Nanometrics Incorporated (NASDAQ:NANO)

Removing NANO from the GeoSpecial List @ $15.09

Added to the GeoSpecial list @ $12.07 on August 6th, 2010.

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Catalyst: Strong GeoPowerRanking. The Company reported multiple quarters of 30%+ EPS growth.

Current road block: GPR is now -7.

Current Price: $15.09
Peak performance: Reached a high of  $20.00 on February 17, 2011.

Fourth Quarter and Full Year 2010 Results

• Revenues were $46.1 million, declining 14% from $53.9 million in the third quarter of 2010 and up 75% from $26.3 million in the fourth quarter of 2009.
• Net income was $26.1 million or $1.12 per share on a GAAP basis.
• Earnings for the fourth quarter compare to net income of $12.3 million, or $0.53 per diluted share, in the third quarter of 2010 and a net loss of $0.3 million, or $0.01 per diluted share, in the fourth quarter of 2009.

Highlights for the year include:

• Record revenues of $188.1 million, up 145% year-over-year;

• Record operating profitability, with $41.3 million of operating income and 22.0% operating margin;

• Record net income of $55.9 million or $2.43 per share, which includes the favorable $18.2 million impact of the release of our tax asset valuation allowance, equivalent to $0.79 per share;

Commenting on the fourth quarter and full year results, president and chief executive officer Dr. Timothy J. Stultz said, "2010 was the best year in Nanometrics’ 35 year history, achieving record revenues, operating profitability and earnings per share. Revenues increased 145% year-over-year, well outpacing overall industry growth of just over 100%. Our fourth quarter results demonstrated another strong quarter for Nanometrics, following our record second and third quarters. While some shifts in the timing of orders and shipments contributed to a sequential decline in revenues, in the fourth quarter we saw increased contribution and growth from our integrated metrology, materials characterization and advanced wafer-scale packaging businesses, demonstrating the breadth of our product portfolio and continued expansion of our served markets. We also achieved incremental competitive wins that are positive indicators for our long-term growth potential."

"As we look toward 2011, we are encouraged by current order activity and reports of increased capital spending levels in the worldwide semiconductor industry, driven by increasing demand for semiconductor-rich products such as smart phones and tablet computers as well as momentum building in cloud computing, networking and corporate IT spending. Complementing this growth are our well-positioned products addressing the increasing need for optical process control metrology technologies in the semiconductor and adjacent markets such as high-brightness LEDs, solar photovoltaics and data storage devices."

With continued execution against our model, the first quarter of 2011 is shaping up to be another record quarter for Nanometrics in terms of revenue and operating profitability. We expect first quarter revenue in the range of $56 to $60 million, gross margin in the range of 54% to 55%, operating margin in the range of 24% to 27% and, assuming a tax rate of 35%, we expect net earnings in the range of $0.36 to $0.44 per share. Finally, provided that the strong capital spending forecasts materialize through year-end, we look forward to achieving higher performance levels for fiscal 2011."

Excerpt from article on August 16, 2010.

NANO's high-performance process control metrology systems are used primarily in the fabrication of semiconductors, high-brightness LEDs, data storage devices and solar photovoltaics.

With 2010 second quarter non-GAAP EPS of $0.60, NANO crushed analyst EPS estimates of $0.27, when it reported its best quarter in 35 years and fifth quarter of sequential margin improvement.

This was Nanometric's first $50 million quarter, exceeding its prior record revenue quarter by over 30%. Also notable were its pre-tax margins of 25%, a level we rarely observe in U.S. firms.

The earnings press release did not provide specific details on management’s future business outlook. Consequently, we listened to the earnings conference call to determine if management would give investors a glimpse of what could be in store for the next few quarters and its view on economic activity.

Echoing the sentiment of other companies that participate in the technology semiconductor sector and contrary to economic statistics, NANO expressed extreme optimism in the growth outlook of its markets.

• Driven by global demand, the information technology, electronic device and digital content markets are strong, leading to huge growth in chip demand.
• Leading chip companies are aggressively investing to meet this demand.
• Order flow from its two largest customers, Intel and Samsung, is strong.
• New customer activity from second tier companies is coming online.
• North America and South Korea markets are particularly strong.

We were very impressed at management’s ability to communicate and exceed its growth objectives set in 2009. We also found it significant that customer lead times are shortening up, meaning they want the product faster.

One thing investors need to be aware of is that a majority of NANO's sales come from two customers, although the company did mention that it is making positive inroads to diversify its customer base.

In a June 8, 2010 press release, the company reaffirmed its business outlook:

I believe the current business environment is extremely healthy, and the positioning of our Company’s products is the strongest in Nanometrics’ history,” commented Dr. Timothy Stultz, Nanometrics’ president and chief executive officer. “Our business outlook is strong, both in the near term and in the longer term, and is continuing to improve. The technical capabilities and expected fan-out of business for our Atlas® thin film/optical critical dimension (OCD) platform with key customer accounts are tracking nicely and in fact are exceeding prior forecasts, leading us to reaffirm our strong business outlook for 2010 and 2011.

As far as future outlook, NANO was not specific, but commented that the second half of 2010 will be stronger that the first half (where it reported non-GAAP EPS of 0.69) and barring external economic events, also sees growth continuing in 2011. This should ensure that the company will beat its 2009 second half non-GAAP EPS performance of $0.23. Please note that the stock has risen sharply since the release of its financial results.

The 2011 challenge: At $1.69, 2011 analyst estimates translate to EPS zero growth. Although, EPS for each of the next three quarters are expected to grow significantly.

Highlights for the second quarter include:

• Record revenues of $50.8 million, up 37% quarter-on-quarter and 250% year-on-year;
• Gross margin of 55.1% including improved product gross margin of 57.6%;
• Operating margin of 25.4%;
• Record high quarterly earnings of $0.51 per diluted share;
• Cash and equivalents increased $9.1 million over the first quarter of 2010, to $54.9 million;
• Continued strong growth for the Atlas^® thin film/optical critical dimension (OCD) system, with increased customer adoption, expanding applications and growing demand from all geographic regions; and
• Accelerating growth for Overlay, Integrated Metrology® and high-brightness LED products.

Commenting on the second quarter results, president and chief executive officer Dr. Timothy J. Stultz said, “Our second quarter results are testimony to the progress we have made against the operational and performance objectives we are consistently driving toward; namely: strengthening the competitiveness of our products to drive key customer wins and strong gross margin performance; improving our predictability by managing to a robust and sustainable business model; and demonstrating the operational leverage, profitability and cash flow ensuing from our greater scale and improved cost structure.

“Our operations team did a terrific job executing deliveries in response to widespread strength in customer demand. This was Nanometrics’ first $50 million quarter, exceeding our prior record revenue quarter by over 30%. The level of revenues reflects our strong position with numerous customers, across several geographic regions and all device types, including logic, DRAM, Flash and high-brightness LEDs. We are truly emerging as a critical supplier to most of the world’s leading chip companies, enabling their aggressive performance and cost objectives by addressing tough technological challenges with best-in-class, differentiated, optical metrology systems and solutions for advanced process control.

“Our position with leading logic and memory companies, which have been sizeable customers for us since mid-2009, will enable us to continue to benefit from planned capacity expansions, ramping of the next technology nodes and fan-outs of our tool-of-record designations. Our business pipeline is also benefiting from increased spending by other major semiconductor customers as well as contributions from our newer product offerings, which address rapidly-growing segments such as high-brightness LEDs and advanced wafer scale packaging.

“Our financial results for the second quarter were notable in that we achieved our long-standing profitability targets. While this is evidence that we have a talented and motivated team that can compete, manage and execute, we are also committed to further improve and deliver financial performance consistent with being a leader in the industry.”