Nova Ltd (NVMI) 2011 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Nova Measuring Instruments fourth-quarter 2011 results conference call.

Today's conference is being recorded.

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

Kenny Green.

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 2011 results conference call and presentation and 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'd like to draw your attention to the presentation that accompanies today's call.

The presentation can be accessed and downloaded from the 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 press release also pertains to this call.

If you have not received a copy of the release please view it in the Investor Relations section or new 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 the call over 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 2011 and full-year earnings conference call.

2011 was the best year in our history.

It was the third consecutive year of outgrowing the industry, a year in which we crossed the $100 million revenue mark for the first time, generating a net income of more than $27 million (technical difficulty) $22 million in free cash flow.

As previously communicated, our long-term financial model calls for gross margins of 55% and net profitability of 20% to 25%.

During 2011 we were able to achieve the high end of that range.

Our service group also delivered all time record results both in revenues and profitability.

During 2011 we successfully launched next generation products for integrated and stand-alone metrology.

The Nova T600 has been selected for 11, 14 and 20 nanometers at multiple foundries.

The Nova i500, which has been selected for 11, 14, 20, and 30 nanometers at multiple memory customer sites and foundries alike.

During the second half of the year we initiated our first beta site for 3-D interconnect at a leading foundry and based on how things are going, it looks like we have a strong competitive vehicle to successfully answer this developing new market.

We are currently in discussions with multiple customers to initiate on-site evaluations of that product.

As we have stated on many occasions our focus as a company is on the highest end of technology.

Looking into the breakdown of our revenues for 2011 strongly supports this statement with over 50% of our revenues coming from 20 nanometers and below and over 75% coming from 30 nanometers and below.

During 2011 we started to experience a transition to 28 nanometer manufacturing at foundries and 20 nanometers at NAND Flash as well as in DRAM 30 nanometer transition, which is in its final stages.

Our customers have also been very active in starting to develop the next two technology generations in conjunction with this ramp-up and in many cases we have been called upon to participate.

Being selected for such advanced technology nodes has required us to both extend the performance envelope of our products as well as deepen our technological collaboration with our customers.

Given the very short time between process development and high-volume manufacturing the number of unknowns our customers are dealing with has grown significantly, providing us with an opportunity to differentiate ourselves by relying on our highly professional customer-facing team and by designing our tools and software differently with substantially more flexibility.

The dependence on optical CD for next-generation chip design is strong and sometimes it is the only way to measure and control the process.

In light of this, our served addressable markets have gone from about $500 million to close to $1 billion over the course of the last few years, and we continue to focus on both growing with the market as well as gaining share.

Now to give you some additional insight, let me review what happened during the fourth quarter and the year as a whole.

We began to see a pickup in bookings early in the fourth quarter which accelerated as the quarter progressed, and we have continued to see a positive trend in the early part of the first quarter as well.

As a result we ended the year with a very significant improvement in our backlog compared to the end of the third quarter and have entered 2012 with improved visibility.

The most significant recent change we have witnessed has been with our foundry customers.

Having delayed the 28 nanometer ramp up by two to three quarters and in light of a continuing strong demand for new smartphones, tablets, ultra books, and servers, there is a real need to add significant capacity.

Each of our customers is at a different state of process maturity and some of them see this as an opportunity for market share gains against the others.

Some are ramping up as quickly as they can and others are still facing yield challenges delaying their ramp up.

These challenges have required an expanded deployment of optical CD, and accordingly, the number of tool orders as a function of wafer output has grown significantly.

During the fourth quarter we were able to quickly ratchet down our expenses to accommodate for the sudden reduction in revenues while maintaining profitability.

As we closed the quarter we were pleasantly surprised to exceed the top end of our guidance for revenues and profitability as a result of a favorable product mix which included a high portion of fully configured tools.

Worth noting is the operational flexibility displayed by our factory which allowed us to book and ship in a very short time, meeting customer demand despite the limited visibility at the outset of the quarter.

After several years of focusing on new customer penetrations, we are benefiting from repeat orders in stand-alone solutions and they accounted for a significant portion of our business in 2011.

We see this as a testament to our technological leadership as well as credit to our excellent customer-facing organizations throughout the world.

Nova's strong end market position coupled with excellent technological collaboration with leading OEMs offered significant opportunities for further growth.

In the short term the 28 nanometer ramp up at foundries and 20 nanometer at NAND production sites, adding optical CD control steps, the transition to 3-D gates at foundries and vertical gate structures in memory where only optical CD can measure.

In the midterm critical add steps requiring closer monitoring will lead to an enhanced transition to integrated metrology for etch.

The move to 3-D interconnect by all of our leading customers and an expectation for a ramp up during 2013 will add another opportunity.

In the long term the transition to 450 millimeter by six leading customers, which is expected to take place 2015 onwards, is offering another opportunity where pilot lines are expected at the end of 2013.

We expect the use of integrated metrology to significantly increase at 450 millimeters, given wafer cost and process complexity.

In order to take full advantage of these opportunities we have put in place a multi-year program that touches upon product developments, cross-company organizational developments, and operational extendibility.

We have recently re-organized and expanded our CTO group, which now consists of 10 PhD's, all of whom are focused on looking into the more distant future of three and more years ahead.

It is our belief that in order to remain at the forefront of technology and deal with our customers' needs, we must take a proactive approach and be ready for their future requirements through well-prepared development cycles.

Our focus in 2012 will be on maturing existing platforms, enhancing our infrastructure and deepening customer technology partnerships via field support and the said CTO group.

As we have been communicating recently and in order to support these strategic efforts, our board has approved a plan that calls for an increase in our operating expenses from a level of about $8.5 million per quarter to about $9 million as of the first quarter, gradually increasing throughout the year to close to $10 million by the fourth quarter.

We will of course consider adjusting the pace of investment in light of changing market conditions.

Now let me turn to the outlook.

As mentioned, customers are coming back to spending after six months of significant reduction.

The areas they are focused on are at the high end and one can coin these investments as technology related.

At the same time, customers are not continuing to add capacity to older technology generations since they are currently running those products at lower utilization rates.

In this state of affairs, companies like our own that are exposed to the high end are well positioned to outperform the overall industry.

Our current expectation for the wafer fab equipment industry during 2012 is that there will be a modest decline of 10% to 15%.

At the same time and in light of the role optical CD continues to play, we believe we are well positioned to outgrow the industry for a fourth consecutive year.

In today's press release we stated our guidance for the first quarter of 2012.

For the first quarter of 2012, management expects revenues of $20.5 million to $23 million with diluted earnings per share of $0.07 to $0.13 on a non-GAAP basis.

Dror will provide more details in his prepared remarks.

To summarize, 2011 was momentous for us as a company.

Achieving the golden $100 million mark has been a dream for the entire company and is now a reality.

As management, we have now set targets on the next big round number for the top line and look forward to achieving it over the next few years.

Clearly, we will be looking to doing so in line with our long-term profitability model.

In doing so we will rely on our proven management capabilities, our deep technological pockets, and an excellent customer support team as well as our financial strength.

In the meantime our challenge remains to put in place the building blocks that will provide the means for reaching our goal.

And with that, operator, let me turn it over to Dror for a closer view on the numbers.

Thanks Gabi and welcome, everybody, to Nova's quarterly conference call.

Before I start with an overview of 2011 fourth-quarter results, I would like to note that the numbers presented in the press release and in all the following discussions represent GAAP -based results unless specifically specified as non-GAAP.

Total revenues in the quarter were $19.2 million, slightly above the high end of our guidance and down 26% quarter over quarter.

Product revenues decreased by 29% quarter over quarter, reflecting the slow business environment in the second half of 2011.

Service revenues decreased by 12% in the quarter, mainly as a result of lower time and materials activity during the quarter.

Product bookings distribution in the quarter was approximately 80% from the foundry segment and approximately 20% from the memory segment.

This is a significant shift from previous quarters as few major foundry customers have initiated extensive ordering for the high-end technology nodes.

On an annual basis, distribution between these two segments was approximately 60% from foundry and 40% from memory.

On a regional basis, approximately 75% of the bookings in the quarter came from Asia Pacific and the rest from US and Europe.

Blended margins in the quarter remained stable at 55%, within our target model.

Product gross margin came in at 61%, 3% higher than the previous quarter due to favorable product mix.

Services gross margin decreased from 37% in the third quarter to 31% in the fourth quarter due to a reduction in time and materials revenues, which was partially offset by effective cost restraints in the quarter.

Operating expenses slightly decreased in the quarter and came in at $8.3 million.

This level of operating expenses was also attributed to one-time cost restraining measures which we implemented during the fourth quarter.

As Gabi explained we expect operating expenses in the first quarter of 2012 to reach the $9 million level and continue to gradually increase until the end of 2012.

Operating margins came in at 12%, much better than our guidance for the fourth quarter, driven mainly by the said favorable product mix and improved gross margin.

Let me now move into the tax aspects.

Based on Generally Accepted Accounting Principles following three consecutive years of profitability, we were required to create a tax asset related to the expected benefit from net operating losses previously incurred by the company.

The net operating tax losses in Israel amount to approximately $25 million in the end of 2011.

In addition, the company is part of an Israeli government incentive program, which provides zero tax payments in the first two years after fully utilizing these NOLs.

We expect this program to be relevant for most of the taxable income in the relevant years and, hence, we do not expect the company to pay meaningful cash income taxes in Israel in the next few years.

For industrial companies in Israel, the tax rate is expected to be 12% starting 2015.

Hence, on a consolidated basis our business model assumes an effective tax rate of approximately 15% for the consolidated company in the long term.

Specifically for 2012 the statutory tax rate for companies in Israel is 25% in 2012.

Accordingly, our quarterly GAAP results for 2012 are expected to reflect an effective tax rate of approximately 25%.

This effective tax rate is related mainly to the accounting adjustments of deferred income tax assets, and these adjustments will be excluded in the non-GAAP portion of our quarterly financial reports.

In terms of actual payments of taxes in cash in 2012, we do not expect to pay any cash taxes in Israel.

And cash taxes payments related to our global activity, which is done through fully-owned subsidiaries, is expected to amount to couple of hundred thousands of dollars in 2012.

GAAP net income in the quarter was $5 million or $0.18 per diluted share based on a share count of 27 million shares.

Non-GAAP net income in the quarter, which excludes the said benefit from income taxes and excludes stock-based compensation expenses, was $3 million or $0.11 per diluted share.

Most of the difference between GAAP and non-GAAP earnings is related to the creation of the said $2.5 million deferred tax asset in the quarter.

Cash flow from operating activities continued to be healthy at $3.9 million in the fourth quarter of 2011.

Moving into balance sheet key metrics, this also remained healthy and came in at 60 days.

Inventories decreased from $11.4 million to $9.6 million in the current quarter as a result of a decrease in finished goods and work-in-process inventories as we align the supply chain to the current business volumes.

Capital investments came in at $1.4 million in the quarter as a result of additional transfer of demo and application tools from inventory to fixed assets, and depreciation came in at $0.5 million, slightly higher than the previous quarter.

In 2012, we expect capital expenditures to continue to be at the $4 million to $5 million level on an annual basis.

I will now move to discuss 2011 annual results.

2011 was an exciting year for us, shifting gears in each important element of the business and leaving the company to present record revenues exceeding the $100 million mark.

Total revenues for the year were $103 million, 19% higher than 2010.

Blended gross margin in 2011 was at a record level of 56% with product gross margin at the record level of 61% and services gross margin at a record level of 36%, all situated well above our target model.

Annual operating expenses came in within the middle range of our target model with R&D at the high end and SG&A at the low end of the model.

Operating margin for the year was 24%, at the high end of the target model.

GAAP net profit for the year was $28 million or $1.04 per diluted share, including the $2.5 million benefit from income taxes.

Following the ramp up in operations, the number of employees increased in 2011 by approximately 20%, and we currently employ approximately 350 employees worldwide.

In 2011, our ability to scale the operations in parallel to maintaining DSOs at approximately 50 days, maintaining supplier days at approximately 70 days and achieving inventory turns of approximately 4.5 times a year, is a strong indication of the leverage which was built into the operations during recent years.

These elements also played a critical role in our ability to generate $25 million positive cash flow from operating activities for the year, resulting in $87 million cash reserves at year-end.

Gabi?

Thank you, Dror, and with that, operator, we'd be happy to take any questions.

(Operator Instructions).

Patrick Ho, Stifel Nicolaus.

Thank you very much.

And Gabi, congrats on a really good year.

Thank you, Patrick.

Just looking I guess forward in terms of the mix between stand-alone versus integrated, can you give a little bit of color as to how Q1 is going to shape up in terms of that mix?

Generally we haven't provided a breakdown of revenues.

Our long-term objective as a company is to reach about a 5/50 level between integrated and stand-alone, and we are making very significant inroads to reaching that number in not the too distant future.

Okay, great.

Maybe a second question in terms of the outlook.

Obviously everyone is starting to see a little bit of a pickup.

You guys are well exposed to the foundries.

I guess on a broader industry question, how do you see the sustainability of these type of order flows, at least through the first half of the year?

And what will be kind of the variables that either continue it or hit a pause as we look into the second half of the year?

Sure.

It's a good question.

Actually, Patrick, things have been changing so rapidly in the last three months it's pretty amazing, and the working assumptions are being modified as we go.

I will say that as we had mentioned, we are off to a pretty good start for the year.

Right now what we're seeing is that on the foundry side, order volumes continue to be on the high side for the first half of the year.

And as I had mentioned in my prepared remarks some of the foundries are slower to spend as they work through some of their yield issues, which leads us to believe that a lot of their spending is actually going to happen in the second half of the year.

As you well know, you need to reach a certain yield level before you actually ramp up so they've already put in place capacity sufficient to demonstrate yield.

And in some of the cases I think that we'll be spending in the second half of the year in some of these foundries.

So some of them are moving very aggressively because they are ready and they see the opportunity for market share gains.

The other ones are a little bit slower, but the demand I think is going to be growing for 28 nanometers.

And right now it's -- everyone is working as hard as they can to reach the necessary levels of yield.

On the NAND Flash side, we also see quite a bit of strength through the first half of the year.

My expectation right now is that we are going to see probably some increase in DRAM probably the second half of the year.

What we saw in the second half of 2011 was a completion of a certain realm of migration to 30 nanometers in DRAM.

I think there should be more of that coming up and it may take for the second half.

So right now on a general year view indeed it seems like a strong start for the year.

Second half, as I had mentioned we have some indications that there should be pretty reasonable business volumes, but I do admit that we are 1.5 months into the year and that the visibility is probably pretty good till the end of the first half.

And after that it's more a general statement that we are getting from customers and some expectations that we have.

Final question from me in terms of -- your gross margins held up very well.

But I think as you mentioned on your prepared remarks you had several I guess quick cycle times to try and meet customer demand.

Can you just talk about some of the levers there on how you're going to maintain gross margins at (technical difficulty) while you're trying to have a quick turnaround to deliver tools?

Sure.

Well you know one of the things that works in our favor -- and I think Q4 was a wonderful indication to see revenues having gone down to a little bit over $19 million from where they were at the beginning of 2011 and still maintain that kind of gross margin, what it takes is the fact that we have built a lot of feature and functionality into our tools.

And many of the customers are taking fully configured tools that would sell at a significantly high ASP.

We are seeing that trend hopefully continuing, meaning that at the below 3X technology node, those features and functionality are becoming more and more necessary.

And so we do expect product gross margins to remain pretty healthy.

I think -- and I'm looking at Dror right now to see if I have it right, but probably somewhere between 58% and 61% is the range that you should expect from us in the near future, correct, Dror?

Yes.

Thank you very much.

Thank you, Patrick.

Edwin Mok, Needham.

My first question is regarding visibility.

I guess on your prepared remarks, you talk about the visibility is a little bit longer for -- that's extended.

And you also mentioned booking has picked up.

Is it fair to assume that booking is probably even about what you guided in the March quarter or give you confidence into the second quarter of the year?

And then I have a few follow-ups.

Yes, again, as you mentioned, indeed, we provided guidance only for the first quarter, but I will say that order intake is already had a nice portion for the second quarter as well.

So visibility has improved.

I think during the second half of 2011, as you know, visibility was very poor with maybe a couple of months -- three months.

Now it's extended to about five to six months is a reasonable way to look at it.

And then my follow-up question regarding that is you mentioned -- I think drawer Dror mentioned in the prepared remarks that 80% of your booking comes from the foundry.

I was wondering, if that is -- relates to I guess does it relate to Nova's position?

Does it relate just how customers are ordering?

And then I guess a follow-up to that is, when do you expect the memory guys to come back a little more aggressively?

Yes, for the year, right now, our plan for 2012 calls for about something like 60/40 in favor of foundry.

Generally as you remember we've been around the 50/50-ish mark for quite a while.

In some quarters, one or the other takes over to about 60/40.

So, right now our assumption for 2012 is about 60/40 in favor of foundry.

So there are definitely orders that are coming in from memory.

But I think the more aggressive move in the fourth quarter was foundry.

And I think the reason is because the projects that were supposed to ramp up in the second quarter of 2011 have been delayed by almost three quarters, and people could not wait any longer.

So I think the more aggressive trend on foundry is explained by the fact that there's really -- there was a real lack of capacity at 28 nanometers.

At the same time, also, what we're seeing is that not a small portion of these orders that we are getting from foundry are for 20 nanometers and even small amounts for 14 nanometers.

And the reason for that is the fact that with what's going on now between the leaders they are working not just on the ramp up of 28 which is really where things are headed, but how do they create a differentiation one and two technology generations ahead.

So we're seeing that happening.

And it was very aggressive I think in the fourth quarter.

I think, again, we are seeing a continued strong trend in that direction, but also, I do think that you're going to see some more memory as well coming in.

So for the year just to summarize probably 60/40 for the year in favor of foundry; exact timing right now, a bit too early to say.

I see, I see.

Great.

Very helpful there.

And then just touch on your 3-D packaging product.

I think previously mentioned you have one customer that you might be closer to revenue-ing and then in discussions with several other customers.

Any kind of thinking on that?

Just to correct, we didn't speak about revenue.

We spoke about a very successful beta site.

And the fact that there are a couple of more customers that are at various very advanced stages of engaging with us and looking to take evaluation tools.

We have mentioned in previous discussions that we believe there will be some minimal revenues from this product in the second half of 2012.

You need to remember that when we launch new products the recognition cycle is significantly longer, but our objective as a company is to be with four customers by the end of 2012 so that we could go ahead and ramp up that product in 2013 when the industry hopefully moves forward on that.

I see.

Very helpful there.

And lastly, just a question on kind of OCD adoption.

I think on the prepared remarks you talked about the SAM being -- spending right.

And you know you are investing too on the R&D side to kind of help that I guess, right?

So just curious in terms of how much are you seeing pulled in beyond the traditional kind of CMP application, and how much of the growth you expect this year and next year come from etch and other applications?

Thank you.

Sure, sure.

It's interesting to see that a very significant portion of our stand-alone bookings probably in the last four to six months is coming from etch.

That's something that had already started and I've spoken about before, but I have to say that now it's increasing even more significantly on the stand-alone front.

So, etch is becoming I think a main application for that, and you're going to start seeing that more and more with a high-k metal gate structure adoption, even when it's with 2-D gate structures but also of course with 3-D gate structures, as well as the vertical gate structures in NAND Flash which are extremely complex on the etch side.

So etch is becoming I think a main thrust.

What we're also starting to see -- and I mentioned that in my prepared remarks as what I call a midterm opportunity, is the move to more integrated metrology in etch in specific layers where the complexity is significant enough.

And what we see there is that there are real issues with matching between chambers; generally etchers ship with three or four chambers.

As those issues become more significant there is a need for an onboard feedback loop and optical CD, and its integrated metrology form is what's able to cope with that.

So, etch is becoming I think a significant area.

Also we are starting to see more migration to lithography, which was slower to adopt and some high-end CBD, although those are fewer layers that are run through the high-end CBD that we're talking about, which is related to gate structures.

Those are critical I would say strategic layers for the customer.

So that's what's happening.

At the same time the proliferation and the copper interconnect and the back end continues to be very strong.

And that is a market that we keep on addressing, both with integrated and stand-alone.

And we see, again, extensive deployment there.

I even mentioned I think in our investor presentation that on a fab basis we see even a doubling of the addressable market because of the number of OCD layers.

Krishna Shankar, ROTH Capital Partners.

Yes, congratulations on some nice results and the outlook going forward.

A couple of questions.

Can you talk about the gross margin difference between integrated versus stand-alone metrology tools?

Yes, these days they are pretty similar to one another on a generalized basis.

It depends on the configuration of the tool, right, if it's a fully configured tool or if it's a more basic configuration.

But the range of gross margin is quite similar between those two tools.

Okay.

And what do you estimate to be your market share in the OCD market for 2011?

It's a little bit early.

You know, one of the ways to determine that is associated with some reports that come out from all the companies that are relevant.

We ended 2010 with a combined market share for both integrated and stand-alone of 40%.

It's still a little bit too early to say about 2011.

I'm hopeful that we have actually seen some growth in that area, but it's a little bit too early for me to say.

Okay.

And then, the 3-D tool that you talked about, is that for wafer-level packaging and is that also an OCD tool, or is that some other kind of technology?

Yes, this tool is -- we haven't what I call we haven't done what we call a formal announcement.

It's shipped to one beta and then there's two other customers as I said that are lined up.

The technology that we deploy there is a combination of several techniques, not just optical CD.

It's focused on what I call 3-D interconnect.

So, what we are calling via first and via middle, which is done by the front-end fabs, meaning the existing customers of Nova, it's not focused on the back end OSATS, which deal more with wafer-level packaging.

So this is a little bit about where this product is going.

Great.

Thank you.

Thank you, Krishna.

Leron Roshman, Oscar Gruss.

I wonder if you can tell us if you have -- how many 10% plus customers you had for the year?

How many 10% and plus customers for the year?

Probably five.

Five.

Okay.

And then when I'm looking at your market, it looks like suppliers are really changing.

You now have Intel and Samsung in a whole different league in terms of CapEx for the year.

And most of the foundries are actually reducing their CapEx, including TSMC.

And then you have a memory, it looks like it's going to be a lot of consolidation over there this year.

Is it fair to say that in light of the effects that you have lower order to Samsung and no exposure to Intel, this year will be more challenging to you guys for let's say more than your competitors?

I don't necessarily agree with the thesis.

Samsung is a very strong and important customer of Nova's.

So, we are actually enjoying a continued relationship with that customer that actually has hundreds of Nova tools and continues to employ our technology quite extensively.

The other thing that I would look at is I'm not actually sure that the guidance that has been given by foundries for instance, in particular, TSMC is actually what's going to happen.

I think that the need to invest should be more extensive than has been communicated.

Indeed, Samsung and Intel have been the most aggressive in describing their investments.

But I actually think that TSMC may need to invest more.

I think that the foundry race which is going on is going to require global foundries to invest significantly as well.

And also, the other foundries are very important customers of ours.

So actually I don't see this as a more challenging environment specifically for Nova.

I actually think that we are extremely well exposed to where the spending is happening.

Indeed, Intel is not currently a customer so that is correct.

But actually, no, we feel like we're exposed to where growth is taking place.

And again based on the interactions we've had with the customers we are very well positioned in the spending that's happening.

As I had also mentioned, the spending is happening at the high end.

And there, we are really well positioned.

You should refer to the press releases we've had in the last several months.

All of them are focusing on announcements around 20 nanometers and below, which should be an indication as to how well positioned we are.

Okay, okay, great.

And, I'm just wondering if I'm going back to your numbers this quarter, in terms of service revenue, is it fair to say that the service revenues are going down as well when we see like all the rest of the investments are going down or it's just one quarter that won't -- we won't need to conclude about that?

You know, service revenues has portions which are repeatable in behavior which are contract related and has certain portions which are time and material or upgrade related.

And, therefore, you do see some variability in revenues from one quarter to the next.

I will say that the level of revenues that we have seen which has ranged between somewhere like $3.7 million to about $4.5 million quarterly for service should be the range that we operate within, at least for the foreseeable future.

And what we're doing quite rapidly is continuing to add more upgrade features and functionality which I think should contribute to growth and service.

Admittedly those revenues tend to be more lumpy in their behavior because the opportunity for upgrades have to do with specific customer decisions.

So that's kind of the way to look at it.

From a gross margin standpoint, our long-term model for service is to be above 30%.

Certain quarters we are higher than that, certain quarters, we may be a little bit lower than that.

But that's just to give you a little bit of a flavor of where it stands.

Okay.

Very well.

Thank you very much and good luck.

(Operator Instructions).

There are no further questions in the queue.

Okay.

Well I wanted to thank everyone for joining the call.

As mentioned, again, 2011 was an amazing year for the company a year of achieving a dream that had existed for while.

And as mentioned we are focused on continuing the growth for the company.

Look forward to meeting everyone again in our next conference call.

Thank you very much.

I matter.

That will conclude today's conference call, ladies and gentlemen.

Thank you for your participation.

You may now disconnect.