Onto Innovation Inc (ONTO) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanometrics fourth-quarter and full-year 2014 financial results conference call. (Operator Instructions). Please note that this conference call is being recorded today, February 2, 2015.

At this time I'd like to turn the call over to your host, Claire McAdams. Please begin.

Thank you and good afternoon, everyone. Welcome to the Nanometrics fourth-quarter and full-year 2014 financial results conference call. On today's call are Dr. Timothy Stultz, President and Chief Executive Officer; and Jeffrey Andreson, Chief Financial Officer. Shortly, Tim will provide a recap of the fourth quarter and full year, and our perspective looking forward. Then Jeff 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 also available on our website at 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 general economic conditions, changes in timing and levels of industry spending, the adoption and competitiveness of our products, industry adoption of new technologies, customer demand, shifts in timing of orders of product shipments, timing of product acceptance, 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 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. Good afternoon, everyone, and thank you for taking the time to join us on our call today. Today, I will begin by briefly speaking to the highlights of the December quarter, then turn to key achievements and milestones made in 2014, with a particular focus on the relevance to our business opportunities and prospects. I will finish by providing our perspective on the industry outlook, and guidance for the March quarter. Following my prepared remarks, Jeff will provide you with a more detailed review of our financial performance.

Our December quarter came in largely as expected, with a strong snap-back in revenues, up 46% over the previous quarter, and at the high end of our guidance range. Fourth-quarter sales benefited from the resumption of memory spending by one of our largest customers, driven largely by DRAM investments, as well as revenue contributions from recent tool-of-record position wins as evidenced by our record quarterly sales to both TSMC and Micron.

Turning to the calendar year 2014, our year-on-year revenue growth outpaced industry investments in wafer fab equipment, largely driven by the strong growth in our primary served market of optical critical dimension metrology, as well as market share gains at several of the top spenders in the industry. Notably, our revenues from products serving the semiconductor industry were up 32%, versus WFE growth estimated to be approximately 12% for the year.

Perhaps the most significant achievement of 2014 was the addition of new major accounts and expanded tool-of-record positions to our revenue mix. In the fourth quarter, we had four 10% customers: Samsung, Micron, TSMC, and Toshiba. And for the first time in Nano history, we had four 10% customers for the full year, with a very narrow miss of having a fifth. Importantly, this broadening of our customer profile included significant penetration and share gains in the foundry market, led by OCD wins for FinFET process control, where we have an industry-leading position.

As a result, foundry business contributed more than 20% to our total revenues for the year, with a current outlook for that segment of our business to continue to grow meaningfully. And finally, we've seen a strong increase in demand for our UniFire, used for advanced packaging applications; which, at its current growth rate and trajectory, is on track to be a 10% contributor to our product sales.

Summing up the year, successful execution against our strategic objectives of targeting technology inflections with significant growth potential has resulted in growth in our market share, an increased industry footprint, and an expanded SAM for our business.

We have never been in a stronger, more balanced business position in our Company's history. As we look forward to 2015, WFE spending is currently forecast to grow 5% to 10% to approximately $34 billion. Driven by the ever-increasing complexity and challenges of bringing new device technologies to market, capital intensity and, in particular, investments in process control tools and technologies is expected to outpace overall spending trends.

Notably, we expect investments in OCD to remain robust in 2015, as the industry continues to rely on this enabling technology to solve problems, control processes, and accelerate yield ramps. Further, new WFE investments are expected to be concentrated on ramping 16/14 nanometer FinFET logic devices, first and second generation 3D NAND memory devices, 20 nanometer DRAM devices, and advanced packaging applications, all areas where we have strong tool-of-record positions across a broad customer base.

With a positive outlook on industry spending, and our strengthened product positions within strategic growth markets, we are stepping up our focus on operational efficiency, sustainable outperformance, and bottom-line results. Internally, we are prioritizing key areas of organizational development, strengthening business processes, and streamlining operations.

In parallel, we are working to further grow our position as a critical and trusted partner with our key customers by developing enabling technologies and products that align to their technology roadmaps, while meeting their quality and supply time frame requirements.

Operationally, our goal is to reduce cycle times, shorten customer lead times, and increase the financial leverage to our business model. This business model leverage, combined with our enhanced competitive position and the growth in scale we currently see in our business outlook, will result in a return to profitability in 2015 with strong incremental margin contributions from incremental revenues.

Turning to our near-term business outlook, we see continued strength in DRAM and foundry logic spending in the first half of the year. And with that, our guidance for the first quarter is as follows. Revenues up 18% to 28%, in the range of $47 million to $51 million. And on a non-GAAP basis, gross margin increasing to 46% to 47.5%. Operating expenses of $21 million to $21.7 million, and breakeven to $0.09 in earnings per share.

With that, I will turn it over to Jeff.

Thanks, Tim. Before I begin my comments, I'd 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, customer, end market, and geographic region, is available in the investor section of our website.

Fourth-quarter revenues were $39.7 million, up 46% from Q3 and down 14% from Q4 2013. Product revenues increased 62% to $31.6 million compared to $19.5 million in the prior quarter, while service revenues of $8.1 million increased 6% from the prior quarter on slightly higher upgrades. The sharp increase in product revenue was driven primarily by increased sales in the DRAM and foundry segments. In aggregate, fourth-quarter revenues were comprised of 64% automated systems, 10% integrated metrology systems, 6% materials characterization systems, and 20% service and upgrades.

By end market, DRAM revenues increased 62% from Q3 to comprise 35% of product revenues in the fourth quarter. NAND revenues increased 15% to comprise 27% of product revenues, and foundry revenues increased from 7% in Q3 to 27% of product revenues in Q4. Logic comprised 4% of product revenues; and the LED, bare wafer, silicon, and discretes end market comprised 7% of product revenues.

Our 10% customers in the fourth quarter included Samsung at 24%, Micron at 18%, TSMC at 16%, and Toshiba at 10% of total revenues for the quarter. As a reminder, our revenue segmentation information is available on our website.

I will now discuss the remainder of the P&L, which are non-GAAP measures unless I identify the measure as GAAP-based. These measures exclude the impact of amortization of acquired intangible assets, restructuring charges, and non-cash tax adjustments for tax assets.

Our Q4 gross margin was 45.4% as compared to the prior quarter of 44.6%. Gross margin was within our guidance, but lower than our model this quarter due to product mix, unfavorable absorption carried over from the third quarter, and seasonally weaker service gross margin. Product gross margin increased to 47.3% from 44.9% in the third quarter, primarily as a result of improved factory utilization; while service gross margin was 38%, down from 43.9% in Q3.

Operating expenses of $20.5 million were at the midpoint of our guidance, and included the cost savings of several shutdown days during the quarter. For Q1, the expected increase in operating expenses from the fourth quarter is primarily related to the typical seasonal increases in payroll and other taxes, no shutdowns, and variable compensation programs. Beyond Q1, and depending on the level of profitability and variable compensation, we expect quarterly operating expenses to normalize in the $20 million to $22 million range, with the back half of the year being at the lower end of the range.

The net loss in the fourth quarter was $3 million or $0.12 per share, better than the midpoint of our guidance.

Turning to the balance sheet, our cash and investments at year-end were $84 million or about $3.50 per share. During the fourth quarter, the Company purchased 363,000 shares of stock for $5.3 million under its existing stock repurchase plan. There is approximately $6 million remaining on the total plan of up to $20 million. Free cash flow from operations was $5.9 million in the fourth quarter.

Our DSOs this quarter decreased to 59 days. Inventory in the fourth quarter increased slightly to $37 million to support the higher revenue volume expected in the first quarter.

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

(Operator Instructions). Weston Twigg, Pacific Crest.

Number one, logic still seems to be a bit lower. And I was wondering if maybe you could give us some idea on when you think that customer base might pick back up this year.

Hi, Wes. This is Tim. You're talking about the advanced logic?

Yes.

Yes so, as you know, the most recent rollout of tools is winding down. The next ramp of that is not expected to occur till towards the end of the year, in terms of general timing. And then there's still an open issue of how much of a ramp we're going to see at that time frame. But it's certainly not any sooner than the end of the year.

Okay. And then with that in mind, can you give us an idea in terms of how big you think the OCD market is now, or maybe was in 2014, and then how big it might be by the end of 2015?

We believe that the OCD market grew about 20% year-on-year between 2013, 2014. And it's right around $200 million in total. We think that it's going to at least keep pace with the overall spending trends, perhaps a little upside to that.

Okay. And then just finally, and then I'll get back in the queue after this. But just on gross margin, it looked a little low. I thought it might be a bit higher on the Q1 guide. Just wondering if you can give us an idea, at what revenue level you think you might get back above 50% gross margin.

Hey Wes, it's Jeff. Yes, this quarter, or the guidance is a little lower than our model because we're still carrying some of that unabsorbed -- or lower absorption in the factory into our tool margins. So I think once we can sustain a $50 million, or near $50 million, run rate we should be able to see 50% gross margins.

It could happen earlier if the mix is favorable. But certainly we're looking at that as a lot of programs focus around improving costs as we get into the second half of the year.

Okay, very helpful. Thank you.

Patrick Ho, Stifel Nicolaus.

Tim, maybe first off, in terms of the industry outlook. With a lot of the moving pieces with different customer segments, how do you see the first half shaping up in terms of overall spending trends, particularly on the foundry side, where you've made these penetrations? Are you concerned about any moving pieces from quarter to quarter, or do you see that somewhat firming up, based on your visibility?

Yes, Patrick, thanks. A good question. I think there's always the risk of things moving around quarter to quarter. We never have absolute certainty. But if I characterize first half and what I think the industry drivers will be, we see continued strength in the foundry logic area, and we see continued spending in DRAM. What we're not seeing is a lot of strength in the next-generation 3D NAND or the advanced logic, which we think is more of a second-half, back-end-of-second-half event.

Great, that's really helpful. Maybe Jeff, a question for you, maybe just following off of Wes's question. You mentioned second half you should start seeing the gross margin level begin to track towards your normalized model. As the year progresses, what is the biggest variables? Is it customer mix, absorption, product mix? What's going to be the biggest influence for you to get back to your normalized operating model?

Yes, well, I think some of it is going to be customer product mix, versus in Q1. It's really -- I think the other big levers are going to be some initiatives we have around driving material costs down, and efficiency through the factory and the service organization, maybe kind of equally weighted.

Great. Thank you very much.

Tom Diffely, D.A. Davidson.

Hi, this is Andrew Masuda calling in for Tom. Tim, I was just wondering if you could give us your view of NAND spending throughout the year, and maybe differentiate between planar and expectations for 3D?

That's a good question, Andrew. So, we see continued investments in next-generation planar NAND. Some of it is a backup to what's going on in 3D NAND. 3D NAND yields have not been -- didn't come online as rapidly as they were hoping. And also the number of pairs that are going to be needed for 3D NAND to reach a price-performance parity has gone up. So it's starting out at 24 pairs, going to 32. Many folks are going to the 48 to 50 side of it.

So, what we're seeing is parallel investment at all the memory customers, both in the planar, and that's ongoing now. And then with what -- we've got one leader in the 3D NAND side who had a pause between phase 1 and phase 2, while the other ones are trying to do a little catch-up by technology investments and getting the first generations launched.

Okay. And what's your timing on the expectation of the customer who's in the lead on the 3D NAND spend? When would you expect to see them pick up spending for the second phase of investment?

That's a good question, which I wish I had a precise answer. But based on everything we're seeing right now, it is a late second half, subject to the fact that if they can get the yield and/or the pricing within the NAND market shifts. But under the current economic environment, the current pricing, and the current yields, I think it's a back end of second half.

Okay, great. And then just one question for Jeff. Is there any meaningful foreign currency exchange exposure to the yen or the euro for you guys?

Obviously this last quarter it moved a lot, and it was a couple of hundred thousand. So we try and manage it fairly closely. We don't do a very aggressive hedging strategy. We were looking at doing one on the balance sheet side eventually, which would help improve that, at least quarter to quarter.

Okay, thank you.

(Operator Instructions). Weston Twigg, Pacific Crest.

I just had a couple more questions. One, just wanted to spend a second on your long-term model that you presented last month at a conference. It occurred to me that that's significantly lower than the previous model that I had been looking at from a couple of years ago. The old model showed revenue over $80 million a quarter, gross margin over 55%. And the new model is showing revenue over $65 million a quarter and gross margin over 52%. So I'm just wondering if maybe you could help us understand what has changed from your perspective over the last couple of years to drive a lower target model.

Well, I think one of the biggest changes from the last model was that we had a fairly large MC business factored into that, I think. And those are a little bit higher margins, but other than that, I think if you look at the flow-through, it's not woefully off that model.

Wes, another thing, too, is that we are trying to identify -- with the new model, it's like, how soon do we get back onto the model? So if you look at the earlier one, that we felt we had to reach to a higher revenue levels to get onto the model in a meaningful way. And actually I would look at the new model as more optimistic, showing that we're going to get onto our contribution margin model at a lower revenue run rate than the previous one you're referring to.

Okay. So trying to give us an idea, in terms of a more realistic midterm revenue target, rather than a longer-term --?

No, absolutely. So, if you go back, there was enough uncertainty at that time as to when we would be able to get back on the model. So we wanted to identify at what revenue levels would we comfortably and confidently get back on the model.

And you can see that drop in the model down to the $60 million, $65 million from the $80 million means that we have a lot more confidence of getting onto a robust financial model at a lower revenue level. And that you should see the leverage go forward after that, starting with a lower point.

Great. Okay. And if I could, I have a couple more questions. One, just wondering if you could comment on the new competitive win for Atlas you had in the fourth quarter. It looked like that was for 3D NAND. Is that right? And if you can give us any idea, in terms of color or timing of when that might contribute, that would be helpful.

Yes, so, it was. It's a new win. It was another one of the head-to-heads. It added nicely to both our tool rec position, as well as our customer position. As far as timing, we're already recognizing revenue benefit from that. And as that particular customer starts to fill out their fab and drive up the ramp, we should benefit accordingly.

Okay. One more question. There was a large order filed on the Taiwan Stock Exchange with TSMC. I think that was the first time I've seen you show up in their filings. I was just wondering if you could comment -- I think it was roughly a $21 million order. If you can comment on how you see that customer tracking through the year. Do you think that that's something that would represent the full year, or would there be upside maybe to that business throughout the year?

Yes, that's good. I'm glad to try to clarify that one, as well. So, it was nice to see us reported by TSMC. That's a nice one. You're right. As far as I know, that's a first for us.

But I think the important point is that that number represents an accumulation of business over the year; it wasn't a single order. So it's good business. They continue to be a strong customer; obviously hit the 10% mark again this quarter. And we see good, solid position and a growing opportunity with them. But it wasn't a single order, Wes.

Okay. And then, maybe just finally on the foundry side. I haven't done the math yet to see what the foundry revenue was in 2014. But can you give us an idea of what you think that will be in 2015, as the FinFET ramp gets underway and you benefit from some of these recent wins? Maybe as a -- I don't know -- as a percentage of the total, or percentage growth year-over-year.

Do you want to speak to that, or do you --?

I'm just saying that the foundry ended up being $27 million, almost $28 million.

21%.

21%, yes. And year-over-year growth, I don't know if we're ready to give you year-over-year growth color at this point. But foundry is still, I think, relatively strong in the first half.

All right. Thank you very much.

(Operator Instructions). Mahesh, RBC Capital Markets.

Hi, this is Shawn in for Mahesh. Thanks for taking my questions. Tim, I looked at your DRAM revenue. It's been at a very high level through 2014. And that, we're thinking, is mostly driven by capacity addition as well as conversion to 25 nanometer.

And then in your prepared remarks, you mentioned that in 2015, it looks like DRAM is going to continue at a high level, driven by 20 nanometer conversion. Can you quantify your opportunities from 25 to 20 nanometer? Could the revenue stay at the same level, or higher or lower?

It's a good question. I won't quantify it, but there's two things I'll refer to. One is, if you refer to our IR presentation, we show the incremental opportunity per 10,000 wafer starts going from the 25 to 20 nanometer.

But on a qualitative basis, I believe that 20 nanometer represents anywhere from about a 12% to a 15% increase, incremental benefit to us, over the 25. And as long as we sustain our competitive position on those key accounts, which we are doing our best to do, that should be the upside to our DRAM revenue expectations.

Great, thanks. And then one more question on the overall revenue. When we look at 2014, your revenue grew up almost -- around 15%. So it's roughly in line with the WFE market growth, 10% to 15% range, for 2014. And then for 2015, you are looking at 5% to 10%. So do you think your revenue is going to grow along, in line with the market, above or below?

And then you also, in your Q&A session, you said that OCD market is going to be about 20%. Do you think you're going to be able to outgrow the market in 2015?

So, good questions. Let me step back to the first observation. So, our total revenues grew about 15%, which is a few percentage points higher than at least most folks are calculating the growth in the WFE spending. Importantly for us is that our product revenues grew 24%. And if I take our product revenues that are -- face the semiconductor industry, and excluding materials characterization, those revenues grew 32%. So our semiconductor -- when we compare against WFE, which is a semiconductor market, we have materially outpaced the industry spending year-on-year going into 2014.

With the share gains that we've got, the new tool positions we have, and the outlook, I think we're going to continue to outpace and outperform the industry against WFE spend going into next year.

Okay. Thanks, Tim.

(Operator Instructions). And at this time, there are no further questions. I would now like to turn the conference back over to Tim Stultz for closing remarks.

Thank you once again for participating in our call. In closing, I bring your attention to the terrific contributions of the Nano workforce who are committed to driving increased stakeholder value, and are united around the vision and mission of our Company.

We look forward to reporting on the results of our operational and financial performance for the first quarter results in April. And in the meantime, please be on the lookout for an invitation to our Investor and Analyst Day in New York, scheduled for June 3. With that, we conclude our conference call today. Thank you again.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.