instructions]

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 the demand for the Company's products, changes in the Company's ability to ship its products in a timely matter, changes in the business or economic conditions and additional risks and uncertainties set forth in the related press release and in the management's discussion and analysis section of the Company's latest annual report on Form 10-K filed with the SEC.

I would now like to turn the call over to Mr. Bruce Rhine. Please proceed, sir.

Thank you, Operator. Good afternoon, everyone. First of all, although this is my first earnings call as CEO of Nanometrics, I'm committed to providing all of you with a good understanding of where we are as a company today.

Second, concurrent with the release of our Q1 results today came the news that Quentin Wright will become Interim Chief Financial Officer of Nanometrics, as Doug McCutcheon moves on to pursue other interests. I can assure you that the transition will be as seamless as possible.

So here's what I plan to discuss today. First of all, profitability, then cash flow, and predictability.

First of all, on profitability, not only did we have a record revenue quarter in Q1, but we surpassed the Nanometrics previous record quarter by 28%. But even at $37 million revenues level, we were not profitable as a Company. Why? Well, poor gross margins, which were about 18% off our model, and high operating expenses were about 8.0% off our model were the reason and these percentages are reflected as a percent of revenue.

So let's talk about product gross margin. It's still shy of historic levels and the service gross margin is negative and this has occurred for four primary reasons. First of all, poor integration of the various acquisitions last year, duplicate efforts caused by outsourcing, underestimated and under-forecast field reliability costs and lack of a service business process focused on profitability.

The integration of operations is a multi-quarter undertaking and today we predict that it will take at least until the end of the year to complete. What is perhaps not been adequately explained is that we are not just completing the integration of several entities, we are also implementing an outsourcing strategy at the same time. This adds additional complexity and that accounts for duplication of efforts and under-absorption negatively impacting our gross margin.

The service gross margin has always been an issue for Nanometrics. There's a lot to be gained by changing the business model to a more conventional semi-cap equipment service model and we're implementing those changes. High warranty expenses and a practice of giving away process application services have also contributed to service losses and both are readily addressable.

The other contributor to our lack of profitability is that the operating expenses continue to be high, particularly in G&A. Top priority upon taking the CEO position was addressing our lawsuits with Nova. We were able to disregard the last two years of hostility over legal issues and look solely to what's best for us looking forward. We settled the lawsuits and eliminated a large distraction and a large expense.

We have identified a number of other items that have contributed to high G&A expenses and we believe we are moving in the right direction to reduce those costs.

Now let's talk about cash. Our operating losses and acquisitions have had a negative impact on our cash balance, but our cash trajectory has changed and here's why. We improved our cash balance in Q1 despite the operating loss. We are focused on achieving positive operating cash flow and improving balance sheet fundamentals.

The real issue is liquidity and we have over $9.0 million in cash, a $15 million bank line and we own our headquarters in Milpitas and other real estate worldwide, which provides us with additional opportunities for liquidity.

So let me state my personal rule of thumb, which is that a semi-cap equipment company should have two quarters of revenue in cash on the balance sheet with no debt. This is our long-term goal. So the net is we're very focused on improving our cash position.

So now let's move on to the predictability question. Part of the reason why I'm CEO today is that the Board wanted to change the trajectory of the Company. We are four weeks into a 10-week plan. The first week involved largely communicating and stabilizing employees, customers and our strategic partners. Week two was to resolve our lawsuits with Nova.

We're now into week three-to-five, which is to dig into the numbers, understand our operating expense and balance sheet issues, understand tasks that are necessary to complete the integration and understand our strategic partnerships. In week six, we'll develop new budgets, plans and adjust the organization accordingly to converge on our model. In week seven-to-nine, we'll begin rolling out and implementing our plan and from there on we'll implement refinements and continuous improvement.

But in addition to these things, we are focused on improving business processes, putting into place managerial accounting, budget variance reviews and other practices that enable us to understand our numbers and reliably deliver financial results.

In parallel to these activities, the Board is focused on putting in place a CEO who is going to lead the Company well into the future.

So, in conclusion to my prepared remarks, if I were to grade the quarter I would give good marks for competitiveness, corporate governance, and market conditions. I would give 'Needs Improvement' in the integration of our various entities, cash flow, expense and margin management.

We'll go a bit more into detail on the numbers and I'll now turn it over to Quentin Wright.

Thank you, Bruce. Earlier today we released our first quarter of 2007 financial results. If you've not received them yet, you may find them on our website at Nanometrics.com. I will now address some financial aspects of the quarterly announcement.

As predicted in our fourth quarter conference call, Q1 revenue growth would be strong. Indeed, total revenues for the first quarter were $37.1 million. This is a 49% increase over Q4 2006 revenues of $24.9 million, a sequential growth rate exceeding the guidance provided on the Q4 conference call, which was up 25 to 35%.

The large increase in revenue is primarily a reflection of our memory customer's ramp up in manufacturing capacity. In addition, we discussed last quarter the fact $2.9 million in revenue, as was expected to be recognized in Q4, did not achieve acceptance before year-end and all of that revenue was accepted in Q1.

For the first quarter, revenues were divided by channel as follows -- standalone metrology, $29 million or 78%; integrated metrology, $3.5 million or 10%; and service revenues, $4.6 million or 12%.

Revenues were divided geographically as follows. North America, $16.3 million or 44%; Japan $5.6 million or 15%; Taiwan and China, $4.1 million or 11%; Korea, $3.8 million or 10%; and then Europe and Other was $7.3 million or 20%. We should note, however, that of the $16.3 million of sales to North America, $10 million was from sales to a U.S. facility of a Korean customer.

Regarding our gross margins, our product gross margin for Q1 was 44.3%. Our service gross margin was a negative (-) 27% and our overall gross margin was 35.4%.

On a GAAP basis, our overall gross margin improved by 15 percentage points over our reported gross margin for Q406. These figures include certain non-cash charges. When we exclude amortization of acquired intangible assets, our product gross margin was 46%, reflecting a 10-percentage point improvement over the comparable gross margin for Q4. And our overall gross margin improved by 9.0%, excluding those non-cash changes.

Total reported operating expenses increased from $17.2 million in Q406 to $17.8 million in Q1. As discussed on our Q4 conference call, we had expected operating expenses to decline in Q1. However, expenses associated with the Nova litigation were higher than we expected, increasing to $1.2 million in Q1, a $500,000 increase over Q4. In addition, we incurred severance charges of $800,000 associated with the termination of senior executives and the closure of our Concord, Massachusetts facility.

When we exclude non-cash charges such as amortization of acquired intangible assets and stock-based compensation and the charge for severance expenses, operating expenses were roughly flat from Q4 to Q107, even with the higher litigation expense.

Our loss from operations was $4.7 million, including non-cash charges of $2.7 million for amortization of intangible assets and stock-based compensation, broken down as follows. Amortization of intangible assets was $1.5 million, of which $647,000 was included in cost of products and $902,000 was included in selling expenses. Our stock-based compensation expense for Q1 was $1.2 million, of which $77,000 was in cost of products, $78,000 was in cost of service, $221,000 was in R&D, $279,000 was in selling expense and $578,000 was in G&A, for a total of $1.1 million in operating expenses.

Our headcount increased from 522 at the end of 2006 to 555 at March 31st, an increase of 31 people.

A few quick aspects of balance sheet are as follows. Cash at March 31, 2007 was $9.2 million, up from $8.0 million at the end of 2006. AR stand at $28.1 million, up from $24.8 million at year-end. However, DSOs were reduced to 68 days from the previous level of 90 days.

I should also point out that we made a reclassification change to our balance sheet. Inventory associated with our deferred product revenue is now grouped with the deferred revenue in the liability section, reflecting deferred product margin. We have made this reclassification for the December 31, 2006 and March 31, 2007 balance sheets. Accordingly, our inventory levels fell to $39.6 million, down from $43.9 million at year-end.

That concludes our prepared remarks. Operator, you may now poll for questions.

[Operator Instructions] And your first question comes from the lines of [Westin Pled] with Pacific Crest. Please proceed.

Hi there. I had a question on -- it looks like in a couple of quarters back there was a substantial amount of deferred revenue based on recognizing tools with upgrades that were shipped in Q3 and a lot of the revenue, I believe, was supposed to be recognized throughout 2007. And I'm wondering how much of that was recognized in the first quarter.

None of that was taken into Q1. We are still working that issue with our customer.

Okay and I'm also wondering about some of the deferred revenue recognition from the Accent tools that was discussed in the last couple of quarters. Has all of that been recognized or should we expect, I guess, a few additional recognitions?

Are you talking about the step up in the inventory basis?

Yes.

Yes. Almost all of that has now blown through the financial statements. I think there's a small amount left that will come through in Q2, but it's an insignificant amount at this point. So, yes, all that's gone now.

Okay. I was also wondering, on the last call the break-even number was discussed and the number was said to be around $34 or $35 million revenue and I'm wondering where do you think that number is now.

Wes, this is Bruce. That's a very good question and I think part of what we intend to devolve as a part of the next couple weeks digging into the cost structure. I would say that our goal is to get to a break-even point of approximately $25 million in quarterly revenue.

I would say that what's occurring is we've got this outsourcing activity and we're relocating production of products from the UK to Korea. So, at this point, the overriding consideration is to make sure we have reliable, dependable delivery to our customers.

As we scale back the Boston facility and the York facility, we'll downsize both headcount and facilities costs in those areas. So right now, those costs will continue through the second quarter and into the third quarter and then we'll start to see those costs pair out.

So the way to look at this, I think, is sort of a steady state break-even that that we achieve sometime early next year, which is an approximately $25 million quarterly run rate.

Okay. So that was kind of I guess a little bit of a lead in to my next question, which is I was wondering if you could just give me a little bit more color and more of an idea on how the York transfer is coming along.

So the York transfer has two components to it. Part of it are products that are outsourced completely and that exercise will be complete by June and we'll be in position to downsize the labor and overhead costs associated with that. That's going in a schedule that's reasonably predictable.

The other part is transferring our overlay operation into Korea and in the first quarter, all of our overlay product revenues were derived from production in the York facility. So we have this situation where we've got under-absorption in York associated with transferring part of the product out of there, while at the same time we're ramping our Korean facility to take the overlay and training the folks in Korea to be able to manufacture overlay.

So we have essentially three locations. The Korean facility, which is experiencing under-absorption and then the York facility and as we're closing down the IBS facility in Boston. And so I think what's occurred largely is that we're in a period where we've got duplicate capacity in these three different locations and we expect that all to resolve itself, such that we'll see those results in the fourth quarter and certainly by the first quarter of next year.

Okay great. Thank you very much.

Thanks, Wes.

[Operator Instructions] And at this time, we have no more questions in queue. I would now like to turn the call back over to Mr. Rhine for closing remarks.

Okay. Well, thank you for the one question and we look forward to continuing to report on our progress at the end of the second quarter and thank you for all of your patience and interest. That concludes the call.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day. 4