Nanometrics' CEO Discusses Q1 2012 Results - Earnings Call Transcript

Nanometrics Incorporated (NANO)

Q1 2012 Earnings Call

April 26, 2012 4:30 PM ET

Executives

Claire McAdams - Investor Relations/Council

Tim Stultz – President and Chief Executive Officer

Ron Kisling – Chief Financial Officer

Analysts

Weston Twigg – Pacific Crest

Patrick Ho – Stifel Nicolaus

Richard Grace – RBC Capital

Tom Diffely – D.A. Davidson

Auguste Richard – Piper Jaffray

Graham Tanaka – Tanaka Capital

Presentation

Operator

Good afternoon and welcome to the Nanometrics First Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded today April 26, 2012.

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 first quarter 2012 financial results conference call. On today’s call Dr. Timothy Stutlz, 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 for the first quarter and second quarter outlook. 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 1:00 PM Pacific this afternoon and it’s 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, margins and earnings per share, customer concentration, tax rate and product adoption.

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 changes in levels of industry spending, the adoption and competitiveness of our products, our ability to successfully integrate acquisition, to realize operating efficiencies and to achieve reduced tax rates, including the receipt and timing of pending approvals from tax authorities, changes in product mix, and the additional risk factors and cautionary statements set forth in the company’s Form 10-K on file for fiscal year 2011 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 statements.

I will now turn over the call over to Tim Stultz. Tim?

Tim Stultz

Thank you, Claire and good afternoon everyone. Q1 was a good start to 2012. Total revenues increased 23% over Q4, while product revenues increased 30% bolstered by record revenues in our flagship product line, Optical Critical Dimension or OCD more than offset in sequential declines in some of our other business areas.

We also benefited from strong strategic positions with the industry’s technology leaders and the two top industry spenders. And we saw continued strength and demand for and rapid adoption of our newest OCD platform the Atlas-II. Launched just last quarter, the Atlas-II represented nearly a third of our revenues in Q1 easily surpassing the initial revenue contribution and growth rate of any new product we’ve ever brought to market.

And is on track to be the most successful new product ever developed by Nanometrics.

Now turning from the top line, I’ll take a few moments to discuss our performance in other areas starting with gross margin. Last quarter, we discussed the negative impact on our near-term gross margins driven by sales of our Atlas-II. We also made it clear that the initial low margin of this product was a result of its cost structure and not the result of pricing pressures or concessions.

Over the last quarter or so, our manufacturing, engineering and procurement teams have been hard at work negotiating long-term volume purchases agreements and driving improved manufacturing efficiencies in order to increase margins on this product as we ramp it up.

I’m pleased to say that those efforts are starting to produce results as evidenced by the quarter-on-quarter improvement in our product gross margin and specifically for the Atlas-II. We are confidence that we are on track to raise the margin of this key product and bring it up to our more traditional levels of 55% or better within the next 12 months.

That being said, in Q1, we felt short on the improvements we expected to deliver for total gross margins for the quarter. Much of this is attributed to the timing and magnitude of improvements in margin on the Atlas-II, which were not quite what we forecast for the first quarter.

The balance was associated with the decline in service margins driven by lower core service revenues, lower upgrade sales and increased cost associated with advanced hiring for planned (inaudible).

Importantly however, we believe based on the product mix we currently see, the timing of additional cost improvements to the Atlas-II, and overall business volume, Q2 should be gross margin bottom for us as further cost improvements take effect and lead to improved margin performance in the third quarter.

Now I’d like to turn to spending and investments. Over the last couple of years, Nanometrics has been successful in establishing itself as a key supplier and partner with the leading customers in the industry. This has resulted in market share gains, increased fab footprint and revenue growth above the industry average. These strengthen customer engagements have also led to invitations to participate in additional areas of the fab as well as a partner in the development of new products and technologies that address future technology needs and product roadmaps.

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