Nova Ltd (NVMI) 2012 Q1 法說會逐字稿

Thank you, operator, and good day to everybody.

I would like to welcome all of you to Nova Measuring Instruments first-quarter 2012 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 CEO; and Mr.

Dror David, CFO.

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 I would like to remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement included in today's earnings release also pertains to this call.

If you have 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 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 would like to 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 first quarter of 2012 conference call.

The first quarter of 2012 marked a very good start for the year.

Our revenues during the first quarter were up by 18% versus the fourth quarter of 2011.

Our revenues came in at the upper end of our guidance and operating margins exceeded our expectations as a result of favorable product mix.

During the quarter we executed for our communicative plan, which included a carefully managed increase in our operating expenses.

These development efforts are critical to allow us to continue and improve our market position.

While the fourth quarter of last year marked the initial phase of the 28 nanometer ramp-up in foundries, we are now clearly in full swing.

Moreover, as recently reported by some of our leading customers, there seems to be a severe shortage of capacity, limiting short-term growth potential of some leading device manufacturers who feed the tablet and smartphone markets.

This situation has led some of our key customers to announce an increase in their planned CapEx for this year and add capacity faster than they previously planned.

Since all leading foundries are our customers and all want to play a significant role in this current ramp-up, all are either qualified or in the qualification for the relevant technology node, which puts us in a favorable position since we have been designed in with all of them for quite some time.

On the memory side of our business, CapEx has so far been limited as a result of low average selling prices on a device level as well as short-term capacity sufficiency.

We expect CapEx and memory, both into DRAM and NAND, not to significantly improve before the end of the year or even the beginning of next year.

We recently posted several important announcements signifying both an increase in business volumes, as well as technological wins for our products.

The first was for winning a tool selection for development of 11 and 14 nanometer technology nodes at a leading-edge logic manufacturer.

This win was of strategic importance to us as it covers the most critical manufacturing steps of lithography, etch, and CMP, both in the frontend and backend of the fab.

We also announced the addition of another foundry customer for our integrated metrology platform and commented that we expect this particular win to generate significant business for us in the future.

Now to give you some additional insight, let me review what happened during the first quarter.

Our focus on the foundry segment and the strong position we have achieved there over the past two years are clearly paying off.

As stated, the ramp-up in foundries at 28 nanometers is very significant.

Both our main product lines -- integrated metrology and stand-alone -- are benefiting.

Given the strengthening competition amongst foundries, customer focus also includes investments in the next two technology nodes, both 20 nanometers and 14 nanometers.

As stated in our last call, we expect to continue to receive orders for these two technology nodes in coming quarters and indeed saw some orders during the first quarter as well.

In light of supply shortages and the implications on device manufacturers' ability to support their customers in NAND, we expect device manufacturers who place orders with foundries to continue to get closer to the fab as time passes.

We have recently received more indications that optical CD measurements play a significant role in data sharing between the fabs and their customers, providing further evidence of the strategic role our technology plays in next-generation device manufacturing.

This is most pronounced in the more critical steps of gate fabrication were on the one hand process complexity is highest and on the other hand yield requirements and process tolerances are tightest.

From a wider market perspective and as mentioned, memory spending continues to be low.

Though we are seeing some capacity increases in NAND Flash and DRAM, we expect customers to only change gears towards the end of 2012 or the beginning of 2013.

With the technology transition to 30 nanometer in DRAM already in place at most customers, we expect that most, if not all, of the next RAM will be focused on below 30 nanometers.

On the NAND Flash side, going below 20 nanometers will require significant design changes, especially in etch and litho, creating a need for more optical CD-based process monitoring and control.

As previously mentioned, the number of etching and lithography steps is significantly growing as customers continue to circumvent the transition to extreme UV lithography for as long as they can for cost and complexity reasons.

We expect the benefit from these trends when spending comes back in this sector where we are strongly positioned as well.

The net of what we are saying is that we are indeed off to a good start for the year and have indications that spending will continue into the second half of the year.

So in order for the industry and for Nova to grow year over year there would need to be a significant step function in spending in the second half.

The positive developments I have been describing are good signs for the near term, but it's too soon to extrapolate this into a trend that goes beyond our visibility.

From a competitive standpoint, we were pleased to announce winning yet another foundry customer for our integrated metrology platform following a head-to-head evaluation.

We proved yet again that our technology combines very high reliability, excellent productivity and cost of ownership, as well as advanced and mature automation developed for foundries over the last several years.

Our latest model, the I500, is continuing to gain traction at below 20 nanometers though some of our customers are opting to extend the reach of our previous generation, the NovaScan 3090Next.

On the stand-alone front order intake combines our latest model, the Nova T600, the Nova T500, as well as the earlier 3090Next stand-alones.

As indicated in today's press release, operating expenses increased to about $9.3 million during the quarter.

As previously communicated, we plan to continue and gradually increase operating expenses throughout the year in order to support our short- and long-term development activities as well as take measures to support the continued increase in our stand-alone metrology shipments from a facility and product engineering standpoint.

Having an increased variety of products in the field, as well as new customer fabs to support, has required that we increase headcount in our application and field service organizations.

We have also put in place several engineering programs that are focused on continuous improvement of reliability, manufacturability, and factory productivity -- all of which are included in the set increase in operating expenses and capital investments.

Discussions with our key OEMs, as well as key customers and potential customers, over the last several weeks show that the transition to 450 millimeter programs will be happening more rapidly than previously anticipated.

Accordingly, our plan includes speeding up efforts in that area to secure our position for when revenues start kicking in, expected toward the end of 2013 or the beginning of 2014 and onwards.

Today's reported earnings are good testaments that our delivered roadmap, which has included the addition of many features and functionality to our product, was the right way to go.

It has allowed us to increase our average selling prices and partially mitigate the short-term impact of increased R&D spending as we work to create more growth opportunities for the future.

Now let me turn to the outlook.

Recent announcement by our leading foundry customers call for a continuation of spending, at least for the next couple of quarters.

Given the severe shortage in 28 nanometer capacity, we expect customers to continue and pull in deliveries wherever possible.

Our mature supply chain and efficient manufacturing capabilities will allow us to support this need.

After some recent weakness, we expect NAND and DRAM to come back towards the end of the year or beginning of 2013, fueled by signs of insufficient capacity at the high end, driven by demand for tablets, smartphones, and Ultrabooks, as well as the launch of Windows 8.

This improvement on the memory side should contribute to maintaining strong revenues into next year.

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

For the second quarter of 2012 management expects revenues of $24.5 million to $26.5 million with diluted earnings per share of $0.14 to $0.19 on a non-GAAP basis.

Finally, we are pleased that we have continuously outperformed the industry as a result of a well-executed strategy.

We are determined to continue on this path by aligning our product strategy with our customer needs and allocating necessary development resources.

With that, operator, let me now turn it over to Dror for a closer look at the numbers.

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

Before I start with an overview of 2012 first-quarter results, I would like to note that the numbers presented in the press release and in my following comments represent GAAP-based results unless specified as non-GAAP.

Total revenues in the quarter were $22.6 million at the high end of our guidance and up 18% quarter over quarter.

Product revenues increased by 23% quarter over quarter, reflecting the improved business environment.

Service revenues slightly decrease as a result of lower time and materials activity during the quarter.

Product bookings distribution in the quarter was approximately 70% from the foundry segment and approximately 30% from the memory segment.

On a regional basis, approximately 87% of the bookings in the quarter came from Asia Pacific and the rest from US and Europe.

Blended margins in the quarter increased to 56%, slightly above our target model.

Product gross margin came in at a record level of 62%, mainly due to favorable product mix plus higher-than-average software revenues.

Services gross margin decreased from 31% in the fourth quarter of 2011 to 26% in the first quarter of 2012 due to a reduction in time and materials revenues in part lead to higher costs related to new customer sites.

For the second quarter of 2012, based on the forecasted product mix for the second quarter, we expect product gross margins to slightly reduce relative to the first quarter of the year.

As expected, operating expenses increased in the quarter and came in at $9.3 million.

Research and development expenses increased in the quarter by $1 million, or 22%, to $5.6 million while SG&A remained stable at $3.7 million a quarter.

Looking forward, we expect operating expenses to further increase towards the $10 million level per quarter as we continue to invest in the execution and the initiation of research and development programs related to next-generation products and 450 millimeter tool sets.

Operating margins came in at 14%, higher than our guidance for the first quarter, driven mainly by the favorable product mix and improved gross margins.

For the second quarter of 2012 we expect the combination of higher revenues on one hand and the higher research and development investments on the other hand to result in operating margins which are similar or higher than the first quarter of 2012.

GAAP net income in the quarter was $2.7 million, or $0.10 per diluted share, based on a share count of 27.2 million shares.

Non-GAAP net income in the quarter was $4.9 million, or $0.15 per diluted share.

Cash flow from operating activities came in neutrally in the quarter due to the increase in working capital requirements related to the ramp up in business volumes, and as reflected in the higher accounts receivable and inventory levels at the end of the quarter.

Moving into balance sheet key metrics, DSOs remained healthy and came in at 63 days.

Inventories significantly increased from $9.6 million to $13.3 million during the quarter.

This increase is related mainly to higher production inventories and to support the increasing business volume, as well as to higher level of inventory related to new products, which were already shipped and installed at customer sites but were not yet recognized in revenues.

Capital investments came in at $0.9 million in the quarter as we continued to align our infrastructure to the current business volumes and enhance our manufacturing facilities towards development and manufacturing of next-generation products and 450 millimeter tools.

Depreciation came in at $0.6 million, slightly higher than the previous quarter.

I will conclude with total cash reserves which remained at the $87 million level during the quarter.

Gabi?

Thank you, Dror.

With that, operator, we would be happy to take questions.

(Operator Instructions) Edwin Mok, Needham.

Nice result and guidance.

So first question I have is some of the peers that had reported results has just got booking trends have started to decelerate into the second quarter.

Have you guys seen that for your business?

And if so, where is it decelerating?

If not, why are you guys doing better than your peers?

Did you ask whether it's decelerating or accelerating?

I couldn't hear.

Decelerating.

It seems that [adjusted bookings have decelerated].

No, I think in general the trend is quite positive right now.

As indicated by our guidance, we see that business continues to be quite strong right now.

So the year is off to a good start.

I can't say also that we are seeing a good move into generally the second quarter.

So, no, I think in general the trend continues to be quite positive and in general I will say book-to-bill is definitely above 1.

So actually I think things right now, as we started the year and also moving into the second quarter, remained quite good.

I see.

Then maybe tied to your commentary for the second half and for the full year, it sounds like second half you expect memory to be a little bit -- remain somewhat soft, even though foundries continue to grow.

So with that in mind then for full year you might not be able to outgrow 2011; did I get that correct?

Yes, I think it's a little bit too early still to say that we could grow better than the previous year.

We need to remember where we started 2011, which was a very, very strong beginning for the whole industry.

Indeed and granted there was that very big softness in Q3, which led to lower revenues in Q4.

So my statement was that we are off to a good start for the year.

You see what our guidance is for the second quarter and, indeed, if you extrapolate from that it requires things to go up another step function.

I think they could, but I think it's a little bit too early to say that.

Therefore, we are taking a cautious approach as to the second half and saying that we think the overall year looks quite good, but it's difficult for us to say that it's going to be a growth year at this point.

This is how you should interpret what I said.

I see.

Great, that was helpful.

Then going back to the foundry area, so you talked about the 20 nanometer or the 40 nanometer you are starting to see some orders, right?

Just wondering -- two questions related to that.

One is how do you see your position in those nodes versus the 20 nanometer?

Do you see that you are stronger or there is more work to be done there?

Then the second question is do you expect investment in how the 20 and 40 nanometer nodes to start at your customer site, or are these more just R&D development work at this point in time?

It's a very good question.

I think that we have a very strong position in 20 and 14.

If anything, customers are looking to expand the application usage of our tools, both integrated and stand-alone.

So I think what they are trying to do is to benefit from what they have already proven that we are capable of doing and even expanding.

Which goes part and parcel with what I have been saying all along about optical CD, that it's going into more etch layers, that it's going into lithography, that the gate structures require more and more measurement.

You remember my comment also about the fabless companies and how much attention they are paying to these critical steps which are associated with these advanced gate structures.

So, if anything, I expect that our addressable market for each of these fabs and how well we have done is that we have designed ourselves well into at least the steps that we have been in and even most cases actually more steps than before.

As far as the ordering pattern, I think what is going on now, and I can speak freely about this because there has been so many announcements by TSMC and by Qualcomm, etc.

What is going on now with this aggressive spending, which is to try to catch up with the requirements.

On the other hand the other foundries -- UMC, GLOBALFOUNDRIES, and others -- positioning themselves in order to be qualified for 28 also implies that all these fabs need to show that they are ready for the next technology node after that.

Because I think what happens in these situations is that the customers want to feel confident and comfortable that the next generation and even the one after that are actually being developed.

And so I think what we may see happening -- as I said, we have seen orders for 20 and 14 for several quarters already.

It has continued in the first quarter and will continue in the second; whether it ramps up rapidly I think it will take some time.

I think the indications that we have is that 28 nanometers is a significant technology node.

I know that there were questions about whether it's a significant node or if it's transitionary.

I think right now it seems like there is going to be significant buildouts of 28 nanometer capacity given what is going on.

But at the same time I think what these guys are going to be wanting to show is the availability even of limited capacity at 20 nanometers as the next step, etc.

So I think gears may shift, the timing of that is not clear.

I do think that most money will continue to be spent right now on 28 and foundries.

Great, that was very helpful color.

I have one more question and I will go away.

So on the gross margin line it improved quite a bit and very strong in the first quarter.

How much of that was driven by new product that you guys are selling versus just software?

And why are you guys guiding for product gross margin to come down in the second quarter?

First of all, I will try to comment on the first quarter and I will let Dror comment on the second quarter.

On the first quarter our revenue combines now new products and older products as well.

As I mentioned in my prepared remarks, a lot of our revenues still come from older versions but the nice thing that has happened is that they now include several features and functionality that did not exist maybe a year ago.

And, therefore, average selling prices have gone up on those products.

At the same time, the new products that are rolling out are rolling out at favorable average selling prices as well and so those things combined together are helping us.

I think, obviously, as I said, this is not a coincidence.

What we have worked really hard on is the value proposition in the last few years.

As you know, we have always focused on productivity which is a critical virtue, but also we have learned that an ecosystem of capabilities surrounding the platform is absolutely critical as well.

And I am glad to say that in several sectors -- and foundry is definitely enjoying those capabilities and ordering the tools significantly with those capabilities.

So that is helping the product gross margins quite significantly.

I will let Dror comment about Q2 on product and also about services.

Well, for the second quarter the difference in gross margins is, first of all, as I mentioned in the first quarter of 2012 we enjoyed higher-than-average software revenues.

This contributed around between 1% and 2% to the higher gross margin in the first quarter.

This will probably not repeat itself in the second quarter according to the forecast, so gross margins will be a bit lower.

In addition to that, as mentioned before, the product mix has its impact and we see some shift in the second quarter to products which are not fully featured with all the software capabilities.

This will have also some small impact on gross margin, so we expect it to be slightly below the 60% level.

On the services gross margin, we do expect to see increasing revenues in the next quarter.

This should drive gross margins toward the 30% level for services.

I see.

Sorry, one last question.

How should we think about the GAAP tax rate for the year or the coming quarter?

25%.

Great, that is all I have.

Thank you.

Patrick Ho, Stifel Nicolaus.

Thanks a lot.

Nice quarter as well.

Gabi, in terms of the last question or what you were talking about in terms of the opportunity in the fab, as you go to 28 and eventually to 22 and 20 nanometers what is the dollar content opportunity for fab at those nodes?

For us, what we have said on several occasions that we believe in these fab situations, on a per fab basis -- let's say for 100,000 wafer starts per month foundry.

Whereas at around 65 nanometers we modeled that as being something like $30 million, $40 million addressable market for us, we now believe it's about $80 million to $100 million at those technology nodes.

Actually we did a review of that just a few months ago so this is pretty fresh data.

So I think it has more than doubled itself actually over the last two years with the transition.

I think this also bodes well with the comments heard from Morris Chang recently of TSMC where he spoke about more than doubling his CapEx, the need, from 65 to 28.

He also mentioned that it would even not go X2 but probably go at least 1X more in addition when moving at 20 and below.

So I think OCD is also a reflection of that.

With penetrating more layers in the production perhaps it's even exceeding those rates sometimes.

That is very helpful.

Looking at the memory side of things where you guys are trying to make inroads, as the industry shifts to vertical NAND how do you see that impacting, one, the OCD market and, secondly, for you specifically?

First of all, it's important to state for everyone our position in memory is quite strong.

Historically, about 50% of our revenues comes from memory.

What we are looking to do now obviously is to continue to strengthen our position.

Where we have been extremely strong in memory has been with integrated metrology and, at least in a group of customers, also quite strong in stand-alone.

I think the growth opportunity for us in memory is primarily in the area of stand-alone metrology.

I think that the move to virtual NAND is a huge opportunity.

If you look at the virtual NAND design, and this has been in several publications so we can talk about it, this is extremely complex, things like what they call the staircase application.

It turns out that the only way to measure those things is with optical CD.

There is no other way.

So I think that in itself provides a huge opportunity for all of us that are competing on the optical CD market.

A lot of our algorithm development focus these days is going in that direction, as well as activities that I won't be able to discuss too much, but I will say more activities these days with the etch OEMs, the equipment manufacturers, since we believe the need for onboard metrology at below 20 nanometers for the virtual NAND is going to grow significantly as well.

So I think overall this is a good opportunity and as we go down the design rule these opportunities continue to grow.

So we are quite bullish on that opportunity to be honest, Patrick.

Right.

Final question for me in terms of the industry outlook for both EUV and the delays are occurring there.

From your perspective, especially on the OCD metrology front, one, what are you seeing in terms of the delays in EUV?

And, secondly, how does the current state of double and multiple patterning, how does that help you guys in the near term until EUV gets adopted on a production volume basis?

Yes, I think these situations -- and I remember this was the case when ASML went after immersion lithography and extended the life of 193 nanometer lithography.

This continuous extension of extreme UV means that there are more litho sets; actually there is a lot more etching steps.

I have said before that we know there to be 50% more etching steps as well to allow this extension of the lifetime of immersion lithography.

It's all good news.

It means basically that people are depositing lines which are coming closer and closer to one another and that their tolerance for any mistake whatsoever are becoming smaller and smaller.

What it's requiring us to do obviously is to continue to be aggressive on our roadmap, continuously increase our tool sensitivity to subtle changes in the process, continue to develop algorithms that are able to deal with these complex structures.

So definitely there is a direct link between that trend and how we are managing our roadmap, and what our customers expect us to deliver.

Great.

Thanks a lot, guys.

Thank you.

Krishna Shankar, ROTH Capital.

Congratulations on the good quarter and guidance.

What was your mix of stand-alone versus integrated tools for the quarter, and how will that trend through the rest of the year?

We don't provide that breakdown on a quarterly basis.

I will say that generally we are gradually climbing up to the level where on an annualized basis things range somewhere between 40% and 50%.

Our long-term model is to reach a level which is sustainably around the 50%, between those two products, until obviously we introduce more products which we intend to do.

But we don't provide that on a quarterly basis, I apologize.

Then do you see a broadening of foundry capacity additions in addition to TSMC?

Do see people like you UMC, GLOBALFOUNDRIES, and others expanding 28 nanometer and below capacity?

And given the expected pickup in memory spending at the end of this year, should all this result in sort of a smooth progression in our orders for the rest of this year?

For your first question, absolutely the foundries are spending.

As I mentioned in my prepared remarks, these companies are either in qualification process or trying to get into a qualification process with these big players -- the Qualcomms, the NVIDIAs, the Broadcoms of the world, etc.

And so indeed we are seeing order traction from those two customers that you had mentioned and quite healthy.

I think that that is going to continue, at least for the couple of quarters.

Could continue even beyond that.

As far as the memory, as I mentioned, we expect that to be more towards the end of the year.

We have seen some memory traction.

As Dror mentioned, 30% of our revenues were memory and in Q4 they were only 15%.

So there is traction still ongoing in memory but we think that that is going to happen later.

Perhaps that is even a good sign.

If it pours into the next year, it could help us all in the industry continue with the positive trend into 2013.

I don't think they are going to be able to hold off for much longer.

Much like what we said six months ago about 28, where we knew the transition would have to happen but none of us, everyone included, knew about the extent of it or could forecast it.

I think the same is going to have to happen with memory.

I don't think that they are going to be able to stay at the current design rule.

ASPs have shrunk so much that from a gross margin standpoint printing more chips per die is just going to be absolutely necessary.

So my personal feeling and from speaking to our customers is that I think it's going to come back.

It should come back quite as strongly because of the need that is going to start driving it.

Great, thank you.

Thank you.

(inaudible), Singular Research.

Good afternoon, gentlemen.

I wanted to revisit just the margins and the ASPs on the product side.

I know you are not going to give a breakdown between stand-alone and integrated, but how much -- I guess what I am getting at is how much is the higher growth in stand-alone driving the margins and the overall pricing?

If you could just give us a little more color in that area.

I can say that both products are with healthy gross margins, around about the levels that we gave, that level of around 58% to 60% on a normalized basis.

As Dror had mentioned, we had significant software sales during the quarter.

Software sales are either included in systems and then they drive the specific systems average selling price upwards or it is sold separately.

The separate sales of software is still a lumpier business and, therefore, is difficult to build a trend around that.

So I would say that both contribute these days quite well to the margin picture.

Both are positioned well because of the features and functionality, as well as I mentioned the productivity that they offer.

So I think both sides of the business are enjoying a healthy trend right now and contributing to the results.

Kind of a follow-up to that.

Is there some point when stand-alone kind of stabilizes as you are saying at half your product sales?

Or is margin growth at that point kind of going to be driven more by added functionality from things like software?

One of the things that also matters, of course, is the introduction of new versions and new capabilities.

So the product portfolio is not stagnant, it's a moving target and changes over time.

What we have tried to do and I think we have done successfully is drive average selling prices and margins upwards, again for the benefit of the customers, which is the most important thing here.

It doesn't just happen on its own.

It happens as a result of these things.

So as far as whether it's going to stable out, etc., what we are focused on is we are focused on growing the top line, continuing this growth trend that the Company has enjoyed in the last several years.

What those 50% represent is a function of the size of revenues that we are driving.

So the Company is still, we think, on a secular multi-year growth trajectory and over time there could be some changes in the product gross margins.

What we have intimated in our long-term model for overall margins for the Company is to stay overall at about 55% for the overall business, combining both services and products.

And we think that that is a good long-term model for us.

Certain quarters we exceed that, just like in this particular quarter.

Certain quarters we are a little bit below that, which is -- happens as well.

So this is a little bit about my perspective on margins, hopefully that is helpful.

Yes, that was.

I had another question, I guess it's more for Dror, having to do just with the working capital.

In terms of inventories, you mentioned some percentage of the shipments were at customers but still counted in inventory because you couldn't recognize the revenue.

Could you talk about what impact that might have on -- if we looked at DSOs, taking that effect out or what effect that had on DSOs?

In general, this did not significantly impact DSOs because when the revenues are not recognized and the accounts receivable are also -- do not appear in the balance sheet.

In general, I would say that regarding inventory we do see also in the current quarters that inventory turns are around 3.5 a year, which we believe is a robust level.

Hopefully and our plan is to stay at that level looking forward.

Okay, thanks.

Amit Dayal, Rodman & Renshaw.

Thank you.

In terms of segments in relation to your operating expenses going higher, where are we spending money to beef up resources?

The spending increase, as I had mentioned, is mostly in the R&D area.

The increase in expenses there is to drive new programs that we are working on.

One of the things that I had mentioned in the call is the 450 millimeter program, which for quite a while for the industry was really on hold.

What we have seen actually in recent weeks, to be honest, is a speeding up of that.

We have at least four or five interactions with customers and research institutes that are pushing very hard for much more aggressive deliveries than they had before.

So that is a change that we have seen and it's going to require some shifting of gears.

But also from the more planned activities standpoint there is continuation of rolling out new versions of our products, both software as well as hardware.

Also, on the operations side internally, as I had mentioned, from a facility standpoint, separate of what I had just mentioned right now, we are now a bigger company.

The infrastructure did require taking us a notch further up on the engineering and manufacturing capacity sides, so some spending is going in that direction from a capital standpoint.

As I mentioned also, new fabs as well as penetrations that we made required some adjustments to the headcount upwards of service and application people.

So this is where things are being spent these days.

So just from a longer-term view on this, with the expansion of the infrastructure would OpEx remain at current levels going into the future or once this is taken care of should we expect it to come down a little bit?

We said that we expect this year to reach somewhere around a $10 million level on a quarterly basis.

We may -- at first to continue on our remarks on the previous call, the expectation was that it would take probably until the end of the year that we would reach close to the $10 million level.

We are going to do that a little bit earlier now.

We think it's the prudent and the right step in the right direction for us to take given all the opportunities that we see.

So we are trying to normalize them at the $10 million level.

As far as the long-term sustainability of that, Dror, you may want to make a comment about that.

First of all, our long-term model is for R&D to be between 16% and 19%, and for operating expenses to be between 30% and 35% of revenues.

So, in general, looking forward we do not expect operating expenses to go down in the near future so that is in general.

That is helpful, thank you.

Just one housekeeping question.

In terms of our tax expectations for the rest of the year, what should we be looking to model that around?

First of all, it's a good opportunity to mention again that the tax expenses that are seen in our GAAP results only -- most of them, if not all, reflect adjustments to deferred tax assets.

So these are not actual cash payments of taxes within 2012.

Because the Company has NOLs of approximately $25 million at the beginning of 2012, plus tax incentive programs from the government which apply for zero tax rate from the first year which we have taxable income, this means that probably our forecast is that during the next three years we are not expected to pay any significant cash tax expense from the headquarters in Israel.

So, however, because of the accounting needs and rules, we did need to create a tax asset in the end of 2011.

What you see right now is adjustments to this tax asset in the P&L.

The effective tax rate for 2012 and for the second quarter, as I mentioned, is expected to be 25%.

Perfect.

Thank you so much.

(Operator Instructions) (inaudible)

Thanks very much.

Gabi, just so I am clear on the OpEx commentary, I think in response to the last question you said that the goal was to trend up towards $10 million per quarter by the fourth quarter of this year for OpEx.

But because of 450 accelerating and what not that that may happen sooner, which I presume means 2Q or 3Q.

Is that what you are saying?

Yes.

Yes, that is what I am saying, that we are going to get to that level earlier than we had previously communicated.

The reason is that we see more opportunities in front of us.

We would like to react to those and believe that that bodes well for the long-term opportunity for the company.

So that is indeed the case.

And based on what you know right now, are you contemplating flattening it out at $10 million when you get there and then just starting to leverage some revenue growth from that point forward?

Right now from our vantage point my answer to you, Jay, is correct, yes.

That is kind of the level.

It could mitigate downwards a little bit or a tad upwards but right now that is a level.

Obviously, our objective is to continue at the same time to grow the top line and OpEx as a function of revenue to come closer to our long-term model.

That is the objective.

As Dror mentioned, that is a 30% to 35% OpEx.

We are obviously not there right now, and we are exceeding that in this particular time, but we think this is a necessary step to continue and demonstrate growth.

I think as we have shown in the last 2.5 years, as we have gradually ratcheted up expenses we have also grown significantly as a company.

I think this is the right direction for us right now, but, yes, I think for now I am sharing with you the best of my knowledge and my thinking of this.

We would like to try to flatten out at that level.

Perhaps if we could bring it down a little bit we will, but I think let's give it a couple of quarters and see where we stand.

Sure, that certainly all makes perfect sense.

Then so if you look at the pickup in OpEx, in particular in R&D and whatnot that you have executed over the last several quarters, including the first quarter, and what you are looking for in the second quarter, do you believe that some of that will manifest in new product revenues in the third or fourth quarter of this year?

Yes, you will find it and I think larger portions of new product revenues of already announced products.

Obviously as you know the cycle of seeing revenues from the announcement takes some time and so what you will probably see is a bigger portion of revenues going in the direction of the newer products as we add feature and functionality.

The other thing is, as we have said, we believe that the 3D interconnect product that we have will probably start generating some initial small revenues in the second half and more so in 2013, but these things do take some time as you know from a recognition standpoint.

There is always the evaluation.

Dror just discussed the implications on inventory, so these things are all tied in together.

But I think generally the answer is, yes, you are going to start seeing some revenues coming from new products in the second half.

Okay.

Because the reason why I asked that is because you are expressing some level of optimism that there is a chance that your revenues could continue to grow sequentially in the second half on some level.

Obviously that depends on the magnitude of this foundry momentum continuing and whether or not memory comes back.

I was just kind of curious if you were breaking into that commentary some level of assumption that some of your new products from your pickup in R&D over the last three or four quarters plays into that so that Nova can actually do a little bit better than the general wafer fab equipment trends.

Not only because optical CD is picking up share, but because you start to see the benefits of some of your brand-new products kicking in.

I think that is a fair assumption, Jay.

I think that is exactly how we look at it, and I think if I would look on a multi-year basis this is exactly how things have played themselves out.

We continuously work with our customers two generations ahead; that is why I made the commentary on 20 and 14 nanometers.

It has proven to be the exact right direction.

In doing so we also involve them in the planning process of the roadmap and getting their feedback on what we are developing.

That way we secure the fact that when we kick off a new product and roll it out to the field we actually get the traction that we are looking for.

And so, yes, that is the case.

I think if I would look historically, just to put ourselves at ease, this is actually how it happened.

So I think, yes, I think in the second half you are going to see more of the new products coming online.

Usually during the year, around the middle of the year we announce new things and so you can expect us to continue to be aggressive on that.

The market is demanding that and we are there to pick up that demand.

That is so critical because as I said it's a very interesting field to be engaged in because of the dependency level growing so much.

So my answer to you is, yes, I think you understand correctly our strategy.

Okay.

Gabi, I am not sure if I remember this correctly or not, but my recollection is that there may be a large foundry out there that was traditionally not completely focused on foundry but is getting bigger in foundry that I don't recall if they are a stand-alone tool customer for you.

Then, of course, you got some big IBMs that haven't exactly been your biggest customers.

Are you seeing any traction with your stand-alone tools, with any customers that traditionally have only bought integrated or nothing from you?

Yes, we are.

Since you are hinting on customer names, so I will avoid referring myself also to specific customers.

But, yes, we are growing and actually penetrating with stand-alone, more so with -- actually at this point pretty much almost all of them are our customers in stand-alone.

All of them are our customers is integrated.

As I had mentioned in our press release earlier at the beginning of this quarter, I think, meaning the second quarter, the press release that we had on adding a new integrated metrology foundry customer.

That was an interesting situation because that is a customer that started by being a stand-alone metrology customer and now is taking big, big portions of integrated metrology as well.

So in most cases we have grown from integrated to stand-alone.

There is already a situation of a major foundry that has taken it in the other direction.

Right.

I guess what I was just really getting at is I think there is some pretty big spenders out there that aren't necessarily stand-alone customers of yours yet.

I am just curious if there is any e-mails going on there or if there is any chance that those big, chunky spenders could start to buy stand-alone from you guys; if there is any visibility on that.

I will just make a general comment.

We are gaining traction with stand-alone on both memory and foundry.

Also, for competitive reasons, I will keep it at that if that is okay with you.

I understand.

Then my last question, Gabi, is you guys are sitting -- I hate to beat the dead horse; I think I asked you this question every other quarter.

But I think you guys are sitting on a very impressive, very nice cash situation considering the size of your company.

It doesn't appear that buybacks or dividends are in the strategic plan and it seems like it's more dialed in for future growth in some way, shape, or form.

Just wondering if there is any creative use of cash that might be happening tactically this year.

I think the creativity we want to apply to the use of cash, and I have said this before on the conference call and elsewhere, is that we are very actively looking for an acquisition.

We believe it would be better use of a portion of our cash to induce more growth into the Company and so that is where we would focus a certain amount of that cash.

Other amount would obviously stay on the balance sheet to secure what we need to do from a growth standpoint.

So that continues to be the case.

We are very active in that area.

Obviously there is nothing to announce right now.

If there were, everyone would hear about it, but we are active there and we would like to continue with that direction.

I see.

Is it your goal to stay a process control company in that sort of scenario, or -- because I can't imagine there is a ton of things out there -- or would you be looking to broaden your product line into other areas?

Nova is very good at process control.

This is what we specialize in; this is the Company's know-how, core competence.

Using all sorts of electro-optic signals and other types of signals is what we will do in the future.

We think that is our strength.

We think that there are opportunities for us to grow within the semiconductor market in process control and that is our focus right now.

I see.

Okay, thanks very much.

Thank you very much.

Gentlemen, we have no further questions at this point of time.

Operator, thank you.

I would like to thank everyone for attending today's call.

Look forward to speaking to you next quarter.

Thank you.