Onto Innovation Inc (ONTO) 2013 Q4 法說會逐字稿

Good afternoon and welcome to the Nanometrics fourth-quarter and full-year 2013 financial results conference call. (Operator Instructions). Please note that this conference call is being recorded today, February 4, 2014. At this time, I would now like to turn the call over to your host, Claire McAdams. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Nanometrics fourth-quarter 2013 financial results conference call. On today's call are Dr. Timothy Stultz, President and Chief Executive Officer; and Ronald Kisling, Chief Financial Officer. Shortly, Tim will provide a recap of the fourth quarter and our perspective looking forward. Then Ron will discuss our financial results in more detail, after which we will open up the call for Q&A.

The press release detailing our financial results was distributed over the wire services shortly after 1:00 PM Pacific this afternoon. The press release and supplemental financial information are also available on our website at www.Nanometrics.com.

Today's conference call contains certain forward-looking statements including but not limited to financial performance and results including revenue, operating expenses, margins, profitability, and earnings per share. 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 timing of product acceptance; general economic conditions; changes in levels of industry spending; the adoption and competitiveness of our products; industry adoption of new technology and manufacturing processes; customer demand; shift in timing of orders or product shipments; changes in product mix; our ability to successfully realize operating efficiencies; and the additional risk factors and cautionary statements set forth in the Company's Form 10-K on file for fiscal year 2012 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 statement.

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

Thank you, Claire, and good afternoon, everyone. We appreciate you taking the time to join us on our call today.

Today my prepared remarks will address highlights of the Company's 2013 performance with a focus on execution against our key corporate initiatives, followed by our outlook going into 2014 and guidance for the March quarter.

Beginning with our fourth-quarter results, revenues came in at the high end of our guidance with gross margins and earnings slightly better than our expectations. Q4 was also our third consecutive quarter of revenue growth, which has averaged 24% per quarter since the beginning of the year, and marked an earlier-than-expected return to profitability due to better-than-forecast gross margins and lower spending in operations.

Whereas we're certainly pleased with the trajectory and continued improvement in our financial performance, it is the progress we have made against our key strategic initiatives that strengthens our long-term business outlook and sets the stage for what could be a very exciting year for Nanometrics.

Starting with our efforts to gain market share in the foundry sector, we have success on multiple fronts. We now have a total of four foundry customers using our Atlas OCD platform, three who have adopted our UniFire for advanced packaging, and a key IMPULSE integrated metrology tool of record position for advanced process control of critical etch applications at the 20-nanometer and 16-nanometer nodes.

All of the new foundry accounts won this year are pure play foundry customers.

A second key initiative in 2013 was to leverage our extensive experience in the OCD metrology using the manufacture of FinFET devices in order to expand our OCD footprint in logic. Beginning with a strong position with the leader in the FinFET technology, during the year we added two additional customers further strengthening our overall position in this critical and demanding area of device technology.

In 2013, we also defended our existing strong position in OCD metrology for memory devices as the industry began to shift from planar to 3D architectures. Our Atlas and IMPULSE platforms are already being deployed for high-volume manufacturing and production of VNAND memory devices by one customer, as well as being used by two others in 3D memory development programs.

And finally, with the uptick in investments in advanced packaging, we're seeing increased demand for our UniFire. The UniFire has now been adopted by seven customers, most of whom already have multiple tools. We feel well positioned in this emerging market with industry-leading tools and solutions and tool-of-record positions at nearly every major account.

The take away here is that our new account penetrations, market share gains, and strong positions within emerging markets constitute strong tailwinds for our business as we enter 2014, a year which is expected to see continued investments in advanced technology, the rollout of next-generation devices, an increase wafer/fab equipment spending on a year-over-year basis.

Longer term and of significant importance, our products and technology road maps are at the very heart of the ongoing transformational activities driving the future of the semiconductor industry. Let me briefly highlight the important trends that benefit and will continue to drive our business going forward.

First, as process tolerances become ever tighter and less forgiving, the dependence upon process control technologies to meet yield and manufacturing cost challenges is increasing, driving increased demand for our current and next-generation products.

Second, an outcome of the delays in delivering EUV lithography has driven the need to develop and implement complex processing techniques such as multiple patterning to realize the reduced dimensions needed for leading-edge devices. Multiple patterning increases the number of steps in the process flow, which in turns creates incremental demand for tools in the litho sequence such as scanners; etchers; and importantly, process control metrology platforms.

Third, foundry spending in the competitive landscape within that sector have been increasing at a rate greater than other areas of the semiconductor industry. FinFET technology is becoming ubiquitous across all of the leading-edge logic devices. Current and next-generation FinFET, as well as future generation 3D transistors such as incorporating nano wires, will incrementally increase demand for in line, high-speed, nondestructive metrologies capable of measuring complex 3D structures.

OCD is a key enabling technology for 3D. This, combined with our strengthened positioned within the foundry market and multiple product platform placements within the industry leaders, will lead to an increase in contributions to our business from this growing sector.

Similarly, VNAND memory devices, with road maps going up to 96 stacked layers, have a very high dependency upon precisely controlling repeated deposition and etch steps. OCD-based process control metrology and advanced process control, or APC, strategies will play an integral role in helping the chip manufacturers develop and produce these 3D memory devices.

Next, there is an expansion of the use of APC strategies utilizing feed-forward and feedback techniques to tighten up integrated process variation across multiple process steps and tools. Our integrated metrology platforms, along with our data generation and analysis capabilities, are key enablers to this trend and are already playing an important role in this growing market.

And finally, advanced 3D packaging, driven by performance, cost, and form factor constraint, is still a relatively new market but is starting to take off. It, too, is creating incremental demand for specialized metrology and inspection tools such as the UniFire that meet the unique performance and cost challenges of back end-of-line fabrication and assembly procedures.

Summing it up, with the tailwinds derived from success of our key initiatives, industry trends favoring our tools and technologies, and sustained healthy investment by the leaders in our industry, 2014 is setting up to be a very good year for Nanometrics.

In addition, we have an exciting pipeline of innovative new products and technologies, some of which we will launch this year, which are aligned to our customers' road maps and will continue to strengthen our competitive position.

But even with the wind at our backs, we still have much to do, many challenges going forward, and more opportunities to strengthen our business and growth stakeholder value. Our operational execution must be excellent, meeting our customers' needs while exceeding their expectations. We must constantly defend our leadership position through new innovation and continued improvement in our products and technologies. We must continue to focus on and pursue the numerous opportunities to further increase our market share and expand our footprint within our key accounts. And we must further improve our financial performance, delivering bottom-line results consistent with being a leader in the industry.

Now, turning to our near-term financial outlook and guidance. In our Q3 call, we discussed the unusually large number of shipments of tools to new fab locations where revenue recognition would not occur until the following quarter as it required receiving signoff on the first tool of each type. As we sit here today, nearly half of our revenue forecast for Q1 is comprised of either new tools, new fab locations, or a new customer, and is therefore subject to first-tool signoff prior to revenue recognition.

We bring attention to this fact as this proportion of revenue subject to signoff is highly unusual for us. Importantly, however, the overwhelming majority of these tools have already been shipped. Many of them sold and even paid for. Further, all indicators and activities, internal and external, are positive and on track to occur within the quarter. There is, however, risk that a delay in the timing of customer signoff could result in a shift of a significant portion of our forecast revenue from Q1 to Q2.

With that, our guidance for the March quarter, which assumes timely sign up for the aforementioned tools, is revenues ranging between $48 million and $54 million, up 4% to 17% over the last quarter. And on a non-GAAP basis, gross margin of 48% to 50%; operating expenses of $21.9 million to $22.5 million; and earnings of $0.01 to $0.13 per share.

Ron.

Thank you, Tim, and good afternoon. Before I begin my comments, I would like to remind you that a schedule which summarizes GAAP and non-GAAP financial results discussed on this conference call, as well as supplemental revenue segment information by product, end market, and geographic region is available from the investor section of our website.

Over the course of 2013, we saw a strong rebound in business level with sequential [quarterly] revenue growth averaging 24% from the first quarter to the fourth quarter driven by growth in spending by our largest customers.

Fourth-quarter revenues were $46.2 million, up 18% from Q3 and up 52% over Q4 2012. Product revenues increased 25% to $37.6 million compared to $30.2 million in the prior quarter, driven primarily by growth in sales of our automated tools at our largest customers. Automated tool revenue increased 36% over the prior quarter and comprised 68% of total revenue. Integrated tool revenue decreased 32% from relatively high Q3 levels to comprise 7% of total revenues. Materials characterization tool revenues continued their improvement off of historically low levels in the second quarter to comprise 7% of total revenues in Q4. And service revenues decreased 4% on lower upgrade sales to comprise 18% of total revenue.

By end market, the largest increase occurred in memory which increased 63% to comprise 48% of tool revenue. The increase in Q4 was driven by DRAM where the increase we see in Q1 will be driven by Flash.

In the fourth quarter, we shipped a significant number of tools to a new NAND fab in China, which we expect to recognize as revenue in the first quarter.

Sales into the foundry end market increased 11% to comprise 13% of product revenues.

Sales into the logic and IDM end market decreased 4% to comprise 31% of product revenue. And revenues into the LED, silicon wafer, and discrete end market increased 19% to comprise 9% of total tool revenue.

Customers representing 10% or more of our total revenues for the quarter were Intel at 30%; Samsung at 25%; and SK hynix at 19%. This same revenue segmentation information for the full year is available on our website as I mentioned earlier. I will point out that for the full year 2013, Intel comprised 30%; SK hynix, 18%; and Samsung, 14% of total revenues.

Turning to other P&L metrics, my prepared remarks regarding the income statement refer to non-GAAP measures unless I identify the measure on a GAAP basis. These measures exclude the impact of amortization of acquired intangible assets, restructuring charges, and write-downs of inventory of discontinued product.

Our Q4 gross margin came in slightly above the high end of our guidance range at 48.9% due to better-than-expected warranty and manufacturing variances.

Product gross margin improved to 50.6% from 48% due to the benefit of higher revenue levels against fixed manufacturing costs and the aforementioned favorable warranty and manufacturing variances.

Service gross margins declined to 41.7% from 49.7% due to the expected lower upgrade revenues compared with the prior quarter. As we look into Q1, our gross margin guidance range of 48% to 50% reflects a relatively flat product gross margin as changes in product mix will offset some of the benefits of increased revenue.

Fourth-quarter operating expenses decreased $604,000 from Q3, well below expectations due to a shift in timing of variable R&D program spending. The increase in our spending guidance going into Q1 reflects the normal seasonal increase in payroll and other expenses and the aforementioned shift in timing of R&D program spending. We expect spending to begin to come down in the second half of 2014 due to typical seasonal declines, the timing of R&D program spending, and realization of savings from the consolidation of our SPARK product line activities into our York, UK facility, which was initiated last quarter.

We saw a return to profitability in the fourth quarter with net income of $1 million, or $0.04 per share, compared to a net loss of $1.3 million, or $0.06, in the prior quarter.

At December 28, our cash and investments were $92.9 million, or roughly $4 per share. Our DSO was 61 days, reflecting strong collections and less back-end loading of sales during the quarter than we have seen previously.

Inventory increased $2.6 million to $41.4 million at the end of the fourth quarter.

We saw a large increase in deferred revenue, up $10.7 million to $25.5 million at quarter end due to the relatively large number of tools shipment subject to sign off. Our tangible book value was $187 million, or roughly $8 per share. And we ended the quarter with a headcount of 536 employees, a net decrease of 4 employees from the prior quarter.

And with that, I will turn the call over for questions. Operator.

(Operator Instructions). Weston Twigg, Pacific Crest Securities.

First, just to clarify on the Q1 revenue guidance, you said roughly half the revenue in Q1 or almost half the revenue in Q1 was on deferred revenue are new tool shipments, or new customers, or new sites. Does that imply than that the demand profile for Q1 is really only roughly half the revenue guidance? Or is there something else I am missing, maybe more deferred revenue?

Wes, that is a great question. I'm not sure how to answer it.

We have had a lot of shipments of tools in Q4 that went into the Q1. And it is a normal pattern with the exception of the fact that a lot of tools require signoff. We only wanted to highlight the uniqueness of the signoff requirement as opposed to the normal acceptance procedure which is revenue recognition upon shipment.

Okay. Let me ask another question, if you would. Just on the OCD traction at the foundries, you have four foundry customers. Last quarter, I think you gave us a little more color on the potential to win some business at 20-nanometer versus the FinFET process. And you may have mentioned that at the beginning, but I missed it. Could you give us an update on whether or not you are getting 20-nanometer traction or if we need to wait for FinFET ramps to see that OCD business ramp up?

So, we have gotten some 20-nanometer business in the OCD area. And at least one customer is trying to use similar tools both first 20 and 16 in the same fab. So, we benefited from that even though we were targeted on 16 nanometer, they did pull us in and use this on the 20, as well.

Okay, so we could expect you to benefit from that earlier 20-nanometer ramp.

We're getting a little bit of that. That is correct.

Great. Thank you very much.

Tom Diffely, D.A. Davidson.

Looking at this year, what do you think the linearity of just the industry is going to be? It sounds like a lot of the front-end players are expecting business to be obviously pretty strong here in the first quarter, maybe dying off a bit in the middle of the year and coming back in the fourth quarter. Just wondering if you're seeing similar transfer the industry right now.

Yes, actually, we are seeing a slightly different pattern. We have certainly had some improvement in the strength in demand, but we actually see strength in the middle of the year -- growing strength coming off of Q1 into the middle of the year. We don't see it getting softer right now in the middle as some of the other ones have reported.

Okay. And do you see a certain pattern as far as memory early, foundry in the middle, memory late again? Or how do you see the mix that way?

Yes, it is sort of playing out there. There is certainly -- as most folks know, there is a huge amount of investment, a lot of cash going into memory in this first quarter. Then we start to see foundry picking up in the second quarter. We see some additional memory in the third quarter with foundry continuing, and then a more balanced profile going into the fourth quarter.

Okay. And then what was your back-end mix during the quarter?

We don't -- I'm not sure. You're talking about in terms of like -- are you asking specifically to our advanced packaging and UniFire?

Yes. Wonder if that is a big enough section or segment yet to break out.

It is not. We haven't broken it out yet. We have to reach that 10% mark. But it is on track to being something that we can start to talk about, and we look forward to be able to break it out in the not-too-distant future.

Okay. And then just finally here, I wonder if you could quantify what you think the share gains mean to Nano versus the industry in the sense that if the industry grows 10% this year, how much additional would you get from the share gains from last year?

I don't have a good answer to that. I know that our projected revenue growth year on year is substantially higher than the projected spending increases. Part of that is we came off a rather weak year in 2013. But a lot of it has to do with the incremental contribution from the foundry area, the continued strength in the memory. We have really done a nice job of expanding our pure play foundry. And the UniFire's growth is going to be a nice incremental contributor, too.

Okay. And maybe just quickly for Ron, what do you see as the taxes for the year?

For 2014, we see that tax rate probably between 35% to 38%. If the R&D tax credit gets extended, that would come down by about 2% to 3%.

Okay. And then if you could make any comments at all about the margin progression beyond the first quarter.

I think, as we talked about in the last call and this call, mix is an important driver in terms of the margin in Q1. I think beyond that for a year as a whole, mix will continue to drive quarter-to-quarter fluctuations as we are starting to see significant contributions from some of our other products. For the year as a whole, we expect to see gross margins above 50%.

Great. Thank you.

Patrick Ho, Stifel Nicolaus.

Congratulations on a nice end to the year. Tim, in terms of 3D NAND adoption and the capital intensity that is rising in many of the process segments, do you see any bias for OCD metrology's adoption between automated versus standalone?

First well, thanks for the comment, Patrick. Appreciate the sentiment.

We actually are seeing incremental opportunity for OCD going from the planar to the VNAND of on the order of 20%. We're also seeing for ourselves we have gain some market share, and we will have increase participation on the integrated metrology in addition to our position with the automated. So we really like that space. We like what is happening. And I think it is going to bode well for us going into the future.

Great. You also mentioned multiple patterning in your prepared remarks and the opportunities there. As the DRAM industry migrates to 20 nanometers and the likelihood that they will have to use double pattern at least for that node and giving you strong presence there, what are some of the opportunities you see in that transition and whether you think that is more of a 2014 or a 2015 story?

That is another good question. The DRAM shrinks are starting to be a 2014 story. And we will see with the multiple patterning going down to the 24 nanometer, incremental demand for our tools. But it does play into 2015 assuming that the DRAM pricing remains what it is and the big companies continue to invest in those technologies. But in either case, multiple patterning does translate to multiple tools for us.

And maybe not to get really granular, do you see what the percentage increase from the last -- whether it was then the mid-20s or the 30 nanometer node to 20, what the incremental opportunity on a percentage basis is for you guys?

I don't have it right in front of me, but I know that we have seen like 20% incremental I believe going from NAND to VNAND. We have seen about 25% on the foundry. And I would expect something on that order going into the new DRAM if they embrace as much multiple patterning as the other device types did.

Great. Thank you very much.

Mahesh Sanganeria, RBC Capital.

Tim, the question on what you are seeing on the advanced packaging. Is it based on your what you're seeing -- does that become really a significant portion in next couple of years?

Yes, Mahesh, actually I do believe as I said, I think we are on track to starting to see the UniFire starting to create -- cross the threshold of the 10% contributor to our business. It is primarily focused on advanced packaging. Plus, we have some applications that our SPARK has gotten a toehold on. And so collectively, I think that becomes an important part and the contributor to our overall business.

Okay. And on the answer on the discussion on the linearity, you said you were seeing something slightly different. And you gave us a pretty good indication how you are seeing it. Can you put that in context of when is that 20 nanometer ending and the 16 nanometer starting on the foundry side? And on the memory side, a broader adoption of 3D NAND, when do you see that? If you could talk a little bit more in terms of that technology adoption at different nodes, that would be very helpful.

Okay, I will try. It is all subject to change as we all know.

The way it is looking to us right now is I think it's pretty obvious there's at least one customer spending an awful lot of money on 3D NAND, taking tools in Q4 and a lot of tools in Q1. And there will probably be a bit of a pause after that.

Meanwhile, there are three other customers that are developing the 3D architectures. And they will start taking some tools for the development and pilot areas.

In terms of the foundries, we're in the middle of a 20-nanometer spends and ramps. There's going to be probably some benefits to us as we get some of the 20-nanometer business.

And then, I think the 16 nanometer starts to be realized towards the end of the year.

Okay. And one more clarification. Your Samsung revenues were much smaller in 2013. I'm assuming that is a function of the fact that Samsung spent most of its CapEx in Q4 which you got the cash but the revenue recognition comes in Q1. Is that a good way to explain that?

Yes, I think you've got a really clear picture of it. Samsung spent roughly half of its total CapEx in 2013 in the fourth quarter. For them, that is a spend. For us, it is an order and shipment. We actually have collections, but for revenue recognition that does not until we get that first tool sign off, which has kind of a domino effect. A lot of tools that have been put in place. Once we have the first tool accepted, all the other tools become recognized.

Okay, that is very helpful. Thanks, Tim.

Josh Baribeau, Canaccord.

Could you help me out with the mix of the deferred revenue between memory and foundry? You talked around it a little bit. Curious if you could share the mix between them.

We haven't historically broken out the mix of deferred revenue between the two. I think, though, as Tim talked about, a large portion of it is going into memory. Specifically with what is driving some of the growth, we expect to see in memory going into Q1 revenue in terms of NAND. So the biggest piece of the growth is in NAND but we don't break out the specifics.

Maybe the same question, but for the inventory at the customer site, is that memory or is that part of the foundry?

You're talking about evaluation inventory. It is a mix across because the inventory at customer sites is typically a valuation or it is the deferred revenue -- excuse me, the deferred inventory directly tied to the deferred revenue. So it matches the deferred revenue mix.

Got you. And again, this is probably been asked a couple of different ways, but I will try again in a different way. In looking at your presentations, previously you have shown a slide in terms of capital intensity for different next-generation processes. A lot of that, I think, was hypothetical, whereas now I think we have got a quarter or two, maybe more in terms of actual pilot production, mass production of these 3D memory structures and pilot production of FinFETs. Are there any changes to what you originally anticipated, obviously with the hope that it would be to the upside of the attach rate for optical metrology from what you originally anticipated before they went in production?

Actually, we're pretty pleased with the work that our team did in putting together this table, considering what information they had. It has played out pretty well. We have seen some incremental benefit on the advanced process control and some of the integrated metrology, but I think we have called the standalone OCD platforms and those opportunities pretty well.

Could you share how you think about the growth, let's say, in whatever time period you think about. Let's start with maybe 2014, but maybe longer term so you can be a little more specific so it is not like giving guidance. Can you talk about the growth from market share gains versus just overall increases in capital intensity? How are you thinking about the going forward?

I always think about it in three ways. The first one is what is the bait of the industry? What are they spend patterns can to look like? Which rising tide generally raises all boats.

The second one is market share gains.

And the third is that secular growth that will benefit us.

So we will put us side the spending patterns of the industry because there are smarter people trying figure that one out. I think that we have a lot of opportunity to continue to gain market share. We've got our foot in the door in a couple of new accounts. We're very pleased with it. But we don't have the position in those accounts as strongly -- we don't hold positions our strongly as we have in the advanced logic and memory. And we really look forward to gaining more market share and doing greater participation in the foundry business itself longer term.

And then the second thing is that we have some nice incremental contribution coming from the advanced packaging UniFire, which we have been working on for quite a while. That should be incremental to the business. And we have actually -- and taking a little bit of market share in the integrated metrology, which is also incremental.

So our focus generally is the only way we can meaningfully outperformed the industry is to gain market share. And also in concert with that, expand our footprint in a key account. And we just count on the spending patterns just to give us a little boost.

Great. And then sorry, Ron, one last one for me. I miss the mix of automated versus integrated in the quarter. Would you mind just repeating it?

Automated tool revenue was 68% of total revenue and integrated was 7% of total revenues.

Great. Thank you. I will jump back in.

(Operator Instructions) Graham Tanaka, Tanaka Capital.

Congratulations. If you just get a base feel for the market share as best you could guess for the last year now that that is in, just so we can gauge what the growth might be this year. Thanks.

So I don't know that the market share numbers are all again, Graham. Thanks for the comments.

We are confident that we have gained market share in the foundry business since we had almost none. We are confident we have gained market share in integrated metrology because there some slots and applications that we didn't have before. And those are probably the two most prevalent areas where meaningful and quantifiable market share has occurred. But we don't have all the numbers from all the other accounts and how they account for their own spending for me to give you an accurate number.

I still believe that we still have leadership in OCD technology across the board.

I didn't hear -- one of the guys was asking what percent lift you might get relative to whatever the industry CapEx gains are, equipment spends are. So say if equipment spend is up 10%, would you expect the market share gain to get more like a 20% gain, or 30% gain, or bigger than that?

Well, I think the way I was trying to respond to that was the lift is actually a smaller percentage of what is going to drive our revenues than market share gains and the contribution of the new businesses. The contribution in foundry -- if you look at the incremental revenues that we will begin reporting on the foundry side of it, as it starts crossing that 10% threshold, going to be -- dramatically overwhelm any changes in actual spending year on year, whereas current forecast on wafer fab equipment spending is only up 10%.

Our outlook and our quarterly growth and our growth rates are substantially above that. And it is really driven by market share and then the contribution of those of the products.

Thank you.

(Operator Instructions) And I'm not showing any further questions at this time. I'd like to turn the call back over to Timothy Stultz for closing remarks.

Well, thank you once again for participating in our call. And as always, I like to point out that the credit for all we do well belongs entirely to the outstanding team of Nano employees and Nano business partners whose talent, energies, and creativity help us successfully compete in a challenging and highly competitive industry. We look forward to reporting on the results of our operational and financial performance for the first quarter in April. And with that, we conclude our conference call today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.