Nova Ltd (NVMI) 2012 Q3 法說會逐字稿

Good day, and welcome to the Nova Measuring Instruments third-quarter 2012 results.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Kenny Green.

Please go ahead.

Thank you, operator, and good day to everybody.

I would like to welcome all of you to Nova Measuring Instruments' third-quarter 2012 results conference call and presentation and 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'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.

IR.

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

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

IR.

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 now like to hand the call over to Mr. Gabi Seligsohn, Nova's President and CEO.

Gabi, go ahead please.

Thanks, Kenny.

Hello, everyone, and welcome to our third quarter of 2012 earnings conference call.

I will begin today's call by describing the main aspects of our performance during the third quarter.

I will then provide some color on the current state of the industry as it relates to us, and finally, provide an outlook.

Revenues for the third quarter were in line with our expectations and reflected our strong exposure to the foundry segment.

EPS for the quarter modestly exceeded the high end of guidance due to tighter expense control in light of recent market conditions.

During last quarter's conference call, we mentioned our largest customer, TSMC, recently reaffirmed its commitment to more than double its current 28-nanometer capacity by the middle of next year.

We also mentioned their plan to spend most of their CapEx next year on the 20-nanometer technology node.

Our recent checks revealed a continued commitment to that plan, though at the same time, orders have been delayed by about quarter.

Plans to increase capacity at 28-nanometers also include most of our other foundry customers, who are focused on increasing their market share in that critical technology node.

These customers are also working towards qualifying a 20-nanometer process during the coming year.

Another leading customer of ours is initiating an upgrade at an existing fab to support the 28-nanometer ramp-up, and we expect to get multiple stand-alone and Integrated Metrology orders to support this project.

The competitive landscape in the foundry segment is fueled by continued lack of capacity at the high end.

At the same time, diversifying the semiconductor supply chain as a means to overcome this gap is proving to be difficult as yields are not easily attained.

Meeting certain yield targets are a precondition for continuing a capacity ramp-up, and therefore, the pace of the ramp-up has been compromised and affects our short-term business results.

Another aspect of the current environment is that each of the players needs to demonstrate an ability to develop and later produce semiconductors at even more advanced nodes.

As a result, we find that all of our foundry customers are actively engaged with different stages of developing three to four technology nodes.

Though tool purchasing volumes for these efforts still remain low, support and application development efforts are in place in order to secure our position for such time when those technology nodes ramp up.

We gain a lot of confidence for our future growth potential in light of how deeply we are designed into these plans.

On the product side, we were very pleased to announce multiple orders for multiple customers for our recently-announced new product, the Nova V2600.

We are in the process of adding a few additional customers and expect this product to gain significant momentum as the industry transitions to high-volume manufacturing using 3D interconnect technology.

The level of interest and engagements we have received so far are a direct result of the differentiated capabilities that we have introduced with this new product, which offer us significant competitive edge.

We also recently shipped our first 450-millimeter tool to a key OEM to support early development efforts.

Looking at the current environment, we believe there are several drivers that will fuel continued growth in foundry spending in 2013.

We believe that the tablet and smartphone markets will continue to remain robust.

New major entrants into these markets will offer a diversity of choices with a variety of price points and hence a larger number of relevant consumers will join.

Smartphone sales next year are expected to increase to more than 850 million units and tablets should ship 140 million units or more.

Thirdly, Apple and Samsung's preference to use discrete application processes drives up the die side compared to integrated processors, and as a result, the amount of consumed silicon needs to continue to grow.

It will be interesting to see how Microsoft, Google, Nokia and others decide to differentiate themselves.

By way of example, the transition from the Apple A5 processor to the A6 has enlarged the die size by a multiple of 1.4 and hence requires more wafers to be produced.

The steady ramp in 4G LTE penetration is leading baseband chip vendors to transition to 28-nanometer technology in order to mitigate the significant increase in die size, again driving demand for wafer capacity.

With a move to 4G-compatible phones needs to come a continued upgrade of cellular bandwidth and capabilities, which should drive both server and with it logic and memory consumption ultimately.

The transition from 28-nanometer to 20-nanometers, which we expect to gain momentum towards the end of the first half of 2013, will drive another increase in capital intensity.

From about $100 million in capital spent for every 1000 wafers per month added, we believe it will grow to about $130 million of capital invested.

At the same time, some markets such as PCs have remained low.

Most influenced by this are our memory customers.

DRAM spending on capital equipment has remained very low for the last several quarters.

We believe the resumption of spending in this segment will take longer than we had originally anticipated.

The transition to 20-nanometer design rule in DRAM offer several power consumption advantages that are critical for mobile devices, and we therefore believe that a ramp-up to that technology node is inevitable, but could take longer due to the tough business environment in memory over the past year, as well as the process complexity associated with such technology shrink.

On the NAND Flash front, it seems that the current existing capacity is sufficient to meet market needs.

As a result, we believe spending will remain low in the coming months.

Key drivers for that market are again the mobile devices, and on top of it, cloud computing, which is poised to rely on solid-state drives for data storage given the significant energy consumption advantages offered by that technology.

That transition is just starting now and we believe it will gain momentum during the coming years.

The move to next-generation NAND technology depends on the introduction of 3D gate structures.

Collaborative work that we are doing with leading customers in that area shows that the process complexity, especially in the etching steps, is very significant.

Optical CD is the only way to measure and control these steps and we expect to enjoy an increased adoption rate as customers overcome development challenges and move to high-volume manufacturing with this technology.

In light of these overall market conditions, we will continue to remain focused on our key customers.

The amount of collaboration engagements with our customers continues to increase as they invest heavily in technology transitions.

Our experience demonstrates these collaboration efforts pay off nicely as they secure our position for when the customers are ready to ramp.

Our customers expect us to continue and be innovative by increasing the information content coming from our tools and software, by continually improving our cost of ownership and by allowing us to extend the sampling rate of wafers on our tools without slowing down their process.

A recent trip I have made to our leading customers reaffirmed that we are at a positive inflection point for process control.

Several elements contribute to this assessment.

Within wafer and wafer-to-wafer nonuniformity specifications are nearing the edges of process tool capabilities.

Secondly, wafer pattern and (inaudible) etch and lithography is becoming increasingly difficult, requiring customers to invent significant changes to the manufacturing flow.

The repeated delay in the transition to extreme UV lithography increases that challenge exponentially.

Thirdly, very subtle process drifts in one step of the process lead to significant drifts as the wafer progresses to later manufacturing steps.

The impact on process control is very clear.

Customers are looking to sample more wafers, customers are looking to control the process more tightly and want to do so as the process takes place and not retrospectively.

And finally, customers are not willing to tolerate a decrease in wafer output in order to achieve higher yields.

We believe we are very well-positioned to take advantage of this state of affairs on several counts.

First, we continue to be the market leader of integrated process control.

We continue to secure that position by collaborating very well with both our process equipment manufacturing partners and end customers.

Secondly, we are in the process of developing several new software capabilities to enhance our offering for integrated process control and further solidify our market position.

Thirdly, our stand-alone metrology tools have been qualified for the most complex technology nodes and are the fastest and most reliable out there, allowing us to meet both the metrology and process output requirements of our customers.

Fourthly, our strong field presence physically places us where the action is taking place and that customer intimacy is what counts when customers look to solve issues.

Looking forward, we will continue to expand and enhance our product offering to further distinguish ourselves.

Now let me turn to our outlook.

Current end market demand continues to require an addition of significant capacity at 28-nanometers in foundry.

Discussions we have recently held with our customers reconfirm our thesis that current wafer capacity in that node will need to almost double itself during 2013.

This is a high-stakes game for our customers and the time it is taking to close that capacity gap is indicative of just how difficult it has become to perform design rule shrinks.

Optical Metrology plays an enabling role and the extent of its use is continuing to grow from one technology node to the next, and we believe it will continue to account for a higher share of overall capital expenditures.

We expect memory spending to remain weak in the near term.

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

Dependence on Optical CD will continue to grow given the design complexities being introduced.

We expect foundry order momentum to resume during the fourth quarter to support the next phase of ramp-up.

Finally, in today's press release, we stated our guidance for the third quarter of 2012.

Excuse me -- for the fourth quarter.

For the fourth quarter of 2012, management expects revenues of $18.5 million to $22 million, with diluted earnings per share of $0.00 to $0.08 on a non-GAAP basis.

And 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 third-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 $24.4 million at the upper range of third-quarter guidance, representing 10% decrease quarter over quarter.

Most of the decrease was in the Integrated Metrology front, which is usually linked to capacity expansions.

Service revenues remained stable at the $5 million level.

Product booking distribution in the quarter was approximately 60% from the foundry segment and approximately 40% from the memory segment.

This distribution is a change relative to the first half of the year and is related mainly to spending patterns of our main foundry customers.

On a regional basis, approximately 78% of the bookings in the quarter came from Asia Pacific and the rest from US and Europe.

Blended gross margins in the quarter were 53%.

Product gross margin came in at the healthy level of 59%, similar to the previous quarter.

Services gross margin was within our model of 30% or higher, yet 2% lower than previous quarter due to higher employee-related expenses.

Operating expenses came in flat with previous quarter at $9.9 million.

This level is lower than previously communicated and reflects our selective approach towards expenditures during the current business conditions.

Operating margins came in at 12%, higher than the guidance for the third quarter.

GAAP net income in the quarter was $2.9 million or $0.11 per diluted share based on a share count of 27.5 million shares.

Non-GAAP net income in the quarter was $3.7 million or $0.14 per diluted share.

Cash flow from operating activities was $4.3 million in the quarter with cash reserves increasing to $94 million.

Moving into balance sheet to key metrics, Accounts Receivable reduced to $15 million, with DSOs at the stable and healthy level of 60 days.

Inventories significantly increased from $16 million to $19 million during the quarter, mainly in the new product platforms areas.

The manufacturing cycle of these new product platforms is currently taking longer than legacy products, and in addition, most of the tools which are already installed at customer sites have not yet received final customer acceptance, leading to a higher level of inventory.

Gross capital investments came in at $1.2 million in the quarter, similar to the previous quarter, and depreciation came in at $0.8 million.

In that aspect, given the increasing working capital requirements and the need to continue and enhance the Company's infrastructure, which at this stage are combined with soft business environment, we expect cash flow to be negative in the fourth quarter of the year.

With regard to the guidance for Q4, the current business environment is characterized by lower business visibility.

In addition, in the coming quarter, we expect to recognize revenues from new products, the T600 and the V2600, while the timing of recognition depends on customer formal acceptance.

Evidently in such cases, the visibility of exact revenue timing is lower and as a result the revenue guidance range for the fourth quarter is wider than usual.

As Gabi explained, we continue to be selective in planning our operating expenses.

In the coming quarter, operating expenses are expected to increase by 5% in order to enable us to properly address the coming industry transitions and opportunities.

On the tax front, in the third quarter of 2012, we have fully utilized the deferred tax assets created in 2011.

Given the fact that NOLs at year-end will be approximately $15 million, we will again be required to create a deferred tax asset at the end of 2012.

The guidance for GAAP EPS in the fourth quarter is assuming creation of a deferred tax asset, yet the final number may vary based on the next-year planning and forecast.

The changes and deferred tax assets are considered as a non-GAAP adjustment and therefore do not impact the Company's non-GAAP earnings per share, which are expected to be breakeven to positive $0.08 in the fourth quarter of the year.

With regard to the Company's overall tax position and plans, it is worth noting again that the Company is part of an Israeli government incentive program which provides zero tax payment 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 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 15% for the consolidated Company in the long term.

Gabi.

Thank you, Dror.

And with that, operator, we would like to open it to questions.

(Operator Instructions) Edwin Mok, Needham & Company.

Thanks for taking my question.

So first question I have is just kind of roughly on book-to-bill -- I know you guys don't give a number -- but in the third quarter, would you characterize book-to-bill as less than one?

In the fourth quarter, you said bookings recovering, so would you characterize that as going back to about one?

I'll say that in the third quarter, definitely it was below one.

And looking forward, our expectation in the fourth quarter is that direction changes.

I see.

Okay.

So that's helpful.

Just to clarify, right now, our expectation is that book-to-bill in the fourth quarter goes to about one.

I see, that's helpful.

And then on your commentary, Gabi, you mentioned there is an existing foundry customer that you guys had recently won some business and that there will be an upgrade opportunity; that is -- that you guys are expecting from that, both in integrated in OC as well as stand-alone.

I was curious what is the timing of that.

And is that baked into your fourth-quarter guidance or is it more -- your commentary -- related to the first half of 2013?

Actually, as far as whether it is baked or not in the fourth quarter, very, very, very minimally.

So this is more -- on the revenue front, this is more something that will become more evident beginning of next year.

As the action is already taking place and it is significant, therefore I decided to mention it.

We are very happy.

It is an existing fab.

They are upgrading it.

We have in the past enjoyed these opportunities where existing fabs try to extend their capabilities, and we are well-positioned to enjoy it.

And in this case, yes, it will be significant for the integrated and stand-alone.

Okay, that's helpful.

One of your competitors, Nanometrics, reported their result yesterday.

And in their result, it is just that they made actually really good progress in foundry, and especially TSMC, which they mentioned as a customer; they won a few positions there.

I was wondering where do you think your competitive position is right now relative to that competitor as well as KLA.

And do you see competition intensifying, and is that any risk on pricing?

Good question, and of course, the foundry is a target for everyone.

And it's no secret that everyone wants to be a part of that business and makes significant efforts in order to penetrate those accounts.

And Nanometrics, of course, has been trying to do that I think for quite a while.

The case in point and matter is that foundry is a very significant part of our business, and I am very, very confident in our ability, because I see how many technology generations looking forward Nova is fully designed in.

And actually from a visit that I just came back from, we are working our way into more of the manufacturing steps.

So to begin with, we feel very confident about our position with that customer and it continues to be the case.

And if anything, I was very, very much impressed by the extent of expansion of the customers looking to deal with us on interactions in the future.

As far as the penetrations that they have made, I think you should probably refer to them and talk to them about that.

But I can tell you that as far as we are concerned, market share-wise, position-wise, we are actually only increasing right now, and we have not seen any decrease in market share.

I believe that the things that are being talked about is where a single tool gets in and there has been some qualification processes going on.

But we feel very confident about our current market share over there, as well as the coming generations, and we are involved, as I had mentioned in previous calls, not just at 28, but 20, 14 and other generations as well.

And this is just one example how these foundries are working on several technology generations at any given moment.

So we feel very strong.

Regarding your question on KLA-Tencor, obviously, we've been competing for quite a while; we continue to do so, I think very effectively.

And they are with us in that particular account, so we continue to focus on winning market share in that aspect.

So these are the answers hopefully for the questions.

Great.

That's very helpful.

One last question I guess on the financial model.

If I take the midpoint of your guidance, it seems to imply margins will be down a little bit.

How much of that is to do with this new tool that you guys expect possibly customer acceptance in the fourth quarter and how much is that just to do with volume?

Actually, on the gross margin side, if we differentiate products and services, we do expect product gross margins to continue and be robust in the fourth quarter from several reasons, and services to remain within our model of around 30%.

So general, there is a reduction in gross margin because of the combination of these two and the reduction in product revenues.

But segmenting them separately, we do expect gross margins to be robust in the fourth quarter.

I see.

It was just mix, then.

Okay, great.

That's all I have.

Thank you.

Patrick Ho, Stifel Nicolaus.

Thank you very much.

Gabi, first off, on the memory side of things obviously that marketplace is depressed at this moment in terms of new capacity buys.

But that segment has also been one that has a high level of reuse among technology nodes.

I guess two-part question on that is, one, what are you seeing in terms of the memory customers, in terms of their reuse of overall tools?

And secondly, how does it relate to possible reuse for your tools that are in place with those customers?

Well, the way it usually plays itself out, Patrick, is by the customers, when they look to reuse -- so what was a critical layer in a previous technology node becomes a noncritical layer in the next node.

The way that they do it is basically to try to reuse tools to help them in the noncritical layers.

And in the critical layers, they find themselves compelled to add new tools or new a feature to the functionality.

This has been generally the lay of the land.

What we have seen in the last several months, and again, as you heard from Dror, it is not that memory is dead; it was 40% of our bookings, obviously on a low bookings level, as we had stated, but it is still there.

And what we are seeing continuing is an incremental set of tool buys where they incrementally upgrade the fabs.

So this goes bodes well with what you are saying, in the sense that they incrementally do tool purchases in order to allow themselves to move forward.

At the same time, if you look at the DRAM side, the transition to 20-nanometer is very, very difficult.

The gate structure change is very tough for the customers, and also the financial situation in their markets, those things are delaying the transition.

I believe that transition will require significant new capabilities, because the complexity of a lot of the things they are doing grows.

So once they do that, I do expect that orders for measurement tools will be back on the rise.

On the NAND Flash side, again, the markets are what they are, as we all know, which they are very soft.

And there, customers are trying very hard to move to three-dimensional NAND structures, which is extremely complex as well.

So my expectation is that the next round of investments -- significant investments, if you will, in memory will be such that requires quite a few will tools.

And in the meantime, yes, indeed, they can work in order to make incremental buys for what remain to be critical layers for them.

Hopefully that is clear.

That helps.

Moving just to the foundry side, it sounds like you guys continue to maintain a very strong presence there.

As you mentioned, you are working on not only 2820, but also the next few nodes.

Obviously down the road, in a couple years, the foundries are eventually going to move to FinFET technology for their devices, as well.

Can you describe what work you are doing there on that process technology, and what you feel -- I guess your confidence level of maintaining or even increasing your position with the foundries?

You are right that the transition -- and this is public knowledge, so I am not divulging any confidential information -- you are right that the foundries are delaying the transition to FinFET, and that is a unique situation.

We have been collaborating -- and again, I can talk about this openly because it has been publicized at professional conferences, such SPIE -- we've been working with at least one of our foundry customers -- again, it is public, so I could speak about it -- it's IBM -- for many, many years on FinFET structures.

We have developed significant capabilities in that area and feel confident in our ability to support our customers' needs when it comes to transitioning to FinFET in high-volume manufacturing.

So we think this offers a great opportunity.

As mentioned and as everyone knows, it requires a lot of, I would say, interim steps, meaning more steps of manufacturing are being added in order to be able to do these FinFET structures.

And as a result, the need for Optical CD grows.

And as I have mentioned on several occasions, really Optical CD is the only way to measure these three-dimensional structures.

So we feel very confident about our ability.

We've been involved in this, the technology nodes that we are doing this measurement -- of course I will not specify with some of our customers -- but they are very advanced nodes.

Of course very early stages.

So I think we are in very good shape for several technology nodes generations down the line, and once they are ready, we are ready for them.

Final question for me on the business model side in terms of OpEx; not surprised that is going up a little.

Can you give a little color in terms of where that is going to be focused on?

Is that primarily for 450, or are there other projects within that increase in 4Q '12?

First of all, you know, there are several projects that we are working on.

As I have said, we are expanding our activity in the software area.

What we are learning is, as I had mentioned, that integrated process control and process control as a whole, the needs and requirements are changing, and we are innovating several new products that we are investing in right now.

These products will be primarily software products, and so not only are they going to offer specific and significant advantages for integrated process control, they are also going to do very well for our margin profile in the long-term once they start becoming part of our revenue, which I believe will start probably somewhere towards the later part of 2013.

So we are spending money on that.

We are looking, of course, at the 450 and spending as we need.

As you heard, we shipped an initial tool for initial development efforts that one of our key OEMs is doing right now.

We are, as you know, rolling out a new product, and it is going extremely well, which is the V2600.

As I mentioned, we are already in multiple customers and we are already engaged with several more.

We think we are going to gain market share and momentum in that area very, very fast.

And so there is spending that goes on in that area as well.

So these are some of the things that we are spending on.

Again, as you heard from George, this 5% increase is still within the range of overall operating expenses that we were targeting for this year on a quarterly basis.

And as we've always done, I think, as a responsible management, we carefully manage situations when we deal with seasonality in order to be able to generate, I think, a very good P&L.

Great.

Thank you very much.

Keith Maher, Singular Research.

Good morning, gentlemen -- or afternoon, I guess, for you.

I think you mentioned that TSMC might have delayed some orders, and I didn't know if you would provide any more detail about that.

This is a situation that is being talked about throughout the industry.

They have said publicly that they are planning on doubling 28-nanometer capacity and initiating a ramp up at 20.

And what I was doing on the call was reiterating that statement, but what I said also was that their plans had been delayed by about a quarter.

And therefore, we see the results that we are dealing with basically the reduced bookings in the third quarter and an expectation for an increase in the fourth quarter.

That is what I can say about that.

Okay, thanks.

And I guess this is more of a question for Dror.

With regard to inventories, I think you mentioned a couple of issues related to the build in inventories.

One was manufacturing and I think the other is the ongoing issue with product out of customers and customer acceptance.

I was wondering if you could kind of break down the impact of both of those, and when you thought we might see an improvement in inventory days in particular, which you've been growing for a while.

I would say the following.

We did see a major increase in inventory which is installed at customer sites and either waiting for acceptance or evaluated as a new product, such as the V2600.

I can't break down specifically the numbers, but I would say that we are working towards improving the manufacturing cycle times, and of course, towards receiving the acceptances.

And during the next two quarters, we should see, of course depending on the sales levels, we should see improvement in that area.

Do you have any kind of goal in mind for inventory days, like a range of days?

Definitely.

Historically, we have been able to be above four inventory turns a year, which is around 90 days.

I would say that currently our target for next year would be inventory turns of around three, which should be sufficient.

Okay, thanks.

And finally, with regard to the negative cash flow in Q4, what is that the result of?

What areas are you making investment?

Keith, could you repeat the question?

There was some noise, some static on the line.

I apologize.

Okay, sure.

No problem.

In terms of you talked about negative cash flow in Q4.

I just want to understand where you are making the investment in terms of -- is it working capital, CapEx, just what is causing that.

Evidently, the increase, for example, in inventories in the third quarter is going to be translated to cash payments in the fourth quarter.

And also the timing of specific deliveries for revenues and within quarter collection have impact as well.

So these are the main reasons that are going to impact the cash flow in the fourth quarter and we do expect it to be negative in the fourth quarter.

Okay.

And I guess maybe one final question, just overall in terms of the 3D interconnect market, is that kind of -- is it coming along how you expected?

I know you were looking for some revenues this year, but most of the rollout just continuing into 2013.

Is that really still the case or any changes there with what's going on overall in the market being somewhat weak?

The 3D interconnect, per your question, first of all, we are on track to meet the objective of four customers with our tools by the end of the year.

That is going very well, and there are several new engagements coming.

Only a little bit is showing up in revenues in the fourth quarter, and you are going to start seeing some revenues next year.

We don't expect there to be a serious ramp-up yet in 3D interconnect in 2013 because we think that the industry is taking more time than had been anticipated.

At the same time, this will start becoming part of our revenue, because not only are we penetrating these few accounts that I spoke about, there is a few others that are actively engaged with us.

So there will be some revenue there.

We are not yet in a position to say what is going to be the extent of it.

I believe -- and this is our current working assumption -- that this should start ramping up with some of our customers towards the end of 2013, probably more in 2014.

Okay, thanks.

That's all I had.

Krishna Shankar, ROTH Capital.

Yes, you mentioned book-to-bill ratio potentially getting about one in the December quarter.

Would you expect -- in the March quarter -- I'm sorry -- so would you expect bookings to improve sequentially in absolute dollars in the December and March quarter, and would that be from foundry customers?

I think there was a misunderstanding, so let me clarify.

My comment was about the fourth quarter, and I may have been misunderstood, where we expect book-to-bill to be above the one.

I did not make any comment or reference as to the (technical difficulty), so I apologize if there was (technical difficulty).

So you didn't make any reference to absolute bookings levels for the fourth quarter?

No, I didn't make any absolute -- we don't generally provide on bookings, and we did not make reference to the March quarter either.

Again, just to reiterate, I mentioned that in the fourth quarter we expect book-to-bill to improve and go above one again.

And regarding the memory market, given (technical difficulty) NAND Flash for smartphone and tablet customers, do you see the NAND Flash memory customers potentially reviewing your CapEx and the potential for them to start spending on sub-20-nanometer capacity again?

I think that what is standing in the way is two things.

One is current capacity sufficiency for the current versions of products the NAND Flash is serving.

And number two, the customers are not having an easy job transitioning to below 20 nanometers because of the significant process changes that are being made in order to move in that direction.

So as I said in the call -- and I think that comment was mostly on foundry, but it applies to memory just the same -- you need to reach a certain yield level before you can actually ramp up a product.

So I think that is holding back the investment in next-generation NAND technology, as well, as I've stated, the current market conditions.

So right now, we are thinking that this starts coming back hopefully by the middle of the year.

We believe that our customers -- and today actually, we are at all four NAND manufacturers -- we believe our customers are going to start investing probably at that time, because hopefully they will have overcome any of the issues that they are dealing with.

And your 3D interconnect, or your new equipment, will help them address some of those yield issues, the one that you're just seeing success with now?

I think that the Optical CD product is where a lot of that focus is going to be, simply because, as mentioned, the challenge is the new date gate structures, vertical gate structures that go into the next technology shrink.

The TSV aspect as well, because some of these actually include chip stacking; so I think, yes, this will also be there.

It will probably be a combination of the two, OCD as well as TSV.

I think OCD right now is already being deployed seriously, and that will probably extend as they overcome the initial yield issues.

And with TSV, I think that as they start shipping products that are TSV-capable, yes, we will start seeing some improvement there as well.

Okay, great.

Thank you.

Edwin Mok, Needham & Company.

Thanks for taking the follow-up.

First question is on reuse.

Do you expect to see more reuse on the integrated side?

Because my impression is that, for example, with CMP, there is more and more reuse than [other process] technology.

It is tough to say.

I think that each fab has its own story, and a lot of it depends on how many generations a certain piece of equipment has already been in a particular fab or how new it is.

So that has significant implications many times.

Sometimes the integrated introduction is for the first time, so it is brand-new.

Sometimes it is an existing tool, where they want to buy an upgrade for an existing tool.

And sometimes it is a capacity need where they say, okay, I need a new tool for another layer.

So I think every one is going to be a combination of all of them.

I don't think that -- I hear the question in general about reuse.

I don't see that the needs of the industry right now will be primarily served by reuse.

That is not my state of mind right now.

I think this is mostly new tools that are being supplied, and, yes, indeed, we have done this quite effectively.

It has helped us very much with our customers, that we have supported their wish to extend the usable lifetime of our equipment, and that is why we have developed all sorts of upgrade kits, et cetera.

So when they want to do that, we have a solution; when they want a new tool, we have that as well.

And we evaluate it on a case-by-case basis.

Actually that's helpful.

And then just my last question, so recently there was a news article in Israel that talked about an acquisition you guys tried and didn't happen.

Any color you can shed on that?

Well, we don't have any comments to make about specific acquisitions that people are saying that we're in the process of doing.

I have communicated in the past that we are actively looking at several potential candidates.

The way we look at those candidates, we look for products that will be complementary to what it is that we do, that expand our product offering and allow us to even expand our presence at our existing customers, and that have equipment that sells for similar types of prices that [were used] with advantageous margins, which all always flow from the amount of information, as well as the manufacturing need that is being addressed.

But as far as specific commentary about things that come up in the press, as I've stated to the press itself, we never make any specific comments, but we are active in that area and we hope to hopefully at some point execute on this strategy.

Great.

That's all I have.

Thank you.

(Operator Instructions) We have no more questions.

Okay, with that, I'd like to close the call.

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

And especially in the current circumstances with the hurricane and everything, we appreciate people's attendance and we look forward to speaking to everyone in our next quarterly conference call.

Thank you.