Nova Ltd (NVMI) 2011 Q1 法說會逐字稿

Good day and welcome to the Nova Measuring Instruments first quarter 2011 results conference call.

Today's conference is being recorded.

At this time I'd like to turn the conference over to your host today Mr.

[Gabriel] for CCG Investor Relations.

Thank you Operator, and good day to everybody.

I would like to welcome you all to Nova Measuring Instruments first quarter 2011 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 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.

If you've not received a copy of the release please view it in the investor relations or news section of the Company's website at www.nova.co.il.

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

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

I will now hand over the call to Mr.

Gabi Seligsohn, Nova's President and CEO.

Gabi, please go ahead.

Thank you Gabriel and thank you everyone for attending today's call.

The first quarter was another remarkable quarter for the Company.

It marked the ninth consecutive quarter of growth in both revenues and profitability.

It also provided a great start for what we believe will be a third consecutive year of outgrowing the industry.

The first quarter was also a record-breaking quarter in bookings.

In particular it was our best-ever quarter by far for booking of standalone optical CD tools.

We are very excited about the state of affairs as it exemplifies just how important last year's strategic penetrations were now that the follow-on orders are coming from both Memory and Foundry customers for our leading edge standalone products.

Our exposure to both of the industry's leading sectors of Foundry and Memory continues to benefit us.

This is especially important during these times when strategic decisions by key players such as Apple which today have an economy of scale impact on the entire semi food-chain benefit some of our customers and hurt others.

It is for that exact reason that we are so well positioned in supply to all leading foundries and almost all leading memory players.

This will ensure that we continue to extract much of our success from today's highest growth sectors of mobile computing and smartphones.

The combination of exposure to a diverse customer base within the higher growth sectors together with the recent penetrations resulting in record bookings all support our strong guidance.

Today's earnings results demonstrate yet again the extensive operational leverage we have built into the Company.

Though we continue to deliver results that exceed our long-range profitability model we strongly believe that the model of 20% to 25% net margin which we have presented in the past is the right one for the long term.

Continuing to invest now will allow us to retain the technological leadership we have achieved so far and further distance ourselves from our competitors.

Fortunately, our stated target model affords us the ability to do so.

Maintaining a strong commitment to continued development of leading edge technology in several areas will secure our market position for the future.

And now let me turn to some more details on the quarter.

Revenues during the quarter came in at about the middle of our guidance while net profitability exceeded the top end of our guidance by about 1%.

This increase in net margins relates to a combination of favorable product mix as well as R&D expenses coming in lower than we expected because we were not able to move as quickly as we wanted on some development projects.

As mentioned we are working vigorously to enhance the pace of our product development efforts though in some cases this may take us more than a single quarter.

Dror will provide more insight into this area during his prepared remarks.

Revenues reflected four customers at or about 10% with Foundry playing a larger role in the overall mix of orders.

Booking-wise we had five customers at or above 10%.

During last quarter's conference call, we spoke of our strategy for the next 12 to 18 months.

The first element focuses on expanding our share of currently addressable markets.

In that respect, I would point out two areas of positive development.

First, I'm happy to see that in recent months most of our high-end application development efforts at customer sites has extended into the etch area.

This is the case in both new evaluations as well as recent penetrations.

And it is especially given the significant addition of etch steps and the importance of measuring critical etch parameters using optical CD.

It was recently estimated by several sources that the number of etch layers when moving from 65 nanometers to 28 nanometers in foundries grows by about 50%.

Given our very strong position in the Foundry segment, we see a significant growth opportunity coming our way.

Secondly, I would also point out that our next generation optical CD tool which will be announced later this year is already in high demand and is scheduled for delivery for more than five customers during the second half of the year.

This provides a lot of support for our belief that our next generation tool will become a real vehicle for further increasing our market share and next generation technology node.

The second part of our strategy is related to expanding to new addressable markets.

Here we have spoken about our plans to move into the 3D interconnect sector where we can expand our existing customer relationships by offering a wider variety of products.

I'm happy to report that we are on track with the development of our new system and plan to ship several evaluation units during the second half of the year.

Feedback on early test results with a few of our strategic customers show that we are building a competitive product which will offer several important capabilities.

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

In recent weeks, we have heard both from equipment suppliers in their quarterly earnings calls as well as through announcements by a few customers that business will soften in the near term.

Reasons quoted for this softening relate to low consumer electronics consumption in Japan, lower than expected penetration of Android-based tablets such as the Samsung Galaxy, raw wafer supply shortages given that over 60% of global consumption relies on a Japanese supplier, et cetera.

Besides that our working assumption as well as that of many others continues to be that wafer-fed equipment spending will grow at the expected rate of 12% to 17% to cover for shortages at the high end of technology nodes.

As reflected by our bookings, foundry spending this year will increase at the high end.

Even though one of the top foundries has announced a pause in capital spending for the coming few months, we continue to receive large-scale orders from their peers as places where we have been designed into the process.

On the flash memory side, we have three of the four key suppliers as our customers and have enjoyed large volumes of business given the role that flash plays in the smartphone and tablet markets.

So there's widespread agreement that DRAM spending will be down this year in light of reduced ASPs and some softness in the PC market.

We continue to enjoy nice volumes from that segment.

The reason for this is related to the role our process control solutions play in today's DRAM sector.

Starting at the 4X technology nodes we have seen a significant increase in our business volumes at DRAM sales given wafer sampling rate increases which translate into more tools being needed.

Talking with our customers, we believe that the stage is being set for another technology shrink-down to the 3X coming earlier than expected perhaps as early as the end of 2011.

We see that as a positive sign for more growth going forward as sampling rates will increase even more at that node.

Now let me turn to the outlook.

As stated we have been keeping an ear to the ground to assess possible changes to our outlook.

I would like to point out clearly that we haven't seen any push-outs of orders which we have already received.

We are aware of some announced delays in new projects planned to begin during the second quarter and expect those orders relevant to us to shift by about one quarter.

Although we do not have visibility which extends through the end of the year, our record bookings some of which extends through the third quarter show the picture which is quite strong.

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

We expect revenues of $28.5 million to $31 million with net profitability ranging between 27% and 30%.

And with that, Operator, let me turn it over to Dror for a close review of the numbers.

Dror?

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

Before I start with an overview of 2011 first quarter results I would like to note that the numbers presented in the press release and in all the following discussion represent GAAP-based results.

Total revenues in the quarter were $28.2 million and the middle of the range of our guidance up 4% quarter-over-quarter and up 76% over the comparable quarter of last year.

product revenues in the quarter increased by 6% while service revenues decreased by 2% due to slightly lower time in material activities in the quarter.

As previously reported and as mentioned in the press release, quarterly product bookings were at record levels in each of the product lines during the first quarter of 2011.

These record bookings are a direct result of our expanded customer base and during the quarter five customers accounted for more than 10% of bookings.

Product booking distribution was 65% from the Foundry segment and 35% from the Memory segment.

Asia-Pacific accounted for 79% of total bookings and the rest of the bookings came from North America and Europe.

Focusing on the standalone optical CD product line I would like to note the following.

We have previously reported that during 2010 we have been able to conclude standalone optical CD evaluations and receive bookings from seven additional customers which practically doubled our customer base for this product line.

The expansion of the customer base in 2010 has resulted in record standalone optical CD bookings in the first quarter of 2011 all representing repeat orders.

To date five of the seven new standalone customers are already evident in the reported revenues of the Company.

We expect the remaining two customers to become part of our revenue stream during the coming months.

During previous discussions on our 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 at or higher than 30%.

We are pleased to report that we have not only met but actually exceeded these targets for the second consecutive quarter.

Blended margins increased by 60 basis points quarter-over-quarter reaching record levels of 57.6%.

Product gross margin increased by 50 basis points to 61.5% as a result of favorable product mix.

Services gross margin remained at a 36% level.

In our recent discussions we communicated our plan to introduce new products and develop new solutions for new and existing segments which require an expansion of R&D investments.

As a result, R&D expenditures increased during the quarter by 16% reaching the $5 million level in the first quarter of 2011.

This increase was somewhat offset by efficient SG&A expenses management and total operating expenses came in at $8.4 million or 30% of revenues.

During the quarter, we reported record net income of $8.1 million with operating margins of 28% and net margin of 29%.

Diluted EPS in the quarter was $0.30 up $0.02 over the previous quarter based on diluted share count of 27 million shares.

The fully diluted share count of the Company is currently 27.9 million including stock options and restricted share units.

We expect 2011 second quarter share count for diluted EPS to be slightly below the 27.5 million level.

Cash flow from operating activities came in at a record level of $8.4 million in the first quarter of 2011.

Moving into balance sheet key metrics, accounts receivable were $15 million and this also remained stable at the level of 45 days.

Inventories increased from $11 million to $12 million in the current quarter while inventory turns continued to be above 4.

The increase in inventories is mainly related to system which are already installed at customer sites and are waiting for customer acceptance and revenue recognition.

Deferred revenues increased to $3.8 million by the end of the quarter.

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 will shift to customers is presented only as inventory.

Capital investments and depreciation in the first quarter of 2011 came in at $0.9 million and $0.4 million respectively.

I will conclude with cash reserves which increased to approximately $72 million in the end of the first quarter of 2011 and provide us with the needed flexibility to execute on our business plans as well as to pursue any potential opportunities that may arise in the coming quarters.

Gabi?

Thank you, Dror.

And with that, Operator, we'll be happy to take any questions.

Thank you.

(Operator Instructions) Edwin Mok from Needham & Company.

Hi, great.

Thanks for taking my question and congrats for great result and guidance.

So first question I have is I guess the topic of the day, of the time right now regarding the pushed out.

I think Gabi, and you'll prefer not to talk about some customers maybe moving out some of the shipments.

But it seems like the other customers basically are coming in and therefore you guys (inaudible).

But were those customers moving out of shipment to the third quarter?

Do you now feel a bit more confident about second half versus -- I think previously you talked about potentially some moderation in second half.

How do you think about second half right now, Gabi?

Well, thanks for the question, Edwin, and welcome to the call.

First of all the guidance for the second quarter shows a continued growth which we're very happy with, which is for us a very good indication.

And you rightfully pointed out that we already know that some of that bookings is going into the third quarter.

Indeed there is somewhat of a reduction in the level of orders which is expected in the second quarter and you're right in pointing out that many of the vendors have spoken about that.

That is something that we do see.

The booking level that we do have does carry as confidently through the second quarter and somewhat into the third quarter.

As for the second half of the year we believe that the projects that we had previously seen will go forward albeit there is somewhat of a push-out of about a quarter.

So how that translates exactly into the second half of the year, I'm not in a situation to report exactly right now.

I will say that the business looks very strong, that despite that push-out which is expected I think the year is intact as far as we're concerned in making sure that this is the third consecutive year of outgrowing the industry.

So we feel pretty good about the second half of the year.

But at this point I'm not able to articulate exactly what's going to happen in the third and fourth quarter.

Hopefully that helps you.

Sure, that was helpful and I guess your peers also take away that visibility for the second half, so a little bit limited here.

So a follow-up question on that is and I guess tied to Dror's comments regarding the seven new customers of which five already started to take equipment.

Can I ask him definitely, also, five customers, are you guys already shipping to the level that you thought you would have in terms of that build, or are you guys just starting that custom initial shipment and you expect incrementally more shipment coming in the second quarter and beyond?

And just trying to see where you are in terms of filling those customer and obviously one of the investor concern is that if you're already shipping to all these new customers and will have a new incremental drivers here, right?

Sure, so there's two comments associated with that.

The first one is associated with revenue recognition which was a big part of Dror's comment, in which if you remember we reported in the first quarter which was -- sorry, in the fourth quarter, we reported that a lot of the revenue coming from the penetrations would move into 2011 and that is something that we have seen.

The other good thing is that indeed repeat orders are coming in.

So with the record bookings that we spoke about and I mentioned that standalone bookings were by far the best we've ever had, that is a result of actually repeat orders coming from the penetration account.

So you should take both comments here.

One is the fact that that things that we had penetrated last year are turning into revenue and the other thing which is very exciting for us is that we're seeing repeat orders coming.

Those orders have not ended as far as we're concerned.

We see a continuation of orders the level of which obviously I won't discuss at this point, but we do see a continuation and that's usually the case when you make a design win and that's really what we were alluding to last year when we spoke about how important that is for our growth strategy.

Once you make a design win, you can expect follow-on orders and they don't tend to be just a single or a couple of tools.

They become more significant than that.

The other thing that's happening which is very exciting and I was kind of hinting to is that in our current evaluation then we still have several evaluations and in the new penetrations a lot of the focus is moving into the etch direction which for us is a real growth opportunity.

So not only did we penetrate with the standalone into new accounts, these specific accounts are adding applications growing in the direction of etch which for us is again a good indication that we will be able in fact to expand our position in these specific accounts going forward.

Yes, that was -- you got the next question that I was going to ask you.

I was wondering -- of the numbers that you guys reported, Foundry has been by far much highly weighted this past quarter, I think it's a function of market.

But in terms of memory side, on the standalone side, any kind of progress you make or you have made that you can report to us in that end especially on the NAND side?

Yes, I mean, we've been doing well on the standalone and Memory right that maybe in the middle of last year I said that relative to Foundry, Memory was slower to adopt that standalone metrology as far as we were concerned and the accounts that we were in.

We do see an intake of standalone metrology on the flash side.

It is starting to grow more rapidly for us.

So yes, I think that you are going to see continued adoption.

And one of the things that's leading to that is the vertical gate technology which the customers are starting to deploy.

And three dimensional measurement is becoming absolutely critical in these situations.

So I think actually that there's still a lot of growth ahead of us both on the DRAM actually and the NAND Flash side.

You did hear me commenting also on DRAM.

I do believe that we will see technology shrink are coming up towards the end of the year.

I think it's necessary.

I think the more die per wafer is becoming a necessity given the ASP decrease and also the fact that the high-end DRAM market is starting to address a bigger portion of the tablet market with the specialized DRAM.

So I think both those markets are becoming very interesting optical CD opportunities.

And I think again the -- not just the design rule reduction, but also the structures changing are requiring measurements to be done with optical CD.

And to be honest, in many cases the only way to do the measurement is optical CD.

And that's something that we're starting to see more and more.

Obviously also in the Foundry with the very complex gate structures that people are looking at, people are wanting to do three-dimensional measurement and really the only non-destructive very high throughput solution is optical CD for that.

Great, very helpful.

So I can't leave without asking some questions to Dror.

So Dror, just talk about operating expense in this past quarter.

Obviously you guys ramp up the R&D as you had guided (inaudible), but SG&A came in a little better than expected.

How do you guys think about OpEx in the second quarter or at least let us peek into the guidance and longer term do you see OpEx going above this $9 million level?

Yes.

First of all, we are working on means to further invest and increase our R&D expenses.

Sometimes these things take time and also relate to the timing of specific purchasing of prototypes.

So we are working to increase and invest more.

I can say that our focus for the second quarter is similar levels to the first quarter at this stage.

You mean your operating expense target is similar to the first quarter from the second quarter or --

As for the second quarter, our focus right now is similar levels for the first quarter.

But we are taking measures and -- to increase operating expenses looking forward.

I see, great.

Very helpful and then --

Those you should expect -- sorry, I want to just add, those you should expect to ultimately be within the levels that we spoke about of up to $9 million per your question.

Great.

Very helpful.

And just lastly, Dror, in terms of the margin profile of your business obviously done really well and even better than what you guys had guided.

I actually have a question regarding service margin.

How do you guys think about at the longer run?

Do you -- you guys have been above like the mid-30s for service gross margin for several quarters already and do you guys expect that to be a sustainable level or even going above that and get to 40% or how do you guys think about that piece?

And what other cushion would that drive the margin up and down that piece?

Yes.

You're right that we have reached I think a pretty good level of the mid-30s is a pretty good level.

What will help that go a little bit further up I believe is extended upgrade business.

As we said in the past, upgrade business tends to be more lumpy.

And you will see situations in which in particular quarters you will see more upgrades than in other quarters.

I think that in general given where the industry is right now and the fact that we have successfully rolled out our latest product the i500, and the next generation product is coming up pretty soon we're going to start seeing some upgrades I think in particular on the integrated metrology side.

The extent of it right now is a little bit difficult to foresee.

So there could be a situation in which service margins go above this level.

But I would say that for now our model continues to be above 30%.

We feel comfortable with that level of margins at the kind of revenues that we're at right now which is somewhere around $4 million per quarter.

I do think though and that's what our service group is working on and they get pushed hard on that, I think they're starting to be quite successful, that with an active installed base of a 1,000 tools we can extract more -- even more business for upgrade.

So I think that's still ahead of us and that does provide some upside potential for the service margin.

Great.

That's all I have.

Thank you.

Thank you.

[Jay Deanna], Private Investor.

Thanks very much.

Very nice execution guys.

A couple of questions.

The first --

Thank you.

Yes, the first one is I calculate almost 30% from your market cap in cash which, considering how undervalued your stock is, seems rather ridiculous.

And sounds like you guys are more inclined towards looking to buy something on the M&A front as opposed to buying back stock.

Is that the working model here?

Well, I think for us, first of all, achieving these levels of cash is something that is very important for us also as to how the Company looks in front of the customer base that we have because their reliance on us is very, very significant these days, much more significant than it used to be in the past.

The cash on hand really allows us a flexibility, and the flexibly I'm talking about is first of all as I mentioned it's to invest more in the market that we're already in because we think we can get more [Sam] out of the total addressable market that we have.

Secondly, it's allowing ourselves to aggressively pursue the 3D interconnect opportunity.

And thirdly, indeed we are looking very actively at brining more into the Company from outside sources.

And so we think that as far as the right direction for us to go that we should use that cash for those three directions.

And that that would allow us to continue to grow the business in the way that we have in our three-year plan.

Okay.

So you've decided that something other than a buyback is the best use of your cash.

In terms of M&A going the other way, we have news flow today that Applied Materials is looking to pay about a 50% premium to Varian Semiconductor compared to where the stock closed yesterday.

Are you starting to see the likelihood of more M&A consolidation in the semiconductor equipment space now that we're at this point in the cycle?

What are your thoughts on that?

I think that there are opportunities out there.

I think that there's very good technology out there and that Nova that can be a very good house for technology.

That deal is definitely a very impressive deal, the size of it, the way the deal is being done, and what it offered as a price.

But I do think that there is room for more consolidation.

And we see ourselves as a player in order to bring more into our Company and further grow it inorganically.

So my answer is, yes, Jay, that there are opportunities out there.

I think what's important for us is that we want to demonstrate our ability to do something like that, but also to continue to grow in a profitable manner.

And that's kind of the measuring tape we put against opportunities that we look at.

We're very, very cautiously looking at things that way because we'd like to see a growth trajectory coming, but we'd also like to continue to grow profitably as we do that.

Right.

And then lastly, just kind of putting the pieces together here relative to the industry situation.

You're growing sequentially in 2Q off of strong bookings from 1Q that extend into 3Q, and the fact that you're able to grow whereas others aren't is clearly a reflection of your market share gains and the growth in your served market.

If we assume that the capital spending picture normalizes in the third and fourth quarters meaning push-outs go away, how much runway do you have to potentially significantly outgrow the industry based on your served available market increasing and your share continuing to increase and possibly some new tools scaling?

I mean, are you looking at another couple of years of outgrowing the industry here based on what you're working on today, or is it a shorter period of time?

Well, I think that optical CD -- I always say I feel like I'm very fortunate to be offering that technology.

That's almost like a technology that's laying golden eggs.

The role it's playing is really growing significantly.

I think that optical CD as a technology is going to outgrow the industry on a more continuous basis.

And definitely I think that obviously we're all impacted by what the industry does, but if the industry continues to perform, I believe we're going to continue to outperform not just because we're part of this optical CD opportunity, but because we're so strong in our offering.

So I think we're very well positioned to continue to outgrow.

How significant the outgrowing of the industry is going to be is a good question.

There is all sorts of ways to look at that.

But I do think that we're definitely in a good position to keep on doing it.

And right now, our working assumption is that things are looking good into the end of the year.

Yes, there is this kind of pause that everyone is talking about.

It's a not a full pause, it's kind of a lumpiness maybe in orders.

But overall, I think that the year is continuing to be a very strong year.

And it seems like right now at least from the ability that anyone has at this point that next year is supposed to be a pretty good year as well because of the fundamentals of what semiconductors are being manufactured and for what devices they are being manufactured.

And it's still the same revolution that everyone is talking about that's driving all that.

And the fact that we have exposed it to the right customers that are playing in that revolution is really what makes the difference.

And as I mentioned earlier on, these economy of scale decisions if they're made for instance within the Foundry space because we have such good exposure we are there when one of the foundries wins against the other one if there's a change of decisions or policy as there recently seems to have been in the case of Apple-related business.

So that's kind of how I look at the business.

Hopefully that gives you some feel.

Thank you.

Thank you very much.

[Leron Roshman], Oscar Gruss.

Hi, guys, congrats for the result.

And --

Thank you.

Thanks, Leron.

I'm trying to understand here how you guys see the second half of the year.

And let's say, based on the booking you guys have right now and regarding the remarks Gabi said before, can you guys assume Q-over-Q growth for the second half or you can't tell right now?

Yes, we're not going to provide guidance for beyond the second quarter right now.

It's simply -- it's too difficult for us.

We don't have that level of granularity into the third quarter to be able to say something like that.

And also as you can well imagine, revenue recognition issues also coming the way.

It's not just order intake, but it's also revenue recognition.

I would reiterate what I said earlier on, which is I think that there is a shift in some of the projects, but that they are shifting within the year still.

How much influence, if any, will there be on the third quarter, I'm not sure at this point.

I am encouraged by the fact that the bookings are so significant that some of them are already known to be rolling into the third quarter.

So that kind of helps me, but I can't really tell you beyond that at this point.

Okay.

And regarding the gross margin, obviously you guys have a target for 55% long term and short term it look higher for the second half.

Can you assume it's still going to be higher than the long-term target?

Well, evidently it's -- it also is a reflection of the level of revenues, but yes, our model for the second year is being -- second half is being able to present gross margins which are at or higher than 55%.

Okay.

And last thing, regarding the 3D, can you give us some update where are you guys standing right now and what you expect for the second half in terms of revenue if there are any?

Yes.

As I mentioned in my prepared remarks, the product seems to be very competitive.

We are very carefully not announcing the details of what the product is able to do obviously for competitive reasons.

But there are no less than five strategic customers who are actively engaged with us right now in looking at the capability.

And there is quite a bit of excitement there.

We will be shipping initial units during the second half of the year.

And as I mentioned in our Analyst Day back in January, our expectation is that revenues will start coming in 2012 for the obvious reason is that when we come out with a new tool we evaluate it for a period of time and then we start showing revenues for it.

We are very excited about what the tool can do.

And we're also very excited about the opportunity that that market offers.

We think it's going to start seriously contributing to our revenues probably in 2013.

But you will see some revenues coming in 2012.

As we achieve the end of the year, we'll be able hopefully to understand better the extensive revenues that we should expect in 2012.

Okay.

Thank you very much and good luck.

Thank you.

George [Moremas], Private Investor.

Good morning, Gabi and Dror.

Hi, George, how are you?

Hi.

Great execution this quarter guys.

I had --

Thank you.

I had a few questions.

First one was given the rumored kind of shifts in Foundry on Apple buying from Samsung with TSMC it is -- have you felt any kind of wavering out there due to this do you think?

We have to be very careful because that's customer confidential information.

But there is ongoing activity there.

And as I said, we are in a position to enjoy shifts in the direction of other foundries if they happen.

So we have to be very careful in what we say about that.

But suffice it to say you are right that there's a lot of noise about that and we feel we're well positioned to enjoy that change if it happens.

Yes, that was kind of my point.

You guys would be -- net negative or net positive for you guys, so okay, you answered my question there.

Thank you.

And also moving out towards 3D IC do you -- I'm not sure if it's too early yet, but from what you can see on the 3D market in terms of capital intensity in this, is a move from a 2D to 3D going to be for Nova, you think more or less capital intensive, to keep (multiple speakers)?

Well, I'm not sure I would call the current manufacturing a 2D manufacturing.

The 3D really kind of tries to say that the chip stacking associated with the manufacturing process.

What I will say is that the capital intensity expected in that market, I would say for process control is somewhat similar at this point to what we have today in front-end semiconductor manufacturing as it stands today.

What is not clear yet is what number of applications of process control will become in-line monitoring applications which are the ones that always interest us because they generate the multiple tool orders for fab.

That's still not --

Right.

-- completely clear in what's happing right now, and that's why we think that our rollout to the market is very timely, is that customers are mostly at relatively early stages of qualifying the process.

As we have mentioned they have to go through several hurdles.

One is to achieve yield numbers which are good enough for that -- for going to high volume manufacturing.

The second thing is they have to be able to finish standardizing that process.

So I think capital intensity, the working assumption right now for process control is that it's going to be similar to what it is in front-end manufacturing.

But I think as time passes we will be clear on how much of that is really coming to fruition.

Okay, great, thank you.

And just a follow-up on your earlier comments on etch and perhaps -- excuse me, I'm a little bit half asleep on the [West Coast], probably I missed some of that stuff, but on etch you seem rather excited about that.

I wonder if you could maybe reiterate the high spots that or maybe elaborate more on that or why that is?

Sure.

First of all, thanks for waking up so early for us.

We appreciate that.

And secondly, on the etch front really what's happening is that the design rule shrink is requiring customers to take through layers that maybe they were able to deposit in one shot and break them down into more steps in the manufacturing process because the tolerance to error is so much smaller once you continue to shrink and at the 3X or -- in this case 28-nanometer technology node and Foundry, that's really what's happening.

The gate structures are very complicated.

The materials that they're using particularly low-k materials and other bizarre materials and structures are extremely difficult to manufacture in a repeatable way.

So their work-around for that is to split the process into more manufacturing steps and control each of those discrete steps with I'd say a smaller influence on the overall process one at a time.

The cost associated with it is very significant for the manufacturers.

I mean, I mentioned I think in last quarter's conference call Morris Chang of TSMC telling all of us that it's a prior event that they have difficulty accepting the fact that they're going to be probably doubling their capital spending once moving from 65 nanometers to 28 nanometers.

So etch is just another step in that process where they're saying something like 50% more steps just to make that move.

I think overall that's a great thing for -- obviously for equipment manufacturers.

I would say even in particular for process control manufacturers because the need for process control continues to grow as you do these things.

So overall, I think it's a good picture.

It's exciting for us, it's been on our radar screen when we have spoken about the change we've made in the Company in the last two to three years.

We've always spoken about the fact that the growth should emanate from covering more steps in the manufacturing process and etch is a critical step, lithography is a critical step and we also have a very critical deposition step that we're penetrating into quite aggressively as well.

So that's kind of something that I will try to share with everyone as much as I can because I think it's a good way to look at the growth opportunity for the Company.

And I'll try to give us much information as we can also in the future as we progress with that.

Okay.

Well, thank you very much, guys.

And I really appreciate your leadership.

Thank you very much, George.

(Operator Instructions) Marcel Herbst from Herbst Capital Management.

Good morning and congratulations to a very good quarter and excellent execution.

Thank you, Marcel.

Lot of ground has already been covered, but I have a couple more follow-up questions on the housekeeping side.

Were there any non-recurring expenses in the quarter, for example, for the South Korean office opening?

No, there were no significant, no recurring -- non-recurring expenses.

Okay.

And what impacted the currency translation have on your operating results?

Well, we are working through hedging our expenses of the new Israeli shekel against the dollar on a continued basis.

So practically for the first quarter and the second quarter, most of our expenses are hedged at rates which are similar to the fourth quarter of 2010.

So there was no impact in the first quarter, now significant expected for the second.

Excellent.

Thank you very much.

Thank you.

(Operator Instructions) We have no further questions at this time.

I'd like to turn the conference back over to Mr.

Gabi Seligsohn for any closing remarks.

Thank you, Operator.

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

We look forward to speaking to you in the near future.

And we continue to focus on the business as it continues to move forward.

Thanks very much and have a great day.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.