Onto Innovation Inc (ONTO) 2004 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to Nanometrics Second Quarter 2004 Conference Call.

The following discussions may include forward-looking statements regarding, among other things, Nanometrics' future financial results, business performances 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. [inaudible] such differences included, 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 businesses or economics conditions and the additional risks and uncertainties set forth in the management's discussions and analysts results of operations contained in the company's annual report on Form 10K for the fiscal year ending 2002 filed with the SEC.

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. The Q&A session will be held at the end of the call. Until that time, all participants are in a listen only mode. We'll begin the conference call with John Heaton. Please go ahead, sir.

Great, Nikki, thank you very much. Hello, welcome to our Q2 '04 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 one, please go to our website at nanometrics.com or call our main phone line at 408-435-9600 and ask for the operator to send it to you. With that, I'll turn it over to Paul.

Okay. Thanks, John, and welcome everybody. We'll start off with the press release which was titled, Nanometrics Announces a Profitable Second Quarter of 2004. Total net revenues for the second quarter of 2004 were $16.2m, an increase of 19 percent compared to $13.7m in the first quarter of 2004, and an increase of 67 percent compared to the second quarter of 2003.

The increase in revenues during the second quarter of 2004 compared to the same period in 2003 resulted from increased demand for the company's semi-conductor process control metrology equipment, particularly in the U.S. and in Pacific Rim countries.

Net income in the second quarter of 2004 was $1.3m or 10 cents per diluted share compared to a net loss of $4.1m or 34 cents loss per diluted share for the same period last year.

For the six months ended June 30th, 2004, total net revenues were $29.9m, an increase of 57 percent from the same period in 2003. Net income for the first six months of 2004 was $90,000 or 1 cent per diluted shared compared to a net loss of $13.7m or $1.14 loss per diluted share for the same period last year. The net loss for the six months of 2003 included a $6m charge to record a valuation allowance against deferred income tax assets. The company's financial position continues to be strong with cash and short term investments totaling $26.9m and working capital of $61.3m.

Taking a look at sales by territory in the second quarter of 2004, they were as follows and these numbers are rounded: the U.S. was about 30 percent, Japan was 30 percent, Korea 35 percent, and Taiwan and China combined were about 5 percent of product sales.

Sales by product category in the second quarter of 2004 were as follows and these numbers are rounded: automated systems about 50 percent, integrated systems about 35 percent, table top about 5 percent, and service was over 10 percent of total net revenues.

Our gross margin was 53 percent in the second quarter of 2004, compared to 49 percent in the first quarter of 2004, reflecting improved overhead absorption and increased sales of newer products.

R&D expenditures in the second quarter of 2004 were about 16 percent of total net revenues as the company continued to invest in the development of new products. SG&A was about 27 percent of total net revenues in the second quarter of 2004, which was down from 32 percent in the first quarter of 2004. Cash and short term investments increased by $2.8m during the second quarter of 2004. And finally as we said in the press release, our financial position is strong with cash balance on June 30, 2004 of $26.9m and working capital of $61.3m. And with that, I'll hand it over to John.

Okay. Thanks for the review, Paul. It's with great pleasure that I have the chance to review today's results. It's been quite some time since Nanometrics has posted a profit and I'd like to dwell on that for as long as possible. We've talked many times about our strategy of investing for the future. It looks like that strategy and new products are starting to gain traction and we should look forward to more favorable operational model going forward as more of these units are recognized. But that's for later.

Another aspect of the call which might seem a bit out of the norm is our desire to highlight the differences between our results and our closest peers. There is always a tremendous amount of talk and speculation in our business and it can be quite confusing to the average investor. How does the investor really determine who is performing well in the market? As many of you might recall, we compete in a film thickness market that supports four or more competitors. With so many players and sparse analyst coverage and fragmented market, we think there are clear metrics that will help investors judge our performance. I will try to do my best to highlight those differences throughout the prepared comments. We think they're--we think they are important and just want to highlight them for all of you.

With all that said, I'd like to start off by looking back over the quarterly details and highlight some of the important points and numbers. I must admit that even though our timing of so much good news doesn't sit well with the overall stock market trend and sector downgrades, we are nonetheless very proud of our employees for making it through a difficult period of losses and now performing so well.

I can now give you many positive financial indicators for our company, starting with an operating profit. We had a net income of $1.3m. We went from negative 10 cents a share only last quarter to a positive 10 cents a share this quarter, a very positive change and certainly outperforming our peers. This profit was long in coming and we think is a good indicator of how well we can execute when the market conditions are right.

It also highlights the fact that we have maintained a consistent share count base during the downturn that didn't dilute shareholder value and gives us the ability to increase EPS more quickly than our peers. We have also benefited from a lower blended tax rate due to our tax carry-forwards from the past couple of years.

I mention this because the only significant write-off we've had over the past years has been a valuation allowance against deferred income tax. That $6m charge Paul mentioned occurred last year in the second quarter and as we now make money, our investors will benefit from that charge.

Finishing off the profit comments, I would like to highlight the fact that only one good quarter of profit has produced enough net income to make us profitable for the entire year, another very good sign.

On the revenue line, this was our fifth quarter of increasing revenues, up 19 percent sequentially with service remaining essentially flat. This was at the high end of our guidance above 10 to 20 percent. Again, one can see our revenue ramp is outpacing our peers and confirms our belief that our market share continues to improve. It only makes sense that since we are primarily focused on the film thickness business and our growth is greater than our peers, that we must be gaining market share. There is also an independent ranking firm, Data Quest, that already had us in the number two position with 18 percent last year, 2003. I just want to point this out so that investors can get as accurate a picture as possible.

Continuing on the P&L statement, we continue to see improvement in our gross margins as we amortize some of our fixed costs over a larger revenue base and start to see a more favorable mix of newer products, those products being primarily the new Atlas standalone and 9010 integrated systems. When we introduce new products to the market, one of the primary drivers for making model changes is to improve the overall profit outlook and produce a return on the R&D investment. This seems to be quite different again from some of our peers that continue to give margin away on new products and target a corporate margin goal that is below industry leading targets. We believe this is another key indicator of corporate performance and Nanometrics sets a high bar at 50 percent gross margin.

Our corporate objective is to meet or exceed our customers' needs while generating enough EPS for our investors, all the while having a healthy balance sheet that doesn't rely on repeated visits to the capital markets to survive.

In general, we attribute our improved margins to competitive offerings in the integrated metrology, standalone market and better market share with important customers. We also anticipate a continued reduction in overhead costs in Q3 as we realize the full effect of our cost cutting and head count reductions in Q2. Those reductions occurred throughout the quarter and aren't fully realized so one should expect some further improvement. Increased revenues should also help the margins.

Another item in the P&L is the R&D expenses. We are starting to see some of our engineering costs come down as we naturally complete engineering projects and transition them to production. Our plan for the past few years was to invest in new products and technologies. As these emerge from engineering and demand for engineering resources wanes, the net effect on our profits becomes a positive as we reduce these costs. We will still aggressively invest in our products and technologies, but the bubble of tasks have certainly passed.

Having said that and being a fast moving technology company, we must constantly reevaluate our market position and product offerings. And the result of that, there could be a future adjustment to R&D spending levels and investments.

Moving on to the balance sheet, the one really important item I might want to highlight is the growth in our cash. We have turned the corner on a difficult trend line and anticipate that our cash position should now continue to improve throughout the year as we run our business in a healthy market, barring no major changes on our customers' part that is. Inventories are up only slightly as we continue to ramp our production to meet short delivery expectations by our customers.

There were no major changes to our sales by territory as we remain active in all areas of the world, with Japan and Korea really being the strength of our business. Taiwan has not been good for us lately as we missed some important design-ins a couple of years ago and our current customers there haven't been spending. There is also the ongoing issue of timing of orders for Taiwan, so we should expect to see improvement there later in the year.

On the product side, our newest 9010 product continues to perform well in the field and has been ongoing, constant upgrading and improvements. We are very optimistic about this line of integrated metrology products and hope to penetrate more large production lines and OEM's later in the year and into the next. The Atlas and FLX standalone systems are also performing to our expectation in customers' fabs, as you might see from the acceptances now coming in. We have basically completed the transition to our newer products and feel that constant improvement and operational excellence will be our focus for the remainder of the year.

Beyond the day-to-day issues, we are again focusing our attention on important OEM needs and trying to fulfill the opportunities that exists in today's process fabs, most importantly, those in lithography area. We view that module of the fab at meeting integrated and standalone metrology more than ever as customers try to get a stable, manufacturable process for 65 nanometers and below.

More important and positive news for Nanometrics beyond the financial statements and product is related to the new Sarbanes Oxley 404 certification requirements, affectionately known as Sox 404. As many of you might be aware, there are new rules that go into effect for many companies before the end of this calendar year. If your company is classified as an accelerated filer; that is a company that has a public float above a certain level, you must document, test, and certify most of the important processes in the company before the end of the year.

It all sounds great to the investor, but the issue is there are no best practices established and the rules are somewhat murky. The great news for Nanometrics is that since our stock price fell below the accelerated filer level, we have another year to become compliant. We see this as a big positive for our investors because best practices can now be established and expensive consulting fees and auditing fees will be avoided. We can now take a more careful, thoughtful path to become a compliant public company.

On a similar topic, there has been lots of discussion about our auditor situation. Just to start off, Nanometrics tends to be a fiscally conservative company and hasn't had accounting issues in its history or even large write-offs of inventory, unlike some of our peers. While we can certainly understand that investors are quite concerned about our financials, we can assure you that this change in auditors is by no means a reflection of the quality of our accounting or auditing. In fact, our auditors, by rule would need to disclose any questionable accounting issue or disagreement with management and there have been none to disclose. We just completed our last audit with them and everything went smoothly.

We view this audit change as an ordinary course of business issue that is more a reflection of the windfall that the accounting industry has recently realized. I can assure you that there are no known accounting issues and that we will work closely with our audit committee to engage a replacement firm as quickly as possible. We anticipate that they--we anticipate that we will have a new firm fully engaged in time for our third quarter results and that a smooth transition will be enjoyed by all.

One more housekeeping note, we will also make an adjustment to a footnote value in the first quarter filings. It has no material effect on the company and does not affect the financial results. It's simply a footnote value for investors. If you recall a year or so ago, the SEC required all public companies to add a footnote to the quarterly and annual numbers that indicates the effective stock option based on [unintelligible]. This footnote gives investors an idea of how results would be affected should stock options be expensed. That value was incorrectly stated in Q1 footnotes and will be corrected through the 8-K process. It will be accurate in our coming 10-Q filing for our second quarter with the SEC.

Finishing off my prepared remarks, I'd like to disclose the revenue guidance and general outlook for our business. The overall customer environment is still quite positive from our perspective. We still see an improving order pattern in our main product areas in important territories. For guidance, we should see an increase of between 5 and 15 percent in our revenues for Q3 over Q2 '04.

Having gone through all those highlights and comments, I will now open it up to questions so you can ask me when the upturn will end. Operator.

Thank you, sir. The question and answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press *1 on your push button telephone. If you wish to withdraw your question, please press *2. Your questions will be taken in the order they are received. Please stand by for your first question.

Our first question comes from Martin Chang from SG Cowen.

Yes, hi. Thank you. Congratulations for turning a corner.

Thank you.

My first question is regards to the flat panel business. Can you give us a percentage of revenue?

For Q2?

It was 8 percent in Q2. It was actually pretty light the first part of the year for flat panel display. It has been pretty light for us and with most of the shipments occurring in Q2 and Q3. And the reality is that those things take longer to recognize because they don't really fall under the normal FAB rules. Even though they're going to a customer we've had in the past, virtually every one of these tools is a special because every customer has a different size panel. So the acceptances tend to be longer on a flat panel system. But we have recently shipped our new generation 7 system and business still goes along.

Okay. And you also mentioned about the 9010 integrated, too. Are you seeing adoption for what profit? Is it CMP or is it in litho?

Yes. So far, you know, the big success for our new system has been primarily in CMP. If we look back in the last couple years, we hadn't really done that well in the CMP area. We had--EMET was primarily our only OEM. And their biggest customer was using our competitor's tool. So I think as time has gone on and our product has been now adopted by many of the large companies, we can now see, especially for 300mm, you know, adoption by the end users and therefore, our shipments do apply to other, you know, EBAR or CMP being quite a bit greater than it has been in years past. And beyond the CMP area, we have sold systems for ETCH and we have sold systems for Litho. But the Litho area is still one of those emerging areas that we absolutely believe is going to need a lot of integrated metrology but it's still very much in the larval phase.

When you were at Semicon West, we saw one of the Eval 2's [ph], one of the new CMT2's by Novalis [ph] using a Nano integrated metrology tool. Can you confirm that?

Our system was attached to a Novalis tool at the Semicon show. There's no secret about it. We don't necessarily have a clear path to revenue recognition or to customer end users so we prefer to not really disclose it in a big way because it doesn't really benefit our investors. I mean, to some extent, you might say that being on the Novalis tool is an important metric, but on the other hand, it's only important if they're going to be selling a lot of the CMP tools with our systems. And we have--we don't have visibility into a significant amount of revenue from that. So therefore, you know, we really kind of see it as an insignificant event and [inaudible] we see how they do in the CMP market.

One other question if I may. The R&D line, it came down in Q2. Do you expect it to go up from Q2, flat line or--?

Well, as I said in my prepared remarks, we made significant reduction in the company as the products emerged from the engineering into the production area and we've made pretty significant adjustments to the head count in that area. So we don't see the same level of spending and we don't have the same level of expenses there. And I as I also said, we didn't fully realize those reduction in expenses because the head count wasn't adjusted in the beginning of the quarter, it was adjusted throughout the quarter. So we expect that those dollars will kind of remain flattish and somewhere in the same range. And it might go down, it might go up slightly but, you know, this kind of range is probably where we'll be at for the time being.

Okay. Thank you very much again.

You're welcome.

Thank you. Our next question comes from Damon Watson from Adam Parkins. Please state your question.

Thank you. A couple of quick questions. First off, on the new product side, you talked about new product momentum here driving the margins in the quarter. I'm just curious what percentage of the revenue today is coming from the new products? I expect small but as that ramps through the year, where do you expect that I guess maybe ending the year and how much is that going to impact the margin going forward?

That's a really good question. We didn't break it down that way. It looks like most - probably 50 percent is new product. It's probably reasonable to expect that 50 percent is already new product. As I said in my comments, we've pretty much completed our transition over to the new Atlas, FLX and 9010 platforms. We've been working down all the inventory on the previous generation tools. If we actually need to build more even eight inch equipment, we're going to have to go out and buy more inventory for that. So we've pretty much done a pretty good job of managing inventory and the expectations of the customers. And I think by the end of the year, we'll see 70 percent probably, maybe greater, of new products versus previous generation stuff.

And that's all going to have a positive effect because we design these products with higher technology and we've spent the last couple years, as we've tried to explain to investors, investing in an infrastructure that allows us to produce a higher quality product at a lower cost. And we expect going forward that as the revenues go up and the new products get adopted that incorporate this invertical integration that we should see improved margins. So one would expect that if the new products are adopted at that rate and we're making them inside that we should benefit from that from a gross margin perspective.

Okay. Do you have sort of a target gross margin you're shooting for at this point or--?

Yeah, I mentioned it to Paul. It's always been 60 percent gross margin. And we have achieved that in the past and the target remains. I think it's a solid long term model for a company. During upturns in our business, we've seen the top companies like the KLA or in the old days it was Tencor achieve these kinds of margins. This is what quality companies that have a good market share and good product and thought things through clearly understand that for the long term success of company, you need to maintain kind of a target of 60 percent gross margin. And you can achieve those kinds of numbers when you get into upturns. And then during downturns obviously the effect of having an operational overhead hurts you to some extent but as long as your model is 60 percent, we design our products to achieve that or better.

Okay. And second question I guess you sort of alluded to on the last one, the F turns over here, but I guess how would you qualify your visibility at this point? Has it changed at all from last quarter? And have you seen any change at all in your customers, whether it's OEM's or end user customers?

No. We're just as shocked as everybody else is. I think there's a lot of commentary at Semicon West about where the investors think the market's going and where the equipment companies think the market's going. We have not seen any change in our outlook. We see, as I said in the remarks, continuing demand for the products. It's been very strong. I would characterize it as as strong as we've ever seen for us. So that's what leads us to this guidance even. I mean, we gave guidance of 10 to 20 percent last quarter because we were quite optimistic about our order rate. And we still feel very strongly because we have a lot of visibility into projects that are coming up over the next six months. And we feel pretty good about a 5 to 15 percent increase third quarter.

Okay. So you say you--I guess how is your visibility going into the fourth quarter at this point?

We don't disclose beyond one quarter because it's just too fickle of a market. And who knows, you guys could be right, I mean, everyone that's saying the market has issues or the end market has issues. We don't know. We can't see it. But we certainly want to remain cautious and there's no reason to give guidance on fourth quarter when we have really no way of giving good guidance because we don't have a tremendous amount of orders for the fourth quarter. We've always operated in more of a turn business. We primarily get the business within the quarter to ship in the quarter and that business to us looks pretty good right now.

Great. Thank you.

You're welcome.

And thanks. Our next question comes from Jerry Fleming from WR Hambrecht. Please state your question.

Yeah. Great going, guys.

Thanks.

John, could you give us a number on the number of integrated units you shipped in the quarter and what the ASP was there?

Well, if I give you the number, you can calculate the ASP.

I'm dumb.

Thirty-one systems. $5.6m was the total.

Okay. And how much of that was sold to U.S. customers?

I don't break it down that way. I have no idea. I have no idea. We don't break it down like that.

But there was a fair amount to the new Japanese customer?

They are--they go everywhere. I mean, they're--I don't--it's not highly concentrated on any one customer I would have to say at this point.

Okay. And looking ahead, what sort of guidance or what sort of--what should we use in our model for share count?

I would probably say that the number that we have now which was for the second quarter was 13.3m, it depends to some extent--the calculation relies somewhat on the number of shares and on the stock price. So I would say that it could probably be somewhat higher. I don't--can't give you a good number but I would assume something somewhat higher than that but not a large difference from that.

Okay. And one last question. Anything new on the progress towards to getting a replacement auditor?

Well, as I said in my comments, we have a process here, an audit committee that is primarily responsible for. The new rules say that the audit committee must engage the auditors. And we're working with them to get that done. And we want to make sure that we get a good perspective on what's out there and what's going to provide the best value for our investors and give them the best visibility and comfort. And we're going to make sure that we pick the best and it's not something, you know, kind of a knee jerk reaction, it's something that you want to be thoughtful and careful about. And get the best people you can get for the best price and that's a pretty standard business practice but it doesn't happen overnight. And we don't want to rush out and be sorry that we made some decision later. So we're taking our time and we're going to do it right. But as I said in the comments, we can assure you that we'll have a new firm on board for the third quarter and we expect a nice, long term relationship with them.

Thank you.

You're welcome.

Thank you. Our next question comes from Harper Stevens from Edmunds White Partners. Please state your question.

Hi. Congratulations on a great quarter. It's nice to see you all back to profitability.

Thanks. We like it, too.

A quick question. I didn't hear you comment, I don't know if you commented or not on if you can break down the revenue geographically?

Sure. The geographic breakdown was about 30 percent U.S, 30 percent Japan, 35 percent Korea, and then Taiwan and China were about 5 percent combined. And that's based on product sales.

Okay. And are you seeing any strength in any specific area or weakness in any specific area that you could comment on?

Well, Korea and Japan have been really good areas for us for a long time. And they look like they're continuing to be a strong area going forward. I would have to say that those two areas are the territories in the world that seem to have consistency in their product planning or their fab planning. If you look when the Japanese manufacturers start to move, they move together and they have a plan and they just do it. And it looks like many of the significant semiconductor players in Japan have spending plans going forward. And I think from all indications that they're going to continue to go forward. And we've seen in Korea already they are making a tremendous amount of money regardless of what's going on in the market. It's primarily memory business and we expect that they will continue to expand because they want to increase their market share in the area that they do compete in. So those two areas to us look very good and don't seem to be affected by these seasonality issues that one might be seeing in Taiwan which is very much more of a consumer oriented adjust on a month by month basis kind of trend I would have to say.

Okay. Well, thanks a lot and again, congratulations on a good quarter.

Thanks.

Thank you. Our next question comes from Larry Lang with Second Line Capital. Please state your question.

Thank you. Is it possible or can you look at the business, your business growth relative to the industry business growth and is there any kind of relationship that you can quantify? And for example, if we're looking at '05 for the industry being up by 10 percent, what would you hope that would translate into for Nanometrics?

Holy cow. It's such a difficult question to answer because it depends on so many different things happening. The reason it's so complex is because obviously our trend here in the company has been to develop integrated metrology products and which customers are going to be expanding at what time and which one of those customers are going to be incorporating in a major way integrated metrology remains a question. So while we hope and we plan for--to outperform the market, you know, it really comes down to which customers are going to be expanding. Is it going to be memory expansion, is it going to be a logic expansion, communications? And it's almost impossible for us to predict.

In general though, we believe that we can outperform the market that we deal in. And that's what we've been demonstrating for at least the past two years now.

And looking at it that way though, what is the size of our addressable market and what's the range of estimates for how fast that's growing?

Well, according to the Data Quest folks last year, 2003, it was I believe $177m for film thickness and I think if you look at what people are saying about 2004 it's probably up 40 or 50 percent. So I think the film thickness part of the business is probably on the order of 250 - $250m probably. And the part that we've been penetrating recently has been the critical dimension area using our optical CD technology. And that is a growing area but it's very difficult to get your hands around because it's very much blended with the film thickness part of the business now.

What we see is our competitors and ourselves selling equipment that is primarily film thickness with this additional optical CD technology software added to it. So where is the line between whether it's a critical dimension sale or whether it's a film thickness sale. I think that line is very much blurring as the technologies converge. So that market itself could be another 50 to $100m market this year probably.

And have overall peak-to-peak, trough to trough addressable markets hopefully grow at 20 percent a year or something like that?

Well, they go with the cycle so they go down hard when there's downturns and they go up significant when there's upturns. And I can't predict--I can't really give you guidance. I think it's best to look at the industry pundits and people that follow these kinds of things. But I can't tell you how strong or weak upturns and downturns are because no one's ever able to predict how--.

No. But I'm looking at it on a normalized basis not thinking tops and bottoms. But there is a secular--underlying secular growth to the business?

Yeah. And I haven't looked at it individually. But again, we go back to it's very difficult for us to predict. There's the standalone part of the business and there's the additional integrative part of the business and then there's additional CD part of the business. And when and how much those things are impacted year to year is a very difficult thing. All we can say is that we believe that the adoption of integrated, it grows when people are bringing capacity online. And that as customers trend towards 65 nanometers, they will incorporate more of these optical critical dimension technologies.

So [inaudible] is the 60 percent long term gross margin target, do we not have a long term revenue growth target?

Well, do we have a long term revenue growth target? We don't necessarily target revenue. We target EPS. So we would, you know, general try to increase our earnings per year on an annual basis so we're always trying to find operational model and a market that will return a greater return for our investors. So I don't necessarily believe that revenue is the only way to look at a market. You have to look at the EPS.

And again, before that, do you think the business is now where we are in terms of engineering cycles, is the business different such that in the downturn you would maybe hope to be closer to profitability or maintain profitability, or should we still think about big swings from black to red?

That's a great question. That is a really good question. I think right now with where our technologies are at and what we can see in the 65 to 45 nanometer arena, I think our engineering probably is at the correct level for the current market. So I don't think we're going to see, because we don't have a really big engineering program to reengineer the company like we did last time. In fact, if you go back before the year 2000 and look at our prior downturns, we never had those kinds of significant losses. We made a conscious decision in 2000 to try to upgrade our company's technologies and operational model. That's done now. So unless we were to bring on a new major project or if some competitor came out with a super compelling new technology, I think that we're appropriately sized and the budgets are probably more appropriate now. So during downturns, we should not see those kinds of losses and that would not be part of our plan as it was when we went into 2000.

Okay. And last question. Can you give any kind of understanding for '05 in terms of what happens with [inaudible] taxes or there will be no taxes or effective tax rates or anything like that?

For the rest of this year or for '05?

No. '05, assuming business continues to grow this year and continues to grow next year, would we be--will we have taxes next year?

I can't say for sure on that because there are a number of factors involved, you know, how much of the carry-forwards are we going to use up. And then at some point along the way, what happens is if you show profitability over a number of quarters, if you have any more kind of large deferred tax assets on the books, you're required to recognize them all at once. So for the short term, the answer is that we'll probably have this benefit but in the longer term, we probably won't.

And for the longer term, we move towards like a 30 percent effective tax rate or something like that?

Closer to 40 actually.

Okay. And what is the tax loss carried forward from an IRS standpoint at this point?

We haven't analyzed that because we haven't gotten to the year end yet so we're just making estimates right now.

And from a book standpoint, you said there's a $6m deferral or something?

Yeah. That's right. Plus some other deferred amounts that have built up when we weren't recognizing a tax benefit during the last periods.

Okay. Thank you.

Thanks. Our next question comes from Christina Oxman from Jefferies. Please state your questions.

Hi. A couple of questions. Well, first of all, congratulations on making such a good try for instant profitable territory. Could you let us know whether or not you had any sales of overlay systems in the last couple of quarters? And then I have more after that.

Overlay was 3 percent.

What was it last quarter?

It was something like 5 percent last quarter. So we're kind of on this maintenance level here of overlay but I can report to you that we have shipped our first 300mm overlay.

In terms of the SIM film [inaudible] and some systems that you sold on a standalone basis, you had a good sequential revenue change quarter-to-quarter. But when I take a look at the number of units, it looks like I think it might have increased by about three units. So these are the kinds of units that are sold in large quantities per fab. So how--what amount of a fab are you penetrating when you're penetrating it and when should we see you start winning the majority of a [inaudible] metrology business in the fab?

Oh, lordy, lordy. That's a tough question again. You're absolutely right that standalone systems, they come in bunches. And as you can see from the territorial breakdown, we've done quite well in Korea and that's where a large part of those standalone systems have gone. What can be, for a typical fab, you know, between two and four systems is probably where we could be at the different fabs with the maximum in those fabs probably being 8 to 10. So we probably can get a two to four at this point in our product plan. We're probably targeting two to four per fab as opposed to the eight to ten that is potentially there.

All right. And which types of applications are you typically being used in?

Yeah. We always have been strong on CMP and CVD. Those are the two primary areas because I think our penetration and the synergies between our standalone and integrated are so strong that we really feel like that's really the sweet spot for the company. And that's I mentioned in my conference call--in my prepared remarks rather that the next area of us really needs to be the lithography area. And we need to educate the lithography people on how the OCD technology for CD and then the film thickness can--and the synergy between the track and our standalone system can be there for the future 65 nanometer. So that's really the area that we're trying to focus on as a company is to increase the number of tools including standalone per fab by penetrating more strongly the litho area.

Okay. And on that note, could you give us a split of the integrated systems by applications - CMP, CVD, litho?

No. I don't -- I don't want to break it down that way. As I said, it's primarily been CMP is the strong--is the strong pull.

Okay. And that would be oxide CMP, yes?

Not necessarily. It's oxide and copper.

Okay. Thank you.

You're welcome.

As a reminder, ladies and gentlemen, if you do have a question, please press *1 on your push button telephone. Sir, I'm not showing any further questions.

Well, that's great. As I said, I'd like to drag this call on for as long as possible because we are talking about real positive things here, but I guess it must end. So I want to thank everyone for joining us today and look forward to next quarter's results. Thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.