Nova Ltd (NVMI) 2012 Q2 法說會逐字稿

Good day and welcome to Nova Measuring Instruments' second-quarter 2012 results conference call.

For your information, this conference is being recorded.

At this time I would like to turn the call over to your host today, Mr. Kenny Green, CCG Investor Relations.

Please go ahead, sir.

Thank you, operator, and good day to everybody.

I would like to welcome all of you to Nova Measuring Instruments' second-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 all 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 have not received a copy of this release, please view it in the Investor Relations section 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 will now hand the call over to Mr. Gabi Seligsohn, Nova's President and CEO.

Gabi, please go ahead.

Thank you, Kenny; and hello, everyone, and welcome to our second quarter of 2012 earnings conference call.

The second quarter of 2012 marked a continuation of the positive trend that started December of last year.

Strong bookings and aggressive delivery schedules led us to surpassing the top end of our guidance.

Continued favorable product mix also led to EPS that modestly exceeded our expectations, while we continue to ratchet up our operating expenses to prepare for future opportunities.

The strong position we have built at foundries over the last several years makes our equipment an integral part of the current ramp of 28 nanometers at three of our leading customers.

Having started only late last year, our customers are still not able to meet the strong demand from their customers.

Most notably, our largest customer, TSMC, recently reaffirmed commitments to more than double their current 28-nanometer capacity by the middle of next year and communicated its plan to spend most of their CapEx next year on the 20-nanometer technology node.

As in the case of 28 nanometers, for which we started preparing three years ago with our customers, we are continuing to supply initial units for 20-nanometer and 14-nanometer process development, which in turn will allow us to play an integral role in those ramp-ups when the time comes.

During the quarter, we reported additional technology wins on the memory front, which position us well for the below-10-nanometer technology node.

We were also very excited to announce the selection of our flagship T600 standalone metrology tool by a leading flash manufacturer for the development of future generations.

The early stage at which our tool is being introduced positions us well to provide optical CD solutions for multiple steps in their process spanning lithography, etch, CVD, and CMP, all of which rely heavily on the unique ability to measure 3-dimensional gate structures.

At SEMICON in middle of July, we announced our groundbreaking V2600 standalone metrology tool, which is uniquely positioned as the only tool able to provide full profile information of a single via for leading-edge 3-dimensional packaging.

It was exceptionally gratifying to present the capabilities of this product in a co-authored presentation with IBM, which focused on the criticality of these measurements for transitioning to high-volume manufacturing of 3-dimensional interconnects.

As stated on many occasions and as reflected by our results, I believe we have done a great job over the last few years in building our position in the foundry segment.

Looking at our future challenges and opportunities, it is clear to us that we must continue to invest in high-growth potential areas for short-, mid-, and long-term growth.

We will do so by widening our product offering and expanding our served addressable markets.

From a product standpoint, we will continue to roll out new products that have a high software content.

Short-term aspects tend to be more related to ensuring that we have sufficient field presence to support our customers' needs on the ground as their deployment of our equipment expands to more areas of the fab.

This includes both service as well as application people, the latter of which have become key to the development of metrology solutions for high-end applications such as 3-dimensional gate structures and other complex patterning schemes.

For the mid-term, we see both the increased need for on-tool process control solutions in etch as well as the move to 3-dimensional interconnect to start generating initial revenues during the second half of this year and the early part of next year.

In the area of on-tool process control solutions for etch, we will be deepening the work we are doing with our two etch OEMs, Lam Research and Applied Materials, in order to further mature existing integration schemes and add more features and functionality.

This will entail shipping evaluation units to customers interested in assessing the usefulness of these solutions.

We believe both foundries and memory customers will need such capabilities for the more challenging processing steps at advanced technology nodes.

Given the repeated push-out of extreme UV lithography, customers are required to add several very complex etch steps to the process, where onboard optical CD solutions offer an excellent means to monitor and control etch rate and multi-chamber matching.

On the 3-dimensional interconnect side, we were encouraged to see leading fabless companies such as NVIDIA, Qualcomm, Broadcom, and others and their representatives attending professional symposiums about Through Silicon Vias at SEMICON, which were focused on process control solutions needed for moving to high-volume manufacturing.

Having a solution that is able to perform full via profile characterization, as well as more capabilities that are planned to be announced later this year and next, puts us in an excellent position to provide the needed process control solution for the patterning -- for the partnering device manufacturers of these fabless companies, namely the leading foundries that we serve.

Here we will continue to work collaboratively with our strategic customers to zero in on their in-line process control needs and develop more measurement capabilities.

We expect to ship several 3-dimensional interconnect evaluation units and place support headcount on the ground in order to expand our penetration efforts.

For our long-term efforts we have been discussing the advent of 450-millimeter wafer sizes and the process control challenges associated with that transition.

Here, yet again, we see our excellent relationships with our key OEMs, Applied Materials, Lam Research, and Ebara, as well as leading end-users as a real advantage.

Articulating their expectation from 450-millimeter processing, our customers are asking us and our OEMs for even better within-wafer uniformity, higher productivity, and better reliability.

The level of sophistication that will be required to meet these needs is a step function higher than what is offered today in 300 millimeters.

It is our belief that at 450 millimeters, the need for onboard process control solutions will increase and will allow our customers to add our integrated metrology solutions to more steps in the manufacturing process.

At the same time, standalone metrology tools will have to be even more productive than today, as the customers will be looking to reduce the number of wafer stops in the manufacturing process as much as possible.

To support this need, we intend to continue and develop products which will offer the best productivity, as we always have.

The recent announcement of Intel and ASML has provided a very clear indication that the industry is accelerating its preparations for this major transition.

Since 450-millimeter high-volume manufacturing is still several years out, our investments will span multiple years through evaluations before revenues began to ramp.

Since the current state has five device manufacturers driving this program, you can expect that efforts in this area will be covered by collaboration agreements that carry mutual obligations and engineering efforts being committed.

We have become active in consortiums that are being developed by the customers and research institutes, to secure our position at an early stage.

With all this in mind, we have taken the decision to continue and invest in these growth engines at a more aggressive rate.

As a management team, we have shown time and again our ability to invest and grow while demonstrating excellent profitability.

In doing so we rely on an excellent business model, advantageous product offerings, and well-managed supply chain.

Today's reported earnings are good testament that our R&D investments combined with excellent execution capabilities lead to continued profitable growth.

Having brought this Company to its current size over the last three years and with a view to taking it to even higher levels, we are certain that these investments will prove beneficial for our customers and shareholders.

Throughout this journey we remain committed to achieving our long-term profitability model of 20% to 25% operating margins.

As we increase our operating expenses, we lay the foundation for supporting a higher revenue base over time as we execute our plan for continued secular growth.

Dror will provide more color on operating expenses in his prepared remarks.

Now let me turn to our outlook.

As stated, 28-nanometer capacity increases are expected to continue.

Though in the short term we are seeing some deceleration in order volumes, looking at current capacity levels and comparing those to market demand as well as through talking with our key customers, we believe that spending will have to continue well into next year.

Those customers that are at advanced stages of solving related yield issues are continuing to increase capacity, while others who are still working through their issues may take some more time to add capacity.

Statements by TSMC in recent days about their planned investments next year in 20-nanometers are yet another indication as to just how competitive the foundry segment has become.

Such announcements are sure to influence decision-making processes at other foundries.

We on our side will remain closely engaged and ready to supply these needs through our close customer collaborations.

We expect memory spending to remain weak in the near term and increase by the first quarter of 2013, at which point we believe technology shrinks can no longer be further delayed.

Our recent technology wins will secure our position once spending in that area resumes.

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

For the third quarter, management expects revenues of $23 million to $25.5 million, with diluted earnings per share of $0.04 to $0.12 on a non-GAAP basis.

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

Dror?

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

Before I start with an overview of second-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 specifically specified as non-GAAP.

Total revenues in the quarter were $27.1 million, higher than the second-quarter guidance and up 20% over the first quarter.

Product revenues increased by 18% quarter-over-quarter, reflecting the improved business environment; and service revenues increased at a higher rate, mainly as a result of higher time and materials activity during the quarter.

Product bookings distribution in the quarter was approximately 75% from the foundry segment and approximately 25% from the memory segment.

On a regional basis, approximately 83% of the bookings in the quarter came from Asia Pacific, and the rest from US and Europe.

Blended margins in the quarter were 54%.

Product gross margin came in at a healthy level of 59%, yet lower than the previous quarter due to the fact that software revenues in the first quarter were above normal levels.

Services gross margin significantly increased from 26% in the first quarter to 33% in the second quarter due to higher portion of time and materials revenues.

As expected, operating expenses increased in the quarter and came in at $9.9 million.

The majority of the increase was in research and development expenses, which increased in the quarter to $5.9 million.

Operating margins came in at 17% at the high end of the guidance for the second quarter.

GAAP net income in the quarter was $3.7 million or $0.14 per diluted share, based on a share count of 27.3 million shares.

Non-GAAP net income in the quarter was $5.4 million or $0.20 per diluted share.

Cash flow from operating activities was $4.5 million in the quarter, with cash reserves increasing to approximately $91 million.

Moving into balance sheet key metrics, accounts receivables reduced by $1 million despite the 20% increase in quarterly revenues.

DSOs remained healthy and came in at 60 days, slightly lower than the previous quarter.

Inventory significantly increased from $13 million to $16 million during the quarter.

This increase is related mainly to the newly introduced standalone product platform of T600 and V2600, while portions of this new product inventory are already installed at customer sites for joint development programs and product evaluations.

Capital investments came in at $1.2 million in the quarter, and depreciation came in at $0.6 million, similar to the previous quarter.

Before I conclude, I would like to provide some color on our forward-looking financials and guidance for the third quarter.

On the revenues front, in the second half of the year we expect to start recognizing revenues from new products -- the T600, which is the latest optical CD standalone product, and the V2600, the 3D interconnect product.

The timing of recognition of these first-in-fab systems depend on customer formal acceptance, until we reach a point of certainty which allows recognition upon shipment.

And evidently, in such cases the visibility of exact revenue timing is lower.

As a result, our guidance of $23 million to $25.5 million revenues for the third quarter includes a slightly extended revenue spread relative to the previous quarter.

On the operating expenses front, as Gabi explained, looking into the second half of the year the Company will need to further increase its research and development investments in order to properly address the coming industry transitions and opportunities.

As a result, total operating expenses are expected to increase by 10% in the third quarter.

It is important to note that the timing of these increases is strongly dependent on the progress of headcount recruitments, on the exact timing of design processes, and, most importantly, on the exact timing of supply of the prototypes related to these new products.

On the tax front, because of our improved profitability we expect to fully utilize the deferred tax assets created in 2011 within the current third quarter.

Hence our maximum tax expenses in the third quarter of 2012 will be approximately $0.4 million.

The changes in deferred assets are considered as a non-GAAP adjustment and therefore do not impact the Company's non-GAAP earnings per share.

With regard to the Company's overall tax position and plan, it is worth noting again that the Company still has unutilized net operating losses for tax purposes in Israel.

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 to 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 couple of years.

For the long term, the tax rate for industrial companies in Israel is expected to be 12%, so our business model assumes an effective tax rate of approximately 15% for the consolidated Company in the long term.

So taking into account all these elements, our guidance for non-GAAP earnings per share in the third quarter of 2012 is $0.04 to $0.12.

Gabi?

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

(Operator Instructions) Edwin Mok, Needham & Company.

Hi.

Thanks for taking my question, guys.

Congrats for a great quarter.

So, actually Dror, I have a few questions for you first.

Related to your -- actually just related to your last comment related to tax, so did I get it correct that your deferred tax assets, or your non-GAAP tax if you will, for the September quarter will be around $0.4 million; and then for the rest of the year you expect minimal non-GAAP taxes?

Is that how we think about the model?

Well, actually, the tax expenses which you currently see in our P&L is mostly the adjustment for deferred tax assets.

As of the end of June, we almost utilized in full these deferred tax assets which were created in the end of 2011.

So, practically in the third quarter, we have only around $0.4 million to be in the P&L for the third quarter.

And as a result, our maximum tax expenses in the third quarter would be $0.4 million.

I see, I see.

Okay, okay.

Great that's very, very helpful.

Then, on the revenue recognition part, I'm just trying to understand a little more.

So basically you guys are talking about some new products, and therefore typically there is a little more extended revenue recognition time horizon.

Is it fair to say, then, that you expect your shipment in the coming quarter to be above your guidance range that you provided, because of this extended revenue recognition?

And which products are you seeing that?

Is it just the new product that you guys have recently announced, or is this the T600?

Can you help us with that?

Yes.

Currently, only the new products have their specific revenue recognition which extends until customer acceptance.

All the other products are mostly recognized at shipment.

These new products are the T600 and the V2600 for the 3D interconnect.

So definitely this revenue recognition aspect relates only to the new products.

With regard to the shipments, it mostly depends on the level of the bookings, which also impact the book-to-bill.

But definitely, given the fact that some of these products are already installed and working at customer sites, waiting for acceptance, in the last quarter we did see shipments which are relatively high.

Okay, that's helpful.

Just to clarify -- and sorry, I jumped on a little bit late for the call -- you have mentioned in the beginning.

But was your booking above your revenue level on the June quarter?

In other words, was your book-to-bill about 1 in the quarter?

And how does booking trend quarter to date and the September quarter?

As you know, we don't provide book-to-bill information, Edwin, specifically, right?

So I'll say that it is hovering around a 1, but we are not going to be able to give you specific numbers on book-to-bill in the quarter.

Okay, that's fair.

Then, Gabi, maybe you can help us a little bit about your new product that you recently announced, right?

On the 3D interconnect, right?

How was the reception from the customer?

And you unwrapped some more detail recently, right?

What is your customer -- what kind of feedback have you gotten from the customers so far?

If you can help us just to understand where you're at in terms of progress, number of customers that you have, has either received the tool or are in discussions.

That would be helpful.

Sure.

as I mentioned, this is really an exciting new product announcement for us and also the fact that it was presented in a co-authored paper with IBM was very significant for us, because it was a very production-focused type presentation by IBM specifying why this kind of capability, which does full profile of a single via, is so critical for high-volume manufacturing.

So that in itself I think provided a lot of support.

What was also interesting is that we have been working with three customers already, one of which obviously has been IBM.

And one of those three customers feels so strongly about the capability that he has asked OEMs that are competing for their via technology to use us as the reference tool in order to evaluate and qualify the quality of the etching process that they are doing.

I think that is a great indication as to how the customers are looking at this as a key process indicator.

The work that we have done -- and it's been a very quick project; it took us two years to get to this stage, which is very quick for brand-new hardware -- also included significant innovation.

This is a patent-pending capability.

We're expecting the patent to be granted any day now on this new method that we have invented to perform measurements of a single structure, a nonperiodic structure, using optical CD-like technology.

So this has been really something very significant.

And what is also interesting is, as a result of this announcement and the support from that key customer, we have had several customers approaching us for wafer demos, more than the ones that we were able to address previously.

So I feel very good about this product.

Our goal, as we stated previously, so I will just reiterate it, is to have actually present at four customers by the end of this year.

We mentioned in our initial press release that we are in the process of receiving initial orders for these tools, some of which will be actual revenue orders.

But the timing of those, as Dror said, are not absolutely clear at this point as far as recognition.

Some are evaluation units.

And as I mentioned in my prepared comments, part of the investment that we are making right now, and you can see that in the growth in inventory, is to ship more evaluation units, given the fact that there is such significant interest.

Overall, we expect this TSV market to offer us an opportunity for a metrology and inspection market of about $80 million to $100 million over the course of the next several years, which for us is a meaningful served addressable market.

Great.

That was very helpful.

Then jumping back to how your existing optical metrology business, right?

I think most of us understand that foundries still remain relatively strong, but memory has been softening, right?

So I understand visibility is somewhat limited, but any kind of views about how about that will trend as we go into the fourth quarter and maybe a little bit beyond that?

And then any thoughts about how the memory customer is looking at also metrology?

Because I think we have seen, call it, the foundry guys going back and looking at their existing line and add new metrology or even inspection steps to improve the yield, right?

Have you seen similar issue with the metrology side -- sorry, on the memory side as well?

I guess it's a two-part question here.

Yes, regarding the fourth quarter, as you know, we provide guidance only for the third quarter.

I will say that if we are able to achieve a flat second half versus the first half of the year, this will be a very good achievement for us.

Because it will mean that we are doing, again, better than the industry for a fourth consecutive year.

So that is what I would like to see us doing.

It is not in our pocket, but it is something that we are focused on making happen.

I think to your question as to how I see the industry playing out as we roll into 2013, I think it is always the case that in this conference call we already talk about next year.

As I had mentioned, we are really seeing a huge gap of being able to support the demand at 28 nanometers right now.

If you go all the way down the food chain -- and I know that you cover it and look at it, Edwin, very closely -- all the way from ARM through NVIDIA and Qualcomm and then to TSMC, UMC, GlobalFoundries, and Samsung, you see the same story, which is strong demand and capacity.

I think (technical difficulty) from Morris Chang last week were a great indication, when he mentioned specifically that he is looking to double his 28-nanometer capacity.

So I think that right now from our vantage point, 2013 should be a good year for foundry.

When you hear the talks about 20 nanometers -- and we have been very active in that area.

We have been supplying tools, as you know, also for 14 nanometers, even for 11-nanometer development in some cases.

We are prepared to tackle that.

So my feeling right now is that foundry continues to be strong into next year.

On the memory side, to your question on optical CD utilization in memory, it is pretty extensive.

Actually it is growing in its usage, and I think on two fronts.

One is the vertical gate structures that you are starting to see in DRAM and NAND flash.

Those absolutely require an optical CD measurement.

There is simply no other way to measure it, and it is extremely complicated to process these new processes.

And these design rule strengths -- in the case of DRAM to below 20 nanometers, and flash down to the 1X technology node -- they depend so highly on making that happen that I think optical CD utilization rates are going to grow on the memory side.

So if indeed we are correct in assuming that DRAM spending should be back in the first quarter -- NAND I think is a little bit less easy to predict right now what the timing of NAND coming back is going to be.

But if indeed it is correct that DRAM comes back beginning of next year, and foundry is as good as I believe it is going to be, it makes for a pretty good year in 2013; and I think optical CD continues to play a key role that allows it to do better than the industry.

This is my vantage point at this point in time.

Great.

Very, very helpful color there.

One last question.

Just curious in terms of currently there is the opportunity in OCD, right?

Or OCD-related in terms of metrology, right?

Just curious; from 28 and 20 nanometer, how much incremental -- if you can put a percentage or some kind of color around incremental increase that you have from 28 to 20 nanometer.

I think that the increase -- if you look at it -- let's start with looking at it from a process standpoint and then try to deduce from that the metrology implications.

One of the key areas that is enjoying that growth of spending that the foundries have been talking about -- and you remember the numbers they are talking about when they talk about spending more in the move from 28 to 20.

One of the key areas is etch, and the addition of etching steps in order to circumvent extreme UV for as long as they can.

The double patterning, the quadruple patterning, and the solutions that etch offers there in order to somehow mitigate the dependence on litho-tools, which are also more expensive.

I think that is where the potential is.

This is what I have spoken about in the last several quarters.

I think etch is where optical CD is going to grow most significantly, both on standalone and on the integrated metrology front.

You heard me talking about on-tool process control, maybe something that I haven't spoken about before.

I have always talked about integrated metrology.

The reason I mention that is because you can expect that the type of solutions that we start offering are going to be more significant than just the tool itself.

There are things in the making that will be adding significant software elements to our offering, that will allow process control to have a step function going forward.

So I'm bullish about that opportunity.

Now as to the question that interests you most, which is quantifying that, that is a little bit difficult for me.

I can say that I see an addition of 50% more etching steps from 28 to 20 nanometers.

How much of those we're able to consume through both standalone and integrated metrology wins depends on continuing to grow our market share.

Etch is the place for us to grow, no question about it.

I see; great.

That's all I have, thanks.

Thanks for taking my question, guys.

Patrick Ho, Stifel Nicolaus.

Thank you very much, and also congratulations on the nice quarter.

Thank you.

First, looking at your OpEx at least on a going-forward basis.

You give guidance for 3Q.

On a going-forward basis not only for 4Q but beyond, do you see remaining at these type of elevated levels?

Or are there increases or decreases forthcoming as we go forward?

Well, what we are seeing, Patrick, as I mentioned, is that we are seeing several growth opportunities going forward.

To facilitate those, we must put in place the infrastructure in order to support those opportunities, both on the software development and algorithm development side as well as hardware development.

Add to that the 450-millimeter program which we have already initialized, as you know.

But the pace of execution there, given the opportunity, needs to continue and grow.

So at this point in time, as Dror mentioned, the growth that we are planning right now is a 10% growth for operating expenses.

I think our plan, which is coming up soon for -- annual operation plan coming up in the coming quarter right now, during the third quarter, and the planning we are going to do for next year, at that point we will be able to share with investors in more detail what it is that we plan on the OpEx side.

But I do want to say again to all our investors, I think we have shown as a management team that we know how to plan and manage our operating expenses in a reasonable enough way that combines the need to invest in the future while also remaining profitable in a healthy level.

So hopefully I will be able to add some more color on this in the next few months.

Once the full plan for next year materializes I will be able to answer will that.

But again as mentioned, I think -- and as we have shown -- we will manage between these two, between the need to invest and the need to remain profitable and successful at what we do.

Very important to say also, this in order to set the stage for a higher revenue base.

This is what all this is geared towards.

So of course in looking at the future, and I have spoken on several occasions about taking the Company to the next level, with the steep growth we have enjoyed so far and where we want to take it, we want to be able to put in place enough infrastructure and enough investment so that we can see these step functions continuing for a secular growth rate.

And therefore if you look at a bigger revenue base, I think this will also help have a more advantageous, I would say, operating expense model.

One more word about this.

As I stated, we remain very committed to our long-term profitability model.

This model that we have stated on several occasions of 20% to 25%, which we have already hit last year, our plan is to go back to that model.

I am not forecasting for you at this point in time exactly when; but everything that we are doing and the decisions that we make look at that as part of the growth plan for the Company.

And therefore everything that comes back from that bottom line to the top line, we take a look at when we do our planning looking forward.

Great.

That's helpful.

Gabi, just looking -- I think one of your, in your prepared remarks, you talked about memory coming back in the first quarter of next year.

Given all the moving parts on both I guess NAND and the weakness in DRAM, do you see one of those two segments as being, I guess, the first to pick up?

Or is it a mix of both?

Well, you know, if I look at our bookings in the second quarter, as Dror said, I think it was 75% foundry and 25% memory.

So we are having -- we are seeing business for memory, and that has been a continuous case, obviously.

But as stated, it has been quite weak.

What we are starting to hear on the NAND flash side is that I think it's going to take longer in order for a ramp-up to take place.

But we think that the DRAM situation requires a shrink as soon as possible, and our customers are looking to focus on the higher ASP part types.

All of those require further investment either in their existing fabs or by also adding further capacity.

So, I believe DRAM will improve before NAND flash improves at this point in time.

And I have to admit that it's been an evolutionary picture that we have seen.

Maybe my vantage point was a little bit different a quarter ago, but as things unfold this is what I am seeing currently.

Great.

Final question on the long-term growth prospects for you guys.

You have obviously now entered the TSV market and looking for growth opportunities there.

With a lot of the investments that you are putting in right now, is it fair to assume that you're going to be going into other markets as well and those are some of the stuff that we should be watching on a going-forward basis?

I think right now the addition of the 3D interconnect product has such capabilities that it could touch upon other sectors within the food chain.

I think that it may create an interest beyond just the Through Silicon Via that it's focused on right now.

Other -- so I can't say anything specific right now but I think that that technology and that capability opens the door for several things.

Also, as I mentioned in my prepared commentary, we plan on adding more capabilities to this V2600 tool second half of this year and beginning of next year, and I think that could also expand this addressable market.

As far as the other sectors, I think that for us the best growth opportunity is to expand the reach with the optical CD platform further with the customers that we have penetrated and also the recent penetration on the NAND flash side; that offers an interesting opportunity.

So at this stage, this is the way I look at things.

Great.

Thanks a lot, guys.

Keith Maher, Singular Research.

Hi, I was hoping you could talk a little bit more about what was going on with the product gross margin -- I know it was a little weak -- and if product mix between standalone and integrated had anything to do with that as well.

I hopefully heard well enough the question.

You said something about product gross margin and also wanting to understand the breakdown between integrated and standalone, correct?

Yes, that would be helpful.

Yes.

Generally, as we have indicated before, our product gross margins tend to range between 58% and 62%.

As you saw in the first quarter, it was 61%; this quarter it was 59%.

The way you should look at that is in particular quarters in which the extent of software revenue is more significant, it goes to the higher end.

And in those quarters that it is on a more normal basis, then it goes to the lower end.

But within that range which -- we feel very comfortable with that kind of product gross margin range as a good product gross margin position to be in.

It is something that we look at on a continuous basis.

So that is on the product gross margin.

Again it's a product mix-associated thing, indeed, as you had mentioned.

Regarding the breakdown between standalone and integrated metrology, we don't provide that on a quarterly basis.

As I have mentioned in the past our long-term goal with the current product set -- and again that is an expanding product set -- but were we to stay with the current product set, is to get to a level of 50-50 on the product revenues.

There have been quarters when it's been at that level.

So standalone side of the business does continue to grow.

I would say on a normalized basis it's getting to a very significant level.

But specifically I am not able, for competitive reasons, to provide that breakdown.

Okay, sure.

Just one question on the tax rate.

Once you used up -- it looks like you will probably use up the deferred tax asset next quarter.

And then I think in the past you've talked about -- and you mentioned today -- that 15% tax rate.

But that -- you wouldn't really be hitting that for, what, several years down the road?

Yes, actually, the timing in which we will start seeing actual cash income taxes for the consolidated Company will be only after a couple years from now.

So, everything that you will see in our income taxes in the next couple of years will probably be more of deferred asset adjustments and so forth.

Okay, thanks.

Greg Weaver, Invicta Capital.

Hey, good day, guys.

Just a follow-up on the gross margin question here.

Dror, I'm coming out with about a 52% margin, if I back into it, relative I think the midpoint of your revenue guidance as well as your operating margins.

I guess can you speak to that in terms of why we might see that go down again for Q3?

So, Greg is asking -- he said 52% is the midpoint of our guidance.

He wanted to understand why we are seeing that decline.

Yes, well, I would say that in general product margins are expected to be good in the third quarter, and also services gross margins are going to be in the ranges of the second quarter, around 30%.

However, overall, because we have some revenue decline, the blended gross margins would decrease in 1 or 2 percentage.

So you are correct, the midpoint is around 52%.

Okay.

The inventories being up, now, is that -- I think you might have addressed this as well.

Is that due to the new tools that are being shipped but not accepted?

Well, most of the increase of inventory in the quarter, as I mentioned in the prepared remarks, is related practically to the two new products which we announced and are proliferating lately, which is the T600 for standalone optical CD and V2600 for the 3D interconnect.

So some of that is within the manufacturing cycle right now, and some of that is already installed in customer sites waiting for acceptances.

Okay, all right.

Nice cash generation again.

Any sense what you're going to do with that, plus the money that you raised before?

In terms of acquisitions, anything going on there?

Yes, as I mentioned, Greg, in previous discussions in the quarterly conference calls, we are actively looking at a few opportunities.

There are some interesting opportunities for us, which we think can be significant for us as a Company.

This expanding cash base is very helpful because it allows us to focus on deals which would be mostly cash-based, if not all cash based.

At the same time, whatever transaction we do, we would be leaving a significant amount on our balance sheet, because we believe in this industry it is important to have a strong balance sheet.

So that continues to be the case.

These discussions are ongoing, as you can imagine, and the timing of these things obviously are not things that we can completely control.

Obviously we have some influence, but only to a certain extent.

So our hope is to try to execute something in the not too distant future, but nothing specific to report at this time.

Okay, that's it.

Thanks.

(Operator Instructions) As we have no further questions at this time, I'll turn the call back over to the hosts for any additional or closing remarks.

Thank you, operator.

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

As stated, our focus continues to be on continued growth for the long term; and we look forward to getting the opportunity to update you on progress in the next conference call.

Thank you.

Ladies and gentlemen, that will conclude today's conference.

We thank you very much for your participation.

You may now disconnect.