Onto Innovation Inc (ONTO) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the Nanometrics third quarter 2012 financial results conference call. A question-and-answer session will be held at the end of the call. Until that time all participants will be in a listen-only. Please note that this conference call is being recorded today, October 30, 2012.

At this time, I would like to turn the call over to your host, Claire McAdams. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Nanometrics third quarter 2012 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 the third quarter and our perspective looking forward. Then Ron will discuss our financial results for the third quarter and fourth quarter outlook, 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 www.nanometrics.com.

Today's conference call contains certain forward-looking statements, including, but not limited to, financial performance and results, including revenue, operating expenses, margins, profitability and earnings per share, customer concentration, tax rates and technology product adoption.

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 general economic conditions; changes in levels of industry spending; the adoption and competitiveness of our products; industry adoption of new technology and manufacturing processes; shifts in timing of orders and product shipments; changes in product mix; our ability to successfully identify complete and integrate acquisitions; to realize operating efficiencies; and to achieve reduced tax rates; and the additional risk factors and cautionary statements set forth in the Company's Form 10-K on file for fiscal year 2011, 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 statement.

I will now turn over the call to Tim Stultz. Tim?

Thank you, Claire, and good afternoon, everyone, and thank you for joining us on the call today. Before beginning, we want to take a moment to recognize the extraordinary challenges and suffering that are taking place on the East Coast as a result of Hurricane Sandy and express our sincere hope that conditions will return to normal as soon as possible.

Now, turning to my prepared remarks. Nanometrics' third quarter revenues were generally in line with guidance. Our bottom-line performance exceeded our guidance largely due to stronger-than-expected gross margins and lower-than-forecast OpEx. Ron will provide you with more detail on these items during his remarks.

In addition to our performance against plan, however, two notable milestones occurred within the third quarter. The first was the full acceptance of our first 450-milimeter Atlas OCD tool. The superb execution of our engineering, manufacturing and service teams resulted in a smooth delivery and installation of this first-of-its-kind product, which met out-of-the-box specs and resulted in tool acceptance in a relatively short timeframe. Though it is still very early in the 450-milimeter conversion cycle, metrology tools, such as our Atlas, will play a key role in evaluation of new 450-milimeter process tools and the development of new processes on larger wafers. Further, we believe the early adoption of our Atlas OCD platform positions us well for future 450-milimeter business.

The second milestone was that for the first time in Nano's history, the revenue contribution from a leading pure-play foundry customer exceeded 10% of our total revenues for the quarter. As many of you are aware, gaining traction in this important segment of our industry has been high on the list of our key initiatives for the last few years, and reaching this milestone is a good indicator of the progress we are making. While we still have a long way to go to meet our objective of achieving business levels and market share consistent with overall spending in the foundry sector, our multiple strategic engagements are finally beginning to play out in our favor. And we are confident that this business will continue to grow in the years to come.

Turning to the overall business climate, as observers of our industry are aware, the weak macro environment has clearly had a negative impact on demand and the subsequent investment activities of leading device manufacturers. We have seen a pronounced decrease in capital spending and entered a period of heightened uncertainty and reduced visibility. This is further exacerbated by the increase in concentration amongst leading chip manufacturers, which leads to greater volatility as changes in single-customer investment plans can swing overall CapEx spending by 10%, 20% or even 30% within a given period.

Running a business during a period of depressed spending and increased uncertainty is never pleasant, and in itself presents significant operational challenges. We need to constantly strike a balance between responding to the current business environment versus the necessity of investing in long-term business initiatives, which in turn form the foundation for future growth and value creation. At Nano, we believe these times can be ones of great opportunity. They are periods when customers are evaluating new technologies and innovative products that are required to address their future needs and product roadmaps. They are opportunities for us to strengthen our tool of record positions with our top customers, to expand our position with existing and new customers and to drive increased adoption of our most advanced platforms.

So in spite of these challenging business conditions, Nanometrics remains committed to four long-term key objectives that will drive incremental revenue growth and outperformance. They are sustaining our market leadership in OCD, further expanding our market share in the foundry sector, growing our advanced packaging business and gaining traction and market share for our inspection business. In support of these objectives, we are continuing to invest in R&D and the development of new products and innovative solutions across our entire product portfolio. These systems and solutions are targeted to intersect key technology and industry inflection points, such as advanced 3D devices and architectures, 3D packaging, 450-milimeter and EUV lithography.

If we take a moment to reflect on how Nano has progressed over the last several years and how we are positioned during this industry slowdown, we have stronger positions with the top chip manufacturers in the industry, a broader portfolio of process control products and solutions and a greater breadth of engagements in advanced technology applications than ever before. We have made continuous progress against our strategic initiatives, as evidenced by recent announcements of product [wins], tool adoption and growth of our foundry business. And we have a world-class team of scientists and engineers, a strong balance sheet and a Management team that knows how to execute through industry cycles.

So, simply stated, Nano today is stronger than ever before, and in spite of the economic headwinds that are affecting our near-term business outlook, we are seizing this opportunity to further strengthen our business and business prospects in order to position the Company to deliver above-average growth and stockholder returns when the next investment cycle takes place.

Now, turning to our business outlook, we do see continued near-term weakness in spending across both of our served markets. Although we are experiencing modest improvements in advanced logic spending, as investments in the next-generation technology node take place, it is not sufficient to offset the decrease in investments in the foundry and memory sectors. And though our position in foundry has indeed been improving, we do not expect strong sequential growth until investments in next-generation devices and leading-edge capacity get underway. As a result, our fourth-quarter guidance is for revenues in the range of $28 million to $32 million, and non-GAAP gross margins of 42% to 46%. At these business levels, we expect a non-GAAP loss of $0.12 to $0.19 per share.

Finally, with regard to a longer-term horizon, directionally we do see improvement in spending in the first quarter of next year. However, as we have been experiencing a much greater range of puts and takes than is typical for us in our quarterly customer demand, our forward outlook -- our forward-looking outlook needs to be characterized as one of guarded optimism.

With that, I will turn the call over to Ron to discuss our results and guidance in more detail.

Thank you, Tim, and good afternoon. Before I begin my comments, I would like to remind you that a schedule, which summarizes GAAP and non-GAAP financial results, as well as revenue segment information provided on this conference call is available in the Investor Section of our website.

In the third quarter, revenues were $43.9 million, coming in above the midpoint of our guidance, but down 17% from the second quarter and 25% from the third quarter of 2011. Total product revenues of $32.3 million declined 22% from the second quarter of 2012, reflecting a significant decrease in spending by our three largest customers. Service and upgrade revenues were $11.6 million, flat with the record second quarter, but with continued strength in both core service and upgrades. Service and upgrade revenues were 26% of total revenues, compared to 22% in Q2.

By product area, sales of our automated metrology systems, which are the primary systems sold into our largest customers and were at all-time record levels for the first half of 2012, declined 28% quarter on quarter to $26.6 million and comprised 61% of total revenues in the quarter.

Integrated metrology sales increased 7% from Q2 levels and comprised 6% of total revenues. And sales of our materials characterization products, which primarily served the LED, solar and silicon substrate market -- end market increased 56% over low Q2 levels to comprise 7% of total revenue, but remained well under year-ago levels with a decline of 64% from Q3 2011.

Turning to total revenues by geographic region, we report revenue based on the ship-to or first in-use destination. In the third quarter, revenues from South Korea were 42%; North America 16%; Taiwan 15%; Japan 13%; and 14% for the rest of our geographic regions. Four customers contributed 10% or more to our revenues in the third quarter, with SK Hynix our largest at 24%. Samsung and Intel comprised 17% and 15% respectively. And for the first time, TSMC comprised over 10% of our quarterly revenues at 13% in Q3.

Turning to the end markets, which are segmented by product revenue only, sales to the memory segment were down 23% from Q2 and comprised 44% of product revenues, with both flash and DRAMs bending down from Q2 levels to comprise 29% and 14% of product sales respectively.

Sales to our logic and other IDM customers were 29% -- were up 29% from Q2 to comprise 30% of product sales, while sales to our foundry customers decreased 53% from the second quarter to comprise 18% of product sales due to a significant drop in foundry spending by one of our largest customers.

We continue to see weakness in capacity spending in the LED, solar and bare wafer end markets. So despite the quarter-to-quarter increase and materials characterization products, this end market comprised just 8% of our product revenues in the quarter.

Turning to our financial performance for the quarter, my prepared remarks regarding the Q3 income statement and comparisons to prior periods will refer to non-GAAP information, which excludes the impact of the amortization of acquired intangible assets, unless identified as a GAAP measure.

Gross margin was 51.8%, compared to 47.8% in the prior quarter, with a sequential improvement driven primarily by an increase in standard tool margins, as well as a decrease in warranty and other manufacturing costs. While the improvement in our standard tool margin was predicted in our forecast, we exceeded our gross margin guidance primarily due to this decrease in warranty and other manufacturing costs arising out of quality improvement and manufacturing efficiency initiatives, which drove our product margins well above our forecast.

Importantly, consistent with our plan, we have realized continued improvement in Atlas II gross margins, which met our target for Q3 principally through supply chain negotiations and manufacturing efficiencies. Essentially all of the volume purchase agreements for this product are now in place. However, lower-than-expected shipments in the fourth quarter will result in a delay in meeting our stated objective, which is to bring Atlas II real-life margins to 55% by the end of the year.

In total, product gross margins were 51.2%, up from 516 basis points from 45.6% in the second quarter, while service gross margins were 53.7%, down from 55.6% in Q2 on a slightly lower mix of upgrades.

Operating expenses were $18.3 million, more than $2 million below guidance. While ongoing operating expenses were lower than forecast due to reductions in discretionary spending and response to industry conditions, the majority of the difference between forecast and actual is due to adjustments and reversals made the first half annual incentive plan accruals as a result of the revenue decline now expected in the fourth quarter.

Additionally, included in operating expenses of $18.3 million were approximately $400,000 of costs related to organizational changes in consolidation, which also came in below forecast. These changes were focused in centralizing certain operations and aligning company resources to expected revenue growth and market opportunities, and as we stated on the Q2 call, are expected to reduce our ongoing operating expenditures by at least $500,000 a quarter on an ongoing basis. So even with a 17% decline in third quarter revenues, our operating margin improved to 10.1% compared to 9.6% in the prior quarter.

For the fourth quarter, given that the adjustments to incentive compensation accruals were unique to the third quarter, we do expect operating expenditures to actually increase sequentially in the range of $400,000 to $900,000. This puts the midpoint of our Q4 guidance at approximately $19 million, down $1.3 million or 6% from Q2 levels as we continue to tightly manage costs to reduce discretionary expenses in this customer-spending environment.

Our tax provision for the third quarter was $1.4 million. This represents a tax rate of 41.6%. For Q4, as a result of the anticipated pretax loss, we expect to realize a tax benefit at a similar rate. For the year as a whole, as a result of our lower estimate of annual pretax income as well as one-time tax benefits taken in prior quarters, we expect our GAAP tax rate to be between 5% and 10%.

Third quarter net income was $2.4 million or $0.10 per diluted share, compared to $3.1 million or $0.13 per share in the second quarter. Our cash, cash equivalent and short-term investments increased by $9.1 million to $104.8 million or approximately $4.48 per share based no 23.4 million shares outstanding at September 29. In addition, we paid down the mortgage on our headquarters by 20%, the third straight year we have paid down the mortgage by the maximum amount permitted, and our existing balance is now $5.5 million.

Our DSO was 62 days, down from 68 in the prior quarter, and inventory levels declined by $2.5 million in the quarter.

Our tangible book value increased to $199.6 million or $8.54 per share, up from $8.36 per share at the end of the second quarter. We ended the quarter with a headcount of 545 employees, a net decrease of 24 employees in the prior quarter.

And with that, I'll turn the call over for questions. Operator?

Thank you, sir. (Operator Instructions) Our first question comes from the line of Mahesh Sanganeria from RBC Capital Markets.

Thank you, guys. Tim, a question on the foundry revenues increasing, becoming more than 10%. Can you talk about a little bit what product group that is where we are gaining traction in the foundries? Is that -- does that include the 450-milimeter tool? Can you give us some color on that one?

Hi, Mahesh. Thanks for calling in. Yes, I can give you a little bit of color with regard to our penetration in foundry. No, it doesn't. It's not part of the 450-milimeter platform. But we have made inroads and gotten tool acceptance across multiple platforms, including our OCD, our UniFire product, our SPARK platform and our integrated metrology. So we're making inroads on -- we're coming in every door that's available to us.

And on the OCD platform -- OCD, is it on -- I would think that you're winning some of the applications, and is that for -- related to 20 nanometer or it's in 28 nanometer?

Yes, most of our opportunities are in the 20 nanometer. Some of it, in the early part of the 20 nanometer, some have been targeted at their second phase 20 nanometer as they move into three-dimensional devices. But it's definitely in the advanced technology nodes.

So that would imply that actual production ramp probably happen towards the end of next year and at the new win situations?

Yes, I think that's the way we understand the spending patterns too, to the extent that they've been shared.

Okay. And then on the -- on one of the comments you made that -- it seems like things will improve sequentially in Q1, but you don't think that the pace will be so strong. So can you give us a -- can you give us your sense of what your customers are saying by segment as to when do you think that inflection is likely? And what will drive that, besides just a macro? It seems like that the ramp right now is focused more on 28-nanometer foundries where you don't have huge exposure. And so is that the memory has to come back for your revenues to really pick up significantly?

Well, memory plays a very big role. It's kind of a big swing factor. As you know, there's a lot of wait-and-see spending and investment in that sector. There's a little more predictability to logic that's been a little more consistent in the way that -- in the deployment of capital and investments. And with our tool of record positions and leading-edge logic, we expect to benefit accordingly. We do see some improvement in the spending based on fab investments and in memory, but in terms of the actual timing and deployment, there's probably as big an uncertain bar as there is kind of the sweet spot for where it's going to be.

And you know, as you've seen in this industry, this could be -- it could -- it may not manifest itself, but on the other hand it could snap back. And we're just -- that's why we say we're guardedly optimistic because we believe there will be some improvement, the magnitude of which is probably equal to the uncertainty.

Thank you very much. I'll get back in the line.

Thanks, Mahesh.

Thank you. And our next question comes from the line of Patrick Ho from Stifel Nicolaus.

Thank you very much. First off, can -- in terms of just the outlook that you provided both for Q4 and just a little bit of the color you provided for Q1, how do you see the memory manufacturers as they shape up exiting 2012, which obviously ended up on a down note? How do you see them entering 2013 in some of the opportunities there, given your pretty strong exposure to that customer segment?

Yes, that's a really good question, and we're all trying to sort that out. I've had direct meetings with our largest customers in the memory space, and the way they characterize it is they've got money. They're ready to spend, but they're doing a wait and see until they see some recovery in the pricing and the demand on the market side. And they're encouraging us to be ready to respond in a very short notice.

Great. That's really helpful. And it's great to see that you guys are expanding off of your foundry customer base. You know, looking forward, not only in [2020], but as the foundry segment starts moving to the FinFET technology, do you see that TAM expansion coming for you as well and increased penetrations for that type of process technology?

Yes, that's a good question. All along we've believed that this may be a card that plays well for us since we have the only high-volume manufacturing deployment of OCD in the FinFET world. And so as other companies adopt that architecture, we would like to believe that our experience and proven capabilities will give us an edge in the competitive environment.

Great. And final question from me, I see the advanced packaging market obviously growing over the next several years, and it can be a large opportunity for you guys. Can you give us a little bit of color on where you see TSV at this moment and when you believe the adoption to a more, I guess, high-volume manufacturing or high-volume process, when do you see that adoption achieving that?

So that's a good one -- question also. And we -- I -- we're still at the bottom of the S-curve on the ramp on advanced packaging. There -- we clearly are engaged in TSV on multiple customer sites. We have a wonderful tool position and product position with our UniFire, which has capabilities that really are unparalleled with other products in the -- out in the field. And the question then becomes timing.

And also as they move these through the 2.5D or the (inaudible) model onto the full 3D packaging, again, discussions with our most advanced customers do indicate that they have a continued commitment. They see this becoming a deployed technology. It's driven by the need and the form factor, and we think we're well positioned. Tightening uncertainty, I don't know whether it's one year, is it two years. It's very hard to say. It's one of these things that when they go, it'll go at a pretty quick pace, and we think we'll be in the ready -- in a position to respond to it.

Great. Thank you very much.

Thank you. And our next question comes from the line of Tom Diffely from D.A. Davidson.

Yes, good afternoon. A couple more, I guess, clarifications on the memory side. Did you say NAND was 14% and DRAM was 29% in the quarter?

DRAM was 14% and NAND was 29%, yes.

Okay. I got those backwards.

Reverse of what you said.

Right. And then it sounds like you expect those both to decline in the fourth quarter as well before rebounding sometime next year. So my question is do you have a relative exposure, a relative benefit from one or the other, NAND versus DRAM? Are you more highly leveraged to one or the other?

No. The DRAM products tend to be more complex and have a higher capital-intensive requirement in general, but NAND has a higher volume in the fabs. They build bigger fabs. And so when we kind of just take a squint at it, opportunities are pretty balanced. I just think that the overall -- the global demand suggests that NAND is going to be more important for all of us as spending and investment and demand improve. And it's only mobile DRAM, which is not enough to pick up and replace the decline in DRAM demand for the weak PC market that will be complementary to that.

Okay. And it sounds like most of the equipment guys expect NAND spending to come back some point in the first half of next year. On the DRAM side though, when you hear news about guys going from the 4x node to the 3x node, does that spur demand for you specifically, or do they have tools at the 4x node that they can use, reuse?

Yes, we actually -- when they make a node movement, it does -- it'll increase the demand. Our tools -- we're going to see increased both capital intensity as well as the use of process control. So we believe it does give us increased demand.

And while you're on the topic, you might as well -- one of the other topics that does come up is this whole issue about tool reuse. And that's a -- and I want to make just kind of a general statement across the industry, is that for those of you who have been following the Company for the last three to five years, you realize that our key positions and our tool-of-record positions are all relatively new in those advanced nodes. And we've gotten some very important wins over the last few years, but they're the most advanced fabs.

And so our exposure to tool reuse is relatively low because tool reuse is usually at least two technology nodes, if not three technology nodes behind if they can bring the tools forward. In addition to that, what drives the most advanced nodes are the most advanced technology capabilities. And we're continuing to invest and develop new tools to address those there as well, and so that also plays against the concern about tool reuse going forward.

Okay. That's helpful. And then, Ron, you talked about the very strong margins in the quarter. Would you have reached your fourth quarter goal if the actual volumes reflect quarter over quarter?

Yes, if the volumes were flat we would have reached the goal.

Okay. So really it's just a loading issue then on the factories.

Yes, exactly. That's exactly what's driving the decline in Q4.

Okay. And then finally on the foundry side, did you say you did sell your flagship OCD tool into that space as well?

Yes, we did.

Okay. And did that ship too late in the quarter, or has that been there for a while?

It's not that it's been shipped. It was -- it's actually been shipped, installed and accepted in the quarter.

Great. All right. Thank you very much.

Thank you. And our next question comes from the line of Chris Blansett from JPMorgan.

Hey, guys. Tim, just wanted to get a thought on the customer mix you're seeing in Q4, how you expect that to change as you head into Q1 where you think, you know, are your revenues are going to improve quarter over quarter?

Yes, I think that we're going to see some improvement in overall logic spending in the fourth quarter based on the announced investments, right. And then going into the first quarter, we would expect the -- that the -- we'd like to see a little bit of improvement in memory. But again, it's the one with the greatest degree of uncertainty for us, and that's because it has the wildest swings with the shortest notices and lead times and change in outlook.

When you say logic, could you give us some color, foundry versus IDM, same two quarters?

Yes, well, most of it's IDM.

Okay. And then you mentioned that use of OCD is going to go up when you get to 20-nanometer versus 28, say, for a foundry node. Any sort of relative color you could provide there? And it does sound like you're already selling some equipment for the 20-nanometer R&D or pilot.

Relative color in what way? What kind of color are you looking for?

What kind of increase in OCD capital intensity do you expect for 20-nanometer foundry versus 28/32?

I don't have a good number for you. I'd like to -- rather than pull something out of my hip pocket, can I get back to you on that one and see if I can give you something that's got a little more substance behind it?

Sure. And, you know, last question from me really is given the trajectory of the revenue and the loss that's going to occur in the fourth quarter, will this have an impact on next year's tax rate? We're kind of just looking for modeling reason.

This is Ron. I wouldn't expect it to have an impact on the rate for 2013, and that we would continue to be at -- around our structural rate that we talked about, which is in the mid 30%s.

Even on an pro-forma basis?

You know, we haven't really -- other than when we made the election in the first half, we haven't really broken out for the pro-forma impact. I think we'll still see something in the mid 30%s. It could move around a bit based on the timing of the reinstatement of the R&D tax credit. But we should still see something similar to something in the mid 30%s.

All right. Thank you.

Thank you. And our next question comes from the line of Weston Twigg from Pacific Crest.

Hi. Thanks for taking my question. First, I just wanted to follow up one more time on the foundry business at TSMC. So it was at 13% number in the quarter. I'm just wondering, it sounds like it doesn't stay there, jobs back down. Is that revenue locked in when the actual 20-nanometer ramp comes, or are they still considered development, maybe tools that are still under selection? Or are you pretty confident that this type of a quarter translates into real production revenue within the next year?

Yes. I -- Wes, that's a good question. And no, we -- the tool wins that we're talking about are tool wins that will play out in a high-volume manufacturing environment. Timing is certainly out there when they start going into the 20-nanometer, and then the second node on 20 nanometer. But we believe these are -- we know these are solid positions. They're not just R&D. They are -- they were tool selection for the advanced devices.

Okay, good. Very helpful. And then also just a couple of other quick questions. One, the service revenue in Q4, does that come down as well, or is that relatively stable?

The service revenues were relatively stable with -- in, I guess, Q2, but we do expect that the upgrade levels, which in the last two quarters have been near record levels, to be down in Q4.

Okay. And then the final question, just wondering on the inspection side, Ultratech announced a new fast inspection tool that sounds very similar to the SPARK platform. And just wondering if you can comment at all on the competitive landscape, if you see that changing or if you see these two tools butting heads or maybe even other new entrants coming into that market?

Yes, we have limited, real, hands-on information about the tool, but everything I know about the tool doesn't indicate that it's really the same as or a similar platform to the SPARK. We think the SPARK is still very highly differentiated from what they're doing. And we also see the application space as more targeted towards overlay and implied overlay through stress, and that really isn't a direct threat or competitive opposition for the products that we're selling.

Okay. So you don't really see a lot of overlap necessarily with the products, even though they sound kind of similar?

Not on the SPARK. There may be some areas where we see some competition against the UniFire, but we believe that there are some uniquely different capabilities. UniFire is an absolute and direct measurement with -- that gives you quantitative data, and the other tool is more of a -- as we understand it, has some -- it's an implied measurement rather than an absolute measurement. Where they play together on the fab is still to be seen.

Okay. Very helpful. Thanks a lot.

Thank you. And our next question comes from the line of Edwin Mok from Needham.

Hi, guys. Thanks for taking my question. Coming back to foundries, so beyond (inaudible) your largest customer in TSMC you mentioned on your call right, are you making progress in other foundries as well?

Are we making progress with the other foundries? Yes, in fact if you look -- Edwin, if you look at our foundry revenues as a percentage of our total revenues, they've been between 40% and 50% or so for the last couple quarters, I think. And so we've got -- there's more than one foundry out there, and we've had success with our largest customer in their foundry space as well as now with TSMC.

Great. So it sounds like good progress there on that end. I'm just curious because you mentioned 3D (inaudible) as one of the drivers for that, right. You know, (inaudible) you guys talked about pushing [3D] as a differentiator for them, right. Is that a big driver for you? Because you also mentioned that you guys have a strong position in logic and have a lot of experience with 3D.

Could you repeat the question for me again, please?

Yes. I guess I'm just curious beyond those two foundries, right, it sounds like (inaudible) foundry could be another customer that you guys are targeting because of your advantage in FinFET. Is that a good way to think about that?

Yes. We certainly see that as an opportunity for us. And it's a -- primarily in the 3D devices, but it's still early in their development phase. But we believe as they start to adopt the 3D structure, the FinFET structure, again, it should be an opportunity for us to leverage. And we see some other -- we have some other engagements for it under tool evaluations that hopefully gain some traction in that front, but it's still early with them.

Great. That's helpful. And then moving on to also 3D from NAND, how do we see that trying to (inaudible) benefit or help your business?

Well, we think the 3D NAND, whether it's the Toshiba version or the Samsung version, like the VNAND, brings to -- brings forth some new challenges of metrology. We're very engaged with that. We've got application development and tool modifications to develop that. What needs to be sorted out is what are the measurements that are critical to tracking process and providing yield in that space. And we're working very closely with our customers to try to help them sort through that at the same time as we bring the tools forth. But there's no doubt in my mind that it's going to be a very important metrology application.

Great. Very good call. And lastly, just on the backend packaging, you mentioned that you need to move past (inaudible) to see more (inaudible) adoption. I'm curious -- I'm trying to understand that comment. Is it because (inaudible) adoption and (inaudible) is more limited as customers move to TSV you see a much bigger TAM here?

Yes, so most of our tools are currently used in the [pillar] and the micro bump area, which applies to 2.5D as well as the 3D. But when -- I think that I was responding to the question about TSV, and TSV becomes a more prevalent technology and applied technology as we go into the full 3D packaging.

I see. Okay, great. That's all I have. Thank you.

Thank you. (Operator Instructions)Our next question is a follow up from the line of Mahesh Sanganeria from RBC.

Yes, thank you, again. So I'm just thinking into the spending for next year looks like memory is going to be (inaudible) and how it's difficult to figure out right now. But what are your thoughts on the logic? Do you think the logic spending will improve next year, or do you think it could be down?

So I think logic is actually going to be improved in spending relative to the total CapEx. So it's very -- it's -- none of us really have a clear picture of what total CapEx is going to be, but it appears that a lot of the bricks-and-mortar work is being done, and that we should see potentially a greater spend on equipment, WFE, against that capital spend. And if it does that in the fab fan-outs and technology roadmaps, if they hold true to that, if our customers hold true to that, then we think that there's -- it's a pretty steady and possible improvement for us.

And you expect that spending to be pretty linear throughout the year?

It historically has been linear. We would hope it stays somewhat linear. It's an easier model for us to run to. But like I said, we've seen more puts and takes on a quarterly basis than we -- as a percentage of our total revenues than we've seen in a long time. So that uncertainty factor and the wildcard of what's going to happen to memory still causes us to move forward with cautious optimism.

Okay. Thank you very much, Tim.

Sure.

Thank you. And we also have a follow up from the line off Chris Blansett from JPMorgan.

Tim, now that we're heading into the fourth quarter, I wasn't sure if you had any relative thoughts on the growth of OCD versus other process control or old process control as a whole and then WFV now that you have kind of a trajectory for the fourth quarter.

Are you talking about looking at the next year, or what period of time -- what [horizon] are you looking?

This year and then also your kind of initial thoughts for next year. I think last time you mentioned that OCD was kind of go 40% year over year. I wasn't sure what that ended up being for this year, and then your kind of initial take on next year.

Yes. Well, the OCD growth will probably be a little bit lower than we originally thought just because of the slowdown in the market and the reduction in spending of our top customers, which drive our OCD business. I think relative to total capital spend, I think that you're seeing an increase in capital intensity somewhere to 12% to 15% of the capital spend. I think process control continues to be an important player in that and is gaining a little bit more percentage. And OCD will continue to move forward.

But they -- if you look at us and our competitive environment, the one area where we don't have a strong position in OCD has been with the largest pure-play foundry company. And so the shift in the emphasis of spending on OCD between that customer and our two largest customers is what ultimately will roll up into what the OCD position is for all of those involved.

And the other question I had was tied to integrated. Generally it sounds like you've had some wins there as we've exited the year. And maybe just your thoughts of integrated revenue next year versus this year. Would it be your biggest growth area potentially?

Well, it's -- that's the beauty of small numbers. The internet metrology business has really come down quite a bit from its historical levels, along with our materials characterization. And in fact if you look at our overall business growth year over year, our decline, most can be attributed to the IM and MC. Now, but a direct answer to your question is we do see some growth in IM. We do see some growth in MC. And because they're starting off at such a low base that on a percentage basis that probably is going to look like a large growth area, but they're -- the real revenue drivers and the real margin contributors are going to be our automated systems being in the SPARK and the UniFire and the Atlas platforms.

All right. Thank you. Appreciate it, Tim.

Sure.

Thank you. And I have no further questions at this time. I'd like to turn the conference back to Tim Stultz for any concluding remarks.

Well, thank you once again for participating in our call. I, again, gratefully acknowledge the terrific contributions and commitment to our business objectives expressed each and every day by the entire Nanometrics team. I look forward to reporting on the results of our operational financial performance for the fourth quarter and full year next February. With that, good night.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.