Onto Innovation Inc (ONTO) 2003 Q4 法說會逐字稿

Good morning and welcome to the Nanometrics Q4 and fiscal year 2003 financial results conference call.

The following discussion may include forward-looking statements regarding, among year other things, Nanometrics' future financial results, business performance, and market conditions. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ, and such differences could be material.

Factors that cause such differences include, but are not limited to, changes in demand for the company's products, changes in the company's ability to ship its products in a timely manner, changes in business or economic conditions, and the additional risks and uncertainties set forth in management's discussion and analysis of the results of operations contained in the company's annual report on Form 10-K for the fiscal year ended December 2002, filed with the Securities and Exchange Commission.

Thank you for joining the conference call.

This morning's speakers include John Heaton, President and CEO, and Paul Nolan, Vice President and CFO of Nanometrics.

A Q&A session will be held at the end of the call. Until that time, all participants will be on a listen-only mode.

We will begin the conference call with Mr. John Heaton. Please go ahead, sir.

Great, thanks, operator. Hello, welcome to our Q4 '03 conference call.

Before I review the quarter and update our business, I want Paul Nolan our CFO to read the news release and highlight some of the financials. As usual, if you don't have a copy of the release and would like it, please go to our web page at Nanometrics.com or call our main phone at (408) 435-9600 and ask the operator to send it to you.

With that, I'll turn it to Paul.

Okay, thanks, John and welcome everybody. I'll start with the earnings announcement.

Nanometrics announced its financial results for the fourth quarter and year end 2003. Total revenues for the fourth quarter of 2003 were $12.4 million, an increase of 22% compared to the third quarter of 2003 and an increase of 27% compared to the fourth quarter of 2002.

The increase in fourth quarter sales in 2003 resulted from stronger demand for semiconductor process control metrology equipment, primarily in the Pacific Rim countries.

The net loss in the fourth quarter of 2003 was $804,000 or 7 cents per diluted share, compared to a net loss of $3.2 million or 27 cents per diluted share in the same period last year.

For the year ended December 31, 2003, Nanometrics' revenue increased 20% to $41.6 million, compared to revenues of $34.7 million in 2002.

The net loss for the year ended December 31, 2003 was $17.5 million, or a loss of $1.45 per diluted share, compared to a net loss of $8.3 million, or a loss of 70 cents better diluted share in 2002. The net loss in 2003 includes a $6 million charge to record a valuation allowance against deferred income tax assets as previously reported in the third quarter of 2003.

The company's financial position continues to be strong with cash and equivalents and short-term investments of $29.9 million and working capital of $59.2 million.

Now, taking a look at sales by territory in the fourth quarter of 2003 they were as follows, and these numbers are rounded. In the U.S., about 20% of sales. Japan, about 40%. Korea, 15%. Taiwan, 15%. And China was about 10% of product sales.

Sales by product category in the fourth quarter of 2003 were as follows. Automated systems represented about 59%, integrated systems, 23%. Tabletop systems, 5%, and service was about 13% of total net revenues.

Our gross margin was 49% in the fourth quarter of 2003, up from 41% from the third quarter of 2003, primarily as a result of product mix and greater overhead absorption due to fourth quarter production ramp, resulting from increased product demand.

R&D expenditures in the fourth quarter of 2003 were about 26% of total net revenues as the company continued to invest in the development of new products. SG&A was about 34% of total net revenues in the fourth quarter of 2003, which was down from 39% in the third quarter of 2003.

And finally as we said in the press release, our financial position is strong, with a cash balance at December 31, 2003 of $29.9 million and working capital of $59.2 million.

With that I will hand it over to John.

Okay. Thanks for that, Paul.

In reviewing the quarter, I thought we would quickly run through some of the obvious highlights.

First, of course, our revenue was up rather significantly over Q3. This acceleration in demand, as we have stated on many conference calls, is challenging for management to predict. Our customers have a tendency to move very quickly after decisions are made, and we can have opportunities to grow revenues when that happens. Fortunately we maintained a favorable mix of inventory to meet this unexpected demand.

Secondly, we made good progress in reducing the operational losses. This was accomplished with higher sales, a reduction in work hours through shutdowns and cost reduction programs. All of these factors are important and will be used on an ongoing basis to reduce losses and improve operations.

Another point we want to highlight is that that we maintained a strong balance sheet that could afford to us invest a large percentage of our revenue in R&D. This effective use of cash never put us in a risky financial position as we pass through the downturn, as some of our competitors have.

We are clearly a technology company that relies on new technologies to grow, and we were able to do that the past few years. We are proud of the fact that Nanometrics went through the downturn without significant head count reduction or dangerous cash strain from operations. Our intention through the downturn was to invest heavily in new products and technologies so that we could rise out of the downturn with a better market position in the primary markets that we serve.

Gross margins in the quarter had some amazing gains, quarter over quarter. As Paul stated, we went from 41% to 49% gross margins, which was a tremendous lever on reducing the loss. As many of you know, margin is and always has been a primary focus area for the company and we were very encouraged by the improvements.

The contributing factors, as many of you will want to drill down, on are the shift in product mix from 200- to 300-millimeter as well as more favorable margin newer systems. We hope the trend continues as we start to recognize revenues from our latest products.

I also want to highlight the fact that these margin gains contained no inventory writedown material, as some of our competitors continue to benefit from. We believe this confirms our superior performance in our customers' eyes and over inferior products sold at substantial discounts.

On the product side, Paul reviewed the general mix, with my additional color being that we had greater than 50% 300-millimeter product revenue in the quarter and a strong rise in Integrated Metrology systems, again confirming our belief that Integrated Metrology are very much tied to capacity purchases. We see both the 300-millimeter and Integrated Metrology theme continuing to improve throughout the year.

On the territories, Paul again gave you the numerical data, but I wanted to highlight the fact that Japan was one of the strongest areas for us in Q4 as we continued to penetrate large new semiconductor customers. We now have important momentum with some of the premier semiconductor manufacturers in Japan.

As you all know, the second largest area of semiconductor equipment manufacturing is also in Japan, and we think we are well positioned to benefit from OEM sales through this territory. We believe this trend will continue in 2004, with flat panel display kicking in a bigger percentage of revenue for Taiwan.

China continues to be an important growing territory that we have a good position in with [Anj] Equipment and that should continue also throughout 2004.

A major milestone for us was passed in Q4 as we recognized new OEM revenue with key OEM suppliers. Our goal has been to capture the number one and number two OEM players in each of the process areas that benefit most from Integrated Metrology. With our recently announced five new OEMs and more in process, we made significant progress in that goal.

Our long-term belief is that we can create a balanced and predictable revenue stream if one can create a more broad OEM customer base. We will continue our efforts in this area with further integrations and new products still to be announced.

Although flat panel display business was only 10% of our product revenue in Q4, we see significant opportunity for growth in '04. As many of you have seen over the holiday season, an inflection point has been reached and passed that signals an end to CRTs and incredible demand for flat panel display technologies and capacities. We have been the market leader for many years and stand to benefit from the years of investment in this area.

Although we don't give guidance beyond a quarter, the visibility into flat panel display growth is constantly improving and should -- and should end up by year end to be substantially higher. For your information, we derived approximately $7 million of our revenue in 2003 from flat panel display.

As many of you have seen in public disclosures of the past couple of months we have now announced some of our new OEM partners. Please visit our website at Nanometrics.com to get specific details and copies of the announcements.

We finally see the overall acceptance of Integrated Metrology products gaining traction. We shipped a significant number of systems in the quarter and recognized greater than 20 of those shipments already.

Another key milestone that we are excited about is our introduction of a completely updated stand alone 300-millimeter system called the Atlas. I couldn't be more please with the rollout of this product, as it was introduced more than 6 months ahead of our intended schedule.

We believe it has important price and performance benefits over our competition and will serve as the basis for new technology introductions into the future. Although no acceptances were recognized in Q4 substantial shipments have begun with important performance gains already being realized.

We believe this system will lead to market share gains longer term and will certainly be the backbone of our business going forward.

We maintain our belief that the only truly successful metrology players in the nanotechnology area will be those with compelling stand alone and integrated solutions. Having only one part of the solution doesn't give the customers the needed information to complete advanced process control in these more advanced fabs.

Moving on to the revenue guidance and general outlook for our business. The overall environment has certainly improved over last quarter or two.

We see continuing order momentum in our three main product areas, those being stand alone, integrated and flat panel display metrology systems. All of these areas are forecasted to be up significantly over 2003 and unless there is a significant world event, we should continue to benefit throughout the year.

The challenges we continue to face doesn't seem to be orders, but deliveries and SAB acceptances. As you can see by the sheer number of customer and product announcements, we have a real challenge to predict where the revenues will end up with this quarter, just as we did last. We expect this pattern to improve as the next few quarters pass.

Bottom line is, orders are up significantly but revenue should be flat to up 10% as we continue to ship these new products to new customers. This is the same basic guidance we gave at the end of Q3, facing the same set of challenges.

Having gone through all those key highlights, I will now open it up to questions.

Thank you, sir. The question and answer session will begin at this time.

If you are using a speaker phone, please pick up the hand before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question.

Our first question comes from Cristina Osmena. Please state your question.

Congratulations, by the way, on bringing, you know, closing in on the break even there, John.

Yep, thanks very much.

A couple of questions here.

Could you, you know, I said -- you knew that we would want you drill down a little bit on this gross margin expansion. It expanded quite nicely in the quarter. Could you talk a little bit more about the disparity between your 300-millimeter gross margins and the 200-millimeter gross margins. How many more points are you getting on 300-millimeter and why? Many other process tool companies right now are only seeing parity at the sort of, Applied said at their call.

Well, that's a good question. It is not necessarily all that accurate, though, because even though what I'm saying and what I said in my prepared comments was that 300-millimeter, you know ,was an important area for us in the quarter, I don't necessarily believe that the margins are necessarily that much different on this 300-millimeter than they are on 200-millimeter.

My point was that the systems that we talked about earlier in the year, which were older 200-millimeter systems, kind of worked theirselves through our system, and pretty much all of the systems that we are now shipping or certainly a large percentage of those are newer products with, you know, a lot of of the costs taken out of them and in general newer designs.

Okay.

So that 300-millimeter and newer systems is really what I was alluding to. Not necessarily that 200-millimeter has poor gross margins, just that they are not as good as 300-millimeter.

Okay.

Could you -- you know what, on the Applied call last night, there was only one region where their orders actually declined sequentially. And since you have a very good insight into that region, which is Japan, I wanted to know what your take on that was and if you were -- you know, you said your orders were up significantly but are you seeing the same kind of maybe downtick at some point in the future? Understandably metrology orders don't coincide, you know, quarter by quarter with the process equipment orders, but what's your take on what is going on over there?

Well, you know, I think the cultural differences in Japan are significant and if we all say to ourselves that Japan, Inc. has decided to make a broad-based investment in semiconductor processing, then in general I think that those manufacturers try to support companies that are primary suppliers in Japan. So I don't know that it is necessarily a problem with the Japanese market as it might be with, you know, there is really high quality suppliers in Japan and there seems to be a tendency in Japan to buy their primary equipment from local manufacturers. I mean I think it is a -- you know, a cultural thing to some extent.

And so if you look at it from our standpoint, there is no metrology company necessarily founded and structured in Japan. We're pretty close to it because we have been there for, geez, I think 14 years now as a manufacturer. So we have pretty good visibility into that territory and we think that, you know, our relationship with our customers has been very good for a long period of time and we finally have gotten to the point where we think that, you know, our products are now very compelling for them and, you know, we are seeing the results of that now through increased sales in the territory.

And as Paul said, in the statements, even though the actual numbers come out to be 40% of our sales, where in Japan it actually was higher because some of the U.S. shipments ultimately are installed into the Japanese territory, so in fact if the reality of our business was that even though 40% is pretty high from a relative basis for us, it was actually higher than that even. And we continue to see that throughout the year.

I don't see you know the market softening in Japan. We certainly see lots of new projects that are planned throughout the year and a consistent message from all of our customers that expansion is on the way and I think it's full steam ahead over there.

Is your penetration in Japan across all product lines or is it focused on standalone or --

It's everything that we sell. We sell OCD over there, we sell standalone film thickness. We sell integrated OCD, we sell integrated film thickness. All of our products, you know, are doing quite well in Japan right now.

Okay.

And finally, before I turn the questioning over to somebody -- for other people to ask questions, your interest income was up pretty substantially. What was -- should we continue to assume that that's going to be the case going forward or what drove that?

No, don't assume that. Because we had some tax benefits or some tax refunds from the government and they were substantial amounts and in that includes quite a bit of interest that they owed us on that, so that was a one-time gain.

Okay. So what should we put into our model going forward.

It would be similar to what you have seen in the past quarters.

Okay. Great. Thank you.

Our next question comes from Martin Teng. Please state your questions

Yes, hi. A couple of questions. My first question is with regards to the ASPs, have you seen an increase for your Integrated Metrology tools?

Yes.

As we introduced new advanced integrated products, which we talked about I think going back to the third quarter of last year, our entire plan during the downturn was to revamp our product line with more advanced systems. And when we went through that process of advancing the technology, there was also a price escalation because you're putting more technology into, you know, a smaller form and function.

So you know we were the first company to combine both the OCD technology with film thickness and that was the product that we introduced in the third quarter. And when you have that, you know, you are able to charge, you know, appropriately because you are adding a lot more cost into the system and therefore the average selling price did increase significantly.

And what is the ASP right now?

Well, in the past, you know, we would say the general integrated, if we go out to 2000 for instance, I would say on average the ASP was on the order of $100,000. And if we go now, fast forward to 2004, you know, we're probably in the 175 above, kind of, average selling price now.

Okay. And also could you repeat, what was the flat panel revenue for '03.

It was approximately $7 million. A little under $7 million for the year.

Okay. And did you have any Cap Ex guidance for '04?

Cap Ex for --

So adding -- equipment and fixed assets.

We did -- we did have some systems delivered and we probably will. You know, it'll probably be on the order of a million dollars through the year probably. Pretty typical for us.

There is no significant plans at the moment for any capital spending. We have all of our new buildings and we pretty much have the equipment in place that we need now, so I think it will just be tweaking here and there. It won't be anything significant.

Okay.

And one final question with regards to integrated tools. Where do you see the concentration to be in for processes for CD or UDI or film thickness?

Okay. So historically the area that's been the gray area has been CMP where virtually every tool has integrated technology of some sort, whether ourselves or one of our competitors.

The next area for us that was a really important one that we haven't really seen any competitive pressure has been the CVD area. We pretty much dominate that area. It's been a good, you know, piece of business. It's not big enough where there could be a number of players, because it's still a relatively small market.

Integrated CD is obviously -- you know, OCD is a trademark of Nanometrics, you know, and we believe that we pioneered a very strong product offering and as you have seen from the announcements, the etch community agrees with that, and also our announcement with DNS.

So I think that you're going to see the whole area of CD control, especially as I said in the nanotechnology era, where we are getting below 90-nanometers, and it is not going to be possible for people to take a process, characterize it and then run it. Its going to require feed forward from CVD and then feedback into the scanner and also feed forward into the etcher, so we see a pretty significant shift.

And I think that has been reflected also in some of the comments this week with some of our competitors talking about how there has been an inflection point not only, as I have mentioned earlier, in the flat panel display area, but we also believe in the critical dimension area, and you're going see a lot more of that as people really now try to execute on sub 90-nanometer processes, which is considered nanotechnology.

Right. The tool that is going to be designed into the track system at DNS, do you have any idea as to how many units per track, or the penetration rate.

We don't give forecasts, you know, specifically also for OEMs, it's not our place to speak to those kinds of things.

All we will say is that, you know, we believe that the integrated OCD technology will be an important area for us through this year and we expect increased shipments significantly over 2003.

But, you know, in order to -- we just -- you know, we feel like we have to kind of play a very even hand here when it comes to, you know, our supplier relationships. We're not going to disclose information about shipments to any specific customer and or, you know, segment area because I think it would be, you know, kind of out of school for us to do that.

Okay. Thank you very much.

Our next question comes from Tim [Mateo], please state your question.

Hi, actually my question has been answered. Thank you.

Great .

Hello? Operator?

Our next question comes from Gerry Fleming. Please state your question.

Yeah, John.

You mentioned that I think it was 23% of your business came from the integrated area.

That's right.

Roughly how does that breakdown -- break down between shipments to U.S. and foreign customers?

Oh -- U.S. -- well, as I said, Japan was probably 50%, closer to 50% of our business, you know, realistically from a shipment standpoint, where the things actually ended up. So I would have to say that it's primarily Japan.

Okay.

Now, you had also indicated that you see strong order momentum on all three of your areas. Could you, again, qualitatively talk about which looks the strongest?

Well, most guidance, most forecasters are talking about semiconductor being up, you know, 30% or 40% this year. So that's, you know, I think we see that. Everyone sees that. I mean I think Applied talked, everyone is talking about semiconductor being up fairly significantly. So that is a good thing for our standalone, I would say.

On the integrated side it's, you know, it has to exceed that because we're talking about a substantially changed customer base for ourselves. As I said, our intention is to have the number one and number two in all of the, at least the four areas, for integrated, and what that would mean to us is that whenever a few fabrication area is built, especially for 300-millimeter, sub 90-nanometer that we should see significant orders for that.

So we think that and anybody that is going to be building a new 300-millimeter fab over the next year is going to be targeting, you know, nanotechnology type processes and, you know, we think that that's going to be a significant gain for us. So we would think that integrated would be significantly higher than that 40% for the general semiconductor folks.

And the flat panel, I mean as I said earlier, there's a tremendous shift from the CRTs to flat panels and, you know, we've stayed in this market. It's been an extremely challenging market for us for a long period of time and many people questioned why, you know, even one would say in the market because it was so small. Now, we are finally seeing the fruits of those years of suffering and, you know, there are significant new programs and projects going on this year that will certainly be much greater than 40% change for us.

So if I had to pick one of the three areas that is the biggest change, it would probably be flat panel, secondly being integrated and thirdly being the broad based semiconductor growth for standalone.

Okay.

And going -- talking about pricing and margins. How does the Atlas price compare to the 9300 or whatever it's replacing?

Well, the Atlas tool is a brand new product that has, as we said in the announcement and I kind of mentioned a little bit in our comments, it's got significantly better technology, higher productivity, smaller footprint, better maintainability and reliability, and customers in general will pay a premium for that.

So, you know, I will have to say that if I look back at the 9300 and look forward to the Atlas now, it's got a higher ASP and in fact, what we have done is, you know, done a significant program to reduce the costs of the system because we kind of simplified the design and that, you know, should lead to not only higher ASP but more favorable gross margins.

Okay. I'll come back in a minute. I've got a couple more but I'll pass it on.

Okay.

Our next question comes from Cristina Osmena. Please state your question.

Hi, John, could you tell us what kind of capacity you have for flat panel display and if you might be capacity limited there if you've been adding capacity during the downturn.

Are we capacity limited? I don't think that the company is capacity limited.

I believe that the supplier community, you know, for these large systems is not a robust as it should be, and I think just as we were kind of mentioning earlier, the ramp in semiconductor was somewhat astounding. The same things that are happening in flat panel are not as easy to adjust to because, you know, these systems, you know, are not manufactured by, you know, large suppliers like they are in semiconductors.

So if there is any issue it's going to be hey, can you get, you know, the stage system that, you know, relatively short period of time.

The one thing I will say, though, about the flat panel part is that the lead times in those tools is significantly longer. Nobody in the FPD area expects the kinds of deliveries that they expect in semiconductors. So, in fact what you will generally have is a 6 to 9 month window to build your equipment.

So taking that into consideration I think that, you know, we have a plan in place and that we can -- and we intend to accept all, you know, orders and ship to customers on time.

So I don't see, from our perspective at this time, a shortfall in our capacity. There may be issues along with the way with some suppliers but I don't think that they are substantial, and that we'll be able to talk all the orders that we can get.

Okay.

Question on the Atlas. Probably need -- how many customers' sites have you placed the system, if any?

We have -- how many customers -- I think it's four right now. Four that we have shipped to already.

Okay. And you haven't recognized the revenue?

No, no recognized revenue.

As I said, you know, a lot of these things, it's a new system and we have to go through the qualification process, and as I also mentioned we are already achieving the kinds of improvements that we had planned on and, you know, way ahead of schedule and kind of hit the market at the right time, you know, with the ramp going on. So we think it going to be a good area for us. Probably much better than it has been, historically, I would say, too.

Okay.

And back to the integrated market. You told Martin you were thinking maybe your ASPs could be around 175. What were they this quarter?

Well, this quarter still has a mix of the previous generation and not so many of the newer ones, so it's probably in the low hundreds right now.

So that was a nice uptick in the number of units, then, that you shipped this quarter.

Yeah, it was significant for us.

Could you give us a sense of the mix, then, of CVD, CMP? Like I said, I don't feel that it's really appropriate for us to -- really appropriate for us to speak too much to that. As I said in the past, the CVD has been good and CMP wasn't that good, but we've seen a significant reversal from our OEM partners where there is a broad-based acceptance now and I think a reawakening on where our product position is relative to our competitors, and we are seeing significant orders from the OEMs that we did not see last year. In CMP.

That's correct.

Is that copper CMP?

It's copper and it's oxide. And I think that you saw the announcement about copper, so we feel, you know, even though that market is still very premature, you know, it'sprimarily a logic based market, you know, most of the revenues that we have seen in the past couple of quarters have been DRAM based capacity expansion and now we are starting to see the foundries and the logic people starting to come in, you know, second -- in the second phase. But --

Why do you think it has taken so long for the copper CMP market to adopt integrated versus oxide?

Because I don't think that there is a strong process control problem like there is in oxide. You know, whether you want to talk about dishing or talk about erosion or talk about residuals, there is no clear process control problem that you can point to on a customer by customer basis that emerges.

Some people like to talk about erosion, some people like to talk about dishing, and some people like to talk about residuals. And there is no clear consistent message and that's why we see a highly fragmented, not strongly emerging process control market for it.

People seem to be able to tune their processes up. And I think the number one supplier of -- or, the manufacturer using copper technology does not really use much in the way of integrated metrology because they have pretty well, you know, characterized copper process that doesn't really require it. Maybe it's a nice to have, but it's not a requirement like the oxide is.

The oxide you really have no alternative because of the issues, the ongoing issues with polishing a planer surface.

Do you think the CVD market ever takes off, I mean, is there is strong process control need there in the CVD market.

There is a tremendous driver now that has not been there. As I mentioned, as people now get into the nanometer, the nanotechnology era, the feed forward from CVD to lithography is going to be become extremely critical, where -- as we have now emerged as, you know, a major player in the critical dimension area and as we work with the lithography people, it's becoming clear if you look at the contributors of CD variation, CVD is in the top few areas of causing CD variation. So there will be no alternative but to have integrated technologies on CVD systems, you know, into the future because there is no way to control the CD otherwise.

Okay. Thanks, John.

Yep.

Our next question comes from Stuart Muter. Please state your question.

Good morning. A couple of questions.

First for John, in terms of the dip down in revenues in flat panel, is that really an artifact of the transition from GEN5 to, say, GEN6.

No, no, it's just purely timing. It depends on which fab's going up.

I mean, there's GEN7 going up in Korea. There's GEN6 going up in Korea. There's GEN5, there's GEN6 in Taiwan. There's still a lot of our A, B and C models in Japan. So those folks are mostly working on either OLED or PDP. There's all kinds of different technologies that are still in the smaller size regime that continue for us.

As well as, I think GEN6 if you look at it into the future now, the GEN5, GEN6 are clearly wrung out process equipment and I think we're going to see, you know, pretty substantial expansion in those sizes. The GEN7 is so new and so risky at this time, you know, because it's all new equipment, just as the transition to 300-millimeter in semiconductor was, you know, timely, I think that the transition to GEN7 is going to be, you know, a challenge. But the benefits are great and that's why people take these kinds of risks when they go to bigger glass.

Okay.

And so you would expect ,with your visibility, a nice snapback in terms of percentage of revenues in Q1?

No, I didn't say that. And I don't give forecasts on products by quarter.

What I said was, and because this is the first quarter and we are kind of talking about the 2004, I gave a little more visibility into what we think's going to happen in the year. And all I'm saying is that if I look and I look back on 2004, at the end of the year, you know, what areas do we think are going to be the important ones that are primary focused and areas of substantial growth, and there's no doubt that the order visibility and the projects that we have visibility into right now indicate to us that, you know, flat panel is going to be a significantly improved market for our company.

That is all I'm saying. I'm not trying to predict where it's going to be. Because, as I said, you know, this is SAB stuff, this is shipment stuff and especially when you're deal with the customers in Asia, you know, the timeliness of the acceptances is always difficult.

Fair enough. I understand.

A couple of questions for Paul. If revenues were up around, you know, your high end of your revenue guidance, would you expect your gross margins to be up a little bit?

That is our objective. I can't project for you, but, you know, with the internalization of our manufacturing that we have done, we hope to have good leverage as sales increase.

Great.

As a gross margin.

And what do you think your tax rate is going to be? Are we looking at 0% for the year?

I can't say for the year because we haven't projected what we're going to do for the year. But in the early stages, you know, it's some where around zero, you know, at the early stages that could be -- because we'll have some tax opportunities especially as we, you know, become profitable, we'll have some tax opportunities early in the year that may help us out.

So it may keep it fairly low. I don't know exactly how low.

Okay. Thank you.

Our next question comes from Gerry Fleming. Please state your question.

Yeah, John, historically your flat panel business was a lower margin business. What's being done to get those margins up to more like what you do in the semiconductor marketplace?

I don't think that their flat panel systems have been lower margin.

We have a policy in the company to achieve gross margins on the products and should any of our product groups fall out of those margin goals then what they are asked to do is go back and look at the product, find either a way to get a higher selling price or to reduce the material costs. There certainly is a challenge going on in the flat panel market because as the primary manufacturers moved from Japan into the lower cost manufacturing areas like Korea and Taiwan, but there has been a lot of pricing pressure because of the low end kind of metrology guides that are out there.

But, we feel very confident that, you know, our plan will produce products that achieve our company's goals for margins.

Okay.

And next question relating to Integrated Metrology. I think you said you shipped 30 systems and recognized revenue for 20.

No, I said we recognized for more than 20 systems but I didn't say how many we've shipped.

Does that continue to grow sequentially going forward?

It going to depend on the acceptances.

Our shipments are growing, without a doubt. We have, you know, as I said before, a significant number of orders from all of the suppliers. And we, you know, need to ship those to suppliers. We need to -- if they haven't already recognized revenue from one of these models then we have to, you know, work with them to get these things accepted.

I think the important part is that these products that we're, you know, announcing with these new partners are not science products. They are systems that are shipping and installed at customer sites. This is not some sort of a game that we're playing in order to try to pump up the company.

We announce products and partners when they become revenue for us, when we believe that the integration is close enough that we will see revenues from them. So I think it is important to recognize the difference.

We don't talk about partners where you can't expect us to, you know, talk about revenues and shipments. So we, you know, really carefully focus our attention and our public disclosures on people that ging to produce revenue for us, and that's why we talked about these things recently in press.

It is important to get the story out now that who the people are, so we can go out and talk to customers and prove to them that, hey, these things are real, that Integrated Metrology is becoming a very important trend in the marketplace, that Nanometrics is the leader, and that we have a lot of OEM partners that believe that the future involves having these technologies integrated onto their platforms.

Okay. And then just one last question.

As you start, or ramp, your shipments to the new partners are all of them using the $175,000 plus module as opposed to the old $100,000 modules, so that we can expect your ASP to gradually approach that number?

Well, as I said, you know, the -- it's a very difficult thing to predict for us.

First we have products from previous generations that will drive the average selling price down. Those are continuing. Those are not going away. They are just, you know, not as substantial as they might have been in the past.

The new systems as I said, you know, we have a kind of a targeted price, that we have agreed on, that we try to be consistent with our OEM partners, that their price is dictated by the technologies that they want to incorporate, so we have a fully loaded product and an OEM can choose to take things off in order to lower the price.

So I think there is lots of ways for a customer to achieve the technology they want at the price that is the correct price.

Where things are going to be, when can we see it approaching, you know, a much higher number as I was kind of telling you about, I can't tell you when that is. But it's certainly, based on our shipments right now, it's certainly going to be within this calendar year that we can expect a substantial, probably a far greater number of these new 9010 type systems than we had the previous 9000 series.

Okay. Thank you.

As a reminder, should you have a question, please press star one at this time.

Our next question comes from Cristina Osmena. Please state your question.

Hi. Question for Paul. Just housekeeping for my model.

Depreciation and Cap Ex and head count, please.

Let's see, head count was about 310. And capital expenditures were between $200,000 and $250,000 for the quarter. And depreciation still about the same range, $400,000 to 500,000 in the quarter.

And, you know, John, I guess since I'm on the line, it is very difficult to actually, you know, with all the good body language that your giving us, actually get to flat revenues in the next quarter. Something is, you know, with ASPs going up and integrated and you just assume you know even one more system in flat panel display and your standalone systems are doing well.

What could fall off to -- I mean, in order for revenues to be flat something has to actually be down.

Yeah, but let's look realistically at what revenue level that we are at. We are talking about, you know, a $12.5 million revenue level right now.

Our Atlas system -- one Atlas system is approaching a million dollars in selling price. If I recognize one Atlas versus not recognizing one Atlas that is 10% shift in the product revenues.

So you can see our reluctance, because it is a brand new system at many customers. We, you know, think that it's a great product and it's performing to our goals, intended goals and expectations, but, you know, customers are extremely finicky and they have the power on many of these SAB revenue recognition issues, so until we can get them to sign that document that says that it is fully accepted we are left hanging.

So, why would it make sense for us, should one or two of these either come on or come off our forecast, you know, lead to, you know, a crushing of the company's stock. That doesn't make a lot of sense to us.

So, what we do know is that there is a substantial number of shipments, as we have talked about here, that, you know, we certainly think that we can get back to the number that we were at this quarter. And that we are going to certainly try do better and if things do come in better, then we will reflect that just as we did in the third quarter. Remember, we gave the same guidance at the end of Q3.

So it sounds like we're, you know, you're keying us up for another preannouncement.

Not true at all because I don't know. We're halfway through the quarter and I still don't know actually where the SAB numbers are going to be.

Because as I said $1 million, one system recognition or not, can mean the difference between, you know a hit or a miss for us. And that's, you know, just not acceptable risk to take with the investors' value.

And okay so the swing then in our models would be in the -- under the standalone thin film category.

That's where the biggest risk, because that is where the highest ASP is.

Okay. Thanks.

You're welcome.

As a final reminder, should you have a question press star one at this time.

If there are no further questions I will turn the conference back to John Heaton. Please, go ahead, sir,.

Great, thanks operator.

Thanks very much, everybody, for calling in today and we look forward to talking to you at the end of the first quarter. Thanks and we will see you then.

Bye.

This concludes our conference for today. Thank you all for participating and have a nice day.

All parties may now disconnect.