Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Nanometrics Incorporated (NASDAQ: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

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.

With the readily evident increase in concentration of spending and technology dominance by a few customers, we view these invitations not only as an opportunity to further grow our business, but also as a necessity to stay relevant and sustain our position as a key supplier to leading customers through subsequent technology conversions.

In response to these challenges and opportunities, which clearly go hand-in-hand, we have been invested in people, inventory, customer support and engineering. We have materially added to our global applications team, our service organization and our engineering department to help our customers meet the challenges of technology conversions fab span outs, production ramps and new product development.

And while we understand these investments dampen near-term financial metrics, we probably believe long-term these commitments are not only necessary, the key requirements for taking the company to the next level of growth and performance. New applications, new products and an expanded position with key customers is how we will further grow our market share, expand our margins, grow our revenues and increase the value of our business.

Speaking of expanding our served markets, I would like to say a few words about our newest product lines the UniFire and SPARK which serve the advanced packaging and defect inspection sectors respectively.

Although it is still too early to break out and report on their specific contributions to our overall business, I’m pleased to report that we’ve seen an increase in use and traction of the UniFire across a broad spectrum of packaging and topography applications in multiple industries.

Likewise, we are already experiencing very encouraging interest in the SPARK, not only as a standalone product but also in combination with our other metrology products on an integrated links platform.

The SPARK serves multiple market segments including advanced packaging and lithography progress control applications where key product placements have already been made. I’m very confident that our investments in these new products in the markets they serve will lead to material contributions to our overall business in a not too distant future, nicely complementing our strongly growing position in OCD.

In summary, we are very bullish about the trends and opportunities resulting from our strategic initiatives, which are laying the groundwork for significant growth in our business and business opportunities. And while we are acutely sensitive to the decline in our recent financial performance, we are addressing those issues aggressively; view them as transitory and fixable and are committed to getting back on to our business model of above average performance as quickly as possible.

Finally, I would like to make some general industry observations as relates to our business going forward. The consensus view on total spending has definitely improved since last quarter. For Nanometrics specifically, we see 2012 spending weighted more towards technology conversions and development versus incremental capacity. We do not currently see a decline in the second half as suggested by some and then in fact are beginning to pay some visibility into spending and into the spending environment in 2013.

And we see reduction in customer concentration and a shift in revenue contribution for the remainder of 2012 that some of our other key customers begin to increase their spending and investments versus the last couple of quarters.

With regard to our business in served markets, we continue to view our major long-term goals opportunities to be center around technology nodes at 2X and below, three dimensional devices such as FinFET and 3D memory cells and 3D packaging each of which we are deeply involved with at multiple customer sides with multiple products and multiple applications.

In addition, near-term we are benefiting from continued delays in EUB, which have necessitated the development of alternate lithography strategies that require additional process steps and thus additional process controlled needs.

And finally there is the transition to 450 millimeter, which are driving need for entirely new toolsets. Process control tools such as our OCD are needed at the forefront of wafer size conversions both to healthcare type to process tools as well as to support the development of new processes.

As we have previously announced, we will be shipping our first 450-millimeter tool during mid-2012 to multiple occasions. So in spite of the near-term challenge as a growth and expansion, on a usual mix of uncertainties both global and industry wise, we are optimistic about the long-term prospects for our business.

With that, our guidance for Q2 is as follows: revenues of $51 million to $54 million, non-GAAP gross margin of 45% to 46%, operating expenses flat to up $300,000 from Q4 and non-GAAP EPS of $0.05 to $0.09.

With that, I will turn the call over to Ron to discuss our results and guidance in more details.

Ron Kisling

Thank you Tim. Good afternoon. Before I begin my comments, I’d like to draw your attention to a new schedule of supplemental information we have made available in the investor section of our website at nanometrics.com.

This schedule summarizes GAAP and non-GAAP financial results as well as revenue segment information regularly provided on our conference call. We believe this will allow us to focus on the key drivers in our discussion, while making this information readily available and acceptable to our investors.

As always, a reconciliation of GAAP to non-GAAP results is also available on our website. In the first quarter, revenues of $55.5 million up 22.6% over the prior quarter. Total product revenues of $47.9 million increased 30% over the fourth quarter of 2011 reflecting increased spending by our largest semiconductor customers and strength in our OCD business.

Service and upgrade revenues of $7.6 million were down 11% from the prior quarter due to lower revenues in both core services and upgrade, which tend to fluctuate quarter-to-quarter.

As a reminder, the revenue segmentation data I’m about to provide is also available on our website. First by product area, sales of our automated metrology systems were our largest revenues growth driver in Q1 and were up 49% from Q4 to reach a record $41 million in the quarter comprising 74% of total revenues. Our flagship OCD Atlas-II led this growth at over 40% of Atlas shipments came from our newly launched Atlas-II. This strong growth more than offset sequential declines in our integrated metrology and materials characterization products.

Sales of our integrated metrology products were $4.3 million down 14% in Q4 and comprising 8% of total revenues reflecting a reduction in capacity investments by our primary integrated metrology customers.

And sales of our materials characterization products were $2.6 million, down 39% from Q4 and comprising just 5% of total revenues due to the decrease in capacity spending in the LED and bare way for silicon sectors.

Turning to total revenues by geographic regions, we report revenues based on the shift to our first end-use destination. In the first quarter, revenues from South Korea were 50%, North America, 21%, EMEA, 13% with the remainder comprising 17%. Our largest customer, Samsung and Intel, comprised 41% and 30% of our total sales respectively.

And revenue by end market, which reflects product revenues only, the most significant increase was in the Logic, IDM segments which comprised 38% of product revenues in the fourth quarter. Product sales to the memory segment increased 30% over Q4 with the significant shipment spending towards NAND Flash which comprised 36% of product revenues compared only 3% contributed to DRAM spending.

Product revenues in the foundry segment were down slightly from Q4 to comprise 18% of total product sales. Our LED solar and silicon substrate sales were down 45% from Q4 to 5% of product sales due to lack of capacity expansion in these market segments.

Before I turn to gross margin, I’d like to draw your attention to a GAAP reporting change in our treatment of amortization of acquired intangibles. Since the acquisition of Nanda, the portion of our amortization of acquired intangibles that relates to technology is now significant enough that we have split our total amortization expense into two line items.

The portion that relates to technology will now be reported in cost of product revenues while the remainder will continue to be reported in operating expenses. To ensure profitability, we have applied this split retroactively. To aid and reconciling historical periods for comparison purposes, this presentation is provided on the supplemental information provided on our website.

Consistent with our treatment of intangible amortization as a non-GAAP adjustment, we are also reporting our gross margin on a similar non-GAAP basis excluding the impact of amortization of acquired intangibles.

As non-GAAP gross margin is a metric directly comparable to our historical reporting, our references to gross margin in this call are on a non-GAAP basis unless otherwise specified.

Gross margin for Q1 was 46.3% compared to 46.6% in the prior quarter. The sequential decline was primarily due to lower service gross margins as product gross margin actually increased from 46.3% in Q4 to 48.1% in Q1.

However, our total gross margin came in lower than guidance, primarily because the expected improvement to Atlas-II margins were less than we had projected for the quarter and while product gross margins improved on higher sales volume and from cost reductions in our Atlas-II, the significantly increased mix of Atlas-II systems in the first quarter largely offset the positive impact of higher revenues. We expect to continue to see improvement in our Atlas-II margins throughout the remainder of the year.

Products mix will however, impact our overall achieved gross margins from quarter-to-quarter. Specifically, in regards to our guidance for Q2, while we expect Atlas-II margins to improve over Q1, this tool will comprise an even higher mix of revenues in Q2. Further compounding the mix change will be sequential declines expected for higher margin products such as the Atlas XP, as sequential increases expected for lower margin products such as the UniFire and certain materials characterization tool.

As a result, our gross margins for Q2, as Tim mentioned, are expected to fall within a range of 45% to 46%, which we believe will be the low point for our gross margin as continued improvements in Atlas-II margins take effect.

Service gross margin declined to 34.9% from 48.1% in Q4. The sequential decline is attributed to a combination of lower core service revenue, lower upgrade revenues and higher service costs reflecting needed support for our customers in the coming quarters. We expect service gross margins to improve in the second quarter.

On a non-GAAP basis, operating expenses were $20.8 million, up $3.5 million compared to $17.3 million in the prior quarter. As we discussed in our last conference call, this increase was largely driven by inclusion of a full quarter of Nanda operations, typical payroll tax increases in Q1 versus Q4 and reduced number of holidays compared to Q4, which impacted all functional groups.

For the second quarter, our operating expense guidance of flat to up $300,000 anticipate a decline in G&A due to professional fees that were unique to the first quarter, which will be offset by modest increases in R&D and applications development. Non-GAAP operating income for the first quarter was $4.9 million or 8.9% of revenue compared to $3.8 million or 8.4% of revenue in the prior quarter.

Turning to income taxes, we recently made changes to certain tax selections to improve our ability to benefit from expected losses generated by certain foreign subsidiaries, which will result in an improvement to our 2012 structural tax rate from our previous estimate of approximately 40% to the mid-30s.

The GAAP effective tax rate of 40 – of 54% in Q1, includes approximately $655,000 in tax expense related to certain foreign losses that we cannot reflect in our tax provision until these elections have been approved by the IRS, which we expect to occur in the second quarter.

Upon approval, we expect to recognize these first quarter losses as a tax benefit in the second quarter resulting in a very low Q2 tax provision. As a result, our overall first half 2012 tax rate is expected to be in the mid-30s in line with our expected 2012 structural tax rate.

Therefore, in order to show comparable non-GAAP earnings, we have reflected the impact of this expected benefit in our non-GAAP earnings for Q1 and our guidance for Q2 subtracts the equivalent benefit that will be recorded in our Q2 GAAP results.

On a non-GAAP basis, our net income was $2.9 million or $0.12 per diluted share compared to $2.3 million or $0.10 per share in Q4. As Tim stated, our non-GAAP EPS guidance for Q2 is $0.05 to $0.09 per share and reflects the same effective tax rate as our non-GAAP earnings for Q1.

GAAP EPS guidance range also happens to be $0.05 to $0.09 per share. Our GAAP and non-GAAP EPS guidance happen to be the same for Q2 because the positive impact of the tax benefit from Q1 foreign losses that we will record in our Q2 GAAP earnings is roughly equivalent to the negative impact of amortization of intangible assets.

Turning to the balance sheet. Our cash declined $2.2 million due to lower beginning accounts receivables and payment of our legal settlement accrued in Q4 2011. We ended the period with $95.9 million – $95.5 million or approximately $4.07 per share based on 23.4 million shares outstanding at March 31.

Our DSO was 63 days well within our target range of 60 to 70 days. Inventory decreased by $3 million, while our inventory turns increased from 1.8 to 2.3 times in Q1. Our tangible book value increased to $189.7 million or $8.09 per share. We ended the quarter with headcount of 565 employees, a net increase of 13 from last quarter.

And with that, I’ll turn the call over for questions. Operator?

Question-and-Answer Session

Operator

Thanks you. (Operator Instructions) Our first question comes from Weston Twigg from Pacific Crest.

Weston Twigg – Pacific Crest

Hi, yeah thanks for taking my question. Just, actually a couple of questions. I’m wondering on the gross margin profile through the year, so I know it’s still taking a hit in Q2, but how can we view that improving in the September-December quarters, maybe even in exit rate in December would be helpful.

Tim Stultz

Yeah, hi Wes. I don’t have a number that I want to give you for the exit rate in the end of the quarter. I did say that we except to get back to our traditional margins of 55% or better within the next 12 months. We’re doing our best to bring that in as quickly as we can. There are some extended negotiations and then there’s receipt of materials and there is the normal flow-through through finances. It does impact the actual timing of the recognition, but we have a plan to get that tool up to where but needs to be. The teams have done a terrific job. We will get there and we’ll do our best to get there sooner than later.

Weston Twigg – Pacific Crest

And I know you tried to address this in the call little bit, but I’m still having hard time understanding why the big surprise in Q1 on gross margin? Why did this seem to take longer than maybe expected a quarter ago?

Tim Stultz

So the big hit on the margin actually turns out to be the service margin decline which was based on revenues upgrades and the lower upgrade sales and some additional investment. The other side of it was on the Atlas-II and whereas we realized a large part of what we have set out to pull in on margin improvement, there are couple of things that are slipping into the quarter. So we miss it by few weeks, we miss it – but we’re not going to miss it in terms of the entire program.

Weston Twigg – Pacific Crest

Okay. And then just finally on the OCD ramp, so it sounds very strong especially with the Atlas-II. So can you help me understand why revenues got to lower in Q2? What piece of the business is coming down?

Tim Stultz

We’re kind of a little bit lower flat and the primary issues that we’re seeing in some wind down in some of the fab fan-out activities that consume a lot of tools and we’re seeing a shift in the demand and purchasing towards the new technology nodes. This quarter we actually had record standalone business, record OCD business, which was certainly over offset some of the declines in some of our other business areas.

But, all of our new business that’s coming in and we’re receiving the strength is down in the 1X nodes both for Logic and the NAND and we’re starting to see some improvements in the foundry contribution too. But we’re seeing some of that more in the second half than in the next quarter.

Weston Twigg – Pacific Crest

Okay very helpful. Thank you.

Tim Stultz

Okay.

Operator

Thank you. Our next question is from Patrick Ho from Stifel Nicolaus.

Patrick Ho – Stifel Nicolaus

Thank you very much. Tim, maybe can you give a little bit of color in terms of some of the variables on the improvements that you’re making in both the manufacturing the supply chain over the Atlas-II? I understand that you’re going to probably start seeing those improvements in the second half of the year and into ‘13, but what are some of the specific actions taken that will lead to these tangible gains?

Tim Stultz

Sure Patrick. What we really did is, when we launched the Atlas-II, which went out a little faster we planned, most of that was based on engineering bias and not benefiting from high volume long-term purchase agreements. So the team went out and looked at this tool from the eight items down, look at the big ticket items such as the stage, the head assembly, the packaging, the automation, factory automation and worked with our suppliers to both give them visibility in towards the ramp of the tools as well to get the benefit of some improved cost models.

In addition, we’re doing some – we’re finding about the transferring to manufacturing we’re doing, we’re having the opportunity to train more of the folks inside to get a better efficiencies and quicker turnaround, which will ultimately lowers their cost, but we’re leaving no stones unturned. We see – we saw, we’ve identified actually some very significant opportunities. I’m very confident that they’re going to come into place, because based on the conversations we’re having with our supply chain and I – this Atlas-II which is going gangbusters and we’re pretty excited about it actually.

Patrick Ho – Stifel Nicolaus

Great, that’s very helpful. Second question maybe to what’s this question about the revenue outlook, I’ll take a different approach to it, what is the customer concentration looking like for the second quarter, because obviously you were very heavily tilted towards two customers in Q1. What’s the customer concentration like one of them falling off or is it going to be the same mix but on a lower revenue basis?

Tim Stultz

That’s a good question. I’d like to kind of rephrase that question in two areas. One is that, we do really well and we’ve got strong positions in logic and memory. And so although our performance with the foundry business is growing, it’s not as bigger contributor and so the swings in foundry spending don’t benefit us as much as it do some other folks.

That being said, we’re seeing a decrease in the concentration on going into Q2, in particular the Q1, we have 71% of our business came out of two customers. We’re seeing some slowdown in spending on one and we’re actually seeing picked up in some of the other customers who haven’t been represented strongly in the last couple of quarters which will more than make up for that in general.

Patrick Ho – Stifel Nicolaus

All right. That’s very helpful. Thanks again guys.

Tim Stultz

Okay.

Operator

Thank you. Our next question is from Mahesh Sanganeria from RBC Capital.

Richard Grace – RBC Capital

Hey, thanks. This is Richard Grace here for Mahesh. Hey Tim, you had mentioned you’re seeing benefit as due to delays in EV, is this simply because there are more process steps being added in or is that more to it than that? And then secondly, when do you see EV ramping?

Tim Stultz

I’ll give you an answer to the first question and I’ll let somebody that closer to the business on the second. So, it is basically more steps. It’s more mask level, so when you’re doing double patterning and quadruple patterning that be gets additional process steps and sequences and therefore you apply more metrology. It doesn’t necessarily go to one-to-one it’s not four lethal steps meaning four times and many process steps because some are done sequentially. But it is an incremental benefit to us on the process control. And as far as when the EV is coming through, I think I’ll let to talk to Eric Morris (ph) or someone else on that.

Richard Grace – RBC Capital

Hi, you’re actually seeing customer view quadruple patterning right now?

Tim Stultz

Absolutely. Yes we are.

Unidentified Company Representative

Double, triple.

Tim Stultz

We’re engaged with the multiples including quadruple with our tools.

Richard Grace – RBC Capital

Okay. Thank you. That’s all I have.

Operator

Thank you. Our next question is from Tom Diffely from D.A. Davidson.

Tom Diffely – D.A. Davidson

Yeah, good afternoon. I guess first hoping for a little bit of an update on your view of the growth of OCD and your company specifically versus the market. In the past, you said that you expected to outgrow the market by 10%, 20% I’m wondering that still the case or if the customer concentration has changed that view?

Tim Stultz

Yeah, Tom I think what we have said before is that based on our calculations, the OCD market grew about 30% last year and our OCD business grew 40%. If you look at our standalone business in our and attraction of both the Atlas-II and the Atlas XP our two flagship products we’re achieving record revenues on that and we believe that that growth is still greater than the growth of the sector in itself. And I think it’d be at least to us come into a conclusion that we’ll continue to gain some market share.

Tom Diffely – D.A. Davidson

Okay. So markets like to be flat down a little bit this year, you’d expect to outperform that from both the share gain as well as this year OCD, the faster growing segment. So how was that balanced in by some of the other markets been a little weaker right now? Do you see recovery in the adjacent markets as well then?

Tim Stultz

Yeah, I don’t know about that. When I look at the materials characterization, which is driven a lot by LED and solar that’s been, it’s coming down quite bit, it has come down quite a bit. The bare silicon wafer our substrate market we have seen come down and so those areas I don’t see anything that’s going to suggest are going to have a significant turnaround. We’d hope to see some improvement.

But there is nothing out there on the horizon that drives it. What I’m really optimistic about and pleased by is that, our core business, which is in process control metrology primarily serving the semiconductor industries, is growing nicely. And that’s not just OCD, but as I mentioned during my script or my prepared remarks, we’re seeing some nice improvements in the contribution from the UniFire and some initial indications that we’re going to see similar nice – similarly nice contributions from the SPARK. And so when I look at what’s going to drive our business and what’s going to really improve our outlook it’s really all about process control metrology and I have less dependents or less confidence in the areas of solar LED and bare silicon substrate.

Tom Diffely – D.A. Davidson

Okay. And what about an update on the more of the advanced packaging or 3D packaging. In the past I guess that seem to become late 2012 timeframe, is that still in the cards you think?

Tim Stultz

Yeah I think that’s probably right in terms of timing that’s one of the things when it finally takes off you’ll all recognize it. We’ve got tools deployed basically everywhere. We now have multiple tools deployed in most places both looking at the (inaudible) as well as the micro bumps. We’ve got applications not only for the UniFire but potential applications for the SPARK as well. And so we’re pretty excited about that and I think when it’s I think it’s a – there is a inevitability to it and so for me it’s being properly placed so when it turns, we benefit and I think we are.

Tom Diffely – D.A. Davidson

Okay. And then finally, when you look at the OCD market itself what’s the relative capital intensity of OCD tools when you compare the DRAM to the NAND to the foundry markets?

Tim Stultz

That’s a good question. And I’m not sure – I don’t have that in front of me. I’d rather not guess I’d rather get back to you on that and give you some of that. Clearly it was a DRAM process it’s a much more complex process. But there is not a lot of spending going on either, so but I what I’d like to do is, let me get some accurate numbers and get back to you on that.

Tom Diffely – D.A. Davidson

Okay. Thank you.

Tim Stultz

You bet.

Operator

Thank you. (Operator Instructions) Our next question is from Gus Richard from Piper Jaffray.

Auguste Richard – Piper Jaffray

Yes, thanks for taking my questions. Just real quick on 450 on the three-year signed you spend on it, I mean why don’t you give some idea of what that investment profile looks like for you when you think you might start shipping 450 tools for frontend SAT and not wafer manufacturing?

Tim Stultz

No we actually ship – the tools really shipping our forefront in fab, they’re not for wafer manufacturing. The first tools that they going out. And we’re actually starting discussions about some additional tools going out to other location. So we already have multiple tools on a multiple locations it’s not for the wafer manufacturing it’s actually for some frontend process and development as well as tool characterization.

I think that we’re going to see probably a some frontend loading of those tools and tool demand and there is probably going to be a little bit digestion period sometime in the 2013 timeframe in the middle of it and then before you start to see any meaningful ramp in that product line, but we’re seeing pull across it’s not just OCD but we’re actually seeing pull for the SPARK platform, the UniFire and the overlay tool (ph).

Auguste Richard – Piper Jaffray

Okay. And so where are you in the development of 450 area, its most about spending in your R&D already or you got more to go kind of what is the spending profile look like?

Tim Stultz

So the spending profile is captured in our current engineering spend, we’re within a few couple of months, two to three months of shipping our first tool. And so the guidance for giving our OpEx includes not only the product roadmap in spending but it also captures the spending for the 450.

Auguste Richard – Piper Jaffray

Okay. And then to get to flat year-on-year you’re going to have, I would imagine a pretty healthy step up in the back half. Is that sort of if you’re going to outperform the slight to slightly down, is that kind of how you’re thinking things are going to play out?

Tim Stultz

Yeah, I think I mean if the spending goes away over this at least were consensus is rather we see it being flat and if you’re going to outperform it, where we see the contributions coming from is, as I mentioned earlier, is almost all 1X notes for new technology development and conversion both in logic and in the memory side and in particular the NAND. We don’t have – we’re not seeing any significant step ups in DRAM spending right now. We’re also seeing some improving contributions from foundry. We’ve actually been had some nice new games and footprint and penetration into foundry for across our product line both in the UniFire, the OCD and integrated metrology and those should play out when we get down into the low two, and the 1X nodes and then we’re I think you’re going to start to get the point where the UniFire and the SPARK give us some contributions as well.

Auguste Richard – Piper Jaffray

Got it. And then so this one, I apologize in advanced, I’m sorry I didn’t quite catch it advance, could you go over the tax rate for the first and second quarter just one more time?

Ron Kisling

Yeah. The – so the combined rate that we expect to see for the first half is going to be in the mid-30s. The rate for the, in Q1 where we weren’t able to benefit certain foreign losses came in at about 54%. Q2, on a GAAP basis, is going to be at a rate that brings the first to that 30.5%. Our non-GAAP numbers assume a rate in both Q1 and Q2 at the mid-30s.

Auguste Richard – Piper Jaffray

Got it. Okay, got it. So both GAAP and non-GAAP are in the mid-30s and you just need to address the GAAP to compensate for the tax benefit you can capture in Q1?

Tim Stultz

Or should be captured in Q2 correct.

Auguste Richard – Piper Jaffray

Right, got it. Got it. Thank you. Thank you so much for stating that out.

Tim Stultz

Thanks.

Operator

Thank you sir. Our next question is from Graham Tanaka from Tanaka Capital.

Graham Tanaka – Tanaka Capital

Hi guys. Thanks for the level of detail, there is a lot going on. The service margins, you’re talking about the more positive swing in the second quarter. Can you sort of put bookings around that kind of size it?

Tim Stultz

Well I think that it’s going to get, it actually took those dip in Q1, I know there is a combination of slightly lower revenues and lower upgrades and we think that we’re going to see improvements in both of those and that generally just goes straight to the margin as because it’s almost – it’s revenues again almost a fixed cost on there. So I think you could look at our average, our average margins across most of quarters and start to think about those as being realistic and a way to look at it.

Graham Tanaka – Tanaka Capital

Well so in other words, if gross margins improve as you expect while they’re going to get in bottom in the second quarter but as it improve in the second half, what are we going to see, how much of service revenue margins going to be effecting the Q2 in the second half gross margin? Are they nominal or are they having a significant?

Tim Stultz

Yeah it’s somewhere between nominal significant. I mean just because of the total revenues, this is – service revenues are anywhere between $6 million and $8 million, the margins have been – our core service margins have been kind of in the low 30% and our upgrade business tends to be at higher margins and it really depends on the contribution of upgrades to the total service.

Graham Tanaka – Tanaka Capital

Now the industry spend you talked about encouraging signs and I just was wondering if you can maybe give us a little more granularity on that what sectors and particularly with some, I know it’s difficult, but some comment on 2013 if you can? Thanks.

Tim Stultz

Sure. Well I think that most of this – in most everyone seen in the announcements that the three biggest players Intel, Samsung and now and just SA, TSMC all announced fairly large increases in capital spending because you got drilled down a little bit deeper to understand what part of that WFE. But since they are the dominate spenders and players that’s important to us and if you take that against the expected flat to down of the – some of the other industries, I think the most of the consensus are getting to a kind of flat CapEx spend. Some of that CapEx spend this year is going to go into buildings and this leads into our discussion in 2013 where at least, I’ve read it, at least one report that suggest that Intel for instance will have CapEx down in 2013 but Wafer Fab Equipment will be up in 2013.

And to that extent we benefit from that. We’re also starting to see some of the other memory folks who have been pretty silent over the last couple of quarters starting to spend and they will start to help us reduce the concentration against the couple of customers while some of the major ones slowdown but perhaps in the second quarter.

Graham Tanaka – Tanaka Capital

By the memory folks being silent you’re talking about memory in general or you talking about NAND?

Tim Stultz

Pretty much – it’s NAND because it’s not a lot of spending in DRAM, but I mean if you look at capital spending across the board or without talking about specific to customers but just in general Hynix has been notably low on their spending, Micron and it’s NAND and (inaudible) but notably low and we’re starting to see some improvement in outlook for some of those companies.

Graham Tanaka – Tanaka Capital

Okay. As you’re going to be ramping UniFire and SPARK, what kind of gross margin experience are you – are we going to be seeing there? Are we going to be seeing a little mini repeat or a repeat of what’s going on with Atlas or is that going to be a more higher gross margin to begin with?

Tim Stultz

Well that’s a fair question. So the SPARK platform because it’s a fairly straight forward platform because we manufacture it ourselves in fact that the SPARK platform is being transferred to the Milpitas facility. I’m pretty confident the SPARK is going to hit the ground running with good margins on the full up tool.

The UniFire, as we spoken to several times before, does not enjoy quite a serious of margin or higher margin because of the margin share that goes with our relationship with Zygo. And what we’re doing to improve that is more about adding features that we can and benefits to the tool that have a value that we can charge for and that’s – it’s a different approach, but that’s a pretty much our major weapon to improve that margins on that tool. We’re also integrating that tool onto our link so we’re putting the SPARK onto the links. We’re putting the UniFire onto the links. We’ve got the overlay tool on the links and we have the Atlas-II on the link. So we’re going to get some additional benefits from having everything on a common platform.

Graham Tanaka – Tanaka Capital

Okay, great. Thank you.

Tim Stultz

You bet.

Operator

Thank you. And I would now like to turn it back to Dr. Stutlz for any closing remarks.

Tim Stultz

Well thank you very much and thank you again for participating in our call. I’d like to remind everyone that Nanometrics performance is tied directly to the hard work and commitment to excellence of our global workforce whom I consider be among the very best in the industry and with whom I’m truly excited to work with each and every day. I look forward to reporting on the results of our operational and financial performance for the second quarter 2012 in July. With that, the call is ended.

Operator

Thank you. Ladies and gentlemen this does conclude your call for today. You may now all disconnect. Thank you very much and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Nanometrics' CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts