Nova Ltd (NVMI) 2010 Q2 法說會逐字稿

I would like to welcome all of you to Nova Measuring Instruments' second-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 Chief Executive Officer; Mr.

Dror David, Chief Financial Officer.

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

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

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

If you've not received a copy of the release, please view it on the Investor Relations or News 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 is 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.

For your information, this conference will be recorded.

I will now hand over to Mr.

Dror David, Nova's Chief Financial Officer.

Thank you, operator, and welcome everybody to our quarterly conference call.

The last few months have been very exciting for us, shifting gears in each important element of our business, which has led us to present exceptionally strong and record-level financial performance in all key metrics.

Total revenues in the quarter were of $19.4 million, up 22% quarter-over-quarter, and up 179% over the comparable quarter of last year.

In the second quarter of 2010, 70% of our product revenues came from the Memory segment, up from 50% in the previous quarter, and 30% came from the Foundry segment.

Looking at wafer fab equipment spending forecast for 2010 and 2011, the Foundry and Memory segments are taking the major portion of these investments and the distribution of our product revenues indicate our excellent position to enjoy this investment trend.

In parallel, service revenues increase 15% quarter-over-quarter to $3.6 million.

Overall gross margins increased by 290 basis points, quarter-over-quarter, reaching 54%, mainly as a result of high revenues utilizing existing infrastructure.

Products gross margins increased by 121 basis points to 59%, and services gross margins increased to 31%.

Operating expenses increase by 6% to $5.8 million in the quarter.

This increase was mainly driven by our efforts to accelerate introduction of new products, some of which were already announced during SEMICON in July.

Given the extent of business opportunities we see in front of us, we plan to increase our operating expenses during the coming quarters up to a level of $6.5 million a quarter.

This increase is already baked into our updated profitability guidance for year 2010.

And as you can see, the expected business volumes will more than offset this increase.

Most of this increase in operating expenses is expected to be in R&D expenditures toward introduction of new products.

The timing of reaching the full extent of this operating expense level could vary, based on the rate of product development and introduction.

However, we believe that once we reach this level of expenditures, it should be sufficient to accommodate for our expected business needs in 2010 and 2011.

During the quarter, we reported net income of $4.7 million.

Operating margins reached a record level of 24%, reflecting the high operational leverage built into our operations, as well as the continued increase in the value we offer to our customers.

GAAP EPS in the quarter was $0.18 per diluted share on share count of 26.4 million shares.

Operating cash flow came in at $6.3 million in the second quarter, and approximately $1.8 million of this sum is attributed to collection of unrecognized revenues.

Moving into balance sheet key metrics, accounts receivable were $11 million, similar to the previous quarter, while DSO decreased to 50 days relative to 64 days in the previous quarter.

This all depends on the mixture of customer receivables and the timing of collections in the specific quarter, and we expect it to range between 50 and 70 days looking forward.

As discussed in the previous conference call, we moved to a direct sales model with additional customers during the first half of 2010.

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

The impact of 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 $6 million in the previous quarter to $8 million in the second quarter of 2010.

This increase is comprised of two major elements.

First, increase in inventory of systems related to deferred revenues; second, increase in the 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, which has gained and is gaining very strong market direction.

Inventories related to regular operations of manufacturing and service increased only marginally in the second quarter, despite the increase in business volumes as a result of successful efforts of our supply chain group to continue with our lean manufacturing policy.

Given the continued demand to evaluate our new products, which is a critical market-share gain opportunity for us, we expect inventory levels to further increase, yet at a much slower pace than in the last two quarters.

Inventory turns came in at 5.1 times a year, a high turnover relative to our peer group, and we expect them to remain at these levels throughout the year.

Deferred revenues increased from $3.9 million to $5.7 million, reflecting the collection of receivables related to unrecognized revenues.

Capital expenditures and depreciation came in at $0.3 million, similar levels to the previous quarter.

In the coming few quarters, we expect capital expenditures to increase following our planned enhancements for our -- for application, demonstration and manufacturing facilities.

During the quarter, we increased the headcount by approximately 4%, and our current headcount is 260 employees worldwide.

I will conclude with cash reserves, which increased to $47 million in the quarter.

We believe this cash level is sufficient and is important for the support of our expected growth, and also provide us with needed financial flexibility to execute on our business plans for the coming years.

Gabi.

Thank you, Dror, and thanks everyone for joining today's call.

Q2 was another excellent quarter with record levels of revenues, profitability, and operating cash flow.

Given the fact that our business continues to be focused on the two largest segments of Foundry and Memory, we continue to receive large-scale orders throughout the quarter.

As indicated in the guidance provided in today's earnings press release, we expect this trend to continue at an even higher pace during the second half of the year.

The fact that Nova now plays a much more significant role for the semiconductor manufacturing arena is clearly driving the company to an exceptional growth rate.

The vision that we have held for quite some time that optical CD will play an enabling role in technology transitions below 65 nanometers is becoming a reality.

Moreover, the number of manufacturing steps relying on optical CD as a means to control and meet tight process control tolerances is continuing to rise as well.

It is our belief that our product strategy is well-aligned with customers' needs, and as a result we are getting such a significant vote of confidence.

More specifically, during fast technology transitions with large volumes being manufactured, our customers look for a variety of capabilities which we are able to offer -- high reliability, high throughput and excellent cost of ownership and ability to deal with and measure significant process variability, an aggressive product roadmap, delivering tools on a very short lead time, and the availability of local and professional technical support at customer locations around the world.

To be ready for this kind of ramp up, we spent the least few years in collaboration efforts with leading customers, we optimized our supply chain to facilitate short lead times, and we trained our service and applications engineers thoroughly.

As indicated by recent announcements, we have continued to increase our new customer acquisition rates in both the integrated and standalone metrology segments.

Getting the Nova T500 standalone tool installed at seven leading customer sites by the middle of the year, significantly exceeded our expectations.

We believe these penetrations lay solid foundation for further growth in the area of standalone metrology as we continue on our quest to become the number one player in the standalone optical CD market in 2011.

In last quarter's earnings conference call, we spoke about an effort to revise our service business model.

This effort is clearly paying off as demonstrated by the 15% increase in revenues and the improvement in service gross margins.

Given the transition of more customers to direct purchasing of our products, many of them are now coming to us for extended service delivery, which in turn offers us the opportunity to further expand this important business sector.

Becoming a multi-product company has meant that the number of customers now ordering both our integrated and standalone products to support a variety of needs is continuing to grow.

At the same time, we have been focused on introducing new features and products.

The recently announced productivity enhancement packages offered by our service organization to our existing customers have met significant customer interests and are being installed at multiple sites.

During July, we also announced the new integrated metrology product called the i500, which is geared for the 20 nanometer technology node, and will help us continue solidifying our leading position in this market.

Another recent announcement was for the fourth generation of our metrology and application development software, the MARS 4.0, which offers important technological advancements, allowing measurements to be made in more complex three-dimensional areas with a very short setup time.

Clearly, further solidifying our market position depends heavily on an aggressive product roadmap.

We believe our market-share gains over the last several quarters are a good indication of our ability to tune our product roadmaps to market demand, and to that end you can expect us to keep rolling out new products.

Going after the number one position requires extending our R&D spending over the next couple of quarters.

But as our guidance indicates, we will maintain sufficient operating leverage to absorb this investment.

Now, let me turn to our outlook.

2010 is proving to be a remarkable year for the entire industry.

General consensus in January of this year was that wafer fab equipment would reach a 50% increase and end up at about $19 billion for the year.

Today most key OEMs are talking about an industry of $27 billion to $29 billion and expectation for further growth into next year.

To remind everyone, our previous guidance was $61 million to $66 million, with an operating profit of 13% to 17%.

The three months since our last call brought a significant change to our business momentum and working assumptions.

You may recall the degree of uncertainty that was shared by many in April of this year as to the second half of 2010.

Though we knew and reported an expectation of a record year, a lot of what we know today was not then present on our charts.

Specifically I would mention four factors.

First, a significant and unexpected increase in the rate of 65 and 45-nanometer expansion at a key Foundry customer; second, a huge increase in orders from our largest memory customer; third, an extended deployment of our integrated metrology products at two Memory customers facing challenges in a technology transfer process; and fourth, delivery of tools to a few of the recently announced fab expansions.

As a result, in today's press release, we were very pleased to significantly revise our annual guidance upwards.

We expect revenues to range between $78 million and $85 million and that our operating profit will range between 21% and 24% for those numbers.

Looking further, we believe there are several factors that position us well to demonstrate further growth in 2011.

First, the number of new customer penetrations we have made this year, which we expect will turn into repeat orders; second, our ability to integrate optical CD measurements throughout the fab; third, the large-scale deployment of integrated metrology into more process steps requiring closer and tighter process control; fourth, our very competitive product offering; and finally, our cost structure and operating leverage.

On the Foundry side, we see the race for prominence continue to dominate and in light of the fact that all major foundries are our customers, we feel confident in the role we will play.

On the Memory side, design shrinks continue to be a key factor, and we are already engaged in measuring 20-nanometer devices.

Many of the recent announcements speak of an even larger spend by leading memory manufacturers next year.

And again, almost all leading memory manufacturers are Nova customers.

From an organizational standpoint, we feel ready to support this significant growth.

The investment we made in our infrastructure and midlevel management team around the world over the last several quarters is now paying off.

Having fully localized and highly motivated teams of veterans in every location is what allows us to install dozens of tools uneventfully, and continue this rapid growth further.

Speaking on behalf of the entire management team, I can say there is today a sense of great achievement within our ranks and strong motivation to continue on the path of further growth and profitability.

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

Thank you.

Question-and-answer session will be conducted electronically.

(Operator Instructions)

Our first question will come from Edwin Mok from Needham & Company.

Please go ahead.

Hey guys, congratulations for a great quarter and great guidance.

Thanks, Edwin.

Okay.

So the first question I have, just quickly on the past second quarter as well as for the full year.

How do you now think about integrated versus standalone, was integrated more of a driver for the growth in the past quarter, and for the full year, how do you think about that mix?

I think that indeed for the first couple of quarters, revenue-wise, integrated was the larger portion.

And so, yes, for the first half of the year, the integrated side of the business was larger on the revenue side.

Standalone still continues and will continue to play a key role, and I think that in the second half we will see more standalone revenues coming in.

I think the ratio will still stay in favor of integrated metrology this year without giving an exact split, which we'll probably do at the end of the year.

But I will say that our expectation is that standalone next year will play a much more significant role in light of the penetrations that we have made and the expectation of repeat orders coming from that area.

Great, that was very helpful.

And then on your announcement about the new customer site that you guys are installing for standalone OCT, I guess my question is how many of those are in evaluation that -- and if you can give a rough timeline of how long do you think it will take for you to go [without] those evaluation (inaudible) --

Sure.

-- on that progress there.

Sure.

Our expectation is that most of the evaluations that are ongoing will be completed over the next couple of quarters.

And so that's just to give you a feel.

Some of them will probably be completed in the third, some of them in the fourth, so that's to give you a feeling there.

As far as our recent announcement of customer acquisition, I'd say probably, it's a ratio of around two-thirds, one-third in favor of actual tool purchases.

I see.

And just to be clear, because one thing that I was trying to figure out was, do you expect that later in every quarter, you have one or two customer that you got eval [call], or do you expect all these projects to go on at the same time, and that it might two or three quarters from now that you have one big quarter where you have no multiple customer eval call and then you start to ship on more revenue.

How do we think about that?

Well, I mean, our focus has clearly been penetrating as many key customers as possible.

As we indicated in the press release just before SEMICON, the seven customers we mentioned represent about 70% of overall wafer fab equipment.

So you can assume from that that we're talking about very big customers.

Overall, our expectation is that by the end of this year, we will probably have about 12 standalone customers, all of them are pretty significant customers.

So as far as more evaluations, I would say that the new evaluations going forward would probably be associated with penetrating more areas of the fab that we have penetrated.

There may be one or two other customers that we're looking to penetrate beyond that list.

I think now the time has come in order to expand the footprint even further with this.

And what we see happening is, sometimes a customer will bring wafers from other areas of the fab to be evaluated on the tool on that's there.

Sometimes they will say, you know what, we want to start a whole new evaluation for a new technology node.

But in most cases, that will probably already be an existing customer.

At the stage that we are in now, where we penetrated so many accounts, really, as I said, the focus will be extending footprint, more than anything.

Great, thanks for clarifying that.

And then on the service side, very strong gross margin.

How do you think about that going forward?

And is that part of -- partially driven by Company's [prediction], productivity enhancement project that you guys are doing?

And do we think about that being a one-time event or is it ongoing?

How do we think about that?

Sure.

I'm glad you bring up that question because indeed the area of service is something that we've been focusing on in the last year, and reassessing our position in that area.

And so there is a few drivers here.

As I mentioned, the fact that we're now selling mostly direct has created direct relationships in location where sometimes we were doing service contracts through an OEM.

So that's one side of it which has been very helpful.

The other side of it indeed is the revenue mix.

And we are just in the beginning of showing revenues coming from the upgrade packages.

We expect that to grow significantly more in the future and provide us more leverage, and as a result of it, an even improved gross margin going forward.

So in this quarter we saw 15% increase in revenues.

Most of the gross margin improvement was a result of that.

Some of it was also a result of these upgrades that we've been talking about.

I expect, going forward, the portion of upgrades will probably increase, and that will allow the gross margins and the service to further increase as well.

Great, very helpful.

And lastly, Dror, I just wanted to -- on the operating expense side, you mentioned $6.5 million as (inaudible) target, if you will, and mostly driven by R&D program.

But given all the evals that you guys are doing, wouldn't you expect to have more expense on just supporting the eval as well?

And assuming that you have worked through the -- a bunch of those evals, it sounds like you guys have quite a number of them -- would that help you moderate operating expense, if we look beyond and look into 2011?

Well, first on the aspect of the R&D expenses and sales and marketing.

In general, the infrastructure to support evaluations from the field side is already there.

So we don't expect a significant increase there, mostly in the R&D for introducing new products.

So in general, I would expect that most of this increase would be concentrated in the R&D.

I see.

So it sounds like you already spent -- you already invested in the sales and marketing side.

And then lastly on the deferred revenue, you mentioned, let me see, you -- it went to $5.7 million in the last quarter.

How do you think about that, going forward?

Is that something -- is it just a function of timing because your shipment increased so much, or should we expect it to come down?

How do we think about that?

I think that we should see it coming down a bit in the next two quarters.

Great.

That's all I have.

Thank you.

Thanks, Edwin.

We will take our next question from Arnab Chanda from ROTH Capital.

Please go ahead.

Thank you very much.

Gabi, if you could talk a little bit about -- it seems like you're seeing a pretty significant increase in demand for memory.

Could you talk a little bit about the drivers from there?

Is it more on the NAND side or the DRAM side?

Is it multiple customers?

And what do you see the trajectory of that spending surge?

Thank you.

A lot of the spending in the last quarter has been DRAM related, I say most of it.

But we are seeing a spending increase now on the NAND side as well.

I believe that going forward and into next year, since a lot of the investment has been around DRAM, from what we've seen so far, there will be an increase in NAND flash investment.

There is new projects that have been announced.

As you know, people like Intel-Micron Flash are moving forward with their project.

Hynix is investing again, as well as Toshiba, which we're now facing as well.

And so I would say that the NAND side I think is going to start getting bigger, but so far DRAM has been the larger part.

Okay, great.

And then if I could talk a little bit -- ask a question about Foundry business.

It seems like the largest foundry reported a very strong utilization rate.

It seems like you would expect to see a similar increase there.

Could you talk a little bit about what you're seeing in the foundry market, and maybe if you could get a little more specific like TSMC or Global Foundries or other foundry suppliers?

Sure, I'll do my best.

So, in general, as I mentioned when I spoke about the four elements that influence this very significant increase in guidance, the first factor I mentioned was actually associated, well, with a big investment indeed with the largest foundry.

And that was related mostly to investing more than expected in 65 and 45 nanometer.

And that's a direct result of the fact that the devices that are manufactured today are mostly within that technology node.

If you would look specifically at TSMC's latest investor presentation which is publicly available, you will see them talking about the fact that they've increased their revenue coming from 45 and 65 significantly to above 45% or 47%.

So I'd say that as far as revenue generating output from the fabs right now, 45 and 65 are definitely very, very significant.

As far as what's going on beyond that, what we have seen is definitely this war going on, a very significant war between the foundries.

UMC has come back quite significantly.

They are investing heavily and moving to the next technology node.

We are seeing that.

We are also seeing activity again in China, SMIC as well as Hua Li, the new foundry which is coming to life, and we're there as well.

And so that's happening also.

I'd say that what's very interesting to watch right now is actually the 3X races, the 30-nanometer race.

And here I would mention three players; TSMC, Global Foundries and Samsung.

And Samsung has announced the new fab in Austin.

There is rumors and talks a lot about the fact that will be focused a lot on Apple products and is being done on US soil which is obviously great news for semiconductor manufacturing in the US.

But I think that's where the big race is right now, who can yield a very good level that 3X is what's going to determine, I think, the next step between TSMC, Global Foundries and Samsung.

And each of them are priding themselves with certain levels of credibility and readiness for that.

And I think that's where we're very, very deeply engaged in.

And I think that's what's going to drive growth further, is this race.

But right now, if I would look at what the output is, most of the output from foundries is 65 and 45 nanometers.

And I think yield numbers are now much better than they were earlier on.

Then last question, maybe for Dror.

Could you talk a little bit, given your revenues improved quite dramatically, what is your target for operating margins and is that -- the timeframe for that maybe has brought forward a little bit.

Could you talk -- just remind us on what you're targets are and what kind of timeframe?

Thank you.

Well, I'll take that question, if I may, Arnab.

The way that we would look at this is, maybe try to give a simulation and take a revenue target, let's say what the Company looks like at a $100 million revenue.

And if you look at $100 million revenues, what you should expect is gross margins to be around 55% and net profitability to be around 25%.

And so -- and again, that's just to simulate, if you take that number, let's say $100 million revenues.

Okay.

Thank you, Gabi.

Sure.

Thank you.

We will take our next questions from Robert Katz from Senvest.

Please go ahead.

Hi, Gabi and Dror.

Great quarter, good job, guys.

Thank you.

Hi, Rob.

Thank you.

And I've a follow-on question to something you commented on about increasing your footprint in the fab.

Can you be elaborate on how you've been progressing so far, and where do you see that going on a given line, towards the line of 10,000 wafer starts?

Yes, I'll try to give some insight on to that.

So I think the initial steps of penetration into the standalone area, a lot of it was focused on the copper CMP area, which is an area which we very much focused on.

We changed the process control scheme in copper CMP and in the copper interconnect area altogether, working against opaque film thickness measurement, changing it to an optical CD measurement.

So that's been a very significant success for us both in standalone and integrated.

But a lot of the market-share gains in standalone came from that area to begin with.

The next step has been a penetration, which is becoming more significant into the backend etch and front-end etch area.

And also what we're starting to see is what is called ADI, or after-develop inspection in the litho step.

So I think that the next growth trajectory beyond further deployment of copper -- which I think is going to continue quiet significantly and actually is happening not just in logic or Foundry, but it's happening in Memory -- is going to be the backend etch.

Because what we see with process -- with the process challenges that happen at the 4X and 3X technology nodes, we see after CMP, a lot of issues coming from etch.

And therefore more measurements is going to be required, coming from the etch area.

So I think the next growth opportunity is etch and lithography or what is called the patterning area of the fab, as well as also high-end CVD process steps.

In the past, we communicated our total addressable market on a per fab basis and we gave an example of a 65-nanometer foundry with 100,000 wafer starts per month.

Looking at that and what our overall opportunity is for a fab like that, and we said it's above $30 million.

My belief is actually it's going beyond that right now.

And with the deployment and further steps, I believe that specific example, and nowadays we are talking more about 45 and below, is actually more in the direction of $40 million and above for 100,000 wafer start fab.

Now, obviously, the way these things work is that fabs actually ramp up in phases, sometimes 20,000 wafer starts, sometimes 40,000 wafer starts.

And so the example I gave is for a fab that's already running at about a 100,000 wafer starts.

Therefore, this would be over a certain amount of time.

Excellent.

And you also made one other comment that you were facing more of the NAND memory customers.

How significant is that penetration to date and where do you see that going?

Well, we've always been very strong in the NAND market, apart from, very admittedly, that we did not have business with Toshiba.

But everyone -- everywhere else Nova is very well positioned in the NAND flash, with integrated metrology and actually now starting to be stronger and stronger with standalone.

So I think we are very well-positioned to enjoy that growth.

What those customers as well as the DRAM customers are very focused on is very high throughput, very, very good cost of ownership and wafer output, as well as something that's very critical and where we are very differentiated is very, very high reliability.

And so customers continue to come to us.

What we are really excited about is that as we announced the i500, the new integrated metrology tool, actually a couple of customers immediately asked to receive these.

And both these customers are Memory customers, which to us, is a very good indication.

So I think I see the NAND opportunity as a very good, very solid opportunity for us.

Great.

Congratulations again, and great job with the Company.

Thank you very much, Rob.

Thank you.

(Operator Instructions) We will take our next question from Edwin Mok from Needham & Company.

Please go ahead.

Okay, thanks for taking this call.

Just quickly on the full-year guidance, margin guidance of 21% to 24%.

That seems somewhat conservative given that you already report 24.2%.

If we have to construct a scenario where margin declined a little bit on the second half to get to your full-year number, where do you think the incremental cost number, where do you think that margin (inaudible) gross margin on product, gross margin on service, or is it operating expense, Dror, what you probably think about that?

Well, I think our assumption is that because -- in general, as you know, the gross margin strongly depends on the mixture of products.

Our assumption was that in this guidance that we keep the same margins as in the second quarter, and because of the expected increase in operating expenses, we, in general, improve our net profitability.

But if you look at the year as an overall year with approximately 17% in the first quarter, so it should stabilize around 21% to 24% for the year.

So --

I see, great.

Thanks for clarifying that.

And then just quickly for you, Gabi, I notice -- on part of your prepared remarks you talk about one of your Memory customer having issue of converting a line and therefore they have increased adoption of metrology.

Is that a customer-specific issue, do you -- or do you start to see that in other Memory customer?

And can you clarify if that was DRAM or NAND?

So actually here I want to explain this a little bit because I think it's an important point, and it helps to understand what role Nova plays.

And we also saw this in the Foundry last year as well.

When you have process variability which is larger than is allowed, customers will go and deploy integrated metrology more extensively because they can measure every wafer that's being run and actually control the process on a wafer-by-wafer basis.

And that's exactly what happened with this couple of Memory customers.

Out of respect to them, I won't say if it's NAND or DRAM because it might narrow the field.

I have to be very cautious here because these are critical customer issues.

But again, I will say that what surprised us was the extent of integrated metrology deployment.

We were already there, we were already receiving orders, but there was a huge jump in orders, again which reflect the fact that people want to control the process all the more tightly.

And I think for us as I look at our business and what's changed fundamentally and is very interesting -- and this is maybe a conclusion of 2009 already -- whereas in the past I would say that an integrated metrology purchase is only related to capacity increases.

It's become the case now that it's also associated with technology transitions.

And it's become a key enabler for that as well, which very much pleases us because again it helps us mitigate, to an extent, the influence of the cycles when actually capacity decreases significantly.

So we used to take a much more significant hit on integrated metrology sales when capacity would go down.

And as last year showed, when we were pretty much the only company that held on to its revenues, a lot of that was associated with the fact that we helped with the technology transition and allowed people to actually retrofit existing tools even during a downturn year.

So integrated is actually playing a very important role in our life.

And I think that again, we are very happy to be a source of help in a situation like that and be able to react very quickly to such an increase in orders as we had experienced in the second quarter.

And just to clarify on that integrated metrology that you were referring to, is that still mostly in CMP area, or you guys are seeing some adoption in other area as well?

Yes, the orders that we have seen have been mostly in CMP.

As I mentioned in the last conference call, and we're seeing a little bit of that continuing, there is activity now starting again in integrated metrology for etch.

I would say that mostly in the Foundry space at the 3X technology node and below, it's still not a big portion of revenue, so it's still not something to factor in too much.

But I think that for now revenues on that will remain lumpy for a while, but I think that long term, that will also become a nice source of growth for integrated metrology.

Great.

Thanks.

That's all I have.

Thank you.

Thank you, Edwin.

(Operator Instructions) We will take our next question from Jonathan Half from Ion.

Please go ahead.

Hi.

Nice quarter.

Thank you, Jonathan.

You guys are obviously doing something right.

You explained all the drivers of your business.

I want to get a sense from you, you're obviously growing much quicker than the industry is growing, I want to get a sense from you to the best of your ability, what you think you guys can grow at over the next couple years assuming the industry is flat, just based on all the drivers that you explained in this call.

Thanks.

It's a very interesting question.

And in our industry, having a long-term crystal ball is not something that is handy.

And if you know where I could buy one of those I will immediately today for a lot of money.

I'll tell you what I feel, and it'll be difficult for me to quantify that, and I apologize for that.

What I do feel is that because of the rate of penetration and the number of customers that we're now engaged in, especially with the standalone metrology because with integrated we've really been there for quite a while and we've been, by far, the leader of that market for quite a while.

Becoming the number one player in standalone optical CD is I think something that's going to drive more growth into the future.

Will that allow us to grow in a year when the industry is flat?

It is possible.

It depends on the extent of deployment.

And therefore it's tough for me to forecast the extent of it.

But I would say that, yes, indeed a market-share gain story, frequently, allows you to grow at paces that are faster than the industry.

And therefore that is indeed a possibility.

The percentage rate of it or the extent of it, I apologize, but it's very difficult for me to foresee right now.

Okay.

And just a follow-up on that.

How far out can you see right now in terms of your business?

I mean, you gave some -- you upgraded your numbers quite significantly for Q3 and Q4.

Do you -- how do you see beginning of next year shaping up?

Well, what we saw in the last several weeks, and it was interesting, we just came back from SEMICON West and I attended some executive -- an executive summit and listened to what the major OEMs are feeling and spoke to them personally and then added my feelings from having visited customers in the last few weeks.

What we all saw was several announcements.

People are talking about 14 or 15 new projects that have been announced, which altogether add about 900,000 wafer starts per month for all markets that are covered by that plant.

Applied Materials mentioned that as being a 45 billion or 50 billion wafer fab equipment opportunity for the next six quarters or so.

So I've heard all sorts of numbers being mentioned here and there.

I will say that our visibility is indeed about six months, which is very good right now.

And when we look into next year, what we do see is the fab announcements that have been made.

We are made privy to the extent of ramp that these people are planning for next year.

And, therefore, from that we can calculate what our expected business should be.

And that is what helped us also mention in today's commentary that we think 2011 should be another good year.

But that -- when I say visibility into next year, it's based on that.

It is based on consumer discussions that do give us some visibility into what their plan would be and how much of our equipment they would need for the wafer starts and technology nodes that they are planning.

But that's the way you should look at that.

Great.

Appreciate it.

Good luck.

Thank you.

(Operator Instructions) We'll take our next question from Robert Katz from Senvest.

Please go ahead.

Hi, guys.

(Inaudible) lob in a few more.

Sure.

In terms of an upgrade cycle do you think that the adoption of optical CD is now becoming more prevalent.

How do you monetize when your customer moves from like a 3X to 2X to a 1X mode?

Are there any dollars to be made in that type of move beyond just increasing the pervasiveness of metrology?

I would say that as a whole, indeed process control continues to play a significant role.

And if you look at compound annual growth rate numbers for process control, they have always been higher than the equipment sector because it's all the more difficult to achieve the process requirement as you move from one technology node to the next.

How that translates itself into actual orders in our case, I just used that example about the two memory manufacturers deploying more equipment than was previously expected.

So these situations indeed do offer us an opportunity for more business.

The way we go about addressing that is to try to be there at early stages when the process development begins and try to get designed in.

And that's again what I mentioned in today's commentary, the fact that we're able to grow so significantly this year is a direct result of exactly that.

This is work that started, many times, 6, 12 or 18 months earlier than when you see the volume orders happening.

So the way to do this is to collaborate with the process people, not just the metrology group.

The process people are the ones that are driving everything, and the metrology people need to provide a service.

I think we've done a good job in addressing it from that direction.

It's to understand the process characteristics early on and understand what is the value that we can provide for a certain step and make that understandable or available to the customer when he makes his capital decisions and capital plans.

So that's how we look at it.

I would say that indeed from one technology node to the next we see more.

And I think --

And it's my -- my line of questioning is if you were -- if you have a line that was fully penetrated, is there -- would -- jumping to a new node, would there be more of a software sales upgrade, just an equipment in line to be able to address the next node, or do they have to buy new equipment or upgrade the equipment?

It's a combination of all the above.

And I think that's what's helping both sides of our business, both systems and service grow right now, because one thing that we've always done and we've never looked at the new technology node as something that we should not try to offer an upgrade for.

Some people say let's go with the next tool once we move to the next technology node.

If we can extend the life of an existing tool, we do that for the customer.

And that's really helped us maintain long-term relationships with customers.

So many times, this will be an upgrade just like the productivity enhancement packages that we spoke about.

Many times, it will be a move to a brand new tool.

I will say also that another key driver has been the fact that we are displacing existing techniques, so things such as CD-SEM, things such as opaque film thickness measurement, things such as older thin film standalone tools.

So another growth trajectory comes from displacing other techniques and providing better cost of ownership on the new technique that we bring in.

And on another front, how do you see yourselves in terms of taking market share?

Are you displacing any of your peers?

Well -- yes, I mean, many of the evaluations included, and those that have turned into real business and it'll -- included head-to-head evaluations.

Some of them are offsite where the wafers are sent to our facility and to a competitor and then a decision is made.

And basically, when we do the evaluation it's a validation process, so you've already won the business, but you're validating the fact that you're production-worthy in that particular fab.

So those are many of the situations that we see.

And as far as market-share gains are concerned, as I stated, our goal is to become the number one player in the standalone optical CD market by 2011.

To be able to do that, we will have to exceed the 50% mark, and that's our goal.

Excellent.

Thank you.

Thank you.

As we have no further questions in the queue at this time I would like to turn the call back over to the host for any additional or closing remarks.

Thank you, operator.

Again, I want to thank everyone for joining today's conference call.

We look forward to continuing and communicating next quarter, and continue to deliver very good business results.

Thank you everyone.

Bye-bye.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

Have a good day.