ONTO - Earnings call transcript Q3 2017

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Operator

Good afternoon. And welcome to the Nanometrics third quarter financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. would Claire turn McAdams. I to call time, host your this like the to over At Please ahead. go

Claire McAdams

but Thank you. On And Officer, Tim results, shortly Nanometrics Timothy third X www.nanometrics.com. limited similar release will expenses, good President and afternoon, at of also everyone. toward wire XXXX the the over Stultz, Financial to, that by result Welcome Jeffrey financial provide Andreson, The earnings revenue, conference information Officer. profitability Chief on be call. afternoon. and today's Chief available statements Pacific Today's are quarter call Executive to press and Shortly, the and open for conference distributed a the use quarter detail, financial future supplemental Then, The are our discuss will Such not in or detailing recap results including and financial operating expect after more and including, forward. expressions our may PM call of believe, margin, share. was call financial per which after website this contains performance. up identified events press look words our release will we Jeff like Q&A. our perspective performance the and results financial forward-looking certain looking

in new in believes variety industry adoption a of operating any and actual in reflected ability changes Nanometrics XXXX. and in materially Nanometrics Although timing statement. product the manufacturing our to additional in year obligation update and set technology or fiscal product, that are any on successfully in forward-looking of expectations cautionary for shift company's forth statements shipments, to demand, the factors the economic and in processes, competitiveness levels the due Form file to product customer adoption disclaims factors, orders contained changes risk the mix, reasonable, information from conditions, our efficiencies, XX-K statements forward-looking timing realize of expectations of industry results of general the could spending, differ including

according reasons also During press to non-GAAP for Accepted today's will over the reconciling our call, tables to measures Principles. results. Accounting our we release as turn calculated refer today's expectation I GAAP refer financial Please will well Tim for of those an using such call measures to as measures, Tim. Generally not now Stultz. to to

Timothy Stultz

of will Thank you, before our review I third Claire. opening forward. for then Good views my results results, the give looking perspective details will the remarks, briefly and share quarter everyone. recent in current business prepared Jeff afternoon, our Today, calls on environment, up our our financial the review Q&A.

acceptance business and customer These recognition results of were existing, earlier Our earnings installation these share margin revenues new was new revenue progress of our compared expansion third in fronts. with month, in execution last with product-driven footprint through fourth-quarter on call, revenue Businesswise, expansion complete a improved Since a gains, made follow-on recognize further share. our and unexpected customer of result tools through a SAM of growth to guidance pre-release we've and our were of be area into per into million in profitability above-average the results. an revenues The older our installations quarter shortfall delay fab, to We $X.XX fully tools expansion, consistent but and Japan. resulted of Atlas leverage. continues and earnings initial model $XX.X in those August expect in in some for our which our delays on this acceptance. and to systems Atlas of platform focus number

key performance III control Significant by progress launch adoption deploying adopt of market is in rate on the strong This Atlas process in expectations. be most demanding sales. comprised significantly the second winning quarter types. a have both them Notably, and launched response and applications. As the majority process and III device our adoption in the for positions. multiple ramp productivity improvements continues new initial in row, platform a most to rapid Atlas exceeded factor of more history, product we two we mentioned data additional this making customers in tools far account company In successful precision tool-of-record of software into and and than before, aggressively steady their contributions, led automated analytics and applications control sites our for sensitivity, for tool all July, our key the new across key are have XX% to our revenue

latest First was and in modeling NanoDiffract our our data has to already deployed productivity, OCD been modeling sites. Retrofittable capabilities. time delivering of NanoDiffract improvements to multiple III, generation at industry-leading, the software, Atlas X, significant X

excursions close and analytics The revenues second and tool is newest identification for process QX. of applications SpectraProbe the SpectraProbe. family, in SpectraProbe to the been software multiple member and has shifts. in our feature rapid several our cooperation key device validated OCD was for customers, contributed analytics Developed of tool, data which time provides proprietary deployed with a first

growing needed supplier data-rich, the this Nanometrics new analytics to fabs to control be to development to ramp process leading hardware and expect software contribute of opportunity, to to is the our increasing a of for solutions, position data future. demand unique data profitability. and we a and in As important an a of analytics business response tools drive part pipeline have In in in

current the been hitting are are process and investing applications the new hardware platforms technologies where we've side, beyond control walls. films tools thin technical in OCD and and platforms On These technologies new targeting metrology.

a phase. products industry. introduction an in with the and partner companies collaborating year, introduction new leading-edge launch been is has development lifeblood of are and next closely following for who initial scheduled of new technologies during first our development delivery us the Our platform to Successful

industry new above and the industry benefit points. solutions believe In will to expand addressing focused into be points to become product our served growth in revenue solutions inflection instrumental our and competitive We pace an helping us these from addition of inflection remaining profiles, software revenue markets and hardware long-term to achieve ability investments. new relevant, additive investments

Turning continue end by growing. be markets, in globally, to our XD-NAND to investments outlook robust business and

XD-NAND first increased outlook revenues our this after where Chinese record already last year. positions of XD-NAND earlier in our an from the expectations. part last strong to fabs, important XXXX from that and year customer. We've five devices, and XD-NAND tool-of-record the largest from we doubling of Chinese our top levels double-digits share on from once particularly manufacturing be increase Overall, have expect confidence contributor announced with our XXXX to a next producers market these memory to year spending are And sales. has We expected by the established growth devices high-volume story we starting quarter to on long-term domestic recognize domestic the customers revenues our our become particular again

our this is driver to of second year-over-year growth, XD-NAND year. major clearly and a outside While revenue of expect grow business also DRAM expected we half double-digits other segment every

us supported at on to year, the current new trends, equipment outlook combined in revenue our for XXXX, for by spending prospect growth and our growth Turning with business in next from further confidence fab additive R&D of key gives wafer drivers. records six contributions pipeline,

positions. established we memory investments and where share First, increased DRAM market strong have XD-NAND

Second, the from domestic spending emergence Chinese of significant fab projects.

This year revenue revenue to metrology outlook, year. product from of three-dimensional up thin and and film of And advanced in structures. another growth year from both Summing contribution are DRAM. for our gains combined operating with products. software six, new business positioned our expansion Fourth, our and in device lead of of analytics XXXX double-digit for we share another our growth model integrated initial believe secular Third, and Fifth, revenues we margins. increasing platform. our record a gross the OCD leverage fifth will

Turning of to be meaningfully expected exceptionally forward-looking exceeding revenue adding guidance, revenues delayed third our the the quarter. even our to quarterly from strong QX an contribution quarter, records before previous is

call Jeff for show revenues million; to guidance our quarter of million in $XX.X the turn and XX.X% over results expenses discuss the Jeff? of more Our of I'll margin per to $XX.X million; $XX earnings to detail. $XX and now million to fourth $.XX. XX.X%; guidance to operating $X.XX gross to financial is

Jeffrey Andreson

Tim. Thanks,

costs schedule to supplemental financial segment conference that end The non-GAAP our as are measures comments, exclude revenue metrics P&L market search my I'd unless non-GAAP a and the and tax measure GAAP begin well restructuring amortization executive discrete summarizes I and discussed discussed as product, Investors call, by this Before assets, items. intangible in website. identify like information of based. on which GAAP results available section measures remind of of geographic acquired you I is the the charges, region, These as impact

XX% of XX% XX% IDM devices sales revenues. market, prior DRAM second comprised of from and largest contributor X% grew quarter quarter. down X% other XX%. quarter X.X% of integrated XX% materials from to By million characterization systems, the total type, comprised metrology and $XX.X service revenues NAND sales XX% were a quarter substrates sales product from year-ago and of second sales. were product of of logic XX% decrease revenues. million, XX% $XX.X were By of third segment product up the revenues. revenues of from and million, and XX% quarter XX% continue quarter systems, significantly, of product Foundry revenues to XX% Product and systems, to the the at up year-over-year. Third sales automated of $XX.X the increased end XXXX to product the the be comprise revenues XX% product All were Service from third period.

revenues quarter customers and Intel total of included XX% Samsung for at at Micron in XX%, XX% quarter. the the XX% Our third at

basis from due largely exceeded higher the a service target our of of of business, support high above XX.X%. engineers increased well XXX QX better-than-expected our service XX.X% Product XX%, quarter level service level gross higher margins basis margins end from of the the gross increased points to points range field and margin gross the of XX to for Our model second margin to of our second attributed quarter installations. to utilization the

gross at timing to the and due half product our results Also, being see certain Below Operating $XX in foreign the program Our income, expenses margin were level. margins gross by at improving margin exchange million and guidance the of our interest low of the income normalize was second from service in losses. margin R&D quarter the investment the and half model second with expenditures. sales fourth our we second consisting X% in end other line to primarily XX.X% volume. primarily revenue $XX,XXX, operating for guidance to our offset XX.X% increased range, largely expect QX, quarter of initial in on up of the unfavorable of financial line, came

million quarter the for expense of or tax was $X.X income. XX% Our pretax

value. to grant the basis basis, expense of initial settlement with and includes to at on we tax remain GAAP million income our Net On to difference our XX% share. be utilize due or employee in ongoing the the was during deferred non-GAAP approximately benefits which an tax versus a expect equity assets XXXX, Our earnings rate actual the our ability associated about year. our between $X.X rate per tax the the tax quarter third $X.XX for to XX% cash

for investments record second Inventory quarter several of flow at operations the shipments questions. Turning the was sales and awaiting level per to acceptance. I'll Cash as to of sheet. to reflecting quarter at the over Days balance or was million well as million. flat third to Operator? $X.X support and $X.X quarter, outstanding to XX the million fourth customer days. from shipped the And already flow quarter call $X.XX million $X.X share. in the grew free remain increased and Cash $XX.X turn the with the million that, cash end $XXX.X systems to

Operator

of question comes line first the comment Nicolaus. or Our from Instructions] Patrick from Stifel, [Operator Ho

line open. is Your

Patrick Ho

terms margins, much. Thank of the Maybe you new question talked in big very products. of about picture Tim, you at the some gross

for have tool you so or software nature up? is features ramp did a of generally higher of margins introductions potentially to But like impact the And could or some that and new potential some introduce products, of, begin analytics. the ones quarter new say, or the of about that they margins data as as new what things you impact talk

Timothy Stultz

in calling Thanks pretty will the learning for working them It's There are new bring question. of and I accretive I a new installation close value are going of because tools when look kind the But we margins, of be pressure in, as the our out is process. Patrick. at a and basis good on always be tools coming to they right they shoe. to the of think priced gross strongly on to you on,

Patrick Ho

of mix follow-up has been pretty is, the Great, that's helpful. The I your have question steady. customers

your be Do hard is there to into continues going think you XXXX. out well largest bigger where for you become is contributor XD-NAND I XD-NAND look contributor that XXXX that or as as increase believe can largest revenues. it's in that mentioned a other whole? or contributor know again into are You XXXX forward the XXXX segments a to to either

Timothy Stultz

Yeah. some player participating for fabs. Right we're strong now, very the large again for the well the Chinese domestic we think as year, to XD-NAND There are be us in. going national next as that investments is

fully that I expect going revenues the to So, largest be that's forward. to our looking contributor

Patrick Ho

QX we a could or increase on and expect And flow the flow. out an story? terms push flow Did in this maybe the Obviously, that is terms a the out final from cash quarter in some cash the question cash delivery Great. operations of in of of for systems cash Jeff QX those in some revenues pushed just that were timing. of and also

Jeffrey Andreson

a was were healthy a So, contributor. QX, say we they going wouldn't pretty I In pushed it but say through ramp. a little giant I'd bit,

So, we're capital. in working investing

So, this see start you'll going I quarter. cash the think into first to improve flow

Patrick Ho

Thank you very Great. much.

Operator

you. Thank

or question the from comes D.A. Diffely Tom next from line Our Davidson. of comment

open. is line Your

Thomas Diffely

afternoon. Yes. Good

year. on to to be guess, a still DRAM and how out talked of one your as up So, Are both questions, following year-over-year individually NAND up in you the about I drivers expecting going you memory driver? be that's the

Timothy Stultz

Yes.

an NAND So, profile driver, contributor do that will we growth investment going but do DRAM be year. think we next the a in think big it see be and we is to increasing

Thomas Diffely

Okay.

we're that the couple do think I over business pretty think, becomes up speculate years? DRAM Is a you large as here of to percentage view have your to greenfield some that starting opening going facilities else, well? somewhere next of pretty soon. the And DRAM

Timothy Stultz

new some that are been seeing There will DRAM we're DRAM some – Korea that China, be development of. to as facilities recently some there greenfield in and some in made are aware dedicated specifically we've also

and that in less devices. So, reduction the yes, DRAM. Most as they is it's of in starts, next wafer – we to it really going the investments of the on capacity see increased total understand number are we generation much as die into offset

Thomas Diffely

Okay.

starts split to may actually out lower So, facilities to same, staying some total the wafer industry the the begin into – but cover is new

Timothy Stultz

putting opposed be I look to at deal number the trying trying that in capacity with I but more with be scaling they're know if facilities sorry, and bit put will to on structures, some in of place, as – in die low That that drive die, digits. capacity new of total there will reduction the demand, the and the misspoke to they're I'm single be to starts. which number bits, they you the offset will are the what the

Thomas Diffely

Okay.

capital-intensive move to for they [indiscernible] down As the they do OCD? different get more nodes,

Timothy Stultz

components definitely displace of tighter some They little aspect and high They yes. process tolerances. do, a bit ratio the the

Thomas Diffely

Okay.

fab existing business? incremental still you'd if some updated wafer their an even didn't and So, starts, increase see their facility

Timothy Stultz

and the in growth capacity a in see do the players additional We by as our the it's some do. as business technology driven new nodes on of China. coming absolutely well we both Yeah, and in DRAM

Thomas Diffely

year. I driver been And great. has new reference, Okay, a also the product next

So, year, you revenues released second if next of expect kind even mid-year? the half in of it's

Timothy Stultz

adoption. Yeah. We a shot transition from think evaluation And our at getting contribution. The at the feedback at launch and revenue have looking that. that. And initial we we're of is plan least second partner looking at solid we're

Thomas Diffely

to And double-digit referenced great. few that XXXX? Okay, times then, a XXXX just referenced and for I that both growth. had you confirm you want

Timothy Stultz

absolutely. Yes,

Thomas Diffely

pretty service side, drove And then, What margin okay. the was strong. service Great, that? on

Jeffrey Andreson

high-level Jeff. It's mainly just It utilization. Tom. the of was Hey,

these basically installations. revenue. have to That attributed through product these engineers working our go the all ramps, we is As on field service we

the And of of installations now, starting utilization service levels was forward. to drove new the going that So, some support people hire upside. up. And it majority revenue higher we see that we're to and the

So, that as more some will down normalize on. bring we people

Thomas Diffely

that before as you XX%, cash look cash Okay, When it tax rate being especially how you about the makes talk back normal tax And expect rate, rate the with rate? up you on towards a XX% current to rate. at can then, level long your go tax forward, would sustain sense. at you

Jeffrey Andreson

think you certainly we to year. be utilize I some be to look limitations. will to We'll half I in as it, it get of the think the able next continue first year, but

vary so, And tax they by type assets. of

growth increase So, I range. will still the year, in rates look with XX% And now we probably to profits. it think see be a below tax well moderate as because the seeing it's US-based we next we're the

Thomas Diffely

Okay. the side? your percolating is part non-semi be here. that, finally, of behind driver to then, the the And business seems What other

Timothy Stultz

So, of sensors. silicon infrared and Also, couple systems. adoption the our applications CMOS bare for tools there's wafer a areas. There's our

Thomas Diffely

Great.

Okay, thanks for your time today.

Timothy Stultz

Okay, Tom.

Jeffrey Andreson

Tom. Thanks,

Operator

you. Thank

from question line next of Twigg comment or Our the KeyBanc. Weston from comes

open. line Your is

Weston Twigg

I year thanks to way. couple for will in DRAM, which Can question. them. I have NAND, in most a XXXX? customer growth taking different the drive the growth ask Nanometrics Hey, want foundry logic whether of next segments, my question for you outline a

Timothy Stultz

would it's – but now, the but one new areas. improvement driver investments would opportunities. we be a into we're going advanced some the see Right those are clear I DRAM know have a XXXX. if as in on coming it, China a strong going of opportunities We're We one place. us think Again, in put going out to lot biggest is in half. of because in coming the still seeing strength lot It been second has be the help up new of of greenfield to, foundry They I don't for some capacity of looking a fabs. to our of don't primarily logic. China new are say NAND. is handle we've in

Weston Twigg

Okay.

offers did segment. say you strongest you most before? say what the – The when NAND So,

growth the from most NAND? expect come also to You

Timothy Stultz

of Out XD-NAND, yes.

Weston Twigg

okay. XD-NAND,

numbers, CapEx XX%. looks this XX% little semi over looking have Samsung a this is, I like But year. up question growth the it should other had of the now at just estimate is I And part year, The guidance. over be Nano

So, could it is help us seems disconnect between Nano I of the you the else. understand and a if just like growing. recognition there's CapEx level a industry [indiscernible] something little where in bit revenue or wonder

Timothy Stultz

in things the years observation. a before rates years. year, There's what it. behind profile grown was Because investment years, of investments, industry above And year? these last three, the actually pace three this That's four One than was was quicker almost a over at of over the our two time, good is, the it this the customers for as look our I investment with process tools. are profile. putting timing clearly said, we're four the have and where We, to couple And a first at. growth control to it materially the the customers the

timing at has there's at for – we've been you'll But over also it's and of the multiple strong find growth we've We've the folks When Samsung. for elements some seen at our industry. you look So, been the one if the Samsung. in issues. seen look as has of outpacing many we're some been really at contributors us us, for biggest Toshiba, the industry – growth And investments. you of those haven't the years, other of growth timing out

last years, out the our of So, point advent NAND is things XD-NAND. to XX% like that, the has with one grown four over market share that I'd the

a are of so growth have of in we far ahead the you got We're doubled. next come – seeing to the think going opportunities when And on those market in of and roll outpace industry, over that. sites you're year, some where at the the lot in fully little tracking position, resurgence we that expect double-digit strong we've new of we last So, had year, a onboard, WFE contribute. these top growth foundry, to This we a bit. I all as year investments XD-NAND point,

Weston Twigg

should Okay. color. you, be if Jeff. one And sneak That's can I more. helpful one This for

a you it thought looks ago, higher a OpEx, think, it running QX. just would I quarter be like little a in than touch is

understand help heading trends us the if the maybe and on XXXX. Just you difference could into then wondering OpEx

Jeffrey Andreson

quarter a higher maybe it's Wes. QX little Jeff. It's than ago. in thought a Yeah, Hey, we

And that a program. of week shift can timing it some quarter. the spend related to our is of and engineering just on just shift It or and two

second our think about the the view So, of half is I same.

how fourth that's then I support now. as platform investment quarter talked Tim we'll roadmap into at look some rate we're of a and infrastructure need year, it probably incremental exit that think our we and and support about to the next to a little of looking is the probably bit run little China

Weston Twigg

you. Thank helpful. very Okay,

Operator

Thank you.

Our of the next comes Company. from Benchmark line The comment question Mark or from Miller

Your open. is line

Weston Twigg

and any at at saw mentioned Did you the Toshiba you Samsung. lose of You growth customers? strong share

Timothy Stultz

instance, was nine any In In is some – in look were a last total, which always the no. There's market year's nine Xx revenues take and our around. first the it But revenue up move first you our year-over-year, in Samsung, share it months shifts over at big growth spender. for versus months.

Now, Toshiba. we've got Great numbers growth of coming so I very as growth, Samsung that. on. out Great at said, strong and with

still job getting believe There's think only look defending and own in So, But position our trying at it business successful of at you I some market. major not We've revenue puts and there and XD-NAND we're the a defense say all but strong layers. We're into to we've holding we've comes of when a of customers. in foundry been done additional taking strategies, takes, we a have couple critical our kind you more trying roll the are got where our really over but layers. growth it I'd key markets, good where get of look from, you areas. over to get the of couple XX% a where on the we couple at always share

Weston Twigg

For planned improvements? incremental the what year, next for are your new platform

Timothy Stultz

an brand-new improvement. brand-new a a It's platform. not incremental It's It's tool.

And parameter at served time, has application have films one we've an that It's been is of process an not but So, as this helping in OCD we direct involved it's a at it's in that, mentioned, collaboration a with or product the markets. targeted become for control extension multiple customer our actually, customers. customers us. critical developed key not –

Weston Twigg

you. Thank

Operator

over Thank queue turn Dr. additional in would time. you. conference the I'm showing no I the back to any for this closing at remarks. questions Stultz like to

Timothy Stultz

Thank you.

ending call, want a I on update and CEO succession this progress. brief Before plan our offer to

employees, board who this all profitably in in is for executing thank and remain the of search hard process and spending board in challenges most for the Directors Our to focused extent, and on our want with work our their robust And and front decision all next us, ensure is to a the the next CEO to our I opportunities well-qualified Nano the team be through call process important dedication, environment to I expansion. we the day-to-day joining very responding incremental working consider our at Board growth revalue. to that, call. you be well with to the And our phase to growing business along create We next will we'll Meanwhile, time. makes. stakeholder end of hard and that its exceptionally lead CEO. thank that And for support of my and of leadership this

Operator

in conference. concludes Ladies program. thank for the and participating This you gentlemen, today's

wonderful now may You day. Everyone, disconnect. have a

Claire McAdams	Managing Partner, ‎Headgate Partners LLC
Timothy Stultz	President and Chief Executive Officer
Jeffrey Andreson	Chief Financial Officer
Patrick Ho	Stifel, Nicolaus & Co.
Thomas Diffely	D.A. Davidson & Co.
Weston Twigg	KeyBanc Capital Markets
Mark Miller	The Benchmark Company LLC

Onto Innovation (ONTO) 2 Nov 172017 Q3 Earnings call transcript