Onto Innovation Inc (ONTO) 2011 Q3 法說會逐字稿

Good afternoon, and welcome to the Nanometrics third quarter 2011 financial results conference call. A Q&A session will be held at the end of the call. Until that time, all participants will be in a listen-only mode. Please note that this conference call is being recorded today, October 27, 2011.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations Counsel for Nanometrics. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to the Nanometrics third quarter 2011 financial results conference call. On today's call are Dr. Timothy Stultz, President and Chief Executive Officer; and Ronald Kisling, Chief Financial Officer. Shortly Ron will discuss our financial results for the third quarter. Tim will then share our perspective on the quarter and outlook going forward before opening up the call for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1:00 PM Pacific this afternoon and is also available on our website at nanometrics.com.

Today's conference call contains certain forward-looking statements including, but not limited to, statements regarding financial results for the Company's most recently completed fiscal quarter, which remain subject to adjustment in preparation of our periodic review on Form 10-Q, the continued adoption and competitiveness of our products, the expansion of our served markets and future revenue growth, profitability and cash flow.

Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to a variety of factors including a change in current levels of industry spending, shifts in the timing of customer orders and product shipments, changes in product mix, increased operating expenses, and the additional risk factors and cautionary statements set forth in the Company's Form 10-K for the fiscal year 2010 as well as other periodic reports filed with the SEC from time to time. Nanometrics disclaims any obligation to update information contained in any forward-looking statements.

I will now turn the call over to Ronald Kisling. Ron?

Thank you, Claire, and good afternoon. In the third quarter, we delivered strong financial results in spite of increased industry volatility and concerns regarding consumer demand in the worldwide economy. Revenues were $58.3 million, near the midpoint of our guidance, down 9% from the prior quarter, and up 8% from the third quarter of last year. Total product revenues of $49.8 million were down 8% from the second quarter, and up 12% from the third quarter of 2010.

Service and upgrade revenues of $8.4 million declined 17% sequentially and 12% year-over-year, primarily due to a decrease in upgrade revenues. In total, service revenues comprised 14% of sales, down from 16% in Q2. Sales of our automated metrology systems decreased 12% over Q2 and comprised 58% of total revenues.

Our flagship OCD tool revenues saw the largest decrease driven primarily by capacity pushouts in both memory and logic. This was partially offset by increased sales of our UniFire and overlay automated systems.

Our integrated metrology sales grew by 10% over Q2, our third straight quarter of growth, mostly driven by Flash technology spending and comprised 13% of total revenues. Our materials characterization business declined by 4% compared to the second quarter comprising 15% of total revenues, primarily due to lower sales into the LED segment.

We believe automated metrology systems will continue to make up the largest share of our products, but we will see quarter-to-quarter fluctuations in the absolute percentage mix driven by buying patterns and fluctuations in customer fab rollout schedules.

By end market, fluctuations in the fan-out of our automated products of large customers also resulted in a shift in end-market mix compared to last quarter. The most significant difference was in our sales to NAND Flash market, which had comprised 45% of our product revenues in the second quarter. For the third quarter, Flash revenues declined by approximately 28% to comprise 35% of product revenues. DRAM sales declined as well by approximately 20% to comprise 12% of product revenues in the third quarter.

Product revenue into the logic, IDM, foundry and hard drive segment increased from 24% in the second quarter to 37% in the third quarter. Notably, foundry revenue was 10% of product revenues, as included in the 37%. The LED, solar and silicon end-market segment decreased its share to 15% from 17% due to the industry softening I mentioned earlier.

Consistent with our historical reporting, we report revenue by geographic region based on the ship to our first end-use destination. In the current quarter, revenues from South Korea were 39%, North America 23%, Japan and rest of the world each 19%. Sales to Samsung and Intel each contributed over 10% to our revenues in the quarter.

Turning now to gross margins, our total gross margin for Q3 came in at 52.9% at the high end of our guidance. This compares to 56.1% in the prior quarter and 54.5% in the third quarter of last year with the decrease primarily due to product mix as well as lower sales volume in the sequential comparisons. Product gross margin was 54.1%, while service gross margin was 45.6%, still above our model, but down a bit from Q2 levels.

Operating expenses in the quarter increased 2% over the prior quarter to $19.1 million, primarily due to material costs and R&D associated with new products, and increased professional services. Our operating income was $11.7 million compared to a record $17.5 million in the prior quarter and $13.8 million in the year-ago period. Our operating margin was 20.2% of sales, slightly better than the midpoint of our guidance.

Net interest and other income were $600,000 compared to an expense of $700,000 in the prior quarter and an expense of $400,000 in the year-ago period. The significant change was due to foreign exchange losses moving to gains in the current quarter of approximately $700,000 related primarily to movements of the US dollar against the Swiss franc, yen and euro.

Our effective income tax rate in the quarter was 38%, above our 2011 guidance of approximately 35% as a result of certain prior period items that were reflected in the current quarter. We continue to expect our annual effective tax rate to be approximately 35%.

Net income was $7.6 million or $0.32 per diluted share, just above the midpoint of our guidance of $0.28 to $0.34 per share. These earnings compared to $0.53 per share in the third quarter of 2010, when our tax rate was 8% and $0.47 per share in the second quarter of this year.

Turning now to the balance sheet. We grew our cash and investments by $8.5 million in the third quarter, ending the period with just over $100 million or approximately $4.36 per share based on 23 million shares outstanding at October 1, up from $4.04 per share at the end of last quarter. This was despite paying down our mortgage debt by $2.1 million. During the quarter, we did not repurchase any shares.

Cash flow from operations was $9.7 million or 17% of revenues. Our accounts receivable at the end of the quarter were $45.2 million, an increase of $1.6 million over last quarter, as our DSO increased to 70 days in line with our model but up from a low of 61 days last quarter.

Our inventories increased by $5.2 million over the prior quarter due to purchases to support new tools shipping in Q1, to support increased placement of evaluation tools beginning in Q1 and inventory build for forecasted sales that pushed out of the current quarter. As a result, our inventory turns decreased to 2.1 from 2.3 times at the end of each of our two prior quarters.

Our tangible book value increased to $201.5 million or $8.78 per share, again based on 23 million shares outstanding at October 1 from $8.42 per share at the end of last quarter. We ended the quarter with headcount of 518 employees, a net increase of 34 from last quarter.

And with that, I'll turn the call over to Tim for his comments. Tim?

Thank you, Ron. Good afternoon, everyone, and thank you for joining us today. Concerns about the global economy, the US economy and lower overall consumer spending have dampened the outlook for the electronics industry. This has led to weaker spending by semiconductor device companies characterized by reductions in capital investments, slowdowns in planned fab construction, and pushouts of capacity expansion.

If we take a closer look at the industry and technology trends, however, we see major opportunities for selective and timely investments in close partnership with our customers will lead to long-term growth and an expansion of our business. Because of the importance of this topic, I would like to spend a few moments elaborating on these opportunities.

The advancement in semiconductor devices, both in price and performance, is typically defined by the advent of new technology nodes of shrinks. Importantly, the last series of feature size reduction are shrinks, notably from 65 nanometer through 32 nanometer had been primarily accomplished through traditional scaling, that is reducing feature sizes with tighter process [performances], while using fundamentally the same tool sets and methodologies.

However, to meet the performance and cost objectives for the newest and most advanced devices, and drive to the next technology nodes, 22 nanometers and below, radical changes in device materials, architectures and structures are being required.

Notably, we are seeing an increase in the use of exotic material combination such as high-K metal gates, the advent of three-dimensional transistor architectures such as Intel's FinFET, the development of three-dimensional memory cells such as Toshiba's BiCS architecture and new three-dimensional packaging concepts such as Micron's 3D Memory Cube.

In parallel with the changes that are already underway, delays in EUV lithography have forced many of our customers to revise our litho strategies and expand the use of conventional lithographical methods. This has led to the development of techniques such as double and quadruple patterning, which in turn expands the number of steps used for litho processes, drives an increase in hard mask steps and thereby creates incremental process control requirements.

And finally, with the recent announcement of the Global 450-millimeter Consortium, the industry has begun to procure initial tools to start the development work for the transition from 300-millimeter to 450-millimeter wafers.

All told, these technology inflections, delays in EUV and move to larger wafer diameter are driving the need for new tool sets and setting the stage for an increase in overall capital intensity. These changes are technologically significant and disruptive, and in turn drive the demand for new products and tools to meet the process and process control requirements of the chip manufacturers.

For Nanometrics, these trends create significant opportunities, which we believe can be transformative to our long-term business prospects and outlook. Demand for our leading-edge technologies, differentiated product platforms and tools which address to meet the current and future challenges of the industry are expected to further increase.

And most importantly, the strong positions and trust we have established with the industry leaders have increased the breadth and depth of our engagements with them in planning and developing next-generation products. Specifically, investments by memory, logic and foundry customers and the use of our flagship technology, optical critical dimension or OCD is increasing as a percentage of the overall capital spending.

Our UniFire interferometry platform is being used as an expanding number of customer sites, which has increased at the rate of one new customer per quarter for the last year and a half, and is fully engaged in the development and production of 3D packaged devices. Our NanoDiffract software platform and applications packages are being used throughout the industry at an ever increasing rate to model, measure, analyze and control processing of the most advanced devices, as well as to develop the next generation ones.

And we have received firm orders for 450-millimeter OCD tools for delivery to multiple sites around the middle of 2012. These products will be used at the front end of the development cycle to characterize new 450-millimeter process tools and fabrication processes. So in spite of the current and near-term weakness in capital spending, we are highly optimistic about the long-term outlook for our business, demand for our products, expansion of our served markets, and the growing investments in advanced technology platforms.

Now turning to the more immediate challenges of managing through this industry pause. We are engaged in the large scale deployments in fan-outs of our tools across multiple geographic regions, which require trained personnel and local support to meet the commitments of installation, integration and acceptance of new tools into new fabs.

We are also engaged in multiple joint development programs with these same customers, as well as some notable new ones to develop new products, applications and capabilities for their next generation devices in the low 2x and 1x nodes. We have no doubt that successful execution of these programs will materially strengthen our position within the fabs, increase the demand for our tools and expand our served markets. These programs do, however, require continued investments in R&D and applications development, which are the lifeblood of technology companies.

That being said, we must and we'll continue to be prudent managers of our business, controlling discretionary spending, keeping tight controls on hiring and expenses, and doing our best to manage with this weak economic environment. To do this, we must strike a balance between continuing to invest in products and technologies tied to long-term growth, spending to defend our established business positions, while at the same time responding to softness in capacity expansion spending.

Our current outlook is that we are in or very near the trough in capital spending, with improvements in current order rates underway. And while global spending in 2012 is forecasted to be down as much as 20%, we see strength in investments by our customers in advanced technology, which plays an important role in setting the stage for further growth.

Now turning specifically to the December quarter, like all the other companies in our sector, we've been experiencing softness in near-term capital spending. Beginning around mid-August and through mid-September, rescheduling of tool shipments from 2011 into 2012 was significant. Since mid-September, however, we have seen a stabilization of our business outlook and order rate. With the economic climate, industry dynamics, seasonal pattern and Company factors in mind, our outlook for the quarter is very cautious, leading to guidance as follows, revenues of $40 million to $44 million, gross margins of 50% to 51%, operating margin of 1.5% to 6.5%, and EPS of $0.01 to $0.07.

In summary, we have delivered eight consecutive quarters of strong profitability and positive cash flow. During the last 12 months, our business has outgrown overall capital spending by more than 30%. 2010 was an all-time record year for Nanometrics. And 2011 will be a record again. This performance has been against the backdrop of industry spending that is still below the spending of the last industry cycle.

As a management team, we fully intend to continue to deliver the best possible performance within the constraints of the business environment, but always with the focus and emphasis on long-term opportunities and shareholder value. With that, we'd like to now open the line for questions.

Thank you. (Operator Instructions) Weston Twigg, Pacific Crest.

Hi, yes. Thanks for taking my question. First, I just -- was hoping you could help us understand a little bit more some of the detail behind the decline -- the revenue decline in Q4, which segments were weakest or appear to be weakest into the quarter? Any additional color would help.

Sure, Wes. This is Tim. Thanks for calling in. The biggest issue has been in the memory pushout area that we've seen as well as there was a cancellation of one fab, it was slightly to a lesser extent, but it played a role in it. And it's pretty much attributed to that.

Okay. The cancellation of the fab, was that in the memory area or --?

No, there was a planned fab for logic.

Got you. Okay. Good. And then on the press release, you mentioned UniFire traction, just wondering if you could give us a little bit more of an update there. How many customers are using the UniFire product now in volume or development? And what does that traction look like in terms of maybe revenues or sales next year?

Yes, that's a good question. Yes, actually we're pretty excited about what's going on with the UniFire. And as I mentioned during the commentary, we've added a new customer every quarter for the last six quarters. We only have one customer that's in a significant high-volume use of the tool, which has been previously announced and actually disclosed and that's Intel in the advanced packaging area. But we have another half a dozen customers that are currently using that both in the -- for the through-silicon-via and/or micro-bump applications, as well as some penetration into the hard disk drive area.

Okay. Good. Very helpful. And then just finally on the order rates, you mentioned that you think they're at or near trough. Just wondering what gives you the conviction that you think order rate should be troughing?

Well, that's a good question, because we're all trying and looking at our crystal ball. We track our order and order rates and forecast tightly. We watch it very closely as most companies do, in our case, on a weekly basis. And we look at the variability around what the outlook looks like on a week-by-week basis. In the last six weeks, it's been very stable and very flat, and against what we're looking in the near term, which is a good proxy for what we can expect going forward. So we don't know what we don't know, but right now we feel really good that we are in trough and that I think order rates are improving as we go forward.

Okay, great. Thanks a lot.

You bet.

Srini Sundararajan, Oppenheimer.

Hi, guys. Thanks for taking the call. In terms of the CapEx for next year, do you really believe that it will be down 20%? My feeling is that in terms of logic, it could be generally through that more was spent on buildings this year. So I think more equipment spending might likely come next year. Do you have any thoughts on that?

Srini, thanks for calling in. Yes, I do have some thoughts. I mean, we tried to pay attention to smart folks such as yourself who have -- you look very closely at this. But if I look at it, I think one of the points you're making is the difference between CapEx and wafer fab equipment. And I think that most of the folks were guiding anywhere from 5% to 25% down on CapEx, but wafer fab equipment as a percentage of overall CapEx, I think is actually going to improve, and there is good indications and I've seen some early reports that that it looks like Samsung spending will actually be up next year.

And if I kind of look across the board, we think Samsung is going to be spending more money. I think that Intel is going to be spending a little bit less, but they put in an awful lot of bricks-and-mortar last year. TSMC, I think, on that part of the foundry is going to be down probably a little bit, but we don't have as high of exposure. So being the eternal optimist, I would like to see more like a flat CapEx or at least flat way for fab equipment going out there. And with that as a backdrop, we think we can do pretty well next year.

Thanks. I had just one more question. In terms of 450 millimeters [darn] tool vendors such as yourself who use beams of light, don't you have an advantage that as the throughput scales -- like the throughput scales linearly for you guys rather than in a squared form, so in terms of that do you see any advantage as companies move to 450 millimeters?

Yes. So that's a good question. Actually, I think there is two parts to address that why I think that it's good for Nanometrics. First, just on a more global perspective, metrology tools are generally needed at the front end of this whole process both the characterized tools either by the equipment developers to characterize the tools by the chip manufacturers when they look at a new process tools and then also to develop the new processes. So we are usually one of the -- a good leading indicator in terms of the traction and expectations on 450.

Specifically to our tools, our hard tools are, what's known as step and repeat, and so we're not doing a whole area processing, but we're really doing step -- we step across the wafer, which means that the technical challenges and hurdles for going from 300 to 450 for us are generally less than for those people who do whole area wafer processing.

So we don't really have a huge risk getting into that and we are, again, pulled in pretty early and we're pretty excited about the contribution to our business.

Thanks. Well, just one more question, last one. On the 450 millimeters, would you be willing to tell me whether it was logic, foundry and memory?

No, I've got a pretty tight NDA bound by, but it will be multiple locations.

Okay. Thank you.

Tom Diffely, D.A. Davidson.

Yes, good afternoon. I guess first question is, if we assume a flat market next year for wafer fab equipment, what do you think a relative growth would be for the OCD segment of it?

Well, first of all, Tom, thanks for calling in. I don't have that number in front of me and I'm not -- and I don't really want to guess. But we do know that OCD is growing faster than the market in general, especially in the process control area. And if you take that and add that to what we're doing in the wafer, the 3D packaging, I just think -- I think they're pretty great world for us if we see WFE flat next year against what we think we can do in performance as a Company.

Okay. Maybe look at a different way, I mean, what -- how much does would an OCD market grow or the demand for OCD grow going from the 45 nanometer node down to 32, 28 and below nodes? I think there will be a pretty almost a step function in demand for OCD tools because the complacency of the transistors.

If I have to give you kind of a fab -- some response to it, it's probably 20% to 40%. And it really depends on whether or not -- it depend on what the device technology is and what -- whether they've implemented some of the three-dimensional structures. But it's at least in that range.

Okay. And it just seems like next year, a lot of the -- what demand there's right now is off for 20 nanometer and below and that's all a nice catalyst for your tools. If you look at outside of Intel in the 3D transistor, what's your guess for the timing for some of the other players? Is it a couple of years down the road still?

What we are engaged to -- at least to another one that's going to the 3D transistor right now. And I think it's probably in terms of, when you say how far down the road, I think they're going to have working devices within next year whether -- I think full ramp production probably is a year and a half.

Okay. And then just looking at the bookings, I guess a lot of companies' solid bookings declined pretty big in the third quarter and actually think they are going to come up off of a pretty low base in the fourth. Are you seeing similar trends or do you think the fourth quarter is also a weak bookings quarter for you?

No, I think we -- right now and again, I always have to qualify I'm the eternal optimist. But basic to -- looking at the way our -- both these activities, our business outlook and forecast, I really do feel like we're in a trough and things are starting to turn the corner for us.

Okay. All right. And then looking at the model, it sounds like with all your potential new growth avenues, OpEx is going to be stable to even slightly up over the next few quarters.

Yes, the OpEx numbers we are telling about are looking up a little bit, most of that is applied -- our OpEx was up this quarter and it was tied both to some R&D spending as well as to some contract services. But right now, unless we saw a radical change in the environment, we are going to stay the course with R&D investments. We've got some really exciting new tools we're working on, we've got some exciting new applications we're working on. In the last quarter, we've announced four significant wins as tool-of-records that are result of some of the work we've been doing. And so that that strategy of working with customers, developing new tools and new applications is really laying a nice basis for us to count on some growth next year.

Okay. And I guess during the quarter, we talked about some of the foundry wins. Is that all for the Korean foundry or have you expanded out into some of the other foundry players as well?

We've -- we're benefiting from all the foundry players. And clearly the emerging foundry player that we've had a very strong relationship where there's been highly beneficial to our business. But we're making, I think what I consider to be a critical and important inroads into the others that should start to play out for us in the forthcoming year or so.

Okay. And then finally on the balance sheet, obviously you have a pretty strong cash position. But it sounds like your concentration is going to be on growing some of these new opportunities and not on share repurchases or other avenues?

So we do have a share repurchase -- authorized share repurchase plan of $10 million. We've spent about half of that. We always look at that internally, but I think that we do our shareholders a greater service, if we take that money and turn it into growth of the business as opposed to just returning that through share repurchases at this time.

Sounds good. Okay. Thanks for your time.

Gus Richard, Piper Jaffray.

Yes. Thanks for taking my question. The first quarter is usually a softer quarter for you all. Could you first disaggregate, I think some customers have some financing issues, some customers tend to hold off ordering in the fourth quarter trying to get better pricing, and then there has been some downgrading of demand for 22 nanometer wafers than others. Can you talk a little bit about the impacts of those things on the current quarter?

No, I think, Gus, first of all, thanks for calling in. I think you've done a great job of coloring the customers, you know it's pretty well. And all those factors are captured in our guidance for Q4. We have, for the last two years, as you know, been faced with customers trying to leverage at the end of the year, shipments to extract better terms in which we do not capitulate to, and we're trying not to -- we're trying to learn from our experiences there and be a little more active in our forecast. We have a customer that is going through our financing, which is -- whose money is being managed by the bank. And as a result, there's been significant pushouts there. And they play the biggest role in the softness as we look into Q4.

Got it. Now do you have any thoughts as to the resolution about the financing and the bank control of the financing in terms of their ability to turn spending back on?

I don't have any insight, but I know that when we talk to the people at the operating level, the engineers and the manufacturers, they feel that they're getting behind the curve on this. They've got tools that they want immediately, they keep asking us about lead-times, they're going to the banks trying to get releases on a two-by-two per basis and we would sure like to see a brake loose in the Q1, Q2 timeframe.

Okay. And then in terms of -- you're going to be shipping some of your first tools in 450, it sounds like in the middle next year. Can you talk a little bit, I know it's hard about gross margin and sort of [RevRec], is there going to be a quarter or two delay in that? I'm just trying to think of how the shape of next year is going to look?

The gross margins of the tools would be in line with our other products, if not better. And we're also -- in terms of revenue recognition should be real straight forward in the normal timeframe that we ship tools and recognize them in another environment. Since these are tools that are being brought in for development purposes, we don't expect any form of acceptance issue.

Okay. And then you did mention you built up a little bit of inventory in the quarter for tool placement, customer demos I am assuming maybe [data side] tools, can you talk a little bit about how much, what dollar that represented in the inventory and sort of how many tools replacing on a customer for evaluation?

So, in general, the increase quarter-over-quarter was about $5.2 million, and I think the three main points that kind of drove all that was really purchase has put some of the new tools, new versions of tools that are shipping beginning in Q1, and increasing evaluations tied to some of those new tools, as well as new customers and new users. I don't have a specific number of tools, but there is an increase with some of the activity that's happening on the tool. And so that was a big driver. The other driver is we did make sure that we had inventory built for some of the forecast sales that ended up pushing out of the quarter that both moved into Q4, Q1. So those were really the three big drivers.

Okay. And then last for me, just in terms of the UniFire, what's application for the product sort of I'm interested in the Interposer technology and Micro-Bumps, I understand that there is some yield issues around that. And I was kind of curious how many customers you are working with, and is that driving incremental demand in the short term for the UniFire?

So, I guess, the best information I have on right now is that in terms of who is using our tools in the Micro-Bump area, we've got two customers that are directly using it.

Okay. And are those folks having yield issues, and is that helping you out?

I don't know, they haven't told me that. Now that the -- that sounds slipping, I, we just know we're working with them on those applications. We look at new ways to use the tools. I know that our applications group is much closer to this and doing a terrific job and I see this playing out very nicely for us next year.

Okay. Got it. All right. Thanks a lot.

Thanks, guys.

Patrick Ho, Stifel, Nicolaus.

Thanks a lot. Tim, can you just give a little bit of color in terms of post these pushouts, you've got a little bit of inventory to meet if they return, but how quick can the Company respond should demand pick up say in early 2012, how is the responsive time in terms of both yourself as well as the supply chain?

Patrick, thanks for calling in. Actually we can respond quite quickly. As you might imagine, when folks -- when we take a purchase order, we always quote normal lead times, but when you've got a highly volatile environment like this, we try to anticipate short-term turnaround and pull-ins, and that's part of the reason that you see some of our finished goods inventory numbers are up a little bit that Ron mentioned earlier.

We can respond very quickly. We have the benefit of a strong outsource manufacturing environment that allows us turn the system. We've been driving hard towards product platform commonality, which gives us a lot more flexibility on the manufacturing floor, and we're just not going to let any business that we -- that's available pass us by.

Great. In terms of the foundry business as a whole, a lot of them are actually experiencing yield challenges, particularly as you've got the new high-K metal gate material as well as heat shrinking technology node. Have those challenges, I guess, stimulate potential new opportunities for Nanometrics, particularly as we've seen these technology node migrations go on?

Yes, we are actually pretty enthusiastic about what's going on in foundry. We do, as we mentioned before, benefit from a very strong relationship with an emerging foundry company that's making substantial investments into their manufacturing, both capacity as well as driving to the next technology nodes. We're seeing growth in the use of the OCD platform in particular for this area and we're starting to see some improvements in both our integrated metrology applications as well in the foundry space.

Great. And final question from me. With a lot of the chatter among the memory suppliers about moving to vertical device structures, what are some of the potential opportunities you see there in terms of particularly incremental opportunities for OCD as the memory sector moves to those type of devices?

I think it's hand in glove with what we do. We certainly have to address some of the challenges of looking at some of these high aspect ratio devices like the BiCS one that we mentioned earlier from Toshiba. But when you go into the third-dimension, it pretty much puts all the other technologies to the sideline, and OCD is one of the only viable solutions, and we may have some applications development to do to be able to optimize it for those. But this really falls into our sweet spot and why non-contact high-speed optical techniques can be leveraged in that space.

Great. Thank you very much.

Okay.

(Operator Instructions) Graham Tanaka, Tanaka Capital Management.

Hi. Thanks for your comments, and Tim, just wondering if you could talk a little bit more about the cycle, we're always wondering about the lead lags and what's been going on in the different sectors. But it seems like in the last few months, it's been most takeout and that kind of thing. So I was just wondering if you can embellish a little bit more on how you're seeing your customers responding, what they're talking to you about and maybe utilization rates and that kind of things?

Sure, Graham. This is -- thanks for calling in. As I think everybody that's reported so far has pointed out that there's chip in pushouts in the memory space. My feeling is that when I look at the technology and the technology opportunities, if I look at the bit demand, when I look at the NAND device applications, when I look at content rich mobile devices, when I look at the three-dimensional devices and the technology moves, I can't help it fall back that the macro issues are much more profound and affecting what's going on in our industry than chips and technology and capacity.

Those -- I think those are almost secondary to the macro environment. I think when you see the macro environment stabilize, I don't think it has to me -- have a major improvement, but my personal feeling is that when the macro environment starts to stabilize, I think that consumer demand changes. I think that the corporate companies -- corporations will start to look at PC refreshes and IT investments. I just think it's all good stuff and we've really feel -- I mean if -- when you -- as close as we are with our customers, we get very excited about what they're doing, what they want from our tools, when we talked about when the next tools could be available and what they're going to be used for.

One of the things I was wondering about is I've seen a comment about accelerated depreciation in some tool holders may be being shifted this fiscal year versus next fiscal year sort of pulled in, I was wondering if that is really just the minor of that?

Yes. I think the push and pull things are relatively minor. In our case, I know that there's always -- there's usually a chatter about, for instance Samsung, pulling in tools towards the end of the year, which is a pretty common practice for them as they try to wrap up at the end of the year. We've seen that before. We generally don't find it as attractive because they -- with those pull-ins, they sometimes at the end of the year, like to also extract an extra pound of flesh in terms of -- and we just don't play that game. So we've done that two years in a row, we've found that happen and two years in a row, we've found that -- the tools ship are first and second week of January. And if that's what it is, we're going to continue to run the business that way.

Right. Okay. Great. And nice to be able to deal some strength. So, the other is your tool of what record wins, I was wondering if you could tell us a little more about those and what that might mean for sort of the ramps in the next 12 months?

Sure. So that this last quarter, we announced four tool record wins. We announced an integrated metrology tool of record win, which is for Flash in Korea. We announced an OCD standalone tool-of-record win, which is for an emerging foundry in Asia. We announced an OCD tool-of-record win for a hard disk drive, and we announced the UniFire being adopt this tool-of-record by Samsung for packaging.

All of those tool-of-record wins are just got their early stages and as you start to see the investments in the new fabs for such as Samsung building line 16 as well as developing their foundry business, when we see what's going on in some of the hard disk drive area, we see actual growth and strength in our integrated metrology, our wafer scale packaging, and our standalone OCD platforms, and we should see compounded growth that's better than the normal capital spending as we go forward.

Is there kind of a -- in your mind is sort of (inaudible) either, what you're telling the truth or you have your own sort of vision of the next -- say next year, if the industry does such and such level whether it's a flat or 20% decline, what kind of a delta you would have just by market share gains and the tool-of-record wins?

Yes. Let's -- I'll point to what we did. In the last 12 months, we outgrew spending by 30%. And I believe that that can be directly attributable to a couple of things. One is that we've been gaining market share, the second thing is that OCD is outgrowing other capital spending, and also the wafer scale packaging is starting to contribute nicely. I would expect that those growth factors continue to apply and although I won't give an absolute number, if the industry is flat, I would expect it to grow.

Thank you and congratulations.

Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Dr. Stultz.

Thank you. And thank you once again for participating in our call. It's pretty evident to everyone that these are challenging times. However, we clearly see significant opportunities to further grow our business by capitalizing on disruptive forces and technology inflections that are underway, and we fully intend to execute on them. Our great importance regarding our ability to execute, I have complete confidence in our management team and the employees of Nano, who are fully committed and up to the challenge to take our Company to the next level. We look forward to reporting to you on our fourth quarter and fiscal year 2011 results in February. Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.