Onto Innovation Inc (ONTO) 2011 Q1 法說會逐字稿

Good afternoon, and welcome to Nanometrics' first quarter 2011 financial results conference call. (Operator instructions). 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. Please note that this conference call is being recorded today, April 28, 2011.

At this time, I would like to turn the call over to Claire McAdams, investor relations counsel for Nanometrics. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to the Nanometrics first quarter 2011 financial results conference call. On today's call are Dr. Timothy Stultz, President and Chief Executive Officer, and Ronald Kisling, Chief Financial Officer.

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, including, but not limited to, statements regarding financial results for our most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our financial statements and periodic report on Form 10-Q for the first fiscal quarter of 2011, the continued adoption and competitiveness of our products, the expansion of our served markets, and future revenue growth, profitability, and cash flow.

Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to a variety of factors, including a contraction in current levels of industry spending, shifts in the timing of customer orders and product shipments, slower than anticipated market adoption, changes in product mix, increased operating expenses, and the additional risk factors and cautionary statements set forth in the Company's Form 10-K for fiscal year 2010, as well as other periodic reports filed with the SEC from time to time. Nanometrics disclaims any obligation to update information contained in any forward-looking statements.

I will now turn the call over to Tim Stultz. Tim?

Thank you, Claire. Good afternoon, everyone, and thank you for joining us today. With me today for his first conference call with Nanometrics is Ron Kisling, our new Chief Financial Officer. We are quite excited about the added dimensions Ron brings to the management team, and as you will soon see, he has hit the ground running.

In my remarks this afternoon, I will discuss the business and financial highlights for the first quarter of 2011 and our view of the current and near term industry environment. Following that, Ron will provide a closer review of our financial performance, after which I will return with our guidance for the forthcoming quarter.

In the first quarter of this year, we saw a continuation of healthy investments in capital equipment by the leading semiconductor device manufacturers in all three areas of technology development, capacity expansion and new fab construction. These, combined with our leading market position in OCD, where we continue to gain market share through competitive wins, our growing position in metrology for 3D device structures, and strong operating performance have enabled us to deliver another record quarter of financial results.

In addition to record revenues of $62 million and a 10-year record operating profit margin of 27.5%, Q1 marked the seventh straight quarter of positive cash flow and gross margins exceeding 50%. This consistency of solid performance across the cycle reflects the strength of our business model, our ability to compete, our success in shifting fixed costs to a largely variable cost structure, and solid operational execution. We also believe our above-average gross margins reflect the competitiveness of our products and the efficiency of our operations. And we know that consistent profitability and strong positive cash flows enable us to continue to make the investments in our business necessary to remain competitive and deliver above average performance to our shareholders.

Turning to the key drivers of our business, although we have a diverse product line serving multiple markets, including semiconductor, high brightness LEDs, solar photovoltaics and data storage, our core competencies and technology base is tightly centered upon high speed, nondestructive optical measurements used for process control metrology.

Our products are used to directly address the challenges brought on by increasing device complexity and the growth in the number of process steps resulting from our customers' never-ending quest for improved performance and lower manufacturing costs. And whereas shrinks may be the ultimate driver for performance, throughput and yield have the greatest impact on manufacturing costs and profitability for our customers. By making more measurements and using our products throughout the manufacturing process, our customers are able to increase the productivity of their more expensive process tools, reduce yield-destroying process variations, and increase their ROI for their overall capital equipment investments.

Of particular importance and relevance to Nanometrics is a growing demand for three-dimension metrology measurements, both at the device as well as the packaging level. As I mentioned earlier, leading edge solid-state devices are fabricated with a growing number of steps and material layers, with smaller features and increasing complex physical shapes. OCD stands alone in its ability to quickly, precisely and nondestructively measure complex three-dimensional device structures. Because of this, growth in the OCD market has exceeded the growth of any process control technology, both through an intrinsic expansion of applications as well as the displacement of otherwise conventional technologies, such as CD-SEMs. OCD is a disruptive force in process control metrology, and Nanometrics was a pioneer in commercializing this technology.

The growth of the OCD market, combined with our technology leadership and market share gains, have been the principal driving forces behind our ability to consistently grow our business and deliver strong financial performance.

Now, I'd like to say a few words about the newest addition to our business growth engine, the UniFire.

The UniFire addresses the existing three-dimensional metrology market, advanced wafer scale, or 3D packaging. This system has already gained acceptance at the majority of leading device manufacturers and is being used in production as well as the development of next-generation advanced packaging applications, such as Microbump and through-silicon-via measurements.

With the UniFire, we are at the forefront of an exciting new market with a unique solution and looking at future growth rate that could even exceed that of OCD. Early entry, early leadership, with a differentiated technology and platform, which address a changing market requirement -- this is a formula that has worked for us before and a strategy we are confident will continue to help us meet our growth and performance objectives going forward.

Now, taking a macro look at our industry, in spite of the reported delays and the timing of industry investments in technology and capacity from some customers, we firmly believe that the healthy capital investment outlook for 2011 and 2012 remains intact. Nearly every one of our customers has increased their CapEx budgets for 2011, in some cases quite significantly. These investments are necessary for them to respond to demand, take advantage of business opportunities, and remain competitive. For our customers, the common theme is smaller, faster and cheaper, and they will need new tools to meet these challenges.

Wafer fab equipment spending in 2011 is expected to be 12% to 17% greater than last year, and 2012 is projected to be another good year for capital equipment investments. And we at Nanometrics are fully committed to and expect to outperform this trend.

I will now turn the call over to Ron, who will provide you with details on our financial performance, following which I will return to give next quarter guidance. Ron?

Thank you, Tim, and good afternoon. Nanometrics' press release containing our first quarter results was sent out by Business Wire today, April 28th, around 1.00 p.m. Pacific time. The press release may also be found on our website at nanometrics.com. In our release and on our website are reconciliations to non-GAAP operating income, which is Management's measure of cash flow generation from the P&L. That being said, all of the figures referred to in my comments today are GAAP-based measures, unless otherwise noted.

After a great 2010, we started 2011 with another quarter of strong financial performance. We achieved record revenues of $62.1 million, up 35% from the prior quarter and up 67% from the first quarter of last year, exceeding our guidance of $56 million to $60 million as a result of favorable shifts in delivery schedules and strong operational execution against the steep customer [ramp]. This growth was primarily driven by a significant increase in shipments of our automated metrology system.

Total product revenues of $54 million were up 41% from the fourth quarter and up 89% from the first quarter of 2010, while revenue from service and upgrades of $8.2 million increased 3% sequentially and declined 5% from the year-ago quarter.

As I mentioned previously, the primary driver of our revenue growth in the quarter was a significant increase in demand and shipments of our automated metrology systems. Automated metrology systems grew to 63% of our total revenues, up from 46% in the prior quarter.

Materials characterization and service and upgrades each comprised 13% of total revenues, while integrated metrology comprised the remaining 10% of total revenues. While we believe automated metrology systems will continue to make up the largest share of our products, we will see quarter-to-quarter fluctuations in our mix.

Consistent with our historical reporting, we report our geographical region information based on the ship-to or first-in-use destination. In the current quarter, South Korea comprised 41% of revenues and the US 24%. Revenues from EMEA were 14%, Japan 13%, and the rest of the world 8%. Sales to Intel, Samsung and Hynix each contributed at least 10% to our revenues in the quarter.

Turning to our gross margins, we saw an increase in our overall gross margin to 56.6%, our highest in 10 years. This compares to 52.7% in the prior quarter and 55.3% in the first quarter of last year. Our gross margin exceeded both our guidance and our target model as a result of the favorable product mix and improved service gross margin of 46.8%.

In support of increased revenue, our operating expenses in the quarter increased 16% over the prior quarter to $18.1 million, primarily as a result of our higher sales volume plus some other expenses. This increase came in within our target model to grow operating expenses no more than 10% to 15% of incremental revenues.

Driven by strong revenue and gross margin, our operating income was a record $17.1 million, compared to $8.7 million in the prior quarter and $5.9 million in the year-ago period. Operating margin was 27.5% of sales, a 10-year record, and exceeded our guidance of 24% to 27%.

Net interest and other expenses were $0.8 million, compared to $0.2 million in the prior quarter and a positive $0.1 million in the year-ago period. Other expenses for the quarter included approximately $500,000 in foreign exchange losses related primarily to our operations in Japan and the UK and related movements in exchange rates.

As we indicated in our year-end call, our effective income tax rate increased to 35%, resulting in net income of $10.5 million, or $0.45 per diluted share, exceeding our guidance of $0.36 to $0.44 per share. These earnings compare to $0.26 per share in the first quarter of 2010 and $1.12 per share in the fourth quarter, which included the favorable impact from the release of deferred tax asset reserves of $0.78 per share. Excluding that impact, our effective tax rate for 2010 was approximately 7%, in contrast to our tax rate forecast of 35% for fiscal 2011.

Turning to the balance sheet, we grew our cash and investments by $13.7 million in the first quarter, ending the period with $80.2 million, or approximately $3.50 per share, up from $3 per share at the end of 2010. Accounts receivables at the end of the quarter were $48 million, an increase of $3.4 million over last quarter, and our DSO declined to 69 days, in line with our target of 70 days. We managed our inventory growth to $1.7 million over the prior quarter, increasing our inventory turns to 2.3 compared to 2.0 turns last quarter.

Our tangible book value per share increased to $7.97 based on 22.7 million shares outstanding at April 2, from $7.38 at year end. We ended the quarter with headcount of 473 employees, a net increase of 17 from year end.

This concludes my prepared remarks, and I would now like to turn the call back to Tim.

Thank you, Ron. Summarizing this report, we had a very good quarter with good operational execution and a continuation of solid financial performance. Industry demand and fundamentals remain on the positive side, driving the long-term need for additional investments in technology and capacity. Customer confidence and trust in our products and our services has been rewarded with increased market penetration, gains in market share, and strong positions with the leaders in our industry, and we are addressing the higher growth sectors of our industry, notably three-dimensional metrology.

With that as a backdrop, our guidance for Q2 is as follows -- we see second quarter revenues coming in between $62 million and $65 million with gross margins of 54% to 55%. Operating expenses are expected to remain flat quarter on quarter. Operating income will be between 25% and 27%, and our earnings per share will be between $0.41 and $0.47 per share, with a nominal tax rate of 35%.

With that, we will now open the lines for questions. Operator?

(Operator instructions). Our first question is from Mahesh Sanganeria with RBS Capital Markets. Your question, please.

Thank you. Congratulations, Tim and team. Pretty good numbers here. I guess you probably know the obvious question here is all your larger peers are seeing pretty significant push out from what we estimate, it's TSMC. But you don't have exposure, but Samsung also in the NAND arena. And so can you help us with the deciphering as to what is the difference? Why aren't you seeing that weakness from your largest customer, I would say?

Hi, Mahesh. Thanks for calling in, and thanks for the comment. So I think the way to look at this is that our guidance reflects the business, the backlog and the customer demand for our products as we move forward. As you know, we've got a number of customers that have been ramping up, expanding their use of our tools and given us very good solid business, in particularly in the OCD automated systems. We certainly are aware of the reported push out, notably with Samsung and TSMC. And as you correctly point out, we don't have a lot of exposure to TSMC, but we -- Samsung is one of our largest customers. The other side of that is Intel, which is another strong customer of ours, and I have not put out -- we haven't seen any reports indicating push outs on their side. So we have a little bit of a balance on that, and that's why we think that Q2 will come in at the numbers as we projected.

So just a little bit more clarification on that. When you compare your Q1 to Q2 revenue, can you help us understand what is changing in terms of the source of revenue regionally or by customer type -- I mean, in terms of foundry [logic] or (inaudible) or Korea versus Taiwan versus US? And then in terms of your composition between Q1 and Q2.

No, we're -- in terms of our guidance into Q2, we certainly wouldn't -- are not providing you with any forward guidance on segmentation. Our product -- our revenues have typically been balanced between our two largest customers, between Intel and Samsung, and those have shifted quarter to quarter. And they continue to be very strong customers for us, and Hynix has started spending, as we all know. And other than that, I can say that we expect to see some balance going forward into the next quarter.

I mean, you have reported the 10% as -- Samsun and Intel, they are both 10% of the revenue in Q1? Is that what you said? Or I missed that.

We actually reported three customers. Intel, Samsung and Hynix all contributed more than 10% to our quarterly revenues.

So you don't report the exact percent from these three customers?

We actually -- we do. So Intel came in at 28.7%, Samsung was 27.5%, and Hynix was 11.7%.

Okay. And when you said balancing, you were saying that this balancing means -- I know you don't forecast, but is that something that remains similar in Q2? Did you imply that or not?

I'm just -- the only implication that I'm saying is that our relationships with these customers are strong. They have been for multiple quarters, and we don't expect any significant changes in the balance of our customers.

Okay. Okay.

Okay?

That's very helpful

Terrific.

I think that's good for me for now. Thank you.

Thanks, Mahesh.

Thank you. Our next question is from Weston Twigg with Pacific West Securities. Your question, please.

Sure, just a couple of quick questions. First, I was just wondering -- you mentioned the UniFire traction, and I'm wondering if you can give us an idea of how big do you think the UniFire business can get for you this year and then maybe even into next year. And then after that, I'd love it if you can just give us an update on whether or not you're getting any or you feel like you may be getting some additional business with foundries later this year.

Wes, thanks for calling in. We don't report -- we don't segment UniFire yet because it doesn't represent 10% of our business, and we'll break it out when it does that. However, you may have seen from some of our previous investor presentations where we segment the market, that we estimate that that market that's being addressed by the UniFire will be around $70 million by 2012.

And you would get the whole market for that product?

Well, I don't know. That's a little bit bullish to say the whole market, but we'll try for 98%. No, actually, we're uniquely positioned. I'm sorry, I don't mean to be glib about that. We have a product that really doesn't have direct competition in the way we approach this, and so we feel very, very confident about our position, to be not only a leader but a dominant player in that space.

Great. Yes, definitely helpful. On the foundry side?

Yes, on the foundry side, again, as you know, our history has been that foundry has been the weak link in our revenue story. We've been using our balance sheet and putting a lot of energy into -- and resources as much as energy -- into penetrating that, and we have a good position with Samsung as a key customer, so we feel very confident that we should be able to leverage that into their space. And we are doing our best to penetrate the other accounts, which that being CSMC and Global Foundries, and hope to be successful enough to break that out as better than 10% of our shared -- our industry business in the near future.

Okay. Do you think it's possible that one or more of the foundry players moves into a 10% customer position in 2012?

Oh, I think in 2012, if we don't, we have failed.

Okay. All right, thank you.

Thank you. Our next question is from Gus Richard with Piper Jaffray. Your question, please?

Yes, on -- the service gross margins had a nice step up sequentially. Can you just speak a little bit -- I'm sure that's the upgrade business. Is that indeed what [wrote] that improvement in service margins?

The upgrades actually contributed, but it's not what improved it. What improved it is that service has got -- the core service margins have improved. We actually had that dip in the previous quarter, which was below our model, driven largely by the advanced hiring we did to put people in place to support the ramp-up at our customers. Those investments are now starting to be part of our -- fit within our model. And you see that our core margins have gone up, and we certainly have had contributions from the upgrades. But I would kind of look at that as a blended business and a range to expect our margins to continue to be in on a blended business.

Okay, got it. And then why the sequential decline in gross margin guidance 54 to 55?

The sequential decline is actually a consistent part of our model. We have modeled it at 54% to 55%, and we were -- we had some nice favorable results in the mix that gave us margins up, but that's consistent and flat with the model we've been putting out for the last several quarters.

Okay, but you don't expect anything in your near-term business momentum to change that would cause a shift in that, you're just guiding to model?

We're guiding to model, and we also are being cognizant of the fact that we did have a couple of favorable elements of our mix, and we can't always count on that.

Okay. And then just quickly, a lot of people are seeing push outs and a lot of people are seeing pull ins. Have you seen either?

We've certainly -- we don't -- within the quarter, which is the only quarter that we're giving guidance on, we're doing fine and we're not seeing any big shifts. And we don't really speak to guidance in a forward quarter. But we do know and we have seen the same reports that Samsung has pushed out orders with customers that have large exposure to them, and we've seen it with TSMC, but as I mentioned earlier in the call, we don't have a large exposure to the TSMC side.

Okay. And then the last one for me -- just any update on the overlay product line, any increased penetration?

We're making some gains with that, but obviously we haven't broken it out, so it's not quite as large as we'd like it to be. I think part of the story on this, Gus, is that OCD is being so successful that even some of the other business units that are act6ually doing reasonably well in terms of contribution margin and gross margins, the LEDs, the solar, and so on, they're just not able to keep pace with what's going on in our OCD environment.

All right. Well, thank you very much.

Thanks, Gus.

(Operator instructions). Our next question is from Graham Tanaka with Tanaka Capital. Your question, please.

Yes, hi, Tim. Hi, guys. Nice quarter, and thanks for the guidance help. Just a few things -- if you could give us sort of an indication as to what you think the quarterly trends might be in basic volume in the next three quarters, just kind of like directionally. [Are we talking about] sequentially up each quarter or flattening or what? I'm thinking more in terms of the second half versus second quarter, and what the gross margin trend might be in that kind of environment. Thanks.

Sure. Well, thanks for the question. Thanks for calling in. We're really holding fast on not giving guidance specific to future quarters. I'll kind of stand back and give you our general feel, consistent with the script. We think that 2011 is a good year and there are some good fundamentals. We understand that some of the uncertainty that's going into the -- not only the third quarter. I think a lot of this stuff gets cleared up by the fourth quarter, and we like what's going on in 2012. So we feel that our business will continue to improve year on year, but I won't go down to the quarter on quarter. The second thing is in terms of our margins, we believe in our model and we're doing everything we can to further improve the model with our guidance of 54% to 55%. We did a nice job of taking some corrective action on service, which helped us, and we're continuing to look at what we can do to further improve margins within our product area.

And how about on the overhead side, SG&A in particular? You had said in the last call that you were, in the fourth quarter, investing for the growth which you're seeing now, and I'm just wondering if you're still investing ahead of need or are you kind of properly staffed on the overhead side?

That's a good question. On the OpEx -- actually, most of the investments that we put forward were in the service group. And that was to deal with the product ramps and the training necessary to respond to this pretty serious increase, significant increase in tool installations and sign off. That won't show up in OpEx. That shows up in the gross margin side. On the OpEx side, our model is to manage our spending changes to be within 10% to 15% incremental against changes in revenues, and we feel confident we'll be able to stay on that model.

So in other words, plus 10% to 15% incremental year-to-year, annual rate kind of thing, or relative to what?

Relative to revenues, so for -- it's basically incremental spending against incremental revenues.

Okay. So if your revenues are up, I don't know, 10% sequentially, what would your SG&A OpEx be?

It comes out that it's 10% of the revenues incremental, so if there's an incremental -- whatever the incremental amount of revenues are, we would keep our OpEx to be one-tenth of that.

Oh, I got it. Sorry.

That's okay.

It's such a low number, I was astonished. So it's only 10% of the increase.

Exactly, exactly. In fact, if you'll notice that our guidance going into Q2, the revenues are slightly up and we're guiding to flat OpEx, so it's consistent with that model.

Right. Congratulations.

Thank you.

One things is on the new products that you talked about, I was just wondering, since we really didn't talk about it much in the past, how does that product stack up in terms of whatever other solution there is out there, in terms of performance, price, cost, et cetera?

That's a good question. The primary way to look at it is the tool is the one that we acquired from [ZYGO] almost two years ago. And it's another optical metrology tool based on a technology called interferometry. The way to look at it competitively is this tool has resolution and precision that's greater than any of the other tools out there and can immediately address the challenges of these 2X and 1X nanometer-type devices through-silicon-vias and micro bumps. The other tools that are in the marketplace that we ultimately would compete against are tools that were used on larger features and they're trying to migrate that technology into this space. So we have a technological lead, and therefore we have an adoption edge, and we're really the first movers in this space.

Great. Congratulations. Thanks.

Thank you. Our next question is from Michael Amari with Amarico, Inc. Your question, please?

Hi, Timothy. Congratulations on a great quarter.

Thanks, Michael. Good to hear from you.

How have you been?

I'm doing fine, better than two or three years ago, right?

That's for sure. That's for sure. We have big memories from when the stock was $1 or $2. At any rate, I'd like to just ask you, how were you affected by the -- Japan's earthquake, if any, and did you have any (inaudible) or anything?

Michael, thanks for asking that question. We were trying to be cognizant of time and also the fact that a lot of companies have addressed that and didn't really want to add words that were not -- didn't contribute any meaningful information. But first of all, none of our facilities in Japan were directly impacted, and none of our employees were directly impacted, so we were very blessed from that perspective. The environment in Japan, however, is still difficult with the rolling blackouts and some of the communications and transportation issues. And then there are some supply issues that have come up in the areas that are actually secondary impact to our customers, such as slurries and photoresists and so on. So it is impacting our end users, but we don't have -- we haven't had a direct impact on our own day-to-day operations in any meaningful way.

Great. Thank you, and keep the good work, and stay well, sir.

Thank you, Michael.

Thank you. Our next question is from Steven Shapiro with Intrepid Capital. Your question, please?

Yes, hi. Two questions for you, one on metrology in general. Could you just talk about your share or competition specifically with respect to KLA? Do you think that you're taking share from them, and how significant is that? The second question I have is just sort of broader. If I look out over the next couple of years, what's happening in terms of the total available market for you guys, if there's any way to measure that in terms of, say, machines per line, metrology steps per line? I mean, is that sort of driving demand over the next couple of years, and where are we today, and where do you think we go along that metric?

Sure. So let me try to respond to those as I recall them. With regard to market size, we do actually -- I'd like to refer you to the investor report where we've actually broken down the different served markets for OCD and our overlay and our thin films and so on. I don't have that sheet in front of me, but it's got a nice segmentation.

With regard to our position, we're in the market. As you rightly pointed out, our primary competitor on the high end tools has been KLA, and our primary competitor on the integrated metrology is a company called Nova. And when you roll up the numbers as best we can, we believe that there is solid evidence to suggest we are continuing to gain market share in that space based on our revenue growth and the customer wins, the competitive wins that we've been able to directly and indirectly announce over the last several quarters.

With regard to the total SAM, I refer you back to that investor report or presentation that's on our Web.

And then you wanted to ask about trends in metrology. So we really like this space. One way we look at this thing is we're into a space of three-dimensional metrology, where you need to be in line and non-destructive. And if you look at trends, such as in lithography, lithography's gone from patterning to double patterning to double double patterning, and every one of those steps drives the need for additional measurements. Furthermore, as they try to squeeze yield, they're making more measurements on a wafer, not only more measurements per -- wafer to wafer or total number of wafers. So our outlook we believe is that there's a growth in the number of measurements being made, the growth both on number of wafers and total wafers, and a growth of the number of steps where you need to make the measurements. And we believe that that gives us a pretty robust outlook for just petrology in gen- -- process control metrology.

Add to that the fact that we've made a couple of key acquisitions, notably the one we've referred to, the UniFire, which has expanded our served market pretty dramatically, and it's the combination of the growth of the intrinsic markets that we're serving and the acquisitions that have expanded our total available market.

Thank you very much.

You bet.

Thank you. We have no more questions at this time. I would now like to turn the call back over to Tim Stultz.

Thank you again for joining our call. We continue to be optimistic about the business environment going forward, and we feel confident in our ability to continue to execute and deliver above average performance and solid financial results.

Finally, I tip my hat again and give special thanks to all the folks at Nano, who make it happen and who are directly responsible for all our accomplishments and whatever success we do enjoy.

Thank you for joining our call. We look forward to reporting to you on our second quarter results in July.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect, and have a wonderful day.