Onto Innovation Inc (ONTO) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the Nanometrics Second Quarter 2013 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, July 30, 2013.

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 second quarter 2013 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 second quarter and our perspective looking forward. Then Ron will discuss our financial results in more detail 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 P.M. Pacific this afternoon. The press release and supplemental financial information are 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 and end use concentration and mix, tax rates, technology and product development and adoption, and market share.

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, customer demands, shifts in timing of orders or 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 2012 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 the call over to Tim Stultz. Tim?

Thank you, Claire, and good afternoon everyone. We appreciate you taking the time to join our call today. Today, my prepared remarks will address highlights of our second-quarter performance, progress against key long-term initiatives and guidance for the September quarter. Following my commentary, Ron will provide a detailed review of our second-quarter financial results.

Increased spending by our largest customers resulted in a 41% increase in revenues over the previous quarter with product revenues more than doubling quarter-over-quarter. Whereas we experienced increased business across all our semiconductor end markets, the rebound was primarily driven by increased spending in memory, both in NAND and DRAM which combined and accounted for 45% of our total revenues.

Our non-GAAP gross margin of 43.8% was above the midpoint of our guidance supported by a 500 basis point improvement in our product gross margin. Our total operating expenses were a little lower than we guided to. However, our commitment to forward-looking R&D investments remains intact as we focus on next-generation products targeted at expanding our business and gaining market share in key growth areas.

And finally with higher than expected revenues and lower than forecast expenses, our loss for the quarter came in a little better than the midpoint of our guidance range.

Turning now to our key business initiatives, we had some very encouraging progress that I will now briefly highlight. First, in our drive to increase market share within the foundry sector, we received an order from a leading pure play foundry customer in Asia for our Atlas II OCD System and NanoDiffract software. This platform will be used for 20-nanometer pilot production while also setting the stage for further on-site evaluation for next generation 16-nanometer devices.

We also received multiple follow-on orders for our IMPULSE integrated metrology tools from that same customer as it begins the high volume manufacturing fan-out of this product for 20-nanometer critical layer Etch applications. And our UniFire gained additional traction in the pure play foundry sector as well with multiple tool qualifications in different global regions for both advanced packaging and front-end-of-line topography control on 20-nanometer devices. These wins helped to raise foundry contributions to 26% of our total revenues while also growing our advanced packaging business, another key business objective.

Now turning to the industry and business outlook, we continue to see a strong second half 2013 over first-half revenues. With customer forecasts and build schedules, we also see sequential quarterly revenue growth through at least the next several quarters with 2014 shaping up to be a solid year of growth. This growth has been driven by investments across all semiconductor device types.

For our logic business, we expect our revenues will benefit as the multi-fab ramp in next generation technology takes place. We believe further growth in our memory business will be driven both by investments in next generation devices as well as capacity expansions to meet growing mobile device demand. And we expect further growth in our foundry business as we make new inroads into several areas of pure play foundry applications and benefit from the fan-out of our integrated metrology business.

Although upticks in our business will continue to play out over the next few quarters, we expect much of our revenue growth in this cycle to take place in 2014 and beyond due to the timing of customer investments, installations and revenue recognition. The timing of this revenue growth also means that our return to profitability will likely be in Q1. In the meantime however, our business is expected to be cash flow positive before investments in working capital in the fourth quarter.

In summary, we are very pleased with our progress against our key initiatives to grow our business and shareholder value. Our OCD leadership position in advanced logic and memory markets remains intact. Our focused efforts to penetrate the foundry market are bearing fruits, and our position in the emerging market of advanced packaging is gaining further traction.

We are also very optimistic about our long-term business outlook and the ability to outperform the industry during the next investment cycle as our customers increase their spending on process control technologies to help solve the most demanding leading-edge challenges for the next generation devices, as new technology inflection points create demand for our higher performance process control tools and new applications, as our served emerging markets continue to expand and grow and as our efforts to gain market share at strategic accounts are successful.

With that our outlook for the third quarter is, revenues ranging between $36 million and $40 million, up 4% to 16% over the last quarter, non-GAAP gross margins of 43% to 47%, operating expenses to be up $0.2 million to $0.9 million from Q2 and non-GAAP loss per share of between $0.03 and $0.14.

Ron?

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

Second quarter revenues were $34.6 million, up 41% from Q1. Product revenues increased 103% to $26.5 million compared to $13.1 million in the prior quarter driven by growth in sales of our automated tools which comprised 68% of total revenues. Materials characterization revenue was down 75% from the prior quarter to comprise 4% of revenues after an unusually strong first quarter driven by a small number of relatively high ASP tools to a silicon wafer manufacturer in Asia.

Integrated tools revenue was down 18% from the prior quarter and comprised 5% of total revenues. By end market, the largest increase occurred in memory which increased five-fold to comprise 45% of total tool revenues with increases in both DRAM and NAND. Sales into the logic end market increased 93% to comprise 22% of tool revenues on increased purchases by one of our largest customers. And sales into the foundry segment increased 198% to comprise 26% of tool revenue.

Revenues into the LED, silicon wafer and discrete end markets were down 75% and comprised 5% of total tool revenue. Total service revenues declined from relatively high levels in the first quarter due to the decline in upgrade revenue. By customer, revenues to Intel comprised 25%; SK Hynix, 23%; and Samsung, 15% of total revenues.

Turning to other P&L metrics, my prepared remarks regarding the income statement will refer to non-GAAP measures unless I identify the measure as GAAP based. These measures exclude the impact of amortization of acquired intangible assets.

Our Q2 gross margin came in just above the midpoint of our guidance range at 43.8%. This was an expected decrease from 45.4% in Q1, primarily due to lower upgrade revenue. Product gross margin improved to 44.1% from 39.1% due to the benefit of higher revenue levels against fixed manufacturing costs and service gross margin declined to 42.7% from 52.5% due to lower upgrade revenue compared to the prior quarter.

Operating expenses increased $0.6 million from Q1 to $20.4 million, approximately $600,000 under the low end of our guidance due to the timing of certain consulting expenses and accrual reductions in G&A. All of the increase over Q1 was in R&D spending with small declines in SG&A. Our GAAP tax benefit for the first quarter was $2.4 million representing an effective tax rate of 34.6% and our net loss for the quarter was $4 million or $0.17 per share compared to a loss of $5 million or $0.22 per share in the prior quarter.

At June 29, our cash and investments declined to $86.3 million or $3.72 per share. After the end of the quarter, we paid off our mortgage of $4.8 million and as a result you will notice that the entire balance is reflected as a current liability in the June 29 balance sheet. Our DSO increased to 84 days, up from 72 days in the prior quarter due primarily to an increase in deferred revenue on shipments that were not recognizable at the end of the quarter.

Inventory declined $3.4 million to $41.7 million at the end of the second quarter and our tangible book value was $184 million, or $7.93 per share. We ended the quarter with headcount of 533 employees, a net increase of nine employees from the prior quarter.

Commenting on our guidance for Q3, our gross margin guidance range of 43% to 47% reflects our expected increase in product revenues and relatively flat service revenues. As Tim, mentioned, operating expenses are expected to be up $200,000 to $900,000 and we expect our operating expenses to remain relatively flat at these resulting levels for the remainder of 2013. And for 2013 as a whole, we expect our effective tax rate to be in the 36% to 38% range.

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

Weston Twigg, Pacific Crest.

Hi. Thanks for taking my question. First one I had was just wondering given Samsung's aggressive CapEx commentary for the second half, I am wondering why you weren't able to guide a little bit higher for Q3. I assume part of it might be revenue recognition timing, but I am wondering if you see a reasonable path for upside to your guidance if Samsung comes in as aggressive as they implied last week.

Hi, Wes. This is Tim. I think the issue is more about the timing of the spending for Samsung and it's compounded by some revenue recognition. If we send to some new regions, we obviously will have a delay between shipment and revenue recognition. But also I think that there is still some uncertainty as to when Samsung will spend the balance of its money whether it's Q3 or more heavily weighted in Q4.

Okay. And is that also gives you some conviction to returning to profitability by Q1 2014 that maybe some of the spend could happen in early next year or at least the revenue recognition piece of it?

Yes, that's primarily where it is. If we look at the -- we feel really good about where the business is. We feel really good about the order flow and our visibility. But as you know Samsung is building some -- a new factory in China which is a new location for us. So any tools going into that facility will have a slightly longer revenue recognition profile than our typical products going to Korea.

Okay. And it sounded like in the quarter Hynix was a strong customer, 23% of revenue. And do you see, I guess you can't comment on Hynix specifically, but do you see the memory spend actually holding out fairly well and in September, December and may be increasing in each of those quarters?

Yes, we see memory -- I mean certainly memory is getting strong for us again. It's coming back both in DRAM and NAND. There's some fabs that are being converted from NAND to DRAM. We're seeing investments in capacity in DRAM, and we're seeing some investments going into the new technology on flash. So if you kind of look at the balance between the spending in the first half and the second half of all our key customers, our primary customers, you're seeing that our revenue opportunities first half to second half kind of track their spending patterns.

Okay. Good. Well, that's helpful. I will pass it on. Thanks for answering the questions.

Okay, Wes.

Patrick Ho, Stifel, Nicolaus.

Thank you very much. Tim, maybe just a follow-up on the last question about memory CapEx spending. As we go to the second half of the year, maybe just first a little bit of granularity on 3Q or maybe just the outlook for 4Q, do you see a bias towards DRAM or NAND both near term and into 4Q or is that mix going to be pretty steady on both fronts through the rest of the year?

I don't know if I've used the word steady. There has actually been a shift. I mean, DRAM is coming off of some pretty very low -- a very low numbers. And even with the boost in the DRAM business for us which has been quite substantial relatively quarter-on-quarter, it's still below the historical levels. If you look at -- go back a couple of years, half of our business was not only memory [often] half of that was split between DRAM and NAND. We still see NAND being more of a driver in the total memory side.

Okay, great. Maybe just on the foundry side, you talked about some of the new wins you had and some of the qualifications that you're going through. Are there revenue recognition timing issues related to that as well given that these are, I guess, some new breakthroughs and that's going to take longer and that's why you're talking about maybe, I guess, some of the revenues more into the early part of 2014 versus the second half of this year?

Yes, that also plays into. That's a good point, Patrick. It plays into because if you look at the two key areas, I mean clearly with our established business, with our key accounts [have been] our 10% customers going into similar factories, similar applications, we have a straightforward revenue recognition pace and rhythm.

If you look at shipping products into a new country like China or if you look at into a new customer where you need to establish a pattern of tool acceptance then that pushes rev rec out a little farther from the actual tool shipments.

Again maybe not specific on the customer, but how long does it usually take from when, again I guess you are announcing some of these today, how long does it take for the revenue recognition in terms or timing versus when you get in to when you can actually recognize it?

That's kind of a two-pronged answer to that question. So the first one is if these are tools -- if we take like Samsung in China and we're shipping to a new factory with an established customer and a similar application then the typical revenue recognition really is tied to getting tool installed, running the process and getting a sign off on that application and it's repeating the pattern we've been through before so that's usually a one to two-month period.

If you take a brand new customer where we're making new inroads into --- it's a new customer, new location and a new application then that whole process to get through full sign-off could be anywhere from three to six months depending on whether it's a product evaluation, it's gone from technology development to high volume manufacturing or whatever the stage and process is.

Right. Now final question from me in terms of some of these new foundry breakthroughs, that's an area where one of your larger competitors has a pretty strong foothold in. Have you seen any competitive responses which has impacted potentially pricing or other variables on your front?

So you are absolutely right. It's been a tough battle field as you know and we've been fighting tooth and nail for the last several years, if not three to four years. But most of the battle is on performance. We don't spend a lot of time, fortunately, talking about price. In fact, price is not -- this market is not elastic and so that customers are not making huge decisions based on 10% or 20% price swings.

What they do care about are 10% to 20% or better performance as well as your ability to support and your experience in a particular area. And one of the things that is important and plays well for us is we have a ton of experience in the FinFET technology we have in OCD products into high-volume manufacturing. And as other customers begin to adopt that technology, I think we have a compelling argument that says our experience plus our tool reduces the risk for our customers and gets them to higher yields and into production faster.

Great. Thank you.

Mahesh Sanganeria, RBC Capital Markets.

Thank you. Tim, can you talk a little bit about the material characterization business that's falling 75%? And also it will be -- it was down quite a bit for 2012. Do we see another down year here for the overall and how should we think about where should that be at -- at the new reality level should be?

That's a great question, Mahesh, what's the new reality. Let me just kind of put a little color on what our materials characterization group and the best way to understand is to look at what markets it serves. So if we look at the business product lines, one of the biggest drivers historically back in 2011 was bare silicon wafer defect inspection when they were adding capacity to make bare silicon and blank wafers. And that's a big driver because it's built on a high ASP product as well as a good customer side where we've got very strong market position.

The second market that has helped this business was the LED. And we had a lot of LED product going out when there was ramps in capacity and volume in that space. And the third primary market that has been served is the solar business. And so if we kind of look at those in reverse order, not a lot of capacity has been put into -- new capacity has been put into bare silicon wafer, but we've got a nice boost last quarter when we got some kind of a one-quarter bump in the defect inspection for bare silicon wafers. LED market has been in the [tank], solar market has been worse than in the tank. And so I think that there are some benefits that are going to come out of some improvements in the LED market. I don't know what the timing will be on bare silicon and we are doing some other things with our products to address some of the scientific instruments business to try to restore and bring up [the AMC] business.

Okay. I get the picture. And then on the upgrades, I mean your services revenue went from $11.5 million to $8 million. I mean, excluding the upgrades, the services business, I would assume, should be pretty steady and should be getting better considering the utilization improving. What would be the linearity on that upgrade business? How should that be -- I was thinking maybe something like couple of -- $1 million to $2 million per quarter, but looks like you didn't have much in the June quarter. So how is that going forward?

Yes, this is Ron. So the upgrade business, as we said before, tends to be pretty -- tends to fluctuate quite a bit from quarter to quarter. And it typically ranges on the low end, just under $1 million, between $0.5 million and $1 million on the low end. We have had a couple of really strong quarters at about $4 million. So it does fluctuate quite a bit. And so it's hard to predict when those come in. And typically what happens is customer will do a fleet upgrade which is why it tends to come in in big chunks.

In terms of sort of the core service revenue, I think your point is most of the change quarter-over-quarter was solely upgrades and the core service business is relatively flat over the Q1 to Q2 period.

Okay. And then on the systems business, you had a pretty strong logic quarter. Is that a near-term peak or does it grow from here? How is the linearity on the logic business?

I think [the right] way to look at the logic business -- the advanced logic business is driven by one large customer. And that large customer has multiple fab fan-outs, which are sequential. And so it's not a smooth and up into the right quarter. So as you see them populate new fabs will get an increase, and as they shift over to the next step sometimes there is a small dip. And then you see another increase as they go to the next fab and there is multiple fabs. So it won't be a sooth quarter-on-quarter increase but we will -- we do expect to see some strength in that part of our business and some strong quarters going out on the outside.

Okay. That's very helpful. Thank you, Tim.

Okay, Mahesh.

Tom Diffely, D.A. Davidson.

Yes, good afternoon. First maybe a clarification on your good, nice foundry order. Is it the first time you, I guess, sold a stand-alone OCD tool to the leading foundries?

To this particular foundry, it's the first time we've sold a stand-alone automated Atlas OCD tool to this particular customer.

Okay. And then what's the timing and how long is this product line supposed to last and when does they go to, I guess, full manufacturing and at that point what is the revenue opportunity?

Yes, well we don't -- I don't know -- I can't size the absolute revenue opportunity at that customer, but there are a couple of things going in parallel with the possible split between. One is there's a [pilot line] evaluation of tools at the beginning of transfer to manufacturing for the 20-nanometer. There's also going to be a decision point when they look at what tools they'll carry forward from the 20-nanometer into the 60-nanometer and whether or not any changes will be made. Those two decisions should both be made within the fourth quarter, pilot line going to high volume manufacturing for 20 and then technology development going into pilot line for 16. We'd like them to be as soon as possible, but we're actively supporting and we think we have a shot at the business.

Okay. So was this unexpected or in a sense that it seems like the bigger opportunity has always been moved to FinFET. And so 20-nanometer seem like it -- there was a bit more of a long shot in the 16-nanometer node?

Yes, I would say it's not -- it wasn't totally unexpected. But I didn't -- my under over on it wasn't the size as it is on the 16-nanometer. So we didn't spend a lot of time talking to it. To me that's all upside against our primary focus which was to get into the 16-nanometer FinFET business.

Right. Okay, thanks. And then Ron when you look at the model, what is your current estimate for breakeven?

So on a P&L basis our breakeven is mid $40 million and on our cash flow break-even before investments in working capital is high $30 million.

Okay. So I mean, it sounds like with the [ramp starting to see] from two of your three biggest customers that there should be sequential revenue growth again in the fourth quarter. And so, it seems to me that there is pretty good chance of getting back to breakeven in the fourth quarter. So I am just curious if you're seeing some seasonality in other parts of your business that might offset that?

I think the seasonality that we see, I mean typically we have seen Q4 being a little bit lower, but I think you've got the underlying demand which is driving increases in the second half that we expect to continue through to Q4. And though we haven't given specific guidance on Q4, I think Tim's comment is that the timing of revenue recognition on some of these tools is that profitability may move out to the first quarter.

So, Tom, I want to be really clear is that we do see sequential growth quarter-on-quarter going forward and the issue is the magnitude of the growth against the breakeven point. And if things got really robust and super strong in fourth quarter, we'll have to see where it takes us.

We're very close to where we kind of have the cusp of all those transitions, small perturbations make big -- have a impact on the bottom line as you get very close to cross the line from losing money to making money. But I think what's important is the business has continued to improve. We're seeing increased spending across all of our sectors at little sequence in timing, a little bit of a -- we're seeing a little bit of strength in -- a near-term strength in the logic as we go into Q3. And we see more strength in memory going into Q4 and we see combined strength going into the Q1. So we just feel more confident talking about Q1 and we'll do our best to pull it in as early as possible based on the customers' spending patterns.

Okay. So when you look at the business over the next couple of quarters, in the current quarter you had 60% in your top three customers. Do you expect most of the business is driven by growth in those top three customers or do you see a little bit of broadening of the customer base as well?

Most of them was simply driven by those three customers, but we'd like to see when we look at our -- the pattern of our business against the customers' spends, we're seeing a very close parallel between the ratio of what they spend first half and second half and our business from them second half and -- first half against second half with a notable exception of a pretty significant uptick in our foundry business based on some inroads we're making on pure play foundry. We are coming up a low number there, but that one will not track their spending patterns because that's all about market share gains for us.

Okay. And then final question, are you still comfortable with your kind of low to mid 50% gross margin range on a longer-term basis? And do you think if anything happens on operating expense side to hurt operating margins going forward?

Yes. So absolutely do feel comfortable in that gross margin range. I mean, that's where we need to be. We are absolutely driving our products. What we call our standard product margins will support that. It's really getting good factory absorption, making sure we don't have unusual mix issues. Our total service margins, even though our upgrades drop down, were still above 40% and that's a pretty solid number of contribution from the service margins.

Product margins are improving. We'll get to where we need to be. We're absolutely committed to that. We're not having pricing issues. It's not about pricing, it's really about growth, volume and factory absorption.

In terms of our spending, right now our focus is on these account penetrations and gaining some traction and new account activities. There are some programs that may be temporal in nature, but we won't roll those up until we've completed the development of the tools, the technology, the applications and we've secured the positions in the markets they are going after.

If we do that and in [terms hit a more] sustaining opportunity, then you'll see that we have an opportunity to kind of grow this business without increasing any the operating expenses and they may even come down somewhat.

Great. Thank you.

Edwin Mok, Needham & Company.

Hey. Thanks for taking my question. First question, Tim, just you -- I think on the press release and on the call you talk about some of the software products that are selling into integrated metrology product module maybe coming in 2014. Would that become -- would that help drive your gross margin or your product gross margin back to your normal range?

The software side in our upgrade business always helps drive it, but the core factors for us is we look at a couple of things. When you add a low revenue base but you're -- in product revenues against your service margins, then small perturbations and upgrades in service have a bigger impact on your total margins. As we grow the product revenues which will occur as our key customers continue to expand, we absorb the factory. Then what really is the big stick in moving the total margins are the product margins. So they're nice adders on the software, there are great margins on the software, we've got great margins on upgrades, but we need to -- the way we solve this problem is to increase our product revenues and improve those product margins through factory absorption.

Great. That was very helpful. And then on this IMPULSE I that you talk about at a pure play foundry, is that a new customer that you guys are penetrating or is that existing customers that you guys are winning that you already have [integrated in all your products] and you are winning additional products there?

That was a new position for us.

Great. Congratulations on a great win. And then lastly, I guess some of the customers [talk while] 3D NAND as a technology they are pursuing, right. One of them obviously a very large customer of yours, right. I was wondering how do you guys think about your market opportunity as NAND producer goes from 2D to 3D? And specifically on OCD do you see that as a great driver of OCD's customer to what we talk about (inaudible).

Yes, right now it's a little tough because nobody is really launching the full production and so the dust hasn't settled on the utilization rate. But our first looks at there suggest that there will be incremental use of OCD going from -- 10,000 wafer starts, going from the planar devices into the vertical devices. And we think that that's going to improve the size of our served market but we really don't know that until they start ramping the manufacturing, find out where the problems are and where they need to dial in more process controls.

Actually that's very, very helpful. So it sounds like as they start to ramping production you [might get good] incremental opportunities that get added to this production of this new device, is that correct?

Yes, I think that right now when we look at the number of potential applications for OCD in the vertical devices we see a large number. When we look at where we're using our tools to help in the technology development, we see a large number of applications. But in the end the customer will if they have a 150 to 200 steps whatever it is, they will use process control to get the production going, to get there to their yields, and then what will happen is if there are particular application steps that are well under control that they don't have variability they may reduce the use on process control. So I would say, it looks like it's going to be more and a higher multiple. But I can't bet on it until they actually start doing some real pilot production on it.

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

Okay, Ed.

Josh Baribeau, Canaccord.

Hi. Thanks. You talk a lot about market share issues with your larger competitor or the company that happens to be larger. If I follow the revenue trend of the smaller competitor it looks like they historically had been let's call at about half of what your sales had been. And then recently it's looking like they are creeping up towards something like almost even. Could you talk about some of the things you're seeing there from a competitive standpoint and maybe the changes that are happening there?

Yes, I don't know that I would agree with you that they are coming roughly even to our revenue levels. I am not sure [I covered when that went out] Josh. But in terms of the competitive environment, they've done -- as you know, there are -- they have a very solid position in the integrated metrology which is a large part of their business. We are doing our best to gain some market share in that space. On the high end OCD automated tools, we tend to compete against the larger company. And then there are some things in the middle. I think we're holding our own in all of our major accounts. I feel very confident. We haven't lost any market share in our established accounts and I think we are -- we can point to areas where we're gaining market share both in IM and in stand-alone.

Okay. More on the P&L side, should we think of the increase in R&D as something more -- something longer term going forward as these tools require or become more complex, as nodes and processes become more complex or is this really a push to gain market share at that really one large customer that you're trying to win?

Yes, the majority of the increase which represents about a 10% increase in the spend in R&D was really focused on developing some new platforms that both -- that helped us penetrate some accounts where we weren't as well as to address some technology inflection points. I think as those become successful because they were required investments in our, both the platform as well as the application support for their platform [in their] applications development I think that we came more into a technology evolution and sustaining mode and there may be some opportunities for that to come back a little bit next year.

Okay. Now, if I look at where a lot of the memory spend is happening at least so far this year, it's a lot of conversions and I think you alluded to that a little bit earlier, I would sort of have assumed that a lot of the conversions would be more of a service or a software upgrade. But seeing as how that business is falling, is it more -- is it proper to think that that's more new buys versus the upgrades for those DRAM conversions?

Yes, those are definitely some new buys. When we say conversion we're typically talking about fab conversions, maybe a NAND fab going to a DRAM. DRAM is a more difficult process sequence requiring additional tools. So when they convert from NAND to DRAM, we'll see incremental tool demand. And the other is most of our upgrades go into the older fleets to give them sustained productivity in their older technology nodes. We're pretty fortunate. We haven't really had a lot of exposure to tool reuse and so it's really a population of new capacity, fab conversions and then technology development.

What about within DRAM from PC to let's call it mobile DRAM, is there any need for new buys there?

Yes, most of [all those] business we're addressing is in terms of within the DRAM market is for the mobile DRAMs devices. We're seeing that that's got a higher demand than -- obviously we grow our PC market and the DRAMs associated with the PC world.

Okay. And just finally from me, I think you had mentioned that NAND and DRAM combined are I think 45% to 46% of sales this quarter, can you break that out between each -- between NAND and DRAM?

Okay. I'll get it. I'll get it. So between the NAND and DRAM just like I'm just looking up to make sure I say it right here, so in the second quarter DRAM represented 16% of our of the revenues and NAND was 29%.

Great. Thanks. Pass it on.

Okay.

Robert Maire, Semiconductor Advisors.

Hi. A quick question. You indicated in your presentation and KLA did in theirs of process control increasing as a percentage of overall spend over time. In the near term obviously the shift to 3D and FinFET should likely cause a near-term increase. Would you view that as sort of a quote -- two to three-year bubble of increased spending to get over the hump of the change to 3D technology or will this be an ongoing higher growth rate of process diagnostics as a percent of overall wafer spend? That's the first question.

Well, actually I think there's two elements to that, Bob. The one is that process control -- investments process control usually are higher during a new technology phase or a new node. So if you look at their spend pattern through the development of going into whether it's a 28-nanometer, 20-nanometer, you'll see process control intensity high at the front end and you can see more process tools in the back end. So there is a timing with any of these ramps. But on top of that, I do believe process control as a total expenditure within a fab and a technology node is increasing as we try to squeeze -- our customers try to squeeze more performance out of the given tool set where a lot of innovation hasn't necessarily taken place.

Well, I guess the question is does the conversion to 3D increase that rate of change or do you think it's just once we get over the hump of the change that it goes back to sort of a normal increasing pattern?

No, all [I see which is]-- I think there is a normal increasing pattern. There will certainly be some increased spend on process control fund as they try to figure out what to do to get the yield. So we always see, especially on the technology development side, we see a large commitment to new tools as a sort through a myriad of questions of where the yield issues are. And that may be what you are talking about as a bubble or maybe an overspend against what they will do in a more sustaining mode. So I think against the backdrop of continuing increased intensity in process control, there will be, when you have a large architectural change, you'll see an incremental spend at the beginning stages just as we did in FinFET.

Okay. And second question, if I were to categorize sales as share gains, capacity buys or technology buys across your six different product lines, could you kind of -- I know it's hard to categorize it obviously because it's a mixture of all three to some extent, but could you give us some ideas as to what's driving your different sectors, where you think you have the best opportunity with share gains, where the best opportunity is for capacity and where the best opportunity is for technology wise in your product offerings?

I will try and see if I can answer that in a kind of a straightforward way, our business in advanced logic and our business in the memory market, we have a solid leadership in each of those and it's really defending those market positions and supporting our customers as they go to the next generation devices and next technology nodes. When I look at our foundry business, we have to look at the difference between captive and pure play. We actually have a strong position in the captive foundry market -- in the captive, logic and foundry but we are making inroads into the pure play foundry. And in the pure play we believe that most of the growth and benefit of the Company will come from market share gains.

Okay. Thanks.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back to Timothy Stultz for any further remarks.

Okay. Thank you once again for participating in our call. I close by thanking the employees and business partners of Nano who are the real champions behind the scene and deserve all the credit for any success we enjoy. We look forward to reporting on our results of our operational and financial performance for the third quarter of 2013 this coming October.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.