Onto Innovation Inc (ONTO) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanometrics first-quarter 2015 financial results conference call. (Operator Instructions) Please note that this conference call is being recorded today, April 28, 2015.

At this time I would like to turn the call over to your host, Claire McAdams. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Nanometrics first-quarter 2015 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 first quarter 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 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 2014, 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 over the call 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 speak to the highlights of the March quarter, comment on our initiatives and progress against improved operational and financial performance, and we'll finish with our perspective on the industry outlook and guidance for the June quarter.

As a company, we turned an important corner in the first quarter, returning to profitability while also exhibiting strength in financial performance consistent with the business model improvements we shared with you last quarter. We came in at the high end of our revenue guidance and improved revenue contributions from every part of our business, including optical critical dimension, or OCD platform solutions; integrated metrology and advance process control tools; material characterization products; and system upgrades.

The improvement in factory utilization and increase in upgrade sales drove an increase in gross margin which, when combined with operating expenses at the low end of guidance, resulted in our surpassing our earnings target.

Of most importance is the demonstration of leverage in our business model that yielded greater than a 50% flow-through to operating profit from a 27% increase in revenues. Jeff will cover this in more detail shortly.

On the commercial and competitive front, we are beginning to see results from our focused efforts in new account penetration, market share gains, and expanded footprint at key accounts. Our Atlas OCD platform is now deployed into high-volume manufacturing for every advanced 3D device. Demand for our integrated metrology tools is growing rapidly, driven largely by an increase in the use of our OCD software and algorithms. And our uniform platform is used throughout the industry for advanced packaging applications.

Of particular importance, with the competitive wins over the last few years we now have a more balanced customer mix, with meaningful tool-of-record positions across all device types -- memory, logic, and foundry -- and with all the leaders in the industry. This has substantially reduced our sensitivity to the inevitable shifts in timing of investments by specific customers or industry segments.

Notably, in the first quarter record foundry revenues combined with our historically strong position in memory, which was largely driven by DRAM capacity spending, more than offset weakness in IDM logic investments. This is a new strength in our business model, being in a position to benefit from spending in any sector of the market, be it logic, foundry, DRAM, planar, or 3D NAND, and by any of the market leaders. It is the direct result of successful execution against strategic initiatives we put in place several years ago.

However, while we are the definitive leaders in OCD metrology, as evidenced by our year-on-year performance in 2014, during which we outgrew all major players in both process control and optical metrology, there is still more room to grow and improve. Every new device type is more complex, more demanding, and includes new critical layers which increases the demand for OCD solutions. Multi-patterning, 3D transistor architectures, and 3D memory devices each create new process challenges, which in turn require new process control solutions.

In order to remain competitive and position us for further share gains, we are continuing to invest meaningfully in R&D focused on N+1 and N+2 applications. This is being done in close collaboration with our customers in order to meet their technical performance requirements, technology roadmaps, and product timelines.

But our business isn't just about competitive technology, account penetration, and market share gains. It is also about operational execution, productivity, and financial performance. Whereas we have invested heavily and have been highly focused over the last few years on the competitive and commercial fronts, we are now stepping up our focus and commitment to improved operational performance in order to turn more of our top line into bottom-line results.

To that extent, we have strengthened our management team, reorganized our business units to increase alignment to contribution margins, strengthened our internal business processes to drive improved productivity, and set internal objectives and incentives to drive increased operational efficiencies.

Our first-quarter results, with strong flow-through from the incremental revenues, are just the beginning. With continued focus, companywide commitment, and the right management talent, we intend to drive further improvements in all aspects of our business and bottom-line results.

Committed to industry-leading performance in everything we do is a culture and value system within NANO, that we strive to demonstrate and reinforce every day of the week. By doing so, we fully expect to continue to improve as a company quarter after quarter, year after year.

Now, turning to some comments about the industry outlook as it pertains to Nanometrics, following announcements on reduced capital spending by a couple of large customers, industry analysts and forecasters have been moderating their outlook on spending for 2015. In some cases investment forecasts have been reduced from strong year-on-year growth to flat or slightly up.

Importantly, however, is that the outlook on equipment spending is still very robust, with 2015 WFE estimates ranging from $32 billion to $34 billion. For Nanometrics, while our business is most closely tied to leading-edge device manufacturing and 3D technology investments, our opportunities for growth and outperformance remain intact in this spending environment.

We have a strong position in FinFET production and development, where the dependence on OCD continues to increase, especially in foundry, and we will benefit in node transitions to 10 nanometers and below. We have a strong position in 3D NAND, where increased investments and HVM ramps are projected to occur simultaneously by multiple major customers over the next several quarters.

We have a strong position in DRAM, which has seen healthy investments for the last few quarters and where investments in technology and conversion to 20-nanometer devices is beginning to occur. We have a strong and growing position in integrated metrology, where our integrated OCD solutions are actually helping to expand the market. And we have a strong position in advanced packaging, which is an emerging market with high growth potential.

Looking forward, in the second quarter our share gains in 3D NAND and foundry will continue to drive our business, helping to offset expected slowdowns in DRAM investments and continued low levels of [IDM] logic spending.

With that, our guidance for the June quarter is as follows: Revenues of $45 million to $50 million; and on a non-GAAP basis gross margin of 47% to 49.5%; operating expenses of $20.6 million to $21.4 million; and $0.01 to $0.12 earnings per share.

I will now turn the call over to Jeff for a detailed review of our financial performance and outlook. Jeff?

Jeff Andreson: 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 Investors section of our website.

First-quarter revenues were $50.4 million, up 27% from Q4 and down 2% from Q1 of 2014. Product revenues increased 21% to $38.3 million compared to $31.6 million in the prior quarter, while service revenues of $12 million increased 48% from the prior quarter on higher upgrades. The sharp increase in product revenue was driven primarily by increased sales into the DRAM and foundry segments, partially offset by lower revenue to the NAND segment.

By end market, DRAM revenues increased 30% from Q4 to comprise 37% of product revenues in the first quarter. Foundry revenues increased 75% from Q4 to comprise 39% of product revenues in the first quarter. NAND comprised 14% of product revenues; logic comprised 4% of product revenues; and the LED, bare wafer silicon and discretes end market comprised 6% of product revenues.

The total first-quarter revenues were comprised of 61% automated systems, 9% integrated metrology systems, 6% materials characterization systems, and 24% service and upgrades.

Our 10% customers in the first quarter included Samsung at 30%, TSMC at 22%, and SK Hynix at 13% of total revenues for the quarter.

I'll 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 noncash adjustments for tax assets.

Our Q1 gross margin was 47.7% and increased 230 basis points from the fourth quarter. Gross margin was above our guidance but remained below our financial model this quarter due primarily to the unfavorable [factory] absorption carried over from prior quarters.

Product gross margin increased to 47.9% from 47.3% in the fourth quarter primarily as a result of product mix and improving factory utilization, while service gross margin was 47.1%, up from 38% in Q4, primarily due to higher upgrade revenue.

Operating expenses of $21 million were at the low end of our guidance, as we were able to accelerate some of the cost reductions related to the restructuring of our UK operations. As Tim noted, the Company has made significant progress against our financial model, with 51% of the revenue increase flowing through to operating profit in the quarter.

Other income and expense included a favorable foreign exchange translation adjustment of approximately $700,000, equivalent to $0.03 per share.

Net income for the first quarter was $3.3 million, or $0.14 per share, $0.05 above the high end of our guidance.

I'll now discuss the balance sheet. Our cash and investments at quarter end were $77 million, or about $3.21 per share.

During the first quarter, the Company purchased 111,000 shares of stock for $1.7 million under its existing stock repurchase plan. There is approximately $4.4 million remaining in the current Board-approved $20 million repurchase plan.

Free cash flow used in operations was $6.4 million in the first quarter, due to the increased level of working capital to support the increased revenue level.

DSOs increased to 70 days due to the timing of shipments late in the first quarter.

Inventory in the first quarter increased slightly to $38.2 million to support the higher revenue level.

I'd like to add a few additional comments regarding our Q2 guidance. Our guidance reflects the progress we are making against our financial model. We expect to continue to improve our gross margin through a combination of improved factory utilization, product cost reductions, and operational improvements in our field organization.

For Q2, even with revenues moderating slightly, we expect our gross margin to improve 60 basis points at the midpoint of guidance and up to 180 basis points at the high end of our guidance.

Additionally, we'll continue to tightly manage our operating expenses and expect to remain in the range of $20 million to $21.5 million per quarter for fiscal 2015.

Our tax expense in 2015 will range from $450,000 to $550,000 per quarter, depending on the level of our foreign subsidiaries' profits.

And with that, I'll turn the call over to questions. Operator?

(Operator Instructions) Patrick Ho; Stifel Nicolaus.

Tim, maybe first off, on the foundry and logic side, you mentioned the CapEx cuts by some of your largest customers. Can you give a little color from your angle of the impact of reuse, whether it's for metrology tools or even for the process segments as a whole and how it potentially has impacted your initial outlook of 2015?

Sure, Patrick. Thanks for calling in. So, reuse is clearly one of the buzz topics in our industry and most of our customers are speaking to it. Without naming names, we've got one customer that's been doing a very aggressive effort in pursuing tool reuse. And that has some impact on us on the long-term logic area.

Most of the other ones are pretty standard, though. We're not seeing a huge amount because most of the techno- -- product placements are going into some of the newer fabs with the newer device applications. And so, we don't see this as a broad problem across all customer areas, but at one particular customer it's pretty aggressive.

Great. And my follow-up question on the NAND flash side -- I think in the past you've mentioned that the incremental capacity -- capacity of the capital intensity increases for NAND are anywhere from 10% to 20% as you move to 3D NAND. Two-part question there -- from an industry perspective, are you more optimistic about the traction or the outlook for NAND flash spending, particularly 3D NAND, in the second half of the year? And, secondly, from a technology basis, is there any difference in terms of I guess metrology use, whether it's for floating gate or the charged trapped particle that some of the suppliers employ?

Well, so we'll try address those in [similar] -- so first of all, we do see increased intensity use of metrology tools going from the planar to the 3D NAND, and we see a little bit of increase in that as they go into second-generation-type 3D NAND. The increase in intensity, as you said, is in the area of 10% to 20%, and if you kind of look at the capacity and put in place and you look at the opportunities for us and what we're trying to realize, it tracks pretty close to our model. So I think we're very close there.

I'm looking here -- in terms of where it fits in on each of the (inaudible) ones, I think you're going to see smaller incremental demand when you start to go into this second, third, and fourth generation, because the multiple layers don't drive large increase in process control or metrology. There are small ones, but not as dramatic as going from planar to 3D.

Great. Thank you.

Tom Diffely; D.A. Davidson.

First question is, wondering if you were surprised by the recent announcements by the large foundry and logic player about a little bit lower CapEx. Because it sounded like in the last call you were a little skeptical as to how much they were going to spend this year to start with. So, wondering if your internal plans had changed at all before and after those announcements?

Tom, thanks; good question. We've been skeptical for several quarters on the spending patterns. We try to do our best. We don't have [all] the visibility we'd all like to have over multiple quarters, but when we look at the deployment of tools and when we look at the new fabs being built, it was hard for us to tie together what we saw as capacity adds and the capital equipment budgets that were being discussed.

So I would say that it was more just coming out and telling the story the way that we've sort of been seeing. And we've been preparing ourselves accordingly.

Okay. And then, based on the different segments, outside of DRAM it looks like all the other segments were and still are kind of planning to do more of a ramp in the second half of the year versus the first half?

Yes, I think if we kind of walk through it, the biggest one I think that most of us are seeing in terms of a ramp is going to be in the 3D NAND. And that's because you've got four customers out there that are now almost simultaneously putting in both technology buys and capacity. And we are participating in every one of those customers, and that's beneficial to us.

And because they're coincident, I think that you're going to see a compounded ramp. I don't see a ramp in the DRAM area. I expect a little softening, at least for next quarter or two. And then we'll have to see how it plays out the end of the year, although none of us have great visibility.

I think in the foundry, the foundry wars continue. We've seen some very strong foundry. We have record foundry revenues. We had record revenues at TSMC, specifically. And we expect to see some continued investments there as the Apple chip plays out and who gets it, between Samsung and TSMC. The good news for us is we're becoming more agnostic as to who gets the business.

Okay. And maybe just quickly on TSM (inaudible) foundries, are you equally strong in both the front end and back end at those places?

Tell me what you mean by the front end and back end, Tom.

Well, advanced packaging versus just metrology, I guess.

Okay. So I mean, clearly our revenues are driven by our front-end tools, our Atlas, our integrated metrology tool. Our UniFire is in a good position at the advanced packaging. But we're on whole wafer advanced packaging which is a little different than advanced packaging that's in the outsource assembly tests or OSAT. So, even though I feel very good about that business, it's not nearly as strong in terms of contribution to revenues as our front-end tools.

Okay. That makes sense.

(Multiple speakers) --

Go ahead.

I just wanted to make sure I answered your question.

Yes. No, that's it. And looking at the 3D NAND, you talked about the four vendors there, or customers there. It looks like that's all new capacity going in place. It wouldn't be a transition from an older fab?

Well, several of them are new capacity. There's one fab that's being torn down to the ground, built a new fab. There's new capacity in a couple other areas. And then there's going to be added capacities as second- and third-phase investments on an existing fab.

Okay. But you wouldn't expect to see any significant level of reuse, then, with those facilities?

No, we don't see that, although we always have to be a little bit careful when we look at the timing of investments between metrology and process. And you've kind of been through this before with us, that when they bring in a new fab on line or a new technology on line, there's a little heavier front-end weighted investment in process control. And then as they fan out more capacity you see it get a little more weighted towards process tools.

Yes. Okay. All right. And then, Jeff, you talked about a $0.03 benefit during the quarter. I didn't catch what that was from.

It was from foreign exchange --

Okay.

-- primarily in Europe and some intercompany positions that we have there.

Okay. And then, is there a natural exposure that you typically have in Europe that we should model going forward?

Yes, we have had an unhedged exposure but we're changing that now and taking a bit of a hedge on it now.

Okay. And then, finally, on the operational expense side, it sounds like you're going to try to hold that $20 million to $25 million even if business does ramp in the second half of the year?

Yes, we're going to try and stay in the range of $20 million to $21.5 million. And I think we're doing a pretty good job. We've kind of stayed at the bottom end of the range for the last couple of quarters.

Yes, I would add to it that we have the infrastructure in place to support a ramp. And we feel comfortable with the investment profile. There's always certain variable comp- -- variable expenses that go with ramping. But those get mostly above the line in terms of where we would see the spending coming, with a little bit on the commercial side from the sales, which is on the order of a percent of the revenues.

Yes, and I would say it's the kind of -- we've been planning to use this as leverage and you can see the flow-through in the model. In this quarter it was 51% and when you look at next quarter it's even better.

Yes. Great. All right, thank you.

Weston Twigg; Pacific Crest.

First, just curious -- on Q2 you called it another strong quarter. To me that's a little alarming, because revenue guidance is down a little, barely breakeven as evidenced by the EPS guide. And I'm just wondering, if you consider that a strong quarter, do you feel like you're getting toward a peak number at all? Or is there a lot of upside from here in terms of quarterly revenue opportunity? And, if so, how would you see that playing out over the next, I don't know, four quarters maybe?

Yes. So, that's a good point. The fact that we turned the corner to profitability, we feel good about and we're trying to emphasize our commitment to stay there as best we can, given our certain revenue level. Strong in my mind is the flow-through. If you start looking, as Jeff mentioned, we had a 51% flow-through on the operating performance in Q1 and we were at the top end of our guidance. We actually experienced some pull-ins from Q2 to Q1 that helped us in that area.

And going into the second quarter, if you look at the numbers, we not only stay profitable, but if you look at the flow-through it gets better. So strong from in terms of financial performance, not just simply kind of the revenue number.

In terms of what do we see in the second half, we're all looking hard at that. I think there's a lot of changes in the outlook from the spending patterns. And many of us are waiting to see how that plays out. We're all counting on some 3D NAND investments and some foundry investments. Don't know if DRAM is going to come back strong, and certainly the advanced logic or IDM is being pushed even further out.

Okay. Can you give us an idea of where you think -- where you can get revenue to on an annual basis organically from here?

Where can we get it organically? Well, I --

Yes. Can you grow revenue to $300 million, $400 million annually? Or can you give us sort of a ballpark idea where you think you can grow this business organically?

Yes, well, that's a good question. That's actually a great Analyst Day question, Wes. But in terms of our internal objectives, we believe with the tools and the market share opportunities and the expansion of some of the other markets, we know how to get to $300 million in revenues, in terms of just how we apply these tools and so on. We think that there's upside to that. I think you start pushing it beyond that we have to think about some other ways to expand our served market, whether it's through new technology development and/or possible M&A activities.

Okay. And then, just finally, on the DRAM activities, you said you expected it to slow down over the next couple of quarters, I think, or maybe you said second half. But can you give us some context on why you think it's slowing? Is it just that one large project is slowing down because it's still bad, or do you see actually no transitions beginning to slow down at 20 nanometer?

I just think it's the timing of the investment profile. If you look at the last two to three quarters we've had really good DRAM. DRAM contribution to revenue has been very, very strong, actually stronger than some of the other areas. I think there's an absorption of that.

And then, I think the shift to the next technology node, going to 20 nanometers, starts a new ramp. And we're putting tools into that space. And then as that kicks and the price on DRAM remains strong, then we would expect to see some increased contribution.

Okay. Very helpful. Thank you.

Mahesh Sanganeria; RBC Capital Markets.

So, staying with the DRAM questions, there have been some pushes and pulls and you just mentioned that you saw some pull-in from Q2 to Q1 and we heard about some push-outs. Can you talk about what's happening in those terms, push-outs and pull-ins, what is driving that?

Sure, Mahesh, I'll try to, although we actually really haven't experienced push-outs. We've only experienced pull-ins. We've experienced the pull-ins into Q1 to come out of Q2. In fact, some of the stuff that was even farther out in the year was brought into the first half, given, you know -- looking at strong first-half activities. And I think it's just kind of the natural ebb and flow of the investment cycle.

On the other hand, if you see some strength in the ultimate DRAM applications, the mobile and enterprise, if you start to see some of that, then I think you may see a step-up in spending. We're just not counting on it right now, because there's typically a lull between technology nodes.

And so, also on those terms we have two new projects on DRAM. There is Line 17 and then M14 at Hynix. Do you have a sense of -- I guess can you help us get a sense of the split in first half of this year between the new capacity and conversion?

Oh, that's a good question. I don't have those numbers that way. We certainly participate with both of the customers you speak to. We have tool-of-record positions. And we had a lot of activity with one of them in the fourth quarter of last year and the first quarter of this year.

In terms of the (inaudible) conversion, I think that the bulk of -- in the absence of a significant drive to increase the capacity in the existing fabs, such as the ones you referred to, I think you're going to see the shift to the technology conversion and to the ramp on the new technology. And I think it starts to shift in the third quarter going into the fourth quarter.

Okay. And on the logic side, I mean, we heard about the [DUs] and push-outs from the logic customer, but even if I take that to consideration your logic revenue has gone down for last three quarters. Is there anything specific with that? Because I think before that there was probably eight quarters you had a very high, continuous really high contribution from logic. So can you comment on why such a discontinuity suddenly in terms of logic investment?

Yes, I think it's really straightforward. It's the customer spending pattern. It has nothing -- you know, our market position is unchanged.

Of the two applications in terms of going from 22 to 14 to 10, we're applying -- there's more levels, more critical layers. There's a lot of tool reuse. There's also been a slowdown in some of those fabs. And, in fact, some of those fabs didn't ramp to the capacity that they thought. And so, it really narrows the spending on the fabs, bringing in both the technology and the capacity. No shifts in market, no shifts in position, and no drop in the utilization of OCD for the advance applications.

So, should we see that come back some time in the second half of the -- or it happens sooner?

I don't know for sure. But we would -- I don't think it's going to happen sooner because of the timing that has been disclosed by that company in terms of their fab investments. If it comes back sooner that's a wonderful thing for us because it just automatically comes to us. But there's been a fair amount of push-out on that next-generation fab and until they start tooling it up, we won't see any significant revenues accordingly.

Okay. And then one last question on 3D NAND. We have one customer which has ramped pretty significant last year. And they're in a kind of holding pattern until get the price parity, that's the sense. Then we had Hynix come out and they said that most of their DRAM spending -- most of their spending is going into DRAM, very little on NAND and that, too, mostly on planar conversion.

And so, is it -- you talked about 3D NAND spending in the second half. Is it mostly for the pilot line or you're seeing some actual volume production? Because we don't see that based on what the companies are saying.

Yes, that's a good question. So we have four players out there. There's one that's got a fab running and there's been a delay in their investment on expanding capacity. We see that there's a company that's finally got into it that's starting to put some nicer spending. You've got one of the four customers that's put in very significant new capacity technology investment and we're benefiting pretty dramatically from that. And that's a new position for us. And the fourth company is kind of just going horizontal on their spend.

Okay. All right. Thank you very much.

(Operator Instructions) And that's all the questions that we have for today, so I'd like to turn the call back over to Timothy Stultz for closing remarks.

Thank you once again for participating in our call. We're very excited about the opportunities in front of us and have an extraordinary team of committed employees and business partners working day in and day out to make it happen.

Finally, as a reminder, our Investor and Analyst Day will be held in New York on June 3. Please contact Claire McAdams, whose contact information is provided on the release for any questions.

With that, we conclude our conference call for today. Thank you.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect your telephone lines. Everyone have a great day.