In yet another example of customer concentration risk is illustrated with the recent announcement from a company called Nanometrics. This is a small cap company ($200 million) in the high tech, semiconductor space. They are a supplier of advanced process control metrology systems used primarily in the manufacturing of semiconductors, solar photovoltaics, etc….whatever metrology systems are?
First, let me say I have no clear idea what this company does or if it represents a good opportunity. Rather, I use it as another example of the danger of highly concentrated customer bases. Here is a portion of the story from July 8, 2010
Nanometrics (NANO, Financial) shares are down hard this morning after [i]Oppenheimer analyst Gary Hsueh asserted in a research note that the company has a lost a key piece of business from Intel (INTC). The development spurred Hsueh to cut his rating on the chip equipment maker’s stock to Perform from Outperform, with a new price target of $10, down from $13.[/i]
Hsueh says that Intel - a 20%-plus customer for NANO - made a last minute decision not to switch to the company’s metrology tools for 22 nm chips; he says that after a recent test of Nanometrics tools, Intel has decided to keep that business with rival [i]KLA Tencor (KLAC). The result, he says, will be about a $30 million hit to revenue for 2011, and about a 40 cent hit to the EPS line. NANO today is down $2.11, or 19.4%, to $8.75.[/i]
My first thought with a company such as this is that the product offering is far too competitive and vulnerable to pass the risk test. However, as we see, this wasn’t the primary challenge facing the company. With just some superficial investigation, we learn that almost 60% of their revenue is tied up in three customers. When an announcement like this happens, it really shouldn’t be a shock to the system. This disclosure is clearly laid out in their annual filing (see below)
From the 10K:
We sell our metrology systems worldwide to many semiconductor manufacturers and equipment suppliers, producers of HB-LEDs, solar PV panels, data storage devices, silicon wafers and photomasks. The majority of our systems are sold to customers located in Asia and the United States. Two customers, Samsung Electronics Co. Ltd., and Intel Corporation, represented 33.4% and 10.4% of our total net revenues in 2009, respectively. See Note 20 of the Notes to Consolidated Financial Statements for information regarding our major customers.
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended January 2, 2010, December 27, 2008 and December 29, 2007
The following customers accounted for 10% or more of total accounts receivable:
Samsung Electronics Co. Ltd. 30.5 %
Intel Corporation 16.1 %
Hynix Semiconductor, Inc. 12.7 %
This doesn’t mean that Nanometrics is a bad company or involved in deceptive business practices – it simply means that the possible risks are much greater than the potential reward. To repeat a tired suggestion – take the time to read the notes section of the 10K.
Disclosures: none
