Onto Innovation Inc (ONTO) 2013 Q3 法說會逐字稿

Good afternoon and welcome to the Nanometrics third-quarter 2013 financial results conference call. (Operator Instructions) Please note that this conference call is being recorded today, October 29, 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 third-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 third 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 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. 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, product shipments, or acceptance; changes in product mix; our ability to successfully realize operating efficiencies; 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 over the call to Tim Stultz. Tim?

Thank you, Claire, and good afternoon, everyone. We appreciate you taking the time to join us on our call today.

Today my prepared remarks will address highlights of our third-quarter performance, our progress against key corporate initiatives, and guidance for the December quarter. Following my commentary, Ron will provide a detailed review of our third-quarter financial results.

In the third quarter, increased spending by our largest customers in both new technologies and capacity adds helped fuel our second sequential quarter of revenue growth and margin improvement. Our quarterly financial results came in pretty much in line with our expectations, with revenues, non-GAAP gross margin, and non-GAAP earnings all at the higher end of, or just above, our guidance range.

Whereas we are certainly pleased with the continued improvement in our financial performance, of particular note is the continued progress we have been making against our key business objectives of growing our business through pure-play foundry business growth, market share gains, and expansion of our footprint within key accounts.

I would like to briefly update you on each of these three important activities. Beginning with pure-play foundry, we continued to make significant strides in strengthening our position with the leaders in that sector, achieving important competitive wins and expanding our market share accordingly.

In the third quarter, our Atlas II was installed with a leading pure-play foundry customer to develop OCD recipes for 20-nanometer and next-generation devices. This is a new position for us, and adds to our previously announced 20-nanometer node integrated metrology win for critical layer etch applications and our UniFire tool (inaudible) position in advanced packaging, all with that same foundry customer.

During the quarter our Atlas II was also selected by another global pure-play foundry customer and will be used for OCD metrology in critical transistor-level applications at the 2Y and 1X nanometer device nodes. This will be our second ever Atlas OCD platform adoption by a pure-play foundry, which means we have achieved two brand new customer penetrations with our flagship system in 2013.

Turning to our objective of expanding our footprint within existing key accounts, our IMPULSE integrated metrology platform was selected as tool of record by a leading memory manufacturer for advanced CMP process control of 3D memory device production at its newest manufacturing location in China. This is a new product position for us and is incremental to our Atlas II OCD position in this state-of-the-art manufacturing facility.

And, finally, within the last quarter, our Atlas was also awarded an additional process control metrology layer previously performed on a competitive tool for a leading edge advanced logic application. This additional layer expands the usage and, thus, applications footprint within this key account, where the Atlas is already tool of record for OCD.

We believe these competitive wins, market share gains, and progress against our long-term corporate objectives validate our strategy of increasing investments in R&D and applications during the recent downturn in our business in order to expand our business opportunities and come out a stronger company during the forthcoming upturn in our business cycle.

Now I'll turn to a few comments on our operations, business structure, and target financial model.

In 2011 we acquired Nanda Technologies, a startup developer of a very novel inspection platform. Since the acquisition we've been working with a Nanda startup team to develop commercial prospects for the product line while also systematically integrating the product and operations into our core business units. Over the last several quarters we completed the transfer of manufacturing of the product to our Milpitas factory, as well as the training of our global sales, service, and applications teams.

We also participated in a number of customer evaluations to better understand the applications best served by this tool, as well as its competitive advantages and positioning. In addition, with the customer feedback we received we developed a long-term product and technology roadmap to expand applications and serve markets.

This quarter we took the last step in this process by integrating the SPARK platform's engineering and technology development into our UK engineering operations and closing down our Munich facilities. As a result we have incurred some one-time restructuring charges that Ron will address in more detail later.

Importantly, however, the tool, the technology, and key members of the SPARK team are now fully integrated into our core business units, which in turn will strengthen our commercial and operational performance, while also realizing substantial cost savings through operational synergies and efficiencies.

Solid operational performance is a key objective for us as we return to profitability in 2014, which is forecast to be a strong year for us and the industry in general. Over the last couple of quarters we have delivered revenue growth accompanied by both product and operating margin improvement.

We have also been consistent in communicating our goal and expectations that total margins would meet or exceed 50% once we surpassed $50 million in quarterly revenues. Looking ahead to 2014, we fully expect to be on target with our gross margin model for the full year, accompanied by improving operating margins as we also lower our operating expenses through the cost savings I mentioned earlier.

That being said, in spite of anticipated growth in revenues in the first quarter of 2014, achieving our 50% gross margin goal is unlikely to occur until the second quarter, primarily due to product mix and timing of factory absorption benefits.

A final comment regarding build versus ship and revenue recognition timing. We have been experiencing significant customer-driven, product shipment pull-ins, in particular for new fabs and new geographical locations. Our factory is incredibly busy building and shipping record numbers of tools, including Atlases, IMPULSE integrated tools, and UniFires, to multiple new locations.

Although many of the products will be delivered in Q4 of 2013, much of the revenue will not be recognized until the first quarter of 2014 due to our new fab/new location revenue-recognition policy, which requires us to obtain customer acceptance on the first tool before we can recognize revenue on subsequent shipments.

All in all, the news outlook going into 2014 is very strong. Our business is growing as a result of increased industry spending, meaningful market share gains, and expanded footprints within our existing key accounts. The growth in our business will be accompanied by improved financial performance as we get back onto our business model and benefit from the leverage of incremental revenues on our bottom-line results.

Now turning to our business outlook, as we look towards 2014 we see further improvement in growth and spending for our process control products and solutions across multiple devices at 20-nanometer node and below. End use drivers continue to be mobile devices and service systems, 3D transistors, 3D memory, and 3D packaging leading the way on the chip side.

Our core business is benefiting as our major accounts are making investments in new technologies and ramping next-generation devices. And our market share is expanding as we make meaningful headway into the foundry sector, while also expanding our footprint within key accounts.

With that, our guidance for the fourth quarter is as follows -- revenues ranging between $42 million and $47 million, up 8% to 20% over the last quarter; non-GAAP gross margin of 46% to 48%; non-GAAP operating expenses to be $21.3 million to $21.9 million; and non-GAAP earnings of between an $0.08 loss per share to a $0.03 per share profit.

Ron?

Thank you, Tim. 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 in this conference call, as well as supplemental revenue segment information by product, end market, and geographic region is available in the Investors section of our website.

Third-quarter revenues were $39 million, up 13% from Q2. Product revenues increased 14% to $30.2 million compared to $26.5 million in the prior quarter, driven primarily by growth in sales of our integrated tools, both at a leading foundry as well as to a large memory customer.

Integrated tool revenue increased over 150% from Q2 to comprise 11% of total revenues. Automated tool revenue were essentially flat with the prior quarter and comprised 59% of total revenue. Materials characterization tool revenue improved from historically low levels in the second quarter to comprise 7% of total revenues in Q3. And service revenues increased 11% on both increased core service and upgrade sales to comprise 23% of total revenues.

By end market, the largest increase occurred in logic and IDM, which increased 54% to comprise 40% of product revenue. This increase was partially offset by a decline in foundry revenues, which comprised 14% of product revenues.

Sales into the memory end market were relatively flat with the prior quarter and comprised 37% of total product revenues with a slightly increased contribution from NAND compared to Q2. And revenues into the LED, silicon wafer, and discrete end market increased modestly from historically low levels to comprise 9% of total tool revenues.

Customers representing 10% or more of our total revenues for the quarter were Intel at 34% and SK Hynix at 23%.

Turning to other P&L metrics, my prepared regarding the income statement will refer to non-GAAP-based measures unless I identify the measure as GAAP-based. These measures exclude the impact of amortization of acquired intangible assets, restructuring charges, and write-downs of inventory of discontinued products.

Our Q3 gross margin came in above the high end of our guidance range at 48.4%, which is higher than we would expect at the $39 million revenue level, chiefly due to favorable revenue mix and better than expected warranty and manufacturing variances. This gross margin excludes a $2.4 million write-off of all remaining inventory associated with our discontinued Mosaic product line.

Product gross margin improved to 48% from 44.1% due to the benefit of higher revenue levels against fixed manufacturing costs and the aforementioned favorable mix, warranty and manufacturing variances.

Service gross margin improved to 49.7% from 42.7% due to both higher upgrade and core service revenues compared to the prior quarter.

As we look to the fourth quarter, our gross margin guidance range of 46% to 48% reflects an expected improvement in product gross margin on higher sales volume, offset by lower service gross margin due to a forecasted decline in both core service and upgrade revenues.

Looking beyond Q4, as Tim mentioned, we do not expect to see product gross margin improve on expected higher sales volumes in the first quarter of 2014, primarily due to product mix. We also don't expect the favorable variances we saw in the third quarter to be part of an ongoing trend.

Third-quarter operating expenses increased $668,000 from Q2, most of which was in R&D, to total $21.1 million, within the range of our guidance.

And during the quarter, as Tim mentioned, we consolidated our SPARK product line activities into our York, UK facility. As part of this consolidation we incurred severance and other expenses of $1.7 million as a Q3 restructuring charge, which is excluded from our non-GAAP operating expenses. As a result of this activity, we will begin to see some savings by the second quarter of 2014.

Our net loss for the quarter was $1.3 million, or $0.06 per share, compared to a net loss of $4 million, or $0.17 per share in the prior quarter.

At September 28, our cash and investments increased to $92.9 million, or roughly $4.00 a share. The increase in cash was primarily driven by a decrease in receivables, due to a higher proportion of early-quarter shipments. We also paid off the remaining $4.8 million on our mortgage during the quarter.

Our DSOs were 53 days, reflecting the early-in-the-quarter shipments I just mentioned. Inventory declined $2.8 million to $38.9 million at the end of the third quarter.

Our tangible book value was $184 million, or $7.88 a share.

And we ended the quarter with a headcount of 540 employees, a net increase of 7 employees from the prior quarter.

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

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

I really just was interested in the foundry traction and in particular the new OCD win at the pure-play foundry. I just wondered if you could give us an idea of the timing of those sales and maybe the scope or scale of that win.

Sure. I'll try to give a little more color, to the extent we can. So the two high-volume manufacturing wins that we spoke to were an integrated metrology one in the pure-play foundry for integrated etch. And the other integrated metrology win was for the polishers in memory.

With regard to the other wins, those are initial tool placements being used to develop new technologies. We believe that they're going to play out as we go forward. We need to continue to leverage those positions and benefit from it, but the high-volume manufacturing spending is at least a quarter to two quarters out.

So those would be -- they're still more than development tools, but not quite process tool of record yet?

Right. Well they -- exactly. They're process tools that have been adopted for [less speed] development, but they haven't launched the production investments. And that's at two different pure-play foundries as we've -- so two different locations, both going to have this tool, both for the 20-nanometer and sub-20-nanometer applications.

Okay. I guess what I'm getting at is, as those 20-nanometer process ramp would you expect the volume of those tools to increase accordingly?

Yes, we do expect to benefit from the ramps as they occur. There's a little bit of a delay in the timing based on just the individual customer plans. But we think this is our -- we've got our foot in the door and I think we're going to do our best to try to benefit through some market share gains in those areas.

Great. Congratulations.

Patrick Ho; Stifel Nicolaus.

Tim, maybe could you give a little bit of color in terms of how your supply chain is managing the current environment, given that you mentioned that you're seeing accelerated development. Sounds like Q4 is heading to be a pretty good shipment quarter for a lot of chip makers in terms of their tool deliveries. Given some of the issues in the past, what have you done this time around to make sure that, one, you aren't going to incur some of the costs you did last time?

That's a good question, Patrick. So if you're referring to the Atlas II back in 2011, that was more of an accelerated launch of a new product that was not fully released into manufacturing. In the case of the ramps that we're looking at right now, these are against fully released products with long-term and high-volume supply chain commitments and agreements.

We've worked very hard with our supply chain to make sure they have burst capacity. That being said, we're pushing them very hard. The whole Valley is experiencing some growth in general with our industry. And as a result, a lot of these subs out there are feeling the pressure of multiple companies doing pull-ins.

We've got a team that works on this. It's daily, making sure that we're tracking everything from what's turning out through the machine shops, to the [seats] of the materials and make sure our floor is ready to do it. We've gone onto a multiple shift in manufacturing to meet the customer demand.

Great. That's helpful. Maybe looking longer term, you've mentioned some of the wins you've had, both at the foundries as well as your existing customers. Maybe [need] a little more color about some of the opportunities you mentioned that you -- integrated etch opportunities. What are some of the process segments that you see the greatest opportunities for expansion for your tools?

So I think that the areas where we have the opportunities, which as we've spoken to multiple times, are at key inflection points where customers are considering new tools or maybe need a new tool set. So clearly the 3D, 3D, 3D -- 3D transistors, 3D memory, 3D packaging plays a big role in what we've been trying to do, what we've been focused. And it is those inflection points that we're using to leverage both our installed base, our experience, and the performance of our tools to gain some market share.

On the integrated metrology, those have just been hard fought, competitive battles. And the selection for us for the high-volume applications, there's a rewarding outcome of a lot of hard work on the Atlas platforms. It's getting into those accounts, in particular ones that are now in the foundry, where they're looking to go from the planer to the FinFET technologies. We have a lot of experience. We have more OCD tools that have been deployed in high-volume manufacturing for FinFET than any other company. And we're using that experience and the proven performance of our tools to gain some foothold and market share in those accounts.

I guess maybe just then a little color -- I mean, what process segments? Is it etch where you see the greatest opportunity, CMP, or even in deposition? Which of the process segments do you believe you have the greatest opportunities to gain greater market expansion?

Well, etch is certainly a big one, because we see that there's -- if you look at the FinFET world, it depends on the technology node and the device, but in the FinFET world with the number of litho steps and the etch processes surrounding them are increasing and therefore drive an increased opportunity for OCD.

When I look in the deposition area, it's really more aligned to what's going on in the VNAND, so the vertical memory devices, where you have multiple repeat layers. And we have a position in integrated metrology to support some of those activities and in multiple accounts.

And so, it's certainly more around the etch. The CMP win was incremental for us and that one in the memory site, going into China, and that's a new position for us as well. But I think that the highest opportunity are going to be around the etch and litho cells.

Great. Thank you very much.

Mahesh Sanganeria; RBC Capital Markets.

Tim, just want to get a little bit sense of the magnitude of the shipment and revenue delay. Can you give us an idea for if your revenue recognition would have happened to an older fab, are we talking about tens of millions of dollars here? And what kind of magnitude are you shipping to the new product or new locations that is pushing out the revenue recognition to the next year, early next year?

Well, I'm trying to make sure I understand the question itself. But we do see -- if I look at what the incremental benefits are, in moving from NAND to 3D memory, we see roughly a 20% to 25% increase in total opportunity for that device architecture. And all those products that are going into that factory, although many of them are being shipped in Q4, will not be recognized until Q1.

So then you have to look at the size and scope of the fab and the stages and when they add production. And if it's, like, a 20,000 wafer start per month initial launch, then you're looking for anywhere from $5 million to $7 million worth of OCD product opportunity per 10,000 wafer starts. And so you have to kind of do the math yourself and look at what is the production starts based on their own public commentary, and then our opportunity for the tool attachment that goes with it.

Okay. That's very helpful. And other question -- looks like you have some visibility into the next year based on the fact that you're so busy. Definitely not asking for the guidance, but how do you see the mix and the linearity into the first half of next year, among different segments or customers or regions, whatever way you can give us some color on, in terms of shipment, how does the first half of next year compare to the Q4 of this year?

Well, we see increased both shipments and revenue going into the first half of next year. Right now we don't have a lot of clarity on the entire year. We think the year, at least our current perspective, although it's early, looks kind of flat quarter to quarter, maybe a little bit up towards the end. But it's really kind of the uncertainties as much as the potential growth on a quarterly basis. But we see it year on year to be a nice, solid growth. We see the Q1, Q2 business going up. We see that being driven by some memory as well as some resumption of some of the logic spending.

And importantly for us is, less than the trend of typical spending, it's really about benefiting from the market share gains we've gotten and the new positions we have. So when you look at -- one thing I didn't mention earlier when you were asking about the OCD opportunity at 3D NAND, that 20% to 25% increase in tool intensity is just on OCD. The integrated metrology we won on the polishers is incremental to that.

So what you really need to look at is -- I think the way the math comes out is that the market share gains that we've gotten and the ones that we're working on are going to actually dominate the performance going into next year relative to the spending changes.

And since we are on the 3D discussion and let's say that's where you're gaining the market share and also growing [up TAM], are you having discussions with more than -- I mean, one is very publicly known, the fab in China that is building 3D NAND. Are you in early discussions at more customers about potential 3D fab, populating 3D fab in the second half of next year or even earlier than that?

We're definitely involved with three other customers on 3D memory devices. I think public commentary has been such that we know that Micron, Toshiba and Hynix are also looking at 3D type architectures. And we're very involved with all those. I think they play out later than the early lead coming out of Samsung. But I think that it's a serious roadmap and we expect to participate at each of those accounts.

Thank you. Thanks a lot, Tim.

Tom Diffely; D.A. Davidson.

First a couple questions on the Nanda move. So, did you retain all of the key people moving to the UK?

No. We basically looked at the platform folks, the key technologists associated with software and applications. So we brought some of them over. They'll be joining our team in York. But some of the other areas were not necessary in terms of like systems engineering and so on, which has been now fully adopted internally. Manufacturing's been done internally.

Okay. And is there any revenue to speak of at this point from this group yet?

Well, we have revenue, but it's not as large as we would like it and we're working very hard on positioning. We're getting good traction on advanced packaging. We like where that market is and we like where the tool is. But it's not large enough yet to break it out.

Okay. And then, Ron, what are you expecting from a cost savings point of view from this move?

So I think while we expect to see quarterly savings from the consolidation of the Nanda operations of approximately $1 million a quarter beginning in the second quarter of 2014, some of these savings that we see from this are going to be offset by salary, profit sharing increases, and some hiring in R&D and in applications as we get into 2014.

I think as you start to look at 2014, though, it positions us [nicely.] Despite the strong year and expected increase in revenues the overall level of quarterly spending expenses will be actually down modestly in 2014 over our Q4 levels, probably coming in somewhere between $21 million and $22 million per quarter. It will vary depending on the timing of certain activities and programs. But despite the increase in revenues, we should see quarterly operating expenses actually down slightly because of these savings, with just some smaller offsetting increases.

Okay. So is there variable components at this point in your operating expenses, or is it mainly fixed?

I mean, it's primarily fixed. There's a small amount of commissions that's variable with sales, but it's a fairly nominal amount. Largely the cost structure is generally fixed, based on headcount and investments we're making in R&D around materials and those sorts of things, which really drive spending.

Okay.

(Multiple speakers) --

And then you mentioned the margin in the first quarter would be down a little bit, or not quite to the 50% range, due to mix. Could you explain or elaborate a little more on that?

Well, I think one of the things, if you look historically, our gross margins back in 2011, which were very strong, were driven by a very significant, rapid ramp of our flagship product. Today our product line is much more broader. We have multiple Atlas platforms. We have the UniFire. We have various products, not all of which command as strong a margin as our Atlas XP did. And based on the various mix of those, we actually see more variability just driven on the mix of products from quarter to quarter. And that mix in Q1 happens to be a little bit unfavorable based on the product mix.

I think the other data point just to keep in mind is that with the growth in revenue, as we've said, our absorption or manufacturing overhead costs become a lower percentage. But because those variances get spread over inventory turns, there's some lag in the full recognition of those favorable manufacturing variances. So there's some carryover of unfavorable variances from the second and third quarters of 2013. So you have a little bit of that drag going into the first quarter as well.

So we're really -- it's going to be Q2 when we see us back on the north of 50% margins at greater than 50%.

Okay. But if you average $50 million a quarter for the year you'd expect the full year to be about 50%?

Yes, absolutely.

Okay. And I guess, just finally, a lot of the other equipment guys have talked about little higher percentage of reuse at some of the logic players. Sounded like you had some pretty good logic business in the quarter. Does that reuse not apply to you because of where you're positioned? Or maybe a little detail on that?

Yes. Well, there certainly is reuse and we all are faced with it to different degrees. We don't have quite as much reuse exposure as some companies because we basically only became tool of record in the last technology node and most of those tools are heavily utilized.

However, there is some reuse and one of the things that we're doing and been successful in doing in offsetting the reuse is to win additional layers. And for every layer we win, it incrementally offsets multiple tool reuse exposure. And we've won one layer. We're working on several more layers. And if we are successful in getting those layers onto our platform for this current technology node, we actually increase the tool demand in the node.

Okay, great. And finally, what does your crystal ball say about the LED in some of those other markets that historically were much bigger?

Well, my crystal ball is really fuzzy on that one, Tom. The couple of areas that -- I guess what we really are talking about is our different business units. And it's clear that our integrated metrology business has come back with a big bang, and that's been great with market share gains.

Our materials characterization business, which has the products for LED, solar and bare silicon wafer, are still languishing out there. We hope to see some additional improvement. I don't expect it to come out of solar. With the push-outs, the public push-outs of 450 millimeters, we may see some increased demand for bare silicon wafer tools for the 300 millimeter as the life cycle for the 300 millimeter wafers is extended.

And for LED we've introduced a new product recently that's directly tied to that market. We've gotten some initial traction and we're hoping that the adoption and acceptance of that tool will help strengthen the MC business.

Okay, great. Thanks for your time.

Josh Baribeau; Canaccord.

As I'm looking at some of the presentations you've given historically, you've given a range for 10,000 wafer starts, which you actually referenced a little bit earlier in the day. Can you tell us -- you're certainly winning a lot of applications within some of these, let's call it, foundry applications or 3D memory applications. And what I'm trying to get at is I'm trying to size some of the market opportunities you have.

What percentage of, let's call it, let's say the foundry at 2X. You say 6 million to 10 million in your presentations. What percentage do you think you have of that opportunity with some of the integrated etch and integrated CMP of that opportunity?

Well, so we've got two answers to that. So we talked about the 20 nanometer wins. On the integrated, we actually won the full position for high-volume manufacturing integrated metrology on etch for some of the -- yes, on the [LAN] platform. And that was a very nice win and that's all incremental to our position.

With regard to the OCD business, our focus has been to win the 16-nanometer and sub-16-nanometer FinFET positions at that account. And we've got the tool in there. Now that they're using the tool, they're actually using it to develop some 20-nanometer recipes, which has the potential of giving us some share of the 20-nanometer ramp.

That would be -- it's like frosting on our cake. We weren't counting on that. I think we're going to actually get some of that. But that's above what our original target and strategy was. But we wanted to actually win substantial market share in the 16-nanometer when they went to the FinFET architecture.

Are you able to share with us what types of recipes that they're developing with the Atlas tool? Is it in etch or is it everywhere?

Well, it's primarily surround around the etch, the etch position, which is where one of our highest leveraged areas are. We've got some other areas that they're developing as well, around some lithography steps. But etch is a big driver, in particular with the FinFET architecture.

Okay. And finally from me, sort of on the same topic, this pure-play foundry, it sounds like you might get some retroactive 20-nanometer type of recipes. Is that something that they would add going forward? Because they're already built some pretty significant capacity already this year. Is that something that'd you get on incremental capacity or would you get some retrofit of what they've already built?

The full tool set and choice for the metrology tools on 20-nanometer high-volume manufacturing has not been set. There's a lot of op- -- we do a lot of tool matching and performance matching against other platforms in competitive environment, which gives them the flexibility to put our product in line as they build up the new fabs. So we think if we win some of those, we can actually go into these first build-outs. We don't have to wait for the next phase.

How that plays out is still uncertain. We're working very hard to give them that experience. We think that the more experience they get on our tool at 20 nanometers strengthens our opportunities going into 2016. And so we're encouraging them to put a few layers on our tools, both to exercise our tools, get experience on our tools, learn how to run our recipes. And I think it just helps the continuity going to the next node.

Great. Thank you.

(Operator Instructions) Edwin Mok; Needham & Company.

First question is, with the new wins, did you have any deferred revenue that impacted gross margins for this quarter or next quarter?

Actually, could you clarify the question -- was it whether we had deferred revenue that impacted the margins?

Yes, because sometimes when you have new product that you're shipping and recognizing revenue you have more than normal deferred revenue that might impact gross margins. Did you have any of that?

Yes, so it doesn't have a direct impact on gross margin. When we ship a tool and we defer the revenue we also defer the cost of that tool as well, so that we don't have the cost going through ahead of the revenue. And then we actually recognize the revenue then we would flow through the cost of the tool.

What you can have is that, particularly in Q4, when we start to have a huge ramp of shipments, it can affect our manufacturing overhead and absorptions that flow through the P&L if we're actually manufacturing those tools ahead of when the revenue happens. But the impact's relatively small because we match the cost of the tool with the recognition of the revenue.

I see. Okay, that's helpful to clarify that. And then, on the IMPULSE win that you mentioned, Tim, just to clarify, is that on -- I'm trying to understand is it some unique process, a CMP process, that is needed for the 3D memory? Or is it just [generally] 3D memory that you're thinking of -- you've secured some wins? And obviously if it's a general CMP process then you can probably take that win and go [out to] other customers. Is that the way to think about that or is it more just target for 3D-NAND?

This was a specific win on the 3D-NAND process cycle and sequence. We obviously try to leverage any win into other customer accounts. But this was specific to Samsung, specific to the polisher, and specific to the 3D devices.

Okay. That's very helpful. And then, on last Q where you mentioned you shipped to a pure-play foundry, are you working on that same customer, on placing IMPULSE in those customers, given that integrated and (inaudible) now seem to be working closer together?

Well, we have won the integrated at one of the pure-play foundries already for the X platform, as you know. So we have the Atlas tool at this account. We have the UniFire at that account. And we have integrated metrology on the etch platform, all at the same account.

At another account where our tool was selected, right now it's only UniFire and our Atlas platform. We don't have integrated metrology position there yet.

Okay, great. Thanks for clarifying that. That's all I have.

Thank you. I'm not showing any other questions in the queue. I'd like to turn the call back over to Timothy Stultz for any further remarks.

Well, thank you once again for participating in our call. We all know we operate in a cyclical industry where demand levels can change dramatically over very short periods of time. Responding to these rapid and dynamic changes effectively and with quality is extremely challenging. I thank and express my sincere gratitude to all our employees and business partners of Nanometrics, who routinely execute against those challenges and turn them into a competitive advantage.

Finally, we look forward to reporting on the results of our operational and financial performance for the fourth quarter and full year 2013 next February.

Thank you, again.

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