Onto Innovation Inc (ONTO) 2004 Q4 法說會逐字稿

Good morning and welcome to the Nanometrics Q4 and fiscal year 2004 financial results conference call. Please note that the following discussion may include forward-looking statements regarding, among 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 materially from these statements. Factors that could 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 our press release of this morning and in the Management's Discussion and Analysis section of the Company's annual report on Form 10-K for the fiscal year ended January 3, 2004 filed with the Securities and Exchange Commission. Our earnings release was issued this morning before the opening of the NASDAQ national market. If you haven't received a copy, you can view it on our Web site, www.Nanometrics.com. Please note that we are webcasting this call and will have a replay of it available on our Web site shortly after the conclusion of this call.

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 question-and-answer session will be held at the end of this call. Until that time, all participants will be in a listen-only mode. We will begin the conference call with Mr. John Heaton. Please proceed, sir.

Hello and welcome to our Q4 2004 and 2004 year-end conference call.

Before I begin with my prepared remarks, I'd like to turn the call over to Paul Nolan, our CFO, to read the release and provide some insight into the financial highlights.

Okay, thanks, John. Welcome, everybody.

I will start with our earnings release. Nanometrics announces record financial results for 2004. Total revenues for the fourth quarter of 2004 were $20.6 million, an increase of 2 percent compared to the third quarter of 2004 and an increase of 66 percent compared to the fourth quarter of 2003. The increase in fourth-quarter sales in 2004 resulted from stronger demand for semiconductor process-control metrology equipment, primarily in the U.S. and in Pacific Rim countries. The net income in the fourth quarter of 2004 was $2.4 million or 18 cents per diluted share, compared to a net loss of $804,000 or a loss of 7 cents per diluted share for the same period last year.

For the year ended January 1, 2005, Nanometrics' revenues increased 70 percent to $70.7 million, which was a record for the Company, compared to revenues of $41.6 million in 2003. Net income for the year ended January 1, 2005 was $5 million or 38 cents per diluted share, compared to a net loss of $17.5 million or a loss of $1.45 per diluted share in 2003. 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 first quarter of 2003.

The Company's financial position continues to be strong with cash and equivalents and short-term investments of $33.9 million and working capital of $69.9 million.

Taking a look at sales by territory in the fourth quarter of 2004, they were as follows -- the U.S. was 34 percent; Japan, 19 percent; Korea 16, percent; Taiwan and China combined were about 26 percent; and Europe was 5 percent of product sales. Sales by product category in the fourth quarter of 2004 were as follows -- automated systems, 61 percent; integrated systems, 29 percent; tabletop systems, 1 percent; and service was about 9 percent of total net revenues.

Our gross margin was 43 percent in the fourth quarter of 2004 compared to 52 percent in the third quarter of 2004. The gross margin in the fourth quarter was reduced in part by approximately $800,000 of inventory write-downs and higher costs of service, particularly in our overseas operations.

R&D expenditures in the fourth 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 17 percent of total net revenues in the fourth quarter of 2004, which was down from 21 percent in the third quarter of 2004. Cash and short-term investments increased by about $3.3 million during the fourth quarter of 2004. Finally, as we said in the press release, our financial position is strong with a cash balance of $33.9 million and working capital of $69.9 million at the end of the fourth quarter of 2004.

With that, I will hand it back over to John.

Thanks, Paul.

Our earnings release was issued this morning before the NASDAQ opening. If you haven't received a copy, you can view it on our Web site at Nanometrics.com. Please note that we are webcasting today's conference call and will have a replay available on our Web site shortly and continuing for 2 weeks following. If you have any questions regarding the press release, webcast or replay, please call 408-435-9600 for assistance.

Please note that since our company is currently engaging in a transaction with August Technology Incorporated and the transcript of our conference call must be filed with the SEC, this will result in a slight delay for those investors wishing to listen to a replay of the conference call.

In today's call, I'd like to take the opportunity to review the quarter and then highlight some of our achievements for 2004, followed by an update on our pending transaction with August Technology. After that, we will open up to questions.

Fiscal 2004 was a record year for Nanometrics. The Company gained market share and grew revenues across our product lines and in each geographic region we concentrate on. Nanometrics' revenues increased 70 percent year-over-year, reaching a record 70.7 million, our best year ever. I want to start by congratulating all of our employees worldwide for this record performance. The entire team did an outstanding job.

By many measures, Nanometrics is in its best competitive position ever. During the year, we introduced new products to rapid and significant acceptance within major customer sites worldwide. Products such as the Atlas, the FLX and the newest integrated metrology system, the 9010, met the unique needs of the customers seeking both the technology advantage and profitable operations in the nanometer era. Flagships systems, such as the Atlas advanced metrology system, not only address key technology challenges in the case of the Atlas system by combining multiple metrology technologies in one product, they performed in world-class production environments providing a reduced cost of ownership, higher throughput and higher utilization rates than any competitive offering.

Overall, the financial results for the fourth quarter met our revenue guidance and capped operation performance. The big exception that needs to be noted was in the overall gross margins, which were negatively affected by some reserves and additional cost factors in our service. As Paul mentioned, we took an additional 800K in inventory reserves, mostly in Japan and Korea. As we prepare for our potential merger and SOX 404 certification, we've taken steps to refine our corporate inventory policy, which resulted in larger reserves.

The new ERP MRP system now has 2 full years of inventory data and we were able to better extract better real-time information that helped us refine our policy and better apply safeguards and processes. The effect on our product cost line was approximately $800,000, as Paul mentioned. This was a one-time event and we expect margins to return to previous levels or better. If you take out the reserves, our margins would have been equivalent to prior Q3 '04 results.

On the service costs, which jumped about $1 million quarter-over-quarter, there were a number of factors that we want to elaborate on. Number one, we were negatively affected by our headcount reallocation in Japan and the creation of our office in Tokyo. Korea service was also up and we had a large concentration of installations and service in that territory, which added to the additional costs. Number three, the exchange rate increased our costs by approximately 10 or 15 percent in that area. We believe service costs should return to the more traditional levels, going forward, and a new initiative to improve service costs and customer satisfaction will be important for us in 2005.

These margins obviously had an effect on our earnings, which were 18 cents per quarter -- share in the quarter and 38 cents for the year. Nanometrics maintains a strong financial model that is used to run the Company, and we hope to improve the results in future quarters and ultimately meet our target.

R&D was flat quarter over quarter and is expected to continue on this trendline for the foreseeable future.

Moving to the business highlights, I'm happy to report that we will celebrate our 30th year in business in 2005. Not many companies can report both record annual revenues and celebrate this length of time in business. We again want to thank our employees and customers for helping us achieve these important milestones.

2004 also marks successful introduction of several new products in the semiconductor industry. Our mainline stand-alone product used for measurements of thin films and critical dimensions, called the Atlas, has helped us gained market share and best-of-breed selections, especially in Japan. Now that we have a strong foothold in these important accounts, we anticipate further technology and capability improvements will be gained as we proceed through 2005. We also extended this highly capable platform into the mass metrology area with the Atlas-M. We are confident that this system will displace other smaller competitors and add to our revenues in 2005 and beyond. This system has the ability to provide mass manufacturers and end users with important information about film thickness and OCD that can't be had from many other manufacturer.

On the integrated metrology front, again we can report a record year and continuing market share gains, especially in the area of CMP and 300 mm. We had a solid Q4 with 30 systems being sold. Of those, 85 percent were for 300 mm. Our largest customer continues to be Applied Materials, and the primary application for use of our tool is measuring the thin-film thickness while the wafers are still in the process tools.

We continue to maintain that demand for our integrated products remains strong and 2005 should be a good year for further adoption. We intend to continue to push the technology further into new and important applications and hope to introduce more compelling new products in 2005 to address those applications.

Yes, Nanometrics is in the best competitive shape ever, and we are looking for paths to further growth. As you may have read, last month, we announced our intentions to merge with August Technology, Incorporated. The Company and the Board have long believed that the complementary merger would be one of the ways to expand our product line and global service footprint. For its part, August presents an ideal merger opportunity to bring 2 strong companies together to form a substantially stronger provider of world-class metrology and inspection solutions.

Notwithstanding recent announcements regarding alternative proposed transactions, August Technology and Nanometrics remain fully committed to our merger plan and are proceeding forward. The Hart-Scott-Rodino regulatory filings have been filed, and the clock is ticking. We believe the initial shareholder proxy in the form of an S-4 will be delivered to the SEC in early March. After the S-4 is filed, we will need to wait for SEC comments before proceeding. There is no way of estimating whether the SEC will make comments or how long the process might take, if they do. The best case estimate on the deal closing is early May. We remain hopeful that we can quickly execute on a transaction that is in the interests of both companies' shareholders. Getting this process completed as quickly as possible and minimizing disruption to our business is a top priority.

Why is this merger so important? We believe the August/Nanometrics merger will be good for the semiconductor industry, our customers and our investors. We expect the combined August/Nanometrics to provide a broad array of front-end and final manufacturing inspection and metrology equipment that will offer better alternatives for its customer base. That means more choices. We believe that keeping alive a competitive environment in metrology inspection is good for the industry and good for our investors.

Both companies believe that the challenges to small, innovative providers in our industry have never been greater. While often producing the best new ideas, small and mid-sized companies in the capital equipment industry today work very hard to serve the increasing global needs to meet their financial responsibility as public companies, particularly in this era of Sarbanes-Oxley, and to reinvest in leading-edge R&D that can move technology forward. In these times, smart combinations like the August/Nanometrics merger can produce the technical, financial and infrastructure critical mass needed to serve our customers and shareholders better without sacrificing our innovative cultures.

As we move forward on this transaction, there has certainly been disruption and confusion created by some of our competitors. We can't really speak to specifics on those issues other than to say that we believe our deal provides great opportunity for both companies and August management will continue to evaluate all potential options. We can't give you guidance into what others may do and repeat that we have a deal in place today that we are -- that we fully intend to execute.

These are certainly heavy times for us. Coming off a year of record performance and bolstered by the continued success of our highly differentiated products, Nanometrics is positioned for further growth and success.

Finishing off our prepared remarks, I'd like to discuss the revenue guidance and general outlook for our business. The overall customer environment has remained relatively unchanged since our last conference call, and we continue to see encouraging signs. While we continue to hear many negative comments about the first half of 2005, we still have a strong base of customers that want to buy Nanometrics' equipment and we are continuing our story of growth through new product introductions and market share gains. We have had no push-out for cancellations in the prior quarter.

For guidance, we think a flat to up 10 percent in revenues for Q1 over Q4, '04 would be a good start to 2005.

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

(OPERATOR INSTRUCTIONS). Stuart Muter of RBC Capital Markets.

Thank you. Good morning. First, a question for Paul in terms of gross margins. About -- is it about 5 percent of gross margins were impacted by the service -- increased service costs in Korea and Japan? Is that about right?

We said the exchange rate affected it by 10 or 15 percent.

Okay. In terms of -- with revenues flat to up 10 percent, what do you think your gross margins would be like in Q1?

Well, what we guided for was -- if you listened to my comments, again-- we guided towards where we were in Q3, so if we had not had the effect of both the inventory reserve and the additional service costs in Q4, actually Q4 would have been very, very similar to Q3. In fact, we would have easily exceeded all of the expectations on the Street had we not had those 2 issues in the Q4 year-end.

Okay. A question for John -- roughly what were flat-panel revenues in the quarter and maybe for the year?

About $3.4 million for the quarter.

And the year?

We will look for the year number.

All right. I got one more question. SG&A was down a fair bit in Q4. Is that level sustainable going forward?

There were some adjustments during the quarter between marketing and service, so marketing was probably a little lower than it would normally be, just as service was a little higher in some regards than it would normally be.

Yes, but one of the issues, as I raised in my comments was, that we've done somewhat of a reorganization in Japan, where we have split the flat-panel and semiconductor parts of the Company into 2 different buildings now, so we have a facility in Tokyo, as I mentioned, which is more convenient for the semiconductor customers. As we did that allocation, some of the accounting of the costs, which prior to the separation of the 2 companies would've been in the marketing side, so as we separated the 2 organizations and created more pure play, flat-panel and semiconductor as a company in Japan, those numbers got kind of moved around a little bit.

Okay, thanks. If you have the yearly number for flat-panel, that would be great, but I can take that later.

No, I can give you a rough number on that. It looks like it was probably between 8 and $9 million for the year.

Avinash Kant of Adams, Harkness.

Good morning, John and Paul. One clarification first -- I think you did mention that 300 mm systems revenues were 85 percent. Was that just for the integrated metrology, or for the total systems?

That was for the integrated side of the business. I didn't do the calculation for the whole revenue. I can give it to you off-line, but it was still a significant part of our business, probably 50 percent probably.

Okay.

Stephen Dan (ph) of HMC (ph) New York.

Good morning. I have a question. I am a large shareholder, both of August and also of Nanotechnologies, and your offer to us right now is worth about $7.30. I understand it's going to be a great combination but how can I justify this to myself into my fiduciaries that I have a responsibility to -- to vote for your deal?

Well, there is no single answer to that question I can give you. We are not looking at a trade on the market; what we're looking about is creating future earnings for the 2 sets of shareholders that we think having those 2 companies together will provide a better long-term investment for our shareholders than you might be indicating today. I mean, if you wanted to have a price today for your shares, you could certainly sell your August shares at quite a premium to what our offer is today.

On the other hand, if you're looking to a much better picture for the share price in the future, we think that the potential remains for our company combined to provide that to you. That has been our philosophy from the very beginning. It's not about where the stock prices are at today; it's about putting 2 companies together and creating a really compelling company that provides great shareholder value and earnings into the future.

Well, I just don't believe that you're going to be able to get a positive vote, going forward, when you put out the proxy. I think you're going to just have to justify a higher price and when you're dealing against a much larger organizations such as KLA, who is a huge organization versus yourself, I don't see how you can get around that. Can you explain that to me?

Well, number one, you'd have to really take that up with the August management and not the Nanometrics management. I mean, they are the ones that have a KLA offer, not us. So we have a deal with August. We maintain that it was a fair deal for both sets of shareholders, and we will make our presentation to the shareholders and hope that they believe that the combined company will provide the kinds of performance in the future that we expect.

Well, as a shareholder, as I told you, of both companies, and I am a large shareholder of both, I feel that KLA has made a much better offer than you have for August.

Like I said, that's not for Nanometrics to decide and --.

Well, if Nanometrics wants to buy this company and go forward and get the synergies out of it, I think it is something for you to consider.

Well, I think it's very clear and I think the August folks have made it clear as well that August is not for sale. August has placed a strategic merger on the table with Nanometrics. The company has not been for sale. They've maintained that over and over again, and nobody seems to understand that concept. These are 2 companies that operate independently that want to join together, that will create a more significant entity to provide greater shareholder value. That's the direction that we're going. Now, if August is for sale, then that would change, but --.

Well, I understand that, but you are using the word "not for sale" in a very nebulous way. However, it sure looks like it's up for sale for me as a shareholder.

Like I said, if you have issues relative to your shares of August, that's for you to take up with them, not with us.

Why don't you just offer us a better ratio if you really want to acquire the company?

We have a deal on the table, sir, and I think that's all we can say about it. So I would proceed to the next question, operator.

Martin King (ph) of S.G. Cowen.

Yes, thank you. A couple of questions for the top line -- in terms of Japan, Japan slowed down in Q4, so did Korea. Do you see the trend persisting in the first half of '05? Hello?

Hello, we are here. We're trying to think about what you're saying here. I don't think, necessarily, that the interpretation of slowdown is correct. Every quarter, we have shipments that go into different territories and acceptances that occur, and we try to balance these things all off in order to provide the Company with continuing growth. We had shipments that were time-sensitive and acceptances that pretty much dictated where the revenues go in the quarter.

So going forward, you know, going back, we still maintain that Korea and Japan are extremely important territories for us and still provide the kinds of opportunity that we need going forward. We don't see necessarily a slowdown in those areas at this point.

My second question is with regards to the service costs. I just want to clarify. So you're saying that the extra costs related to exchange rate and the allocation of stock in Korea and Japan, those are really one-time and in Q4, the gross margins should revert to Q3 levels?

Yes, that's our anticipation, that we had some trueing-up costs, as we said, as we divided the Company up in Japan and then obviously higher service costs in a lot of installations in those territories, and also the exchange rates. We had a number of factors that worked against us in Q4, and we expect that they will turn to more normal levels. In fact, if you look back over the last couple of years, we've been running at approximately a $2 million cost level, between 1.8 and $2 million, and that hasn't changed. I mean, realistically, we have increased our headcount in any significant way in any territory, so we expect that the overall cost of that organization will return to more normal levels. It's just like I said, kind of an accounting thing and the exchange rate more than anything else.

My last question is in regards to your TAM (ph). You have several new products in addition to the Atlas. One of them, of course, is the Atlas-M. Also, you also announced the Orion product.

Right.

If you could give me an idea of the ASP of the Orion product and the market opportunity and how that changes your total overall available market.

Okay, so the overlay registration, which is the Orion product you are referring to, is a system we just introduced. Well, we actually had a pre-release kind of version of it in 2004 and then a final production of a version at Semicon (ph) Korea in 2005, February, and the average selling price is on the order of 800,000 to $900,000 for a 300 mm system, and the total available market I believe in 2004 was $170 million for that product. (multiple speakers).

For Nanometrics (indiscernible) Japan be over (indiscernible) changed?

Let's see. Since we have not really participated in the overlay registration area much in the last couple of years, as we reengineered the product, obviously if you look at the film thickness market being kind of a 400 to $450 million market, the overlay registration opens up a pretty big opportunity for the Company, although it's going to take some time to get the penetration and ultimately we believe that having integrated metrology for overlay is the direction and the strategy that will ultimately benefit our company and shareholders.

Okay, and the (indiscernible) for the Atlas-M if you have a number for that.

The Atlas-M is on the order of $1 million plus.

Gerry Fleming of Hambrecht.

Yes, John, could you give us an idea of the status of some of your beta units that are out there? When will we start seeing revenues on things like the Orion and on things like the -- products like the Atlas-M?

Okay, so both of those products are at customers today, and we expect their revenue in 2005 probably starting second quarter, as (indiscernible) would anticipate for both. We also (indiscernible) -- I failed to mention that we also, in 2004, did introduce 2 new products for flat-panel display, both a gen 6 and a gen 7 system, the Gen 6 primarily focused on the Taiwan market and gen 7 focused on the newest generation in Korea, and those -- again, average selling prices on the order of 700,000 to $1 million.

When do you expect revenues on those?

Well, they already have started in Q4.

What do you see the flat-panel market or your flat-panel business doing in the coming year?

It looks like it's kind of flattish to down probably. There's been some overcapacity created by all of the new facilities coming online, especially in Taiwan. That will obviously subside over time and we expect that, towards the latter part of the year, there will be more facilities starting to purchase again. So, I think it's more back-end loaded than front-end.

Okay. Are you seeing -- other people have been talking about their Japanese business slowing down. What are you seeing there in the near term?

Well, we did hear, for 2005, Alpita (ph) was doing a delay, potentially a 6-month delay, for the DRAM part. It's not really clear for us, though, that there's going to be a substantial slowdown in Japan. We don't really know because their budgeting usually starts on April 1, so their fiscal year ends March 31, the beginning of April, and it's not really clear; it's kind of a guessing game, trying to understand what the Japanese market and semiconductor manufacturers will do in 2005, prior to that date. So, we are in kind of a good position, relative to projects that we do know are going forward. Flash has been a really hot area as of late, and I think what's going on at Sony and Toshiba, relative to PlayStation 3 introductions with their new motion profits, are I think we're going to see continuous spending in 2005 to support that introduction.

Any guidance on the tax rate for the coming year?

Well, the tax rate was exceptionally low because we obviously had some carryforwards, also some favorable adjustments that we did. We didn't try to do a calculation or we haven't had a chance to really look at what the tax rate would be for the next year, although again we will have some carryforwards for next year as well.

The other issue, of course, is it kind of depends on where we have the profits occurring geographically as to what the tax rate will be. The tax rate will obviously be higher than it is now, but we don't have a fix on it yet for next year.

So should an analyst estimate it at 10 or 15 percent, or 20 percent?

Yes, I would say at the higher range.

Okay. I wanted to go back to one thing and that was in John's guidance. He said, for the first quarter, he expected revenues to be flat to up 10 percent, but then I believe that he said compared to the first quarter of last year and not to the fourth quarter?

No, no, compared to the fourth quarter.

Okay, thank you very much.

Alexander Nockman (ph) of Montauk Financial.

Good morning, guys. I wanted you to try to clarify this $800,000 expense. It was negatively affected -- you were negatively affected by. It was some form of a write-down?

Yes, inventory -- we wrote down inventory, primarily overseas, and some of it just had to do with the cycle of nonusage of the inventory and you know, our estimates of our ability to use it indicated that we couldn't, so it was time to go ahead and write that off.

Okay. Can you quantify, on a per-share basis, had you not taken this charge, what that might translate into?

Well, you can see that our tax rate was fairly low, so almost all of that would have probably gone to the bottom line with a marginal amount of tax impact.

So roughly, if I'm reading this right, on roughly 12.4 million shares -- we can even round up and call it 12.5 million shares -- you're saying that that would have translated into --?

Well, you should use 13.5 million.

13.5?

Yes.

Okay, 13.5. (indiscernible) here again if you would bear with me.

That's all right. So you know, with the tax rate of -- I don't know -- maybe it would have been incrementally at 10 or 15 percent. It looks like perhaps we would have added 4 or 5 cents earnings per share.

Okay, not a problem. That's good. Also, I've been aware that you don't really give forward-looking guidance and you don't really give guidance to the Street. It seems to me that you guys are coming in with your best numbers ever, with substantial top-line as well as bottom-line growth and an enormous turnaround as well. You are to be applauded for that but to some extent, it's being viewed as a negative, maybe somewhat explained away by the write-down that might have been unexpected but by a much higher Street number. Do you plan on trying to work more cohesively with the Street, going forward, in terms of, you know, better guidance and so everybody is more online? Because I would've thought that, given these type of numbers, that the news this morning would have been hey great rather than disappointment per se, which I view the Company as a whole as going forward and everything across the board to be positive, especially some of the things you're sharing today. But what's your thoughts on that in terms of sharing with the Street going forward?

So, I want to speak to that because I think there's a couple of issues that need to be taken into consideration. You are absolutely right that we have not given EPS guidance to the Street. We've always had a certain amount of complexity in trying to do that because of all of these other factors that usually come into play. On the other hand, I think one of things you have to take into consideration, even though we gave and met our guidance and as you said, we feel very positive about 18 cents per share and (indiscernible) if you look at one or the other competitors for August, we are a 50 percent higher EPS basis than them and our stock is trading at a huge discount to theirs and you've got to say to yourself wow, Nano is growing at 70 percent, they are producing better earnings at the bottom line, yet we are getting heavily discounted in the market. I don't know whether it's an arbitrage issue or not but it certainly is probably related somewhat at least to the perceived myth on the EPS.

You know, one of things you have to take into consideration is that we did go through an auditor change this year and as we go through that complication, you have to go back and re-examine the things that you do, bringing up to speed and trying to educate both sides on what it best (indiscernible) policies and procedures are. There's no way that we could have forecasted, in the beginning of Q4, that we did have issues relative to inventory. As I said also in the prepared remarks, we now have a 2-year window on our ERP system and we're getting tremendous visibility now into the inventory parts that are moving, how they are moving, when they move. These are the kind of metrics that we never really had at our disposal in the past. So what we're using this is an opportunity to go back and refine our policy, which has not changed; it's just a refinement -- saying we've got more information now, we can do a better job of monitoring and maintaining our process for looking at the inventory, and we kind of view that as a major positive going forward. So, we shouldn't see these kinds of issues come up again because we are going to have a much better handle on it.

Having said all of that, you know, I don't know that we will change our EPS policy at this point. We potentially can do a better job if we get maybe even the critical mass associated with being with August, if we have a larger, more stable revenue base and I think an overall better picture on where the costs are. I think small incremental changes in the quarter would be more easy to predict if we were of a larger financial critical mass.

So, if we do get together, I think that will probably be in the cards. If we don't, then obviously any one of these events that occur in a quarter can have a substantial impact on our EPS and can cause misses. So I'm not really sure, at this moment, that we can tell you that things are going to improve from a forecasting standpoint, other than we've done a pretty good job of maintaining our guidance on revenues and we hope to continue that and hope that the EPS follow more in line with expectations into the future.

Okay, great. One last question -- with regards to the August Technology's merger, can you comment on whether or not you feel that this situation, if it does close let's say in the second quarter of '05, will be accretive this year versus any type of expenses you may bear with it across the board?

It's almost impossible to know! I would say that, within a year, that would be the goal for the combined company. Whether it can happen within calendar '05 is a major question mark because the longer this thing gets delayed, the less opportunity you have to resolve the 2 companies. So until we get to the close, it's impossible to predict, but we certainly intend to get this thing on a very positive note as quickly as possible.

Thank you very much, guys, and congratulations on an excellent year.

A follow-up from Avinash Kant of Adams, Harkness.

Actually, I have a few questions. I got cut off last time. One was -- the first one is that, of the 30 systems for the integrated metrology, would you be able to help us in terms of feeling out how many went to CMP and how many for other applications?

They were primarily CMP. I mean, they are probably 90 percent CMP right now.

The rest of the 10 percent was for other applications?

CBD and OCD, but those were not big things for us in the quarter. If you look at the overall numbers, there are 1 or 2 systems here and there that go to these other applications but primarily, we are outfitting new 300 mm lines and that's driving demand. As we've said before, the adoption on CMP is so high now that whenever a new facility goes online, we are almost guaranteed to get a significant part of that business.

So John, when do you seed the opportunity for CBD and CVD starting to happen basically in any meaningful way?

Well, it's going to be driven by the customers. To date, although we have seen some adoption in CVD -- I think the cost associated with incorporating the integrated on the platform has not necessarily provided the customer with the compelling reason to adopt a technology. On the Etch systems, it's the same kind of a thing. There's a few applications that customers feel are compelling but realistically today, most people are meeting their production line goals without having integrated.

Now, we believe that, going forward into the 65 and 45 nanometer transition, that there will no longer be a lot of options available to customers. They won't be able to accommodate stand-alone systems and be able to get the device performance that they expect. So if you are asking me when we expect to see much broader adoption of integrated, we believe that, whenever the 65/45 nanometer production buys start, that we will see much further adoption of our technology in a much bigger market.

Of course, your sales in Europe in the current quarter, did they come from a new customer?

No, they were -- yes, I guess they are. They were smaller customers. There were a couple of stand-alone systems in Europe. I'm not necessarily characterizing as new. We've been in business for 30 years now, and we've pretty much sold to everybody in the world at some point, so I'm not sure that characterizing it as new is fair.

For that particular application, had they bought before or --?

No.

Then was that it a memory or a logic customer?

Well, I think one was an equipment manufacturer, and yes, they were equipment manufacturers and also I think logic.

Okay. Could you also give me some numbers like headcount, depreciation, CapEx?

Sure. Headcount at the end of the year was about 311. Our capital expenditure for the quarter was very low; it was about $50,000. Depreciation is in the 4 to $500,000 range for the quarter.

Ben Stoller (ph) H.S. Capital.

Most of the business questions have been asked and actually, since you opened the door on the Nano/August, as a shareholder of Nano, how much money have we spent on this process and how much do we intend to spend on this process? It is obvious the market doesn't think it's going to happen. If there's such a great disparity in the multiples between where we are trading and where August is trading, why doesn't it make sense for August to buy us? (LAUGHTER). Really, it doesn't make sense. Our stock continually -- you know, we're under pressure here. Where is the focus with the upper management? We have to spend time running the business, not running after an asset that it's obvious we can't get or that is trading at $4 through the price?

Yes. We don't have -- we don't accumulate the costs associated with doing the deal because obviously there's lots of people working on it at this point. That would be done at the end of the process, as opposed to kind of -- (multiple speakers) -- process.

Right, and you would capitalize those, right?

Sure. We will take a one-time write-off, so we are not going to be incorporating them in the Q4 or Q1 numbers or any along those lines. So, what are we going to do? You know, obviously, as you say, we are trading at quite a discount to both August and to KLA and to Rudolph. I think the best thing that we can do is go out and tell people about the story and highlight the issue that we -- you see obviously and we see, which is that we are trading at a much lower multiple for some unknown reason. We are providing the growth, we are providing the earnings and we're not being rewarded for it.

Well, I think the reason is obvious -- that August is for sale. You say they are not, but they are. They agreed to sell themselves to us, so that's the disparate in the multiples. Just looking or -- (indiscernible) that's what's built into their price. So I don't know if it's a fair one-on-one multiple comparison, but you know -- and before you said, you know, the shareholders will get the vote for the transaction, correct?

That's correct.

Okay, so basically the shareholders run the company, so we will decide if we want to buy them or not through a vote. You know, just strategy or not but if the multiples are just so disparate, maybe it doesn't make sense to do it.

Right! I mean, that's going to be up to the shareholders ultimately, and we can't -- you know, like I said, our objective in the Company is to provide our shareholders with the best growth going forward. We believe that this is the best thing for our shareholders. We maintain that. We believe August also maintains that. We're going to try to take it to a vote unless something happens between now and that vote. We maintain that it's the best thing for both companies and that we will proceed down this path in a very positive way.

Well obviously we're going to vote for it. I mean if we can buy them at a $4 discount to where it is trading in the marketplace, we will do it all day long, so I don't think that's the issue. The issue is do we take our eye off the ball and try to pursue this, or do we get back on track, on point and make sure we run the Company the way we want it run?

Well, we are running the Company the way we want it run. Actually, now that we've gone through the negotiation process, we are --.

While incurring significant costs as well.

But if the deal does not go through, if you read the proposed merger agreement, then you'll find that those costs are recoverable.

Okay.

So going forward, it's a great situation, I think, for our shareholders. No matter what happens, I think we're going to go forward in a very positive way, and we are totally hopeful that we can merge with August and that, like I said before, that we provide our customers and our shareholders and employees with a great future and a great company. I think there's a tremendous demand on the customer side to make that happen. You know, if I look at -- if you go beyond Wall Street and what people are saying about the stocks and the trade and you listen to what the customers are saying, you are going to get a completely different picture on this merger for them. Many of our major customers and August customers absolutely want to see this merger going forward because they want to see a stronger metrology company out there; they don't like to have so much of only one large company and a lot of small ones. They want to see a consolidation; they want to see strong alternatives with good technology and cultures. They don't necessarily have that today. In fact, when they have to make choices about metrology, they are to some extent stuck with go with the guerrilla or go with a smaller company that induces some risk in their company. They don't like that in general. So there's been a tremendous support from our customers. We'd like to see that play out in the stock, which it has not up until this point. We think that, if this thing does go forward, that they will support the new company even stronger than they would had it not happened. So I think there's all kinds of major positives going forward if we can get this deal done.

I concur and I look forward to it. I just don't know if we can get it done at this price. It seems impossible the way it's trading. But no, I agree, if we can buy it at this price, we will buy it all day long. That's why we support it.

The vote is not today. I think everyone has to kind of wait. It's very early in the process still. We still have a long way to go.

Right. I mean, earlier, I was on listening on the call and some shareholder -- a shareholder got on and said he owned August Technologies and said basically why would he take this $4 discount towards trading on the market? I would have to agree with him, if I owned August. I just wouldn't do the deal.

Yes, I understand everyone's perspective and I appreciate and respect all opinions. Again, we go back and we maintain that this is a fair deal for both sides, regardless of where the stocks are trading at today. When we did the deal, they were trading in a certain range. All of the understandings of EPS and revenue and growth were all taken into consideration, and here we are now.

Sure, sure. Also too, as you said, let's make sure we get our fee if the deal breaks too. Maybe it's more prudent just to take our fee and move on and focus in on our business if we can't get it at the price that we want. It's very difficult toe-to-toe, as you say, with the guerrilla in the space.

I can't really speak to those things, as I said in my comments. It is what it is. We're doing our deal.

How much per share is the breakup fee?

I don't know what it is per share. If you look at the document, I think it's $8.3 million for us.

Okay, that will make up for the sudden exchange rate movement in Japan, right? (LAUGHTER). All right, thank you, guys.

Jared Cohen (ph) of JAM Cohen (ph) & Company.

Just a quick question more on just the more macroenvironment, particularly as companies are increasing or totally investing in 300 mm technology in their new fabs or existing fabs. How more important is just aggregate, particularly integrated metrology equipment become to that as a transition to 300 mm (sic) and 65 nanometer?

Well, I think you can see, from the revenue picture on the integrated side, the 85-plus percent was 300 mm, so it's very strong for 300. I mean, it's become a standard part of many pieces of equipment, as we mentioned earlier, but I think, as I also mentioned, that because the costs have escalated so much on 300 mm facilities, that if there is a way for them to kind of take money, they will try to do that because of the $3 billion investment. So if there's a way where they can get away with not having integrated at the initial stage, you know, at maybe the 90 nanometer node, that they will take that and then later, when they do scale to the 65, then they will bring the necessary equipment in to upgrade and improve the capabilities of the fabs. So again, I think that there is a strong drive to have integrated on 300 mm, especially in CMP, and in a more minor way in CBD, Etch and Litho, but as we go to 65 nanometer, I think they will be a significant change in that adoption rate.

Okay. Looking at it that way, what will be their incremental cost relative to, say, older -- when they were doing 200 mm fabs at 90 nanometers -- in terms of adding metrology equipment? What will be their incremental cost?

It's extremely complicated to try to extract that number out because there's lots of other enhancements that came with 300 mm, so it's not a straight line where you can say, well, adding integrated added 5 percent to their metrology budget. You can't really draw that inclusion at this point, because there are a number of factors that came into play. For instance, the OEMs have an adoption or an integration work for themselves that they also charge the customer for, so it's not necessarily only a metrology cost but it also can be a process tool cost. On top of that, you had a lot of new automation and new features that were integrated into 300 mm facilities that were not part of many 200 mm facilities.

So you know, what we would hope to see is an equivalence in the cost for adopting integrated metrology at 65 nanometer to what it would have been with standalone. That would be the goal. But the thing we're going to leave on the table for the customers is going to be the improved device performance. We're going to improve the performance of the process tool in a way where they could not produce the 65 nanometer geometries without. So, that would be our goal.

Okay, All right. Thank you very much.

A follow-up from Gerry Fleming of Hambrecht.

Good morning. This is (indiscernible) for Gerry Fleming. I have 3 questions really, and at the risk of flogging a dead horse, if you could provide some color on how you value your inventory, the process that you go through and how frequently you do it.

Second was, your share account at the end of the quarter (indiscernible) up around .75 million. How should we be thinking about that going forward? Finally, if it's possible for you to provide Q4 ending backlog. Thank you.

Okay, on the inventory policy, we've had a long history here of an aging policy on the inventory, so after some period of time ,if it doesn't move, then we start to take reserves for that inventory. That's been the policy and there's no chance to that. The way we have enhanced it has been that we are actually looking at what the value of those parts is, so a lot more metrics on the number of systems in the inventory, how often they are moving. When they become more slow-moving is really the enhancement that we had to the policy.

Paul, you can answer the other 2 questions.

Yes, so with regard to the share account, I presume you're talking about the diluted shares that we used. One of the biggest factors that drives that during a quarter is just what the share price is throughout the quarter, because we take an average of the share price during the quarter in making the calculation. So that's what drove it up this quarter. Obviously, we don't know what the share price is going to be throughout this quarter, but that is what you'd use as an indicator of how many of the options we have to add into the dilution effect. (Multiple Speakers)

(multiple speakers).

(multiple speakers) -- regards, I think your one question had to do with backlog. We report backlog in the 10-K only.

Okay. On the inventory valuation, how frequently do you go through the process?

Every quarter, so we do we scrub the inventory every quarter, at the end of the quarter. Obviously, the difference here would be that we are at year-end now, where you really look at all of the policies and procedures in the Company, on an annualized basis, for the full audit. In general, the quarters are cursory audits and don't go into the level of detail that you would -- (technical difficulty) -- year-end, so that's when we started saying to ourselves, well, let's look at these policies and make sure that they all make great sense and that these are all going to be very compliant for the SOX 404 process because obviously as part of our 404 preparation, we need to get their policies in writing and not open to any kind of other interpretation and be very clear and specific. You need to have the metrics associated with those. So now, as I said earlier, we have this wonderful ERP/MRP system that is providing some new data and therefore gave us the opportunity to enhance that policy.

Thank you.

A Follow-up from Martin King (ph) of S.G. Cowen.

Yes, just a quick question on the SG&A -- it came down quite a bit. Going forward, do you expect it to be at the same level?

You know, I would expect it to be more in line with the previous quarters than it was this quarter. This quarter was a little bit lower than the others. Again, there was some impact related to reclassifying costs between marketing and service related to the restructuring that we had.

Okay. You guys made a lot of improvement on your inventory. Do you expect the inventory turns to remain in the 1.8 times level going forward?

Well, if sales continue to increase, then we would expect the turns to increase as well.

Well, I mean, in terms of managing inventory, I mean, your sales go down. I mean, if you have better system of management of inventories, your turns should remain.

Yes, that's our objective. I mean, our objective is to have those turns go up and to drive the inventory number to be more real-time, based on our orders, going forward, so we like to have a 6-month kind of a rolling forecast that we buy inventory to.

Another interesting thing is, if you look at our inventory in '04 relative to '03, you're seeing a very equivalent kind of an inventory number. Even though we had a 70 percent increase in sales, we were able to maintain a very low inventory number on those sales levels. So we think that there's kind of an inventory level that we need to maintain and it's probably in this $25 million area. That inventory number includes demo systems, obviously work in progress and the like, so we feel like we made major improvements to the inventory in 2004 and expect that, if the year progresses as we expect it to in 2005, that it can be on a similar or better level for the rest of the year.

Okay, thank you.

Sir, you have no more questions.

Okay, with that, I will wrap it up and thank everybody for listening to the call today and look forward to reporting to you on the first-quarter results. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. Have a good day.