Onto Innovation Inc (ONTO) 2008 Q1 法說會逐字稿

Good afternoon, and welcome to the Nanometrics first quarter 2008 fiscal results conference call. The speakers today include Tim Stultz, President and CEO, and Gary Schaefer, Chief Financial Officer and Vice President of Nanometrics. (OPERATOR INSTRUCTIONS)

Before we get started, I'd like to call your attention to the following safe-harbor statement.

This conference call contains certain forward-looking statements within the meaning of federal securities law. These securities are based on management's expectations and involve risk and uncertainties that may cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause these differences includes but are not limited to changes in demand for the company's products, changes in company's ability to ship its products in a timely manner, changes in business or economic conditions, and the additional risk factors and cautionary statements set forth in the company's Form 10-K for the year ending December 29, 2007, and in the other reports which the company files under the Securities and Exchange Commission and incorporates herein when referenced.

I'll now turn over the call to Dr. Tim Stultz. Please proceed sir.

Good afternoon, everyone. I do appreciate your calling in today.

With me is our Chief Financial Officer, Gary Schaefer, who will go through the details of our financial results at the end of my prepared remarks.

I'm pleased to be announcing a solid first quarter for Nanometrics. Our financial performance in a challenging market environment demonstrates that we have continued to make progress in the areas of profitability, predictability and cash flow while driving toward an improved business model and strengthening our business processes.

Highlights of our first quarter include revenue growth of 5% over the fourth quarter of 2007; gross margin increase of 150 basis points over last quarter, which is the fourth-straight quarter of margin improvements for the company; a significant improvement to service gross margin, which year over year has gone from a negative 27% to a positive 23%; our fourth-consecutive quarter of generating an operating profit net of amortization of intangibles and stock-based compensation; and a strengthened balance sheet, where we grew cash by 25% and reduced our receivables and inventories by 14% and 7% respectively.

There were three key factors which contributed to our improved performance in Q1. First, our materials characterization business had a very strong quarter, more than $7 million in sales, while we continued to see strength from high-brightness LED's and solar markets.

Second, a large proportion of our stand-alone metrology business came from one of our largest memory customers, who took shipment of some of the systems that were pushed out of the fourth quarter of last year.

And, third, we executed well on our plan to improve service margins and revenues through a dedicated marketing program, which combined a detailed analysis of our install base and the offering of customer-specific, value-added product enhancements. The result was record service revenues and record service gross margin.

We, of course, are not immune to what is happening in our sector or the economy in general. What we do control, however, is the way in which we run the business, how we set our priorities, and how well we execute against our strategies.

Over the last four quarters, we have continued to improve our operational efficiency by completing the integration of our acquisitions and consolidating operations, monetizing or dispensing with nonstrategic assets, converting an inflexible fixed cost structure to a more variable structure through downsizing of our manufacturing capacity and increased outsourcing, and reducing overall expenses.

Early in the first quarter -- in fact before many of our peers did the same -- we announced a workforce reduction that will cut nearly $1 million out of our quarterly operating expenses beginning in Q2.

The above actions we have taken cumulatively reduced our working capital requirements, lowered our cash flow breakeven, and improved our profitability.

Looking forward, our focus will remain on operational efficiency, management execution, and improved profitability. We will continue to increase our product and service margins through the development and introduction of products with demonstrable cost and performance advantages, which in turn will support value-based pricing.

We will leverage our install base of over 6,000 systems worldwide and relationships with the world's leading semiconductor manufacturers to align our product roadmaps with customer requirements, improve our market share, and benefit from current and planned capital spending.

And, finally, we will continue to improve our overall performance through strengthened business processes and a more responsive business structure.

Key factors and an ability to perform to any plan are the skills and experience of the management team. Our COO, Bruce Crawford; our CFO, Gary Schaefer; and I have just completed our first full quarter of working together. With the addition of our new head of sales, Mike Fischer, to our existing senior managers, we have essentially completed our management team and have a high degree of confidence in our ability to execute to the strategies we have outlined.

In summary, we believe we are a better company today than before. We also have plenty of room for continued improvement. Although the near-term focus is on the current economic environment, we will continue to execute on every one of our strategic objectives and drive towards our target model of 53% gross margin and 13% operating margin on a GAAP basis and a $25 million breakeven revenue level on a cash basis.

During the last year, we have progressed from poor performance to average. I do thank our long-term shareholders for their confidence during this turbulent period. Going forward, we will continue our commitment to improve business management and our trajectory towards excellence in financial performance. We understand the fact that we cannot control or even influence the market, but we can and will structure and position the business to disproportionately benefit from an upturn in the industry in order to deliver superior performance for our shareholders.

I will now turn the call over to Gary Schaefer to discuss in more detail our first quarter results.

Thank you, Tim.

Earlier today we released our first quarter 2008 financial results. If you have not yet received them, you may find them on our Web site at nanometrics.com.

I will now address some financial aspects of the announcement.

For the first quarter, total revenues of $34.7 million represented a 4.6% increase over the fourth quarter of 2007 and a 6.4% decrease from the first quarter of 2007.

Revenues for the first quarter increased over the fourth quarter of 2007 primarily as a result of strong performance in our material characterization business and a record revenue quarter for our service business. We also saw increased sales from one of our largest customers, who had pushed systems out of Q4 and into Q1.

Gross margin increased to 45.6%, compared to 44.1% in the fourth quarter of 2007 and 37.2% in the first quarter of 2007.

Our product gross margin was 51.1%, a slight decrease versus 51.6% in the fourth quarter and an increase of approximately 5% compared to 46.2% in the first quarter of 2007.

Our service gross profit increased by $1.1 million in the first quarter, equating to a service gross margin of 23%, compared to the 8% margin achieved in the fourth quarter of 2007 and the negative gross margin of 27% in the year-ago period. Our service gross margins have improved both sequentially and year over year primarily as a result of our focus on reducing service-related expenses, higher revenue from upgrades, and a growing install base.

Operating expenses for the first quarter totaled $16.8 million on a GAAP basis, compared to $16 million in the fourth quarter and $18.5 million in the year-ago period. The sequential increase was due primarily to approximately $870,000 of restructuring charges associated with our reduction in force announced January 9, 2008.

The decrease in operating expenses versus the year-ago period was due primarily to the consolidation of our facilities around the globe, the completion of the integration of our acquisitions, and reduced legal and audit expenses.

We experienced a GAAP operating loss of $945,000 in Q1, compared to an operating loss of $1.3 million in the fourth quarter of 2007 and an operating loss of $4.7 million in the year-ago period.

The first quarter operating loss includes the restructuring charge of $870,000, as well as noncash charges of approximately $1.3 million in amortization of intangibles and $900,000 in stock-based compensation. Excluding these charges, we generated non-GAAP operating income of $2.1 million in the quarter.

Our net loss in the first quarter was $0.7 million, or $0.04 per share, inclusive of $870,000 restructuring charge equivalent to $0.05 per share. This compares to a net loss of $1.3 million in the fourth quarter and a net loss of $4.6 million in the year-ago period.

For the first quarter, revenues were divided by channel as follows: stand-alone metrology, $15.6 million, 45%; materials characterization, $7.4 million, 21%; integrated metrology $4.9 million, 14%; service revenues, $6.8 million, 20%.

Revenues were divided geographically as follows: North America, $11.8 million, 34%; Japan, $8.9 million, 25%; Korea, $5.4 million, 16%; China, $4.4 million, 13%; rest of world, $4.2 million, 12%.

We had one customer representing over 10% of sales, which was Samsung, whose worldwide shipments represented 21% of our net revenues during Q1.

Our head count at quarter end was 508, a decrease from 523 at the end of 2007, primarily due to the reduction in workforce announced January 9.

A quick aspect of the balance sheet are as follows:

Cash at March 28 was $18.7 million, an increase of $3.8 million compared to our cash balance at December 29, 2007.

Our accounts receivables stand at $29.9 million, compared to $34.9 million at the end of Q4, therefore, resulting in DSO's of 77 days. The lower level of receivables is due primarily to collections from two of our largest customers related to shipments in the third quarter of 2007.

Inventory levels decreased to $31.9 million, with annualized inventory turns at 2.4 times for the quarter.

We used $0.3 million of cash for share repurchases, which included 43,650 shares in Q1.

That concludes our prepared remarks.

Operator, you may now poll for questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Weston Twigg with Pacific Crest.

Please proceed.

Hi, just had a couple of questions here.

One, was wondering if we should expect any more charges from the restructuring in the second quarter? It seems like you said that would be fully complete this quarter.

Weston, I don't anticipate any more charges with regard to the restructuring.

Okay. Also wondering on the service revenue, was part of the bump in service revenue as a result of new contracts signed in Q1? I guess, in other words, would it be a seasonal bump and maybe drift back down, or do you expect it to be sustained?

The basic service revenues were fairly consistent with a little bit of growth quarter on quarter. The primary bump is coming from the product enhancements program that I mentioned during the script, and we see that continuing for the next several quarters at least.

Okay. Great. And then also just kind of looking at the gross margin improvement, you've had several quarters in a row of gross margin improvement, do you expect that to continue next quarter?

We certainly expect to continue to push on our gross margins. So the core service gross margins have increased a couple of points. We got a big kick from these product enhancements, and because we expect to see continued success in that part of our effort, we would expect the margins to benefit from that as well.

Okay. And corporate gross margins, do you think, would continue to trend up also or --

That's our commitment.

Okay. Also just an industry question. We've had some of your peers come in and really call for a fairly weak June quarter, and I'm wondering what kind of -- I guess, how would you characterize your customers' spending habits right now?

Well, as you know, we don't give specific guidance, but we're certainly seeing the same challenges in the sector in the forecast from our customers. They're managing their capital expenditures on a quarterly basis, as opposed to giving us an annual visibility. So I think we face the same challenges as our peers.

Okay. And, in particular, are you seeing more or less weakness in any given sector, DRAM, NAND, boundary, logic?

Well, we actually benefit -- you saw from the report that -- from some spending by Samsung so we saw some strength in the DRAM sector. I don't see anything specific to a particular sector. I think it's just a general economic control of CapEx spending.

Okay. And then one more here just on the HBLED market. You said you had a good quarter related to HBLED and the materials characterization group. Would that be expected to continue through a quarter or two, or is that fairly lumpy?

The pipeline looks pretty healthy for us in materials characterization, and so I think we're going to enjoy some good performance out of that group for the rest of the year.

Okay. Thanks.

With [Amari] Company, your next question comes from Michael Amari.

Please proceed.

This is Michael Amari. Congratulations for a very good quarter from my point of view.

I have a couple of questions. First of all, the stock is so low. The shorts are really doing a job on it. What are you plan for continued stock purchase? You have any authorization to continue to have an opportunity to buy stock?

We're continually monitoring the price of stock, and we've been authorized to purchase up to $4 million, and we'll be looking at this constantly.

So far you've bought how much out of the $4 million?

So far we've purchased back over $1 million in stock.

Let me ask you a question that has some nostalgia for me. Is Bruce Rhine still with the company?

Is Bruce Rhine still with the company? Is that the question?

Yes.

Yes, Bruce Rhine is actually Chairman of the Board of the company and one of the largest shareholders.

Right, I know he's the largest shareholder. But somehow I read someplace that he had resigned his position in taking the strategy of the company. Am I recollecting this right?

Bruce Rhine is -- yes, Bruce Rhine did resign his position as Chief Strategy Officer but still continues to serve the company as Chairman of the Board and one of the Directors.

Great. Tim, may I ask you something else. With a healthy volume of $34.7 million and you're striving to have a breakeven at -- what is that? -- $24 million -- I'm not sure about the number -- is it possible to predict that if the volume continue at anywhere near there then you're going to be doing better than a breakeven? What was your breakeven number?

The objective -- the goal that we have set for ourselves is $25 million cash flow breakeven. We're running about $27.5 to $28 million of cash flow breakeven, and we're doing our best to drive that down to the $25 to $26 million and hope to be at that point by the second half of the year.

Well, that's great. And thank you for doing such a great job.

You're welcome.

Have a good day, sir.

Your next question comes from Wenge Yang with Oppenheimer & Company.

Please proceed.

Hi, this is Wenge for Gary Hsueh.

First question is still regarding your business target. You mention about 53% gross margin and 13% operating margin sometime this year. I guess your comment is that you're still staying with target for to achievable this year; is that correct?

Yes. Yes. We're on the right trajectory to achieving no cash burn at $25 million, and we feel we'll achieve that by the second half of the year.

So despite the market situation, which some of the other equipment vendors commented about 20% to 25% down, you think with your particular product portfolio you can achieve that kind of dough in this down market. Any comments on that?

Well, we have a model that we're getting to, and I'd think we've made large headways to getting to that model, and, yes, I believe that we'll be at that point in the second half of the year.

The next question is actually regarding a couple of your products. One is overlay products. We haven't heard about any updates on that product. The other one is OCD. Any new updates on those two product lines?

Well, we often don't breakout the -- in our standalone business we discuss, we don't always breakout the overlay versus the OCD and thin film. Part of the reason is that our Atlas products are often sold with both OCD and thin film. But we have seen some nice growth in our overlay part of the business as an increasing percentage of our total standalone, and I think that we're back in the market. We kind of lost our way about a year ago, and I think we're back in play now.

Okay. Thank you.