Nanometrics Incorporated ( NANO)

Q3 2011 Earnings Call

October 27, 2011 4:30 PM ET


Claire McAdams – IR

Ronald Kisling – CFO

Timothy Stultz – President and CEO


Weston Twigg – Pacific Crest

Srini Sundararajan – Oppenheimer

Thomas Diffely – DA Davidson

Auguste Richard – Piper Jaffray

Patrick Ho – Stifel Nicolaus

Graham Tanaka – Tanaka Capital Management



Good afternoon, and welcome to the Nanometrics’ Third Quarter 2011 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 October 27th, 2011.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations Council for Nanometrics. Please go ahead.

Claire McAdams

Thank you and good afternoon everyone. Welcome to the Nanometrics third quarter 2011 financial results conference call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer, and Ronald Kisling, Chief Financial Officer. Shortly, Ron will discuss our financial results for the third quarter. Tim will then share our prospective on the quarter and outlook going forward before opening up the call for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1:00 PM Pacific this afternoon and it’s also available on our website at

Today’s 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, which remain subject to adjustment in preparation of our periodic review on Form 10-Q. The continued adoption and competitiveness of our products, the expansion of our served markets and future revenue, 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 change in current levels of industry spending, shifts in the timing of customer orders and product shipments, changes in product mix, increased operating expenses and the additional risk factors and cautionary statements set forth in the company’s Form 10-K for the fiscal year 2010 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 Ronald Kisling. Ron?

Ronald Kisling

Thank you, Claire and good afternoon. In the third quarter we delivered strong financial results in spite of increased industry volatility and concerns regarding consumer demand and the worldwide economy. Revenues were $58.3 million near the midpoint of our guidance, down 9% from the prior quarter and up 8% from the third quarter of last year. Total product revenues of $49.8 million were down 8% from the second quarter and up 12% from the third quarter of 2010. Service and upgrade revenues of $8.4 million declined 17% sequentially and 12% year-over-year primarily due to a decrease in upgrade revenues. In total, service revenues comprised 14% of sales down from 16% in Q2. Sales of our automated metrology systems decreased 12% over Q2 and comprised 58% of total revenues. Our flagship OCD tool revenue saw the largest decrease driven primarily by capacity pushouts in both memory and logic. This was partially offset by increased sales of our UniFire and overlay automated systems.

Our integrated metrology sales grew by 10% over Q2 our third straight quarter of growth mostly driven by flash technology spending and comprised 13% of total revenues. Our materials characterization business declined by 12% compared to the second quarter comprising 15% of total revenues primarily due to lower sales into the LED segment.

We believe automated metrology systems will continue to make up the largest share of our products, but we will see quarter-to-quarter fluctuations in the absolute percentage mix driven by buying patterns and fluctuations in customer fab rollout schedules.

The end market fluctuations in the fan out of our automated products of large customers also resulted in a shift in end market mix compared to last quarter. The most significant difference was in our sales to the NAND Flash market, which had comprised 45% of our product revenues in the second quarter. For the third quarter, Flash revenues declined by approximately 28% to comprise 35% of product revenues, DRAM sales declined as well by approximately 20% to comprise 12% of product revenues in the third quarter.

Product revenue into the logic IDM, foundry and hard drive segment increased from 24% in the second quarter to 37% in the third quarter. Notably foundry revenue was 10% of product revenues as included in the 37%.

The LED solar and silicon end markets segment decreased its share to 15% from 17% due to the industry softening, I mentioned earlier. Consistent with our historical reporting we report revenue by geographic region based on the shift to our first in use destination.

In the current quarter, revenues from South Korea were 39%, North America 23%, Japan and Rest of the World each 19%. Sales to Samsung and Intel each contributed over 10% to our revenues in the quarter.

Turning now to gross margins, our total gross margin for Q3 came in at 52.9% at the high end of our guidance. This compares to 56.1% in the prior quarter and 54.5% in the third quarter of last year with the decrease primarily due to product mix as well as lower sales volume in the sequential comparisons. Products gross margin was 54.1%, while service gross margin was 45.6%, still above our model but down a bit from Q2 levels.

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