Onto Innovation Inc (ONTO) 2009 Q2 法說會逐字稿

Good afternoon, and welcome to Nanometrics Second Quarter 2008 Financial Results Conference Call. Before we 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 uncertainties 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 June 27, 2009, 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 Stulz, President and CEO 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. I will now turn the call over to Dr. Tim Stulz.

Thank you. Good afternoon, everyone. Thank you for joining us for Nanometrics Second Quarter 2009 Conference Call. With me today is Jim Moniz, our Chief Financial Officer, who will be reviewing our financial results following my prepared remarks.

Today we are pleased to report we are experiencing improvements in our served markets, which have translated into significant revenue growth in the second quarter. This growth, combined with our aggressive efforts to restructure operations and expand our served markets through new product development and strategic acquisitions puts us well on track to deliver above average performance through operational and earnings leverage as industry spending continues to increase.

Highlights for the second quarter include a 44% increase in revenues quarter-on-quarter, a nearly 50% improvement in our gross margin, from 28% to 41%, record service gross margins of 50%, and the completion of the acquisition of the UniFire product line, which firmly establishes us in a rapidly growing advanced packaging market.

Like every company in our industry and, indeed, nearly every durable goods manufacturer, we have experienced a significant decline in our core business over the last several quarters due to the global economic and industry downturn. This downturn has largely obscured much of the progress we have made in improving our business model and fundamentals, and overall strengthening of our business outlook.

Specifically, over the last several quarters we have consistently lowered our break-even level, increased our commitment to outsource manufacturing, and remain steadfast in our commitment to deliver improved performance by focusing on three key areas -- first, restructuring of operations to improve our operational efficiency; second, strengthening our competitive position within our served markets; and, lastly, by expanding our served markets.

I would like to briefly report on our progress in each of these areas. First, restructuring of operations. Over the last several quarters we have reported on our progress in shifting fixed cost to a variable cost structure, consolidating operations, expanding our outsource manufacturing, and reducing our operational expenses and cash break-even levels.

In Q2, we reduced our ongoing operational expenses by an additional 9%, bringing our cash-based operating expense to $8.5 million, our sixth straight quarterly reduction in this area. As a result, our cash break-even revenue level declined for the sixth quarter in a row to $19 million.

At the same time, [growing] by an all-time record service gross margin of 50%, we increased our total gross margin to about 40% for the eighth time in the last nine quarters, and realized a 71% incremental gross margin compared to the first quarter.

These gross margin results are direct indicators of our progress in four areas -- improvements in product quality performance; second, increased customer satisfaction; third, strengthened operational leverage; and fourth, follow-through on our stated strategy to systematically mine our customer base for upgrade opportunities.

Of critical importance to our shareholders, these improvements have by and large been achieved through fundamental restructuring of operations, leaving intact the infrastructure to respond to and support increased revenue growth and market expansion with improved efficiency and earnings leverage.

Our second area of focus has been to strengthen our competitive position within our served markets in order to benefit disproportionately from increased capital spending, which is now beginning to occur. Like all best-of-class companies in our industry, we continued our investments in R&D, and last year developed new product offerings for each of our key served markets of thin films, OCD, overlay, and integrated metrology. We have taken advantage of the industry downturn to introduce and qualify these products for next-generation applications and capacity spending, and have subsequently experienced some key design wins.

In addition, we are particularly pleased with customer adoption of a Lynx metrology platform, a highly differentiated architecture which offers our customers the most versatile and lowest cost of ownership approach to in-line process control metrology. This platform has already been accepted for high volume manufacturing implementation, and we have received multiple follow-on orders accordingly.

Our final area of focus has been to increase the size of our served markets through new product development and strategic acquisitions. In the new product development area, we have leveraged our core competencies and expanded our product offerings to the solar photovoltaic and high-brightness LED markets, where we have already experienced an expansion of our customer base in revenues from new products.

We have also developed the business processes and demonstrated the management talent to identify, acquire and integrate inorganic business opportunities. In a little more than one year, we completed two key strategic acquisitions, each of which increased our footprint in our established markets and, importantly, expanded our served markets. Notably, these acquisitions meaningfully increased our business opportunities while being nondilutive to our shareholders.

Specifically, our acquisition of Tevet last year added to our integrated metrology OEM base, while also adding in-line thin film metrology capability for high volume solar photovoltaic manufacturing. And our most recent acquisition of the UniFire interferometry product line firmly establishes us in the emerging and rapidly growing area of advanced wafer-scale packaging specifically for wafer-bump interconnect and through silicon via applications. These two acquisitions alone have increased our served markets by at least one-third.

Last quarter we reported that we believe Q1 was a trough revenue quarter. We continue to believe the industry has turned the corner from a psychology of uncertainty which caused our customers to delay and/or halt their capital spending plans, to a return of more normal, albeit conservative, order rates. We saw this improve towards the end of the quarter and it has continued so far into the third quarter.

Looking forward, we see continued improvement in capital spending particularly in technology buys for next-generation devices and architectures. We are encouraged by the reception to our new products and are optimistic about the growth opportunities in our expanded served markets.

With our current visibility and outlook, barring any external macro event, we are confident that revenue growth will continue in the third quarter.

In summary, we continue to have confidence in our business model. We are cautiously optimistic about the near-term business environment, and we are confident in our ability to deliver improved performance to our shareholders.

I will now turn the call over to Jim Moniz.

Thank you, Jim. Good afternoon, Nanometrics' press release containing second quarter fiscal 2009 results was sent out by Business Wire today, July 30, around 1 p.m. Pacific Daylight 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 break-even.

Second quarter revenues of $14.5 million were up 44% from the previous quarter and were down 39% from the second 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 US at 46%, Korea at 25%, Japan at 15%, and rest of world at 14%.

Revenue by product type was materials characterization at 13%, standalone and integrated metrology at 42%, and service at 45%. Gross margin in the second quarter was 41.4% compared to 28.3% in the previous quarter, and 42.4% in the second quarter of fiscal year 2008. The high level of gross margin was primarily the result of higher revenues, better margins for our service business, and an overall benefit from our operational cost reductions.

Service gross margins were 50.1%, driven by higher upgrade business as well as continued improvements in our core service gross margins.

Total operating expenses in the second quarter were $12.5 million compared with $11.9 million in the previous quarter, and $29.1 million in the second quarter of 2008. Included in total operating expenses were $1.9 million in impairment charges due to the closure of our Korean manufacturing facility and the resulting write-down of the cost of our building to its fair value, $0.4 million of restructuring costs due to further headcount reductions, and $0.3 million for amortization of intangible assets.

Ongoing cash-based operating expenses were $8.5 million in the second quarter compared with $9.1 million in the previous quarter, bringing our cash-based revenue break-even to $19 million. We estimate the cash-based revenue break-even will increase by approximately $1 million with the integration of the UniFire product line acquisition, which will increase our ongoing cash-based operating expenses.

Interest and other expense in the first quarter was $0.9 million, and included $0.5 million associated with losses on foreign currency. The net loss for the second quarter was $7 million, or $0.38 per share. Cash came in at $14.5 million, which was $2.4 million below the previous quarter. Back in December we gave one of our customers extended terms on a $3 million letter of credit, which was due to be paid mid-July. So, we decided to borrow $3.5 million against our line of credit in order to reflect a more appropriate cash position. We have since paid back this borrowing and we now have available the full amount of our $15 million line, and we are well within all of our covenants.

Accounts receivable came in at $14.9 million, which was higher than the previous quarter by $4.6 million, driven by higher revenues. DSO was flat with last quarter at 92 days. Inventory came in at $34.2 million, which was an increase of $1.6 million from the previous quarter. We added $2 million this quarter for the acquisition of the UniFire inventory from the Zygo strategic business partnership. Without this addition our inventory would have decreased by $0.4 million. We are still confident that as revenues increase, inventory will decrease and be a source of cash.

Our tangible book value now stands at $3.77 per share. We ended the June quarter with headcount of 402 employees, including 13 new hires related to the acquisition of the UniFire product line from Zygo. This compares to 414 employees at the end of March.

As Tim said, with our current visibility and outlook, barring any external macro event, we are confident that revenue growth will continue in the third quarter, wherein we will benefit from operational and earnings leverage resulting from the improvements we have made to our business model. Going forward, we will continue to drive execution and operations with a particular focus on balance sheet management and the generation of cash from inventory.

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 Gary Hsueh with Oppenheimer, Inc. Please proceed, sir.

Hi. Thanks for taking my question. Let me just try and backtrack here just to get my numbers right. Are you guys basically now combining standalone and integrated, and that was 42% in June, off of 17% in March; is that correct?

Yes, that is the way we have been reporting it.

Okay, great. And then as you go forward in September, a lot of the process tool manufacturers are starting to step it up in terms of shipment. I am just wondering, I know you don't break down the mix between standalone and integrated, but is there a probable mix shift more towards the integrated side in September and December with the process tool shipments really stepping up, or is there really no net change here in terms of that mix within integrated and standalone?

First of all, Gary, thanks for listening in and the question. The integrated part of this has been pretty low over the last several quarters because it is driven almost all by capacity (inaudible) that process equipment. And we would expect that as process equipment shipments increase and based on the OEM relationships we have, we would see a pickup in that area. So, there might be a relative shift, although the growth in the standalone side of the business is actually picking up at a higher pace than it had in previous quarters, and we are seeing some very good signs, in particular, in the OCD arena.

Okay. All right. So, there is really no impact -- there are really no push-and-takes really in terms of your product gross margins as I look out here into the September quarter. It's really more about increased unit volume and fixed asset or cost absorption.

Yes, the primary benefits on the product side will be on the absorption part of it. The product pricing and value propositions have been holding really well, and so as we get some little improvement in [factory] absorption, you should see improvement in the product margins.

Okay. And, also, if I can kind of just inquire about the mix of business between product and service, again, some of the process equipment guys are seeing a little bit more of a mix shift from service and field upgrades to just outright system shipments going from June to September. Is that the same way you characterize your business going from June to September, more of a rotation towards product shipments instead of service or field upgrades that really kind of drove the gross margin number on the service side to 50% in the June quarter?

So, I think the way to try to look at that, Gary, is we're actually seeing improvements in both areas. The upgrade business has been very good to us and continues to be good and supports -- and, as you know, is reported within the service area. So, you are seeing a growth of total reported service revenues. But as a percentage of total revenues, you would expect it to see it become a declining percentage simply because our standalone business, in particular, in last quarter had been so low. So, as a total representation of revenues, service had a higher visibility. But I see growth in both of those areas.

Okay, great. So, you are still not providing any guidance, but any expectation however helpful it might be for inorganic revenue contribution from UniFire in Q3?

We are not going to be breaking out the inorganic part right now. Our guidance is, as you point out nicely, is more directional. As we look into Q3, we think that Q3 against Q2 probably is going to have similar performance advantages as Q2 did over Q1.

Okay. And what should be the expectation in terms of working capital? I know that inventory numbers really just picked up from a step-up in terms of inventory that you have taken on from UniFire. But going forward with all the kind of inorganic issues kind of settling out, what should we be modeling or expecting in terms of inventory turnover and working capital management here in September-December quarters?

If I look out at the next quarter, as we said, we have taken our break-even down to about $19 million. We expect that may go up about $1 million. So, depending on the direction Tim gave in terms of potential revenue, I would expect that the cash from operations should essentially be break-even. And then the issue there will just be how much does revenue grow from a working capital standpoint, and I think you will see a decrease in inventory. We have seen a shifting in inventory recently from raw materials to the [Whitman] finished goods.

Okay, perfect. Thanks, guys.

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

Hi. I just wanted to ask a little bit about the materials characterization business. It looks like that was only 13% of revenue. One component of that I know is LED, which Veeco had very strong commentary about this week. I'm just wondering if you are seeing a pickup in LED business heading into the September quarter?

Yes. Thanks for calling in. I guess a couple of comments just to help you understand the materials characterization part of our business. So, historically, a lot of the revenue is reported into materials characterization came out of the wafer substrate manufacturing side and was bundled into materials characterization, which are pretty high-end high ASP tools. And as the capacity and number of wafers that are being processed have dropped, and we have seen a decline in the sale of that specific product.

The good news is that materials characterization over the last couple of quarters has been mostly, almost exclusively, both in the high-brightness LED and in the solar photovoltaic, and in this quarter it as almost exclusively in the high-brightness LED. We have seen a significant uptick in both the number of customers that are buying our high-brightness LED products as well as the regions that we are serving. That is the really good news.

The other side of that is that these are lower ASP tools, so it will take a while before they actually start to move the needle on total revenues.

Okay . Okay, that is helpful, but the trend looks like it is improving as we go into Q3

Yes, the trend has improved quite substantially and significantly. Selling (inaudible), I think we had our press release out a few weeks ago that indicated we had seven new customers in high-brightness LED. So, we are getting a very good reception to some of our current, as well as some of the newer products that we have introduced into the market. And we see that continuing to be a good part of the good news story.

Then on the overall order side, I would assume we have a book-to-bill over one if you are guiding revenue to be up in Q3; is that correct? So, a nice order uptick in Q2?

Yes, so we don't report the book-to-bill, as you know, but what -- the indication I would like to give is that our current bookings activities, our order activities, our quotation and lead time discussions are all good, strong leading indicators that we would expect continued improvement in the top line going into Q3.

Okay. And then do you have any -- can you give any commentary on current OCD runoffs that you are in? Have you had any recent wins that you can talk about or any selection closures?

Nothing new that we can report on. There is some very encouraging signs and we think that this is going to be a big part of our story going forward.

Okay. Were there any 10% customers in the quarter?

Yes, we actually had two -- one was Samsung and the other one was WD.

Okay, and one final question. I am just wondering how many Lynx sales or shipments were there in the quarter?

We don't give you a specific unit disclosure on that, but there was follow-on revenue from the Lynx, as well as additional modules onto them.

Okay. Thanks a lot.

And your next question comes from the line of Michael [Omari] with Omari Co., Inc. Please proceed.

Hello, guys. Congratulations on a great quarter considering, and excellent margin numbers. I am a bit concerned about $1.9 million charge related to the closure of your Korean manufacturing facility. A couple of years ago, in the days of (inaudible), we thought that you were going to Korea in order to save, etc. Does this mean that your manufacturing, where is it now? Is it like in this part of the world or in the Orient?

Okay, Michael First of all, thanks for calling in, Michael. I appreciate the comments. About two years ago when I -- almost two years ago, when I joined the Company, we had five manufacturing sites distributed around the world, and we clearly had a lot of fixed costs and absorption issues. We looked hard at what we were doing and we realized at the same time we had almost no commitment to outsource manufacturing. So, our strategy going forward was to reduce our fixed cost, go to a variable cost structure, increase the number of -- the percentage of our total systems being manufactured at third-party sites on turnkey operations. And clearly we took the last step in that activity.

We still have a -- we had two facilities in Korea. One was service and applications and customer support, and the other one was the manufacturing, and we closed down the manufacturing. And the write-off is associated with the way we were carrying the building on the books and the fact that we are now going to sell the building.

You were actually one of the first semiconductor companies to expect lower sales, and if I remember, you called for earning 7% of your workforce, and I hope you will be one of the first people, and you are, (inaudible) around. We have all the faith in you because you have been doing a great job, especially how you are achieving the margin numbers. So, good luck and keep us happy shareholders.

Thank you very much. We appreciate your support.

And your next question comes from the line of Marty [Elibon] with Verizon Networks. Please proceed.

Hey, Tim. Actually, it's Marty Elibon with Horizon Networks. Congratulations, Tim and your team. The numbers really look good. It looks like the turn is here. As a shareholder, and we have a lot of other customers that are shareholders, what I would like to see -- I guess you guys are out of your blackout period now because you released the numbers. I would love to see Tim and some of the management people, since there is a turn here and it has been announced, I would like to see some support. Can we count on you for some insider buying, which would really help shareholder value, and that would be a very positive standpoint, from a PR standpoint. And the shareholders that are buying now, they want to be reinforced that we are on the same side of the fence here. Can you comment on that and tell us if you can support us?

Well, first of all, we are as strong of believers in the Company as you are and we appreciate your support. You can imagine that there have been certain restrictions that we are bound by when we are involved in strategic discussions, such as the one recently with the acquisition of the Zygo product line, and also the one with Tevet. And if you think about the time duration and activities of those, it puts certain restrictions on those of us who are directly involved in those negotiations and it constrains our ability to participate. As a senior manager of the Company, and I look back to where the stock was six months ago, I would personally like to have been a major beneficiary of the recent run-up.

All right. Thank you very much.

You bet.

At this time there are no further questions. I would like to turn the call back over to Dr. Tim Stulz for closing remarks.

Thank you very much. In closing, I want to give special recognition and thanks for the extraordinary efforts of our employees, for their sacrifices and innovative ideas which make this performance possible, and to our shareholders for their continued confidence in the Nanometrics team. Thank you again for calling in. We look forward to updating you on our third quarter results conference call.

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