Onto Innovation Inc (ONTO) 2008 Q2 法說會逐字稿

Good afternoon, and welcome to Nanometrics' Second Quarter 2008 Financial Results Conference Call.

The speakers today include Tim Stultz, President and Chief Executive Officer, and Gary Schaefer, Chief Financial Officer and Vice President of Nanometrics.

The Q&A session will be held at the end of the call. Until that time, all participants will be in a listen-only mode.

Before we get started, I'd like to call your attention to the following Safe Harbor Statement.

This conference call includes certain forward-looking statements within the meaning of federal securities laws. These statements are based on management current expectations and involve risk and uncertainty that may cause actual results to differ materially from those described in the forward-looking statement. 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 a timely manner, changes in business and economic conditions, and the additional risk factors and cautionary statements set forth in the Company's Form 10-Q for the quarter ending March 29, 2008 and in the other reports with -- the Company files with the Securities and Exchange Commission and incorporates herein by reference.

I would now like to turn the call to Dr. Tim Stultz. Please proceed.

Thank you, and good afternoon, everyone. I 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.

Like the majority of companies in our sector, we have experienced a significant decline in revenues resulting from a sharp decrease in semiconductor capital spending. While our Q2 revenues dropped 32% quarter-on-quarter, our gross margins declined only 3%, clearly demonstrating the value of our Metrology product solutions and reflecting the progress we have made in restructuring our business to reduce fixed costs as well as our previous dependence on vertical integration.

Of particular note, our product gross margins struck only 0.5% versus last period and remained above 50% for the quarter. Our service gross margin came in just shy of 14%, which represents the fourth straight quarter of positive surface margin and the second highest service margin in the last two years.

During the quarter, we recorded an asset impairment charge of $13.2 million. Excluding this charge and other noncash expenses, our net loss was $2.3 million. The impairment charge we took was primarily related to the acquired assets of Accent and Solaris, and will cut our quarterly amortization of intangibles expense by more than a half.

During the past year, we have discussed our intention to monetize our Milpitas headquarters, a property we own originally through a sale-leaseback transaction. The current state of the real estate market made those products prohibitively expensive. However, just last week, we did place a traditional mortgage of $13.5 million against the building, which significantly strengthens our cash and liquidity position.

Turning now to some strategic highlights of the quarter. In May, we announced the acquisition of Tevet, a company with a novel approach to thin film Metrology, which greatly complements our integrated Metrology product line and expands our solar [potable tape] Metrology product offerings. Recent customer wins and installations in both of those sectors encourages us about the future prospects and contributions from that product line.

Within the last two quarters, we have introduced new products and product platforms in each of our key served markets, including our IMPULSE integrated Metrology module, our INSIGHT overlay Metrology tool, our NanoDiffract OCD software suite, and our Lynx Metrology platform, which offers the lowest cost of ownership-highest productivity Metrology architecture in the industry.

All of our new products have been, or are currently, under evaluation by leading-edge semiconductor manufacturers, and we have already received firm orders for several of them. In addition, in the last two quarters, our integrated Metrology product has been selected as the tool of record at four major customers for deployment in their next fab expansions.

We feel these results are a direct outcome of the focused effort and R&D investment we have made into strengthening our product line and matching our technology roadmap to those of our customers.

These gains are very gratifying and bode well for our future business outlook, as a slowdown in capital equipment purchasing activities is actually an opportune time to improve our competitive position and strengthen our customer relationships.

On the operational side, we continue to focus on improved business processes and a responsive business structure. The resiliency of our gross margin performance is just one indicator of the progress we have made to improve our competitiveness and control our cost structure. Progress to our business model of 53% gross margin and 13% operating margin on a GAAP basis has definitely been impeded by the difficult business environment and the industry headwinds we face.

Our commitment to continuous improvement in financial performance, however, remains steadfast. Although the timing of a turnaround within our industry is still uncertain, we believe the steps we have taken to increase our competitiveness, strengthen our management team and approve our business fundamentals will keep us on a positive trajectory towards achieving our business model.

As we have stated in the past, we recognize our inability to control or influence the spending profile of the inelastic markets we serve, but our shareholders can count on us to manage those aspects of the business which are under our control and drive to a robust and sustainable business model with improved financial performance.

Looking forward, you can expect us to continue to evaluate opportunities to further reduce overhead structure and operating expenses, to sustain healthy gross margins, which will further benefit from increased business volumes and improved utilization of field and factory resources, to continue investment in R&D to further strengthen our competitive position and in particular our top line performance through new products, applications and customer relationships, and to increase our focus and performance on improved capital efficiency.

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

Thank you, Tim.

Earlier today, we released our second quarter 2008 financial results, which you can find on our website at nanometrics.com.

Second quarter revenues of $23.8 million decreased 32% from the first quarter and 36% from the year-ago period primarily due to sharp reduced levels of spending by our customers in the memory, logic and foundry segments of the semiconductor industry, and, to a lesser degree, as a result of modest declines in our materials characterization and service businesses.

To reiterate Tim's earlier comments, in spite of the sharp decline in revenues, our gross margin decreased by just 3% to 42% for the quarter. To put this in perspective, the last time our revenues dropped below 25 million was the fourth quarter of 2006, in which we reported a gross margin of 28%. Our service gross margin was 14%, down from 23% in the first quarter as a result of a reduced mix of upgrade businesses. Our R&D and SG&A expenses were $14.6 million for the quarter, a slight decrease compared to Q1, and includes approximately $300,000 in severance expenses related to a 3% workforce reduction during the quarter.

Operating expenses also include about $250,000 in operating expenses added with the Tevet acquisition, which closed in May. We took an impairment charge in the quarter of $13.2 million, which primarily consists of intangible assets related to the 2006 acquisitions of Accent and Solaris. As a result of this impairment, we expect our quarterly expense for amortization of intangibles to decrease by approximately $700,000.

Other noncash expenses during the quarter included $1.3 million for amortization of acquired intangible assets, $1.1 million for stock-based compensation expenses, and $1 million for depreciation. Our net loss in the second quarter was $18.9 million, or $1.02 per share, and included a total of $16.6 million in noncash charges equivalent to $0.89 per share.

A couple of last points. Two customers represented at least 10% of our revenues in the second quarter -- Samsung with 12% and [Renesys] with 10%.

And finally, we repurchased about 32,000 shares of our stock during Q2.

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

(OPERATOR INSTRUCTIONS.)

Wenge Yang of Oppenheimer.

Hi, thank you for answering my questions.

The first question is regarding the weakness across the board. You mentioned the weakness is happening in both semis and materials characterizations.

So, in the semi side, is there any specific sector that showed a weakness, DRAM, NAND or foundries? And on the material characterization side, I thought that business was independent of the semi cycle. So, could you give us some color on why that business also decreased?

Sure.

On the semi side, the primary decrease in revenues can be directly attributed to the memory side of our business, both NAND and DRAM, and we saw sharp declines in the products that go into those customers as a result of their reduced capital spending.

On the materials characterization, there are three basic components that we often refer to, and we find that the -- historically, materials characterization group has been a little more insulated from some of the memory pricing aspects of semiconductor.

So, the areas of business in the compound semiconductor, LED and solar [potable tapes] actually has -- continues to do well. But, we also sell some high-end products into the wafer side of the business, and there was a couple of orders in there that had been pushed out and did not manifest themselves, and that's why we saw the decline in the materials, which dropped about 26% quarter on quarter.

Okay, thank you.

The other question is regarding your working capital management. When you look at the balance sheet, the account receivable inventory [and] account payable is tied up almost more than $70 million. And the company's market cap is around -- is a little bit over $80 million. So, that seems to be quite a bit of cash tied up in the account receivable inventory. So, what's the reason in this quarter for the increase in inventories, and how do the management plan to better manage the working capital?

Yes. DSOs were about 109 days in Q2 versus 65 through 95 days in the last four quarters because of the extended terms on some back-end loaded Q1 shipments, which we expect to collect in Q3.

Inventory levels increased during Q2. Our turns were 1.6 versus the prior four quarters of 2.2 to 2.6 turns because of some push-outs we saw at the end of the quarter.

Okay. Is there any thinking of reducing both inventories and accounts receivable in a permanent basis, because that actually -- those two items count quite a big portion of your total working capitals at this moment.

Yes. I mean, that's the overall goal that we have, and we hope to see reductions in our inventories in Q3 and Q4.

Okay, thank you.

Weston Twigg of Pacific Crest.

Hi there, just a couple of questions.

I'm wondering, on the break-even, I think before you had mentioned you expect break-even at about 25 million [res]. You're pretty close to that right now. You're at 23.8. Do you still think 25 million is the right break-even, or is it a number a little bit higher than that?

So, with the current growth -- hi, West, anyway --.

Hi.

With the current gross margins at 42% or so, the break-even came in closer to 30 million, right around 29 million. And obviously, the break-even is impacted by the decline in the gross margins. If we look at the historical gross margins that we were benchmarking against for the $25 million, then we'd need to get closer to 50% gross margins to achieve that, or, at 45% gross margin, that would put us around 27.5.

We still believe we need to get closer to 25 million at a margin that's at least 45% to 47%. so that that clearly drives us to continue to find better ways and additional ways to reduce our cost structure. We're just not there yet.

Okay.

Also wondering, as we roll Tevet in here, can you give us an idea of how much revenue you think we'll have moving forward with that acquisition?

Yes. We're not going to break out the Tevet revenue on the reports, but we see it contributing somewhere between 20% and 30% to our integrated Metrology business.

Okay.

And is that a growing business on the Tevet side?

So far it looks that way, yes.

Okay.

Also just wondering, you mentioned that you had some wins, four new customers on the [integrated] Metrology product, some evaluations here with all of your new products. Do you have any idea on when some of those projects are going to ramp? Do you see any of those ramping this year, or are those all in 2009, or can you give us an idea on the timing?

It's really difficult to tell -- to identify exactly when they'll ramp, but I think that most of the companies in our sector don't see any significant ramps for the next quarter, possibly next two. So, I would hope that we start to see a ramp, you know, meaningful ramps in the '09 timeframe.

Okay, great. Thanks.

You bet.

(OPERATOR INSTRUCTIONS.)

Michael Amari of Amari Company & Associates.

Yes, hi. You mentioned that you have bought 30,000 shares previous quarter. Do you have authorization to continue buying? And with the price right now almost 40% of book, even the new book, seems like the price is highly undervalued. What's your feeling about that?

Well, we used about $250,000 this quarter to buy about 32,000 shares of stock. However, we received about $600,000 in proceeds from stock option and exercises.

As for the timing and amount of repurchases, we have Board approval that enables us to buy stock periodically provided we're not in the blackout period. Our principal goal is to net out the effect of option exercises and limit dilution to our shareholders. So far, we've used about $1.25 million in cash for stock repurchase out of the $4 million that we have in the program.

But, now you're going to be out of the blackout period of the -- right after the earning report. You probably would consider looking at purchasing some shares?

So, Michael, this is Tim. Let me add a little more color to that, is that, in addition to the blackout period, we also are constrained on repurchase if we are in possession of material information which may or may not be during a blackout period.

As an example, when we were going through the acquisition of Tevet and we knew that was an activity that we were pursuing, even though some of it was occurring not during the blackout period, we were still precluded from purchasing, or repurchasing stock.

So, there are two constraints on when we can do it. And as Gary said, our objective is to purchase sufficient shares to counter any dilution that the -- granting the shares to employees would cause to our shareholders. And we continue to have the authorization to do so, again, as long as we're not in a blackout period, or as long as we do not have at our disposal material information that could affect the business that is not available to the other shareholders.

Thank you.

Your next question is a follow-up from the line of Wenge Yang of Oppenheimer.

Hi. Recently, we're hearing talk from Korea about some reduction on CapEx, and also Sandisk and Toshiba came out saying the NAND is going worse than expected, and they are going to adjust their CapEx [spend] for the future. So, have you seen any orders, cancellation or push-out for the next month?

So, we actually have not seen cancellations of orders, but we certainly have experienced the -- either delays in planned purchases and/or push-outs with regard to when they would anticipate taking delivery on products, which, you know, I think all the companies in our sector have experienced.

It is interesting for us that we have a pretty good understanding of which companies are going to be buying products, what products they'll buy, and in what locations [they'll] put them in, and I think where we all struggle is not understanding when the -- what the timing will be.

Okay. So, what's the impact on your lead-time? And obviously, some of the orders are coming in the last minute, and the lead-time is a challenge for you guys, right?

Well, lead-time's sort of always a challenge in our environment, you know? We'll quote a standard lead-time, and the customers will wait till an hour before they need the tool, then ask for a much shortened lead-time. And we try to be somewhat responsive to that whenever possible.

In fact, as Gary mentioned, you know, when our inventory went up, we have some long lead-time product items that we buy with some level of anticipation of forecast revenues because some of them are way outside of the lead-time of the products themselves, and that resulted in a little bit of an inventory build-up towards the end of the quarter.

But, it is the nature of our industry to quote longer lead-times. But, when push comes to shove and the customer demands shorter lead-times, we often find ourselves doing our best to respond to them.

Thank you.

Just one other question. I look at your revenue breakdown by geography. Actually, Japan, Korea and the rest of the world are doing pretty good Q2 versus Q1. The big drop is happening in U.S. I thought U.S. is -- the main push-outs and delays are happen in the memory sector, which is mostly in Asia. Why the U.S. revenues dropped the most? Is there any explanation on that?

I'd give you a partial explanation, and that is we attribute revenues to the location where the tool was put into service. So, there's at least one large memory company that is from Korea that has an operation in the U.S., that being Samsung. And if we ship products to Samsung in the U.S., we deem that to be U.S. revenue, not a Korean revenue. I'm not sure that that's consistent with what everyone else does at all times.

So, in Q1, Samsung in the U.S. did represent a nice piece of business for us, and we've seen more of the business in the Korean side, rather than the U.S. side, with that customer.

Understand. Thank you.

And I show no further questions at this time, so I'll turn the call back over to Dr. Stultz for closing remarks.

I want to thank you all for calling in again and joining us today. We look forward to updating you on our Q3 results at our next conference call. Good-bye.

Thank you for your participation in today's conference. This concludes our presentation, and you may now disconnect. Have a great day.