Onto Innovation Inc.
Q4 2010 Earnings Call Transcript

Published: 11 Feb 2011

[Operator:]

Good afternoon and welcome to Nanometrics’ fourth quarter and full-year 2010 Financial Results Conference Call. A Q&A session will be held at the end of the call. Until that time, all participants will be in a listen-only mode. Please note that this conference call is being recorded today, February 10, 2010. At this time, I would like to turn the call over to Claire McAdams, Investor Relations Counsel for Nanometrics. Ma’am you may begin.

[Claire McAdams:]

Thank you and good afternoon, everyone. Welcome to the Nanometrics fourth quarter and full-year 2010 Financial Results Conference Call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer, and Jim Moniz, Chief Financial Officer. Before we get started, I would like to call your attention to the following Safe Harbor statement. This conference call contains certain forward-looking statements, including, but not limited to, statements regarding financial results for the company’s most recently completed fiscal quarter and full-year, which remains subject to adjustment in connection with the preparation of our financial statements and periodic report on Form 10-K for the fiscal year 2010; the continued adoption and competitiveness of its products; the expansion of the company’s served markets; and future revenue growth, profitability and cash flow. Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to a variety of factors, including a contraction in current levels of industry spending, shifts in the timing of customer orders and product shipments, slower-than-anticipated market adoption, changes in product mix, and fees operating expenses and the additional risk factors and cautionary statements set forth in this company’s Form 10-K for fiscal year 2009 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 to Tim Stultz. Tim?

[Dr. Timothy Stultz:]

Thank you, Claire, and good afternoon, everyone, and thank you for joining us today. In my remarks this afternoon, I will discuss the business and financial highlights for the fourth quarter and fiscal year 2010, and our view of the current and near-term industry environment. Following that, Jim Moniz, our Chief Financial Officer, will provide a closer review of our financial performance, after which, I will return to provide you with guidance for the fourth coming quarter. It is with no small measure of pride that I’m able to announce that Nanometrics just completed the best year in its 35-year history. Our record revenue of $188 million were up 145% versus 2009, and 29% higher than 2007, which was our previous record year and the last peak year in industry spending. A particular note, our year-on-year revenue growth significantly exceeded industry growth of approximately 100%. Highlighting the progress we have made in strengthening our position with key customers, expending our served markets and gaining market share. We also have emerged as the market leader in optical critical dimension or OCD metrology, which we believe is the highest growth segment of inline process control metrology as it systematically surplants the role of CD-SEM technology for the most advanced process notes. Our operating profitability of 22% is also [inaudible], likewise, net income and earnings per share for the year. Even when we exclude the $18.2 million benefit recorded for the release of our tax asset valuation allowances, were also company records. While we did experience some shifts in the timing of orders and shipments in the fourth quarter, leading to a decline in revenues compared to our record $54 million third quarter, Q4 was still the third best quarter in our history with revenues up 75% year-over-year and 19% higher than the peak quarter of 2007. Notably, the fourth quarter marked our sixth straight quarter of profitable operations. Our sixth straight quarter of gross margins exceeding by 50% and our sixth straight quarter of positive cash flow demonstrating continued strength in our business model and overall execution. Taking a closer look at our fourth quarter results, we experienced increase contributions and growth from our Wafer-Scale packaging business unit, which serves a market that is experiencing high growth and increasing focus by nearly every major chip manufacturer. Our Materials Characterization business unit which includes high-brightness LED, solar photovoltaics and bare silicon wafer metrology, and our Integrated Metrology business unit which is largely driven by capacity spending and where we gaining market share. We also saw a shift in memory spending from DRAM to NAND as any market demand for flash continues to grow. These are all favorable trends, they expect to continue in the near future. Turning to the demand side and industry trends going forward, it is pretty evident to industry observers that fundamental demands for digital [inaudible] and [inaudible] components just continued to rise. Driven by smartphones, tablets, tablets, IT spending, cloud computing, and network storage. In order to benefit from these trends and meet highly competitive market price and performance requirements, our customers are focused on continuing to push technology through shrinks, increasing their yields, and developing new device architectures such as stacked-3D packaging. Over the last couple of years we have aligned our product development roadmaps with these customers and have strategically focused on the areas of process control that are increasingly crucial for the 3X, 2X, and 1X nodes. As evidence by our series of competitive wins, such as our recently-announced tool of record selection by a major Japanese semiconductor company for our suite of OCD products, we have emerged as a critical leading supplier for the majority of the world leading [inaudible] manufacturers. From a more macro view, I’d like to help put the phenomenal industry growth in 2010 into perspective. Even though industry investment in capital equipment roughly doubled over 2009 levels, we still have not returned to the level of spending and capital intensity seen in 2006 and 2007. The fast majority of industry analysts predict 2011 will be another growth year for semiconductor capital spending in a range of 10 to 15%. This view is supported by recent CapEx forecast provided a number of the world’s leading CHIP companies. Our curb perspective is consistent with those estimates and thus our outlook for 2011 is quite optimistic. We have consistently emphasized our objective to outperform the world industry. As we enter 2011, we believe we will be able to continue the outperform the industry leveraging our improved competitive position to benefit from the increasing adoption of OCD for critical dimension applications, expanding implementation of wafer-scale packaging and 3-device architecture – 3D-device architectures and growth in adjacent markets such as high-brightness LED, solar and bare-wafer metrology. All taken, and borrowing a global economy dislocation, we expect these factors, combined with execution and operational excellence will lead to another year of solid growth for Nanometrics in 2011. I will now turn the conference over to Jim, who will provide you with details on our financial performance; following which I will return to give next quarter guidance. Jim.

[Jim Moniz:]

Thank you, Tim, and good afternoon everyone. Nanometrics press release containing a fiscal fourth quarter and full-year 2010 results was sent out by business wire today, February 10, around 1

[Dr. Timothy Stultz:]

Thank you, Jim. I’d like to make a couple of comments before giving you specific guidance on the quarter. In 2007, we made the decision to discontinue giving guidance based on a number of factors. Not the least of which was our own uncertainty of our business outlook and our inconsistent business performance and execution. Underlining that decision was the strong belief that our focus needed to be on improving the fundamentals of our business with the long-term perspective for our stakeholders and not to compromise those efforts for the sake of meeting short-term performance metrics. Our performance over the last two years has demonstrated this unwavering belief in focus. Today, we are highly confident in our ability to [inaudible] and have significantly improved position of relationship with the leading customers in our industry. Consequently, we have a much better visibility on our business outlook and feel comfortable sharing that with you. But I must add an important caveat before going forward, and that is although we are initiating guidance, we will not alter the way we run the business. We will give you our best perspective of a near-term business outlook, and we will do our best to perform towards those levels, but we will not compromise our future growth or profitability simply to meet the guidance or consensus estimates. There are occasions when, just as we saw at both year end of 2009 and 2010, our customers asked for commercial concessions in order to hasten tool delivery and revenue recognition within the quarter. We will continue to refuse these concessions in every case, irrespective of quarterly guidance. This is how we have done business since 2007 and we firmly believe it is in the best interest of our shareholders to continue doing so going forward. That being said, our outlook for Q1 is very strong. We see revenues growing more than 20% over Q4 levels coming in between 56 and $60 million, with gross margins of 54 to 55%. With regard to Q1 earnings, we expect our operating income to be between 24% and 27%, and our earnings per share to be between $0.36 and $0.44 with a tax rate of 35%. In conclusion, we are more confident and enthusiastic about our business and a business balance for Nanometrics than ever before. The improvements we have made to [inaudible] especially in OCD, advanced wafer scale packaging, and LEDs, our strong competitive position, our demonstrated ability to execute, and a positive outlook on industry fundamentals and spending, we are looking forward to filling new performance records in 2011. With that operator, we will now open up the line for question.

[Operator:]

Thank you. (Operator instructions). One moment, for the first question. Our first question comes from Weston Twigg from Pacific Crest.

[Weston Twigg:]

Hi, thank you taking my question. I have a couple of questions here. One, I just wanted to get an idea on the 3D packaging opportunity in 2011 to 2012. I was wondering if could maybe help size it terms of revenue.

[Dr. Timothy Stultz:]

So – hi, Wes, good to hear from you first of all. We’re not ready to break that out yet in terms of sizes for you, in absolute numbers. You know, we’ve got some announced positions that I think you’re aware as to tool record, they didn’t tell which actually announced publically by Zygo when it was first won, and we’ve got a number of new installations that we believe are going to lead to quite appreciable growth in that space. When we started having consistent levels above the 10% which is kind of our nominal cutoff point, then we’ll start breaking that out and sharing with you in more detail.

[Weston Twigg:]

Okay. Also, earlier on the call you said they expected to outperform the industry this year. I know that historically your market share position at foundarys has been a little bit light, do you expect that share position to improve meaningfully this year to allow you to outperform the market?

[Dr. Timothy Stultz:]

Yes, so that was really polite for you to say that our foundry position was light, it’s actually been quite weak. But as we have announced over the last year or so we’ve been using the strength of our balance sheet to put tools in to the key accounts for evaluation in order to penetrate those markets. We’ve got some initial traction and I believe that pretty soon we’re going to segmenting that into – and showing you growth in pretty significant ways.

[Weston Twigg:]

Okay, that’d be growth that would hit the topline in 2011 or would that be something a little bit further out, maybe 2012?

[Dr. Timothy Stultz:]

No, I think we’ll – I think in 2011, it’s going to be a nice contributor to our overall revenues and be above the 10% mark which will allow us to share with you.

[Weston Twigg:]

Okay, great. And then just one more question on upgrades, with the service line down a million and a half this quarter, does that go back up in Q1? I guess, in other words do you expect upgrades to pick back up in Q1?

[Dr. Timothy Stultz:]

Yeah, you know, as you know, for the last several years our upgrades have been kind of between ½- $2 million and up as high as 4 and as low as 1, and bouncing around about a $1 million a pop. I think that – I think it will all average all. At one time we shared that we thought that upgrades would be 7 or 8% of revenues, but the revenues have grown more than we had projected at that time and I think we see that kind of leveling off right around 5% going forward.

[Weston Twigg:]

Okay, perfect, thank you very much.

[Dr. Timothy Stultz:]

You bet.

[Operator:]

Thank you. Our next question comes from Gus Richards from Piper Jaffray.

[Auguste Richard:]

Thanks sir, for taking my question. Just following on to that question on service. What was upgrades in the fourth quarter?

[Dr. Timothy Stultz:]

We don’t break that out, Gus. Thanks for calling, Gus. No, we don’t break that out from the service.

[Auguste Richard:]

Okay. And then you know, the gross margins clearly in the fourth quarter on the service side came down, you sort of indicated you hired a bunch of people, and you know, the revenue there was a little bit lower, should we expect service gross margins to stay in this low-30s or will it creep back up into the 40s?

[Dr. Timothy Stultz:]

So the – you know, the decline in the margins s really came in three areas. One being able to upgrade revenues. We did front-end load some hiring to prepare for the ramp in 2011 because it takes anywhere from 3 to 6 months to properly train the folks that are going to be deployed on the international basis. And overall service revenues actually had declined primarily on the parts side. I think that you’ll see as the ramps go, then we’ll do a better job of fully absorbing our service personnel and we would expect some recovery in the overall service revenues on the parts side as well as on the upgrades.

[Auguste Richard:]

Got it. And then just to be clear on the tax side, you basically had to take your reserve in the fourth quarter giving you the you know, giving you that pop in revenue, and then you’ve essentially taken off all your NOLs and then going forward, we should assume a 35% tax rate, is that correct?

[Jim Moniz:]

Yeah, Gus, that’s correct. This one application, you said we took a pop in our revenues. We took a pop in the income because income…

[Auguste Richard:]

I’m sorry, I misspoke.

[Jim Moniz:]

No, no, I knew what you meant. So yes, that is correct because we essentially now have determined that it’s more likely than not that we’ll continue the profitability, we had to reverse the evaluation allowance and give the benefit all at one time, which happened in Q4 and we’re projecting right now, 35% tax rate as we go into 2011.

[Auguste Richard:]

Okay, and then just a couple of product questions, or do you have a sense of what your marketshare is CD-SEM, and sort of what the market size is in 10?

[Dr. Timothy Stultz:]

We have a sense but I wouldn’t tell you that. We have that down to a science. It’s a little hard because the various analysts and reports don’t really capture all the elements of OCD. You know, we believe – you know, we’ve shared some numbers on our IR presentation showing there’s been a change from kind of a mid-teens of market share of OCD against CD-SEMs in the total CD market, showing up into like 30-35% and we think that’s going to continue to grow pretty substantially. We’re seeing over 100% compound annual growth rate in the application space of OCD which is coming largely at the expense of the CD-SEM market.

[Auguste Richard:]

And then last one for me just on the overlay market, any you know, in the update on how you’re doing with your newer tools?

[Dr. Timothy Stultz:]

We’ve got some tools that have – were taken in that we talked about I think last quarter, they’re in place.

[Auguste Richard:]

Okay, great. Thanks, thanks for taking my questions.

[Dr. Timothy Stultz:]

Thanks, Gus.

[Operator:]

Thank you, our next question comes from Patrick Olsen [ph], Stifel Nicolaus.

[Patrick Olsen [ph]:]

Thanks a lot, and congratulations on a great quarter and a great year. Tim, maybe – can you give a little bit of color on your progress with the foundry customer segment and I guess where I’m trying to get with that is you know, you guys have made significant inroads in both logic as well as memory based on you know, the nodes shrinks. Given some of the technology challenges that foundries have experienced, particularly last year, year and half, how has that opened up some opportunities for you guys on a going forward basis?

[Dr. Timothy Stultz:]

That’s a good question Patrick, and thanks for calling. You know, we’ve made good progress as you’ve point out in logic and memory, but we really have not established a strong market-leading position in the foundry space, and it’s a part that we’ve put a lot of energy into. In particular over the last year, were we placed some tools, used our balance sheet, put some resources on site to try to open those accounts. The other part of that equation besides being – trying to put our tools in, is to have a pool from the customer side. If they don’t have a problem, they’re willing to look at your tool but they’re not willing to buy a bunch of tools, they’re not willing to make a change. As the foundries are pushing down in the 2x nodes, they are running into some technology issues, as you point out. And it does open the door for us to demonstrate what we can do and how we compare our vis-via our competition. So that’s a crack we needed, and I think that that’s going to play out nicely in 2011 and 2012.

[Patrick Olsen [ph]:]

Great, thanks a lot guys.

[Dr. Timothy Stultz:]

All right.

[Operator:]

Thank you, our next question comes from Grant Tanaka from Tanaka Capital Management.

[Grant [ph] Tanaka:]

Tim and Jim, congratulations. Just wondering how many evaluation tools you have out now roughly versus a year ago?

[Dr. Timothy Stultz:]

We don’t count the total number of tools, but last time I think we had about $8 million in finished goods and an overwhelming majority of it was represented by tools that are installed in different locations.

[Grant [ph] Tanaka:]

And these are – are the concentrated in any one particular type of IC manufacturing process?

[Dr. Timothy Stultz:]

Well, not so much. Well, they’re all in the – they all addressing – well, I should say they all. The overwhelming majority of them are addressing the 2X nodes and the overwhelming majority of the are addressed at the foundries.

[Grant [ph] Tanaka:]

How about launches, new product launches and revenues recognition? Is there anything in terms of lumpiness in revenue recognition versus shipments of either the recent quarter or quarters coming up?

[Dr. Timothy Stultz:]

That’s a good question. I’ll let Jim talk to you about rev rec and what we’re doing there.

[Jim Moniz:]

Okay. And then Tim can talk about product launches. No, we – as you can imagine, rev rec is really, really important for an equipment manufacturer like us. And so we have not had any problems. We have not had any issues. Certainly, if you look at our deferred revenue in Q4, it went up a little bit from Q3 because we do have some equipment out there that we don’t have an acceptance for at the end of Q4 but there’s nothing abnormal. It’s kind of the normal course of business and we have a very strict revenue recognition policy that we follow very carefully.

[Grant [ph] Tanaka:]

And launches, that might be more a rev rec expansion for the second and third quarter?

[Jim Moniz:]

So we certainly are going to be doing some combination of new products and product reprices, which we will be announcing as the year goes on. But we generally – nodes going to locations that, you know, that do not impact what our outlook on our revenue and our revenue recognition, but more strategic placements, address more – the 1X nodes, in fact.

[Operator:]

Thank you. (Operator Instructions). I’m showing no questions at this time. I would now like to turn the call over to Dr. Stultz for concluding remarks.

[Dr. Timothy Stultz:]

Thank you, Operator. As many of you probably know, this is Jim Moniz’s last earnings call with Nanometrics. It has been a genuine pleasure working with Jim over the last couple of years and I will tell you without reservation that he was a key factor in contributing to the turnaround of the company and helping Nano achieve new levels of operational excellence. All of us here at Nano thank Jim for his contributions and wish him the very best with his planned retirement. And last but not least, I want to once again gratefully acknowledge the outstanding performance and contributions of the global Nanometrics work force, who are directly responsible for all the reports we report on. Thank you once again for joining our call and we look forward to reporting to you on our first quarter results in April.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.