Onto Innovation Inc (ONTO) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Nanometrics fourth quarter and full year 2011 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. Please note that this conference call is being recorded today, February 8, 2012. 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 fourth quarter and full year 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 Tim will provide a recap of 2011 and our perspective looking forward. Then Ron will discuss our financial results for the fourth quarter and full year before turning the call back over to Tim for our Q1 guidance. After which we will open 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. Before providing our comments regarding forward-looking statements I would like to inform each of you of our 2012 investor and analyst meeting scheduled for March 15 in New York. For more information regarding the event please contact me at the email address provided on our earnings release.

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 and year which remain subject to adjustment in preparation of our periodic report on Form 10-K, future revenue, margins, earnings per share, financial performance and expansion of our served markets. 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 changes in industry spending, the continued adoption and competitiveness of our new and existing products. Our ability to successfully integrate acquisitions, to realize operating efficiencies and to achieve reduced tax rates, our ability to identify strategic acquisition targets and complete acquisitions, changes in product mix and the additional risk factors and cautionary statements set forth in the Company's Form 10-K on file for 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 to Tim Stultz. Tim?

Thank you Claire and thank you everyone for joining us today. 2011 was another strong year for Nanometrics. In the first half of the year we delivered our two highest revenue quarters on record and despite the industry slowdown in the second half we finished the year with record revenues of $230 million, up 22% over 2010's prior record. Importantly, our revenue growth was more than double the year-on-year increase in wafer fab equipment or WFE spending. Giving clear evidence of our success in outgrowing the industry and general.

Solid operating income also helped drive positive cash flows throughout the year with free cash flow increasing more than 100% versus 2010. 2011 performance however was not only about financial results, but also about the continued strengthening of our business and business outlook. Resulting from our strong positions in growth markets, our progress in expanding our market share through critical competitive wins, and expansion of our served markets through strategic acquisitions. I would like to briefly expand on each of these areas as they represent the foundation and basis for our ability to continue to outperform the overall industry.

Let's start with our primary served markets where capital investments are expected to outgrew spending in general. First and foremost, there's optical critical dimension or OCD. Our flagship technology and primary revenue driver. OCD has and is continuing to play an ever-increasing role in the development and manufacturing of all types of solid-state devices. Including logic, memory and even thin film heads for disk drives. Last quarter we announced the release of our one thousandth OCD recipe into production. A significant milestone for us as well as OCD technology. OCD recipes are a key indicator of the proliferation of our OCD solutions within our customer's grasps.

Notably, whereas the overall deployment of OCD recipes into production increased by more than 60% in 2011, their use at technology nodes of 3X and below increased by more than 150%. This clearly points to the increased reliance upon OCD to develop, monitor and control the production of the most advanced devices such as 3D transistor's or FinFETs. Those devices which have the most complex feature sets, the smallest feature sizes and the tightest process tolerances. In terms of growth, we estimate that the OCD market grew more than 30% in 2011, triple that of overall WFE for the same year. Similarly, our technology leadership and established footprint in the emerging market of advanced 3D wafer level packing has us well-positioned to benefit from yet another exciting growth area where form factor, performance and power consumption are fundamental drivers behind the inevitability of this packaging evolution. We fully expect this market to become a meaningful contributor to our business in the not-too-distant future.

Now let's turn to market share gains. Over the last few quarters we have announced important competitive wins for both our automated and integrated OCD metrology products. As well as significant growth in customer traction for our UniFire product line. In each case these successes translate to gains in process control market share. Earlier I mentioned that the OCD market had grown more than three times that of overall WFE spending. In 2011 Nano's own OCD business grew more than 40% year-on-year. Clearly pointing to our success in gaining market share. We believe these gains further validate the competitiveness of our product and support offerings as well as the confidence our customers have in our ability to meet their current and future technology and manufacturing needs.

Finally, last quarter we announced the acquisition of Nanda Technologies. A small and innovative company in Germany that developed a unique and highly differentiated wafer inspection product called SPARK. Primarily targeted toward macro defect applications throughout the wafer fab. This acquisition is a clear example of our stated strategy to identify and acquire companies or technologies that expand our served markets, increase our fab footprint, leverage our core competencies and global infrastructure and offer a differentiated competitive advantage which can drive significant market share positions. With this acquisition we increased our served market by over 30% and expanded our presence within process control to include the inspection market which in total is even larger than the metrology segment of that sector. Similar to our expectations following the acquisition of the UniFire product line, we see the start becoming a material contributor to our revenue story within the next two to four years. So as we look back upon 2011 it was another pivotal year for Nano. Not just because of the new sales records achieved, the strengthening of our positions with key customers and market share gains, but also because we took another important step in our strategy of making acquisitions that fuel future revenue growth by gaining us access into incremental and strategically important growth markets.

Now, turning to the general outlook for 2012. Without a doubt the macroeconomic environment continues to be the single largest factor affecting the investments and wafer fab equipment. The details of which are generally understood and have been reported by many elsewhere. That being said, the two largest IC manufacturers in the world, ones where we have established solid positions in multiple areas of process control metrology, have announced meaningful year-on-year increases in their CapEx budget for 2012. This is in stark contrast to the analyst forecast and prevalent outlook from just a month or two ago. Whereas overall 2012 CapEx estimates have been in the range of down 15% to 20% year-on-year. In just the last few weeks analysts estimates have now improved to be flat to down 5%.

While improving in the overall forecast is certainly encouraging, of particular note is the CapEx guidance provided by our three 10% customers. Which collectively add up to 14% growth year-on-year. These customers alone represent nearly half of all the forecast spending for the year. While not all that increase will be WFE, the construction of new buildings clearly sets the stage for additional investments and our tools in 2013 and 2014. To address capacity requirements, next generation devices and increased wafer sizes. That being said, the significant and rapid changes in the forecast for 2012 also highlight the fact that long-term visibility is still relatively low. Near-term volatility is high and outlooks can turn on a dime. All of which dictates that we at Nano continue to remain vigilant and flexible with our planning and investment strategies. We currently however remain optimistic about 2012 and believe that if the current outlook for spending manifests itself during the forthcoming year, Nanometrics will enjoy another year of growth and outperformance.

Before I turn the call over to Ron I want to make a couple of comments about operation results, execution and our goals for financial performance. Over the last few years we have generally delivered solid financial performance against a robust business model that exhibited strong margins and operational leverage. In the last two quarters we've experienced downward pressure on our margins, notably our product gross margin, which has primarily resulted from changes in product mix and decreased manufacturing volumes. As well as other factors, such as the initial build and launch of new products and the advanced deployment of additional resources in regions where we expect to see significant growth in installations and support in the future. We've also entered a time when our tax rate is among the highest in our history as well as the industry. This is principally due to our corporate tax structure rooted in the US, the absence of any benefit such as NOLs and now the expiration of the R&D tax credit. I want to assure you that we are not satisfied with this aspect of our overall performance and believe we can do better. Specifically, we understand that excellent and operating profitability and strong positive cash flows are just as critical as revenue growth, market share gains and technology wins. And are the hallmarks of well run companies.

Whereas we will continue to invest in R&D and in particular those areas that strengthen our business and business outlook, we are also working very hard and taking steps to prove our financial performance to deliver even better results to our shareholders. Some of this will certainly come from a rebound in revenues from Q4 levels, our operational leverage expresses itself as increased incremental margins. Other improvements however will come from better operational and manufacturing efficiencies such as increased product platform commonality, further leverage of our outsourcing capabilities, improvements in supply chain management, and corporate restructuring to lower our net tax obligations. We are committed to these objectives. We have active programs in place to address them. And we look forward to reporting our progress as it occurs. With that, I will turn the call over to Ron to discuss our results in more detail before concluding with our guidance for the next quarter.

Thank you, Tim and good afternoon. In the fourth quarter revenue (inaudible) $45.3 million above our guidance of $40 million to $44 million reflecting the improvement in semiconductor business conditions which occurred after our third-quarter conference call in late October. However, consistent with the overall decline in industry spending, Q4 revenues were down 22% from Q3 and were 2% below Q4 of last year. Total product revenues of $36.7 million were down 26% from the third quarter of 2011 and down 4% from the fourth quarter of 2010. Service and upgrade revenues of $8.6 million were up 1% from the prior quarter and up 8% year-over-year, primarily due to increases in core services on our growing install base. In total, service revenues comprised 19% of sales in the fourth quarter compared to 14% in Q3.

Sales of our automated metrology systems comprised 61% of total revenues in the quarter, down about 18% from Q3 due to softening conditions in semiconductor equipment spending. Also affected by the slowdown in capital spending were our integrated metrology sales which comprised 11% of total revenues in the quarter declining 33% from Q3. And our materials characterization business which comprised 9% of total revenues in the quarter and declined 51% compared to the third quarter, primarily due to weak spending conditions in both the silicon substrate and LED industries. By end market we saw a significant increase in our product sales into the foundry segment which increased 25% of product revenues in the fourth quarter from 10% in Q3. Product revenue in the Vologic, IDM and hard drive segments were 24% of total product sales in the fourth quarter compared to 27% in the third quarter.

In the memory market, our sales into the NAND flash market declined by approximately 46% to comprise 26% of product revenues compared to 35% in the third quarter. DRAM sales declined as well by approximately 19% to comprise 14% of product revenues in the fourth quarter compared to 12% in the third quarter. The LED, solar and silicon end market segment decreased its sale of our product revenues to 11% from 15% due to lack of capacity expansion in the silicon substrate and LED market segments. Consistent with our historical reporting, we report revenue by geographic region based upon the ship to or first in use destination. In the current quarter revenues from South Korea were 37%, North America 31%, Japan 17%, and rest of the world 15%. Samsung and Intel each contributed 10% or more to our revenues in the quarter.

Turning to our gross margin, gross margin for Q4 came in below guidance at 46.6%. Compared to 52.9% in the prior quarter and 52.7% in the fourth quarter of last year. Product gross margin was 46.3% compared to 54.1% in Q3 and 57% in the fourth quarter of 2010. As expected, product margin declined due to lower factory absorption with the decreased systems sales volumes. The primary driver to the further decline from Q3 was product mix and the impact of lower margins on the initial build and launch of new products in the quarter which were adopted more rapidly than we expected. Service gross margins remained strong at 48.1% up from 45.6% in Q3 and 32.1% in Q4 of 2010. The increase in service gross margins came primarily from an increase in core service revenues plus our growing installed base.

As we turn to operating expenses I wish to call to your attention the special charges recorded in the fourth quarter which we had excluded from our non-GAAP operating results. These charges have been detailed in the non-GAAP reconciliation tables provided in our press release as well as on our website. These non-GAAP charges are important because they quantify the impact of two significant events that occurred since we reported our Q3 results. Namely, the acquisition of Nanda Technologies and the for settlement of patent litigation with KLA-Tencor. First, if you recall from last quarter we had guided operating expenses to increase quarter-on-quarter by approximately $300,000 to $500,000. At the time we were in the midst of completing the acquisition of Nanda Technologies and included in our guidance were expenses we expected to incur in the fourth quarter. We did not include in our guidance expenses that were contingent on the transaction close such as investment banking fees or incentive hire-on stock grants to employees. The $19.1 million in GAAP operating expenses in Q3 included $682,000 in legal expenses related to the Nanda acquisition which were not broken out in our conference call given that the transaction was still pending.

As a reminder, under the current accounting rules, transaction costs are expenses incurred rather than treated as part of the purchase price. In Q4 we incurred professional fees in connection with the acquisition of Nanda of $803,000. Also included in our Q4 results and excluded from our non-GAAP earnings is stock compensation expense of $474,000 associated with hire-on grants for the Nanda employees. Amortization of intangible assets for the quarter included $247,000 associated with Nanda. Therefore, the combined impact of transaction fees, hire-on stock grants and the amortization of intangibles related to Nanda was $1.5 million for the quarter.

The other significant impact on our Q4 performance was the impact from the settlement release with KLA-Tencor regarding outstanding patent litigation. Under the terms of the settlement agreement we each agreed to dismiss our separate lawsuits against each other. As part of the settlement we made a one-time payment of $2.5 million to KLA-Tencor. The settlement the sediment occurred in January 2012 but because the litigation existed prior to the end of 2011 the expense was recorded in the fourth quarter. The combined impact of the Nanda acquisition charges and the KLA-Tencor settlement were $4 million. Excluding this amount our operating expenses for the quarter were $17.6 million compared to $18.4 million in Q3 excluding the $682,000 of legal expenses associated with the Nanda acquisition which we did not separately breakout in Q3. The decline in operating expenses in Q4 was due to lower incentive compensation driven by the lower revenues, the increased number of holidays, seasonally lower payroll taxes and a decrease in professional fees which were partially offset by the additional operating expenses associated with operating the Nanda business between November 21 and December 31. We expect that many of the favorable expense reductions recorded in the fourth quarter will come back in our Q1 2012 results as well as a full quarter of Nanda operations.

Total operating expenses on the GAAP basis including each of these expenses totaled $21.6 million compared to $19.1 million in Q3 and $15.6 million in Q4 of 2010. Our operating loss on a GAAP basis was $500,000 compared to operating income of $11.7 million in the prior quarter and $8.7 million in the year ago period. Operating margin in the fourth quarter on a GAAP basis was negative 1.2% compared to an operating profit margin of 20.2% in Q3 and 18.8% in the year ago quarter. However, after excluding charges of $4 million related to the acquisition of Nanda and settlement of patent litigation, operating margin was 7.7%, ahead of our guidance of 1.5 to 6.5%.

Net interest and other was an expense of $194,000 compared to income of $567,000 in the prior quarter and an expense of $227,000 in the year ago period. The significant contributor to the Q3 other income was foreign exchange gains over 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 26.3%, reflecting the impact of the acquisition resulting in an effective tax rate for the year as a whole of 35.7%, in line with our expectations. As a result of the expiration of the R&D tax credit and our inability to recognize a tax benefit on the Nanda intangible amortization in 2012, we expect to see our effective tax rate increase to approximately 40% on a GAAP basis. And on a non-GAAP basis 36.7%. If the R&D tax credit were to be reinstated the rates on GAAP and non-GAAP basis would be 38% and 35% respectively. Not considering any catch up adjustments.

We recognize that our tax rates are one of the highest in the industry and we completed an assessment of our global tax structure and alternatives. We expect to provide direction on our progress and our ability to move toward industry level tax rates during the first half of 2012. Because of the significance of these acquisition related and legal settlement expenses we have added a non-GAAP net income and earnings per share measure to our standard reporting. We believe this non-GAAP measure will make it easier to understand our ongoing business trends absent these expenses. Excluded from non-GAAP net income are acquisition related expenses, litigation settlement expenses, intangible asset amortization, discrete tax items and restructuring and impairment.

Our net loss on a GAAP basis was $500,000 or $0.02 per diluted share. The impact of the Nanda acquisition charges was approximately $0.05 per share while the legal settlement impacted earnings by approximately $0.07 per share. On a non-GAAP basis our net income was $2.3 million or $0.10 per diluted share compared to $0.35 per share in Q3 and $0.35 per share in the fourth quarter of 2010 presented on the same basis. Going forward, absent any other significant events, we expect non-GAAP adjustments on a quarterly basis will be $850,000 representing intangible amortization expense which, with the 15% tax effect, will equate to approximately $0.03 per share on an ongoing basis.

Turning to our balance sheet. Our cash only declined $2.5 million despite our cash purchase of Nanda in the quarter and we ended the period with $97.7 million or approximately $4.21 per share based on 23.2 million shares outstanding at December 31. We did not repurchase any shares during the quarter. Our accounts receivable at the end of the quarter were $29.3 million, a decrease of $15.9 million over the last quarter on lower revenues and a decrease in DSO to 58 days. Just under our target range of 60 to 70 days. Inventory increased by $600,000 over the prior quarter and included Nanda inventory of $1.6 million. Our tangible book value decreased to $184 million or $7.92 per share based on 23.2 million shares outstanding at the end of December. From $8.80 at the end of last quarter as a result of the acquisition. We ended the quarter with headcount of 552 employees, a net increase of 34 from last quarter.

Turning now to our fiscal year performance. For the year our revenues increased 22% over the prior year to $230.1 million from $188.1 million in 2010. Product revenue growth was 26% reaching $194.8 million, compared to $154.5 million in the prior year. Service revenues of $35.3 million increased 5% from $33.5 million in 2010.

For the year, all product groups demonstrated year-over-year growth. Our automated metrology systems sales increased 26% and comprised 61% of our total revenue and our integrated metrology system sales increased 40% over the prior year to comprise 11% of total revenue. Our materials characterization business increased 15% over the prior year and comprised 13% of total revenue. For the full year, Samsung, Intel and Hynix each accounted for over 10% of our revenues.

For the year, our overall gross margins declined slightly to 53.5% compared to 54.4% in the prior year due primarily to the impact of product mix and decreased factory absorption in the fourth quarter. Our GAAP operating margin was 19.9% compared to 22% in 2010 reflecting the impact of lower revenues, the litigation settlement and acquisition costs in the fourth quarter. Fiscal year net income on a GAAP basis was $28.7 million or $1.22 per diluted share compared to $55.9 million or $2.43 per share in 2010. Which included the favorable tax benefit of $18.2 million in the fourth quarter. On a non-GAAP basis, our net income was $32.7 million or $1.39 per diluted share compared to $39 million or $1.70 per share in 2010.

Turning to the balance sheet for the full year, cash increased $31 million and our tangible book value increased by $19 million. Free cash flow for the year, which is cash flow from operations less capital expenditures, was $51 million, more than doubling from 2010's free cash flow of $25 million. With that, I'll turn the call over to Tim for his outlook for the first quarter. Tim?

Thank you, Ron. Last quarter we reported on softness going into the fourth quarter and guided revenues down accordingly. We also commented that by mid-quarter we were experiencing a stabilization of our business outlook and order rates which was expected to play out favorably entering into the new year. That has in fact turned out to be the case. As we have seen some improvement in our business and business outlook entering 2012. With that, our guidance for Q1 is as follows, revenues of $52 million to $55 million, gross margin of 47% to 50%, operating margin of 5% to 10%, EPS of $0.06 to $0.13 per share, and non-GAAP EPS of $0.09 to $0.16. With that we would now like to open the line for questions.

Thank you.

(Operator Instructions)

Tom Diffely of D.A. Davidson.

Good afternoon. Maybe first couple questions on the margins. For the outlook, is it a combination of the mix and volume again or does Nanda have a play in it?

Tom, this is Ron. Most of the impact in Q1 really is the mix and the launch of new products that we are seeing. We're seeing a little bit of sequential increase, but it continues to be the global mix. It is not really significant impact from Nanda in Q1.

For the new products is it just because you are just starting the learning curve and something you expect to come up over time?

Yes.

Okay. Then I guess looking at your long-term model has that changed at all? As far as what you think operationally you are going to achieve, different revenue levels?

I think by and large, this is Tim. I think by and large the model is still a valid one, we are driving to get back onto the model. We lost a little ground as we reported. But we think that that is a robust and viable one and we're going to do our best to get back onto it.

Okay. Great. In the quarter it sounded like you had some pretty strong foundry business. Were there some one-time items there or do you think foundry remains a pretty big part of your business going forward?

I think that we have benefited from increased foundry spending. I think our positions in a couple of areas are strong and I would expect foundry to continue to play an important role in our revenue reports.

Okay. And when you look at the foundries it looks like when he moved to 20 nanometers and below, there's a big increase in OCD demand. Just wanted to know, wondering if you could quantify that somehow, going from node-to-node? No, I don't have that in front of me Tom, in terms of the node-to-node change other than we have shown the adoption rate of the different nodes, I will refer you to the chart that we have published on our IR apprisal which suggests that the node-to-node increase, at least from a recipe point of view is anywhere from 50% to 100% higher than it was in the earlier nodes. Okay. Great. And then finally, when some of the leading edge customers go from 20 down to 14 nanometers is there a big impact on the tools or is there a shift of tools as it refers to OCD?

I'm not sure how to answer that. I think that OCD continues to play a very key role. I don't think that there's a step function or discontinuity in the role. I think one of the areas that we'll all be looking at is the changing of the role of OCD as we potentially enter into the EUV world. But at this time with the double patterning, quadruple patterning and pushing down to the one 1X nodes I see a continuing strong demand for the OCD technology and our products.

Okay, great. Thanks for your time.

You bet.

Mahesh Sanganeria, RBC Capital Markets.

Thank you very much. Tim, just to follow-up on the gross margin comment again. How should we be thinking about gross margin in terms of these items that the projects you are working on to improve, if the revenues were to stay flat, I'm hoping they won't, but if they were to stay flat when do we start to see a pickup in the gross margin?

Mahesh, yes, that's a good question. I don't have an absolute time, but I -- clearly even in the face of flat revenues we've seen ability to improve the margins and the different programs that we're working on kind of stage in at different rates. I would hope that as we get more mature on the launch of our new platform which as Ron mentioned in his comments, we received a much higher demand for than we planned on in the Q4 timeframe, as volumes pickup that we should see some improvements to our supply chains and our factory efficiency. Then the other programs will take a little longer. But these are all 2012 objectives for us.

Okay. At least first-half look towards the second half sometime to start to see some improvement, that's how I did it? But just one more thing I want to follow. Most of the companies guided so far in semi, most of them have guided 200 basis points lower than what I would expected. So it looks like there's something industry wide phenomena going on here. Would you agree to that? Or do you think there something specific in this case? You're assigning it to specific Nanometrics, but I'm just trying to figure out if there is something industry wide which also is impacting your gross margin?

I don't think there is an industry wide issue. There's always the normal elements that come into play such as the creeping cost of materials in the supply chain, increases in salaries that go into -- inside of the manufacturing environment so are those normal creep factors, but I don't think there's anything industry wide. We look at our own margins and we've been proud to post very strong margins historically and we're going to get back on that curve.

Okay. Just one last question on the revenue. Assuming that most semiconductor companies spend what they have guided, what is your expectation in terms of the linearity of spend -- if you don't go by quarterly, first half or second half how do you expect -- how do you see that playing out?

That's a great question and I think the question I ask is there some speculation that the year might be front end loaded, there may be some softness in the second half. We actually aren't seeing that in our activities. But I really want to emphasize the fact that the high levels of volatility and the visibility being so short that I don't think any of us have a strong certainty either way. I would be no more surprised if the second half was stronger than if it was a little bit weaker. We just don't have visibility beyond that.

Okay, that's fair. Thanks a lot.

Weston Twigg, Pacific Crest.

Hi, thanks for taking my question. Just a couple of quick ones. Can you give us an idea on what you think the full year revenue contribution might be from UniFire and maybe even Nanda this year?

Wes, the simple answer to that is no. We are not going to break out that granularity. We do believe that as we said there are a couple things that we are looking forward to in the year and that is that our contributions from foundry and our contributions from the overall packaging inspection areas start to become material in the year. We've got some traction as you know about in the UniFire. There's some nice product placement activities that have gone on with the Nanda and we see those all helping us. But other than that, I cannot give you any more granularity.

Okay. And I guess the other thing I wanted to dig into a little bit is KLA on their call talked about winning market share in OCD and I'm just wondering if you can give us any idea or give us a feeling on how current head-to-head competitions are going, if you feel like you are winning more than losing in OCD, and if maybe part of KLA's bullishness is related to some foundry business that you haven't been able to announce?

You know, I would just say that to the extent that they've won market share, it's definitely not been at our expense.

Okay. You are not necessarily losing significant head-to-head competition, significant numbers of head-to-head competitions, I should say?

Not at all.

Okay. On the foundry side, just to wrap it up, have you or do you expect to have, to be able to announce any additional wins in addition to the one you announced last fall?

We would certainly hope to. There's no guarantees in our life, but we have some interesting positions. We have some product placements. We have some ongoing activities and we're doing everything we possibly can to turn those into material contributions to our revenue model. But no guarantees, just our best efforts.

Okay. Great. Thanks a lot.

Thank you.

(Operator Instructions)

Srini Sundararajan, Oppenheimer.

Hi, guys congratulations on a good quarter. Actually better than my expectations. And going forward would it be fair to say that even the second quarter you would be expecting something similar to the first quarter? Meaning you're not seeing a slowdown in second quarter as far as visibility is concerned?

Srini, thanks for the question and I cannot blame you for trying, but as you know, we only give guidance on the subsequent quarters so I'm not going to give you a specific or direct answer to the second quarter other than we will go back to the fact that we feel very encouraged by the announced spending plans. A couple of points that are interesting is that of the top three spenders in the industry with their new plans they represent about 56% of the total spending and if you look at our three 10% customers, it represents almost 46% of its spending. So if they spend it where they say and there's some linearity to that, then we should enjoy a decent year. But it is volatile. The visibility is low and these guys do change their minds pretty quickly.

My next question is, would you be willing to take on debt actually to reduce the tax rate and perhaps use it to fund acquisitions?

I will let Ron address that one. He is under the pressure to fix my tax rate here.

Yes, we've looked at a number of structures. I think the best way to do it and the way that gives long-term benefit that also is a restructuring of our supply chain that's aligned closely with actually how we are doing business. We think that can give us some benefit. I think as we move through the first half we will be able to share more details about exactly what we are planning and what our expectations are. But that's generally where we focus most of our attention right now in terms of improving our tax rate.

And my last question is would it be fair to say that a certain US Logic manufacturer might probably account for the biggest level of your revenues this year?

I don't want to respond to that directly. You know our top customers and we expect them all to be -- continue to contribute to our success in 2012. We're not going to speculate on how that sorts out.

Okay, thank you very much.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time. I will turn the call back over to Dr. Stultz.

Thank you. And thank you once again for participating in our call. I continue to be optimistic about the future for Nanometrics. I have justifiable confidence in the terrific team of employees who make it happen each and every day. I look forward to reporting on the results of our operational and financial performance for the first quarter of 2012 in April.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.