Nova Ltd (NVMI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Nova Measuring Instruments Limited first-quarter 2014 results conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

I would now like to turn the call over to Miri Segal of Hayden IR. Please go ahead ma'am.

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments' first-quarter 2014 financial results conference call and presentation. With us on the line today are Mr. Eitan Oppenhaim, 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 the 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 review it in the Investor Relations or News section of the company's website.

Eitan will begin the call with a business update, followed by Dror with an 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. Please go ahead.

Thank you Miri. Hello, everyone, and thank you for joining our first-quarter 2014 financial results conference. I will start today's call by addressing our results and our performance highlights for the quarter. I will then provide a brief commentary on industry trends as they relate to us, and then I will provide the guidance for the second quarter of 2014. Following my commentary, Dror will review the quarterly financial results in detail.

For those who are following the presentation, please proceed to Slide number 3. Following our growth initiative, along with operation efficiencies, we performed very well and had another strong quarter to kick off 2014. We posted record revenues for the first quarter, reaching the high end of our quarterly revenue guidance due to strong demand for our optical metrology solutions during the quarter.

We posted quarterly revenue of $34.7 million, along with $6.9 million, or $0.25 per diluted share, non-GAAP net income, exceeding our profitability guidance. This quarter's results are well within our long-term operating model.

We had a great start to the year with well executed brands to initiate growth with our main product line and within our leading customers. The industry challenging condition continued to reduce the complicated metrology requirements which we believe gives us the opportunity to grow with our advanced portfolio that is best able to deal with this transition.

Our customers recognize our value and during the quarter, we saw more opportunities to increase our market share. As a result, during the first quarter, we experienced growth in demand for both our integrated and standalone tools, while revenues from our standalone tools were at record high level.

With more than 25% of our orders to be delivered to the 1X technology node compared with 20% a quarter ago, we continue to build growth in several outstanding military evaluations with major customers, which is well in line with our strategy to partner with our customers early on with development stages in order to better assist them in their initial development and then be part of the high-volume production later on.

Our initiatives to strengthen opposition in the industry are clearly paying off as evidenced by Gartner's most recent public figures. In 2013, we grew our share in the Optical Metrology segment by 5%, securing us as the number two position in this segment. We believe that this achievement demonstrates our valuable position on this cooperative relationship with our customers.

While we keep investing a significant amount of resources in order to continue broadening our technical leadership and increasing our market share, we also demonstrated our solid operational efficiency with operating profit of 18%. This allowed us to increase our net income on a cumulative significant amount of cash.

Our cash reserves by the end of the quarter increased to $113 million. As part of our strategic plan and in order to optimize our shareholders' value, we announced this quarter for the first time a share repurchase program of $12 million. Most of our customers are facing technology challenges to ramp up and improve yield. In the most advanced peer set and recent node, we expect this technology transition to advanced nodes will continue intensively in 2014 and beyond. Cost complexity and technical barriers appropriate with ramping up such complex nodes will continue to grow, and with that the potential of optical metrology as the unique enabler for this transition. We are confident that Nova is well positioned to benefit from it.

Let me now shine some light on our portfolio performance during the quarter. We continued with system deliveries in 20 nanometer production line with several foundry customers as well as incremental delivery with 16 and 40 nanometer pilot and new production line. We also continued to deliver systems to 28 nanometer production lines following strong market demand for these devices. Since leading customers are starting to develop the next technology node, we are also deeply engrossed with federal (inaudible) evaluation to be concluded in the next coming quarter.

We are well-positioned today with our advanced portfolio in the Foundry segment. Our keeping standard standalone OCD tool was adopted by all major foundries in most technology nodes below 28 nanometer. We can probably state today with our integrated experience in such solution which involves advances to all of the measurements is very tight fit, is well recognized by our customers when they decide on their next generation toolset.

Following that quarter announcement of major wins to deliver significant amount of systems, with 20 nanometer (inaudible) we can relate today that the systems are well expected for production but now recognized as part of our revenue.

We have demonstrated during the last six months that we have the second innovation of the right execution network (inaudible) ramp up (technical difficulty) standalone tools in the most advanced nodes and to become the (inaudible) of record in the short cycle time.

Our i500 integrated metrology tools are rightly exposed in both memory and foundry customers. During the first quarter, we saw incremental growth in this delivery to both mesh, MRAMs and foundry customers.

Since the recent technical condition which has produced many process challenges over much more complicated structures, we've seen increasing demand for not just (inaudible) (technical difficulty) closer to the poster in order to identify wafer to wafer variability. And as a result, the demand for this tool is growing.

In addition to our growing position in foundry, we are currently involved in federal memory DRAM evaluation. Also, our customers are investing intensively to commercialize their agreement structures. We are still facing challenges in scanning the device. The different complex issues are mainly around the deposition and exports we are seeing, which also presents metrology challenges but a big opportunity for us.

We are also in the final stages of our evaluation with our major leading memory customer for good silicon (inaudible) process with our V2600 system. We are in continuous evaluations with others.

Beyond the hardware offering, our revenue mix this quarter included also several software orders. We received the first order for the Hybrid Metrology software solution during the period and also received additional orders from multiple customers for the fleet management solution. This string of software orders is expected to continue throughout 2014.

Let me now turn to this commentary on the current market environment and our view for the remainder of 2014. In general, while our visibility is limited beyond the near term, we continue to see our customers investing intensively, particularly during the year, and we like the performance. Essentially the most challenging environment the industry ever faced was the transition to 3-D scaling.

Although there are three technical challenges in commercializing these devices, we are certain that this project will continue intensively all through the course of 2014 and 2015. Following extensive tools delivery in the last quarter from retail customers reached (inaudible) capacity and improved yields, in the near term we expect some fluctuation with investment in the next few quarters.

In the foundry stake, the investments are being led by our largest customer. Along with increasing revenue and strong demand for the 28 nanometer device, the customers continue ramping the 20 nanometer production line following extensive tool delivery in the last few quarters.

As there are three challenges in transitioning to this node, the period of (inaudible) necessary before moving to the next investment, which we believe can still take place in the second half. From our experience, this leading customer has the same investment partnering in the previous technology node during the last two years. Additionally, the (inaudible) expenses by this customer means (inaudible) 2014 stays firm. We still believe that this announcement demonstrates the 2014 investment blend for this leading foundry remains intact and the flexibility to invest either in 20 nanometer expansion or 60 nanometer ramp.

The main issue for us in the second half will be, again, as in 2013, the timing of receiving the orders and new time to deliver. That said, we learned over the last few quarters to adjust our operations to be efficient enough to deliver systems in short midterm, to accommodate these customers' requirements.

Beyond the leading foundry customer, we do see continuous investment by other foundries in 28 nanometer as well as 20 and 14. We still believe that investment in 16 and 40 nanometer thin set modes was impacted during the second half of 2014 and it all depends on our customers' customers buying decision.

In the memory space, we are consistent with our previous message. We will reduce these various capacity expansions and more conversion. In flash, we cite incremental capacity addition in 2X and 1X (technical difficulty). With this, we do see more (technical difficulty) suppliers reduce their initial product for basic application towards the end of 2014. All the leading memory players have aggressive plans to introduce cost-effective advanced DRAM devices for more applications only during 2015, which we believe will be the starting point for significant win and ramp up.

From a secular point of view, we see increasing technical challenges in scanning vertically the DRAM device beyond certain amount of players. The main challenges of (inaudible) for this multilayered stack from my aspect ratio is (inaudible) material.

Year-to-date we have seen challenges that our customers are facing. Some of them are still debating the transition point for vertical gate, but we are starting to see the effort. We introduced another scale planner gate in 1X before moving to Greenland. (inaudible) which happens broadly in 2015 will allow us to keep introducing new metrology products that will better support memory customers.

As for the DRAM, the combination of price supply and the right pricing scheme for the (inaudible) devices should keep driving investments for additional capacity and conversion in 2014.

In summary, we believe that the market for the end-user application remain solid, and the customers are made committed to maintaining investment, export and resources to continuing introducing advanced 3-D devices in the near future. The challenges our customers are facing represent -- sorry, will present some uncertainty as for the timing of continuous investments in the second half. However, given the competitive scenarios in the (technical difficulty) space, the pressure on buying decisions (inaudible) companies are facing, along with some incremental growth for memory, we still believe that our initial projection for revenue (technical difficulty) increase of around 10% in 2014 is still valid. We support our optimism that Nova should be able to perform well in this environment.

Finally, the growing investment in advanced technology nodes and complex structure has introduced increased complexity and new challenges. Scaling the technology progress by connected (technical difficulty) in order to improve the cost profile and deliver a competitive advantage. These fundamental elements create favorable market conditions for metrology growth where more quota steps are needed, new Nova materials are introduced, an innovative (technical difficulty) solution are incorporated. We are confident that Nova is well positioned to benefit from the memory favorable -- sorry, from the metrology favorable environment with our advanced holistic portfolio, combining hardware and software solutions with both our current generation and next-generation product line.

Now, I would like to share with you our guidance for the second quarter of 2014. Revenues will be in the range of $32 million to $34.5 million. Diluted EPS on a GAAP basis will be in the range of $0.15 to $0.20, and on a non-GAAP basis, EPS will be in the range of $0.16 to $0.22 per share.

At this point, I would like to turn the call over to Dror to review our financial results in detail.

Thanks Eitan, and good day everyone. Please move to Slide 8.

(inaudible) revenues in the quarter were at the record level of $34.7 million and (inaudible) high end of our guidance driven by market share gains and higher spending from foundries. It is important to note (technical difficulty) incremental revenues over the previous quarter resulted from a major market share win with the latest T600 standalone product. The company announced this market share win at the end of 2013 and the implication of this business progress is now evident in the company's revenue.

It is also important to note that the 12-month trailing revenue of the company is now $190 million, and second-quarter guidance implies another step function in 12-month trailing revenues towards $125 million.

Product bookings continue to be strong in foundries, which represented approximately 80% of total bookings in the quarter. Following some recovery in the memory segment, bookings for memory increased from an average of 10% in calendar year 2013 to 20% in the first quarter of 2014. Geographically, 75% of the bookings in the first quarter came from Asia-Pacific, and the rest from the US and Europe.

Product gross margin came in at 56%, lower than expected, mainly due to the fact that the incremental market share gain and related revenue carries lower gross margin than remission penetration states. Everything gross margin increased the normalized level of 30%, following an increase in revenues from contracts and (inaudible) in the quarter. All these measurements put together resulted in quarterly gross margin of 51% in the first quarter of the year.

It is important to note again that we expect to continue to see fluctuations in quarterly (inaudible) gross margins mainly as a result of fluctuations in the product mix, which now includes a higher portion of new product, including software. On an annual basis, we expect to be (inaudible) model of 52% to 55%. In the second quarter of 2014, we expect improvement in (inaudible) gross margins and our guidance for the second quarter assumes (inaudible) gross margins of around 53%.

Operating expenses in the first quarter came in at $11.4 million, lower than expected. As previously communicated, the main fluctuations in operating expenses are related to the level of R&D expenditures in a specific quarter.

In 2014, our R&D plans include intake of prototypes related to the development of several new products. The direct delivery timing of these prototypes can vary based on the recovery timeline and (inaudible). As a result, we will continue to see fluctuations in the expenditures quarter-over-quarter.

For the first quarter of the year, we experienced higher than average income from the office of (inaudible) which offset stable R&D growth in the quarter. The environment, as expected, will experience a one-time step function and favorable marketing expenses, reflecting the company's expensive customer-facing activities. These activities are important in order to capitalize on the continued R&D investment and diversified product portfolio.

For the second quarter of 2014, we expect total operating expense to increase to around $12.7 million with possible fluctuations related mainly to R&D expense levels. Operating margins in the quarter were 18%. These profitability levels clearly demonstrate the significant leverage built into the company business model, which targets operating margins of 70% and 20%.

Cash expenses in the first quarter of 2014 increased to $0.1 million as we started utilizing certain government incentive programs in Israel which provide (inaudible) in the first (inaudible).

GAAP net income in the quarter was $6.4 million, or $0.23 per diluted share, based on a share count of 27.9 million shares. Non-GAAP net income in the quarter was $6.9 million, or $0.25 per diluted share, $0.03 higher than the upper range of the company's first-quarter guidance.

Moving into (inaudible) accounts receivables significantly decreased in the quarter to $22 million with (inaudible) revenues increased by 16% in the same quarter. As we said in the December quarter conference call, in the first quarter of 2014, we concluded the collection of previously granted extended payment terms to major customers. As a result, DSOs declined to 65 days. Looking forward, we expect DSOs to remain at the healthy level of below 70 days. Meanwhile, inventories in the first quarter increased to $19 million as the company continues to align it supply chain to support the high level of business activity which we are experiencing. The company continues to be very effective in managing inventory, as evident in the inventory turns which were higher than 3 times a year in recent quarters. Capital investments were $0.6 million in the quarter and depreciation expenses were $0.9 million.

I will conclude cash reserves, which increased to a record level of $113 million following record free cash flow of $12 million in the first quarter of 2014. We expect to continue to generate positive cash flow in the second quarter of the year. And in parallel, we announced a $12 million share repurchase program which we can start executing shortly following this conference call.

With that, I will move call back to Eitan.

Thank you, Dror. Before (inaudible) Q&A session, I would like to add that we are extremely pleased with our first-quarter results, and the progress we are making in achieving our significant goals which will allow us to grow in the next coming years. With that, we will be pleased to take your questions.

(Operator Instructions). Edwin Mok, Needham & Company.

Hi, thanks. Congratulations for a good quarter, and decent guidance. So, first, I guess a question on the foundry front. You mentioned -- by the way, thanks for all the color you provided in your prepared remarks. It was helpful there.

So you mentioned that you see customers continuing to actually spend for the foundry area. There is some timing issue related to investment for 16 -- or 14 nanometer, but nevertheless spendings do continue. That's good information.

A question that actually is to the extent that a customer decides he (inaudible) more in 20 nanometer than 60 nanometer, what impact it could have on your business. I understand from your previous commentary that 16 or 14 would have higher OCD intensity. Would that happen in your business? That's my first question.

My second question, I guess talk a little bit about your market share position beyond your first large customer. If you can provide any color on that that would be helpful.

Thanks Edwin. There are two questions, and I'll start with the first one. Regarding the metrology or optical metrology intensity, we definitely see (inaudible) between memory and foundry, and even in the memory sales (inaudible).

Looking right now on the foundry space, because of the complexity of the (inaudible) devices and because of the complexity of the profile of the device, we see more metrology intensity in the foundry. And I said before is that the range can increase up to 20% and 25% in the advanced nodes for foundry.

If you are looking right now in memory, (technical difficulty) less and like we said before, it's around 10% in memory where DRAM is a little bit more and (inaudible) is a little bit less. So, this is intensity and those numbers, when I'm looking at those numbers, those are the transition between 20 nanometer to 14 and 16. So this is the first question.

Regarding the market share, as we said during last quarter actually, we started to get market share with our leading customer, so (inaudible) which qualified us, as I said in the commentary, we expect the system (inaudible) for both 20 nanometer and 16 nanometer. But actually what started as a 20 nanometer market share in these leading customers actually becoming right now also 16 nanometer market share. And if you remember, I am saying all the time that those movements from one technology node to another is so complex, so changing metrology vendors in between is very difficult to do.

Specifically regarding the market share, there are other market shares that we are working on gaining. I will not share it in this conference call until they become mature.

Okay, great. That's very helpful. With regard to the memory areas, right, we have heard about investment in VNAND, and I think you talked about TSV memory also. I'm just curious. I think, for VNAND, we have heard quite a few people talking about push out to 2015, right? And maybe some incremental investment in plainer. Just wondering how that could impact your business in the second half. And then we got into TSC that you mentioned on the call. Is that just doing the developmental stage where you see that going to production in the second half of this year, 2015, any kind of timeframe you can provide on that?

Yes, so I feel like the remarkable technical challenge is that those customers are having moving towards the VNAND. Most of this is around the hedging of the position because we need to give a very high aspect ratio device with the multilayers and multi-materials, and the major elements (inaudible) is becoming extremely difficult. And even if you are being able to do 24 layers or 32 layers, you're moving to the next set of (inaudible) 100 which, in those layers, most of the applications are neither right now in the market, extremely difficult. And therefore we are consistent with our message along the last few quarters that we believe that all customers will introduce their initial devices this year, but we assume that the ramp will start somewhere in 2015. By the way, part of it will start to ramp only in the second half of 2015. We have those players, which one of them is doing something (inaudible). We do see about in one of the (inaudible) the Korean customers that are having the problem in China.

But if I'm looking on that, they're assisting one, it will allow us, Nova, to introduce more product into those memory customers and it will give us more time to gain market share over there. We have (inaudible) evaluation that we are currently conducting in a very unique technology way, and I think that we will be able to win those in the next two, few quarters.

Secondly, you know that you can see from this quarter only 20% of our revenue is exposed from memory. So ask the big questions of the upside in the continuous growth in the second half responders. And over there, we have 50 of domestic availability (inaudible) new investments in the sense that in the next few quarters. So -- and I remind you also, Edwin, that every year, we see the same phenomena, that the living customer has to have some DRAM for the disk capacity but then they renew it immediately. And we believe we can do the same thing in 2014.

Great, very helpful there. A question for Dror. On the gross margin, I hear you about the new product -- or ramping in new customer, but I saw you guys had some software sales this quarter. Shouldn't that have a benefit on gross margin? And as I looked at your 2Q guidance of 53%, that actually implied stable product gross margin. Am I correct on that?

Well, specifically regarding the software sale, we did announce software orders and that keeping coming in. However, in terms of revenues, actually the first two quarters include the (inaudible) portion of these softer revenues. It does include (inaudible) but a small portion and we would see more probably more towards the third quarter in revenue. As Eitan mentioned, the bookings are streaming, but the timing to revenue (inaudible) revenues (inaudible) time.

In terms of the gross margin in product for the next quarter, we do expect the improvement there. This quarter, it's around 66%. Next quarter, we expect it to be closer or within the target model of product gross margin, which is 58% to 60%.

Great, very helpful. Lastly and I'll go away. On the operating expense, you're guiding that based on this increased R&D expense. Is that the one-time pickup because of some project timing, or is this $12.7 million level how we should think about OpEx going forward?

Yes. This quarter was quite I would say special in terms of the level of operating expenses. We wouldn't expect them to be at that level looking forward, so I would say that the level of between $12.5 million and $13 million is more or less the level that we should be looking forward, as stated a few quarters ago.

Great. That's all I have. Thanks.

Patrick Ho, Stifel Nicolaus.

Thank you very much. Maybe first in terms of some of the commentary you've made about the 16 and 14 nanometer thin set transition, from your discussions with customers as they begin to transition to this, do you see maybe the delays are kind of maybe not push outs, but just the timing of it, is it the yield challenges they continue to experience or is it market demand that's kind of holding it up at this point?

I think (inaudible) I think I'll open, with your permission, the answer to your broadened view, and I'll talk a little bit about the foundry in the second half (inaudible). I think it's (inaudible) why I'm a little bit optimistic on the foundry is first because we are in very tight cooperation with the customers and we see the amount of (inaudible) that are invested in order to improve the qualification of the thin-film devices. I think that most of the technical challenges that I see there we overcome and right now in my mind it's a moot issue. So here is our technical element (inaudible). It's not easy. It's a very complicated device, but I think that at the end of the day, I see more (inaudible). Now, having said that, we had to customers that are doing 16 and 14, and the picture is different in each one of them.

The second thing is if I'm looking right now on (inaudible) end-user application market or the mobile market (inaudible), so I think that's saying that the demand for these devices is seen in the market. I think also the competition between the foundry and supplier is becoming really fierce. I said in the second half of the year we will be able to see who is going to be the second thin-film provider. And after this placement all of the foundries are running.

And the third thing is the fabless decision. I think the fabless decision was a major element here and I think if we keep on seeing the big fabless companies switching all those three vendors to continue and ramp their 14 and 16. And if you're looking right now on the foundry segment, what's happened in the last few quarters, actually we had three groups. We had the leading foundry, which actually doesn't have only (inaudible), it has also 28 nanometer, but we had some premium because we are holding 80% of the market. He is going to use 20 nanometer will probably be the biggest one. So in my mind, the decision of the entry point is not only technical. This is one.

Second, this customer is not (inaudible) already only on the other foundries, but he's looking also in the big IBM, which is becoming his competitor. And this (inaudible) over the last two years. So we need really to come and see it as soon as possible.

And the position regarding the first, the second group is the second and the third foundry is actually if you are looking over their announcement, they have together four product lines to ramp in thin-set. So we have one in Korea, one in the US, one which is they are doing together in partnership, and one which is being done by the other foundry. So, it's four product lines that they invest in. I assume that one of them will start to ramp in the second half, and they will try everything right now in order to be in the market before the first one because it's a business decision that they have to be in thin-film. Besides that, we are always talking about the leading foundries that we do see increasing in capacity, both in 28 and 20 nanometer, not only by the living foundries.

And the third group which is all the other foundries that are still investing in 28. So if I'm looking right now at something like this one, I do believe that, from the point we are looking right now in the market, (inaudible) the year, for me it will be (inaudible) upside in thin-set in the next eight months. And I do believe (inaudible) 2014 with vendors will have to shorten their leadtime and they will have to adjust the short leadtimes and (inaudible) thin-set somewhere towards the end of the year. This is my view.

That's really helpful on the color there. Maybe if you could go to the memory side for a second, you mentioned that, based on your most recent analysis, that you see DRAM having a little more capital intensity for OCD metrology as you move to 20 nanometers. I guess a two-part question. What's driving that increased capital intensity? Is it the use of double patterning? And what applications are you seeing I guess wins for you guys in terms of that transition in DRAM?

So as you know, the challenges in VRAM and DRAM are different displays. DRAM is actually coming from the multi-pattern in the module and (inaudible) that we start to see in various technical transitions, and (inaudible) applications along the gate. Once you are going to advance (inaudible) like that, most of the times they are coming from the gate area. And we see more and more application in this area.

Right. Thank you very much.

Josh Baribeau, Canaccord.

Hi, thanks. Back to foundry, obviously you're seeing yield issues as people try to migrate to the next node. In your opinion, are these opportunities for maybe more share? Asked a different away, are the yield issues something that maybe OCD could solve, or are they in other areas where you don't play?

Very good question, and I'm happy that you asked that one. I am (inaudible) the issue. If you're looking right now on the (inaudible) intensity and those on the development side, and also on the pilot lines that are doing thin-set, we actually see more metrology in sensitive than we saw before. The majority of that is because when you're going through those -- the multi-patterning (inaudible) as well as building structures with this thin-set device, actually we move from measuring something like 8 to 8 foundries as before to something like more than 20 nanometers right now in order to stabilize the device. But definitely, which is why I said in my commentary that those challenges actually introduced a lot of complicated measurements. But for us, it's an opportunity.

Great. And then the increase in the memory bookings, is this -- and I may have missed this -- is this more spending by your existing large memory customer, or is this more penetration at multiple new customers?

During 2013, we announced that we have a new memory customer, but it would take time to ramp in this customer. So most of the incremental growth is with (inaudible) coming from existing customers. And most of it, by the way, comes from integrated metrology. This is where we are very strong in the memory segment.

Got you. And then a good segue to my next question, could you talk about the mix (inaudible) and the standalone in the quarter, and maybe how you see that projecting throughout the rest of the year?

Generally, we don't disclose the proportion because of competitive reasons. But what I keep saying and Eitan mentioned is we are not (inaudible) during the first part of 2014 standalone revenues are at record levels, and they are very close to becoming 50% of our revenue pool.

Like I said, I just want to mention (inaudible) I just want to mention something and I said it very clearly in my prepared remarks. We see also (inaudible) metrology and we see growth in integrated metrology as well. Because we have challenges in the integrated (inaudible) and integrated (inaudible) as well. And therefore customer wants to see more variability between wafers before going to the next process, and many customers right now are starting to measure optical critical dimension measurement in the integrated (inaudible). So the demand for those tools are really increasing.

Great, thank you. I'll pass it on.

Graham Tanaka, Tanaka Capital.

Congratulations, guys. Just if you could help us out a little bit on the intensity, metrology intensity for the different levels of 28, 20, 16, 14 and 10 nanometers. Is there a way -- is there a rule of thumb or some way you could us get a feel for the potential market growth as you go to smaller diometries? Thanks.

Yes, so actually what we're talking about is that publicly, in our IR presentation, we have a slide for that. And we are saying that moving from 28 to 20 is actually scaling. When you scale, then you have challenges, so the metrology intensity grew at around 15%. I'm talking right now that foundries (inaudible) relation to our (inaudible) memory we can do it as well. But in foundry from 28 to 20, we'd say something like 15%. Once we are going from 20 to 16 and later on to 10 (inaudible) we think this can go up to 25%.

Memory is similar?

Again? No, memory is not similar at all. If you're looking right now on the memory devices, if you're looking right now on those two (inaudible) gate in the planner gate, moving to the 3G gate to the vertical VNAND, you will see an increase of maximum between 10% to 15%.

Please understand that the challenges are totally different. In the vertical NAND, the challenge is actually to control the export, the server edge, under edge, things like that, and planetary (inaudible) of the layers, which can be controlled with the metrology (inaudible) metrology.

When you look at thin-set, actually you need to control the whole profile of the thin-set and you need to undercut, you need to do material valuation in the structure itself. Second is becoming (inaudible) in the thin-set devices, and therefore in metrology is much higher -- sorry, in the foundry is much higher.

People have been talking about the yield difficulty. I'm just wondering how difficult it is you're seeing with the foundry yield. Where are they now versus where they should be? And what kind of -- is there a way for us to understand what the return on investment and how attractive it is to employ more metrology?

I'll tell you exactly what I said before, that we should expect the advanced node for thin-set will be between 20% to 25% more metrology. And actually we see that. Now, every quarter that goes by, we have more system over there and you can understand exactly what is going on in those technology nodes. On 20 nanometer, we know exactly how much the capacity for metrology increased. For 16, we are starting to see -- or 14 we're starting to see the increase, and actually we see incremental increase once they move to thicker devices.

I'm just wondering. In terms of from the customer's point of view, how do they look at the spend, the cost of introducing your tools versus not doing it, or is it really a function of they are going to do it, it's just the question of whether they use your tools or somebody else's to improve these yields? Thanks.

I think if you look right now, you know there are all kinds of directions that maybe a memory customer can take balancing between stabilized process and the amount of process control that they need because they have that built up.

I think that in the foundry space, no question, it is not even a viable question. (inaudible) they need more, they buy more. The attach rate (inaudible) is actually increasing, both for integrated and standalone. And one of the things that we see more and more, that optical metrology that is different from the other metrology is becoming really the only enabler that will make these thin-film devices come into production. They cannot do it otherwise because you start to go into a 3-D dimension, you start to go through all kinds of different materials, and the only tool that can come combine all those measurements and help those customers to go through (inaudible) is metrology.

The other thing I was curious about is you referred to the 5% gain in market share last year, is that correct?

Yes. Correct.

Okay. I Just was curious if you could be maybe a little more specific how you gain the share, either in terms of number of customers, percent penetration? Help me we understand how you gain the share and what your goals are for this year and next year on market share growth? Thanks.

So the major market shares that we have coming from our leading customers, we announced this in the last three quarters. With our leading customer, we were the incumbent doing the part of the metrology. And going towards 2014, we increase the market share going to other (inaudible) doing value application and actually taking market share from the other competitive (inaudible) at this point. And those market shares are significant because we are talking about significant amounts of cost to it.

Besides that, we actually went into other customers that even (inaudible) for example integrated metrology is there process, actually two of them. And if you look right now, those customers right now, all of them are using integrated metrology. (inaudible) if you are looking right now on the integrated metrology, you have the standalone tools, you increase market share in both. We know it is practicing in the market that are integrated metrology market share is more than 80%. And it keeps on increasing. So coming from a variety of customers, the majority of it coming from our living and our foundry customers.

Great. And so it sounds like you've gotten further penetration, more process steps at existing customers. I'm just wondering how many new customers you've been able to gain traction with, say, in the last 12 months, and where do you go for the next 12 months? Thanks. Number of customers.

Okay, so looking right now, two quarters ago, we announced that we have new memory customers. So we added a new memory customer to our installed base. This customer is working with us, cooperating with us. And I'm sure that, in the next investment cycle, we will see some productivity coming from him as well. This is one.

Second, we are -- as I said in my prepared remarks, we are doing an extensive evaluation right now for VNAND. VNAND is memory, and as you know, those customers are striving to have the right tools that would solve their technical challenges and (inaudible) issues for them to run. So we are in a win on the valuation and it will take -- I hope it will take to a month and we will be able to penetrate inside.

Besides that, besides that, we are continuing with our TSV product. The TSV product was late to the market and we are competing with the incumbent provider. And we have a valuation going over there. Actually, we did pretty well in 2013 gaining market share in the TSV as well.

Lastly, we would continue working with our leading customers because there are plenty of opportunities for us to grow, even with our leading customers.

Thank you very much. Congratulations.

Keith Maher, Singular Research.

Hello. I was wondering if you could talk about the opportunity size for the software business. And also, within software, how do you price it? And is it a traditional license maintenance model, or is it a subscription type model?

Okay. So, Keith, let me answer that one. There are two questions. I'll start first on the software production. One of the strategies that we announced something like one year ago is that we would like to diversify for the activity on the software side. With that, we said we're not going to a different area. We are just utilizing our core technology, which is basically around the ability to convert (inaudible) into measurement and try to have those products -- sorry, those engines, those products (technical difficulty) application and (technical difficulty) marketed to three areas. One area is what we call fleet management. Fleet management is the ability to go to wherever we have a (technical difficulty) which can be [100-to-1] with very advanced software tools be able to look on the screen and create additional measurements with additional operations by comparing and by managing this fleet. This is the first product.

The second product we recently announced is we've got some orders for the hybrid metrology, which (inaudible) is a unique way that we are being able to take measurement from other tools that were not optical metrology and combine it for a different measurement which can be (inaudible), can be x-ray; it can be MBIR; it can be other software we have been working on. So this is the second area.

The third area is we apply our software product and modeling engine for another (inaudible) exists in the semiconductor. These are the three areas. I can probably say that we are holding right now orders for high-grade and fleet management, a significant amount of clients, and it will continue coming in the next two quarters.

Regarding the business model, the business model is exactly as other software business models. There is an entry point and there's the client's price and later on there is service price on that.

Okay, thanks. That was helpful.

Tom Diffely, D.A. Davidson.

Yes, good afternoon. I appreciate the color you gave earlier about the OCD opportunity on a pure node basis. I'm curious if you can give us some insight as to what the split is or the ratio between integrated and standalone as we move to 28 to 20 and over to the thin-set node?

So, when I talked about 25%, 20% to 25% growth, it's actually in the node segment. We think this is what we experienced. In the standalone, it is obvious that we need to make a more complicated application and more complicated measurement. Between the process spread, before edge, after edge, we (inaudible) so the increase is over there as well.

In the integrated, because those integrated are used to measure thin-film or thin thickness, currently the customer would like to have more sophisticated measurement over the integrated. So therefore we see more OCD application coming into the integrated, which we have to deal with that. Having said that, this means that more integrated (inaudible) because they need it more, connected to more process tools and they need to measure more over those two. So, I can't say if it was just 25% (inaudible) exactly in each one of them that is roughly close to those numbers.

Okay. When you look at your opportunities over the next couple of nodes, do you think you ultimately get more growth from integrated or from the standalone side?

I think we will get it from both. But if I'm looking right now on the market carry gain that I have, I think that the most growing part will be standalone.

Okay. And I apologize. My connection is not great here. So, I got the earnings guidance but I didn't get the revenue guidance for the second quarter.

$32 million to $34.5 million.

Okay. And did I hear you correctly? You said you're comfortable with the 10% revenue growth for the full year?

No. We said we (inaudible) is around 10%.

Okay. All right. Thank you very much.

Keith Maher.

Yes, one quick question, just on your stock repurchase plan. I was wondering what the timing of that, when you guys might actually start buying shares, or if you have started already.

As I mentioned in the prepared remarks, definitely we can relate specific buying (inaudible) but the share repurchase program was announced during the blackout period for us as a company. When this blackout period is concluded tomorrow, we can start executing the plan right after that.

Okay, thanks.

I'm showing no further questions. I'll turn the call back to Eitan Oppenhaim for closing comments.

Thank you operator. I would like to thank everybody for joining the call today. We appreciate your interest and your questions and we hope to see you soon on our next quarterly call. Thank you, and have a good day.

Ladies and gentlemen, this concludes our call for today. Thank you for your participation. You may now disconnect.