Nova Measuring Instruments' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.19.13 | About: Nova Measuring (NVMI)

Nova Measuring Instruments Ltd. (NASDAQ:NVMI)

Q4 2012 Earnings Conference Call

February 19, 2013, 05:00 PM ET

Executives

Gabi Seligsohn - President & CEO

Dror David - CFO

Kenny Green - IR, CCG

Analysts

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

Edwin Mok - Needham & Company

Keith Maher - Singular Research

David Wu - Indaba Global Research

Robert Ammann - RK Capital Management

Operator

Good day and welcome to the Nova Measuring Instruments’ Fourth Quarter 2012 Results Conference Call. Today’s conference is being recorded. And at this time, I’d like to turn the call over to your host today, Mr. Kenny Green of CCG Investor Relations. Please go ahead, Sir.

Kenny Green

Thank you, operator, and good afternoon to everyone. I’d like to welcome all of you to Nova Measuring Instruments’ fourth quarter and full-year 2012 results conference call and presentation and I’d like to thank management for hosting this call. With us on the line today are Mr. Gabi Seligsohn, President and CEO; and Mr. Dror David, CFO.

I’d like to draw your attention to the presentation that accompanies this call. The presentation can be accessed and downloaded from the link on Nova’s website at www.nova.co.il.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statement outlined in today’s earnings release also pertain to this call. If you have not received the copy of the release, please view it in the Investor Relations or News Section of the Company’s website.

Gabi will begin the call with a business update, followed by Dror with an overview of the financials. We will then follow with a question-and-answer session.

I’ll now hand the call over to Mr. Gabi Seligsohn, Nova’s President and CEO. Gabi, go ahead, please.

Gabi Seligsohn

Hello, everyone and welcome to our fourth quarter of 2012 and full-year earnings conference call. First, I’d like to apologize for my voice resulting from a common cold. I will begin today’s call by describing the main aspects of our performance during the fourth quarter and for 2012 as a whole. I’ll then provide some color on the current state of the industry as it relates to us, provide some details of our plans for the year and finally provide an outlook as well as guidance for the first quarter of 2013.

2012 represented a fourth consecutive year in which we outperformed the wafer start equipment industry. While the industry has been struggling as a result of weak memory and large spending, Nova has been able to capitalize on its presence at all leading foundries. Moreover, foundry capital intensity continues to rise as the customers continue to move to advance technology nodes and specifically their spending on optical metrology is growing at the highest rate.

Several years ago when we laid out our strategy for growth, we spoke of three key elements, becoming a multi product company, expanding our footprints in more steps than the manufacturing process and delivering disruptive technology to displace existing solutions.

Judging by where we stand today as a key supplier to most of the industries leading manufacturers with an ever expanding addressable market, I believe we have executed well on this strategy. A study we recently performed to compare our performance to that of the industry, over the last several years, it shows just how beneficial this strategy has become. Based on this analysis Nova’s compound annual growth rate from 2007 to 2012 was much better than the wafer fab equipment sector as a whole and optical metrology in particular, 10% growth versus a negative 1.2% for wafer fab equipment and positive 6.6% for optical metrology.

When looking deeper to understand the reason for this performance, once finds that while foundry fab equipment spending did in fact grow 18% during that period, Nova’s foundry revenue grew by an impressive 46%. Nova’s integrated and standalone metrology platforms are now deployed across several manufacturing steps in our addressable market on the per fab basis has grown from a mere $30 million to over a $150 million and a 100,000 wafer stock per month foundry producing 28-nanometer technology. We believe this number will rise to above $200 million at the below 20 nanometer technology node.

While memory spending remained weak throughout 2012, and is still weak at this time, our relationship in collaboration with memory customers is as strong as ever. Because our belief that the next ramp up of NAND flash and DRAM technologies has been held off not just by business reasons, but also for technical reasons. The next technology transition in these segments depends heavily on complex design changes of gate structures, which our customers are yet to make production (indiscernible).

Optical CD is treated as an enabling technology for these design changes; it offers the only means to measure such structures at the required level of accuracy and speed, which customers demand. We are therefore optimistic about the opportunity offered to us once they challenge us or overcome and customers are ready to ramp up.

Now let me turn to some commentary about our performance during 2012 and during the fourth quarter, in particular. 2012 was a year in which we both proliferated previously announced products as well as launch new ones. The high adoption rate of our latest products, the Nova T600, and the Nova i500 combined with our advanced modeling engine the NovaMARS and advanced technology nodes down to 11 nanometers is testament to our ability to develop market leading products to cater for our customer’s most demanding challenges.

At SEMICON West in July, we announced our groundbreaking V2600 Via profiling product for the emerging 3D interconnect market. This product has broken all our records of new products as option and we’re proud to have had it installed at four customer site by the end of 2012. We also shipped our first 450 millimeter tool to a key original equipment manufacturer to support early development efforts. During 2012 we increased our R&D spending in order to address the expanding opportunities that we see ahead of us.

Our product roadmap continues to combine the introduction of high-end hardware platforms with extensive software capabilities. During the year we also experienced an increase in the percent of integrated metrology tools utilizing optical CD capabilities. To do so, customers are buying tools with our Nova modeling software. This increase is a direct result of customers need to measure on more complex structures in order to achieve higher process control.

As we’ve demonstrated, delivering high productivity tools with continuously expanding data content has allowed us to maintain a remarkable gross margin profile, even as we introduce new products in the market. 2012 revenues came in at $96.2 million with a non-GAAP net income of 15% and a gross margin of 53%. Despite the weakness during most of the second half of the year, we manage to generate positive operating cash flow in 2012, bringing our cash reserves to over $90 million at the end of the year.

As stated, foundry played a very significant role in 2012 accounting for about 75% of our revenues. Revenues for the fourth quarter were at the high-end of our guidance range and due to our manufacturing efficiency we were able to capitalize on improving demand late in the quarter. Gross margins temporarily fell to 50% as a result of a less favorable product mix as well as lower revenue base. Dror will provide some more color on this during his prepared remarks.

Let me speak clearly at this point, that you should expect gross margin to return to our normal levels of closer to 55% during the first quarter of 2013. We were pleased to see significant increase in orders during the fourth quarter, providing us with strong momentum for the beginning of 2013. This increase will be reflected in the guidance that I will provide towards the end of my prepared remarks.

Looking at the current environment, let me now provide some color as to how we see 2013. As we’ve previously communicated, we believe that 28 nanometer capacity at foundries is still lacking and not able to fully support market demand. A study we recently performed which took into consideration the smartphone and tablet markets for Apple and Samsung products versus available capacity at the end of 2012, lead us to believe that there is still a shortage of 70,000 to 100,0000 wafer starts per month.

Looking at the speed ramp up taking place right now, and in light of strong order tracks and we’ve enjoyed since the later part of Q4, we believe that about 60% and more of that capacity will be added in the first half of 2013. As mentioned in the past, one of the strongest drivers for demand by our customers is a smartphone market. We believe that there are several changes taking place in that market, which will drive continued demand for 28 nanometer capacity. Windows 8 has become fully integrated with several OEMs. Nokia’s Lumia announcement and aggressive marketing efforts, Blackberry 10 and new phones coming within April, the introduction of 2.5G smartphones, in China which offer the very extensive low end market in which the big guys don’t play.

And finally, overall market shares struggled between the different players, which will cause them to increase demand for 28 nanometer capacity. Beyond 28 nanometer we already see plans to ramp up 20 nanometers towards the middle of 2013. This will be necessary to support the next generation of smartphones and tablets. The extend of the 20-nanometer ramp up during the second half of 2013, its still not clear and very much depends on the timing and extend of new product introductions into the end market.

From Nova’s perspective the 20 nanometer ramp up fell big business. We’ve been shipping 20 nanometer tools required for some time, in order to assist with the preparations for this ramp up and as stated the extend of deployment of our tools, we will continue to rise with this transition as well.

We’ve also been heavily involved with the development processes of several technology generations ahead. With the transition of 3D gate structures expected to take place at below 20 nanometers in foundries, OCD plays an enabling role and it’s the only means to measure critical aspects. Historically, on average about 50% of our revenues have come from the memory sector. As mentioned, during 2012 that number declined to 25%. At current technology nodes in memory, there seems to be sufficient supply to meet demand and hence spending has been weak throughout 2012 and in the beginning of 2013.

As it’s customary in our industry, during times of minimal spending, customers devote their attention and limit their budgets to the development of their next generation. In DRAM the focus has been on the transition to complex vertical gate structures and enhance flash focus is on 3D gates (indiscernible). In both areas our customers are facing significant challenges in achieving targeted yield numbers. The most critical manufacturing stuffs impacting this yield are lithography, Etch and CMP and as you know we’re well positioned to capture these opportunities once the relevant yield threshold are passed. At this point, we don’t expect memory spending to increase during the first half of the year, and it is still too early to predict whether it will pick up by mid-year.

Now let me give some color on our plans during 2013. In 2012 we created a strategic software group. It is our belief that many opportunities exist to expand our software products offering and we’re therefore extremely active in that area. We also believe that the programs we’re pursuing will further differentiate us from our competitors and provide us with a unique strategic position vis-à-vis our customers and process equipment manufacturing partners as well as expand our current – serve this addressable markets. Accordingly during the year ahead of us, we will continue to invest a lot of our R&D efforts on advanced software solutions. These will include significant improvements to our OCD modeling engine as well as productivity tools for our customers who use dozens of our tools in any given fab.

We also plan to launch new capabilities that will enhance process control offered by onboard metrology. This is a novel approach that we’re co-developing with our process equipment manufacturing partners and end customers and we expect to start seeing initial revenues towards the end of 2013 as we complete initial evaluations. As for the 3D interconnect market we plan 2013 to be another penetration year in which we extend our position to more customers in both the foundry and memory sectors. As stated, we’re already installed four customer sites so we have good footing for an expansion of the customer base.

Our Nova V2600 offers an enabling and unique capability to measure the profile of the Via’s that connects the chips as they’re layered one on top of another. Based on the study performed with one of our leading customers, controlling Via profile is a critical element in achieving process yield requirements. Ultimately when the 3D interconnect market ramps up, we believe it will expand our addressable market by about a $100 million.

As for 450 millimeter wafer sizes, the transition will take quite sometime. Our plan during 2013 is to continue to work closely with the selective customers, research institutes and major process equipment manufacturers who are preparing for this transition. This activity will ensure that we’re well positioned and ready to participate in this market, once it has ripened. Here too the ramp up has been delayed several times, that we expect the need for process control to grow given wafer cost once the industry is ready to make the transition.

Now let me turn to our guidance. For the first quarter of 2013, we expect revenues of $25 million to $27 million with GAAP diluted earnings per share of $0.06 to $0.09. On a non-GAAP basis, which excludes adjustments of deferred income tax assets and stock-based compensation expenses, we expect diluted earnings per share of $0.09 to $0.13 for the first quarter of 2013.

And with that operator, let me now turn it over to Dror for a closer view on the numbers. Dror?

Dror David

Thanks, Gabi. Good afternoon to everyone and welcome to Nova’s quarterly conference call. Before I start with an overview of 2012 fourth quarter results, I’d like to note that the numbers presented in the press release and in my following comments represent GAAP-based results, unless specified as non-GAAP.

Total revenues in the quarter were $22.1 million, slightly higher than the upper range of the fourth quarter guidance, representing 10% decrease quarter-over-quarter. All of the decrease was in the integrated metrology front, which is usually linked to capacity expansions. Service revenues remained stable at the $5 million level. Product bookings distribution in the quarter was approximately 90% from the foundry segment and approximately 10% from the memory segment.

On the regional basis, approximately 70% of the bookings in the fourth quarter came from Asia Pacific, 25% from the U.S. and 5% from Europe. On an annual basis, in current year 2012, approximately 75% of the bookings came from the foundry segment and approximately 25% of the bookings came from the memory segment. On the regional basis, Asia Pacific accounted for approximately 80% of the bookings for the year.

Blended gross margin was 50% in the fourth quarter of 2012 and 53% for the full-year. Product gross margin in the fourth quarter of 2012 was 57%, 2% lower than the previous quarter due to unfavorable product mix and the impact of fixed expenses at a lower revenue base. Services gross margin in the fourth quarter of 2012 was 28%, 3% lower than the previous quarter due to higher repair cost in the quarter. On an annual basis, product gross margin was 59% and service gross margin was 30% within our targeted financial model.

Operating expenses significantly increased by $1.5 million in the fourth quarter to $11.4 million, and including increase in R&D expenses related to observation of product roadmap and one-time loss related to equipment and inventory damage. GAAP net income in the quarter was $2.5 million or $0.09 per diluted share based on a share count of 27.3 million shares. Non-GAAP net income in the quarter was $1 million or $0.04 per diluted share. On the tax front in the fourth quarter of 2012 we created a $2.5 million tax asset related to the leftovers of our net operating losses and other tax adjustments.

We currently expect that either 2013 or 2014 will be Nova’s first years of taxable income. The actual cash tax payments in the first two years of taxable income are expected to be at a rate lower than 5% due to government incentive programs in Israel. Our long-term model assumes tax rate of approximately 15%. For 2013 on a GAAP basis, the effective tax rate is expected to be 22%. This tax rate will be comprised mainly from the conversion of the deferred tax assets and accordingly it will be adjusted for non-GAAP purposes in 2013 quarterly reports.

As communicated in our previous conference call and as expected, operating cash flow in the quarter was negative $1.1 million. On an annual basis for 2012, the company generated positive operating cash flow of $7.7 million and cash reserves at the end of the year were approximately $91 million.

Moving into balance sheet key metrics, accounts receivables increased to $17.4 million with DSOs marginally increasing to 66 days. Inventories decreased by $1.6 million during the quarter, with inventory turns reducing to 2.4 times a year. On an annual basis, inventory turns were 3.3 times a year.

Gross capital investments came in at a level of $2.2 million in the quarter, reflecting continued investments in infrastructure related to growth and new product rollout. Depreciation came in at $0.9 million. Gabi?

Gabi Seligsohn

Thank you, Dror. And with that, operator, we’d be happy to take some questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now move to our first question today which comes from Patrick Ho of Stifel Nicolaus. Please go ahead.

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

Thank you very much and really nice quarter and nice year for you guys.

Gabi Seligsohn

Thank you, Patrick.

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

Gabi you mentioned that – you’re welcome. You mentioned about the increasing capital intensity for OCD as you go with that Etch technology as you get to 20 nanometers, what are some of the specific process that’s why you’re seeing that increases finally come from Etch, CMP or is it coming across the board?

Gabi Seligsohn

Actually it’s coming across the board Patrick and I will say it comes from the combination of things. Obviously, the Etch and litho steps are very relevant for the novel gate architectures that we keep discussing and as I’ve mentioned in the past the number of processing steps increases as you go down the design rule, and therefore the process control opportunity and needs increase as a result of it. Also the other trend that we are seeing is that the adoption of integrated metrology continues to grow in the specific steps that become more and more difficult, and as I have mentioned in the past we expect integrated metrology to penetrate much stronger in Etch for instance. It already is very strong in CMP, but now it's really at a rate of 100%. And in lithography there’s more and more OCD taking place as well. So, I would say it's a combination of the fact that there are more processing steps that there are more challenging steps to be able to control and OCD is so productive in the solution that it provides that customers want to continue to deploy it more and more. And the final aspect I would say is, as I said from our strategy standpoint, it is so disruptive that it's actually also taking away market share as I’ve said in the past from CD (indiscernible) tools. So, all these things altogether come to the levels that I’ve mentioned which I think are phenomenal. We’re talking about $150 million to $200 million opportunity on a single fab basis for 100,000 wafers at 28-nanometers, it goes above a 100, we’re very certain of that. At below 20 we’ve done this study several times with the customers, so this is real information and we feel very strong about it.

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

Great, that’s helpful on the foundry side. Maybe moving to the memory side, as the industry eventually migrates to the vertical NAND, there’s been a lot of talk about the memory for manufacturers having to obviously change their process fee in the way they do things. Can you give a little specific details or a little more color on I guess, what type of applications on 3D NAND, and where you’ll see perhaps the biggest growth as that process or at least that structure takes hold?

Gabi Seligsohn

The biggest one I would say is; ask no question about it. That’s the step that’s having the most amount of difficulty and the reason is if you’ve looked at the design of these chips and I think in our investor presentation I’ll refer investors to that. There is a slide that shows an image of what these things look like. It looks like a staircase with 32 steps in some cases, and that is created within the Etching process. So, if anything I think that is the key area to focus on, where a lot of the customer effort has been taking place in the last two years. Also obviously lithography, there’s a need for a lot of double and quadruple patterning as well as a direct self assembly type application’s. And I’ll point out to investors since its public domain by now. We have recently made a significant publication with Toshiba at SEMICON, Korea as well as an SPIE next week that’s also been announced in which we’re going to talk about these applications and how advanced the work that’s being done is and the role that we play which is quite significant. So, I’m feeling very good and confident about the opportunity there.

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

Great. Final question for me in terms of the manufacturing and supply chain. You mentioned that you were able to turn around some very late orders to satisfy your customers. How confident do you feel that you can achieve the space given the active 28-nanometer capacity ads that we’re seeing in the first half of the year? Do you see that any potentially impacting the gross margin line given that you may have expedited cost, quick turnarounds; how do you feel about manufacturing the supply chain looking at the first half of the year?

Gabi Seligsohn

The supply chain has done a wonderful job for us ramping-up and ramping-down. I think in the last few years our operations group has done a great job, everything -- almost everything is -- actually everything by now is outsourced and gets delivered in modules to the manufacturing floor. We work with vendors to do vendor managed inventories and things like that. So I feel quite comfortable that we can carry this ramp-up quite successfully. I don’t expect a hit on gross margins. Actually on the contrary as I said, we had a temporary reduction to 50% blended gross margins and you should expect us to come back to closer to 55% in the very near-term already in the first quarter. So, I don’t thing expediting aspects et cetera are going to hurt us. I think the supply chain is quite agile and able to deal with these fluctuations, and I don’t see an issue with that.

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

Thank you very much.

Gabi Seligsohn

Thank you, Patrick.

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

Thanks.

Operator

Thank you. We will now move to our next question which comes from Edwin Mok from Needham & Company. Please go ahead.

Edwin Mok - Needham & Company

Hi, guys. Thanks for taking my question, and congrats for a very strong guidance. The first question I have is on the bookings call, what you guys are seeing on bookings so far in this quarter. Are you seeing stronger bookings in your guidance into this quarter or is booking call leveling out, can you give me some color on that?

Gabi Seligsohn

Definitely the increase in Q4 was very significant, and as I mentioned it was mostly the later part of Q4. We’re seeing a continuation of a positive trend right now on the issue of bookings. I won't provide you specific numbers obviously as we always -- we don’t provide that, but I think that the trend is continuing to be quite positive. As I said, I believe that about 60% of the trend -- excuse me, 50% of the expenses on 28-nanometer is probably going to happen in [Etch 1]. We have a very strong backlog coming into 2013 also. So generally we see a continuation of strong bookings transitioning, we’re already in the second month of the quarter, so we see a continuation of the strong trend. Most of it is to support this ramp up of 28-nanometers, but there’s also starting to be more and more 20-nanometer activity. So, I’ll say that, that this is continuing, and therefore I mentioned I think that there’s a very strong first half for foundry and what is interesting for us to watch and I think for investors as well, we know that a 20-nanometer ramp-up will happen, the extent of it is what's interesting for all of us to see. Meaning we’re going to see that ramp-up beginning in the middle of the year and the extent is very much associated with the end market drive, that drive Apple and the other guys to move on to the 20-nanometer node. So, all in all a continuing positive trend, strong backlog coming into 2013, a very positive feeling.

Edwin Mok - Needham & Company

That sounds really good. Just to be really clear about the 20-nanometer ramp-up, is that still very concentrated just one customer, or are you starting to see some pick up in other customers as well?

Gabi Seligsohn

A lot of it I would say is in a particular customer, obviously I can’t mention but you can guess. A lot of it is happening there. The other customers have made some movement in that direction actually some of the orders that we took in Q4 were for 20-nanometer at one of the other foundries. So, I think that what's going to be interesting and we’ve all been watching with a lot of interest this struggle for market share and 20-nanometer is another step in that struggle. I think we will see other guys joining the 20-nanometer ramp-up. Again lets be honest about it, the extent of the other guys ramp-up is very much associated with the -- I would say stability of the process that they have at this point. The one big particular customer feels confident enough that they’re moving pretty aggressively, the other ones are a little bit more cautious.

Edwin Mok - Needham & Company

That sounds good. And then just coming back to the application side, I think historically you guys always have very strong position CMP and you mentioned Etch being an area of growth especially of integrated metrology. Where you guys are positioned in terms of Litho and also have you seen any work being done that’s related to (indiscernible) steps at all?

Gabi Seligsohn

Yeah. First of all for Etch, most of our work so far in Etch has been with standalone metrology. It's only the beginning of the integrated metrology market for Etch; we’ve been doing this for many years. But as I’ve mentioned in the past the integrated part of Etch was really early innings so far. So, we’re already enjoining quite a bit of Etching business. Actually to be honest with you, I’d say a higher percent of our overall standalone revenues this past year came from Etch, then CMP. The other area deposition I’ve spoken about in the past has been the high-end deposition step. What I’m starting to see also is a trend towards what I would historically call lower-end, but it's a high-end process node, there’s more CVD applications coming in our directions right now. In lithography, historically that’s not been a big portion of our OCD revenues, but there’s starting to be more of a pull in that direction. That is focused on standalone metrology. So, I would say, the CVD and the Litho is standalone for us. There’s more Litho happening right now than there was before. But if I would have to put it by order with standalone metrology, so it's Etch, CMP, CVD then Litho as far as what they represent for us on a standalone metrology side, integrated at CMP and then it's Etch.

Edwin Mok - Needham & Company

I see. And then one more question on [proxy], you talked about 3D Interconnect tool; did you guys recognize revenue in the fourth quarter for that tool and how do you expect to recognize revenue on tools that you’ve already shipped at those customers this year, or how do we kind of think about that?

Gabi Seligsohn

Yes, as Gabi mentioned the tool is already installed at four customer sites. The first tool was recognized in revenues in the fourth quarter and we expect the rest to be recognized in the first half of 2013.

Edwin Mok - Needham & Company

Great, that’s very helpful. So, Dror I have two question for you; one is, what happened to your service gross margin in the fourth quarter, it declined like you said all your service cost has increase, and then the second question is, how do you think about operating expense in the first quarter?

Dror David

So for services gross margin in the fourth quarter we had the quarter with higher repair costs and that was the reason for the decrease in services gross margin, revenues we’re more or less stable at the fourth quarter. Looking at the first quarter operating expenses we expect that to be more or less flat with the fourth quarter, so more or less the same level as the fourth quarter.

Gabi Seligsohn

Just to say Edwin, just so you understand the higher repair cost is associated with closing off RMA systems and things like that towards the end of the year where the customers were very eager to get these things done and so inherently, obviously the cost associated with turning that around increases in a quarter like that.

Edwin Mok - Needham & Company

I see. How do you guys think about your OpEx, and I think even in the press release and previously you guys talk about that you have to invest into developing these your business. Do you think that you can, now that you have invested in bringing your OpEx to this level do you think that you’re going to increase a little bit more?

Gabi Seligsohn

Well, I think as we said in the past we spoke about ratcheting up the expenses until the end of the year and then if you remember there was a soft rate too, except for many things came in the way. But to speak about our plan, as I had mentioned and there’s several things that we still want to develop. We’re planning on OpEx hovering around the $11 million area, $11 million to $11.5 million for the foreseeable future. What's very important to mention and that’s what we’re really proud about is that these development efforts are yielding these very good gross margin numbers, meaning the adoption rate of the solutions that we’re delivering to the industry is very, very high and with the software content increasing that helps margins as well. If you heard in my commentary I even mentioned that in integrated metrology there was a very high adoption rate of the modeling capability. So, for measuring just (indiscernible) applications they’re now looking at complex structures in integrated metrology that automatically increases the average selling price of tools as well. So, I think what we try to do when we look at our OpEx plans and we sit in management and review, what do we need to spend, what do we need to do? We look at the short and long-term roadmap. We look at the product that we develop and the margins associated with that. We try to create a balance between the two, and I think the return on investment has been very good so far.

Edwin Mok - Needham & Company

Great. That’s all I have. Thank you.

Gabi Seligsohn

Thanks a lot, Edwin.

Operator

Thank you, sir. We will now move to our next question which comes from Keith Maher from Singular Research. Please go ahead sir.

Keith Maher - Singular Research

Good evening gentlemen. Kind of continuing on that last question; you grew R&D quite a bit last year, but given what you just said in terms of kind of holding OpEx in that $11 million to $11.5 million range, do you think you’ve kind of got that to a level now where it will be a bit more stable and we’ll see kind of a more level spending in R&D this year?

Gabi Seligsohn

In general yes, but you should expect also that when we develop new tools, I spoke a lot about software, but we’re also developing next generation products as well. You may see some oscillation, small ones during the year which are associated with the in-taking of prototype tools et cetera. So that goes into R&D expenses in a particular quarter. But we feel pretty good about the $11 million to $11.5 million level at where the Company is right now in order to achieve our objectives for 2013. So, my answer generally is, yes.

Keith Maher - Singular Research

Okay, great. And this is a question for Dror, I always have to ask this just, to get your thoughts on what's going on in working capital, I mean, it seems like perhaps some of those units or customers maybe converted to sales and that maybe receivables go up, but just if you can talk about that, and also it looks like your payables dropped pretty significantly only on a sequential basis.

Dror David

Yes, definitely. These were the reasons as expected and as discussed in the previous conference call that the operating cash flow was slightly negative in the fourth quarter. We definitely expect to return to positive operating cash flow in the first quarter and also for 2013 as a whole.

Keith Maher - Singular Research

Okay. Great. That's all I have. Thanks.

Dror David

Thank you, Keith.

Operator

Thank you. (Operator Instructions) We will now move to our next question which comes from David Wu from Indaba. Please go ahead.

David Wu - Indaba Global Research

Yes. I want to get some clarification on the figure that you quoted which has this, the SAM for I think 20-nanometer node in a foundry was $100 million, I am sorry, was something like that, but does that represent a 20-nanometer comes in two flavors, the first one is planar and then the follow on immediately by the FinFET version. I assume that number includes the second one which is the FinFET and between going to 20-nanometers from 28 and going from planar to FinFET, which is the bigger driver for demand for OCD?

Gabi Seligsohn

I think first of all just to clarify again, what we had mentioned was that the addressable market at a 100,000 wafer start foundry at 28-nanometers there’s a $150 million to $200 million and then it goes above $200 million when we go below 20-nanometers. The insertion point of FinFET versus planar is something which is very specific to each of the foundries and you seem to know the field. But as you know the introduction of it in some cases will be by doing what are called half nodes of 20 and 16-nanometers. In other cases it maybe below 20-nanometers. Intel has been the only one to introduce this in production at 22-nanometers. When you ask about what are the key drivers for the growth? Indeed the addition of significant number of Etching sets as a result of the FinFET structure makes a big difference. At the same time the mere transition to 20-nanometers even before the introduction of FinFET is also causing that addressable market to grow. What is it percentage wise? It’s difficult for me to analyze for you at this point, but both of those are drivers for more adoption of OCD.

David Wu - Indaba Global Research

Well perhaps I could ask it differently; if we were looking out the following node where essentially you get a full node, as well as second generally FinFET, what would be SAM be for the 100,000 wafers starts foundry? Would it go from 200 to 400 or even higher?

Gabi Seligsohn

No, I don’t think so. That’s with you. I think that again, again what I’d like, the number that I’d like you to use and that we’ve analyzed well with our customers is above 200 (), the extent of the above 200 very much depends on the continued displacement I would say of CD SAM technology. It's been happening. The extent of it is growing. It's not on a linear scale. It's actually moving quite significantly. But the extent of it, if that changes even another step function then it jumps up to significantly above 200, but I don’t see it doubling that easily and I don’t have calculation that shows that, so I wouldn’t just throw it out there and say, yes.

David Wu - Indaba Global Research

Okay. Thank you.

Gabi Seligsohn

Thank you.

Operator

Thank you. We will now move to our next question from Robert Ammann from RK Capital Management. Please go ahead, your line is open.

Robert Ammann - RK Capital Management

Yeah, a quick housekeeping question for Dror. Could you [explain] the $509,000 loss rate in equipment and inventory damage, where did that flow through the P&L and maybe you could give a little bit of color of what that related to?

Dror David

Yes, that was a one time damage event that we had in our facility. The half million is presented in research and development of sales and marketing, more or less half in half. This is an event which is covered by our insurance, but because of some accounting principals we needed to account for it in the fourth quarter. We hope to receive the grants or payments from the insurance in the first half. So, I mean that’s one time event and this is the reason we also put it in the adjustments as non-GAAP.

Robert Ammann - RK Capital Management

Okay. So when you say that the OpEx should be relatively flat; does that mean flat excluding that $500,000 one time event or for flat more of the $11.4 million?

Dror David

Yeah, what I mean is flat to the $11.4 million. So, as Gabi, mentioned we do expect operating expenses in the first quarter to be around $11.4 million to $11.5 million in the first quarter.

Robert Ammann - RK Capital Management

Okay. Thank you. Congratulations on a good quarter.

Dror David

Thank you very much.

Operator

Thank you. (Operator Instructions) And we now have a follow-up question from Keith Maher of Singular Research. Please go ahead sir.

Keith Maher - Singular Research

Yeah, just real quick, when do you think you’re going to file your 20-F?

Gabi Seligsohn

Yes, we expect to file it in the next three weeks. We have already started working on that and we need all the approval to go through. So, it will be filed in the next three weeks which is I would say two or three weeks earlier than last year, so this is our plan.

Keith Maher - Singular Research

Okay, great. Thanks.

Operator

Thank you. As we have no further questions, I’d like to turn the call back over to you sir for any additional or closing remarks. Thank you.

Gabi Seligsohn

Thank you operator. I want to thank everyone for participating in today’s call. As mentioned we’re excited at the beginning of 2013. We see a lot of potential and we look forward to meeting you in the future. Thank you very much.

Operator

Thank you, sir. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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