Nanometrics' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Nanometrics Incorporated (NANO)

Q2 2012 Earnings Conference Call

July 26, 2012 16:30 ET

Executives

Dr. Timothy Stutlz – President and Chief Executive Officer

Ronald Kisling – Chief Financial Officer

Analysts

Mahesh Sanganeria – RBC Capital Markets

Patrick Ho – Stifel

Tom Diffely – D.A. Davidson

Gus Richard – Piper

Presentation

Operator

Good afternoon and welcome to the Nanometrics Second Quarter 2012 Financial Results Conference Call. A Q&A session will be held at the end of the conference call. Until that time, all participants will be in a listen-only mode. Please note that this conference is being recorded today, July 26, 2012.

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

Claire McAdams – Investor Relations

Thank you and good afternoon everyone. Welcome to the Nanometrics second quarter 2012 financial results conference call. On today’s call are Dr. Timothy Stutlz, President and Chief Executive Officer, and Ronald Kisling, Chief Financial Officer. Shortly, Tim will provide a recap of the second quarter and our perspective looking forward. Then, Ron will discuss our financial results for the second quarter and third 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 www.nanometrics.com.

Today’s conference call contains certain forward-looking statements including, but not limited to financial performance and results including revenue, margins, profitability, and earnings per share, customer concentration, tax rates, and product adoption.

Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from expectations due to a variety of factors including economic conditions, changes in levels of industry spending, the adoption and competitiveness of our products, shift and timing of orders or product shipments, changes in product mix, our ability to successfully identify, complete, and integrate acquisitions to realize operating efficiencies and to achieve reduced tax, 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?

Dr. Timothy Stutlz – President and Chief Executive Officer

Thank you, (Claire) and good afternoon everyone. During my prepared remarks today, I will hit on a few of the second quarter performance highlights followed by an update on our long-term business drivers and close with comments on the near-term outlook and our guidance for Q3.

Overall, our second quarter revenues came in as forecasted without any major surprises. We did benefit from stronger than expected upgrade business that gave a boost to our overall gross margin, pushing that above our expectations. This in turn contributed positively to incremental earnings which also exceeded guidance.

As expected product gross margin declined sequentially driven by an increased mix of our Atlas II systems which comprised about a half of all Atlas units sold in the quarter. The good news is that the Atlas II margins are steadily improving, met our objectives for the second quarter and are on track to meet our projection to exit the calendar year with gross margins of 55% or better. This tool continues to be well-received by our customers and is ramping faster than any other product we have previously brought to market.

Another significant highlight for the quarter was that our foundry business hit an all-time high contributing 30% to our overall revenues as we benefited from ongoing investments by existing customers as well as some additional penetration into our key target accounts. On the device side, we saw a significant decrease in DRAM spending, which helped to offset lower spending in logic and flash.

From our customer perspective, we saw a welcome step-up in spending by Hynix. Historically, a stronger account for us, as they resumed their investment and tool needed to support capacities, as well as the development of next generation devices. In spite of these positive trends, however, we did see a sequential decline in revenues of 4%. Our automated systems business was negatively impacted by the well-publicized pause in spending by one of our largest customers.

In addition, limited capacity investments at some major accounts hampered our integrated metrology sales. While continued softness in the LED, solar and silicon wafer business brought our materials characterization business to a three-year loan. And finally, our balance sheet has remained strong with cash increasing to nearly $96 million, net of $5 million spent in the quarter on stock repurchases.

Now, I’d like to turn to our key business drivers, the foundation upon which we will grow and further strengthen our business. Today, we have more engagements across more customer products and technologies than ever before. In addition, and quite importantly, the semi industry is pushing a large number of disruptive initiatives that will lead to major technology inflections and thus growth opportunities for Nanometrics. These include 3D device architectures, such as FinFET transistors, 3D memory chips, such as the VNAND, 3D packaging, complex multi-step lithography, EUV, the impending wafer size increased from 300 millimeter to 450 millimeter, and of course, the ongoing pursuit of Moore’s Law through shrinking of critical dimensions with current development efforts focused on low 20 nanometers and below. These investments in device technology whether they are to drive performance, increase yields, or reduce manufacturing costs create more demand from measurement and control and translate to growth opportunities for Nanometrics.

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