Nanometrics Incorporated Q4 2009 Earnings Call Transcript

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 |  About: Nanometrics Incorporated (NANO)
by: SA Transcripts

Operator

Good afternoon and welcome to the Nanometrics fourth quarter and fiscal year 2009 financial results conference call. Before we get started, I’d like to call your attention to the following Safe Harbor statement.

This conference call contains forward looking statements, including but not limited to, statements regarding Nanometrics’ expected results for its most recent completed fiscal year quarter and year, which remains subject to adjustments and connection with the preparation of Nanometrics financial statement in periodic report on Form 10-K for the year ended January 2, 2010, the continued adoption and competitiveness of its products, the expansion of the company’s serve markets and future revenue growth, profitability and cash flow. Although Nanometrics believe that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to variety of risk, including slower than anticipated market adoption, a concentration in current levels of industry spending, and the addition of risk factors and cautionary statements set forth in the company’s Form 10-Q for the quarter ended September 26, 2009 as well as other reports filed with the SEC from time to time. Nanometrics disclaims any obligation to update information containing forward-looking statements.

Leading the call today will be Dr. Tim Stultz, President and CEO of Nanometrics. A Q&A Session will be held at the end of the call. Until that time all participants will be in listen-only mode. I would now like to turn the call over to Dr. Stultz. Please proceed.

Tim Stultz

Thank you and good afternoon everyone. Welcome to our fourth quarter 2009 results conference call. With me today is Jim Moniz, our Chief Financial Officer, who will be reviewing our financial results following my prepared remarks. In my remarks today, I will discuss the financial and business highlights for the quarter. Our view of the current and near term industry environment, and give some perspective on our business outlook for 2010.

We are pleased to report that in the fourth quarter of 2009, we achieved our third straight quarter of revenue growth. Highlights include product revenues, which grew 23% quarter-on-quarter and 56% year-on-year, with product gross margin hitting a four year high of 53%. We did a see sequential drop in revenues from our high margin upgrades as expected and guided to last quarter.

However, our core service margins increased for the eighth quarter in a row coming in above 35%. Revenues overall were $26.3 million, up 2% on a quarter, and up 29% on the year. During the quarter, we generated $6.5 million in positive cash flow, of which $3.5 million was used to pay down our line of credit in full.

We also completed a secondary equity offering, which added more than $23 million to our balance sheet, and help bring our yearend cash position to $43.5 million, a level sufficient to support our business growth and strategic initiative. Before turning to the business environment and outlook, I would like to make a couple of additional comments about this most recent quarter.

As you are likely aware, our practice over the last three years has been to share our target business model, discuss our progress towards achieving it and to discuss how the current business planning affects it. Our practice has been not to provide specific revenue guidance for the forthcoming and future quarters. We do this for a couple of reasons, not the least of which is to lessen the pressure and tendency to make business decisions which might offer short term benefits such as meeting or bidding our numbers that can also have longer term downsides such as the compromise of our overall business model and future financial performance.

This becomes particularly relevant when near the end of quarter our customers sometimes present us with the option of accelerating shipments and to our product acceptance in exchange for commercial concessions. We believe that the downside of this confessions far outweigh the benefits of near-term revenue contributions.

I will make a further observation that in nearly all of those instances the forecasted revenue recognition or shipments will occur and usually within the first few weeks of the following quarter. Our fourth quarter was such a quarter. In fact, a handful of systems representing over $3 million in business which we anticipate in shipping within the fourth quarter were moved out of the quarter.

We were, however, subsequently shipped within the first few weeks of the current quarter and importantly under the original commercial returns. So why am I speaking to this issue at this time? Because it goes to the heart of our business philosophy and our management beliefs. Our products are competitive which is evidenced by our ability to simultaneously increase our gross margin, while at the same time growing market share.

We work hard to protect our margins. Knowing that gross profit is a fuel for investments, and new products and technologies, which in turn are the lifeblood of our future revenues. And importantly, we firmly believe it is in our shareholders’ best interest that we build a scalable franchisees based on long-term growth, operational excellence, and profitability. Going forward, we will continue to offer business under terms consistent with our business model and our competitive position.

Now turning to the business environment and our position within it. We see continued strengthening in industry dynamics and with it an increasing demand for our metrology solutions. We believe the overall semiconductor industry is in a healthy cyclical recovery driven by solid integrated circuit growth, high fab utilization rates and an improving balance with supply and demand.

With the absence of meaningful near-term capacity expansion through new fab construction or wafer size changes, our customers are highly focused on meeting growing demand by increasing production and improving performance through yield improvements and shift to smaller future sizes.

In our opinion, these directions stable products which are either are technology enabler or those which can used to reduced process tolerances and increase yield. Enabling our customers to deliver more good diet for wafer at a lower cost. This is, in fact, why much of the recent capital spending has been for a technology buys.

Over the last few years in addition to our focus on improving our business fundamental and driving to a sustainable robust business model, we have invested heavily in R&D to strengthen the performance and competitiveness of our products. We developed new products for each of our serve markets and we use the industry downturn to introduce those products and establish lead positions with key customers through competitive technology evaluation and selection processes. In constant with our development of new products, we have also made strategic acquisitions which have increased our product offerings and expanded our serve markets to include new growth area, such as wafer-scale packaging, solar and high brightness LEDs.

Our overriding mission is to be chosen as tool of record for an expanding number of applications in leading edge and next generation technology nodes, with an increasing number of IC industry leaders. As we have been reporting the result of those efforts have been key competitive wins, increased traction for our Lynx metrology platform and a series of multiple system orders for OCD, thin film and overlay products.

Success in these efforts translate to long range growth and scale of our business. As our customers walk onto common toolsets and deploy them over a multiple factory pan out, over multiple years. At the same time we are gaining market share for our unified metrology system, for which we will begin to recognize revenue in the first quarter, and we continue to see increasing adoption of our high brightness LED metrology systems.

With the improvement in the overall industry and our improved market position, we see 2010 shaping up to be a very strong year for Nanometrics. To elucidate our expectations I will make four points. First of all, the $3 million in business I referenced earlier will be incremental to our Q1 revenue plan. Second, in the first few quarters we have one several competitive customer evaluations that will fan out over the next two to six years. Third, we’ve expanded our served market to address advanced wafer label packaging, high brightness LEDs and so metrology, which in turn provides us with additional growth opportunities. And fourth, we have demonstrated our competitiveness through consistent improvement of our product gross margin and simultaneous market share growth.

Thus, our good visibility is limited to a couple of quarters. The competitive improvements and scalability we have added to our franchise combined with the trends and upturn in the industry gives us growing confidence that we will continue to see sequential revenue growth through 2010 and a level of business above our current revenue rate.

With that I’ll now turn the call over to Jim Moniz.

Jim Moniz

Thank you, Tim, and good afternoon everyone. Nanometrics press release containing fourth quarter and full year fiscal 2009 results was sent out by Business Wire today, February 18 around 1 p.m. Pacific Time. The press release may also be found on our website at nanometrics.com. Also on our website are reconciliations to non-GAAP figures referred to in our prepared remarks, such as non-GAAP operating income.

Fourth quarter revenues of $26.3 million were up 2% from the previous quarter and were up 29% from the fourth quarter of fiscal year 2008. Product revenues of $20 million increased 23% quarter-on-quarter and 56% year-on-year. Service revenues, which includes both upgrades and core service revenue were $6.3 million down from $9.5 million in Q3 and $7.6 million in the fourth quarter of fiscal year 2008 as a result of lower upgrade revenue.

Revenue by geographic region is based upon ship to or first in use destination and during the quarter the breakdown was Korea at 46%, US at 29% and rest of world at 25%. Revenue by product type was standalone and integrated metrology at 64%, service and upgrades at 24% and materials characterization at 12%.

Gross margin in the fourth quarter was 50.7% compared to the 54% in the previous quarter and 42.1% in the fourth quarter of fiscal year 2008. Product gross margin improved over Q3 by 450 basis points to a four-year high of 53.3% as a result of higher sales volume, increased factory utilization and our improved manufacturing cost structure.

As we mentioned last quarter, we expected Q4 upgrade revenues to decline sequentially from the record high level theme in Q3, resulting in lower service gross margin. Overall, service gross margin did come in lower and was 42.3% in Q4 compared to 62.9% in Q3. Notably, however, our core service gross margin improved for the eight straight quarters, and is now in the mid 30s. We believe upgrade sales would be an ongoing component of our service revenues and we remain focused on continuing to improve our core service gross margin.

Total operating expenses in the fourth quarter came in at 12.7 million, which was up slightly over the third quarter, primarily because we had fewer unpaid days off for our employees in response to improving business conditions. Non-GAAP operating income, which is how management looks at cash generation from the P&L was $2.8 million in Q4 compared with $4 million in Q3 and a loss of $1.2 million in the fourth quarter of 2008. The sequential decrease in non-GAAP operating income was primarily due to a reduced mix of upgrade revenue in our total revenue.

Interest and other expense in the fourth quarter was $1.1 million which was increased over Q3 primarily due to $0.4 million of unrealized losses on foreign currency compared to the unrealized gains of $0.6 million we recorded in the prior quarter. The net loss for the fourth quarter was $282,000 or $0.01 per share on a weighted average share count of 19 million shares. The loss per share included approximately $0.03 of stock based compensation expense and also included approximately $0.02 per share of unrealized losses on foreign currency exchange.

I’d like to make a couple of comments on share count. As part of the offering, Tim referenced, we issued 2.3 million shares in December, but as of at the end of the quarter very little impact is in the share count per EPS. Also, due to the small net loss our diluted share count is now used for EPS calculations. Starting in the first quarter, we would look at share count being around 21.5 million basic and around 23 million fully diluted depending on share price.

Turning to the balance sheet. Cash came in at $43.5 million, an increase of $26.3 million above the previous quarter. Our common stock offering resulted in net proceeds to the company of $23.3 million after expenses. In addition, we generated cash during the quarter in the amount of $6.5 million, of which we used $3.5 million to pay down the entire balance on our line of credit.

Account receivable came in at $23 million. DSO was at 79 days, which is up from last quarter's DSO of 73 days. Inventory came in at $32.6 million, which was essentially flat from the previous quarter. We ended the December quarter with headcount of 399 employees, also flat from the previous quarter.

Although, we have greatly strengthened our balance sheet, we have not lost our focus on closely managing the cash flow and cash conversion aspects of our business, and we will continue to execute on our plans to generate cash from operations.

Going into 2010, Nanometrics is a more efficient company focused on market share gains and continued development of new products, which we expect will result in increased revenue level. These increased revenues taking together with our management of margins and expenses should result in significant operating leverage to the bottom line.

That concludes our prepared remarks, and now I would like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Gary Hsueh from Oppenheimer. Please proceed.

Wenge Yang – Oppenheimer

This is Wenge for Gary. Couple of questions. First one, you mentioned in your press release that you expect to see significant revenue growth in Q1, could you elaborate a little bit more on what's driving upside and in what scale we’d have to see to the revenue to grow?

Tim Stultz

Well, what's driving the – first of all, hi, Wenge, good to talk to you. Thank you. What's driving it is the continued capital spending that I think most of the companies in our sector are experiencing, certainly on quarter-on-quarter. A lot of the technologies, some of it shifting to the capacity and we’re seeing a shift, we’ve seen a lot of memory and DRAM spending early on. I think you’re starting to see some flash spending as well as some of the logic spending taking place. And we have very solid position in the memory area and the logic area in particular, and we’re going to benefit from that increased spending.

So that’s what driving it. I won't give you a quantification of the number but I – the point I do want to make is that the revenues that we pushed out Q4 have occurred, have already taken place in the current quarter, and will contribute nicely to the performance in Q1.

Wenge Yang – Oppenheimer

So if you take out that $3 million deferred revenue, do you see revenue growth based on Q4 levels?

Tim Stultz

Yes, absolutely.

Wenge Yang – Oppenheimer

Okay.

Tim Stultz

Yeah, absolutely.

Wenge Yang – Oppenheimer

Regarding your upgrade business, obviously Q4 upgrade revenues came down quite a bit, so that’s indicating a kind of an end of the upgrade cycle or you see upgrade revenue to pick-up again in 2010?

Tim Stultz

Yeah, so it's a good question. Our upgrade revenues have certainly proven to be quite lumpy on a quarterly basis. We initiated the program of upgrades and our strategy to sell into our install based and take advantage of the relations we have with customers about two years ago, and if we look at the revenue contribution from upgrades more on a blended average rather than on a quarterly average, it went between 6% to 8% of total revenues, we saw that in 2008, we saw that in 2009 and we expect that to continue in 2010.

Wenge Yang – Oppenheimer

Okay, so we expect upgrades to be lumpy but still significant in 2010 revenue growth, right?

Tim Stultz

Yes, yes, I think it will be, you don’t have about the same percentage contribution in 2010 that it has in the last two years. I would like it not to be lumpy but it just happens to be that way. The origin of that is that when we sell a revenue – I mean an upgrade package, this might help you understand little bit, but when we sell a revenue an upgrade package to a customer, we go to a place where they have an installed base of multiple tool and so when we get our revenues, I mean our upgrade order it applies to anywhere from 4 to 10 tools at one time, and so it tends to make – instead of having a smoothing effect it has got a lumping effect in terms of the – on a quarterly basis. But Q3 we had a very high record level, Q4 dropped down quite a bit and I think we are going to see kind of a hopefully returning to more normalized levels quarter-on-quarter going into 2010.

Wenge Yang – Oppenheimer

Okay. Last question is more regarding your customer base, could you give us the top ten customers for Q4 and...

Tim Stultz

What I can give – what we do report on is our 10% customers and that was Samsung and Intel.

Wenge Yang – Oppenheimer

Samsung and Intel. So it remains similar to Q3, and recently there were several announcement of new fab in the NAND space basically in Japan and Singapore, could you comment on your exposure to this new fab opportunity?

Tim Stultz

We think it’s a great opportunity. I have pretty high level of confidence in our products and our people, and I think that we are going to have a favorable participation on those builds.

Wenge Yang – Oppenheimer

Okay. Thanks.

Operator

Your next question comes from the line of Weston Twigg from Pacific Crest. Please proceed.

Weston Twigg – Pacific Crest

Hi. I just have a couple of questions here. One, I am kind of curious how many equipment selection you are currently participating in or in other words tell me what’s the opportunity to win new business this year, if you can quantify that in some way?

Tim Stultz

Hi West, it’s good to hear from you. Let me address it slightly differently. There is a limited number of customers out there as you are very well aware of, there are some equipment selections going on in a customer sides, but probably the more relevant response to your question – and a more accurate response to your question is that we are participating in evaluations for expanded applications within some of the same customers as well. So, it’s customer side plus application with other customers.

Weston Twigg – Pacific Crest

Okay. Can you give us an idea of the numbers so – just trying to get a feel maybe if new applications and new customers, just maybe even the number of potential wins that you could be competing for this year?

Tim Stultz

I don’t think I am – I am not comfortable answering that in a quantified way. I would just say that there are several out there that are going on, that are of a meaningful size and opportunity for us.

Weston Twigg – Pacific Crest

Okay. And then, I guess another angle, wondering what you think if you just had your existing customer base and assume you didn’t win any new business or selections, what would be a peak revenue level with your current customer line up?

Tim Stultz

I don’t know how to – it depends on what the peak spending levels look like for the CapEx. You know our peak revenue, which I’m sure you realize, was in the third quarter of 2007, and we had about $39 million. I don’t think capital spending this year is going to be nearly as high in 2010 as it was in 2007, in fact I think it's still going to be a lot less than 2008. But I think the incremental business positions in market share will allow us to challenge our previous peak level with the business in 2010.

Weston Twigg – Pacific Crest

Okay. And then, just another question on the Tevet product, just wondering if you could maybe just give us a little bit of idea on the current level of traction and maybe figuring revenue from that product now what's the scale and how do you see that trending through 2010?

Tim Stultz

So the Tevet product line which we call the trajectory product line, those revenues are captured in our materials characterization, which in turn captures our high-brightness LED and solar. We don’t break it out specifically, but I will tell you that we have introduced a couple of new products based on the original technology that was acquired, now when we acquired the company Tevet, and they were giving traction with those, and we’re focused on some reasonable design wins in the high volume manufacturing environment, in particular in the solar right now.

Weston Twigg – Pacific Crest

Do you mean it's in – being used in the high volume production right now or still being evaluated?

Tim Stultz

It's being evaluated.

Weston Twigg – Pacific Crest

Okay. And one more question, just on the tax rate for 2010, can you give us an idea of what we should use or think about using?

Jim Moniz

Yeah, for 2010, I think you should use a nominal tax rate, maybe 3% to 5% at most. We still got quite a due tax losses. We are looking right now doing a study to determine if there is any limitations on those losses for 2011 and beyond. But for 2010, it’s really a nominal more foreign jurisdiction tax rate; I'll use maybe 3% to 5%.

Weston Twigg – Pacific Crest

Okay, very helpful. Thank you very much.

Tim Stultz

Thank you, West

Operator

Your next question comes from the line of Gus Richard from Piper Jaffray. Please proceed.

Gus Richard – Piper Jaffray

Yes, thanks for taking my question. Just a little bit, you mentioned in the press release you have good traction in the overlay part of your business, and I was just wondering if there is any update, have you won some new customers on that diffraction-based overlay.

Tim Stultz

We don’t break down whether it’s a diffraction-based or image-based overlay, but we are getting new business in overlay in general, and we have had some multiple system orders in that area. The diffraction-based overlay technology is still in a kind of it’s an emerging area, and there is a lot of activities on there but it will be a while before its total volume exceeds, that will be more established image-based overlay.

Gus Richard – Piper Jaffray

Okay. And then could you just talk a little bit about the Unifier product and I would expect that you guys are going to start to be able to recognize revenue from that product line this quarter, is that correct?

Tim Stultz

Yes, Gus exactly. We’ve mentioned in previous calls that there have been some shipments that follow the acquisition of the product line but due to purchase accounting regulations we couldn’t recognize the revenue. We will be recognizing Unifier revenues in Q1.

Gus Richard – Piper Jaffray

Okay, and so the purchase accounting impact is now done and now that should be a normal product line for you?

Tim Stultz

Yes, certainly from revenue recognition, that’s correct.

Gus Richard – Piper Jaffray

Okay. I think that’s it from me at this point, thanks.

Tim Stultz

Thanks Gus.

Operator

Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Please proceed.

Mahesh Sanganeria – RBC Capital Markets

Yes, thank you very much. Tim, one question on the material characterization that is up pretty significantly, do you think that that is at sustainable level or do you seeing an upside to that number, how do we think about material characterization numbers going forward?

Tim Stultz

We are actually – we are very pleased that it’s growing, but we think it has got a lot more run rate left. That part of the business actually dropped off quite a bit partially because of our bare silicon wafer products that are captured in that revenue report, but also because we see some nice opportunities, increasing opportunities in high brightness LED and the solar. So I would expect that to continue to improve sequentially.

Mahesh Sanganeria – RBC Capital Markets

So do you think that you can come back to 2008 kind of level in 2010 or it will take a little longer than that?

Tim Stultz

Actually our levels are pretty close to that, I think you are going to see it exceeding these kinds of those 2008 numbers. I think there is going to be some good news coming out from that part of our business.

Mahesh Sanganeria – RBC Capital Markets

Okay. So the other question that $3 million push out that happened, was that in the metrology division?

Tim Stultz

That was in our primarily in our standalone business, yes the metrology business.

Mahesh Sanganeria – RBC Capital Markets

Okay. And just one more industry-wide question, I mean, looking at reports file, all the guys who have reported it’s kind of all over, usually normally they are all very correlated but we had LAM [ph] reporting a huge March quarter and some reporting a more slower growth. Can you – and then there is concern over first half loaded versus second half, and I guess there is a lot of – a lot depends on your customer exposure, but can you talk in general terms the linearity of the quarter through the years, is it something like Q2 being strong and there you see some kind of pause in Q3 and pick up in Q4? Or anything if you can help in that matter it will be helpful?

Tim Stultz

Sure. It is confusing, when I think you have numbers out there from 7% to 35%, it was in the sector, some of that’s timing as I am sure you are aware of whether or not they are buying some early adoption technology products, process equipment or moving into capacity purchases, for us what drives our opportunity is that as we are winning these slots, which is kind of a key to our future or the slots that have multi-year opportunities, a lot of that as we have reported in the past don’t really even kick in till the middle to the latter half of this year. So, I am not smart enough to tell you whether or not capital spending goes through – flattens out in general across in the second half of the year, but I believe with some levels of confidence that we are going to see sequential quarterly growth. I would also point out that the spending and as reflected by the different reports here that we have seen in this quarter whereas, when the tide rises in this one, not all the boats float at the same level. We see the spending bias towards technology enablers, lithography, process control and also some of the, like say copper tools for through-sell can be in bumps and in the stack wafers. And I think that those companies who offer those products as I mentioned in my script are the ones that probably get a slightly better benefit. And so I would expect going forward you are still going to see pretty good spread between outlook company to company on each quarter. But I feel pretty good about 2010 being a reasonably smooth growth year for us.

Mahesh Sanganeria – RBC Capital Markets

Okay, then that’s good. So, one question on gross margins, so for the product and as well as the core service, the core service you hit the 35%. Is that close to your target or is this some kind of one-time benefit, what is the long-term sustainable rate we should be modeling for the core service? And same thing, same questions for the product side, you had a good quarter on the margin side, how should we model a long-term target basis?

Jim Moniz

Sure. Let me respond to the service. So we have a publish model, which you can now find on your web in our IR presentation, that shows what margins we might expect as a function of revenue going from 30 million, 40 million, 50 million. Our model is that service plus upgrades comes in about 33%. We have been beating that number pretty consistently, and now our core service has hit those numbers without the upgrade. So we think we are going to do a little bit better in that area but our model is still at 33%, we haven’t revised it yet.

On our product margins we set our model at 50% gross margin at 30 million ramping to our 54% gross margin at 30 million, ramping to 50 million, and we think that we are going to – if these tools and the OCD products ramp out, and we get better factory absorption, I think we are going to be hitting our model.

Mahesh Sanganeria – RBC Capital Markets

Okay. And then one last question on the other income, I missed Jim what your commentary at it, what was the reason, what was the special expense this time in the other income line?

Jim Moniz

The other income was $1.1 million.

Mahesh Sanganeria – RBC Capital Markets

Go ahead, sorry.

Jim Moniz

The other expense was $1.1 million, and last quarter was essentially flat, and the driver between both quarters was – this quarter we had a FX translation loss of $400,000, and last quarter we had a translation gain of $600,000, and most of that had to do with the strength of the dollar versus both the yen and the pound.

Mahesh Sanganeria – RBC Capital Markets

And how should we model the other income, is that having that cash help you a lot itself, all interest free, zero interest right now?

Jim Moniz

The way you should model it without the FX is the other expense runs around $600,000, which is the combination of the interest that we paid for the loan on the mortgage of the building, which is about $300,000. And then the imputed interest we do based on the acquisition we made on Zygo Unifire product line, which is around 300,000, it dropped to about 200,000 in the second half of the year. So, it runs anywhere between 600,000 and 500,000 a quarter not counting the FX rate. And the FX rate we are looking at a way to try to modify that and moderate that, so we don’t see such big swings. Some quarters we see a favorable $0.5 million, last quarter we saw an unfavorable $400,000. So, we don’t really model that or give people and put the model at without – we should model about 600,000 in other expense in the quarter.

Mahesh Sanganeria – RBC Capital Markets

Okay. Thank you very much.

Tim Stultz

Thanks Mahesh.

Operator

Your next question comes from the line of Edwin Mok from Needham & Company. Please proceed.

Edwin Mok – Needham & Company

Hey, thanks for taking my question. First question regarding, I think, Tim your comment that you expect sequential growth throughout the year, I was just wondering how much visibility you have on that, and are you referring to product revenue since you said service [ph] could be somewhat lumpy?

Tim Stultz

Yes, well the – I think service of course won’t be lumpy. I think it’s is improving quarter-on-quarter at reasonable levels 5% to 10%. Clearly the driver would be the product revenues and – there is the lumpy part is the upgrades which is a little hard for us to give you a good forecast on. Our visibility improves when we win these technology notes because it causes to have engagements with their customers that address multi-quarter leads and so we are gaining some improved visibility that way. I would like to tell you of our absolute visibility, which I don’t, but we are doing our best to track it.

Edwin Mok – Needham & Company

Yes, I think best visibility out there is right now for a top anyway. So, thanks for the color there. Second question is on your standalone and integrated – I think you reported 64% if I caught that correctly, can you give us a breakdown between those two pieces?

Tim Stultz

No, we don’t separate those two, I apologize, but we just can’t lump them together into our product revenues.

Edwin Mok – Needham & Company

Okay. That’s fine. And then maybe two questions more along with term rate, first one is regarding the OCD module, I was just wondering how do you view that market this year, next year and one of your competitor has talked a lot about OCD replacing or at least after much harder replacing, (inaudible) right now, are you seeing similar kind of pulls from your customer for your products as well?

Tim Stultz

Yes, I think the way to look at OCD is a pretty exciting area and it's evolving and it's also going to probably cause us all the – try to redefine what it mean. It's clearly disruptive. It is disruptive to traditional tools using copper, its disruptive to CD-SEM. It has got an expanding application base, and when you start looking at what the core capabilities of these tools are, as kind of looking them – the way we are starting to look at is there are optical metrology tools that happen to have reflectometry, ellipsometry, interferometry and OCD kind of more narrowly defined although it’s a traditional way to look at it. So, I guess there is long way to answer. We are pretty excited about how we think it is going to become a predominant metrology technology if properly defined encompassing all those different aspects used in process control.

Edwin Mok – Needham & Company

Given the dynamics, do you expect this market to outperform the industry this year and next year?

Tim Stultz

Yes, I think process control does – as I mentioned earlier, I think lithography outperforms the market. I think process control outperforms it. I think some areas of inspection outperforms it because I think those are the areas where you give more juice to your customers to get more devices out. Until those recently announced fabs get put on line, the only way to make more money and meet the demand that our customers are still getting is to get higher yield and to go to shrinks and that favors certain types of tools.

Edwin Mok – Needham & Company

Great, that was helpful. And then lastly, you have $43 million of cash end of last quarter, and you guys have done a pretty good job in terms of integrating basically some of the metrology company, right any thoughts of more acquisition and what's your view on that. Are you guys looking to make bigger acquisition on row or more smaller (inaudible) acquisition? Thank you.

Tim Stultz

Sure. I obviously would not respond to any specifics on M&A activities, but I do believe that this industry needs larger companies and that consolidation will occur and is usually in the shareholders' best interest to create the size to be competitive in this environment where you’ve got a shrinking customer base, you need to have a more concentrated delivery system of tools and support and service to leverage your channel. And so I do think there’s things are going to occur, and if I have my brothers [ph] we are going to be one of the consultants.

Edwin Mok – Needham & Company

Great. That's all I have. Thank you.

Tim Stultz

All right.

Operator

Your next question comes from the line on Bill French, Ravenswood Capital. Please proceed.

Bill French – Ravenswood Capital

Thank you. Tim, this $3 million push out, is that the result of tough negotiation over price or terms or was it the convenience for the customer or what?

Tim Stultz

That's a good question. No, it's really testing our resolve and to some extent exercising us. So the negotiations generally have, when these occur the negotiations have been completed, the commercial returns have been set, and then you get towards the end of the wire, and once in a while our customers will test our resolve and suggest that, it’s a little bit difficult to get all the paperwork done in this timeframe but maybe they could push it through while we make some sort of concession, and we are just not going to do that. We don’t lose the business and if it moves out a week or two, so be it.

Bill French – Ravenswood Capital

Yeah, good. Very good. That's the way to go.

Tim Stultz

Thanks for calling Bill.

Operator

Your next question comes from the line of Michael Amari from Americo, Inc. Please proceed.

Michael Amari – Americo, Inc.

Hello guys. You had – considering everything, a very strong quarter and strong future. And the only thing I’m concerned about, do you have any – do you expect any capacity or strength with the fact that you are having the same number of employees, and are you going to hire employees?

Tim Stultz

Michael, thanks for calling in and thanks for the comment. Actually couple of things. Number one is that, as you know, over the last couple of years, we have put a lot of energy into developing an outsource model where we leverage factories and manufacturers outside of our core business; that our manufacturing focus has been on our key technology the optical systems, the software systems and being a systems indicator as a final step. So we actually have a lot more leverage in our manufacturing environment.

The second thing is that even though we have a significantly reduced headcount versus say two years ago. Most of that came as a result of our restructuring where we closed – duplicate operations and facilities. We at one-time had up to five manufacturing sites, and we had distributed the workforce where we have now consolidated those into core competencies. So I feel very good about the team. I will take this opportunity to say that, I think the challenge for all of us during these ramps is in our supply chain management, and although we haven't been impacted in a way that manifest itself on our revenues, I think all of us have to stay very close to our suppliers and our supply chains to make sure that they don’t impact our ability to deliver on time.

Michael Amari – Americo, Inc.

That’s for sure. Another question, I’m curious to know whether you have a time limit to finalize your secondary offering, this could come anytime or you can't comment on it?

Tim Stultz

The secondary offering that we went on through the – first of all, there maybe two steps, let me just suggest. We filed an AS3 where we have had self registration of about 5 million shares. The formal secondary offering, we sold 2.3 million shares of ours and we sold almost a million shares of Vincent Coates, the founder of the company. That concluded that secondary offering. And, so, at this time we have no other activities in terms of funding or selling shares.

Michael Amari – Americo, Inc.

Great. Thank you very much for your good quarter.

Tim Stultz

Thank you very much.

Operator

(Operator instructions) There are no further questions at this time. I will like to turn the call back over to Dr. Stultz for closing remarks.

Tim Stultz

Thank you. In closing I will say that we are very confident and enthusiastic as ever about the business and business opportunities for Nanometrics in the foreseeable future. I want to again give special recognition and thanks to our employees who have worked tirelessly through some very difficult times to help grow stronger and a more resilient company, and I want to thank all of you for joining our call. We look forward to updating you on our first quarter results in early May.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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