Nova Ltd (NVMI) 2010 Q4 法說會逐字稿

Good day, and welcome to the Nova Measuring Instruments fourth-quarter results conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to your host today, Mr.

Kenny Green, Investor Relations.

Please go ahead, sir.

Thank you, operator, and good day to everybody.

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

With us on the line today are Mr.

Gabi Seligsohn, President and Chief Executive Officer; and Mr.

Dror David, Chief Financial Officer.

I would 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 I 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.

During this call, certain non-GAAP financial measures will also be discussed.

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

Management believes the presentation of non-GAAP financial measures is useful to investors' understanding and assessments 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.

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

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

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

I will now hand over the call to Mr.

Gabi Seligsohn, Nova's President and CEO.

Gabi, go ahead, please.

Thank you, Kenny.

Hello, everyone, and welcome to our fourth quarter of 2010 and full-year earnings conference call.

The fourth quarter continued to show strong business momentum and marked and eighth consecutive quarter of continued growth in revenues.

Most bookings during the quarter came from the Foundry segment, an area in which we are particularly strong.

Our foundry customers in Taiwan, China, Singapore, Europe and the US are all ramping up very aggressively to deal with the strong demand created by tablets, smart phones, mobile infrastructure, cloud computing and other applications.

Revenues during the quarter came in higher than the top end of our guidance, exceeding our expectations, as a result of earlier sign-off on a couple of tool evaluations, as well as higher-than-expected service revenues.

Still, as previously communicated, much of the revenues coming from our successful standalone metrology penetrations made during 2010 have rolled into the first half of 2011.

At our third-quarter conference call, we indicated that we plan to increase our operating expenses during the fourth quarter in order to accelerate our R&D efforts.

Given the importance of these plans for our near and long-term roadmaps, I am pleased that we were able to execute faster than planned, resulting in overall spending of around $8 million in the quarter.

Dror will provide further insight into this area and to what you can expect operating expenses to look like going forward.

I will state clearly that the needed increases are well-managed, such that we will remain within our long-term target financial model during 2011.

Now let me turn to the year as a whole.

2010 was a year in which Nova broke every possible record.

Clearly, and as many others in our industry, we rode the positive wave which came after the severe downturn of 2009.

To me, what is important, though, is the way by which we rode this wave and the foundations we have laid for continuing to ride this wave into 2011.

During 2010, we implemented adjustments to our business model in Integrated Metrology.

We continued our penetration of the standalone metrology market and doubled our customer base.

We improved the performance of our services business.

And finally, we identified attractive new areas for growth in new process technologies.

Coming out of 2010, our financial and business fundamentals are at an entirely different place than where they were a couple of years ago.

2010 was the second consecutive year in which our product revenues significantly exceeded the growth rate of our industry.

As you will see when I discuss our plans for 2011, we expect to continue this trend for a third consecutive year.

We have always known that serving a global and advanced market such as the semiconductor manufacturing market requires heavy investment in technology and infrastructure, and that accordingly, scale matters.

2010 marks a turning point for Nova in that respect.

As I have said on many occasions, the role we now play in the industry has significantly expanded, and therefore, our business has scaled.

Our technology has become an enabling element in high-end memory and foundry manufacturing processes.

The challenges posed by the transition to the 3x technology node and foundry, the 4x node in DRAM and 2X in NAND Flash have meant that the amount of measurement being performed has had to grow significantly.

Customers are looking for measurement technology able to detect the most subtle changes in the process.

They are looking to be able to visualize the process in a much more detailed way than ever before.

And needless to say, they want to be able to measure at a speed which exceeds that of the process itself, and that is exactly where we come in.

Now let me turn to the overall market trends as we see them.

On many occasions in the last several quarters, I have referred to the role smart phones and tablet computers play in the lives of our customers.

It seems that these two segments continue to break every possible record.

Recently-released data shows that for the first time ever, smart phone shipments exceeded those of PCs, such that in the fourth quarter of 2010, 101 million units were shipped versus 92 million PC units.

A September 2010 report on tablets predicted about 40 million units for 2011.

A report issued last month following CES, and as a result of a survey with the supply chain of the tablet market, speaks of 80 million to 90 million units in 2011.

In response to these numbers, and strong demand, our foundry and memory customers are increasing the rate by which they ramp high-end capacity.

Based on their behavior, there clearly continues to be supply insufficiency, an important and positive indicator for our market.

Most of the memory being consumed for tablets has been flash-based for performance and energy consumption reasons.

A recent report reveals expectations for 5X year-over-year bit growth in flash memory consumption for tablets.

We have recently also learned from one of our key memory customers that specialized DRAM content in tablets is on the rise, and should go from current levels of half a gig per tablet to ultimately eight gigs.

This DRAM is a high-end chip with very good margins and will require more aggressive shrink and design rule, bringing on the 3x technology node into high volume earlier than expected.

Again, this is good news, as the requirement for more process control should come as a direct result.

Another market segment for which demand is on the rise is the solid-state drive market.

The key inhibitor to this market taking off has been price so far, but judging by how our key customers are lining up to produce larger volumes, we expect unit shipments will increase and prices will decline.

Our exposure to this positive trend is very clear.

Our three largest memory accounts all manufacture both DRAM and flash memory.

All leading-edge foundry capacity utilizes our tools for many steps in the manufacturing process as well.

Now let me turn to our outlook.

Before referring to the guidance we provided in today's press release, I wanted to discuss the steps we are taking to increase our growth potential for the long-term.

At our first analyst event in New York last month, we presented details on our long-term growth strategy, which we believe will lead us to reach the $40 million quarterly revenue level during 2013.

Our strategic focus so far has been on execution and expense control, while maintaining adequate R&D to penetrate the standalone metrology market.

Our main strategic goals for the next 12 to 18 months require shifting gears and include four elements.

First, expanding our share of addressable markets in existing segments, relying on the large number of customers we have penetrated by adding more measurable parameters in the four areas of manufacturing we are involved in.

To do this, we will release new hardware and software capabilities with significant competitive value during 2011.

Secondly, expanding our total addressable market from about $700 million to about $1 billion in the next couple of years by addressing emerging process technologies, going after three-dimensional interconnect markets, shipping several evaluation tools of a new product later this year, leading to revenues starting in the first half of 2012.

Thirdly, continuing to focus on high-value, high-margin products.

And fourthly and finally, generating substantial free cash flow, while also investing to support the next phase of growth.

We are off to a very good start for the year, given a very strong opening backlog and continued strong bookings from all our key customers.

This momentum increases our confidence that we will outgrow the industry for a third consecutive year.

It is important, however, to bear in mind that we don't have specific visibility which extends all the way through the year, so it would be unwise to expect us to exceed our own quarterly expectations quarter after quarter.

In today's press release, we've stated our guidance for the first quarter of 2011.

We expect revenues of $27.5 million to $29.5 million, with net profitability of 25% to 28%.

This guidance represents a further improvement over Q4, which in itself exceeded our own expectations.

With that, let me turn it now to Dror for a closer view on the fourth-quarter numbers.

Dror.

Thanks, Gabi, and welcome everybody to our quarterly conference call.

I will start with an overview of 2010 fourth-quarter results and will then move to 2010 annual results.

The numbers presented in the press release and in all the following discussions represent GAAP-based results.

The fourth quarter of 2010 was another great quarter for the Company.

Total revenues in the quarter were $27 million, up 11% quarter over quarter and up 77% over the comparable quarter of last year.

Product revenues in the quarter increased by 11%, driven by higher Standalone Optical CD revenues.

Service revenues increased by 12%, driven by higher time and material activities and upgrades.

Product bookings distribution has changed during the quarter, with approximately 75% of the bookings coming from the Foundry segment and approximately 25% coming from the Memory segment.

In the fourth quarter of 2010, North America product bookings accounted for 28% of total bookings, a larger portion relative to the first three quarters of the year, as memory and foundry manufacturers extend their investments in that region, and the rest of the bookings came from Asia Pacific.

During previous discussions on the target P&L model, we mentioned that we are targeting blended gross margin higher than 55%, based on product gross margin of 60% and services gross margin higher than 30%.

We are pleased to report that we have exceeded these targets in the current quarter.

Blended gross margin increased by 129 basis points quarter-over-quarter, reaching record level of 57%.

Product gross margin increased by 117 basis points to 61%, mainly as a result of higher product revenues relying on existing infrastructure.

Service gross margin increased to 36%, mainly as a result of the increase in time and materials and upgrade revenues.

In recent discussions and Analyst Day, we communicated our plans to introduce new product and develop new solutions for new segments, which require expansion of R&D investments.

Following a fast startup of this plan, operating expenses increased by 25% quarter over quarter to $8 million, with most of the increase coming from R&D.

This increase was comprised of higher expenditures for prototypes, higher usage of subcontractors for hardware design and software development and, in parallel, lower income from the Israeli Chief Scientist in the current quarter.

Looking forward, we would like to note the following.

Our plan is to continue to increase R&D investments during the first half of 2011, yet at a much slower pace than in the fourth quarter of 2010.

Some portions of this increased investment is in non-fixed costs related to materials and subcontracting, which will reduce once the development [projects] will materialize.

And our guidance for net profitability in the first quarter of 2011, which is higher than 25%, includes the planned increase in expenses.

During the quarter, we reported net income of $7.5 million with operating margins of 25% and net margins of 26%.

Diluted EPS in the quarter was $0.28, up $0.01 over the previous quarter, on a diluted share count of 26.8 million shares.

The fully-diluted share count of the Company is currently 27.8 million, including warrants, options and restricted share units.

We expect 2011 first-quarter share count for diluted EPS to be slightly above 27 million.

Operating cash flow came in at $6.7 million in the fourth quarter.

Moving into balance sheet key metrics, accounts receivable were $13 million, similar to the previous quarter, and DSOs remained stable at a level of 45 days.

Inventories increased from $10 million to $11 million in the current quarter, reflecting increasing manufacturing floor inventories to accommodate the increased market demand.

Deferred revenues decreased to $3.5 million by the end of the quarter due to recognition of revenues from previous quarter shipments.

It is important to note that the deferred revenues in the balance sheet reflect unrecognized revenues which were already collected in cash.

The other portion, which was not yet collected, but was shipped to customers, is presented only as inventory.

Capital expenditures and depreciation in the fourth quarter of 2010 came in at $1 million and $0.3 million, respectively.

I will now move to discuss 2010 annual results.

2010 was an exciting year for us, shifting gears in each important element of the business and leading the Company to present record performance in all key financial metrics.

Total revenues for the year were $87 million, 120% higher than 2009.

Product revenues were $72 million, 142% higher than 2009.

During the year, we have seen fluctuations in the quarterly distribution of bookings from the Foundry and Memory segments.

Yet on an annual basis, the distribution was 54% Memory and 46% Foundry, reflecting the Company's strong and balanced position in both segments.

Blended gross margin in 2010 was 55%, with product gross margin at 59% and service gross margin at 32%, all situated well within the target model.

Annual operating expenses came in at the lower end of our target model, mainly due to a slower pace of scaling R&D investments in parallel to the significant revenue increase, and R&D as a percent of revenues came in at 50% relative to our target model of 16% to 19%.

Operating margin for the year was 25%, at the higher end of our target model.

Net profit for the year was $22 million, or $0.86 per diluted share.

In parallel, following the steep ramp-up in operations, the number of employees increased by more than 30% from the beginning of 2010 until today, and we currently employ approximately 300 employees worldwide.

Our ability to scale the operation in parallel to maintaining DSOs at approximately 50 days, supplier days at approximately 70 days and inventory turns at approximately 5 times a year is a strong indication of the leverage which was built into the operations during recent years.

These elements played a critical role in our ability to generate record positive cash flow of $26 million from operating activities for the year.

As previously communicated, we expect capital expenditures to be at the high level during the first half of 2011, as we expand our manufacturing space and build application and demo tools to support new products rollout.

On an annual basis, capital expenditures were approximately $2 million in 2010, and we plan to double this capital investment amount to the $4 million level in 2011.

I will conclude with cash reserves, which increased to $62 million in the end of the fourth quarter, and provide us with a little financial flexibility to execute on our business plans for the coming year.

Gabi?

Thank you, Dror, and, with that, operator, we would be happy to take questions.

(Operator Instructions) Edwin Mok, Needham & Company.

Thanks for taking my question, and congratulations on a great finish for the year and good guidance.

The first question is on margin side.

In the fourth quarter, you guys did 61% product gross margin.

And if I kind of look at your guidance, it seems to imply that you guys expect to stay kind of around that level in the product gross margin.

Is that a fair way of thinking about that?

And what is the driver for increased margin?

And is that software, and should we expect those drivers to remain throughout the year?

As Dror mentioned in his commentary, the increase in gross margin on the product side came from growth in the revenues, which leveraged the same operational basis.

So you know, as far as our model is concerned, I think that the upper 50s level is where we should be.

Somewhere between 57% and 60% is where we should strive to be at.

And that fits well within what we communicated as our long-term model.

I think what is also helping the overall blended margin quite significantly is the service side of the business, which Dror mentioned, in the quarter went up to 36%.

And there, as we have mentioned in the past, a lot of the revenue is coming from upgrades and also time and material based, rather than contract-based revenues.

As far as software components, indeed, average selling prices have increased throughout the year quite nicely, which translates itself to these very good product margins.

And as far as our roadmap is concerned, that trend is going to continue.

We will continue to invest in software capabilities.

The customers are accepting them very, very well.

They appreciate them and they understand the value that they add, and that helps the overall offering improve in conjunction with the ASPs and the margins that come with it.

Great.

That was very helpful.

And if you talk a little bit about the mix between standalone and integrated.

I think in 2010, there was quite a sizable increase in DRAM capacity, so I imagine integrated was a pretty meaningful amount.

But you guys have won a number of new business.

So any way you can kind of quantify ballpark what is the split between the two pieces of business in 2010 and how do you kind of think about it in 2011?

I will try to answer it a little bit from a different direction.

The Integrated Metrology revenues were very, very high this year, and actually exceeded our expectations.

What we have found and have actually mentioned in the past is that these moves in foundry, DRAM and Flash, have required a lot more integrated metrology than used to be consumed.

And I think the reason there is because of the fact that the ramp technology migrations are much faster than they used to be.

The cycles are now down to six to nine months.

And customers see the investment in integrated metrology as something very, very useful in order to reach their yield targets at a very fast pace, sampling, actually, 100% of the wafers with a lot more measurement sites.

And so there, we've seen a significant increase in revenues.

On the standalone front, I think the biggest thing has been the number of customers; as we mentioned, we have doubled the number of customers.

I will say -- and it is difficult for us to break down the revenues at this point -- but what I will say is in the fourth quarter, a lot of the revenue growth that we saw in the fourth quarter came from the standalone side.

And what is very encouraging is when we roll into 2011, we already see the repeat orders from the successful penetrations that we have made.

So I believe from a mix standpoint, integrated is still the larger portion of our business.

In 2011, I think that standalone is going to come up significantly, and therefore will represent a different percentage point.

As far as the actual numbers, we won't discuss that today for competitive reasons, in order not to shed too much light on that.

But I will say, as I mentioned, integrated revenues, very, very high, exceeding our expectations.

And then standalone penetrations, which turned into a significant increase in revenues as of the fourth quarter, which is something that we see actually materializing going forward in 2011.

Great.

That was very helpful.

And then Gabi, maybe you can talk a little bit about the wins that you guys had with the foundries throughout 2010.

I was wondering how should I think about maybe increasing penetration of these foundries.

I understand all the time these wins are driven by one application, but once you get two in a customer, you might be able to [fan] that out.

Should we expect that to potentially drive continued growth beyond just this year?

Because, obviously, last year you won a number of wins and (inaudible) to revenue right now.

But how do you think about that longer-term?

I think your observation is correct.

And indeed, when you make a penetration, you penetrate with the standalone, it's a specific area of the fab.

And the nice thing about standalone is that it is able to accept wafers from all parts of the fab.

And as you build that relationship and trust, people bring more wafers to you.

And therefore, we have seen a move, strong move actually, coming into edge.

And we see also signs of success in the litho area.

As we communicated in our analyst event last month, we spoke about the fact that as we have carved deeper into the four areas that we cover, which are litho, etch, CVD and CMP, we have revealed with the customers actually several applications that they would like to start making use of.

In order to be able to cater for those, we are going to be doing two things.

One is they are actually starting to proliferate us into more areas with the existing toolset.

But also, our roadmap is very much geared in that direction, and you can expect us to announce significant progress on the product side, both the platform itself and the software, to cater for the fact that the customers are going to be wanting to measure more applications than they have before.

If I try to quantify this, if you remember in the past, I spoke about a 65-nanometer fab foundry with 100,000 wafer starts per month representing maybe a $30 million or $40 million opportunity.

I think that at 28 nanometers and below, that actually as an addressable market goes at least time and a half if not even two times from that number.

So I think if you look from a bottoms-up analysis, the addressable market is definitely growing.

And I believe it is very much roadmap-related, meaning if we can continue to deliver the capabilities that we have, the customers are very, very happy to actually take in these tools and migrate from existing measurements, such as CD-SEM, in favor of optical CD or from existing metal measurement techniques to optical CD as well.

So that is kind of a summary of how we see things.

One thing I want to touch on that is in terms of the expansion in the end market or the TAM that you've talked about on that number, does that include TSV as an option?

I think you guys talked about that being an area to grow -- of potential growth for you guys.

And then in terms of -- in your prepared remarks, you mentioned that revenues to be expected on these new products in the first half of 2012.

Is that related to TSV?

Yes, absolutely.

Just to make sure that everyone got this clear, I spoke about two development efforts.

One is an effort to actually increase our share of our existing addressable markets, which are product roadmaps related to the area that we are already in.

And then I spoke about what you just asked about, which is TSV or three-dimensional interconnect.

Indeed, we are going to be shipping first units the second half of 2011.

From the early interactions with customers, they are very excited about the capabilities that we are going to be coming out with.

And as I mentioned, indeed, for that area, for TSV, you can expect to start seeing revenues in 2012.

As for as the addressable market is concerned, what I did mention was that if we believe that the addressable market we address today and let's say as of 2012 is about $700 million, I would add to that about $250 million once we start addressing the TSV opportunity.

And actually, once the industry starts ramping up, which right now is expected in 2013, is the year in which we believe high scale manufacturing using TSV technology will actually take off.

I see.

Great.

Thanks.

Very helpful.

And one last question for Dror.

I think on Analyst, you know, you guys -- you talked about operating expense may increase by $1 million to $1.5 million in 2011.

And obviously, in the fourth quarter, you have already increased quite a bit -- actually $1.6 million already.

How are you going to think about that?

Is that -- was a lot of that already came in in the fourth quarter or should we tack on another $1 million to $1.5 million on top of that?

Well, in the fourth quarter, approximately $0.5 million from this $1 million to $1.5 million planned increase already happened.

So looking forward to the first quarter, it should be between $0.5 million to $1 million.

Great.

That's all I have.

Thank you.

[Leron Roshman], Oscar Gruss.

Congratulations for the quarter.

My question is regarding the bookings.

Dror mentioned that 75% of the bookings this quarter came from the foundries.

This is something that -- it is consistent with the industry or something more in Nova business?

Well, I'll say this.

The way we look at our business is we are exposed to the DRAM and Flash market on the memory side, and then the foundry.

These are the segments that we are focused on.

What has happened, and that is kind of what Dror was trying to allude to, is that for the entire year, I think revenues were about 50-50 between Memory and Foundry.

And then what we see is in particular quarters, we see fluctuations in which it may go in any given direction, either in favor of Memory or in favor of Foundry.

As far as whether it coincides well with the industry, I would say the following, is that all these sectors are ramping up quite significantly.

Meaning flash memory, which is expected to grow quite significantly, and foundry, very much ramping up.

And so I think the takeaway should be that we are very well-exposed to where the growth is.

In particular quarters, certain customers invest more than others, and you can expect that to change and vary throughout the year.

I will say the Foundry segment is extremely competitive right now.

Samsung and GLOBALFOUNDRIES are going aggressively after TSMC's business.

There was an announcement today, which was quite astonishing, that Samsung and Apple have signed an $8 billion contract in which Samsung is going to be providing LCD screens and then processors and memory.

And on the processor and memory side, Nova is very, very well-exposed.

So I think the entire food chain, which consists both of processors and memory, is experiencing a continued growth situation, and that there is continuous increased capacity.

You will see as you continue to follow our activity is that there are fluctuations and they very much relate to investment decisions which are particular to a given customer.

But I would look at the overall sector and, in general, we see very nice growth.

Okay.

That is very helpful.

And another question regarding the competitors.

How do you see the competitor landscape right now?

Are you expecting to keep growing in LCD, or can you talk about this a little bit?

Sure.

I think first of all, the competitive landscape is very, very aggressive.

On the OCD front -- in optical CD, we have two key competitors, which are Nanometrics and KLA-Tencor.

I will say openly that every deal requires significant competition.

I think that the customers are definitely leaning in the direction of allowing themselves to get the best technology, as well as the best deal they possibly can at any given moment.

So I will say that from a direct competitor standpoint, it is highly competitive, and for that exact reason, we are upping the investment in R&D because we need to deliver more and more capability as we go.

The nice thing about optical CD is that the market is just actually asking continuously for more and more improvements because they want to deploy it more extensively.

I believe this will continue to lead to market share gains as we go.

And also, back to the question that was asked previously, I think that what it is also going to lead to is the fact that we expand our footprint in any given fab by adding more and more applications.

So on a direct competitor basis, there is a lot of competition.

On the indirect competition level, which is other markets, such as CD-SEM, and then such as the metal market as well, is very competitive also.

And I think there what we are focused on is offering higher productivity than those two other techniques, as well as better precision and measurement stability.

These are the key drivers that drive customers to want to change from an existing technique which is not optical CD in the direction of optical CD.

So I think overall, our expectation is to continue to grow our share of the market.

But we also understand that there is no free lunches here and that we need to invest very heavily to keep ourselves at the top of the technology curve and try to be one step ahead of technology at any given moment.

Okay.

Thank you very much, and good luck.

Marcel Herbst, Herbst Capital Management.

Good afternoon, and congratulations to a successful quarter and year.

Just a follow-up to the previous question.

From a competitive momentum point of view, are there any market segments where you are currently gaining or losing market share?

I think for the most part, our feeling is that we have gained market position.

I would say as far as marketshare is concerned, on the integrated metrology front, we have more than held our market share and even increased it a little bit.

On the standalone metrology front, I think that we have increased our number of customers and held on from a revenue standpoint, kind of held onto our market share standpoints where we were.

In 2011, I think that we have an opportunity to further increase our standalone market share by taking the duplicate or repeat orders from the penetrations that we have made.

So I think from a customer base foundation standpoint, we've laid good foundation for more market share gains in 2011 on the standalone front.

Okay.

And are your competitors doing anything irrational as it relates to production or pricing?

And secondarily, are there any pressures regarding material costs and leadtime?

I don't know what irrational means.

We all manage our company to the best of our ability, so you might need to be more specific if you want to understand that a little bit more.

I'm not sure what that question alludes to.

As far as leadtimes are concerned, our industry is very much driven by short lead times.

One of the things we have done very successfully over the last couple of years is improve the operations.

Dror gave a few numbers there that you may have listened to -- sort of inventory cycles of five times per year, et cetera.

So I would say this, that we are always looking to reduce our lead times in order to satisfy the customer demand.

And we've worked the supply chain in a way that allows us to have the flexibility that we need on the one hand, and on the other hand, manage our inventory and finished goods inventory, I think, in quite a healthy way.

You may want to try to specify it more specifically what you were asking for regarding the competitors.

Yes.

Are there any competitors that are doing any strong discounts or reductions in pricing, anything in that regard?

You have those situations occasionally.

And where we try to position ourselves is rather than go in that direction, basically add feature and functionality and capability.

I think the best indication is that, in general, average selling prices have improved for us in 2010 because we've added more functionality and capability.

There are situations in which customers are very much cost conscientious.

But I will say that for the most part in the equipment sector, especially in metrology, that needs to be so advanced in these days, customers also understand that there is only a certain extent that prices can be driven downwards and they really need capability more than anything.

So while each negotiation is a process, I don't think we are in a situation where we see price erosion as a result of competition.

Okay, and one last question.

Was there anything in the quarter of a generally nonrecurring nature?

Any expense that wouldn't ordinarily be there -- or credits?

No, nothing specific.

Excellent.

Thank you.

Greg Weaver, Invicta.

Nice quarter.

A related question to the last one.

In terms of the services gross margin, is there anything unusual there?

Do you have to hire more people or is there additional leverage opportunities?

I think from a service standpoint, you should expect our gross margins to range between 30% and 40%, probably the higher end of that for the foreseeable future.

And the reason there is, again, the revenue mix has changed.

We've gone more in the direction of time and material based and selling more upgrades than we did before.

I mentioned that one of the reasons why we exceeded the top end of our guidance was the fact that we got more service revenues than expected, and also at higher margins, specifically, to deals that were relevant there.

So as far as leverage is concerned, as Dror mentioned, in general, we have increased headcount.

We will increase headcount a little bit more, mostly actually in the development side.

But I think the operation is definitely able to handle what we have planned for 2011.

Okay, great.

And related to that, I think, Dror, you might have covered it; I'm sorry I missed it.

But from an OpEx perspective, I believe you said at the Analyst Day on a go-forward basis, you thought you would be able to keep it within the $8.5 million to $9 million a quarter range.

Are you sticking with that?

Yes, yes, definitely.

Okay.

And back to the margins again.

In terms of the standalone versus the integrated, is there any discernible gross margin differential there?

No.

Actually, the gross margins are pretty comparable; sometimes a standalone is a little bit higher, but they are pretty comparable.

Okay.

And any view in terms of -- I guess in the last month or two -- in terms of 2011 industry growth for your addressable market?

I think -- as I mentioned, I think that we should continue to outgrow the industry for a third consecutive year.

I think things have changed quite a bit in the last month with the big announcements from Intel and from GLOBALFOUNDRIES and TSMC and Samsung.

And so I think people are now expecting a growth year.

I'm hearing different numbers.

I'm sure you are hearing at the same thing, about 10%, 15%, or 20% growth.

We feel comfortable that we can grow more than the industry.

And I think the reason for that is the things that we had mentioned.

The adoption rate of optical CD, which is increasing continuously.

The need to measure more.

One of the things we had mentioned in the Analyst Day was that our compound annual growth rate over the last five years has been about 26%, whereas overall equipment has been about 2% to 3%.

So I think we are fortunate to be in this specific technology sector.

It is a sector that is growing tremendously.

So I think I have a pretty positive view of the year.

And even with a positive view of the year, I think that still wafer fab equipment would probably still not be at the levels of 2007, but it's going to start getting closer to that, I think, as the year progresses.

Great.

Thank you very much.

(Operator Instructions) [Dave Deanna], private investor.

Thanks very much.

Nice execution, gentlemen.

Just one quick question.

Given your robust cash flow, just wondering if there is any plans for something shareholder friendly with that cash, such as a buyback or a dividend at some point.

We are considering possibilities there.

In any event, consideration should take us some time.

Our annual report, our 20-F, should be submitted by the end of March.

And if there is something announceable, it would probably be around that time.

So we are looking at that.

We are discussing it with the Board of Directors, and looking at possibilities there.

Okay.

And then the second question I had is are there any plans for you to make any acquisitions?

Or conversely, have you seen any indications that any larger companies might be interested in taking look at Nova?

I think that as far as growth is concerned in an inorganic way, we are continuously evaluating and looking at things.

I think the important thing for us as we look at opportunities, and there are a few opportunities out there, is to go for something that continues to support the P&L that we have built in the Company.

It is very, very important for us to show progress as we go.

And that is something that is a key consideration when we look at things.

I do believe that we have built enough brand equity in the Company and customer intimacy that we could bring more technology to market, and that is the reason why we are looking at possibilities.

As I have indicated on several occasions, Nova is a Company which is poised to grow, and grow organically and inorganically, and therefore, we are not in any discussions on selling the Company.

Great.

Thank you.

[Ken Moss, Moss Co.]

Thanks for a wonderful quarter and for, let's say, the long-term vision of what you folks are building.

It is really very impressive to see it coming together like it is here.

I'm sure it is very gratifying for you guys.

Thank you.

In relationship to the inventories that you are showing, I gather that a significant portion of those are actually, let's say, lender tools that are out there that are basically bait for the ultimate of where the user can quantify the value of it and then step forward.

What kind of percentage of the $11 million worth of inventory is out there on that kind of a basis, do you think?

I would say that because the implication of this amount is also forecast of revenues, we would not like to disclose this amount.

What I can say is that during recent quarter, the levels of inventory related to evaluation tools or tools which were shipped to the customers and waiting acceptance was kept more or less at the same levels.

We do see some -- expect some reduction in debt in the first and second quarter as most of the systems finish evaluation and revenues are recognized.

Thank you.

And on the upgrade on your selling and service, that I assume is, quote, software.

And what kind of a range of a sale is a thing like that per-unit that is out there?

Are we dealing with $10,000 or $50,000 or $100,000?

All those numbers are good numbers, actually, because it really depends on the age of the system which is being upgraded.

In some cases, it is a system that was purchased a couple years ago, and so there would be a smaller amount spent on it.

But because we've been in the market for a quite a while and Nova has an active install base of over 1000 systems, there are also deals that exceed the $100,000 number level as well.

So it really varies -- it is very important for us to develop packages for upgrade that actually includes different price points in order to cater for specific customer requirements, and that is how we are building that business.

Very interesting, and I think you folks are doing just a really spectacular job.

Keep up the good work, and good luck.

Thank you.

Thank you very much, Ken.

[George Morena], private investor.

Thank you for taking my call.

Good quarter, guys.

My questions were related to the 3D market opportunity.

At this time, do you guys have any evaluation installations or are you tool of record anywhere yet?

As I mentioned, we have been in op sites back and forth with a few strategic accounts.

We are building towards shipment of first units to customer sites beginning of the second half of the year.

But we do have the capability to evaluate our competencies already in-house, and that is what is creating a lot of interest and a lot of excitement on our side.

It looks like we are building something very useful.

So there's nothing out there yet.

As I mentioned, it is the second half of 2011 when you can expect that to start going out there.

And because of the fact that we expect that market to really start taking off in 2013, we believe the timing is very good.

And we want to be there with the customers as they mature the process.

The reason it is going to take customers to mature that market quite a while is, you know, there are several reasons.

One is the process itself that allows chips to be stacked one on top of the other.

It is quite complex.

There are several steps in the manufacturing process, which will be added as a result of this.

And because of it, people are going to need to measure a lot more.

There are also industry standards that need to be created in order, for instance, to allow a processor to be connected to a memory chip directly.

And then thirdly, it is a cost consideration.

The end markets, meaning the fabless companies such as Qualcomm, Broadcom and others, have said very clearly that they will not allow the wafer cost increase to exceed $100 per wafer as a result of this change.

And everyone is working very hard to bring the efficiency levels to those levels.

So I think the next 18 months or so is when all that gets worked through.

Our industry has shown its ability to do that.

And being there at a reasonably early stage allows us to take part in that in a sense and evaluate what will become what I call the in-line measurement requirement.

That is the area that we've always focused on because it is an area that requires several wafers to be measured, and as a result of it, several systems per flab.

Excellent.

And on the market opportunity for that, obviously it is a large addressable market.

In terms of slice of the pie and opportunity to Nova, how do you feel if you could maybe -- I know it is kind of early innings, but how big do you think the realistic addressable market is for that?

It is going to be difficult to say at this point in time.

I will say that what still needs to be defined is what I just mentioned, which is what applications will become in-line applications and, therefore, consume a large portion of that $0.25 billion market that I mentioned.

I will say that we are in this business in order to achieve number one or number two position.

I think our market in general requires you to shoot for those levels, and we are building a product strategy that should get us up to that level.

Otherwise, it would not fit with the way we do business.

Excellent.

Thank you, Gabi.

Thank you very much.

Thank you.

Since we have no further questions, I would now like to turn call back over to you, gentlemen, for any additional or closing remarks.

Thank you, operator.

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

As mentioned, 2010 was a momentous year for the Company.

We are very excited about 2011, and we believe it is going to be another great year.

We look forward to seeing you on the next conference call.

Thank you very much.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.