Nova Ltd (NVMI) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to the Nova Measuring Instruments first quarter conference call.

For your information, this conference is being recorded.

At this time I would like to turn the call over to Mr.

Kenny Green, CCG Investor Relations.

Please go ahead, sir.

Thank you, operator, and good day to everyone.

I would like to welcome all of you to Nova Measuring Instruments first quarter 2010 results conference call and presentation and thank management for hosting this call.

With us on the line today are Mr.

Gabi Seligsohn, President and CEO; and Mr.

Dror David, CFO.

I'd like to draw your attention to the presentation that accompanies today's conference call.

The presentation can be accessed and downloaded from a link on Nova's website at www.nova.co.il.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements; and the safe harbor outlined in today's earnings release also pertains to this call.

If you've not received a copy of the release, please view it in the Investor Relations section of the Company's website at www.nova.co.il.

In addition, during this call certain non-GAAP financial measures will be discussed.

These are used by management to make strategic decisions, forecast future results and evaluate the Company's current performance.

Management believes that the presentation of non-GAAP financial measures are useful to investors' understanding and assessment of the Company's ongoing core operations and prospects for the future.

A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

Dror will begin the call with an overview of the first quarter financials, followed by Gabi with a business update.

We will then follow with a question-and-answer session.

I'll now hand over the call to Mr.

Dror David, Nova's Chief Financial Officer.

Dror, go ahead, please.

Thank you, Kenny.

And welcome, everybody, to our quarterly conference call.

The first few months of the year were very exciting for us.

We successfully concluded the follow-on offering, we saw record quarterly shipments, and in parallel, we presented strong financial performance.

Total revenues in the quarter were $16 million, up 5% quarter-over-quarter, and up 179% over the comparable quarter of last year.

Also during the first quarter, we continued the transition of integrated metrology sales to direct sales model with an additional two customers.

Looking at product revenues, 50% of the quarterly product revenues were from the Memory segment, and 50% were from the Foundry segment.

Substantially, most of the revenues came from the Asia-Pacific region and approximately 90% were for sub-65 nanometer technology nodes.

Service revenues increased 19% quarter-over-quarter to $3.1 million as a result of customers returning to high level of tool utilization rate.

Overall gross margins increased 224 basis points quarter-over-quarter, reaching a record level of 51%.

This increase was mainly driven by the improvement in service gross margins, which increased to a record level of 22%, while product gross margins were stable at approximately 57.5%.

Operating expenses increased to $5.4 million in the quarter.

This increase was a direct result of our efforts to accelerate the introduction of new products, our efforts to enhance existing products, and our extensive presence with new products and solutions at new and existing customer sites.

Going forward, in -- and in order to ensure we capture the available business opportunities, we expect operating expenses to increase modestly by an additional 5%.

During the quarter, we reported net income of $2.7 million similar to the previous quarter.

We were able to maintain this net income level through the extension of our revenues and gross margins, which offset the needed increase in operating expenses.

Operating margin in the quarter was 17%, which is significantly better than our peer group performance.

GAAP EPS in the quarter was $0.11 per diluted share on a share count of 24.2 million shares.

Operating cash flow came in at record level of $5 million in the first quarter, and approximately half of this sum is attributed to early collection of unrecognized revenue.

Moving into the balance sheet key metrics, accounts receivable were $11 million similar to the previous quarter while DSO increased from 51 days to 64 days.

We expect DSO levels to remain at the 60- to 70-days level in the coming quarters.

As I mentioned before, during the first quarter we continued to move to direct sales of integrated metrology with additional two customers.

In some cases, this move changed the revenue recognition timing of systems from recognition at shipment to recognition upon customer acceptance.

The acceptance cycle in these cases is normally shorter than eight weeks, but acceptance timing may roll revenues from one quarter to the next.

The impact of the unrecognized revenues related to such cases is also evident in balance sheet items such as inventory and deferred revenues, which increased during the quarter.

Looking into inventory levels we saw an increase from $4 million in the previous quarter to $6 million in the first quarter of 2010.

This increase is comprised of the following three elements.

First, increasing the inventory of systems that were shipped to customers based on an approved customer purchase order, yet the related revenues were deferred until customer acceptance will be obtained.

Second, increasing inventory of systems which were placed at new and existing customer sites for an agreed evaluation period.

This inventory increase is mainly from our new standalone product, the T500.

And third, general buildup of inventory to support the increasing customer demand for the existing products.

Given the extended customer demand to evaluate our new products, which is a critical market share gain opportunity for us, we expect inventory level to further increase.

Inventory turns came in at 6.2 times a year, a high turnover relative to our peer group.

Deferred revenues increased from $1.7 million to $3.9 million reflecting the early collection of receivables related to unrecognized revenues.

Capital expenditures and depreciation came in at $0.4 million and $0.3 million respectively; similar levels to the previous quarter, and we expect these levels to be maintained in the coming quarters.

During the quarter we increased headcount by approximately 10% and our current headcount is 250 employees worldwide.

This increase was mainly in the software application and manufacturing team as part of our plan to meet the increasing demand for our products and solutions.

I will conclude with the cash reserve, which increased to $41 million following the net proceeds from the offering and the positive cash flow in the quarter.

This provides us with the needed financial flexibility to execute on our business plans for the coming quarters.

Gabi.

Thank you, Dror.

And thanks, everyone, for joining today's call.

As Dror mentioned, the first quarter of 2010 was characterized by excellent business and financial execution.

With industry fundamentals continuing to show improvement and in light of customer needs to ramp production rapidly, the Company made record shipments during the first quarter.

These record shipments were direct results of several factors.

First, our very strong position in Foundry and Memory with integrated metrology products.

Second, continued proliferation of standalone tools to support capacity ramp-up.

Third, continued design wins for the 40-nanometer-and-below technology nodes.

These high-end wins and especially -- are especially worth noting given the fact that 60% of wafer fab equipment spending is expected to be made at the 40-nanometer-and-below technology nodes during 2010.

Fourthly and finally, our well-managed operation, which allowed us to meet customer demand and support the steep ramp with tight delivery schedules.

We are also pleased to see that our revised business model is paying off and leading to strong financial execution.

Selling primarily directly to end-users allows us to engage more closely with our customers as well as enjoy a larger portion of the value our products provide them with, ultimately leading to improved average selling prices.

Given the return to high levels of capacity utilization rates at customer sites, we were able to increase service revenues and profitability levels.

It is our intention to continue and improve service business results by offering our large-installed-base customers several productivity enhancement packages.

Over the coming months we will be announcing these new products as they complete evaluations and are adopted in high volume manufacturing.

Net profitability numbers are coming close to our long-term model and free cash flow from operations is at record high levels.

With high-end manufacturing ramping up, we feel we are well-positioned for further growth.

Our optical CD platform is really taking off on several fronts.

First, the transition from CD-SEM technology to optical CD in high volume manufacturing during 2009 and in the beginning of 2010 has been happening at a much faster rate than previously expected.

Second, our leadership of the copper metrology market continues to gain traction on both the integrated and standalone platforms in Foundry and Memory markets.

The fact that we played an active role in the development of copper processes in the last several years is now benefiting us as we see volume orders rolling in.

Third, the fact that our customers are mostly from the Foundry and Memory segments is benefiting us especially in light of the fact that both these segments enjoyed the strongest growth this year.

Fourthly, the fast pace of technology [shrinks] requires a lot more wafer-to-wafer process control which our systems make possible.

Our optical CD products are continuing to proliferate into more areas of the fab and the lithography and etch areas are playing a larger role than before.

Our technology roadmap is very exciting and we expect to continue and add more differentiation to our products as the year progresses.

Finally and most importantly, excitement in the Company is at the highest level in light of the fact that new tool evaluation requests are exceeding our expectations.

We believe that this is clear indication of the market recognition our technology has gained.

Now, let me turn to the industry outlook and also provide you with some insight into how we see our performance looking forward.

Looking at overall industry fundamentals, the picture remains quite positive.

First, Memory price charts are opposite from what they used to be when looking at 65-week average.

They are all up.

Customers are generally reporting their consumer electronics component demand remained healthy and that demand for high-end devices continues to exceed supply capabilities.

Also one gains further positive signs from capital intensity levels which are at a sane level of around 20% even in Memory where one remembers the days of 70% back in 2007.

At such levels our customers feel more confident that their ability to sustainably spend this year and next will continue.

In recent months, we have counted as many as 15 new fab announcements for the coming 3 years, eight of which are starting this year.

On top of all these indicators, we are closely following the demographic changes in the Foundry space with more competitive manufacturers coming online and with a need to speed up transition to smaller technologies as well as creating an increased demand for more equipment.

As for Nova, the sense of a prolonged down -- excuse me -- the sense of a prolonged upturn which our customers are sharing with us gives us an opportunity to do several things.

It allows us to further solidify our market share gains through repeat orders and successfully complete the several evaluation projects we are engaged in and lay the foundation for growth in 2011.

To announce new products and capabilities which our top-gear customers are eagerly awaiting.

To leverage our large installed base by supplying value-added solutions through our services group.

Our ability to support fab efficiency improvements and extend the use of existing equipment, where possible, continues to create demand from our customers.

And finally, to build more growth engines by expanding our products and technology portfolios.

To summarize, the Memory side of the business is performing better than it did three months ago.

In addition, we currently have better visibility on new fab build-outs and expansions in both Memory and Foundry.

And we believe we are very well-positioned to address these opportunities.

Based on these developments, we think it is appropriate to raise our revenue guidance for the year.

The Company's revised revenue guidance for 2010 is $61 million to $66 million.

Based on this revenue guidance, the Company is also guiding to net profitability of 13% to 17% for 2010.

And with that, Operator, we would be happy to take questions.

Thank you.

(Operator Instructions) We are taking our first question from Edwin Mok from Needham & Company.

Please go ahead.

Hi Gabi, can you hear me?

Yes.

Hi, Edwin.

Thank you, hi.

Hi, Edwin.

Hi, Dror, how are you?

Hey, thanks for taking my questions.

So my first question is just on bookings.

On last quarter you guys made a few announcements, gave us a really great visibility in terms of your booking on the last quarter.

Can you give us some color in terms of booking this quarter?

In general, during the first quarter, we did see some moderation of bookings.

As we mentioned, the fourth quarter was an exceptional quarter, I think, for the entire industry.

The strength of the fourth quarter as well as the continued orders that we got in the first quarter leads to a very strong business situation right now.

But indeed there was some moderation in the first quarter.

In terms of -- great.

And then you mentioned that you have record shipments.

I guess a part of that was what [you asked for] -- for new opportunity, is that a fair way of looking at that, but you might not recognize [that] until later on this year is that how we should look at that?

Actually not.

Most of the deferred revenues are from the integrated metrology segment, because we moved to direct sales.

And there was some change in criteria, so we do expect to recognize these revenues.

Most of these revenues in the second quarter.

Just to explain, when most sales were happening through OEM, recognition was happening pretty much upon shipment, and that was the transition to direct sales.

Recognition takes place upon acceptance as Dror mentioned in his prepared comment, which takes up to eight weeks sometimes less than that.

And therefore, you may see situations in which acceptance may trail up from one quarter to the next.

Great.

So given that you guys are in pretty good business momentum, given that there is some deferred revenue, is it safe to assume in the coming quarter, you should see -- we should see some revenue growth?

Well, we see a strong business performance continuing.

As you saw and as we mentioned we have raised our guidance for the year.

So in general we see strong momentum continuing.

The momentum is related to a variety of things which are all very exciting to us.

Some of them are capacity build ups of places that we were designed into previously.

Some are recent design wins.

As we mentioned we see a nice split between the Foundry and Memory side which is very helpful.

And generally, business continues to be quite strong into the second quarter.

Great.

That was very helpful.

And as for the year as I mentioned, overall we see continued strength and therefore the revised guidance is for the year as a whole.

Great.

I forgot to congratulate you for the revised guidance.

So one thing I want to ask you about the guidance.

So one of your largest customers, TSMC, had said last week that they are -- their CapEx is going to be more than 60%, it's going to be front-end loaded this year.

Do you see that, potentially, to be -- have some impact on your revenue in the second half of this year and how do we look at second half of the year?

Yes, first of all, definitely the exposure to the larger customers, and you know our customer base quite well, is very helpful.

And when they decide to spend more money we are very, very positively impacted by that.

The things that really influence us going forward are related, first of all, to the continued proliferation of the product and the existing products, and also the fact that as I mentioned the number of mutual evaluations is continuously on the rise.

Some of these evaluations are happening at very rapid processes, because customers want to go ahead and transition very quickly from development onwards into high volume manufacturing.

So those are good indicators as well.

As far as the second half of the year and how we see it, in general, I think sentiments in the industry has been that the year as a whole is up, and up significantly.

Right now there may be some moderation in the second half of the year.

But in general, if you look on average, at our behavior for this quarter and the previous one, we're talking about significant growth.

What is happening now, which can help us I think, even if the industry does tend a little bit downwards in the second half, is the fact that we are in these penetrations right now.

And I think they help solidify our position also into next year.

So for now I think there may be some moderation.

On the other hand as I mentioned in my prepared comments, we do see a lot of positive feedback from the customers.

I think as I mentioned the capital intensity levels in Memory are something to be appreciated that we would love to see continuing long-term.

We think that makes for a more sane business that is able to support continuous ramp-up.

So I think those things are very helpful.

And the other thing is this arms race that's going on on the Foundry side is benefiting us simply because we are now at all the leading foundries in the world.

And therefore as they go ahead and struggle for position, we are positively impacted by that.

So I think that kind of, hopefully, gives you a flavor of how we see all this playing out.

Great, that was very, very helpful.

I've two more questions and I'll step off the queue.

First one is on the standalone evals.

You guys talked about that in your prepared remarks as well.

Is it possible for you to quantify the number of Qs that you have placed in terms of evals and also the number of sites that you have placed?

Well, I don't want to talk specifically about the number of evaluations, but the way we look at it is basically gaining customers.

And as we state in our presentation our goal is to gain at least four or five more customers over the next 12 to 18 months.

It could be more simply because more and more customers are coming.

But that's our goal right now is to do that and also turn that into market share gains, which would basically imply repeat orders and design wins.

But it's about a handful that I expect, hopefully, to be able to turn into our customers and show market share gains within the next probably 12 months or even less that.

And the list of what I'm excited about, and I mentioned the whole Company being excited about is that list is actually growing, which for us is huge recognition of how customers perceive the new products.

Everything, by the way, is focused on the new products when I talk about evaluations, which is a good indication to us that the technology decisions we made were the right ones for what the customers need now is a transition to the 4X, 3X and even the 2X technology node.

Great.

I understand you -- I know you can provide too much -- specific on the eval, but that was helpful.

It just sounds like you did have inventory reduction this quarter, is that correct?

Edwin, I'm sorry, I didn't hear the second half --

Sorry.

Yes, sorry, it sounds like you do -- you did have new eval requests as well as a new shipment this quarter than on --

They are continuing quite rapidly indeed.

Great that's was helpful.

And then lastly, I think in the past you guys have touched on this, but on the standalone -- your standalone OCT for the Memory sector, you -- I noticed you guys mentioned a little more in this quarter than you have talked about in the past, because in -- I think in the past obviously it was focused on Foundry side or the logic side of the [world], right.

Can you help us on the standalone side, where are you guys seeing the most interest?

Is it more for copper metrology or is it more for CD-SEM replacement and also is it more in NAND or DRAM?

Some kind of way of quantifying it that will be helpful.

Thank you.

So if the question is focused on Memory now I will say that we are gaining a lot of traction now both in DRAM and in NAND.

So standalone is becoming unlike maybe where it was a year ago where there were only lesser customers for standalone on the Memory side, there's now more customers coming online for standalone.

Indeed the Copper side of it does take a part, but also as I mentioned we're already engaged very heavily in etch and lithography applications as well.

So I'd say it's both DRAM and NAND, it's copper metrology, but also we see etch and litho becoming an interesting part of the activity on the standalone front.

Great, that's all I have, thank you.

Okay, thank you, Edwin.

Thanks Edwin.

We are taking our next question from Arnab Chanda from Roth Capital.

Please go ahead.

Thank you.

I've two questions.

One for Gabi, one for Dror.

Gabi, if you can talk a little bit about -- qualitatively, what you see going on in the Foundry market versus Memory.

And how do you see that proceeding both in terms of utilization as well as demand from both sides?

And then a question for Dror about operating margins.

What do you think your target model is and if you have a qualitative idea of when you think you can get there?

Thank you.

Okay, just to repeat the question for those that didn't hear.

You asked about a qualitative assessment between Foundry and Memory and the trends we're seeing there and for Dror to speak about the long-term model for profitability.

I'll try to explain a little bit how we see it playing out between Foundry and Memory.

I think on the Foundry side, we see two types of activity.

One is repeat orders and volume orders from people that are duplicating and extending the activity in the 4X technology node and some evaluations in those high-end customers [and activity] for 3X and 2X, because they are making announcements that lead them to start pilot production of 3X and 2X sometime this year.

On the other hand, we're seeing in the Foundry space, because as I mentioned, the demographics are changing there, that there are some relatively new engagements from people that are trying to attack the position of the leader there.

And there again, everything is very, very much technology-focused.

Foundry being mostly logic heavy, the application tends to focus a lot on the gate and the transistor level; so more complicated applications that need to be measured.

And also, of course, the fact that there is a variety of products in each of these foundries.

So I'd say, technologically, the Foundry side is pushing very, very hard, both on the technology node side, but also on the type of applications that needs to be measured.

As far as the quantity, as I mentioned, in Q1's revenues, it was 50-50.

Last year Foundry was survey strong, Memory is definitely coming back in a very, very big way.

What we see in Memory right now is definitely very significant capacity increases.

I think there -- again, the struggle, of course, as always, between the different customers, is for market share.

But I think, again, the changes that we see there -- for instance, if you look at the extended micron group and the need for (inaudible) to transition in order to meet the requirements there.

The expansions that you see in Samsung, Hynix, which is pushing hard as well.

So that kind of activity -- also Elpida and its supporting fab in Taiwan that kind of activity is mostly focused on moving forward, on what has already been qualified and duplicating orders in order to increase capacity.

So that, hopefully, gives you a little bit of a feel on how we see between the two areas.

It may be that in a given quarter, one side of the business, Foundry or Memory will take a larger portion.

From what we're hearing right now, I think Memory is going to grow probably faster for us in the next quarter or two.

But I think Foundry remains solid as well, because of what's going on between the five leading players all of which are our customers right now.

Let me turn it over to Dror about the profitability levels.

Yes.

Hi, Arnab.

On our target models for operating margin, the target gross margin that we have on the long-term model is around 52%.

Operating expenses; our model assumes 30% of revenues.

So our targeted operating margins is around 22%.

Thanks.

And the timing?

As mentioned, we believe that we may be able to reach that level on quarterly revenues of around $20 million a quarter.

Thank you very much.

Thank you, Arnab.

And now we are taking a question from Robert Katz from Senvest.

Go ahead.

Hi Gabi and Dror.

Congratulations on a very nice quarter.

Thank you.

I have a few questions.

You talked about the 15 new fabs over three years.

Can you break out what is Memory and Foundry, or logic?

How much is it?

Yes.

Between Foundry and Memory?

Memory, yes.

Don't have the list in front of me at this very moment.

But I'd say that we're seeing announcements actually coming from both sides.

Just to mention a few, you see announcements coming from TSMC that's planning a new fab, you see announcements from Global Foundries, which is building the New York fab.

You see Samsung that's talking about Line 17 right now, and expanding the fab significantly in Austin, Texas.

I'm just giving some examples off the top of my head right now.

So IMFS in Singapore, of course, is a very, very important project.

So I think you're seeing it right now on both sides.

There's also the phases -- in TSMC and in UMC phases 4 and 5 et cetera, which are perceived as new fabs, simply because they really are, even though they call them phases these days.

And of course, what's being talked about quite a bit is whether Toshiba, you know, will go forward with fab number 5.

They're definitely focused on expanding fab number 4 and there's talks about fab number 5 coming online, hopefully in the near future.

So this is kind of a -- I don't know what that works up to as far as percentage, but I think both sides probably -- I don't know these percentage points.

Have you had any success and -- with Toshiba or is it still in the eval status?

I think that we are progressing rapidly there.

I don't want to talk in granular detail about that for obvious competitive reasons.

But I think that we're proceeding quite rapidly over there.

And definitely, that customer, specifically, is taking a very serious look at us right now.

But I don't have anything to announce at this very moment.

And if you don't mind I'll keep it at that, again, for competitive reasons --

Sure, not a problem, not a problem.

If -- looking at the existing fabs, what is your opportunity in these 15 fabs?

As far as accumulated business for the Company?

Yes.

Again, these announcements talk about the next three years.

As far as we look at that, the way we do our analysis internally is obviously on an account-by-account basis.

But potentially, this is tens of millions of dollars worth of business.

And I'll try to refer to an example we gave recently when we spoke about the addressable market for Nova.

In a specific example, if you remember we spoke about let's say a foundry at below 65 nanometers with a 100,000 wafer starts per month.

That in itself represents an opportunity of $30 million to $35 million for us.

So there are several projects here that imply that and more.

So for us this is an opportunity for the next several years, which is tens of millions of dollars.

I think what matters is to see the pace in which these things happen.

We're excited to learn from the customers that about -- I'd say six to eight of those are going to start happening this year.

And so I think we're going to see some equipment rolling in and that obviously influences the revised guidance that we had given.

But it also leads us to get a positive feeling about our overall positioning, that we play a serious role there.

And also given the fact that activity now with customers is direct as part of the changed business model, we get much more engagement with the customers and get a better understanding of their plans and what tools -- what amounts of tools and what kind of tools they're going to be needing when they ramp up.

Sure.

And the $30 million to $35 million, that's a new -- a green field or is that a upgrade?

Or is there a difference for you?

I'd say that if it's an upgrade there's possibility it could be more depending on what our installed base is in a given fab.

For a green field, that's about right.

Okay.

And on the Memory side does that differ or is that pretty -- if you're going in NAND or DRAM to sub-40 nanometer and sub-30 nanometer?

It differs based on the extent of optical CD deployment.

I think that in the case of DRAM and NAND, each customer is at different stages right now.

It's tough to generalize.

I won't say that in many of these fabs, we're already positioned both for integrated and for standalone.

It's still the case that most of the business in the Memory side is integrated, but what's exciting now is that standalone is becoming part of that business.

So it could be that's -- that it's -- that it is somewhat less.

The expense of the opportunity could be somewhat less than it is in Foundry.

To give you a ballpark figure, probably somewhere between I'd say $20 million to $25 million, maybe a little bit more if we're really selected for as many processes that we think that we can be qualified for.

And that's [per -- 100,000] wafer starts per (technical difficulty.)

(Technical difficulty.)

Yes.

Okay.

That's good to know.

And in the current quarter, how many standalones have you recognized revenue on?

Oh.

Yes, we have not generally given a breakdown of the number of tools we either sell or recognize.

So at the end of the year we give an analysis that talks about the products on a percentage point, how much of the revenue was from each product side.

But on a quarterly basis, because of the fact that it does tend to change from quarter-to-quarter, we have not provided that kind of information.

Okay.

And was your book-to-bill positive this quarter?

You mean, above 1?

Yes.

Yes.

In general, as Gabi mentioned before, we had a very strong booking quarter in Q4, probably all the industry.

So bookings in Q1 did moderate a bit.

I think the right way to look at it is looking at both quarters together.

And book-to-bill, if you combine both quarter together are -- is still above 1.

But it's important also to mention the number -- (multiple speakers.)

I take it that's a roundabout way of saying that --

-- the year has significantly improved, which is what has allowed us to raise our guidance.

Right.

And so even though there is some moderation within the quarter, overall we feel very strong about the business performance for the year.

Right.

And that new activity you said in Memory and Foundry -- or is it mostly in Memory that's giving you that increased confidence?

It's both.

It's both Memory and Foundry that we're seeing new activity in.

A lot of it is Foundry and actually some of it also in Memory.

Okay.

And what is the fully diluted share count now, what's the offering behind you?

I think it's $24.2 million.

Share count for the quarter was $24.2 million.

For the next quarter it should be around $26 million.

$26 million, that's what I wanted.

Yes, $26 million.

$26 million, okay.

Thank you very much guys.

Keep up the good work.

Thank you.

Thanks, Robert.

Thank you.

We're now taking a question from Andrew Kaplan from Harvest Capital.

Please go ahead.

Good morning.

Congratulations.

I wonder if you could talk a little more about the percentage your business is now coming from applications related to etch or lithography and whether in the eval or new business if you can at least qualitative or quantitatively talk about a percentage perhaps coming from the applications related to that?

Percentage of what, I'm sorry?

The percentage of your business that comes from applications related to etch or lithography.

Currently I know it's growing.

And where you expect it to be perhaps in a year.

Okay, yes, yes.

Yes, sure, sure.

I think definitely the etch and lithography side are growth opportunities for the Company.

It is the case that a lot of the activity has been -- on the [LTD] front has been in CMP.

I'd say that right now the combination of etch and lithography probably is accounting for about -- application-wise for about 20%, 30% of the activity.

I think that it has the potential of raising to a higher level simply because the amount of applications in that area is very significant.

And the reason for that is that both these processes are becoming more and more challenging with the advent of things such as double patterning.

And also customers are wanting to characterize the profiles of trenches that they etch much more closely than they did before.

Every little artifact matters to them these days.

So I think that the etch and lithography side are going to be growing.

At the same time, our strong position in copper CMP is continuing and the proliferation there is quite strong.

And there we see it both on the integrated and the standalone front.

So I think hopefully that gives you a little bit of a feel.

I think those two areas are definitely going to be seeing some growth.

Right.

But you're still seeing a number of applications related to CMP grow as well?

Yes.

Yes.

I think that the number of CMP applications is growing.

Even within the copper area there are certain applications.

Also in the dielectric area of CMP there's a lot of applications that are continuing to come online.

Customers are wanting to control the CMP process more tightly.

And with that we are required to measure many, many more complicated applications.

But right now I'd say it's probably 60% or 70% CMP-related as far as applications are concerned.

And then probably about 30% the two others, the etch and litho together.

Great.

Great.

And you had mentioned, I think, either in the -- on the call or in the press release about a 5% further increase in the operating expenses to get yourself to the level of where you feel you need to be in terms of support and new product development and so on.

Does that imply that operating expenses in dollars will flatten out after that or can you put a little more color on as you go through the year?

Yes, definitely.

We do expect up to 5% increase in the second quarter, and then we expect operating expenses to stay the same throughout the year.

Great.

So even if -- I know you're -- what you're guiding to in terms of revenue suggests relatively flat sequential revenues during the year, the midpoint of your new guidance.

In the event that you're fortunate enough that revenue increases, you would be able to get operating margin leverage?

Yes.

Okay.

Great.

Thanks very much guys.

Congratulations.

Thank you very much.

(Operator Instructions) Gabi Seligsohn, would you like to make your conclusion statement?

Yes, Operator, thank you.

As mentioned, business fundamentals continue to be very strong.

We're very happy to demonstrate the continuation of strong financial performance, which is the foundation of the business changes that we had made during last year.

And we look forward to this improved business cycle and utilizing as much of the opportunities that are out there for us.

We thank you all for joining.

And we look forward to speaking to you in the next conference call.

Thank you very much.