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Nanometrics Incorporated (NASDAQ:NANO)

Q4 2012 Earnings Call

February 04, 2013 4:30 pm ET

Executives

Claire McAdams – Investor Relations

Timothy J. Stultz – President and Chief Executive Officer

Ronald W. Kisling – Chief Financial Officer

Analysts

Thomas Diffely – D.A. Davidson & Co.

Patrick Ho – Stifel, Nicolaus & Co., Inc.

Mahesh Sanganeria – RBC Capital Markets

Weston Twigg – Pacific Crest

Christopher Blansett – JPMorgan Securities LLC

Operator

Good afternoon, and welcome to the Nanometrics Fourth Quarter and Full Year 2012 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. (Operator Instructions) Please note that this conference call is being recorded today, February 4, 2013.

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

Claire McAdams

Thank you, and good afternoon, everyone. Welcome to the Nanometrics fourth quarter and full year 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 fourth quarter and year 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 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 and mix, tax rates and technology and product development and 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, customer demand, shift and timing of orders, their 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 disclaim any obligation to update information contained in any forward-looking statements.

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

Timothy J. Stultz

Thank you, Claire. Good afternoon, everyone, and thank you for joining us on the call today. In addition to reporting on our financial results, which Ron will cover in detail shortly, I would like to begin by sharing the progress we are making with our key strategic initiatives, which are the foundation for long-term growth and shareholder value.

First off, our Nano’s efforts to penetrate and grow our foundry business; last quarter, we reported that for the first time in Nano’s history, the revenue contribution from our leading pure play foundry customer exceeded 10% of our total revenues. Our engagements with this customer and collaborative work on the most advanced technology nodes are continuing to expand, and once again have resulted in this customer contributing greater than 10% to our quarterly revenues.

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 sets the stage for meaningful revenues beginning in 2014 and we are confident that this business will continue to expand in the years to come. Our next key focus area is to grow our advanced packaging and inspection businesses, driven by penetration and adoption of our UniFire and SPARK platforms.

During the quarter we placed Multiple SPARK and UniFire products for the development of advanced lithography process control applications, a key customer side. This is an exciting and critical technology area, and we are optimistic that these placements and cooperative program will lead to an increased use of our tool, and high volume manufacturing.

Additionally, we’ve received follow-on business for the UniFire, which has now been selected of the tool record at foundry, memory and logic customers for advanced packaging application such as Through Silicon Via or TSV. As this emerging market takes hold, we believe our technology leadership and competitive position will contribute meaningfully to our revenue growth and market expansion objective.

Our last key initiative is to defend our market share and tool-of-record positions at the two largest chip companies in the world. We are doing this by providing extraordinary customer support well continuing to invest in technology, product roadmaps and applications development directed to the next-generation devices such as 3D memory chips.

Notably our Atlas OCD product along with the support of our application scientists have been used to help develop 3D memory devices and are now being deployed in private line application. We have similar engagements in the development advanced logic and other memory devices, which we believe will also lead to increased demand for our products. On line, I’m very pleased to report that our position with everyone of our strategic customers have been strengthened over the last few quarters. And we continue to make solid progress against our primary objectives of growing our foundry business, expanding our served markets, and increasing our footprint, and key customer accounts.

Now for some perspective on our near and longer-term business outlook; against the backdrop of recent encouraging, if not surprising announcements in investment plans for 2013 by the three largest chipmakers, we see continued softness in our media business outlook followed by a very strong recovery in the second half of the year.

This can be understood as follows. Whereas foundry investments in 28-nanometer are expected to continue in the first half of the year. Investments for the next technology node, mainly 20-nanometers are targeted for the second half of the year. Our penetration in the foundry is almost exclusively for 20-nanometer below. And as such we don’t expect the pick up in revenues from that sector until the third and fourth quarters of the year.

Similarly, for advanced logic, publicly announced plans for high-volume manufacturing costs and to expansion of capacity for leading edge node devices, as well as initial 450 millimeter wafer fab equipment investments are expected to be weighted towards the second half of the year and into 2014.

And finally, with the strengthening of DRAM and NAND pricing expectations are for investments in memory capacity and new technology development to pick up in the second half of the year. So while the overall CapEx outlook for 2013 has meaningfully improved over the last few weeks. We see the upturn for Nano business to be heavily biased to third and fourth quarters of the year with continued momentum into 2014.

Now before giving your next quarter guidance, I want to reinforce comments we’ve made over last several years regarding our operational and investment strategy. We believe the interest of long-term shareholder value are best served by growing our business with the industry leaders, expanding our served markets and gaining market share. We further believe that this can only be accomplished with continued investments in technology, product roadmaps and applications development. And that in spite of a cyclical nature of spending in our industry, our commitment to supporting our customers and their technology requirements cannot be cyclical.

Competitive wins and market share gains are almost always takes place at technology inflection points and during industry slow down. This is the time when customers determine if they need new tool sets as well as evaluate advances in technology required for the most demanding applications. Success with these engagements and cooperative development programs translated to incremental business during the subsequent investment cycle.

Over the last few years, we have made significant inroads into the largest customers in the industry by successfully addressing and competing for the most demanding applications. This resulted in record revenues and profits during the last cycle peak in 2011. We intend to repeat this performance in the next cycle using the same strategy of R&D investments, strategic customer engagements and aggressive competitive efforts.

To that end, we are increasing our investments in R&D and applications developments. This is in direct response and in support of customer specific joint development programs targeted to the development of new technologies and process control capabilities required for devices one, two and even three technology nodes into the future.

This is a very exciting part of our business as we work on the most challenging applications in close cooperation with the leaders in the industry and develop the tools and capabilities that will enable the fabrication of devices of the future. The final component of competitiveness is to have an organization, resources and infrastructure that can respond effectively to rapid changes in demand.

Our served customer base is undergoing significant consolidation with investments by the top three companies accounts [for] well over half of all the industries’ spending. In addition, the number of companies that can actually afford to develop advanced chip technologies build fast to manufacture them is rapidly shrinking and is already down to a small handful. This concentration leads to increased market volatility, driven by the business health and investment strategies of just a very few large companies.

In order to benefit from the abrupt and often large swings in industry investment plans, our operations team are focused on having a flexible manufacturing model, carrying sufficient levels of inventory and having a well managed supply chain with first capacity, which collectively can respond to short lead time demands.

We firmly believe that operational excellence not only results in improved financial performance, but also provides an additional competitive edge for our business by increasing our ability to rapidly respond to the dynamic changes in demand from our customers.

Now, turning to our first quarter guidance, we see revenues coming in between $24 million and $28 million, non-GAAP gross margin of 35% to 42% and a non-GAAP loss per share of between $0.25 and $0.33.

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

Ronald W. Kisling

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

2012 was a dynamic year. In the first half, we achieved record revenues for our flagship Atlas systems driven by front-end loaded spending by our key customers.

In the second half, a sharp reduction in memory spending and weakness in other end markets including the LED and silicon substrate market led to a decline in second half revenues of 32%, compared to the first half resulting in a full-year decline in revenues of 21% to $183 million.

Product revenues decreased 26% from the prior year to $144 million, compared with $195 million in 2011, while service revenues increased 11% over 2011 to $39 million from $35 million on both increased upgrade and core service revenue.

Sales of our automated tools were down just 14% from record 2011 sales while materials characterization and integrated products were down 60% and 51% respectively. By end market, we saw memory revenue declined by 45% with declines across both DRAM and Flash as memory contribution to total product revenues dropped from 50% to 37%.

Revenue into the logic end market remains fairly strong, only declining 5% and increasing its contribution to revenue from 25% to 32%. Sales into the foundry end market segment increased 85% over 2011 levels increasing from 9% of revenues in 2011 to 23% of revenues in 2012.

As we have reported in our previous calls, we have seen declines in sales into the LED, discrete device, and silicon substrate end markets, which declined 64% over the prior year to comprise 7% of product revenues compared to 15% in 2011. By customer, Samsung, Intel and SK Hynix comprised 28%, 22% and 16% of total revenue respectively for 2012.

Turning to our other P&L metrics, my prepared remarks regarding the income statement for fiscal year and fourth quarter of 2012, as well as comparison to prior period we’ll refer to non-GAAP information, which excludes the impact of amortization of acquired intangible assets, unless identify the measure as being GAAP based.

Our gross margins declined to 47.3% from 53.5% in 2011, due primarily to lower margins in the first half of 2012 on the newly introduced Atlas II and on lower overall revenue volumes in the second half.

Operating expenses increased 9% in the year to $78 million, compared to $71 million in 2011 due in support of our increased investment in R&D, driven in large by our investments inspection and support of our acquisition of Nanda Technologies in November 2011. SG&A expenses were essentially flat in 2011. Our net income for 2012 was $5.3 million or $0.22, compared to $32.7 million or $1.39 in the prior year.

During 2012, we increased our cash and short-term investments balance by $12.2 million. This is after repurchasing $8.5 million of our common stock, paying down our mortgage by $2.2 million and investing $5 million in capital expenditures.

Turning to our Q4 results, in the fourth quarter revenues were $30.3 million, coming in just above the midpoint of our guidance, down 31% from the third quarter and 33% from the fourth quarter of 2011. Total product revenues of $22.1 million declined 32% from the third quarter of 2012 reflecting a significant decrease in spending by two of our three largest customers.

Service and upgrade revenues were $8.2 million, down 30% from Q3, primarily due to lower upgrade revenues, which fluctuate from quarter-to-quarter and were up relatively high levels in each of the previous two quarters.

By product area, sales of our automated metrology systems, which are the primary systems sold into our largest customers, declined 44% quarter-on-quarter to $14.8 million and comprised 49% of total revenues for the quarter compared to 61% in the prior quarter.

Integrated metrology sales increased 10% from Q3 levels to comprise 10% of total revenues. And we saw [welcome] improvements in sales of our materials characterization products, which primarily served the LED, discrete component and silicon substrate end markets, as revenue increased 44% over Q3 to comprise 15% of total revenue.

Turning to total revenues by geographic region, we report revenue based on the ship to or first-in-use destination. In the fourth quarter, revenues from South Korea were 13%, North America 41%, Taiwan 15%, Japan 13% and 17% for the rest of the geographic regions. Two customers contributed 10% or more to our revenues in the fourth quarter; Intel at 33% and TSMC comprised 11%.

Turning to the end markets, which are segmented by product revenue only, sales to the memory segment were down 81% from Q3 to comprise just 12% of product revenues, with both flash and DRAM spending down significantly from Q3 to comprise 9% and 3% of product sales respectively.

Sales into the logic and other IDM customers were essentially flat with Q3 and comprised 45% of product sales, while sales to our foundry customers were also nearly flat with Q3 and comprised 26% of product sale.

We have seen modest improvement in the LED, discrete component and silicon substrate end market, and together they comprise 16% of our product revenues in the quarter increasing 44% over the prior quarter. Gross margin was 41.6% compared to 51.8% in the prior quarter coming in slight below the low end of our guidance range of 42% to 46%.

The expected decline from Q3 was due to the decline in product sales volumes, which resulted from increased fixed cost as a percentage of revenue and the decline in the mix of upgrades which have higher gross margins within services revenues. The additional decline below the guidance range was due to an increase in warranty expenses which had a more significant impact on margins due to the relatively low overall revenue. As a result of these factors total product gross margin were 42.7% compared to 51.2% in the third quarter.

Service gross margins were 38.6% down from 53.7% in Q3. Importantly, consistent with our stated plans, we realized continued improvement in Atlas II standard margins which were up more than 400 basis points since Q1 meeting our target for the end of the year. Operating expenses were $18.3 million coming in below the low end of our guidance. Operating expenses were lower than expected due to the deferral of some spending into future quarter.

Our GAAP-based tax benefit for the fourth quarter was $2.7 million representing an effective tax rate of 42.7%. For the year as a whole, our GAAP-based effective tax rate was approximately 3%. The lower effective tax rate for the year is primarily due to a one-time benefit from certain tax selections made in the first half of 2012. The fourth quarter net loss was $3.1 million or $0.13 per share compared to the third quarter net income of $2.4 million or $0.10 per share.

Our cash, cash equivalents and short term investments increased by $5.1 million to $109.9 million or approximately $4.73 per share based on 23.3 million shares outstanding at December 29.

During the fourth quarter, we repurchased approximately 250,000 shares for an aggregate amount of $3.5 million at an average price of $14.12 per share. We also received a tax refund of $5.5 million in the quarter. Our DSO was 64 days up slightly from 62 days in the prior quarter and inventory levels declined by $2.8 million to $41.9 million.

Our tangible book value was $194 million or $8.35 per share. And we ended the quarter with a headcount of 536 employees, a net decrease of nine from the prior quarter.

Looking forward to the first quarter, our expected decline in revenues to $24 million to $28 million is responsible for the decline in our expected gross margins to 35% to 42%, which reflects the impact of lower factory utilization, which is partially offset by expected increase in upgrade revenues.

The increase in operating expenses of $2 million to $3.1 million in Q1 reflects the acceleration of our investment in key initiatives. Over 75% of increased is focused on R&D and applications. There’s also a small increase in overall spending compared to Q4 due to the seasonal pattern of payroll taxes. We expect to continue this level of investment throughout 2013.

For Q1, we expect our GAAP-based tax rate to be in the range of 38% to 42% reflecting a benefit from the expected pretax loss as well as a one-time benefit from the 2012 R&D tax credit, which because it was not signed into law until January, will be reflected in our first quarter of 2013. For 2013 as a whole, we expect our effective tax rate to be in the 36% to 38% range, which includes the ongoing impact of the recently renewed R&D tax credit.

And with that, I’ll turn the call over to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Tom Diffely of D.A. Davidson. Your line is now opened.

Thomas Diffely – D.A. Davidson & Co.

Hey, good afternoon. First, a couple of questions on just the business trends today. Is there any unusual linearity in the first calendar quarter that you’re seeing, is it post Chinese New Year or little bit of a ramp of how do you see it?

Timothy J. Stultz

Hi, Tom, this is Tim. So you are asking about linearity within the quarter or against the year?

Thomas Diffely – D.A. Davidson & Co.

Yeah, just for the first calendar quarter in particular. I wondered if it starts up super slow in January and ramps up after Chinese New Year or if it’s just fairly lackluster through the quarter?

Timothy J. Stultz

I don’t know if I could attribute it to the Chinese New Year, but it certainly has started up slow in the quarter, and as we mentioned during our script, we are seeing a huge amount of heavy weighting in the second quarter and frankly it’s a very dynamic time. We’re expecting a lot of updates. These things are changing almost on a weekly basis, fortunately in a positive direction. But we won’t have any more clarity on this until we get through the forecast with our customers, which are our renewed forecast, which are probably going to occur in the latter part of the quarter.

Thomas Diffely – D.A. Davidson & Co.

Okay. So there’s no one to quantify that the slop you’re seeing now, 60/40 or 40/60 or something like that first half, second half?

Timothy J. Stultz

No, I wouldn’t quantify yet, but it’s probably going to be stronger than that.

Thomas Diffely – D.A. Davidson & Co.

Okay. And then, it makes a lot of sense with the foundries and some of your good work there on the 20-nanometer; but it seems like some your other clients like Intel, Samsung, some of the big guys, they’re fairly even spenders through the year. Are you not seeing those trends this year?

Timothy J. Stultz

We’re certainly not seeing the trends based on our pipeline, Tom. It’s kind of a strange time there. There’s been a little less transparency in our customer engagements over the last several quarters than I’m used to. I think everybody was caught by surprise with Intel’s public announcement that they were going to raise CapEx by 18% year-on-year. And that really wasn’t completely consistent with what we saw in our product pipeline and now they’re updating us and we’re seeing the changes. So I don’t think it’s going to be linear at Samsung or Intel.

Thomas Diffely – D.A. Davidson & Co.

Okay. And then when you look at I guess both of those customers, alleged customers, when you look at those two particular guys going down to the next node, how much reuse of your particular equipment do you see there versus maybe an industry average?

Timothy J. Stultz

That’s a good question. We have very little if any exposure to reuse and that’s primarily because our tool requisitions were recently established. And since most of our tools are used in just the most recent and last technology nodes, they usually have to skip more than two nodes to go for a full reuse. It’s in fact, reuse means using the same tool – the modest upgrades. So we see very little or almost no exposure for that at all.

Thomas Diffely – D.A. Davidson & Co.

Okay. And then on the kind of the back hand side, that’s packaging side, you mentioned that some of the UniFire were used for TSV and some of the 3D packaging. Are you also using the two and half D – more the interposer type for applications or are you mainly a 3D play?

Timothy J. Stultz

No, in fact a lot of it is the interposer both in the microbumps and the connections between those devices. So the two and half D or the interposer technology as well as the 3D have demand and drop for our tool.

Thomas Diffely – D.A. Davidson & Co.

Okay. And it’s finally on the margin front, when you look at the margin for the first quarter, I know it’s hard to tell, but do feel as if your product gross margins have gotten back to kind of normalized levels?

Timothy J. Stultz

Well, when we frac our margins, we look at our standard margins, that is, the building materials and direct labor and overhead and we don’t take into account factory absorption. Our products are moving along nicely. The Atlas II has joined the family of other products with good margins and once we get some improved factory utilization, I think you’ll see them reflected in the P&L.

Thomas Diffely – D.A. Davidson & Co.

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Patrick Ho of Stifel Nicolaus. Your line is now open.

Patrick Ho – Stifel, Nicolaus & Co., Inc.

Thank you very much. Tim, I understand the gross market weakness at least in the mini term due to factory utilization over the low factory utilization, but as you get to the second half of the year, as business picks up, do you foresee any problem on supply chain or manufacturing given that is probably a steep ramp up from where you are today?

Timothy J. Stultz

That’s a good question, Patrick, and no, I think we put a lot of energy into our supply chain as I mentioned earlier, both addressed in any potential quality issues, looking adverse capacity, making sure that we’re carrying the right inventory, not just the right amount of inventory, but the correct inventory. And I think that that will play out nicely when we get back into the volumes that allow us to leverage the top end of the P&L.

Patrick Ho – Stifel, Nicolaus & Co., Inc.

Okay, great. Looking forward as we go to foundries with their [still type] technology either a 16 nanometer or 40 nanometer node, I guess can you give color in terms of how you’re experienced with Intel and their [still type] technology is going to help you down the road with those technology nodes?

Timothy J. Stultz

Sure. You could imagine that we consider that one of our strong suites and we certainly are playing that card pretty heavily in our engagement. We bring to the market group of application scientists and successfully launched application, there are pretty detailed across the entire FinFET technology area. And we believe we know how to address them, we know how to model them, we know how to measure them and I think that’s a point of advantage that we have in that competitive environment.

Patrick Ho – Stifel, Nicolaus & Co., Inc.

Great, and then the final question from me, do you think that you’re trying to penetrate that customer segment, which it has viable players right now. Have you see any pricing pressure especially from the larger guys given you that that scenario that they want to maintain their relationships at this time?

Timothy J. Stultz

That’s a good question, actually our primary competitor has a very good and rational business model and we don’t really see a lot of pricing pressures. We certainly see competitive technology issues. So we were always going to compete. They address these products and these application for the same – for also as we do. But we believe we have an edge. We think we’ve got a little more experience. We think our tool has technical advantages and that’s pretty much were the competitive efforts takes place.

Patrick Ho – Stifel, Nicolaus & Co., Inc.

Great, thank you very much.

Operator

Thank you. Our next question comes from Mahesh Sanganeria of RBC Capital Markets. Your line is now opened.

Mahesh Sanganeria – RBC Capital Markets

Thank you very much. Tim, you sounded lot more positive on the memory spending in the second half, then you, well last time I talked to you, are you getting the sense from early read from the customer that they might be spending a little bit more than what they were planning on the memory side of the business?

Timothy J. Stultz

Yeah, we do see some of that, in fact I feel little more bullish about the forward-looking outlook on our business than I have in the last several weeks it’s not several months, and our engagements for the customers and looking at lead times, and looking at product roadmaps, and looking at when they would need tools on site suggest that we would see improvements both in the memory, foundry, captive logic and advanced logic areas in the second half for us.

Mahesh Sanganeria – RBC Capital Markets

And on the memory side, is it both on the DRAM side or the NAND side?

Timothy J. Stultz

I think we have a little more clarity on the flash side. We know about the investments that we’ve made in, if some very large fabs being developed by one our largest customers. There is encouraging news by DRAM, but I can’t say that I’ve seen how that translates into additional tools in the pipeline. DRAM pricing, as you know, has improved and usually associated with that we see an increased investment, but I wouldn’t say that I have a window into that yet.

Mahesh Sanganeria – RBC Capital Markets

And on the foundry side, do you expect that your full year revenue, you will have 10% customers on the foundry side for the full year?

Timothy J. Stultz

I’m not sure about that. We had the first two quarters with that way. There is going to be some pause as they use some of the tools and then it depends on what their spending plans are going into the 20-nanometer and it could bring the year over to 10, but we don’t know.

Mahesh Sanganeria – RBC Capital Markets

And can you give us some color on what application you are, where you have got the biggest traction on the foundry side?

Timothy J. Stultz

Well, fortunately we have engagements in a couple of different areas. In the foundry we’re engaged in advanced packaging, we’re engaged in advanced lithography, and we’re also engaged in some of their OCD, in particular the integrated metrology area. So we’ve got a couple of different points of entry and they’re all starting to play out nicely.

Mahesh Sanganeria – RBC Capital Markets

And one last question for me. You talked about that making the investment right now and those are driven by joint development programs. Can you help us a little bit more, can you give us more color into what segment of the business is still in the metrology and is there customer commitment on those projects for which you’re investing today?

Timothy J. Stultz

I’ll answer the last part first. We seldom get hard and hard and fast customer commitments up on our success. But we know that we get, we have a significant advantage for the ones that they’re developing the products on, their products on when we’re using our tools. And so it’s really been in there and having a relationship.

With regard to what we’re working on, we’re working right across the Board. We’re working on customers that are trying to bring FinFET technology into their fabs. We’re working with customers that are going into the three dimensional memory devices. We’re working on customers going into the next generations of shrinks and we’re working in the advanced packaging and advanced lithography area.

So we have as large number of engagements, I would say we have the largest number of engagements we’ve ever had with a significant customer pool. They are encouraging us and asking us to put our tools and our people on site to help and develop these. And ultimately, if we do a good job, we’ll translate into more business.

Mahesh Sanganeria – RBC Capital Markets

All right, thanks. That’s very helpful.

Timothy J. Stultz

Okay.

Operator

Thank you. Our next question comes from Weston Twigg of Pacific Crest. Your line is now open.

Weston Twigg – Pacific Crest

Hi, thanks for taking my question. Just first, I wanted to start off on the OpEx side, just wondering if you can discuss in a little more detail some of the controls you have in place to maybe limit that from growing from here and maybe if you can give us a little more detail on what you’re doing to improve your burst capacity on the supply chain? That would be helpful.

Timothy J. Stultz

Okay, Wes. Well, so you’re speaking of the control with regard to spending. We have a very deliberate program, very defined activities where we measure customer engagements, JDPs and JDVs. We looked at the opportunity, we look at the resource requirements, we look at the timing necessary to be there because if you’re late, it doesn’t make any difference and it’s betted pretty heavily through the entire management team as well as the applications and R&D groups. So I’m very comfortable. These things are – these are not control issues. These are deliberate investments, deliberate spending increases and taking advantage of the inflection points to make sure we’re there with the right tools, with the right customers at the right time. What was the second part of the question?

Weston Twigg – Pacific Crest

The burst capacity of the supply chain, what are you doing there to, I guess improve that or expand that?

Timothy J. Stultz

Yeah. So we’re working pretty close especially with our leading suppliers. We’re trying to give them updated outlooks against our build plans. We’re talking to them about their own inventory management. We’re looking at putting in tools and support to help them with their own quality assessments to make sure that they can meet our delivery requirements and we also look at commercial benefits and penalties if we’re not able to achieve our burst requirements.

Weston Twigg – Pacific Crest

Okay. And then, does that help, I guess improve your margin profile over the long run or are you just seeing sort of as preventing it from degrading anymore?

Timothy J. Stultz

Yeah, I think, our biggest – our primary focus is making sure we don’t miss a window or we don’t disappoint a customer. The difference between a quoted lead-time and the required lead-time still have a pretty good gap. And we have to take advantage of that whether or not we like it. And so we have to make sure our entire supply chain is ready to support us in that process. The margins will come from – our standard product margins are still very robust now with Atlas II being well improved. And with good factory absorption, then when we get to the right revenue levels, we go from underutilized to actually favorable variances which will also contribute to improve the gross margins.

Weston Twigg – Pacific Crest

Okay, got it. And then just finally on the second half improvement, you mentioned I think that you’re expecting new forecasts hopefully by the end of the quarter from new major customers. But I’m just wondering how you can have or if you can give us an idea on how you can have such conviction in the second half rebound if you haven’t seen the forecast yet? Are those based on just customer conversations or just general industry outlook?

Timothy J. Stultz

No, it’s about the customer conversations. The general industry outlook in the announced CapEx spending by the three biggest splendors actually caught us a little bit by surprise. We’ve had a lot of ongoing conversations now with each of our major customers and they’ve all indicated increases at the latter part of the year. They’ve told us, what kind of tools we will be looking at and what we will be doing between now and the end of the quarter is not only firming up those outlooks, but also negotiating the contracts going into that period.

Weston Twigg – Pacific Crest

Okay, definitely helpful. Thank you.

Timothy J. Stultz

You bet.

Operator

Thank you. (Operator Instructions) Our next question comes from Chris Blansett of JPMorgan. Your line is now opened. Chris, please check your mute button?

Christopher Blansett – JPMorgan Securities LLC

Hi, Tim, I apologize. You mentioned in the press release, in our comments that the SPARK has now been positioned at a number of customers. And I wasn’t sure if you have a better read on when you would expect to repeat volume over some of these penetrations, or is this just too early to tell?

Timothy J. Stultz

It’s still fairly early in the game. I mean, we see some follow-on business winding up, but we’ve got multiple friends with the SPARK, we’ve got backside inspection. We are looking at some advanced packaging applications. We think there are multiple tool opportunities, but we’re going through the whole process, one of the tools where the applications get them released as a tool record position and also doing some integration with our current platforms. So it’s a little early for me to give you a good forecast on that.

Christopher Blansett – JPMorgan Securities LLC

Are there certain technology nodes we should focus on or think about for when you expect you would think that SPARK would actually be a tool of record?

Timothy J. Stultz

So when we think about the SPARK, in particular, like, for instance, packaging is not really a technology node driven thing. It’s more about when they adopt that technology and strategy. So as that market evolves, it’s rather node independent. We would expect some nice growth for the SPARK in that area.

I think that when we look at some of the other inspection opportunities back to inspection; it’s driven more for the nodes of 20-nanometer and 50 nanometer when you start to, where back side particles have a major impact on the uniformity of the lithography step and that plays an important aspect. And then we have a couple of other ones that are emerging. So it’ll all be advanced with regard to inspection, but packaging is simply kind of an independent market growth question.

Christopher Blansett – JPMorgan Securities LLC

And then, I had a follow up on. You obviously indicated a number of times that you’re gaining share at the largest foundry and that started to show in your fourth quarter numbers. I wasn’t sure when, while we move into, say, 2013 versus 2012, what kind of revenue outlook would you expect from this customer? I’m trying to get the reference of what these market share gains are going to mean to your top line numbers?

Timothy J. Stultz

Yeah, I think the biggest play for us, I mean, we expect some increasing contribution overall. But as I mentioned, on an earlier question, we had two nice quarters with that customer. There is going to be some digestion periods with some of the tools. Their investments patter they’ve announced has been, looks like two thirds, 28 nanometer in the first half one third, 20-nanometer in the second half of the year. Our play is the 20-nanometer in 2016. And so as we look at when we would expect it to really contribute, hopefully we see a nice uptick in the later half the year in the 20, but it’s really a 2014 play when it become material enough that I think it’ll start to become evident the progress we’ve made.

Christopher Blansett – JPMorgan Securities LLC

Last question from me, you are increasing your OpEx slightly as you mentioned to support some customers in some new product position. I wasn’t sure if these are very product focused or these are pretty much just increase across the board to support customers who’ve been moved in your tech nodes?

Timothy J. Stultz

Yeah, these are actually, these are platform specific and device centralized. In other words, we have engagements across most of our product platforms. We’ve got some very interesting programs on our core platform of the OCD the Atlas OCD. We are doing some very interesting developments in the area of integrated metrology. We have additional development programs associated with the UniFire, and we also have (inaudible) with the SPARK. And then if we look at the laying on top of that are there are applications with the front end line, the back end line whether it’s Etch, CMP, films and lithography. And they all lay on top of it. So we have this rather long list of the engaged JEP JDP program that hopefully manifest themselves into some nice increase in tool demand.

Christopher Blansett – JPMorgan Securities LLC

All right. Thank you. I appreciated, Tim.

Timothy J. Stultz

You bet.

Operator

(Operator Instructions) And now at this time, I’m not showing any further questions on the phone line. So I’d like to turn the call back to Timothy Stultz for any further remarks.

Timothy J. Stultz

Well, thank you and thank you once again for participating in our call. I close by reminding everyone that the performance at Nano is the direct result of all the efforts of our employees, which I firmly believe is the best team in the industry. We look forward to reporting on the results of our operational financial performance by the first quarter of 2013 this coming April. Thank you.

Operator

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.

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