Timothy Stultz – President and CEO
Nanometrics Incorporated (NANO) Citi 8th Annual US Small/Mid Cap Conference Call November 16, 2011 11:45 AM ET
So, Nanometrics, five points I am going to try to address this morning. The first one is, although in the semiconductor capital equipment market primarily which is a process control metrology provider. Talk a little bit about the drives high-growth business, in particular our flagship product known as optical critical dimension. Where we will talk a little bit about the emerging growth of three dimension devices, three dimension packaging and the market that support those activities. Our efforts to expand our position within the markets through a combination of acquisitions, new product development and key comp penetration, and little bit our financial performance which we’re quite proud of.
So what is Nanometrics, Nanometrics provides products to the semiconductor, data storage, LED, solar markets, these are light-based technology to make measurements in the fabrication of our integrated devices, integrated circuit LED or solar cells. All of our technologies are non-destructive, high-speed and in line metrology components.
We have a variety of products that are used depending on which environment, whether it’s a semiconductor fab or LED fabric, but what’s really importantly is, it’s not about machines themselves but the software analysis and measurement capabilities that are provided by what we call our NanoCD suite which is a combination of server platform and proprietary software.
Our products have all this optical techniques to take advantage of the physic of the way light in our actual surfaces to make these measurements, but it apply to multiple markets, primarily -- our primary market is the semiconductor, but we -- as I mentioned earlier, we are in this high-growth utility solar, data storage and the packaging area, and for us it really doesn’t matter what the device does, because what we are measuring are the features and structures that play direct role in the performance of the devices, so whether it’s a light emitting dial or it is a solar cell, or some integrated circuit, they all make features, they all make devices that have structured properties that need to be measure to control in order to get the desired outcome and that’s why our tools come into play.
And the common theme to all of our customers is that we -- they use our tools to develop the next generation applications, the smaller features or smaller devices to improve the yields by controlling the process variations and therefore reducing their manufacturing costs, the return on investment for products like in process controller area are very high and as a consequence more the capital spending in general goes to process control than in process tools as time design.
So this picture is a little schematic to show you, a little bit of what we measure and this is an example of 6-Transistor SRAM Cell, and you see the building device software, the layer after layer that comes in to that make every device and we – they use our tools to make these measurements along each of process steps, so in this case it maybe thickness of the film or width of the particular area, then they build another, might be the dimension here in the height, then they will measure the length and depth and pitch.
And in every one of our measurements, the use it through a sequence of measurements but then we also collectively measure what’s happen to the layers below, so we don’t measure just a surface, we measure down interim material and to make sure that the properties of the previous layer haven’t been disturb by the subsequent process steps.
So what drives our business, well, the first one is, most law is shrinking the device, as they make the device smaller this particularly graph shows, technology more than semiconductor going from 130 nanometer as the small feature down to 22 nanometer, which is one of most advance nodes at this time and actually working on nodes below that in the one X 18 and 14.
To make these devices smaller they also have to add layers in order to make the structures that they want, every new layer is the new measurement opportunity. In addition as they make the devices smaller the tolerance for variation is reduced and so it right they need to make additional measurement they have excel.
So as a result process control measurements have a key metric relationships to -- for the advancement of these devices, as they scale down, which is represented by the orange line, as they scale down on the device structure, they need more measurements and more steps and therefore more tools, so that’s best kind of a underlying driver with high process control. Within our technology space, our flagship product is known as optical critical dimension, it’s an optical technique for making these measurements in a non-destructive way.
And one of the key things that’s happening is that there have been tool, critical dimension measurement have been made since they have been -- all these transistors, but traditional workforce, already now exceed and one of them is the Scanning Electron Microscopy. The Scanning Electron Microscopy has been the industry work force for making critical dimensions. But that electron beam technology in the technology world and OCD is now displacing it, so in upper right hand corner we are showing the relative displacement of CD-SEM by OCD as is market in terms of market penetration.
The third thing is that many of you have watched the industry, know the recent announcements such as Intel that’s making 3 dimensional transistors. So historically transistors reflect in their profile and all that matter look the upper layer in the left. But the new transistors are 3 dimensional, they have a vertical component, the vertical component is necessary for the shrink and the performance and Intel and other in production with this device, and we’ve previously announced where we actually had the two record used in developing this device.
But what is important about this, in 3-dimension you requires a different technique for measuring the critical parameters, so no longer just measuring a lateral risk or film thickness, but you’re measuring high pitch, a memory card and the other technologies can’t capture the level of data, the richness of data required to make these devices, this is a huge driver for OCD.
And finally, 3-D packaging, so as we think about, when you look at your cell phone, the phone pack alone tells you that you can’t have a big motherboard inside of your phone, so what they are doing with the chips is the stack, so if they can’t spear them out they stack them, so just for special reason they stack them, but more importantly for technological reasons, they stack them, because it reducing heating, extend battery power and increase the speed.
Stacking devices requires very precise alignment and connection between subsequent layers, and you can imagine the value proposition, if you have a chip and you connected with high semiconductor process and probe it out and it works, so you have another chip, that’s gone through the whole process and it’s vary. And now we’re going to stick them together, maybe we do something incorrect you’ve taken at the highest point of value destroy two chips. Our tools are used both to evaluate the contact, the inner connect and alignment of these 3 dimension packages that we have a couple of images here.
So I’m going to talk a little bit about where this OCD fit into the metrology space and we’ve shown the two parameters here to talk about, one is how many data points can you measure, not those are special, but maybe a given feature, can you measure height with the length under correct and multiple layers at the same time or do you just get one parameter, never wonder, how fast can you do it, because if you want to use in the process control, you need to be inline, you need to be able to respond, you keep space with all the other tools.
So the first one that some of you maybe familiar with is the Atomic Force Microscopes or AFM. High precision device more or less like a [photograph] going across the surface, but truly a 3 dimension device and it’s various source. So you get some very interesting data from high precision data, you don’t get a lot of richness because it’s one dimension and you don’t get in a timeframe that allows you to keep space with other tools, so it’s really an offline technology.
The second one is workforce, we are talking about CD-SEM. CE-SEM uses electron beam, electron beams come down to the surface and come off and look at what happens to electron beam to make measurements. Its further memory of 2 dimensional measurement electrical surface and it doesn’t need to capture any information below the surface.
In order to get the resolution of -- even on 2 dimensions you have to increase the beam intensity and the increase electron beam intensity actually can damage the device. So the technological limitation of CD-SEM are two folds, one is 2 dimensional and the second thing is, it can be damaging to the device, it’s still a very fast tool though.
Now in terms of data richness a most power tool out there in the laboratory is transmission electron microscope, in this case they take biopsy of a chip, they take a slides out and they look at it from the side and you could see its image, and you get a lot of information, depth, width, some -- and some feature information.
However, this is absolutely destructive because you have to take a piece out of the chip and you have observed. So you have to take that offline. What OCD does, it captures the speed of the CD-SEM, it’s faster than CD-SEM measurements roughly or about a second.
In one second we capture 3 dimensional information on a surface and below the surface and can take information and feed it back through the machines or the operator to find out whether the processor is under control, so the benefit of the data fidelity of the transmission electron microscope and the speed of the CD-SEM in a non-destructive environment.
So let’s talk about, I tell you OCD is really great, here is proof positive that OCD is being adopted. This is a chart of just the high recipes, the recipes on our tool in production at key accounts, at our customers. So isn’t a market, this is the adoption of our tool and our recipe, why we call a recipe is a discreet measurement at some point along the process sequence, and you’ll see that we have adoption in the memory market both Flash and DRAM, in the largest market, in the foundry market and even in the hard disk drive for making the thin film heads with the very high growth rate in each of these areas.
But the point and another point when you look at the data, is by technology node, who is really using it the most, are the people making it at 40 -- 60-nanometer or 50-nanometer or the growth rate, now it’s a double-digit growth rate. But look at the growth rate at 2X, almost 200% growth rate at the 22-nanometer node, the more challenging geometries are implementing this technology at a much higher rate. So it shows that this technology is coming as its own and its ramping ever more faster as the technology requirements increase.
So let’s talk about OCD, I want to talk a little bit about 3D wafer packaging. Now packaging depending on what world it come from, have good news and bad news, now packaging sometimes does not associated with wafer processing where it’s considered after the wafers done and it’s an offline application, low base entry, low differentiation. And this kind of shows traditional packaging with stack chips and we have this built with rates and some wires.
We are not in that space. We are in the space where the chips are actually marry to one another in top and so when you see the scrap here, the lower section of the large bulb are the areas those are called for (inaudible) chip, those are the measurement that are that companies make in the packaging arena.
If you look at the upper part of this image, so you see very small features, those are the holes through the chips and they contact to the chip, so they use to marry the chips together before they put into this packages, that’s where we are and that’s what our tools measure. So why are we looking at this highly refine data that occurs what during wafer processing not in the backend packaging arena and this is an example of I believe a Samsung memory chip showing eight layers, where they actually put holes, contact holes, contact holes, contact and you can imagine, you have eight chips and if you make it a single one of them, you can destroy the whole stack, it’s our tool to play key roll both measuring the hole, the contacts and the alignment, and that product unify, it’s a product we acquired in 2009 and it’s contributing nicely in terms of the growth rate, overall growth rate for the business.
So what’s going on in 3D packaging, while there is a couple of charts here, one that is showing just wafer scale packaging in general and the lower graph shows two images the courtesy of micron which is call the memory Q, where they put multiple memory chips, DRAM chips on top of the larger chip and put this inside the package.
So the number of wafer packages are growing at about 17% and the number of areas where they are using this true silicon via the hole they drill through the chip devices and make the contact is going now even great rates. So it’s a great market. It’s an emerging market. It still a small market, relatively small, and it’s absolutely the way the business is going, and we’ve got a leadership position with our product in there.
So little about the history, Nanometrics is actually a 35-year old company and we’ve gone through a number of phases and in the last several years we’ve gone through a pretty significant transition to become a key supplier to key accounts.
And so we’re looking at our 2007 revenues -- by product revenues, against our last 12 months and the point we want to make is in 2007, that was a last peak cycle for capital spending, in fact, in 2007 they spent more money in capital equipment then they spent this last year 2010 or it’s projected for 2011, 2012 -- 2010, ’11, ’12.
So the point is that our revenues have grown substantially even though total spending has not increased year -- period-over-period on this and what you will see is the growth has been primarily in the logic area where we have a 162% growth and in the Flash are that those chips are in the cell phone or in the iPad’s, all your games and so on, and all the stack, your camera systems. And so these two markets, the high growth markets are adopting our technology at a very high rate.
Now most of you here, again in front of you, say, we are here and we are outperforming the market, and I’m going to say the same thing, but we’re trying to show the data that says we’re outperforming market.
So here is what we look at is we look at our revenues, starting with down, when the rollout of the last cycle, so it get Q1 of ’07, we’ll take everyone for last peak cycle, and there is a rollout since we know this is very cyclical industry, and so the blue line is capital spending rollout in that cycle and the green line is our revenues at that time and pretty much we were down with the industry hand in growth.
When you look at the difference now, we’ve really proceed ourselves because our growth rate in revenues have exceeded the increase in spending, as you’ll see that the green line, significantly higher then the blue, so that benchmark against that one data, and so without playing games about market share or what’s going on, we could simply point to the fact that our business is growing faster than the overall industry and therefore, we can stand behind same that they saying we’re outperforming industry.
Another way to look that is this is a look back in capital spending all the way back to 2004, and the line that – that with the points are simply our revenue is divided by capital spending, so it simple, there is no segmentation, we are not having up a markets, we are not saying this is only process control, just OCD, this is capital spending divided into our revenues. So you can see that year-on-year, year-on-year, year-on-year, we are giving a bigger piece of the pie, another validation that are growing market, we’ve actually got a bigger piece pie in the downturn from 2007 down to 2009, and we got a bigger piece of a pie going up. So we have outperformed the industry both going down as well as coming up.
One reason that we’ve been able to do that is that over the last several – couple of years, we’ve established ourselves through some very key competitive terms, which I’ll summarize in a few minutes at the major technology leaders, the Intel, the Samsung, the Hynix, the Toshiba, that’s been driving our business, that where we win, and we win this long-term relationship, so we have multi-year implications in our business, it’s not about winning an orders, orders really don’t matter, what matters is when you become a upside, that they got a technology node, 22-nanometer and you win that, you benefit not only from that particular, but you benefit from the fab as they put those fabs around the world, because they use the same set of tools, and so a real matter of technology node, this have two to six impact on you revenue outlook.
So let talk about last quarter announcement of recent wins, we will -- each of these are competitive win, and so what I’m going to share are not orders we’ve got, not customers saying that not providing the tool. But one, we put our tool on the floor next to the competition and we actually some very intense run off and this is like head-to-head, any of this run from six months to a year, with multiple engineers and thousands of wafers and tens of thousands of measurements made before a tool that selected, because once they make this tool fraction, they carryforward.
So we won the Tool of Record at an Emerging firm manufacturing one of the biggest one this one, and it is a very key one, and again, these are sizable, long-term monthly year rate. We won Integrated Metrology Tool of Record at Major Korean Flash Manufacturer, so what’s integrated metrology that take our biggest machines and take up the core elements and bolt it on to a process tool, so as a process tool like natural, polish or deposition tool to each step to make measurement right away and put it back into machine to control the machine. We call that Integrated Metrology as appose to standalone, because it’s tied directly to another tool such as one made by Lam Research or by Nova, or Applied Materials, the Tokyo Electron, all of which they use our tools on their tools.
Our Unifire was adopted by Samsung, we thought this size going to get to use the customer name, there is but we are not allowed to do that, we have be little more hazy about that, but did win the Wafer Scale Packaging tool run off and Samsung has adopted our tool for their wafer scale packaging.
We also won the – we did a pretty intensive run off in displacing content at a major disk drive manufacturer and we got the OCD platform in there. So now we are in a very strong position and it is not quite a bigger market as the semiconductor market. But once again, it’s using the same core technology, the same product platforms into additional and adjacent markets.
And we also have our one of our tool selected by Solar PV Manufacturer for in-line processing. Again, this is a long time we are going through the process evaluation, looking at other tools, and they selected a Tool of Record. Tool of Record is a very important to us, because Tool of Record implies you have a position, the incumbent and you get the carryforward on the business.
So little bit about our financial performance, if we go back to the Q1 ’09, which is the kind of something we got a trough, I got the trench of spending, we had a $10 million quarter there, and after we just turn the corner, a couple of things I’d like to point is, we are one of the first company’s coming out of that downturn that turn to profit. We have put down a lot restructuring prior to that. We put in some operating leverage and by the second quarter of the term we were profitable and I’ll point also to the margin in line in top.
So the lines down at the lower area are the non-GAAP operating margin and the GAAP margin, but the line above is the growth margin and it’s hard to look at this and I’ll come and summarize in the next slide, is that, we currently gaining market share, we clearly gaining more of capital spending, and a lot of folks have support to that and say, that’s why my margins are so low, because we have to make a compromise on pricing, we have to make compromises on the commercial terms in order to gain those slot, we have got nine consecutive quarter of gross margins above 50%, it’s a very expectable in any industry we made this offline.
So bad performance; is not about one quarter, is what do we done consistently, so quarterly revenues are grown over 100%, the Q1 of ’09 on the CAGR. Our gross margin has been above 50% for nine straight quarters, we’ve been cash flow positive and we’ve been profitable through this entire phase. We have added cash to the balance sheet. We’ve increased our intangible book value and all of you say, it’s clearly translate to we believe we are creating a shareholder value.
One thing that we typically point to, is our focus is on stakeholder value, in fact, if you ask, why I put my energy, my energy is on taking care of our two primary stakeholders, our employees and our customers, because if we do really good job with that our shareholders benefit. So we are returning -- giving good returns to our shareholders by doing a very good job of penetrating and satisfying our key customers and been able to higher retain on bests and buys in the industry.
Along with profitable operations and good balance sheet management we’ve continued to increase our cash, our cash at one time was little bit less than $10 million, that’s now one at, during company, okay. We closed over a $100 million in cash. We’ve got a strong balance sheet. We’ve got good cash flow and clearly associated with is the increase in the tangible book value.
So basically, Nanometrics once again, a growth story that is driven by core demand, technology trends and execution in penetrating key accounts, and we benefit from our number of things that are going on the industry in terms of the shrinks increase complexity, move to mobile computing, the 3 dimensional packaging, and in fact, that we have some really exciting technology that supports it all.
And, with that, thank you, and I would like to open it up for any questions. Yeah.
So the question is, where we are taking share from? Our primary competitor in the OCD standalone market is KLA-Tencor, our primary competitor in the integrated metrology market is the company call Nova Instruments, the smaller company in Israel, that’s pretty my challenge to this, two competitors.
Could you tell us why fourth quarter is going to be so soft and can you shed any light on 2012 at this point?
Okay. That is a good question. So the question is why the fourth quarter is soft? I’ll talk to fourth quarter being soft and that’s, there is a lot of things that are going out there and I can’t explain briefly, I’ll spend little at the same time. But I will tell you is that, there’s been a real focus and some real pushups in the memory side. DRAM spending has been down, because their price is down, also driven by the softness in the PC market. PC market primarily drives DRAM demand. And we’ve seen a lot of under spending, although we do see increase spending in DRAM in 2012.
Flash spending was monster last year and out of the capacity this year, we see a little slowdown, although Samsung recently announced a anomaly of 30% increase in CapEx spending next year, that’s a new announcement and that’s, we were expecting a 15% to 20% decrease in capital spending, but we’re looking at very dynamic problem, tomorrow I may have another piece of information.
The logic spending on our case is been found out, we won the Intel fab, this is pretty well publicized, Intel recently about several months ago announced that they were going to build a fab in Ireland, so that fab in Ireland which was an outlook for the fourth quarter and first quarter some of those were easing and we’re going to the next technology node and some of those tools are going to go into some of the other sites.
So that we, the bad news was in about four weeks in around of August, we saw a huge drop in demand for our tools in terms of order pushups, no cancellation was involved, but pushups. The really good news is in the last six weeks, we along with many other customers have seen a stabilization of that outlook, so we don’t -- we track this up weekly and very closely, and over the last six weeks, we’ve not seen the decline, but we are actually seeing some upticks. And so, I think in general, not – most of us running companies in the same industry, we are out there, we are out of trough and that 2012 should be better year for all of us.
And of course, that comes a little basis for the run rate of Q4. But if that all it was, if that trough is bad trough, that’s an amazingly circumstances it was in 2008 and 2009 when revenues fell up 50% to 90%. Our softness in Q4, which is what we guided to $40 to -- $44 million, is still higher, substantially higher than our peak quarter in 2007. I would have given my eye too for $40 million quarter in 2008 and 2009. Any other questions?
Okay. Thank you very much.
Well, thank you very much.