Onto Innovation Inc (ONTO) 2008 Q4 法說會逐字稿

Good afternoon and welcome to the Nanometrics Fourth Quarter and Fiscal Year 2008 Financial Results Conference Call. Before we get started, I would like to call your attention to the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of federal securities laws. These statements are based on Management's current expectations and involve risk and uncertainty that may cause actual results to differ materially from those described in the forward-looking 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 risk factors and cautionary statements set forth in the Company's Form 10-Q for the quarter ending December 27, 2008, and in other reports which the Company files with the Securities and Exchange Commission and incorporates herein by reference.

Leading the call today will be Tim Stultz, President and CEO of Nanometrics. (OPERATOR INSTRUCTIONS.) I will now turn the call over to Dr. Tim Stultz.

Thank you, and good afternoon, everyone. And thank you for joining us for the Nanometrics Fourth Quarter 2008 Conference Call. With me today are Bruce Crawford, our Chief Operating Officer and former Interim CFO, and Jim Moniz, who joined us this week as CFO.

First, a few words about Jim. After an exhaustive five-month search, we found a financial executive with the right blend of professional, industry, business experience and drive to make immediate and long-term contributions to Nanometrics. That person is Jim Moniz. Prior to joining Nano, Jim served as CFO of Photon Dynamics until its recent sale to Orbotech, and was CFO of Nextest until its acquisition by Teradyne. Jim has more than two decades of senior financial leadership, including serving as the CFO of two publicly traded companies within our sector. We are truly very excited about having Jim join our management team.

Now, turning to our quarterly report, since Bruce Crawford was responsible in leading the finance team during the fourth quarter, I have asked him to present the details on our financial performance following my prepared remarks. I've also asked Jim to feel free to contribute during the Q&A session where he feels comfortable.

Pervasive uncertainties in the global economies and financial markets put extreme pressure on long range planning and investment. Capital spending specifically within the semiconductor market has undergone a significant decline over the last year, dropping nearly 30% since 2007, and is expected to decline further in 2009. Consolidation and company failures within our served customer base have also negatively impacted total capital spending and opportunities within our sector.

Without a doubt, however, the biggest challenge to [effective] management of companies during this time is not so much about the drop in business, which has certainly been severe, but rather the lack of visibility and uncertainty of the business in the future. How deep is the downturn? How long will it continue?

During these highly uncertain times, we believe it is imperative to strictly focus on those elements that are within our control, and in particular to those which ensure our staying power and our longer term competitiveness. For us at Nanometrics, this boils down to balance sheet and cash management, cost control, and reductions of costs and expenses, and new product introductions, which expand our served markets and provide a competitive advantage for future technology and capacity spending.

Now, I would like to take a few moments to address each of these important areas. First, with regard to our balance sheet and cash position, during the quarter we increased our cash through tight expense controls and reduction of inventory and accounts receivable. At the same time, we took care of our vendors with whom we share a co-dependence, and reduced our accounts payable and days accounts payable as well. The net result was that we closed the quarter with nearly $24 million in cash, a 10% increase over the previous quarter.

On the operations side, through a combination of restructuring, workforce reduction, and expense management, we brought our total operating expenses down 15% from the third quarter, net of restructuring and impairment charges. This brought our cash based revenue breakeven to less than $23 million.

Turning to our R&D investments and new product introductions, in 2008, we introduced new products into each of our major served markets - thin film, overlay, and optical CD metrology. These products were specifically designed to address future technology [nodes] on our customers' product roadmaps. We have used the downturn to run evaluations and qualifications at customer sites and have secured initial orders, which we believe positions us well to benefit from new technology purchases and expansion spending when they occur.

In addition, we introduced the Lynx metrology platform, an architecturally differentiated and new concept for clustering of--or combining metrology tools, which offers the lowest cost of ownership and greatest flexibility of any product in its class. This product has been very well received and in spite of the downturn we have received multiple orders and completed installations and acceptance for this product.

Turning briefly to revenues, we have stated repeatedly that we serve an inelastic market with little influence on the timing or magnitude of our customers' capital spending budgets. That being said, we are fortunate to have a diversified product portfolio, serving multiple markets beyond the fabrication of traditional silicon ICs, including high brightness LEDs, solar photovoltaics, disk drives, and both silicon and compound semiconductor substrates. Sales to those end markets represented a quarter of our product revenues for both the fourth quarter and full year of 2008.

Our recent acquisition of Tevet has also been a success and has expanded our served markets, both in integrated metrology, as well as solar photovoltaics, providing incremental revenues at an accretive gross margin. Combined with our service and upgrades business, more than half of our total revenues in the fourth quarter and 45% of our total revenues for the year came from sources other than capacity expansion within the silicon semiconductor IC market.

Finally, I'd like to say a few words about our gross margin performance. Over the last six quarters, we have made steady and significant improvement in our core service gross margin, largely due to our focus on product quality, training, and efficient deployment of service resources. We have also benefited from the sale of upgrades to our large installed base, which was particularly strong in the fourth quarter. Over the same period, our product gross margins have held up fairly well. In the fourth quarter, we saw our first significant drop in product gross margin over the last two years as a result of a 21% sequential decrease in product sales and under absorption of manufacturing overhead. I am pleased to repot however that our total gross margin has remained above 40% for seven quarters running, in spite of a 29% decrease in quarterly product revenues over that same timeframe.

In summary, in a difficult market and with a backdrop of a 12% drop in quarterly revenues, in the fourth quarter we increased our cash by 10% and ended the quarter with $24 million. We reduced our quarterly operating expenses by 15%. We maintained total gross margins above 40%. More than half of our revenues came from sources outside of traditional integrated circuit capital spending. And we continued to gain acceptance and traction with new products introduced within the last few quarters.

Although we are very cautious about the business outlook and foresee further declines in capital--industry capital spending, we believe the steps we have taken to improve our financial performance, strengthen our balance sheet, and bolster our product portfolio will enable us to weather the storm and put us in a strong position of operational and earnings leverage when spending resumes.

Finally, I'd like to emphasize that our entire Management Team is dedicated to further improving our near term performance and long-term prospects in order to strengthen our business, its future, and be worthy of your investment dollars.

I will now turn the call over to Bruce Crawford, who will review our financial results in more detail.

Thank you, Tim. Earlier today, we released our fourth quarter and full year 2008 financial results, which you may find on our website at nanometrics.com. Also on our website are reconciliations to non-GAAP figures referred to in our prepared remarks, such as cash operating expenses and cash based revenue breakeven.

Fourth quarter revenues of $20.5 million decreased 12% from the third quarter and 38% from the year ago period. Relative to many of our peers, the sequential decline was modest. Similar to the third quarter, we saw a substantial change in product mix. Our product sales decreased by 21% while service revenues increased 12%, due primarily to the strong sales of product upgrades during the quarter. We saw a decline in our integrated metrology revenues, which was partially offset by increased sales of our standalone automated metrology and materials characterization products. In the fourth quarter, we recognized sales of several standalone systems that had been pushed out from the third quarter. The breadth of our product portfolio and diversity of end markets continued to provide Nanometrics with a relatively stable revenue base in the fourth quarter. That being said, we expect upgrade sales to decline going into this year and several of our major customers have announced further reductions in capital spending in 2009.

We have and will continue to proactively streamline our cost structure and expenses in anticipation of continued weakening of semiconductor capital spending. Our gross margin for the fourth quarter was 42%, compared to 44% in the third quarter and in the year ago period. Compared to the third quarter, product gross margin decreased from 50% to 40% due to lower volume of system sales, while service gross margins increased from 30% to 46%, benefiting from strong upgrade sales in the quarter.

As a testament to our continued efforts to reduce vertical integration through outsourcing and consolidation of manufacturing facilities, we have sustained gross margins above 42% for seven quarters in a row. Our operating expenses in the fourth quarter were $12.1 million, down 15% from the third quarter and down 24% from the year ago period. Our cash operating expenses for the quarter were $10.1 million. Our operating loss was $3.5 million, while our EBITDA loss was $2 million.

As--we as management exclude these items from our results in order to assess our operating efficiency on an ongoing basis. A reconciliation of EBITDA to GAAP operating income may be found on our fourth quarter results press release.

Our net loss for the quarter was $2.6 million, or $0.14 per share, and includes a stock-based compensation expense of $700,000.

A few comments on the balance sheet. Receivables declined by over $4 million with DSOs decreasing to 75 days compared to 83 days last quarter. Inventory levels declined by $2.4 million. Inventory turns remained flat at 1.5 due to the sequential decline in sales volume. We added over $2.2 million to our cash balance as we generated cash from our operations in the fourth quarter. We used about $105,000 in the quarter for stock repurchases and we currently have $1.3 million remaining in our stock repurchase plan. Our tangible book value now stands at $4.66 per share based on 18.4 million shares outstanding at quarter end.

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

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from the line of Gary Hsueh with Oppenheimer and Company. Please proceed.

Yes, hi. I missed most of the prepared comments. But if I look at your business and the fantastic financial performance that you turned in in the quarter, it seems to be driven by South Korea and standalone metrology in addition to some service contracts or software business that really kind of boosted the margins there. Is that an accurate characterization? And if it is, and if it is South Korea, how sustainable do you think that is kind of going forward over the next one to two quarters?

Hi, Gary. Thanks for the question. We certainly have posted quite a few--quite a bit of revenue and sales in South Korea. But going back to the comments I made earlier, is that over half of our business came from non-semiconductor expansion spending, that being our service, our upgrades, our materials characterization. So those have been pretty steady for us over the last--certainly the last several quarters, about the last year or so. And any reductions in Korea we have exposure to is certainly in the standalone area and we can't--we're going to be faced with that if that continues. But we get the benefit of the support from the other revenue generators.

Okay. Just to be clear, the service business is more driven from non-semi business for software and upgrades or software and upgrades for semis?

It's mostly semi.

Okay. And that upgrade business, I think you guys have been sort of enjoying margin expansion on that kind of upgrade business at least for two quarters now. I mean, how much more can we expect here going forward?

Well, that's a good question. Let we--I'd like to go back a little bit, is when we originally conceived of the upgrade focus and strategy is 2007. And when we looked into 2008 as being a potential area or year where we'd see some revenue declines, it struck us that with an installed base of over 6,000 systems we had the opportunity to mine that installed base by providing productivity and performance enhancement to our customers. And we originally envisioned that as kind of a temporal short-term opportunity and that would have legs maybe to last a few quarters to a year.

What we've learned from it since that time is this will become a--I think will be a steady contributor to our revenue stream. It may be--have ups and downs in different periods. But we see this as part of our standard--part of the lifecycle planning process and I expect to see contributions going forward. Every product that we now design and develop and bring to market has a plan to upgrade strategy associated with it.

Okay. And just a final question. Congratulations to Jim joining the firm. Just looking at the inventory number, it kind of stands out as being something that could definitely work down and generate some cash from. What's the plan here on inventory levels and is there a potential risk of impairment off of that kind of relatively high inventory number?

Gary, nice to talk to you again. Hopefully we'll be doing business long term. We are very happy with the fact that inventory decreased by 2.4 million last quarter. However, we're not satisfied and certainly Tim and Bruce and I are not satisfied that that's enough. My focus, and Tim has made it my focus, as it would be anyway, is to get this inventory number down with the emphasis being to turn that inventory into cash as quickly as we can. We do have a very regimented excess and obsolete process that we follow that we continued to follow in December that gets reviewed by our auditors. And there were no impairments in December. And obviously, business conditions will drive what we do going forward. But our focus is on cash in 2009 and my focus is on making sure I turn that inventory into cash.

All right. Welcome aboard. Thank you.

Thank you.

Your next question comes from the line of Weston Twigg with Pacific Crest. Please proceed.

Hi, there. Just a couple of questions. One, on the materials characterization side it looked like actually revenue was down quite a bit, maybe in line with the total revenue drop. But this is one business that I know is generally lumpy. But is it something you think might grow in Q1?

The only part that's been lumpy with the materials characterization is the fact that we also include a product that is used for silicon substrate defect analysis. And we saw a bit of a drop-off in that last quarter and we've had a--and we've seen a little bit of sensitivity to that in the traditional capital semiconductor spending. The other elements of the materials characterization (inaudible) and product sales have been very solid. And, yes, I do believe that we're going to see--have the potential to see some improvement in the particular product that addresses bare silicon substrates going forward.

Okay, good. And I guess a couple other short questions, and then one a little bit trickier. But I'm just wondering if you could tell me how many Lynx units you've sold so far and how many are in your backlog.

No, we don't disclose it to that level. It's a good question, but I can tell you it's multiples and--with follow on orders, and revenues generated and acceptance completed.

Okay. And then, any 10% customers last quarter?

Yes, Samsung and Hynix.

Okay. And then, one thing I'd like to explore is the idea that Nanometrics is too important to fail. So for one reason, you provide integrated metrology (inaudible) apply to large spenders like Intel and Samsung, and for another reason you're a viable competitor to KLA and [Syncom] overlay and OCD. And so, I'm just wondering in the midst of what [AMSE] or [Mike Skinner] yesterday called the worst downturn in the history of the semiconductor industry, are any of your customers looking at contingency plans for Nano, such as encouraging like a merger with a larger company?

I'm not sure I would--I'm not sure I would characterize anything as saying contingency planning. I would not infer that there's any kind of a financial investment plan or strategy that's been discussed. But I will tell you that our customers are--do care about our survival, that we do play a key role, and we've been very close to some of the key corporate purchasing groups talking about product--matching product roadmaps and making sure that we're going to be in a position to support them as--when they start resuming their purchasing.

Okay. I guess another way to look at it is, I mean, I think Nanometrics is very well positioned to compete for increase in market share at 22 nanometer, especially with your OCD product again KLA. But I just wonder whether customers are concerned about actually awarding the business to Nano--to such a small company I guess in the middle of this severe downturn. And are you hearing those types of concerns from your customers and what exactly are you doing about it?

Yes, I guess a simple answer to that is no. We have great relationships. We match our product roadmaps. We believe that we are going to be gaining market share in our targeted sectors and we believe that we are aligned to be a key supplier to the major customers out there. We feel very confident about that.

Okay. So you're not hearing qualms from customers about will Nanometrics be healthy enough to support us over the long run?

No, I haven't heard those qualms. And I do know that they listen to our calls and they--and we have our conversations. But they, like some of our investors, are pleased with our performance.

Okay, thank you.

Your next question comes from the line of Edwin Mok with Needham and Company. Please proceed.

Hey, thanks for taking my question. I have a question regarding the emerging growth area that you said account for 25% of your revenue. I'm just curious how you kind of view those markets in light of the current environment? Do you think that you can still drive more growth in that area? And if so, what other driver or which specific market? Is it LED? Is it solar that you think would drive growth in coming years?

Hi, good to hear from you. So the primary areas that--in our materials characterization where we see some growth outside the traditional semiconductor side, both in the high brightness LED and the solar photovoltaics. We are also doing some areas in compound semiconductors as well. Solar voltaics with the way the economy is, some of that spending has slowed down. But we believe it's just a matter of time. And we've got some good position with some of our products as we adopt them and their configuration and their applications for in-line process control and monitoring with a price point and performance factor that addresses those applications specifically as opposed to the simple modification of a semiconductor tool. So we see that as a great area for us. And I think that as those industries track up, we'll track nicely with them.

That seems like a good market, right? Are you afraid that other companies will try to get into that business or be a little bit more competitive in that area?

I'm sorry. You've got--a little bit garbled. Could you repeat the question, please?

Sorry about that. My phone is not holding up. But I'm just curious in terms of competition in that area, especially in photovoltaic. It seems like it's a good area and that (inaudible) in that area. Are you seeing more competition and how do you look at that in terms of competition?

Okay. So I understand your question is am I seeing a lot of competition in that space and how do we view it in the solar voltaic and the high brightness. One thing is that within the high brightness LEDs, we've always had a strong position. We have for several years with some of our core products. And the--when I look at the opportunities in the solar photovoltaic, it reminds a little bit of the semiconductor industry back in the '70s and '80s where a lot of the manufacturers were actually designing and building their own products, their own tools, metrology tools, before the capital equipment industry actually brought commercial products to the market.

So what we're seeing here is that there's a lot of homegrown solutions. We're bringing better cost of ownership, better support, and better performance. And we're also leveraging the fact that we've been in this business for over 30 years with some of these core technologies and our core capabilities in the areas of photoluminescence and FTIR, as well as in our reflectometry and scatterometry play well into those markets. So we feel very good about them.

Great, thank you. Sorry about my phone.

That's okay.

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of Kelly Anderson with Sidoti and Company. Please proceed.

Hi. Thanks for taking my questions. And I just wanted to echo Gary's congratulations to Jim. It's an absolute pleasure to be working with you again. Just wanted to talk a little bit about the services revenue. A lot of companies out there are reporting drops in their services income right now on account of the fact that there are so many shutdowns going on. Is there any way you could give us a little bit more color on how much of that is related to upgrades and how much of that is just standard services business that could potentially be at risk?

Yes. Well, we don't break that one apart, Kelly. And our standard business, our standard core service business, has been pretty steady. It's certainly receiving the pressure that others are experiencing as our suppliers look at their capital budgets. But we've done a pretty good job of getting the contracts renewed and really working hard on the billable services. So I would say we're under pressure, not unlike the other folks out there, but it hasn't been as extreme as the CapEx in say standalone capital spending for front end metrology.

Okay. And just a follow on to that, is there a significant margin difference between the standard services business and the upgrades?

Yes, there is. The standard service business, which I think we've called out at different times, which about [a year and a half ago] was about minus 27%, has been brought up to over 13%. And then, we--the difference is made up by margins in the upgrades.

Okay. And then, just we've been hearing a lot of press recently about the potential consolidation in the memory market and the bankruptcies that are going on there. Obviously, you guys are in a good spot because you're aligned with sort of the top guys in that space. But I was just maybe wondering if you could speak to how comfortable you are with your current customers and how any consolidation there might affect Nanometrics.

Well, clearly, all of us are facing the fact that when we wake up in 2010, there's almost a certain probability that we're going to have less customers out there. And so, for us the key issue is to make sure that we are strategically and commercially aligned with those people that are going to survive. And we're doing a pretty good job. We put a lot of energy into those larger companies, and particularly the ones that dominate their sectors in logic and memory and foundry, and making sure that we're dialed into the 22 nanometer activities, that we're supporting them on the 32. And we would benefit--if there's a consolidation, we hope they're the consolidator because that's where we'll gain some additional leverage. In the number of cases that we're watching, I think it could actually work to our advantage because a couple of the consolidators are very strong customers of ours.

Okay, great. And Bruce, maybe could you just tell us what the cash flow from operations was for the quarter?

About $2 million.

Okay, thank you.

Your next question comes from the line of Bill Frerichs with Radnorwood Capital. Please proceed.

Bill Frerichs, Radnorwood Capital. Several housekeeping questions. One is do you give out a book to bill figure?

No, we don't--obviously, we don't give guidance and we don't give any reports on bookings.

Okay. Secondly, what would the share count have been had you been profitable?

About another 300,000.

Okay. And the headcount now versus Q3 and the prior year end?

So headcount now is 467, Q3 was 487, and we started the year--the end of 2008 was 523.

Okay, very good. And could you please break down the inventories between or amongst raw materials, (inaudible), and finished goods?

Bill, we're going to have to pass on that one right now.

Okay. Maybe a follow up on that?

Sure.

Okay. Good quarter. Thanks very much.

Thanks, Bill.

At this time I'd like to turn the call back over to Dr. Tim Stultz for closing remarks.

Thank you. In closing, I'd like to express my gratitude to Bruce Crawford who has worked tirelessly over the last five months in taking on the responsibility of CFO in addition to his role as COO. I also want to thank and give recognition to the extraordinary efforts and contributions of our employees, for the continued support of our investors--in addition to the continued support of our investors, and express my appreciation to the Board and our Management Team for their help and guidance during such challenging times. Thank you all for calling in, and we look forward to updating you on our first quarter results conference call.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.