Onto Innovation Inc (ONTO) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Nanometrics Third 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 risks and uncertainty that may cause actual results to differ materially from those described in 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 develop new products and ship its products in a timely manner, the Company's ability to manage costs and expenses, changes in business or economic conditions, and the additional risk factors in cautionary statements set forth in the Company's Form 10-Q for the quarter ending September 26, 2009 and in other reports the Company files with the Securities and Exchange Commission and incorporates herein by reference.

Leading the call today will be Tim Stultz, President and Chief Executive Officer of Nanometrics. A 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 Stultz. Please proceed.

Thank you and good afternoon, everyone. Thank you for joining us for Nanometrics' third 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 our return to profitability with industry-leading revenue growth, gross margins and an improved cash position. In short, we have grown into our business model during the very early stages of the market's recovery.

Financial highlights for the third quarter include a 78% increase in revenues quarter-on-quarter and a 12% increase year-on-year, a 12.6 percentage point increase in gross margin to 54%, non-GAAP operating income of $4 million, and GAAP profit margin of 6% or $0.08 per share.

During the quarter we also had key strategic product wins at leading logic and memory customers, increased penetration into the growing HB LED market, and expanded acceptance of our Lynx metrology platform.

Early in 2007 we initiated the turnaround of Nanometrics. Since that time, we have reported on our primary areas of focus and progress against objectives. The first leg of our turnaround strategy was to restructure our operations to drive efficiency and improve our operational and earnings leverage. The direct outcome derived from those efforts is a stronger business that has grown gross margins through quality and competitive performance improvements, deploys operational expenses efficiently and consistent with the business, and has improved cash flow and balance sheet management.

As we have reported, we have steadily improved our gross margins, most notably in service, even as our customers' capital spending budgets and our revenues were shrinking, while at the same time reducing our operating expenses by 33%.

Whereas improving our business model, practices and operational fundamentals comprise the first leg of our turnaround strategy, just as important were our efforts to strengthen our competitive position within our served markets and thereby drive market share gains.

During the economic and industry downturn we addressed that objective by continuing to invest in R&D and developing and introducing advanced, highly-differentiated, cost-effective and extendable product platforms for our customers, including the Lynx, NanoGen OCD Suite, and new thin film overlay and integrated metrology product offerings. These new products are tied directly to our recent key account wins and increased revenues derived from technology purchases.

The third leg of our strategy has been to expand our served markets by leveraging our core competencies, our global sales and service channels, and the Lynx metrology platform. These objectives have been advanced through organic development of new products for the solar and high-brightness LED markets and acquisitions which added new products to our portfolio to serve the growing solar photovoltaic and wafer scale packaging markets.

Our strategy and business model are based upon two fundamental beliefs. First, if we properly and effectively execute against our objectives to improve our competitiveness and operational efficiency, we will be positioned to outperform our sector through market share gains and earnings leverage. Our second belief is that the semiconductor customers will continue to work on shrinking devices, increasing device density and increasing process complexity to meet their technology, performance and cost requirements. These trends in turn drive the need for more metrology and process control in order to achieve acceptable yields in the face of increasing complexity and tighter process tolerances.

Economic realities and incentives, however, currently force our customers to address these challenges largely through the retooling of existing facilities versus building new plants or increasing wafer sizes. In our opinion, this environment favors equipment suppliers who offer products that meet current technology requirements while at the same time offering extendability and upgrade paths through several technology nodes, thereby improving our customers' profitability through lower cost of ownership and greater returns for their capital expenditures.

In summary, supported by an improvement in the capital equipment market and business environment, as well as execution against our stated objectives, we are experiencing a sharp increase in demand for our leading edge thin film, OCD and overlay products, our NanoGen OCD software suite, and upgrades to our large installed base.

With further improvement in the semiconductor industry as predicted, we expect our technology-driven product placements to position us to benefit from production ramps and capacity expansions as they occur. Longer term, we expect to have incremental contributions to our business from our recent entry into wafer scale package metrology resulting from the recent acquisition of the Unifire interferometry product line, from growth of the high-brightness LED market driven by increased use of solid-state lighting for large format televisions, smart phones, computers and industrial lighting, and from the overall growth in the solar photovoltaic market.

From where we sit today, we see continuing improvements in the business environment, including the trend of more metrology and process control and further acceptance of our differentiated products. We have enjoyed significant quarter-on-quarter revenue growth over the last couple of quarters and expect revenue growth to continue, albeit at a slower rate as absolute revenues increase.

I will now turn the call over to Jim Moniz.

Thank you, Tim, and good afternoon, everyone.

00 o'clock 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 non-GAAP operating income.

Third quarter revenues of $25.8 million were up 78% from the previous quarter and were up 12% from the third 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 Korea at 54%, US at 25%, and rest of world at 21%. Revenue by product type was standalone and integrated metrology at 57%, service and upgrades at 37%, and materials characterization at 6%.

Gross margin in the third quarter was 54% compared to 41.4% in the previous quarter and 44.1% in the third quarter of fiscal year 2008. All segments of our business contributed to the improvement in gross margin, including the higher level of overall revenues, increased upgrade revenues and improved factory absorption.

Total operating expenses in the third quarter came in as $12.4 million. In comparison to prior periods and excluding asset impairment and restructuring charges, we saw a 23% increase in operating expenses compared to $10.1 million in the second quarter of 2009 and a 13% decrease compared to $14.2 million in the year ago period. The sequential increase in operating expenses was primarily driven by increased payroll expenses in response to the sharp revenue ramp and added expenses associated with the Unifire business acquired in June. Even with these increases, our cash operating expenses grew at one-fourth the rate of revenue growth.

Interest and other expense in the third quarter was flat and included $0.5 million of interest expense offset by $0.5 million associated with gains on foreign currency.

The net profit for the third quarter was $1.6 million or $0.08 per diluted share on a diluted share count of 19.4 million shares. Earnings per share included approximately $0.04 of stock-based compensation expense and benefited from approximately $0.03 per share of unrealized gains on foreign currency exchange rates.

Now turning to the balance sheet, cash came in at $17.2 million, an increase of $2.7 million above the previous quarter.

Our borrowings against our line of credit remain flat at $3.5 million compared to the end of Q2, and we have since repaid this amount in full.

We generated $2.8 million in cash from operations in the third quarter, and we have available to us the full amount of our $15 million credit line, on which we are well within all our covenants. All in all, we feel good about our cash and cash flow management.

Accounts receivable came in at $21 million, which was higher than the previous quarter by $6.1 million, driven by the increase in revenues. DSO is at 73 days, which is down from last quarter's DSO of 92 days.

Inventory came in at $32.4 million, which is a reduction of almost $2 million from the previous quarter.

We ended the September quarter with headcount of 399 employees, nominally flat from the previous quarter.

I'll now expand a bit on the revenue growth outlook provided by Tim. Our Q3 2009 revenues represent double-digit growth from the third quarter of 2008 and a 78% growth over the prior quarter. This came on the heels of a 44% quarter-on-quarter growth rate in the second quarter. Clearly that rate of sequential quarterly growth is unsustainable. We are, however, seeing the order pipeline building for a more modest uptick in revenues for the fourth quarter which will continue our quarter-on-quarter revenue growth trajectory.

This quarter we had record upgrade revenues. We expect revenue from upgrades to return to a more nominal level in the coming quarter, with the mix of revenue shifting more toward product sales.

With the improvements we have made to our cost structure and operational efficiencies, continued revenue growth should have a positive impact on our product gross margins. Core service margins have also improved through improvements in quality and efficiency. The reduction in upgrade business, however, will have an offsetting affect on total gross margins, resulting in a more normalized yet still strong total gross margin.

That concludes our prepared remarks, and now I would like to open up the call for your questions.

Thank you. (Operator Instructions).

Our first question comes from the line of Gary Hsueh with Oppenheimer & Co. Please proceed.

Great. Thank you for taking my question. I'm not going to complain about great numbers, but I had a question just about sustainability of gross margin.

You guys are clearly performing above and beyond, I think, what your stated financial model was earlier this year. You talked about sustainability of revenue growth on a sequential basis. I'm just wondering, could we expect gross margin to still exceed the 40% to 50% range at this current revenue level in Q4 or is there enough of a falloff, as you said, on the upgrade business where we'd get back to that financial target model? I'm just trying to figure out how much gross margins should actually come in in the December quarter.

Hi, Gary. This is Tim. Thanks for calling in and thanks for not complaining about the numbers.

With response to your gross margin question, we did have record upgrade revenues which contributed nicely to our service gross margin. And we expect the upgrade revenues to come down to more of the normal quarterly levels. With that, there's an offset to total gross margin.

But our product gross margins are still pretty robust and our service margins have continued to improve, so with regard to the model you were referring to, I feel very comfortable hitting that model and staying at or above it. But I don't expect to sustain this level of margin if the upgrade revenues drop.

Okay, just a follow-up question here about product revenues then. A lot of semi cap equipment peers of yours are running into supply constraints or bottlenecks in terms of outsourced manufacturing of their tools to meet customers' shipment or delivery dates.

Are you experiencing any bottlenecks or supply constraints in turning around tools in manufacturing?

So far we haven't. We use two outsource manufacturing suppliers. One's quite large, and they have a lot of capacity. So that, backed up by our factory capacity, has resulted in us not having any problems meeting our delivery commitments.

Okay, great. And just a longer-term question -- with the interferometry business and the future revenue stream coming from Intel, I'm just wondering, as you start to layer in some of this business, if this business - I think the fear is that typically the Intel business does layer on at significantly lower gross margins. Is that business big enough at lower gross margin enough to kind of disrupt this target financial model that we're looking at in '09 when we look out to 2010?

Without speaking specifically to any given customer, the purchase agreement, the long-term purchase agreements and the products and the sale prices will continue to support our margin model.

Okay, and just a last question just about taxes. What should we be modeling in terms of a placeholder for tax rate in 2010 at this point?

I think at this point in time we're not forecasting really a significant tax rate. We do have over $30 million in NOLs, and most of that will be used to shelter whatever US income we get and that we would forecast in 2010.

We may see some slight provision for international profitability that's generated, but at this point in time I don't know that I would forecast really a significant tax rate or any tax rate as we go into 2010 -- maybe a few points but not much more than that.

Okay, great. Oh, one final background question -- any 10% customers in Q3?

Yes. There was Samsung and Intel.

Okay, perfect. Thank you.

You bet.

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

Thank you for taking my question. One question is following up on the comment on 10% customers. Would you expect those same customers to be 10% next quarter? And specifically I'm just kind of wondering about this sort of recent -- on the memory side, the recent win last quarter you had Q3 and Q4 shipments from. I'm wondering if those would be stronger shipments relative to Q3 in Q4?

So thanks for calling in, Wes.

With regard to the two 10% customers, we see continued good business with them, but we also see some other customers increasing their spending rates, which can start to shift the mix in terms of what constitutes a 10% total. So I would expect that there's a possibility of adding one or more customers to that 10% list.

Okay, and then just regarding the large memory order that you announced earlier last quarter with Q3 and Q4 shipment dates. Are the Q4 shipment levels larger than the Q3 shipment levels for that customer?

The order we announced was spread over a couple of quarters, and it's kind of evenly spread right now in terms of the total shipments.

Okay. And then I just also wanted to dig into the materials characterization business.

Yes.

I'm not sure if I calculated this right, but at 6% of sales I only get $1.5 million, and that's fairly low. I know it's a lumpy business, but I'm just wondering if you expect that to rebound in a significant way given the exposure to HB LED and solar?

So I think there's two elements of that that we've talked to previously.

The first one is one of the key products that gets rolled into the materials characterization is the FTIR, which is used for bare silicon defect analysis, and that business all but disappeared during this downturn. And those are higher end tools. And so we're starting to see some activity there, and I expect to see contributions to the materials characterization revenue from that product line, the FTIR.

We also are seeing some nice traction in HB LED and I expect that to pick up, as well as solar, with probably more than a dozen engagements. We have over 30 HB LED customers now, and approximately 40% of those are ones that are new to us within the last two quarters. So we're at the early stages of those. And those are lower ASP products, but we're starting to see volume opportunities and I think that you're going to see some nice improvements in material characterization as a result.

Okay. Thank you.

You bet.

Your next question comes from the line of Gus Richard with Piper Jaffray. Please proceed.

Yes. Thanks for taking my question.

Could you break down your revenues by end market -- DRAM, foundry, etc.?

Sure. Hi, Gus. This is Tim. Thanks for calling in.

Our total memory was about 70% -- 69% of the sales were in memory, with about 58% on the DRAM and we're running 12% on Flash, about 21% foundry, logic and other IDM, and then the balance with the compounds, LED, solar and substrate.

Okay. And on the Unifire product and actually the upgrades, can you give us just an idea of where those revenues came in for the quarter as well?

So, with regard to the Unifire product, there have been shipments but, as a result of the acquisition and the revenue recognition rules, we have not recognized ourselves any revenue from Unifire.

Okay.

So the products have been going out. And they're nice; we've got some happy customers. As we go into Q1 we'll actually start to have some revenue recognition opportunities. It just has to do with the accounting of an acquisition.

With regard to the upgrades, we don't break that out from service, but if you look at our service numbers this quarter and compare them to service runs in previous quarters, you can see that there's been a pretty substantial uptick in upgrades, and I would expect that to drop probably 20% to 30% or so.

Okay. And then just more to a normalized service margin, and I guess that question there is what is the normalized service margin? Is it in the mid 40s%?

No. Well, the core service margins, which, as you know -- I believe you know -- came up from like a low of minus 27%, are running into the low 30%. So it's like 33% in the quarter. And then the contribution to that from upgrades will bring that up higher. So I would say we're somewhere like 35% to 40% total, in that range, on the service side.

But service upgrades also will represent a smaller total percentage of the revenues, and so the products will carry -- the product margins will actually carry us as we go forward.

Got it. Oh, okay. All right. So just to sum that up, the service and upgrade line gross margin should be in the 40s% somewhere just given the upgrades aren't going to go to zero?

Yes. Well, the upgrades won't go to zero.

Okay. I understand.

We just had a very strong upgrade quarter.

Right. Right. Got it. Okay, thanks so much.

You bet.

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

Bill Frerichs Radnorwood Capital. Congratulations, Tim, and to your whole team -- a very good quarter.

My question has to do with the other long-term liabilities line, which last quarter jumped from about $800,000 to $2.5 million and it's continued to increase. Could you explain that line to us, please?

Yes, Bill, this is Jim. How are you?

Hi, Jim.

That other long-term liabilities change is exclusively based on the Unifire purchase that we made late in the June quarter. And that purchase essentially had to be split between what we thought we would have to pay long term and short term. So that increase of about $2 million is what was determined payments that would have to be due after a 12-month period of time.

Okay, and that runs off as you pay them?

That will run off as we pay them, yes.

Okay.

That is correct.

Okay, and is there any kind of true up? In other words, is there some circumstance in which it might not be owed or it's definitely owed?

No, not really. It's just a timing difference.

When we recorded the sale we recorded some intangible assets associated with that and then obviously some inventory and some fixed assets, and this was just the liability side of it. Some of it went into the short term and the balance went into this long term you were looking at.

Okay, that makes sense. And forgive me, I had to jump on late, if this has been addressed, the disposition of the Korean real estate asset?

That is still in the process. As you remember from last quarter, we has written that down to what we thought would be a market value, and we said it may take us a number of quarters given the economic real estate market worldwide and especially in Korea.

So we are still actively marketing that, but it would be premature for me to say anything. We have not sold that yet, but we believe we should do that hopefully in the next quarter or two.

Okay, very good. Thank you. Good quarter.

Thanks, Bill.

(Operator Instructions). Your next question is from the line of Edwin Mok with Needham & Company. Please proceed.

Hi. Thanks for taking my question.

Can you help me out a little bit with the advanced packaging market, which is (inaudible) acquisition and how you guys are proceeding there and how do you look at the market going forward?

Well, we're pretty excited about that. Well, first of all, thanks for calling in, Ed. We're pretty excited about wafer scale packaging.

It's really more of a back end of the front end rather than a true back end market, and it's two particular areas that I think are exciting. One is the micro bumps and the other one is through silicon via. And the Unifire product has been accepted for applications in the bump part of the packaging, and we are doing some development and have some engagements to apply to through silicon via. Both of those I think are going to be nice growth markets going forward.

Do you see that, as you mentioned, (inaudible), do you see that as more kind of that strategy working with a Company (inaudible) or do you see actually a standalone solution taking off by integrating that into your Lynx platform? Which way do you see as more opportunistic or have better growth options going into 2010?

Are you talking specifically -- I'm sorry, I wasn't sure, was that about the Unifire?

Yes, yes. That was about Unifire. Sorry.

Yes. So as the Unifire stands, when we acquired the product line it was a standalone product, but our strategy at the outset was to integrate it onto the Lynx metrology platform. It just gives our customers a lot more extendability, it gives them a lower cost of ownership and a lot more flexibility, and it gives them the chance to put, say, a bump tool next to an OCD tool or a [Thinkem] tool, all with the same robotic handler and data acquisition and sharing.

So everything we're doing is really to extend the utility and acceptance of the Lynx metrology platform.

I see. Great. That's all I have. Thank you.

Okay. Thank you for calling.

At this time there are no other questions in the queue. I'd like to turn the call back over to Dr. Tim Stultz for closing remarks.

Thank you.

In closing, it is absolutely essential to acknowledge the exemplary work, innovation, dedication and sacrifices of our employees, who, through a very challenging time, have remained steadfast in their commitment to build a better Nanometrics, and clearly without whom none of our achievements would have been possible.

I also want to thank our long-term shareholders for their continued belief and support of the Company and reaffirm our commitment to continuous improvement towards operational excellence and improved business performance.

Thank you again for calling in. We look forward to updating you on our fourth quarter results conference call.

And ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.