Nova Ltd (NVMI) 2013 Q3 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's third-quarter 2013 results conference call and presentation, and I would like to thank management for hosting this call.

With us on the line today are Mr. Eitan Oppenhaim, President and CEO, and Mr. Dror David, CFO.

I 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.Novameasuring.com in the investor relations section.

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].

Eitan will begin the call with a business update, followed by Dror within overview of the financials.

We will then open the call for the question-and-answer session.

I will now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO.

Eitan, go ahead please.

Thank you, Kenny.

Hello, everyone, and thank you for joining our third-quarter financial results conference.

I will begin today's call by addressing Q3 results and our performance highlights.

I will then provide a brief commentary on the industry trends as it relates to us.

And finally, I will give the guidance for the fourth quarter.

Following my comments, Dror the review our third-quarter financials and details.

Let me now start with providing some details about our business performance during the third quarter.

Our solid financial results for the third quarter with $25.8 million in revenue and a non-GAAP net income of $2.7 million were consistent with our guidance.

We continue to execute well growing at 10% pace during first nine months of the year versus the same period last year, which means that we are continuing to outperform the industry.

Our booking levels increased significantly during the quarter to the highest level this year.

This was accomplished through a combination of favorable market conditions with continuous market share growth in multiple process steps and multiple technology nodes.

The booking mix in this quarter includes more than 80% orders to be delivered to 2X nanometer nodes and below.

This trend towards more advanced tech nodes will continue in Q4 where we expect at least 15% of the orders to be delivered to 1X node.

This indicated our strategy of early engagement with the customers during their accelerated development process is already paying off.

Our strong position with major customers in the foundry segment drove our main business achievements this quarter with tools delivery to support the continuous ramp of 28 nanometer with several customers in Asia and Europe.

As announced early this quarter, we had a major win with aggregate orders of more than $10 million to supply our standalone and integrated metrology tools to support 28 nanometer ramp ups in a major foundry customer with global locations.

We are consistently achieving our objective of expanding into additional process steps in addition to multiple technology nodes as evidenced by the recent selections of our system as process tool of record for multiple process steps including CMP and Etch by major pure play foundries for high volume manufacturing.

Most recently, a leading pure play foundry selected Nova as process tool of record for 20 nanometer production line, for multipart process steps, for high volume manufacturing.

This major selection was achieved following an intensive qualification process that started 12 months ago and included tools delivery to R&D and pilot lines well ahead before production ramp up.

This major achievement will yield a significant order streams to be delivered during the next few quarters starting from Q4 this year.

The set of tools to be delivered include Nova's most advanced standalone and integrated tools, combined with our fleet management software.

While ramping up 20 nanometer, the same customer is working persistently to mature its next generation FinFET gate structure for initial ramp up by the end of next year or at least -- or the latest at the beginning of 2015.

In order to support this transition, we also received this quarter some orders for 60 nanometer as well.

As this customer faces the challenge of developing two nodes at the same time, we also received some initial orders for R&D lines for its next generation structures beyond 60 nanometer.

The recent development in the overall foundry segment accelerated the transition to advanced technology nodes below 20 nanometer.

Our big foundry customers are racing to mature their 16- and 14-nanometer process to be qualified by their customers still in 2014.

This indicates that the competition for advanced 3D structures is happening now and not coming along some time later.

Nova is well-positioned with these customers with both our standalone and integrated metrology tools for multiple critical process steps.

Our tools are already installed in multiple R&D lines to enable production of advanced 3D structures as part of the complicated transition to FinFET gates.

Following these initial deliveries, we expect to see some more orders as the development progresses next year.

In summary, we are very pleased with our current achievements in the foundry segment which solidifies our technical advantage in this arena.

Our recent inroads into multiple process steps in advanced technology nodes demonstrates our strong technology position and the importance of our early customer engagement strategy.

This quarter, we also started to see some pick up in the memory orders from Korean and Japanese customers.

In comparison with the foundry order's intensity, the memory part we still see incremental capacity expansion led currently by Flash investments.

Following the plans to improve our presence in memory, we announced this quarter a new addition to our customer base; a close collaboration with a leading Asian memory manufacturer led to a first-time order.

Turning now to our product portfolio development, we are encouraged from our TSV V2600 rollout to the market and the traction it gets from leading memory and foundry customers.

By now, all of our delivered TSV tools were accepted and recognized.

We are going through additional valuation in the last few months where we expect that they will give some additional revenue in the coming quarters.

Our unique and leading technology to measure major elements of the Via, including the profile, is well recognized now buy our customers towards the possible industry pickup in 2015.

We have also progressed with our plans to diversify our product portfolio via more advanced software solutions.

This quarter we received our first order for our fleet management solution that is used for enhanced level for FAB-wide process control management across a large fleet of metrology tools.

Finally and although the general notion in the industry is that 450 millimeter is postponed, we had some progress with the road map to support the transition when it happens.

Following our intensive work, our second system of 450 millimeters was already delivered and accepted by major OEM partner.

Let me now turn to a brief commentary on the market conditions and as it relates to Nova.

Let me first start with the progress in the foundry segment.

With some of the foundries continue ramping up 28 nanometer, we start to see a significant shift this quarter to more advanced nodes.

Beside the intensive expansion our major customer is leading with 20 nanometer, we experienced acceleration in the FinFET development for 14- and 16-nanometer technology nodes.

The major drive of the big foundries is currently to qualify the 1X structures before the end of next year in order to attract their customers.

The overall foundry sector, supported also by the recent market indication, continues to be positive, and we expect the investment to continue through next year as well.

Following our performance in 2013, our position in this segment is even stronger, and we expect it to continue and fuel further growth in 2014.

And as for the memory front, we continue to see some positive indication mainly led by the non-Flash expansion.

While it's not yet translated to a major investment cycle, we do see some incremental memory expansions in transition by the major players in Japan and Korea.

Memory players are still trying to accelerate the VNAND development, and we may see some progress in 2014 with investment by at least two major players.

In the DRAM part, we expect that 2014 we will start seeing some additional investments mainly in existing lines due to favorable price scheme and increasing demand for mobile DRAM.

As discussed also in previous calls, the transitions to 3D advanced structures as well as the device shrinkage increase the process control and optical metrology intensity.

Nova is well exposed to this technology transition.

The acceleration of roadmap plans by our customers require also extensive effort from our side to deliver our advanced product accordingly.

In order to enable this technical transition, we will continue to aggressively invest in our R&D plans during 2014.

By that, let me now turn to our guidance.

For the fourth quarter of 2013, we expect revenues of $27 million to $30 million with GAAP diluted earnings per share of $0.06 to $0.13.

On a non-GAAP basis, which excludes adjustment of deferred income tax assets and stock-based compensation expenses, we expect diluted earnings per share of $0.10 to $0.17 for the fourth quarter of 2013.

With this guidance, I would like also to mention that 75% from our anticipated revenue will be generated from 20-nanometer orders and below.

This positions us for a very strong year in 2014.

Now let me turn it over to Dror to summarize our financial results in detail.

Thanks, Eitan.

Good afternoon to everyone and welcome to Nova's quarterly conference call.

Total revenues in the quarter were $25.8 million at the mid-range of the third-quarter guidance.

Products revenues decreased by $2.5 million, while service revenues continued to increase to a record level of $5.9 million.

Product booking distribution in the quarter continued to be strong in foundries, which represented approximately 85% of the bookings in the quarter.

On a regional basis, 50% of the bookings in the third quarter came from Europe, reflecting the deep penetration into a global strategic foundry player.

Asia-Pacific accounted for 39% of the bookings; Japan accounted for 6%; and the US, 5%.

As discussed by Eitan, our revenue guidance for the fourth quarter is robust and includes revenues related to pull in of 20-nanometer capacity expansion into 2013.

Looking into 2014, we see several indicators that it will be another year of growth with a robust first half.

As expected and communicated in our last quarterly conference call, the product mix in the third quarter was less favorable resulting in product gross margin of 55%.

Services gross margin remained healthy at 38%, following increase in service revenues that was offset by higher costs related to supporting penetration.

All these elements together accounted for the temporary reduction in blended gross margins, which came in at the expected level of 51% in the third quarter of 2013.

It is important to note again that quarterly blended gross margins tend to fluctuate based on a few factors.

These factors are related to the overall revenue levels, the percentage of service revenues, and a proportion of software sales and new products.

As you know, new products are being shipped at relatively low volumes, which initially did not enable us to take full advantage of cost reduction measures.

Thus, a larger proportion of new products in the mix means a lower blended gross margin and this can vary from quarter to quarter.

These fluctuations are an indication that the new products are being accepted by the customers, which in turn leads to improvement in the Company's market position as evident in the recent design wins which Eitan mentioned at the 20-nanometer technology node.

Looking forward into the fourth quarter of 2013 and beyond, we expect to continue to see fluctuations in gross margin based on the parameters I mentioned.

Our model for the fourth quarter assumes an improvement in blended gross margins to a level of between 53% and 55% due to favorable product mix.

Operating expenses in the quarter decreased to $11 million, $1 million lower than the $12 million level of the previous quarter.

As previously communicated, the main fluctuations in operating expenses are related to the level of R&D expenses in a specific quarter.

In 2013 and 2014, our R&D plans include intake of prototypes related to the development of several new products.

The exact delivery timing of these prototypes can vary based on the product timeline and milestones, and as a result, we're seeing fluctuations in R&D expenditures quarter over quarter.

Specifically for the fourth quarter of 2013, we expect R&D expenses to increase, and we expect total operating expenses to be approximately $12.5 million.

Tax expenses in the third quarter of 2013 were $0.2 million and were reduced due to the adjustment of deferred tax assets to a higher than expected profitability in calendar year 2013.

We expect tax expenses for the fourth quarter to be approximately $0.5 million, mostly related to the final conversion of deferred tax assets created in 2012.

Looking forward, we currently expect the tax rate in 2014 to be less than 5%.

This low tax rate reflects government incentive programs in Israel which provide for zero tax rates in the first taxable years and additional tax payments related to Nova's global operations.

GAAP net income in the quarter was $2.2 million, or $0.08 per diluted share, based on a share count of 27.5 million shares.

Non-GAAP net income in the quarter was $2.7 million, or $0.10 per diluted share.

Operating cash flow in the quarter were $3.3 million.

Moving into balance sheet key metrics, accounts receivables increased to $20.8 million with DSOs increasing to 70 days.

As previously communicated, in the second half of 2013 we have started a major penetration phase into next technology nodes at several existing customers.

These customers are experiencing relatively high capital intensity, and as a result we were requested by these customers to extend the regular payment terms for this penetration phase.

Obviously, our strong cash position enabled us to support that in parallel to being selected as tool of record for the relevant technology nodes.

As a result, DSOs increase in the third quarter and I expect it to further increase in the fourth quarter of the year.

This will negatively impact our cash flow in the fourth quarter of the year, yet we expect this to be offset within the first quarter of 2014 once we conclude the penetration phase, collect the related accounts receivable, and return to normalized customer payment and DSOs.

Inventories remained stable during the third quarter with inventory turns of 3.1 times a year.

Looking into the fourth quarter of the year, we expect an increase in inventory levels as we continue to prepare for some of our customers' ramp up early in 2014.

Gross capital investments were $0.8 million in the quarter and depreciation came in at $0.9 million.

I will conclude with cash reserves, which increased to over $100 million at the end of the third quarter and provide the Company with the record flexibility to support the industry technology road map, the customers' ramp up needs, as well as to exploit business department opportunities.

Eitan.

Thank you, Dror.

Before turning to the Q&A session, I would like to say that we are very pleased from our Q3 results and the progress we're making against our key business initiatives.

Our continuous performance in 2013 is putting us on track for another year in which we outperform the industry and report record revenues.

The current results and future outlook position us very well towards 2014 as well.

And with that, we would be pleased to take your questions.

(Operator Instructions) Patrick Ho, Stifel Nicolaus.

Congratulations on a nice quarter and outlook.

Eitan, maybe if you could give a little bit of color about some of the new wins that you talked about and some of the additional processes with the leading foundry player.

You mentioned CMP and Etch.

On a going-forward basis, where do you think the higher growth opportunities in terms of processes that you guys can continue to penetrate within this customer or other foundries as well?

Without sharing specific information in regard to specific deal or customers, as you know our major strategic initiative is to grow within our strategic and major customers.

The way to grow beside the obvious wins in new technology nodes is to gain market share with additional steps and applications.

Looking now at our yearly expected results, we could outperformed the industry by getting into more steps besides the traditional CMP.

We could do that in a few foundries in Etch and even CVD and some of them even [tinsum].

And by the way, both in the gate structure front end and back end, which give you some kind of notion where we are extending.

And this positions us very well to the foundry transition to FinFET.

As you probably know, going into FinFET in position to 3D structures you will see most of the difficulties and the expansions in Etch and in CVD, and in both of them, we are positioned very well with some gains -- by the way, not only by one foundry but with few, probably with the two major ones.

And you can also see that more than 80% of our bookings are coming from 20 nanometers and below, which applies also to our growing shares in the foundry going below 20 nanometer.

Great.

That's very helpful.

Maybe related to the comments about some of the new market share wins, given the competitive environment in OCD metrology, as you make some of these gains, how are you responding on a competitive front given that some of your larger competitors can take different tactics to put pressure on you?

How are you going to be able to maintain your pretty high gross margin levels as well as your R&D spending to counteract some of the tactics that may occur?

I will split into two answers.

First, I will talk about the market share, and secondly, I will talk about the supply chain.

Regarding to the market share, I cannot speak on others behalf, but I can shine a little bit light on the way things have been decided with the major customers including, by the way, TSMC.

By the way, each of them works with few metrology vendors that are either located in different process steps, for example, CMP and Etch and CVD, or by application, for example, back end and front end.

The allocation between the different steps for of processes is very important and by the way, in order to have a high level of matching and accuracy.

Now, the way to strengthen your position with the specific customer is either earning market share from a competitor through winning a full position in a specific processor application or by getting to new steps that didn't require optical metrology before.

In Nova in the last few quarters, we do both and we have progressed in both directions.

Adding process steps, as I said, probably beyond CMP, it's the Etch and the CVD.

Specifically in the last wins that we have had in 20 nanometer, we have faced only the incumbent vendor where the major battleground is basically on the standalone for Etch.

And we did all of this, by the way, while maintaining our traditional and dominant market share in CMP for both standalone and integrated.

So this is the first part.

The second part you know as much of the market is becoming more consolidated and as much the customer has more power; as much as the competitive environment is becoming fierce, there is pressure on ASP in margin.

You know from the previous years that we have an efficient mechanism to maintain our gross margin even though in some cases we have either low revenue quarter or we have pressures on the ASP.

And the evidence you will see quarter by quarter.

Great.

Final question for me on the memory side of things, you see the industry transitioning to 3D NAND, and that's obviously going to require more OCD metrology over time, particularly as more layers are added on in future generations.

Can you give a little bit of color on one, the industry opportunity for OCD metrology; and secondly, how it relates to Nova specifically as is industry transition occurs?

Thanks, Patrick.

So you know there'd two major 3D transactions right now going in the markets.

One is in the foundry going into the FinFET, starting with FinFET gate and then full FinFET.

And the other one is the plan to VNAND.

So in the foundry regarding to the FinFET, we're starting to see already the full development of FinFET gate structures.

And by the way, not only by one customer but few.

So the major foundries are already maturing their FinFET structures.

And we do measure those structures and those customers.

Looking right now on the process control intensity and optical metrology intensity, going from 20 nanometers to 16 or 14 probably will increase the intensity somewhere between 15% to 20% requirement.

This is in regard to the FinFET.

In regard to the VNAND, this is a much longer story.

If we're looking right now in 2014, we probably will see the first VNAND production on something like 30 or 32 layers, where probably by the end of the year maybe we will see 64.

Over there we see increasing requirements for measurements as well.

We don't see it on the same intensity as we have in the foundry but at least it is something like in the neighborhood of 10%.

Great.

Thank you very much.

Edwin Mok, Needham & Company.

So the first question is related to the foundry.

I'm trying to understanding in your fourth quarter guidance how much of that actually came from these early orders for the 14- or 16-nanometer development to versus the 20-nanometer production ramp that we see at one of the customer.

Can you segregate that?

Well, one thing to note about how the 20-nanometer bookings will translate into revenues in the fourth quarter is that some of these links will be recognizing revenues already in Q4.

Can't give you the exact number, but some of that is going to be recognizing Q4 and support the guidance that Eitan mentioned.

However because some of the penetration into 20 nanometer is with new products.

There are some revenue and commission issues which does postpone some of the revenues into the first quarter or the beginning of 2014.

I guess my follow-up then for the bookings that you guys -- you talked about strong bookings for the third quarter.

Is it substantially greater than a book-to-bill of 1.0 in the first quarter then?

So Edwin, this is Eitan.

Let me answer your -- actually the question and then another additional answer that's will give some light about next quarter.

So the first one, our book-to-bill is significantly higher than 1.0.

This is first.

Usually we don't give the real number, but this is significantly higher for many quarters that we had.

And it gives us a real good visibility for Q4 and Q1.

So this is the first question.

Regarding the second part of the booking mix, and I say this in the last conference as well.

If you're looking right now, for example in TSMC and in other customers, what happens usually they are ramping one node, for example, 20 nanometer right now, but at the same time they are starting pilot lines in development on the other advanced technology nodes.

And they have to do that around one year before the real projected ramp.

So while we are shipping to for 20 nanometer, we're still having this quarter bookings for 16 and even lower nodes or more advanced nodes in the 1X in order to fulfill the development and the pilot line.

So in the next one year, they can qualify the structure.

Great.

That was very valid.

That was exactly what I was asking.

So just to give you, ask a question on visibility, you mentioned that you have really good visibility beyond the fourth quarter into the first quarter.

How is that shaping up?

Is it shaping up to be a similar level?

Do you think you may even grow because some of these revenue might not recognize until the first quarter?

I think that looking at Q4 you have the guidance.

Q1 is going to be probably on the same level if not a bit more.

The big question that we are having right now is because of the pull in of the 20 nanometer and from the other side the deferred revenue recognition, we still don't know exactly how Q1 will finish.

But it will be a good quarter in a bit more than the fourth quarter that we just guided.

We don't give the overall year guidance, and we don't give the full guidance of Q1 because it is yet early.

But Q1 -- Q4 and Q1 are looking healthy.

Very helpful.

You mentioned the fleet software, your first order of fleet software, which sounds like it will happen in the fourth quarter.

Any way you can quantify to how much revenue that is?

And just to be really clear, is that something that you expect to revenue in the fourth quarter?

Well, the bookings for the fleet management started in Q3.

We do expect additional bookings in Q4, but I think at the current given the fact that it's new product, our current expectation is that most of these revenues -- and these are software revenues so that is not a lot in terms of absolute dollars, but very good and major impact on profitability in gross margins.

But we do expect most of these to kick in the first quarter.

To start kicking in the first quarter.

I see, great.

That was helpful.

And then a question on competitive front, one of your competitors reported yesterday that they had secure integrated metrology process at 3D NAND as it relates to a CMP.

I'm curious do you see that competitor historically great metrology you guys pretty dominate, right.

But this seems to me is a new win for that customer.

Do you see that as a risk?

That customer got a little more aggressive and integrated metrology and now that they have won the CMP said they are going to (inaudible) win and try to target other customers at the CMP area?

So Edwin, I heard the same conference call.

And I think that they didn't mention actually CMP.

Looking right now either integrated metrology market share, we actually are expecting to grow in market share above 80% market share in integrated metrology.

And we expect also to grow in standalone.

So, looking right now on the gains in market share, I think it will not influence our position in the market.

In some of the customers, it is a dual-vendor policy where we get some and they get some.

So I'm not worried at all from our position in the integrated metrology.

We are leaving that.

Actually in the last one year we had a lot of technology things that we add to the tools.

And looking right now at our competitive solutions with the integrated I think that we are in a much better solution, in a much better situation than we had before.

Just one addition on the discussions on market share gains because these are going on a lot lately.

And I think if you look at it from the financial perspective or financial results, if you look at Nova's performance in 2013, you would see that Nova is probably the only company within the peer group which is outperforming the industry in 2013, and by 15% at least based on the guidance, the main point of the guidance.

And also is the only company that is reporting record revenues in 2013.

So, definitely presenting record revenue while outperforming the industry means additional market share regardless of the specific this win or that win in a specific customer.

Also looking at 2014, as a Company based on the analyst projections that are out there, Nova will continue to have a record year next year.

And assuming this also includes our performance of the industry, this means a continued market share gains based on their results themselves.

Great.

Very helpful.

One last question, Dror, if I take a look at your guidance, you mentioned OpEx goes to $12.5 million.

It sounds a lot of that comes from R&D increase.

Is that just come a one-time timing thing or should we start assuming R&D will be running at this a $8.3 million, $8.5 million level?

Yes, that is a good question, Edwin.

As I mentioned, we are currently at a normalized level of around $12.5 million of operating expenses.

The reduction in operating expenses in Q3 was temporary.

So we are -- the normalized level right now on a quality basis, it is $12.5 million for operating expenses.

And looking into 2014, we will need to continue investing in research and development.

We do expect OpEx to incrementally increase in 2014, mainly in R&D.

But it will definitely be at a much lower rate of increase than what we have witnessed in recent years.

You should note that as mentioned in the prepared remarks, we will also continue to see significant fluctuations in R&D expenses the same as we witnessed in the last two quarters due to the timing of intake of prototypes related to new products.

But in addition, we remain committed to healthy levels of profitability throughout this investment cycle and hopefully on the continued higher revenue base year over year.

Great.

That's all I have.

Thank you.

Keith Maher, Singular Research.

A question about, you touched on this but if you could give a little bit more color on just the bookings conversion to revenue.

Of say the bookings you got in Q3, I think you are implying that some have converted to revenue.

What percentage, say, would convert this quarter and then into Q1?

If you could get any more color there, that would be great.

Well of course, Keith, we can't give exact numbers.

But definitely this year played out in the way that the second quarter was the lowest booking quarter, which means that once bookings picked up in Q3 some of these bookings were translated into revenues within the quarter at probably at a higher rate than a normalized quarter.

Looking into Q3 bookings, Eitan mentioned, this was a quarter of record bookings for the year.

And some of these bookings to extend into the first quarter of 2014, so definitely visibility has improved in recent months.

Okay, great.

And then on just receivables, I understand what you are doing in terms of providing better terms to your customers, any -- could you quantify how much we should see DSOs go up in Q4?

Yes, I would expect that to be between 80 and 85 days in the fourth quarter.

Of course, this really depends on the level of revenues because I think it is calculated on the actual revenues, so definitely the increase will be in this level.

Then again, looking into Q1, most of these payments were first deferred to the first quarter.

So everything that we will have in Q4 will be offset in the first quarter of next year.

Okay.

But do you think your -- in terms of, you've given better terms your customers now.

Is this going to be something that is going to be expected more going forward and we should assume maybe a higher level of DSOs than you've had traditionally?

No, this is not the case.

We have given that only for the penetration phase of these 20-nanometer or 60-nanometer ramp up.

So we do expect to go back to normalized DSO levels in 2014.

Okay.

And then the final question is just on the tax rate, you are mentioning 5% next year, 2014.

How long do these incentives continue?

And I guess what I'm getting at is where do you think the tax rate is going to be going in say, 2015?

In the tax aspect or the tax front, it's always about what would be the long-term tax rate for the Company and then when is the long-term that we need to discuss.

So what I can say is these incentives that we have in Israel are relevant for the first two years, which means almost zero tax rate on most of the profitability of Nova in the first two years, meaning 2014 and 2015.

And we're already working on some tax incentives to kick in even beyond that in the next two years beyond that meaning 2016 and 2017.

And we could be in a situation where practically the next four years we will see tax rates which are below 5% in the next two years and below 10% in the following two years.

In terms of the long term, the tax rates without any incentives in Israel for an industrial company is 16%, which means a very long term from maybe the fifth year from where we are now of around 18% on a consolidated basis.

Thank you.

That was all I had.

(Operator Instructions) David Wu, Indaba Global Research.

Can you help me with one thing?

That is the 20-nanometer ramp is currently undergoing big scale ramp up at one foundry.

And I wonder if there are other foundries that will follow them.

If not, what would happen to your gross profit margin on product revenues in the latter part of calendar 2014 if all of your -- by that time all the orders will be 16- and 14-nanometer FinFET where you are still fairly high on your learning curve?

So thanks for the question, David.

Let me just answer about a few things here.

First, I think that looking right now in 2014 definitely H1 will be dedicated by our largest customer to the ramp up of 20 nanometer.

The big questions right now the foundries segment had is when exactly the 16 or the 14 nanometer will be qualified as either full FinFET are gate FinFET only somewhere in 2014.

We assume that it depends how long the 20-nanometer technology will stay with us, if it's a bridge node or it is a real node.

As I a see it's personally from other comments on the industry as well I think that it is somewhere in the middle of the year there's going to be a shift towards more massive ramp of 16 and 14.

And while I am saying 16 and 14, there are at least three customers, three foundry customers that will race in building capacity on that.

If I am looking right now on all of these three customers, we are well positioned, by the way, doing front end and back end, which means we are playing the FinFET learning curve today.

Also in the last few months, we are measuring FinFET gates, and we have the capabilities of doing that so once the 14 and 16 ramp will start, technology-wise and also from our operation-wise, we are very ready for that, taking into assumption that the optical metrology intensity will increase.

So, we do see that in H2 we will see a ramp of 16 and 14 somewhere in there.

We will enjoy from that very much.

So we do see the 2014 compose some 20 and maybe later 16 and 14 will benefit our revenue growth.

I was thinking more in terms of product gross margins.

As the 16 and 14 ramp occurred towards the end of the year.

Yes, so in terms of the actual gross margins, the same products which are used for 20 nanometer are going to roll to the 16 nanometers.

So, definitely this is the same product portfolio.

And as mentioned before, we are working on reducing the cost of these new products as the ramp up starts with the new products at 20 nanometers.

So we do feel comfortable with product gross margins within our model both in Q4 in 2014.

And our model assumes gross margins for products between 58% and 60% for products and around 30% or higher for services.

Okay.

Just one other question, which is if we would speculate that the other three foundries want to get going on what they call the 10-nanometer node, when would orders for a 10-nanometer pilot line show up at Nova?

This is a very good question.

So first of all, we started to ship systems for 10-nanometer development lines in the last few weeks.

And as I said, it is based on what I said in my prepared remarks.

In order to qualify a node, nevermind if it is TSMC-level foundry orders, you need to start shipping the first tool, the initial tool somewhere around 12 months before the final qualification.

And this is by the way, the same reason as those customers are choosing their toolsets for at least three technical nodes ahead.

So if they choose 28 on the same time they are choosing the 20 and 16, you have to have the extendibility on your tools to support the advanced technology node at least in the next two years.

So if you are looking right now at the mix of products that we had in our bookings in Q3 and then the mix of products that we will have booking in Q4, they are already including 10-nanometer shipments and also 16 and 14, of course.

Thank you.

As there are no further questions, I would now like to hand over to Eitan Oppenhaim for any additional or closing remarks.

Sir.

Well, thank you, operator.

I would like to thank you all for joining the call today.

Much appreciating the questions.

Hope to see you in the next quarter results call.

Thank you.