Nova Ltd (NVMI) 2014 Q2 法說會逐字稿

Good day and welcome to the Nova Measuring Instruments Ltd. second-quarter 2014 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of Hayden/MS-IR. Please go ahead.

Thank you, Operator, and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments second-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 view 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. Eitan, please go ahead.

Thank you, Miri. Let me add my welcome to everyone and thank you for joining our second quarter of 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 third quarter of 2014. Following my comments, Dror will review the quarterly financial results in detail. For those who are following the presentation, please proceed to slide number three.

Through our partnership with leading customers and our operational efficiencies, Nova performed well and delivered strong financial results for the second quarter. Thus far during the first half of 2014, we have demonstrated our strength in the optical metrology market and delivered growth in excess of 20% compared with the first half of 2013.

The second quarter came in line with our guidance. We posted quarterly revenue of $32.8 million, along with $6.1 million, or $0.20 per diluted share, in non-GAAP net income, which met the high end of our profitability guidance. Overall, our second-quarter results are well within our long-term operating model.

In the first half of 2014, the Company clearly demonstrated the operational leverage that we have built into our business model. In fact, our net income for the first six months of 2014 exceeded our profitability for the entire year of 2013.

We continued our momentum from the prior quarter with a well-executed business plan to generate growth within our main product line and within our leading customers. The industry's challenging transitions, which includes both scaling and device changes, have introduced new metrology requirements. This complexity is actually creating a competitive advantage for Nova and extending our available market, as well as providing new opportunities for Nova to grow. We are well positioned to benefit from this existing transition.

With more than 25% increase in bookings and more than 50% increase in revenues from the 1X technology node investment during the quarter, we continued also to be involved in several 10-nanometer evaluations with major customers. This is a direct function of our strategy to partner with our customers early on in the development stages in order to better assist them in their initial development, and then be part of their high-volume production later on. This effort to create sustainable customer relationships is the key to our long-term success and we are encouraged with our progress to date.

Despite the fact that our leading customer postponed its 16-nanometer next-stage investment, we were able to leverage our strength in the foundry space and mitigate their soft capital intensity with a broader base of orders from other leading-edge foundries. We expect these customers to continue ordering equipment over the coming quarters.

Additionally, we also benefit from the current incremental memory investment.

While we are investing significant amount of resources in order to continue to broaden our technical leadership and increase our market share, we demonstrated total operational efficiencies during the second quarter with operating margins of 17%. Meanwhile, our cash reserve at the end of the quarter increased to approximately $140 million. As part of our strategic plan and in order to optimize our shareholders' value, we initiated our previously announced $12 million share repurchase program during the quarter.

Finally, while our customers are facing some challenges as they ramp up the most advanced [10% renal] node, we expect that their technology transition for this node will continue intensively in 2014 and 2015. Cost, complexity, and technical barriers associated with ramping up such complex nodes will continue to grow the potential for optical metrology as the unique enabler for this transition.

Again, we are confident that Nova is well positioned to benefit from these industry challenges.

Let me now provide some more detail on our product portfolio performance during the quarter. We continued with system delivery to support various technology nodes at several foundry customers and generated a 50% increase in deliveries to 14-nanometer and 16-nanometer product line. As leading customers are starting to develop their next technology nodes, they are also deeply involved in several 10-nanometer evaluations, which we expect to be concluded in the coming quarters.

We are well positioned today with our advanced portfolio in all foundry customers for both the back-end and front-end topline. Our V600 standalone LCD tool has been adopted by all major foundries in all advanced technology nodes. We can proudly state today that our accumulated experience in foundry production and R&D environment is well recognized by our customers when they decide on their next-generation toolset.

Meanwhile, our integrated metrology tools are widely installed in both memory and foundry customers. Since the recent transitions have introduced many process challenges, we see increasing demand to measure CVs and film thickness closer to the process in order to identify wafers and wafer viability, and as a result, the available market for this tool is growing. We have already seen this requirement convert to actual orders, and during the quarter, another large customer adopted our integrated metrology as part of its high-volume manufacturing for advanced technology nodes.

During the first half of 2014, we shipped more than 100 integrated systems to our customers and at a faster pace than in the first half of 2013. Looking forward, we see that the adoption of integrated metrology is increasing and extending to other process areas. As the market leader in integrated metrology, we are well positioned to benefit from this trend.

Also, we are currently involved in several memory evaluations. Although our customers are investing intensively to commercialize their advanced structures, they are still facing technical challenges in scaling their device in high-volume manufacturing. The different complex issues are mainly around the deposition and etch processes, which present metrology challenges but provide a big opportunity for us. We believe that our current and next-generation tools, which will include new technology initiatives, can address critical needs in process control for both DRAM and flash.

In addition, our previously announced evaluation with a major leading logic and memory customer in Asia for Through-Silicon-Via, or TSV, process has yielded our first order for our V2600 system. Following an intensive evaluation in the production environment, Nova's standalone solution was qualified to be the production tool of record for measuring and controlling the TSV formation process in both memory and logic applications. The planned implementation of three-dimensional integration in volume manufacturing by this customer is expected to yield multiple orders over the next few years.

The growth collaboration with this leading customer can also use opportunities in other [OCD] steps besides TSV. We currently have five accounts that have already adopted our unique solution and we are in continuous evaluations with others.

Beyond the hardware offering, our revenue mix this quarter also included several software deliveries and we expect this stream of software orders to continue throughout 2014. The traction that our software portfolio created [figured] a bigger revenue stream than we expected and we are looking forward to an even bigger stream in the next quarter to come.

Let me now turn to a brief commentary on the current market environment and our review for the remainder of 2014. Although our customers are still facing increasing challenges in the transition to the next 3D node, they are still committed to move these complex structures to high-volume manufacturing in 2014 and 2015. Beyond the overall demand for semiconductors, these transitions are being driven by technology inflections to allow for better device performance and productivity.

That said, while the overall industry expects healthy growth during this year, we see some near-term softness in both the foundry FinFET ramp-up and V-NAND adoption. Our booking numbers, as well as the other industry leaders' numbers, currently signal a soft period in the next few months during Q3. And while we don't see any intention on the part of our customers to slow down further this technical transition, we do see some timing issues with achieving the right specification and yield.

As a result, our visibility in the near term is less than clear and we expect to see some fluctuation in the coming quarters. Nevertheless, we see the current softness as near-term challenge in extolling long-term investment cycle and we are well positioned to benefit from it.

In the foundry space, the intensive 20-nanometer ramp-up by our largest customer is increasing the pressure on other foundries to accelerate their own ramp-up of 20-nanometer and sub-20-nanometer technology nodes due to strong demand from their own customers. While our largest customer is yielding its 20-nanometer capacity and postponing its 16-nanometer ramp-up, our other largest foundry customer is working to qualify its 14-nanometer technology node in order to introduce a full FinFET advanced structure by the end of 2014, with production ramp-up in the first half of 2015.

The overall long-term environment in the foundry segment is still positive, with three active nodes, 28, 20, and 16/14. In this segment, the timing [answered] of ordering the next extension for the sub-20 nanometer tech node has created some pressure on our visibility for the remainder of 2014. Nevertheless, it has set up expectations for all the major foundries to deliver productive FinFET devices in 2015 and therefore creates a set for strong investments in 2015.

So while we see some near-term challenges, we're starting to see progress in the next technology node beyond 14 and 16 nanometers. With the increasing complexity and time to market with the sub-20 nanometer node, we're involved in various 10-nanometer evaluations where new players may enter the market and broaden the foundry customer base.

In the memory space, DRAM is the most active segment currently, driven by increasing demand and favorable pricing. The transition to 20 nanometer is leading the technical scaling in this segment, along with some capacity expansion. Although the overall flash market appears to be relatively healthy, we continue to see delays in V-NAND production, which are consistent with our prediction that V-NAND will become commercialized in high-volume manufacturing in the second half of 2015. These delays allow us to have more time to expand our exposure in the memory space with our advanced optical [CV] solution.

Finally, the growing investment in advanced technology nodes and complex structures has introduced increasing complexity and created new challenges. This fundamental element has created favorable market conditions for metrology growth, where more process steps are needed, new novel materials are introduced, and innovative structures and packaging solutions are incorporated. We are confident that Nova is well positioned to benefit from the metrology favorable environment with our advanced holistic portfolio combining hardware and software solutions.

Now I would like to share with you our guidance for the third quarter of 2014. Revenues will be in the range of $26 million to $29 million. Diluted EPS on a GAAP basis will be at the range of $0.05 to $0.11, and on a non-GAAP basis, EPS will be at the range of $0.07 to $0.13 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 number eight.

Total revenues in the quarter were $32.8 million, within the range of our guidance, representing 17% increase over the comparable quarter of last year. It is important to note that the 12-month trailing revenues of the Company have now crossed the $120 million mark, which has tripled in the Company's revenue stream only five years ago.

On the bookings side, product bookings continued to be strong in foundry, which represented approximately 90% of total bookings in the quarter.

Geographically, 47% of the bookings in the second quarter came from Asia-Pacific and most of the rest from the US. This is a major change relative to previous quarters and years, reflecting the Company's deep penetration into an emerging foundry player in the US.

Product gross margins increased to 58%, as expected and as communicated in the previous conference call, mainly due to an improved product mix. This, combined with higher service margins of 39%, resulted in blended gross margins of 54% in the second quarter of the year. This result is well within the Company's target model for blended gross margin.

As previously discussed, we expect continued fluctuations in gross margins in the coming quarter. In parallel, the adoption of our software solutions, hybrid, and fleet management is continuing and that should help us to some extent mitigate the gross margin pressure.

On an annual basis, we continue to expect to be within our target model of 52% to 55%. In the third quarter of the year, we expect blended gross margins of around 52%.

Operating expenses in the second quarter were $12 million, an increase of $0.6 million over the first quarter. These expenses included some one-time G&A provisions, as well as incremental increase in R&D and favorable marketing efforts. As previously communicated, we expect the main fluctuations in operating expenses to result from R&D expenditure.

Looking forward into the third quarter of the year, given the expected reduction in third-quarter revenues, we have initiated some cost-reduction initiatives, mainly in the area of overhead and G&A expenses. As a result, our guidance for the third quarter assumes operating expenses between $11.5 million and $11.8 million, a lower level than the second quarter of the year, with R&D investments staying stable or slightly increasing during the third quarter.

Operating margins in the quarter were 17%, similar to the previous quarter. These profitability levels clearly demonstrate the significant leverage built into the Company's business model, which targets operating margins of 17% to 20%.

Tax expenses in the second quarter were $0.1 million as we continued to utilize certain government incentive programs in Israel which provide for effectively zero tax rate in the first two taxable years.

GAAP net income in the quarter was $5.7 million, or $0.20 per diluted share, based on a share count of 28.1 million shares. Non-GAAP net income in the quarter was $6.1 million, or $0.22 per diluted share, at the high end of the guidance range for the second quarter.

Moving into balance-sheet key metrics, accounts receivables increased sequentially to $26 million, mainly as a result of the timing of the quarterly shipment. DSOs remained stable, around 65 days. Meanwhile, inventory slightly decreased in the second quarter as the Company aligns its supply chain to current level of business activity. The Company continues to be very effective in managing inventories, as evidenced in the inventory turns, which were higher than three times a year.

Capital investments were $1.2 million in the quarter and depreciation expenses slightly increased to $1 million.

I will conclude with pointing out that the Company revenues in the first half of 2014 increased by more than 20% compared to last year. In parallel, cash reserves increased to $140 million and we have started the execution of the previously announced $12 million share repurchase program, which we plan to accelerate during the third quarter of the year.

With that, I will move the call back to Eitan. Eitan?

Thank you, Dror. Before turning to the Q&A session, I would like to add that we're pleased with our second-quarter results and the progress we are making in achieving our key business goals that will allow us to keep growing in the next coming year.

With that, we will be pleased to take your questions. Operator?

(Operator Instructions). Josh Baribeau, Canaccord.

Hi, thanks. So you talked, I think, more qualitatively around your bookings, but are you able to provide us with an actual bookings figure, maybe a book-to-bill ratio?

Thanks for the question. We are not exposing the book to the numbers and we are not guiding beyond the next quarter.

However, I can tell you that the book-to-bill numbers that we had in the second quarter are actually very similar to what we see currently, so it's [clotten] around the last few months.

Okay. And then, maybe talking about this quarter and then specifically the bookings, if you can provide the color, can you help us out with the percentage of standalone revenues in bookings versus integrated?

Again, we do not -- because of competitive reasons, obviously we do not disclose the distribution between the different products. And as mentioned probably around the end of last year, bookings and revenues from standalone product lines have been approaching the 40%, 50% of total revenue.

Okay. And then, as you talk about some of the new applications, such as deposition versus -- or deposition and etch, maybe provide a little bit of color on whether or not these are mostly standalone tools or if they are becoming -- if the deposition and etch, let's say the new applications, are integrated approaches.

Let me shine some light on the process steps that the optical CD or the OCD is taking part of and which one are increasing and which one are in the penetration state.

So additionally, the [CMV] is where we have integrated metrology and we have standalone metrology as well. So that's a well-known process step where we have integrated and standalone.

If you're looking right now in etch, along the year, most of the OCD systems were standalone systems for both back end and front end. And currently, we see also because of the challenges in the process both in the V-NAND and in the FinFET, we see also integrated on etch tools, which is becoming almost a standard in the foundry and it keeps on increasing in other places.

In regards to the other process step, which is CVB and the others, as we said before, one of our technical initiatives is to get even closer to the process and to do even an in situ metrology where the only way by the way right now to stabilize those processes in CVD is growing in situ. So as you understand, it's varied between the process steps.

Okay. Any potential timing on when you might start to either have a product or revenues from the in situ metrology just yet? Or maybe even what process node?

As I said, we have -- our strategic initiatives on the product portfolio included three main elements. One of them is the [fleet] management as we are starting to see increasing revenue coming from the hybrids that we do have revenues from, and the third one is the in situ metrology or the in situ modeling metrology. But that part is very complex. We are working in a not-so-friendly environment, which the OCD is not so used to work at, and it will take a few months before we see some revenues coming in from this part.

Okay, great. I'll pass it on, thanks.

Patrick Ho, Stifel.

Thank you very much. Eitan, can you give a little bit of color in terms of the opportunities on the DRAM side, particularly as that industry transitions to the 20-nanometer node? What are some of the capital intensity increases that you may see on the OCD metrology side and your positioning with your key customers there?

Let me first, you know, give some highlights about our memory market share because it's coming -- all the questions coming in those earnings. So I would like to make sure that we understand Nova's position in the memory space before we refer to any increasing market share.

First of all, as the leading market-share provider of integrated metrology, we are actually selling to all the memory manufacturers. So we are benefiting from the increase in the memory and specifically in the DRAM extension. This enables us to enjoy the current and future investment trend of this segment.

In addition, if we extend a little bit from the DRAM to the flash as well, as I said a few times and I said also in my prepared remarks, we are currently in several evaluations at several customers for both V-NAND and the new DRAM transition to 20 nanometer, and also CSV application. By the way, both with integrated and standalone tools, and I think that it may translate to additional incremental business in the near future, probably somewhere in 2015.

And if I connect what happened in the last one year also with the first [winners] that we had in semicon -- actually around semicon, we announced a major customer in Asia that was doing both memory and logic chose our CSV standalone solution for its logic and memory process. And it's going along with another memory customer that we announced a year ago that start to buy our standalone tools.

So we are doing inroads into the memory or doing inroads into the DRAM, and the close collaboration that we see right now with these two customers that we started to sell standalone in my mind will yield to other memory solutions we'll serve to this customer.

Great, that's helpful. Maybe moving to the evaluation you're doing on the 10-nanometer side, I know it's early on in the early stages of development with your customers there. What are some of the processes or applications you are seeing at 10 nanometers that will continue to increase the capital intensity again for OCD metrology as you go from FinFET, the first generation of FinFET, to 10 nanometers?

As I used to say, we need to look at that in two elements. One of the elements is that -- actually, three elements.

One element is the market conditions and the commercial issues. We see that the time to move from one technology node to the other is increasing, and basically it allows your customers actually to expedite the rate towards the 10 nanometer. And I don't think that we'll see in the 10 nanometer a case where a very big customer will be ahead of everybody.

So I think the customers identify this opportunity and everybody is starting to raise on the 10 nanometer. So in the last few months -- actually, the whole quarter -- we started to see a few evaluation on the 10 nanometer, and with, by the way, all our major customers and even more, and when you're looking right now in 10 nanometer, we need to go in the second element.

Once the [UV] was delayed and it will probably not be introduced in 10 nanometer, we're starting to see all kinds of multiple patterning that actually increased the complexity of the structure inside the scaling. If you're looking right now in 10-nanometer FinFET structure, the intensity or the complexity is increasing in a way that we see the complex in a way that it will require much more system -- much more metrology than we used to have before and much more of process control.

And I think that the third element is the 10 nanometer besides the scaling and what I discussed about the [little] would introduce a few other steps that are not so common in the 14 and the 16, which in any case, if it's materials or something else, will require much more process control than before. So this is why we are looking forward to the 10 nanometer and this is why we announce it right now.

And by the way, as I said before, in order to be the tool of record with those customers in two years from now, we start -- we need to start cooperating with the customers and partnering with them currently. So in two years, we'll start to be the [DCM] and the [PCOR].

Final question for me, maybe for Dror in terms of the stock buyback. You mentioned in your prepared remarks that you will be a little more aggressive in the third quarter. I guess, what type of magnitude are you looking at, because, I guess, based on your results this quarter, you started the buyback in the June quarter. How much of kind of a step-up are you looking at between June to September?

So obviously, we cannot disclose the exact intentions, but in the last quarter, we did buy approximately 100,000 shares at $1 million and we will be accelerating the plan in the third quarter, also because the window for opportunity to buy is only between the quarter and the blackout period. So we will be accelerating the plan in the coming months.

Great, thank you again.

Edwin Mok, Needham.

Hi, great, thanks for taking my questions. So first question is I know visibility is somewhat low right now, but do you guys have any insight into the fourth quarter and how you think that business will shape over the fourth quarter, at least directionally?

You know, we had the same phenomena last year. And we know that when customers, like our leading customers, are increasing the intensity in the first half, then they have a few months of digestion.

And whenever we are going into those months of digestions, we can't have the full visibility in what happens on the quarter after. So therefore, our visibility right now is not so clear in regarding to the fourth quarter and we guide only on the third quarter.

On this remark, I have to say that as we see that one, it is a soft few months in a very solid growth year in the semiconductor. We see solid growth in 2014, we see solid growth in 2015, and we are expecting to behave the same.

If you are looking right now from the six months we just finished with the June quarter, and you take into account the mid-range of the guidance that we just gave, it's actually reflecting around 17% growth in nine months compared with 2013, which was last year. So we definitely -- if you're looking right now on the 16% that we have on this nine months, it's outperforming the industry, it's outperforming the wafer fab equipment, and we are preparing ourselves for another growth year.

The question right now on the fourth quarter is exactly what will happen in the race between GLOBALFOUNDRIES and TSMC and the rest of the foundries when they're going into the FinFET. And you know that the key for this race will be their customers and what will be their choosing criterion in the foundry, where they want to invest in order to get first to FinFET.

So this is why the visibility is becoming not clear. Specifically on that point of the foundry, it's very important to say that our leading customer actually softness started a few months back. And although we saw that when we could mitigate the softness with other revenues that came from other foundries because of our strength in the foundry and it will continue in the next few quarters. So we do see a broader customer base of investing, we see broader amount of revenue coming in order to mitigate the softness of our leading customer, and I personally think that we should expect some time in issue between Q4 and Q1 2015, but I do suspect that we will see some expedition in our leading customers coming towards the end of the year.

Great, that's extremely good color.

Just trying to stay with the foundry, your largest competitor at KOA had recently announced a big order from, I guess, the US foundry there, right? And I was wondering, I understand -- our understanding is basically that foundry has kind of [made] position in terms of the two sets that they want to purchase for the 14-nanometer RAM. I was wondering, do you see any kind of share change at that foundry, especially with the change in direction in the technology, or do you think that you can continue to capture that high share in that foundry?

Looking right now in our results, without getting into details, as I said we do see revenue coming from 14 and 16, okay? So we do have systems in both 14 and 16, so I do -- I do expect that whenever this full ramp will take place, we will enjoy and get benefit from that as well.

You need to understand also that there is a lead time gap between us and our leading competitors, and what they see six to seven months ahead, I probably will see in the next few months. So it's very tough for me to talk about market shares and things like that. We are in a very strong position in all the leading foundry, besides the leading one, and once we'll see the ramp coming in the 14 and 16, we are well positioned for that as well.

Great, that's helpful. And then, I think on the memory question that Patrick had for you guys, right? You mentioned some of the new wins, such as TSE is what was announced last year. But if I understand your commentary, it sounds like, at least through TSE, it would take some time before the customer put that into production. And then, the announcement you made last year for that customer, it also seems like it might take some time before we start to see actual production revenue. And I think you know the right way or the opportunity closer than I think.

I think from what we see, and I talked about it in the previous call, I think that we see some -- as we see customers expediting a bit the CSV. Right now, there's two technologies out there or semi technologies. One is the [privi] and the other one is the 2.5 T1 (inaudible) and the other one is full TSV. We do see some more extensions and some more spending in that one.

Current year, as I said, we have five customers that are using our TSV. We are having more evaluations that we are doing currently. You know right now that the entry point to the market is pretty much pressurized by the pricing of the TSV devices, but I think that when customers are shrinking the devices, one of the options for them to increase the productivity of the devices will be to go to TSV devices of [suction], and I clearly think that in the second half of 2015, we see much more capacity coming in. By the way, both in foundry and memory.

Great, that's helpful. And then, talk a little bit about your software product. I think you mentioned that you're starting to generate for both the fleet, as well as a hybrid metrology product, right? I was wondering any way you can kind of quantify it in terms of magnitude, roughly, what level of revenue are we looking at for first half this year, for this year, for next year. Any kind of metric you can provide for us.

I think that what we can say is that in 2013, we had very incremental software revenues. In 2014, our goal is to reach very close to the 5% of total -- of product revenues, and grow from there.

Great, that's actually useful. And then, I will stay with you, Dror. Then talk about cost control. You mentioned that you expect OpEx to come down a little bit this quarter. Is that just because of a slightly softer topline, and now it's just like sales related, just cut back on spending, or how do you kind of think about OpEx kind of beyond this quarter and longer term?

As always, we are committed as management to the profitability. And now that we see that revenues are somewhat declining in the third quarter, we've taken the decision to impose cost controls, mainly in the overhead and G&A expenses.

So you will not see a reduction in sales and marketing or R&D, which is mainly related to the, I would say, other areas. In terms of R&D specifically, you might see even an increase in the fourth quarter -- in the third quarter, sorry. And I would also say that once we cross this hurdle of the third quarter, you should expect operating expenses to again pick up to the level of between $12 million and $13 million a quarter in the coming quarter.

I just want to say something because I want to put some color on where we invest and where we don't invest. Actually when we look -- and it's related to the market. When we look on the market right now, as I said, this is totally growth years of 2014 and 2015 where we need to observe some softness in the next few months, okay? It's coming, by the way, from the capital intensity reduction in both flash, V-NAND, and foundry FinFET.

Therefore, this is our -- our attitude is, from one side, to use our efficient P&L in order to continue to be profitable, and we are known for that and we have the efficiency to do that. That aside, we are keep on investing in R&D projects; actually, we are investing a lot in the software direction, we are investing a lot in our next-generation OCD product that will come to the market in the second half. We have a few other initiatives that we just started, so for us when you're looking right now in the next few quarters, we're keep on pricing those opportunities with new initiatives, new technology, and we keep on investing in R&D. This one will not be demonstrated in the next few quarters.

Great, that's very helpful. Thank you.

Keith Maher, Singular Research.

Good afternoon. Dror, you mentioned product mix helped the gross margin this quarter. Just wondering if you could give a little bit more color there in terms of what products. And also, the service gross margin up quite a bit sequentially. I'm assuming that's services, but just a little more information there would be helpful.

So on the services gross margin portion, actually service revenues increased mainly in time and materials in this quarter and it significantly increased relative to the previous quarters.

And all that was done on the same cost basis because services are more or less characterized by fixed cost. And this is the main reason why you saw a major increase in service gross margins, more revenues on the same cost basis. On the product gross margins, we did see favorable product mix in terms of which kind of products have been recognized for revenues in the quarter, including some incremental increase in the software portion of the revenues. So that was the main reason for the increase.

Okay, thanks. Also, congratulations on the V2600 order in the quarter. I'm wondering if you could talk, though, a bit about what the sales cycle looks like for that, when the customer started evaluating it, how long it takes, and also if you could talk about the number of any other customers that might be looking at that product.

This is based on your issues. One, as I said in my prepared remarks, we've already five customers that are using this technology.

I think that if you're looking right now in the overall OCD space, we came with a very unique technology to measure those TSVs. I think that according to those evaluations, I think it's unmatched by any other competitors in this direction, where you can actually take an OCD technology and convert it to a single [veer], which is not a repeatable structure, and give the full profile and give the top [city], bottom city, and everything that is going on in the [veerite]. It's a very unique technology that is given to those customers.

And I think that when you're looking right now, an evaluation like that, it's not so different from any OCD evaluation. OCD evaluation takes between three to six months for a new customer. If it's an existing customer, it takes around three months. And because we use much of the OCD that we used on our OCD tools, I think that we in the first demo and the second demo, we actually show our benefit to the customer. So each decision criteria are made early on on the process and then it needs to qualify that one in production.

Okay, that was helpful. And another question, just circling back to the repurchase program, the $12 million program, is there any timing overall as to when you would try to buy back that $12 million worth of shares?

Yes, we did mention in the previous conference call that, in general, our plan is to conclude this plan within 12 months from the initiation. It could take a little bit more, but these are our plans.

And what is -- you mentioned the window, the actual window you have to buy, isn't that wide. What actually -- if we're coming up in the next whenever quarter, what is the actual kind of window when you would actually be buying shares?

So the share repurchase program are controlled by legal or rules of how you can make it, so there are restrictions of how much you can buy relative to the daily volume and so forth, and there are also some restrictions where -- legal restrictions where we do not actually perform the stock buyback during blackout periods, which normally are starting at the last two weeks of the quarter until the announcement itself.

And then, maybe one final question. You mentioned the receivables picking up was mainly just due to the timing of shipments. I was just wondering, I know last year you provided more favorable payment terms to some of your customers. Could we see that affecting receivables, say, later in the year?

No, no. The reason for the change right now is not related to a change in payment terms to the customer. This was a one-time event in the end of last year. So we should not see that, in terms of giving extended payment terms, impacting our results looking forward.

Thanks. That's all I have.

David Wu, Indaba Global Research.

Yes, good morning. I have a couple questions regarding a little bit on the (inaudible). At this early stage, can you guesstimate what -- how much of an increase in metrology intensity is at -- compared with the current 14 nanometer, 16 nanometer node?

Can you repeat again? I didn't -- we didn't hear you very well.

Yes. Can you hear me now? I was wondering, admittedly at this early stage, can you guess at how much more intensive metrology will be used in 10-nanometer FinFET node versus the current 14-, 16-nanometer node?

We don't have right now the current actual numbers in regards to the 10 nanometer because we just started.

When it started, you need to identify the problems, you need to identify the complexity. Over the periods of, I think, some months from now, customers were identifying exactly the attach rate and exactly in which process they would like to add OCD solutions.

Nevertheless, I mentioned in my previous call, and this is something that we can say about the movement from 20 to 14 and 16, and we said that the metrology intensity can grow in a position from 20 to 16 or 14 at around 10% to 20% when they move to high-volume manufacturing, and this one we see already in the foundry world because we are right now in a position between 20 to 16 and 14.

Okay. So if -- the same [thing] assumes that ratio roughly would be the same.

Moving to another incentive, you mentioned something, I think, in your comments that the gap between an Intel and a [resi foundry] plays would narrow when we reach 10-nanometer range. At possibly which calendar year would 10-nanometer (inaudible) go into production, and roughly, I think, your lead times (inaudible) I assume the same calendar year would the orders result from?

There are a few questions in what you said. So first of all, we didn't say Intel, but roughly when the timing for the time to solution has been shortened, I think that all the logic or our logic customers are racing in order to get to the starting point on the same time.

And as complexity is becoming an issue and cost is becoming an issue, I think we will not see one of them is coming well in advance than the other. And therefore, while migration like that will take place, I think that metrology or optical metrology will benefit from that because all of them will run to the 10 nanometer.

What I do say in my prepared remarks, and maybe this is applying to what you're saying, that the 10 nanometer probably will be broadened with other customers as well, and therefore it benefits for Nova.

Roughly which calendar year do you think that [bottom] production will occur and therefore orders accrue to you?

We can look on the analysis of the market. We said this was done on 10 nanometer, which I'm not so sure this is so accurate in this stage where we just started.

But everybody is talking right now on the virtue of 2017, 2018, that's what the estimation is. I just want to take people into a cautious note that you know that 16 and the 14 is not yet in high-volume manufacturing and the customer base, the established customer base, didn't get into the metrics where they are buying from. So therefore, it will be very aggressive for me to point exactly in which year it will start. But if everything goes right and the industry keeps on being strong in the next few years, we probably will start to see that at the end of 2016, beginning of 2017.

Thank you.

We have no further questions at this time. I'll turn the call back to Eitan Oppenhaim for closing remarks.

Thank you, Operator. I would like to thank everyone for joining the call today. We appreciate your interest and your questions. We hope to see in the next quarterly call. Thank you and have a good day.

Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation.