Onto Innovation Inc (ONTO) 2009 Q1 法說會逐字稿

Good afternoon and welcome to the Nanometrics First Quarter 2009 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 certain 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 March 28, 2009 and in the 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 like to turn the call over to Dr. Tim Stultz. Please proceed, sir.

Thank you, and good afternoon, everyone. Thank you for joining us for Nanometrics' First Quarter 2009 Conference Call. With me today is Jim Moniz, our Chief Financial Officer, who joined us in February of this year. Jim will be reviewing our financial performance in more detail, following my prepared remarks.

Over the last several months, spending on semiconductor capital equipment dropped severely, and along with the rest of our sector, we experienced a sharp decline in revenues.

During this period, our customers have had to adjust to the lack of visibility, market uncertainty and reduced consumer spending; while at the same time assessing the effects changes in the global economic environment were having on their respective businesses.

These customers in turn, took a prudent wait-and-see approach, holding back on spending to expand capacity or capability; effectively paralyzing normal industry capital procurement processes.

While we did anticipate declines in spending, this trough revenue quarter is unprecedented in its severity, with significant order push-outs and cancellations.

Throughout this difficult period, we continued to focus on our core business elements, while executing well on our cost-reduction initiatives and efforts to align operations with the current economic and business climate. At the same time, we remain steadfast in our commitment to invest in new products and applications which will be the fuel for growth when spending resumes.

For the fifth straight quarter, we reduced our ongoing operating expenses and drove down our cash breakeven revenue level. This was achieved through a combination of restructuring and consolidation of operations, headcount reductions, plant shutdowns, renegotiation of contracts for Company services, and conservative management of operating expenses.

Assuming a normalized cash-based gross margin, we have meaningfully exceeded our original goal of driving cash breakeven revenues to below $25 million, with Q1 breakeven at just over $20 million and an ongoing cash-based operating expense decline to $9.1 million; a 28% decrease over the last three quarters.

Going forward, we expect continued reduction in these expenses, as we realize some of the benefits from steps taken in the first quarter, as well as additional reduction of ongoing operating expenses in the current and following quarters.

Analyzing our first quarter revenues, 75% of our total sales came from services, upgrades and product sales unrelated to capacity spending by our memory and logic-chip application customers. These results highlight the benefit of having a large install base and a broad product line; in particular, when traditional semiconductor IC capital spending is down.

Specifically, our materials characterization business saw a slight uptick in product revenues in the first quarter. With continued strong sales into high-brightness LED and solar photovoltaic markets. Additionally, our focused program to generate revenues by mining our installed base through customized upgrade offerings, continues to be successful; both from a financial, as well as customer satisfaction perspective.

In the quarter, we continued to make meaningful progress with our customers to qualify and gain acceptance of our new product offerings and for next-generation applications. We are pleased with the reception to the architectural differentiation and performance of these products and expect to benefit from expanded applications and growth in market share when our customers resume investments in capital equipment.

Though we are cautious about industry capital spending in the immediate future, we are seeing signs that the spending paralysis is ending, as customers see an increased visibility and their business fundamentals improve, which in turn, should lead to the return of more typical procurement processes.

As an example, we are starting to see a meaningful increase in demonstration, quotation and order activity as so far this month we have already received new orders and shipped a product that had been cancelled just last February. In addition, customer fab utilization rates are on the rise, and memory-chip pricing is improving, encouraging signs to be sure.

Our customers however, have shuttered a ton of capacity that they'll first need to bring back online before adding to it. They are also in the planning and development phases for production of next-generation devices. We expect these factors to initially lead to increases in technology spending for advanced lithography and metrology, as well as line-balancing capacity purchases and associated services.

In light of the above, we believe Q1 represents a trough in capital spending. That is not to say that the industry is heading toward a rapid and full recovery. We, along with the rest of our peers, have to plan for several more tough quarters; quarters that should be significantly better than the one we just closed, but tough nonetheless.

As such, we will continue to run the business conservatively and take additional steps to reduce expenses, and provide liquidity from our balance sheet. Our focus going forward will be on strengthening the relationships and new product positioning with our customers at the leading edge in order to benefit from technology investments and subsequent capacity spending; driving down ongoing operational expenses and effective management of our balance sheet, cash and cash flow.

We are confident that the steps we have taken over the last seven quarters to improve our business structure and financial performance, strengthen our balance sheet and access to working capital, and bolster our product portfolio will enable us to continue to weather the storm and put us in a strong position when operational and earnings leverage as the industry recovers and spending resumes.

In closing, I believe the best way to characterize our business outlook at this time is confident with cautious optimism. I will now turn the call over to Jim Moniz.

Thank you Tim and good afternoon, everyone. Nanometric's press release containing first quarter fiscal 2009 results was sent out by business wire today, April 30, around 1PM Pacific Time. The press release may also be found on our website at nanometrics.com.

Also on our website are reconciliations to non-GAAP figures referred to in our prepared remarks, such as ongoing cash-based operating expenses, and cash-based revenue breakeven.

As Tim mentioned in his remarks, while we did anticipate declines in spending, this trough revenue quarter is unprecedented in its severity, with significant order push-outs and cancellations.

First quarter revenues of $10.1 million were down 51% from the previous quarter, and were down 71% from the first quarter of fiscal year 2008.

Revenue by geographic region is based upon the shipped-to or first-in-use destination and during the quarter the breakdown was-- Japan at 47%, US at 23%, Europe at 17%, and rest of world at 13%.

Revenue by product type was materials characterization at 32%, stand-alone and integrated metrology at 17%, and service at 51%.

Gross margin in the first quarter was 28.3%, compared to 42.1% in the previous quarter and 45.6% in the first quarter of fiscal year 2008. The lower level of gross margin was primarily the result of factory under-absorption due to the sharp decrease in sales volume. Service gross margins, however, remained above 30% for the third straight quarter.

Our operating expenses in the first quarter were $11.9 million, compared with $12.1 million in the previous quarter, and $16.8 million in the first quarter of 2008.

There was $0.7 million of restructuring costs in the first quarter, as well as $0.4 million for amortization of intangible assets. There was also a charge of $0.4 million in the first quarter for additional reserves for bad debt expense, driven by a customer whose collections are now in doubt.

Ongoing cash-based operating expenses were $9.1 million in the first quarter, compared with $10.1 million in the previous quarter. With the further reductions that were made in operating expenses in the first quarter of 2009, we have now reduced our cash-based revenue breakeven to just over $20 million a quarter, assuming a normalized cash-based gross margin.

Other expense in the first quarter was $1.6 million, and included $1.3 million associated with a loss on foreign currency. At the end of fiscal year 2008, we reclassified loans we had on the books with our Japanese subsidiary from permanent to non-permanent so we could have the subsidiary pay back some of those loans to bring the cash back to the United States corporate headquarters to fund working capital worldwide.

Accounting rules require that when inter-company loans are no longer considered permanent, any changes in foreign currency rates for such loans are to be recorded as a period charge on the income statement, rather than a component in equity.

As a result of the loan reclassification and substantial weakening of the yen versus the dollar during the quarter, there was $1.3 million of expense on the income statement, the majority of which was non-cash expense.

The net loss for the quarter came in a $10.6 million or $0.58 per share. This compares to a loss $2.6 million or $0.14 per share in the previous quarter and a loss of $0.7 million or $0.04 per share in the first quarter of 2008.

Turning to the balance sheet; cash came in at $16.9 million, which was $7.1 million below the previous quarter. Substantially all of the decrease was caused by cash used from operating activities which used cash of $7.3 million.

Accounts receivables came in at $10.3 million, which was lower than the previous quarter by $6.7 million, driven by lower revenue. DSO increased to 92 days.

Inventory came in at $32.6 million, which was an increase of $1 million from the previous quarter. We are disappointed in this increase, which is primarily driven by our providing more tools to customers for evaluations, some of which we had expected to contribute to revenue in the first quarter.

This inventory will be a source of cash for us in the next few quarters, as we record revenue for these tools and slowdown the inflow of new inventory purchases.

Our tangible book value was $4.10 per share at the end of the quarter. We ended the March quarter with headcount of 414 people, compared to 465 people at December year end. Although we believe business conditions are beginning to modestly improve, we will continue to proactively streamline our cost structure and expenses in anticipation of continued weakness of semiconductor capital spending.

As an example, we are currently in the process of further consolidating our manufacturing operations from two facilities to just one, our Milpitas headquarters. This will help us improve the efficiency of our manufacturing operations and reduce fixed costs, while at the same time further increasing our ability to leverage outsourced manufacturing.

As part of this consolidation, we will have restructuring and impairment charges in the second quarter, associated with the closedown of our Korean manufacturing facility. We will continue to have direct sales and service in Korea to support our customers in that region. We expect to generate cash from the sale of this building.

We will also put renewed focus on managing our balance sheet, using our inventory to generate cash. That concludes our prepared remarks. And now I would like to open up the call for your questions.

(Operator Instructions). And your first question comes from the line of Wenge Yang of Oppenheimer. Please proceed.

Hi, thanks for taking my questions. The first question is regarding the next two quarters; you are mentioning about some new possibility of new shipments on orders cancelled and new orders. Could you elaborate on those orders-- those, in which categories and to which type of customers?

Hi, thanks for calling in. So the new orders-- the ones that were cancelled and the ones that were pushed are the ones that are now reemerging in this quarter are all in the areas of front end; primarily the technology purchasing areas in our standalone tools.

Okay, mostly in standalone tools?

Yes.

Okay, in which area- memory or regions and areas?

So we're getting increased business activity, both in logic and memory areas.

Okay, thank you. The next question is regarding inventory reductions; obviously, the inventory has been considerably pretty high in the last several quarters, and it can be a major resource for working capital management. So you're mentioning about shipping some of the systems that's currently in the inventory. What do you think realistically can we reduce the inventory in the next couple of quarters?

Well, you actually hit on an important theme that we also look at. But I can't give you guidance and I'm not going to give you a number, other than to say-- the investments we made in the product demo tools and the last-minute customer push-outs really were the main contributions to the net increase in inventory.

We do expect that that inventory will turn in the second quarter and that inventory will be a source of cash for us in the upcoming next few quarters.

Okay, the last question is regarding some of the product fronts. Could you give us some updates on your overlay product evaluations and also the OCD product evaluations at customer sites?

Sure. In generally, the areas--we're actually seeing some very nice reception to all of our product areas. The two areas that I would point to that probably are amongst the most exciting that I think will drive most of our growth are in the OCD area and then with our Lynx platform as a metrology tool with a unique architecture that gives the lowest cost of ownership and the highest productivity.

We have head-to-head evaluations underway and also some that have been concluded in overlay, thin film and OCD, and integrated metrology, and we're feeling very good about the position we are in with each of those key customers.

Okay. Thank you.

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

Hi, yes; a couple of questions here; one on the cash side. If I heard correctly, cash use for operating activities was $7.3 million and I'm wondering if you had the same type of revenue level next quarter with some of the ongoing cost reductions, what would your cash level be next quarter?

Again Wes, I would say that even at the same level of revenue next quarter-- or this quarter I should say-- Q2 versus Q1; I would not expect to see the same amount of cash decrease as we saw in the first quarter. The inventory that we have, we did expect to convert to revenue and to drive down and to increase cash a little bit in the first quarter and we will see that in the second quarter.

Okay the other part of my question was I guess in terms of the operating activity; the cash used for that. I assume that would be lower next quarter. It was from the ongoing efforts. So at the same revenue level, that would be less than $7.3 million next quarter?

I would say, yes. That would be less.

Okay. And then along the same vein, new breakeven level; I know you said it was around let's see-- over $20 million this quarter. Is there a chance that you can get breakeven below $20 million?

I believe so, yes. We've already taken some steps in Q1 and we've got some additional activities in Q2, reducing some of our fixed costs and fully expect the breakeven numbers to come even lower.

Okay. And then back to the Lynx platform, just as a follow up; I'm wondering-- how many Lynx tools are now placed in the field and how many customers do you have or I guess how many of those Lynx platforms have been revenued?

I won't give you a specific count, but we have multiple tools at more than one customer site. There has been follow on orders and they have been revenued.

Okay. And the other thing-- so product revenue sounds like with orders coming in, we could expect that to be a bit higher, without giving guidance next quarter. On the service side, there was a bit of a drop; maybe you accounted for it. But what was that drop related to, down from $7.6 million in December down to $5.1 million and should we expect that to rebound in Q2?

So there are two components of that. As you know, when we report service it includes both upgrades and our core service. Although we saw a continued strength to the upgrade business, we actually had a very high quarter in upgrades in Q4 and that represents one of the primary adjustments. Our core service has been pushed a little bit, but it's actually holding up pretty well in this environment.

Okay. And is there an upgrade cycle that you would expect to maybe help over the next couple of quarters?

I think I'm pleasantly surprised and very happy with our upgrade business. And it may be a little bit lumpy, based on different customer levels of granularity, but I think that's an area that has [legs] and will continue to contribute not only to our revenues, but nicely to our gross margins.

Okay. Thank you.

You bet.

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

Hi. Jim, you mentioned a charge in the quarter related to the Korean facility. How big do you think that will be?

We're determining that now. I don't have a number actually at this time, Bill.

And the building; have you sold the building or is it up for sale or what's the-?

We actually just took the action in the last two weeks, so we're now going out to see what the building would be appraised for so I don't have a concrete number for what that would be. But we do believe that that will be a source of cash. Although I don't think we should count on that for the second quarter.

Is it worth more than the charge?

The building? If I knew the appraisal, I could answer that question but since I don't, I can't.

What do you think?

What do I think? I think I would be very smart not to answer that question because I don't know, honestly.

Okay, and then finally the change in treatment in currency due to the change in the categorization of the loan; that $1.3 million hit that you had to take is not in your EBITDA now, so I take it?

No, it's not.

Okay, so that's an additional $1.3 million non-cash item that existed in this quarter, correct?

If I break out the $1.3 million, because we actually did transfer some cash back from Japan to the US, not all of the inter-company loans have been settled and not all will be settled this year. The majority of that $1.3 million was a recognized translation loss, but not a cash loss.

Right, okay. Okay, so actually the cash EPS is a little bit better than what you're showing.

Yes.

Very good. Thanks a lot.

Thanks, Bill.

(Operator Instructions). And at this time, we have no further questions and I would like to turn the call back over to Mr. Tim Stultz for any closing remarks. Sir-?

Thank you. I want to once again give special recognition and thanks to the extraordinary efforts and contributions of our employees. It's been a difficult time and they're doing a terrific job; for the continued support of our investors; and express my appreciation to the Board and our management team for their help and guidance during these highly challenging times.

I want to thank you once again for calling in and we look forward to updating you on our second quarter results at the next conference call.

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