Onto Innovation Inc (ONTO) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nanometrics First Quarter 2014 Financial Results Conference Call. (Operator Instructions)

Please note that this conference call is being recorded today, April 29, 2014. At this time, I would like to introduce your host for today's conference, Claire McAdams. You may begin.

Thank you, and good afternoon, everyone. Welcome to the Nanometrics First Quarter 2014 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 first 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 PM Pacific, this afternoon. The press release and supplemental financial information are 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, shifts 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 2013, 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 quarter, some brief comments on the industry environment, an update on our business outlook, and guidance for the June quarter.

From a financial perspective, the first quarter came in largely in line with our expectations. Revenues and earnings both topped the midpoint of our guidance, largely driven by strong sales of our integrated metrology and Atlas products into the advanced memory and foundry markets.

Notably, our sales of IMPULSE integrated metrology tools into the foundry market hit a record high. In addition, UniFire sales reached a new quarterly record, with business coming from both advanced packaging, as well as data storage customers.

And finally, our sales into China were also at a record level, as we completed the installation and acceptance of both Atlas and IMPULSE tools for Phase 1 3D NAND production by a leading memory manufacturer.

What is especially encouraging to us is the continued adoption and expanding use of our optical critical dimension, or OCD, solutions for the most demanding applications of device development in fabrication by an increasing number of leading-edge customers, as well as the growing strength of our overall competitive position within the process control and metrology market.

Let me highlight some of the key positions we have established, which positively contribute to our long-range business outlook. First, our efforts to penetrate and benefit from increased spending within the foundry market has resulted in share gains in the development and manufacturing of leading-edge devices.

Second, our role as a key player in the development and production of 3D memory devices, both for NAND as well as DRAM, with every company investing in 3D memory using our OCD tools.

Third, our OCD tool [of record] position for current and next-generation advanced logic development and high-volume manufacturing. And fourth, the growing success and increased adoption of our UniFire platform for advanced 3D packaging and data storage applications.

What is also very encouraging is that with our recent share gains, particularly in the foundry, our business model and revenue mix across device types and markets are becoming more balanced than ever before. In addition, we have growing contributions from our integrated metrology and advanced packaging product lines.

This reduction in business concentration, with revenue contributions from a larger set of customers and broader line of products lessens our overall exposure to swings by specific customers and/or market sectors, and gives us a more balanced industry profile.

Now turning to the topic of the spending shifts within the industry, in particular in this second quarter, we see a strengthening in both our DRAM and foundry businesses. DRAM investments are being driven by technology conversions to the 2y node, while foundry is being driven by capacity investments in 20-nanometer devices and technology [buys] for next-generation FinFET development.

These increases in spending, however, will be offset by pauses in 3D NAND and advanced logic investments by IDMs.

Last year we expected that the middle of the year would be strong for us, characterized by sequential quarterly revenue growth. Since then, there have been delays reported in a number of projects where we have strong participation, chiefly 3D NAND, 16-nanometer foundry, and 14-nanometer logic.

Whereas delays in the timing of these projects would certainly impact our revenue outlook for 2014, we still see significant year-on-year growth, which meaningfully outpaces industry spending, largely driven by our share gains in foundry, integrated metrology and the growth of our UniFire business.

Importantly on a long-term basis, we continue to remain very optimistic about our business outlook for the following reasons. First, share gains and increase in the [depth engagement] on next-generation technology developments which are expanding our footprint at key customers and within the broader process control market.

Second, growing dependence upon OCD metrology in all areas of device fabrication, from transistor formation to middle interconnects, which is increasing the demand for our tools and solutions on a wafer-start-per-month basis.

Third, the expanding deployment of advanced process control strategies using feed forward and feed backward metrology data to accelerate and improve the yield curves on leading-edge devices, which is in turn growing the SAM for our products and solutions.

Fourth, multiple pattern lithography, driven largely by continued delays in EUV, is increasing the demand for etch and process control solutions on critical layers, particularly for FinFET logic and DRAM memory devices.

And finally, the rise in investments in advanced packaging by every one of the industry leaders, which will drive increased demand for our UniFire products.

In summary, we continue to believe we have significant tailwinds that will serve us well through 2014 into 2015 and likely beyond. We remain committed to our long-term strategy of growing our business through market share gains and expansion of our SAM, principally by bringing to market leading-edge products and solutions, through investments in R&D and applications development.

We are also steadfast in meeting our commitments to our existing and newer customers, to provide technology applications and service support in multiple global locations, as they adopt and begin the fan out of our products and services in their most advanced fabs.

Based on these objectives, we will continue to strike the right level of OpEx spending, balancing between short-term business realities, such as pauses in industry spending, and longer-term strategic investment opportunities. We believe this is simply the best way to meaningfully grow our business and deliver long-term shareholder value.

With that, our guidance for the June quarter is as follows- revenues of $47 million to $51 million, down 5% at the midpoint. And on a non-GAAP basis, gross margin of 47% to 50%, operating expenses of $22.1 million to $22.9 million, and earnings between a $0.03 loss to an $0.08 per share profit. 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 in the Investor section of our website.

First quarter revenues were $51.6 million, up 12% from Q4, and up 110% from Q1 2013. Product revenues increased 15% to $43.3 million, compared to $37.6 million in the prior quarter, driven primarily by strong sales of our integrated products into the memory end market and increased sales of our UniFire product.

Automated tool revenues increased 8% over the prior quarter, and comprised 66% of total revenue. Integrated tool revenue increased 127% over the prior quarter, to comprise 13% of total revenues. Materials characterization tool revenues declined 24% to comprise 5% of total revenues in Q1. And service revenues decreased 3%, to comprise 16% of total revenues.

By end market, the largest increase occurred in memory, which increased 53% to comprise 64% of tool revenue. Much of this increase was driven by the significant number of tools shipped to a new NAND fab in China, all of which were recognized for revenue in the first quarter. The increase in Q1 was driven by NAND, while we expect Q2 memory revenue to be driven primarily by DRAM.

Sales into the foundry end market increased 9% to comprise 12% of product revenues. Sales into the logic, IDM and data storage end market decreased 40% to comprise 16% of product revenues. And revenues into the LED, silicon wafer and discrete end market increased 9% to comprise 8% of total tool revenues.

Customers representing 10% or more of total revenues for the quarter were Samsung at 52% and Intel at 13%. As a reminder, our revenue segmentation information is available on our website, as I mentioned earlier.

Turning to other P&L metrics, my prepared remarks regarding the income statement refer to non-GAAP measures, unless I identify the measure at GAAP base. These measures exclude the impact of the amortization of acquired intangible assets.

Our Q1 gross margin was 48.1%, just below the midpoint of our guidance, due to less-favorable product mix. Product gross margin decreased slightly to 50% from 50.6% due to the aforementioned less favorable product mix. And service gross margin declined to 38.4% from 41.7%, due to lower service revenues in the quarter.

First quarter operating expenses increased $1.5 million from Q4 to just over the low end of our guidance, reflecting the normal seasonal increase in payroll and other expenses, and the expected shift in timing of R&D program spending from the prior quarter.

Looking forward to Q2, the expected increase in operating expenses of $100,000 to $900,000 is related to spending on R&D program. As we indicated in our last earnings call, we expect spending to begin to come down in the second half of 2014, due to the typical seasonal decline, the timing of R&D program spending, and the realization of savings from the consolidation of our smart product line activities into our York UK facility.

Our GAAP tax rate for the quarter was 26.9%, below our expected tax rate for 2014 of upper 30s, due to a discrete one-time benefit of $300,000, resulting from an accounting standards update related to the presentation of unrecognized tax benefits.

Net income in the first quarter was $2.1 million, or $0.09 per share, compared to $1 million or $0.04 in the prior quarter. At March 29th, our cash and investments were $88 million or $3.69 per share.

Our DSO was 57 days, reflecting the impact of revenue recognized from prior quarter shipment. Inventory decreased $1.3 million to $40.1 million at the end of the quarter, and our tangible book value was $194 million or just over $8.00 per share.

We ended the quarter with headcount of 543 employees, a net increase of 7 employees from the prior quarter. And with that, I'll turn the call over for questions. Operator?

Thank you. (Operator Instructions). Patrick Ho, Stifel Nicolaus

Thank you very much. Tim, given some of the new penetrations that you talked about at the most advanced nodes at the foundries, do you see any changes in the timing of their respective rollouts of FinFET that changes your outlook, I guess in terms of both revenue recognition as well as shipment of tools, to those customers for 2014?

Patrick, that's a good question. Thanks for calling in. I don't know if I have a shift in our outlook in terms of timing. We certainly see that there's been a general struggle with getting FinFET yields across multiple players. What's working for us though, in a positive way, is our engagement with multiple foundry customers all in FinFET. So we have a broader base of foundry. It's not tied to just one large spender.

Great. That's helpful. The second question, going to the memory side of things, and you briefly mentioned in your prepared remarks, but maybe you could give a little more color. As DRAM migrates to the 20-nanometer node, there's, as you mentioned, more double-patterning. Can you give a little color of where OCD and specifically for you guys, where you're seeing the type of applications and increased capital intensity as it moves to the back DRAM node?

Yes. So I think there's two things to think about, if we talk about the benefits on the DRAM. The first one is we see something like a 20% to 30% increase in intensity of the use of OCD in moving to that next node. DRAM is particularly demanding in the process sequence, as I'm sure you know. And the role of OCD is much more critical and more highly used than, say, in Flash.

Within the DRAM fabrication process, the key areas for us or the key benefits, are in the transistor and the capacitor formation, where there are critical lithography and multiple patterning steps that are being employed.

Great, final question from me; you mentioned some of the traction you saw in advanced packaging this past quarter. From a broader industry perspective, can you give us a little bit of color of the advanced packaging trends? There's talk out there about the high cost and the limited amount of market demand. How do you see the adoption of overall advanced packaging this year and into 2015? Is volume more a 2015 story?

Yes, I believe we're kind of at the beginning of the S curve, if you will. And we've been kind of bouncing along. We have quite a few tools. We have almost three dozen tools out in the field, spread out amongst multiple customers.

But when you look where the inflection is going to occur, most of the applications right now are on the micro bump, micro pillar area. We expect to see more use on the Through Silicon Via, and we really do see it picking up and becoming meaningful, but more in the 2015 timeframe.

Thank you very much.

Josh Baribeau, Canaccord

Hi, thanks. Maybe just a follow up to that previous discussion; Tim, you had mentioned I think you have somewhere around three dozen tools spread along the advanced packaging—those customers. Can you help us out with maybe the mix between the foundries that are adopting some of those processes as well as, or the mix relative to the OSATs?

So most of our tools are actually with device manufacturers. We don't have a large penetration in OSATs. So it's really between the advanced logic market, where we have tool record position, as well as in the foundry market. And we also have them in the memory. But OSAT is really not a market for us or an area where we've received any meaningful traction.

Got you. And then on the 16-nanometer foundry, I believe last quarter it was a similar issue with the revenue recognition in China, not so much necessarily a new customer, not a new fab, but a new customer. Any—is there still some revenue recognition that we should expect or has that been mostly revenue at this point at that customer?

Speaking to that revenue recognition, the reason we highlighted it last quarter Josh, was it represented a much larger percentage of our total outlook than was historical for us. We always have some tool acceptance, installations that we go through. But we have nothing extraordinary going into this quarter, and pretty much should be plug and play as long as we get the tools delivered, installed. We don't expect any unusual exposure or risk against revenue recognition.

Great. And then maybe finally from me and maybe for Ron—anything that you can do or that you can discuss about potentially lowering your tax rate on a go-forward basis, something about different income jurisdictions or anything like that?

Yes. I think in the near term, and we've looked—there's a number of strategies out there. The issue is that there are buy-in periods to transfer the IP offshore before you start to see the benefit. And so it's very difficult to do anything in the short term. So we're continuing to look at it, but I would expect in the short term, we're not going to see a substantial movement off of our current tax rate.

Great, thanks. I'll pass it on.

Mahesh Sanganeria, RBC Capital Markets.

Hi, this is [Sean Asking] for Mahesh. Thank you for taking my questions. Hey Tim, I remember last quarter you mentioned that we're not going to see a softness around middle of the year. If I remember correctly, you said that Q1 is strong by memory, which was it—[was the portal paid out], as you said, and then you said, expect foundry to pick up in Q2 and then memory again in Q3.

I'm just wondering, given your comments to earlier questions—you said DRAM is going to pick up and I just wondered—has that been changed?

That's a good question. And yes, our view certainly has changed somewhat since we had our last call, and particularly driven by the second phase, the timing of the second phase 3D memory investment, as well as some slowdown in spending on the [DANS] logic toward the end of the year.

On the other hand, I would like to point that if you look at our quarter-on-quarter performance, our last quarter versus Q2 guidance, we're actually within one tool, roughly one tool of being flat quarter on quarter. So I still think of Q2 as a pretty strong quarter, with its midpoint only being down 5%, and really within striking distance of being flat with one tool.

Got it, thanks. And then one more question, about market share in OCD. Is there any change in the competitive landscape? Can you provide more color on there? Because we all know that KLA is the leader in the market and then you're competing against more or less Nova Measuring. Can you just talk a little bit about the competitive landscape now?

To the extent we can speak, we'll speak to it in term of the role. Certainly KLA is very strong and is the leader in process control and in overall inspection and metrology. But when you look into the served part of the market, which is our principle area of OCD, we consider ourselves, and believe that we can demonstrate that we are the leaders in that market.

Great. Thank you very much.

Edwin Mok, Needham & Company

Great. Thanks for taking my question. So Tim, I have a little longer-term question. So if I look at the true inflection point that we talk about, right—3D NAND as well as FinFET, right? Can you kind of quantify roughly how much increased capital OCD intensity you get from playing in—let's say 50-nanometer NAND to 3D NAND? And also in logic from 20-NAND in your planar gate to FinFET? Any way you can kind of give us some color on that?

Well, I'll try to give you a little bit. It's a good question, Edwin. And I think we have a pretty good understanding of what the increase in intensity of OCD is going from planar to FinFET technology, and that tends to be on the order of 25% to 35% increase in OCD utilization. We also see something similar in terms of the magnitude in the second-generation DRAM, where there's a lot of use.

I think that the 3D NAND, we see incremental usage, but it still has yet to play out. They don't have a high volume manufacturing environment where they've got a stabilized process. So we see some increase, but it's too early for us to tell you whether it's 10%, 20% or 30% incremental to the planar devices.

So it's possible that at some point down the road as they develop and finally figure out how to run the 3D NAND process smoothly, there might be some incremental (inaudible) opportunity then? Is that fair to say?

Yes. I believe that our current perspective is that there will be incremental going from planar to 3D, but we just don't have a sizing of it, since there's nobody really running a factory with any meaningful wafer starts.

Great. That's very helpful. And then if I look at your outlook, the outlook actually looks pretty good. I was just curious, how much of that—are we seeing any shift within the product group in the outlook? I know you mentioned about a foundry being a little higher on the coming quarter. But any shift between like OCD versus for example UniFire or SPARK (inaudible)?

I'll make sure I understand—a shift in the market share?

Oh, no. I'm sorry, in terms of product revenue mix, from the first quarter to the second quarter.

Oh, revenue mix. So the big drivers for us, as we mentioned, are going to be foundry and DRAM. There's going to be a drop off of Flash, NAND, 3D and so on. And so we see a nice contribution in there. We came off a very strong quarter with UniFire. So I think the place to look for what's carrying us primarily in the second quarter will be the DRAM and foundry parts of our business, supported largely by our Atlas platform, which is going to be hitting some pretty nice levels.

Great, that's very helpful. And then last question; in terms of the SPARK, (inaudible). I'm just curious where are we on that? Are we—can you give us a quick update in terms of—are you at one customer or five customers and in terms of progress, when do you think you can hit the kind of high-volume ramp for that product?

That's a great question. We have multiple customers for the SPARK, but not nearly where we thought we'd be. We're significantly behind what we thought we'd be on the macro inspection part of the market. We have a couple of applications where we think there's some demand. We're working on the platform to reposition it to the areas upstream. And we have some work in front of us.

So that's one—stay tuned. We've got more to talk about. But right now I don't have anything great to tell you about it.

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

(Operator Instructions). Graham Tanaka, Tanaka Capital

Hey Tim, how are you? Just wondering if you could give—give us a pretty good view on the overall wafer equipment spending trends. We've had a little blip here this year, and I'm just wondering if you were seeing what your trends are, that you see for the next year and a half or so, the rest of this year and into next year? Thanks.

OK. Graham, thanks for calling and good to hear from you. I'll tell you our view of the world, but I'm not sure that I'm standing on the tallest mountain to give you that. But when we look at—I think that most of us are reeling in our expectations of spending WFE from 2014, from the 15% to 20% numbers that we were talking about a couple of quarters ago, to somewhere between flat and 10%.

For me, I think that that's terrific news. I don't see that as negative business, or negative news, because we're going into our fourth and potentially fifth year of $30 billion WFE spending. And that's a very healthy environment, without the huge swing. So I think that's really great.

If I look at our technology engagements with the limited number of customers and what the timing will be, for instance in the advanced logic devices and the next generation of the 3D NAND and memory devices, I think 2015 has the potential to be another $30 billion, plus or minus a couple of billion dollar, a year. So that turns out to be really great.

And I think that some of the volatility we've experienced in the past is not just a reflection of what goes on between yields and capacity. But I think there you see more rational spending by larger companies, that is, more try to market—market opportunities with some evidence of efforts to make sure they don't lose market share; as opposed to the huge swings that we were subject to several years ago.

And in an environment of modest growth in WFE spending, what do you think now that you've gotten some traction in SPARK and et cetera, that what kind of growth are you focusing on for NANO versus overall WFE spending?

Yes. I'll tell you that I think that our growth is driven more by market share gains, as you point out, as well as the emergence of some of the other products and their contribution to the revenue. Adding a foundry link to our business is huge for us, since our business has been carried by advanced logic and memory for quite a few years. I think that if you assume that the spending stays flat, at least there's no reason why we shouldn't be in double-digit growth, based on the incremental markets we're serving and the incremental positions through share gains.

Good luck. Thanks.

Tom Diffely, D.A. Davidson

Yes, hi. This is Andrew Masuda calling in for Tom Diffely. Thanks for taking the question. I was just wondering if you could talk about your guys' efforts to expand the automated metrology business within the foundry market.

So, could you be a little more specific Andrew, on that? Are you talking about—?

I mean obviously you guys are making nice traction on the integrated side and I was just wondering if you've made any traction on the automated side with the Atlas tools.

OK. I understand your question, now. Actually, we have made some nice gains in integrated metrology, coming off low numbers. But the strength of our story is tied directly to our Atlas positions. And our Atlas positions are the ones that are really gaining significant traction inside of the foundry, as well as playing the key role in DRAM, in Flash and advanced logic.

So if I conveyed the story that our growth story is tied to integrated metrology, I've done a disservice to our Atlas platform, which is really the—is the big dog in our product portfolio.

OK. Thank you.

You bet.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to Timothy Stultz for any further remarks.

Well, thank you. And thank you once again for participating in our call. As always, I direct your recognition for all that we do well to the terrific team of employees and our business partners who make it all happen one day at a time. We look forward to reporting on the results of our operational and financial performance for the second quarter in July. And with that, we conclude today's conference call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.