Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Nova Measuring Instruments Ltd. (NASDAQ:NVMI)

Q2 2014 Results Earnings Conference Call

July 30, 2014, PM ET


Miri Segal - Hayden IR

Eitan Oppenhaim - President and Chief Executive Officer

Dror David - Chief Financial Officer


Josh Baribeau - Canaccord

Patrick Ho - Stifel Nicolaus

Edwin Mok - Needham & Company

Keith Maher - Singular Research

David Wu – Indaba Global Research


Good day, and welcome to the Nova Measuring Instruments Limited Second Quarter 2014 Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Miri Segal of Hayden MS-IR. Please go ahead.

Miri Segal

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments second quarter 2014 financial results conference call and presentation.

With us on the line today are Mr. Eitan Oppenhaim, President and CEO, and Mr. Dror David, CFO. I'd like to draw your attention to the presentation that accompanies today's call. The presentation can be accessed and downloaded from the link on Nova's website at in the Investor Relations section.

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

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

I will now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.

Eitan Oppenhaim

Thank you, Miri. Let me add my welcome to everyone and thank you for joining our second quarter of 2014 financial results conference.

I will start today's call by addressing our results and our performance highlight for the quarter. I will then provide a brief commentary on industry trends as they relate to us and then I will provide the guidance for the third quarter of 2014. Following my commentary, Dror will review the quarterly financial results in details.

For those who are following the presentation, please proceed to Slide number 3. Through our partnership with leading customers and our operational efficiency, Nova performed well and delivered strong financial results for the second quarter.

Thus far, during the first half of 2014, we have demonstrated our strength in the Optical Metrology market and delivered growth in access of 20% compared with the first half of 2013.

The second quarter came inline with our guidance. We posted quarterly revenue of $32.8 million, along with $6.1 million or $0.20 per diluted share in non-GAAP net income, which meet the high end of our profitability guidance. Overall, our second quarter results are well within our long-term operating model.

In the first half of 2014, the company clearly demonstrated the operational leverage that we have did into our business model. In effect, our net income for the first six months of 2014, exceeded our profitability for the entire year of 2013.

We continued our momentum from the previous quarter with the well-executed business plans to generate growth within our main product lines and within our leading customers. The industry challenging transition which include both selling and device changes, were introduced new metrology requirement.

This complexity is actually creating a competitive advantage for Nova and extending our valuable market as well as providing new opportunities for Nova to grow. They are well positioned to benefit from existing transition.

With more than 25% increase in bookings and more than 60% increase in revenues from the 1x technology node, investment during the quarter we continued also to be involved in several 10-nanometer evaluations with major customers. This will be direct function of our strategy to partner with our customer, early on in the development stages in order to better equip them in their initial development and then be part of their high volume production later on.

This effort to create sustainable customer relationship is the key to our long-term success and we're encouraged with our progress today. Despite the fact that our leading customer postponed it's 16-nanometer next stage investment, we were able to leverage our strength in the foundry space and mitigate this to capital intensity with the broader base of orders from other leading-edge foundries.

We expect these customers to continue ordering equipment over the coming quarter. Additionally, we also benefit from the current incremental memory investment. While we are investing significant amount of resources in order to continue to broaden our technical leadership and increase our market share, we demonstrated solid operational efficiency during the second quarter with operating margins of 17%.

Meanwhile, our cash results at the end of the quarter increased to approximately $114 million. As part of our strategic plan and in order to optimize our shareholders' value, we initiated our previously announced $12 million share repurchase program during the quarter.

Finally, while our customers are facing some challenges that they ramp up their most advanced FinFET and V-NAND nodes, we expect that technology transition with this node will continue intensively in 2014 and 2015.

Cost complexity and technical barriers associate with ramping up such complex nodes, will continue to grow the potential of optical metrology as the unique enabler for this transition. Again, we are confident that Nova is well positioned to benefit from this industry challenges.

Let me now provide some more details on our product portfolio performance during the quarter. We continued with system delivery and imposed various technology nodes with several foundry customers and generated a 50% increase in deliveries to 14-nanometer and 16-nanometer product lines.

As leading customers are starting to develop their next technology node, we are also deeply enrolled in several 10-nanometer evaluation, which we expect to be concluded in the coming quarters.

We are well positioned today with our advanced portfolio in all foundry customers for both the back-end and front-end of line. Our T600 standalone OCD tool has been adopted by all major foundries in all advanced technology nodes.

We can proudly say today, with our cumulative experience in foundry production and the R&D environment, is well recognized by our customers when they decide on their next generation tool set.

Meanwhile, our integrated metrology tool are widely installed in both memory and foundry customers. Since the recent transition have introduced many process challenges, we see increasing demand to measure CDs and pin thickness closer to the process in order to identify wafer to wafer liabilities and as a result the available market for these tools is growing.

We have already seen this requirement from various large shareholders and during the quarter, another large customer adopted our integrated metrology as part of this high volume manufacturing for advanced technology node.

During the first half of 2014, we shift more than 100 integrated systems for our customers and at a faster pace than in the first half of 2013. Looking forward, we see that the adoption of integrated metrology is increasing and extending to other process areas. As a market leader in integrated metrology, we are well positioned to benefit from these trends.

Also we are currently involved in several memory evaluations. Although our customers are investing intensively to commercialize their advanced structures, they are still facing technical challenges in scaling the device in high volume manufacturing.

The different complex issues are mainly around the position in Etch processes, which presents metrology challenges but provide a big opportunity for us. We believe that our current and next generation tool, which will include new technology initiative and address critical needs in process control for both DRAM and Flash.

In addition, our previously announced evaluation with the major leading logic and memory customer in Asia through-silicon-via or TSV process has yielded our first order for V2600 system.

Following an intensive evaluation in the production environment, Nova standalone solution will qualify to be the production to off record for measuring and controlling the TSV formation process in both memory and logic application.

The planned implementation of Three-Dimensional Integration in volume manufacturing by this customer is expected to yield multiple orders over the next few years.

The close put operation with this leading customer can also yield opportunities in other OCD step despite TSV. We currently have five accounts that they already have adopted our unique solutions and we are in continuous evaluations with other.

Beyond the hardware offering, our revenue mix this quarter also included several software deliveries and we expect these premium software orders to continue throughout 2014.

[indiscernible] our total portfolio created, we got a bigger revenue stream than we expected and we're looking forward with bigger stream in the next quarter to come.

Let me now turn to a brief commentary on the current market environment and our view for the remainder of 2014.

Although our customers are still facing increasing challenges in the transition to the next 3D note, we are still committed to move these complex structures to high volume factoring in 2014 and 2015.

Beyond the overall demand for semiconductors, these transitions are being driven by technology infliction to allow for better device performance and productivity.

That said, while the overall industry expects healthy growth during this year, we see some near term softness in both the foundry FinFET [indiscernible] adoption.

Our booking numbers as well as the other industry leading numbers currently signal top sphere in the next few months during Q3. And while we don't see any intentions on the part of our customers to slow down further this technical transition, we do see some timing issues with achieving the right certification and yield.

As a result, our visibility in the near term is less than clear and we expect to see some fluctuation in the coming quarter.

Nevertheless, we see the current softness as near term [indiscernible] long term investment cycle and we are well positioned to benefit from it.

In the foundry space, the intensive 20-nanometer ramp up by our largest customer is increasing the pressure on other foundry, to accelerate their own ramp up of 20-nanometer and sub 20-nanometer technology node due to strong demand from their own customer.

While our largest customer is yielding 20-nanometer capacity and postponing with 16-nanometer ramp up, our other largest foundry customer is working to qualify with 14-nanometer technology node in order to reduce the full [indiscernible] advance structure by the end of 2014 with production ramp up in the first half of 2015.

The overall long term environment in the foundry segment is still positive with three node, 28, 20 and 16, 14. In this segment, the timing uncertainty of ordering the next expansion for the sub 20-nanometer tech node has created some pressure on our visibility for the remainder of 2014.

Nevertheless it's a set of expectation for all the major foundries to deliver productive FinFET devices in 2015 and therefore create the set for strong investment in 2015.

So while we see some near term challenges, we're starting to see progress in the next technology node beyond 14-nanometer and 16-nanometer. We had increasing complacency and time to market with the sub 20-nanometer node while involved in various 10-nanometer evaluations where new players may enter the market and broaden the foundry customer base.

In the memory space, DRAM is the most active segment currently driven by increasing demand and favorable pricing. The transition to 20-nanometer is leading the technical failings in this segment along with some capacity expense.

Although the overall Flash market appear to be relatively healthy, we continue to see delays in V-NAND production which are consistent with our production that V-NAND will become commercializing high volume manufacturing in the second half of 2015.

These delays allow us to have more time to expand our exposure in the memory space with our advance optical to this solution.

Finally, the growing investment in advance technology node and complex structures has introduced increasing complexity and created new challenges. This fundamental element has created favorable market condition for metrology growth where more process steps are needed, new novel materials are introduced and innovative structures and packaging solutions are incorporated.

We're confident that Nova is well positioned to benefit on the metrology favorable environment, with our advanced holistic portfolio combining hardware and software solutions.

Now I'd like to share with you our guidance for the third quarter of 2014. Revenues will be in the range of $26 million to $29 million, dilutive EPS on a GAAP basis will be at the range of $0.05 to $0.11 and on a non-GAAP basis EPS will be at the range of $0.07 to $0.13 per share.

At this point, I'd like to turn the call over to Dror to review our financial results in detail.

Dror David

Thanks Eitan, and good day everyone. Please move to Slide number 8. Total revenues in the quarter were $32.8 million within the range of our guidance representing 17% increase over the comparable quarter of last year.

It is important to note that the 12 months trailing revenues of the company have now crossed to $120 million mark which is tripled in the company's revenue stream only five years ago.

On the bookings side, product bookings continue to be strong in foundry which represented approximately 90% of total bookings in the quarter. Geographically, 47% of the bookings in the second quarter came from Asia-Pacific and most of the rest from the U.S.

This is a major change relative to previous quarters and years, reflecting the company's deep penetration into an emerging foundry player in the U.S.

Product gross margins increased to 58% as expected and as communicated in the previous conference call, mainly due to an improved product mix. These combined with higher service margins of 39%, resulted in blended gross margins of 54% in the second quarter of the year. This result is well within the company's target model for blended gross margin.

As previously discussed, we expect continued fluctuations in gross margins in the coming quarter. In parallel, the adoption of our software solutions, hybrid and fleet management is continuing and that should help us to some extent mitigate the gross margin pressure.

On an annual basis we continue to expect to be within our target model of 52% to 55%. In the third quarter of the year, we expect blended gross margins of around 52%.

Operating expenses in the second quarter were $12 million, an increase of $0.6 million over the first quarter. These expenses included some one time G&A provisions, as well as incremental increase in R&D and sales and marketing effort.

As previously communicated, we expect the main fluctuations in operating expenses to result from R&D expenditure.

Looking forward into the third quarter of the year given the expected reduction in third quarter revenues, we have initiated some cost reduction initiative mainly in the area of overhead and G&A expenses.

As a result, our guidance for the third quarter assumes operating expenses between $11.5 million and $11.8 million, a lower level than the second quarter of the year with R&D investments staying stable or slightly increasing during the third quarter.

Operating margins in the quarter were 17%, similar to the previous quarter. This profitability level clearly demonstrates the significant leverage built into the company's business model which targets operating margins of 17% to 20%.

Tax expenses in the second quarter was $0.1 million as we continue to utilize certain government incentive programs in Israel which provides for effectively zero tax rate in the first two taxable years.

GAAP net income in the quarter was $5.7 million or $0.20 per diluted share based on the share count of $28.1 million shares. Non-GAAP net income in the quarter was $6.1 million or $0.22 per diluted share at the high end of the guidance range for the second quarter.

Moving into balance sheet key metrics, accounts receivable increased sequentially to $26 million mainly as the result of the timing of the quarterly shipment. DSOs remain stable around 65 days.

Meanwhile, inventories slightly decreased in the second quarter as the company align its supply chain to current level of business activity. The company continues to be very effective in managing inventories as evidenced in the inventory turns which were higher than three times a year.

Capital investments were $1.2 million in the quarter and depreciation expenses slightly increased to $1 million.

I will conclude with pointing out that the company revenues in the first half of 2014 increased by more than 20% compared to last year. In parallel, cash reserves increased $114 million and we have started the execution of the previously announced $12 million share repurchase program, which we plan to accelerate during the third quarter of the year.

With that, I will move the call back to Eitan. Eitan?

Eitan Oppenhaim

Thank you, Dror. Before turning to the Q&A session, I would like to add that we are pleased with our second quarter results and the progress we are making in achieving our key business goals, as we allow us to keep growing in the next coming years.

With that, we will be pleased to take your questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) And we will take our first question from Josh Baribeau with Canaccord.

Josh Baribeau - Canaccord

Hi, thanks. So, you talked I think more qualitatively around your bookings, but are you able to provide us with actual bookings figure or maybe a book-to-bill ratio?

Eitan Oppenhaim

Josh, thanks for the question. We are not closing the book-to-bill numbers and we are not guiding beyond the next quarter.

However, I can tell you that the book-to-bill numbers that we had in the second quarter actually very similar to what we see currently. So, it's plus around [indiscernible] last few months.

Josh Baribeau - Canaccord

Okay. And then, maybe talking about this quarter and then specifically the bookings if you can provide the color? Can you help us out with the percentage of standalone revenues in bookings versus integrated?

Dror David

Again, we do not because of competitive reasons. Obviously, we do not disclose the distributions between the different products. And as mentioned probably around the end of last year, bookings and revenues from standalone product line have been approaching the 40%, 50% of total revenue.

Josh Baribeau - Canaccord

Okay. And then, as you talk about some of the new applications such as deposition versus - or deposition and Etch. Maybe provide a little bit of color on whether or not these are mostly standalone tools or if they're becoming - afterward deposition and Etch, or say the new applications are integrated approaches.

Eitan Oppenhaim

Well, let me shine some light on the process step that optical CD or the OCD is taking part often, which one are increasing, which one are in the penetration side.

Traditionally, the [indiscernible] is where we have integrated metrology and we have standalone metrology as well. So, that long known process step we have integrated in standalone.

If you're looking right now on Etch, along the year, most of the OCD systems were standalone systems for both back-end and front-end. Currently we see also because of the challenges in the process both in the V-NAND end and in the FinFET. We see also integrated on Etch tools which becoming almost a standard in the foundry and it keeps on increasing in other places.

In regards to the other process step which is still really and the others, as we said before one of our initiative, - technical initiative is to get even closer to the process. And to do even an [indiscernible] metrology where the only way by doing it right now to stabilize those processes [indiscernible].

So as you understand it's varied between the process step.

Josh Baribeau - Canaccord

Okay. Any potential timing on when you might start to either have a product or revenues from [indiscernible] metrology? Or maybe even what process node?

Eitan Oppenhaim

As I said, we have, - our strategic initiative from the product portfolio included three main elements. One of them is the fleet management that we're starting to see increasing revenue coming from.

The hybrid, that we do have revenues from. And the third one is [indiscernible] metrology [indiscernible]. At that part, it's very complex. We are working in non-capital friendly environment which relatively is not so used to work at, and it will take few months before we see some revenues coming in from this part.

Josh Baribeau - Canaccord

Okay. Great. I'll pass it on. Thanks.


Our next question comes from Patrick Ho with Stifel.

Patrick Ho - Stifel Nicolaus

Thank you very much. Eitan, can you give a little bit of color in terms of the opportunities on the DRAM side particularly as that industry transitions to the 20-nanometer node. What are some of the capital intensity increase that you may see on the OCD metrology side and your positioning with your key customers there?

Eitan Oppenhaim

So, let me – I think that, let me first give some highlights about our memory and market share because it's coming - all those questions coming in those earnings. So, I'd like to make sure that we understand Nova position to memory space before we refer to any increasing market share.

First of all as a leading market share provider of integrated metrology, we're actually selling to all the memory manufacturers. So, we are benefiting from the increase in the memory and specifically in the DRAM extension. This enables us to enjoy the current and future investment trend of this segment.

In addition, if we expand a little bit from the DRAM to the Flash as well, as I said few times and I said also in my prepared remarks, we are currently in several other valuations, with several customers for both V-NAND and the new DRAM transition to 20-nanometer and also TSV application.

By the way, both with integrated and standalone tools, and I think that it may translate to additional incremental business in the near future probably somewhere in 2015. And if I connect what happens in the last one year also with the press release that we had in SEMICON, actually around SEMICON, we announced that the major customer in Asia that is doing both memory and logic, shows our TSV standalone solution for its logic and memory process.

And is going along with another memory customer that we announced a year ago despite to buy our standalone tools. So we are doing inroads into the memory or doing inroads into the DRAM. And the close-co operation that we see right now with these two customers as we started to standalone, in my mind will yield to either memory solution as we sell to these customers.

Patrick Ho - Stifel Nicolaus

Great. That's helpful. Maybe moving to the evaluation that you're doing on the 10-nanometer side. I know it's early on, in the early stages of the government with our customers there. What are some of the processes or application you're seeing at 10-nanometers that will continue to increase the capital intensity against the OCD metrology as you go from FinFET – the first generation of FinFET to 10-nanometers?

Eitan Oppenhaim

So, as I used to say we need to look on that in two elements. One element is that – actually three elements. One element is the market conditions and the commercial issue.

We see that the time to move from one technology node to the other is increasing. And basically it allows few customers to expedite the rate for the 10-nanometer. And I don’t think that we will see the 10-nanometer the case where a very big customer will be ahead of everybody.

So I think the customers identify this opportunity and everybody starting to raise on the 10-nanometer. So in the last few months, actually the whole quarter, we started to see few evaluation on the 10-nanometer. And with – by the way all our major customers and even more and when we’re looking right on 10-nanometer we need to grow on the second element.

Once the yield view was delayed and it probably will not be introduced in 10-nanometer we are starting to see all kind of multiple patterning that actually increased the complexity of this structure, beside the scaling.

And if you're looking right now on 10-nanometer infrastructure, the intensity or the complexity is increasing in a way that we see the complex in a way that it will acquire much more system that – much more metrology we used to have before and much more of process control.

And I think that the third element is the 10-nanometer beside the scaling and what I discussed about the Litho will introduce few other steps that are not so common in the 14-nanometer and 16-nanometer which in many case if its material or something else, will require much more process controlled than before.

So this is why we are looking forward to the 10-nanometer and this is why we announced it right now. And by the way, as I said before, in order to be the tool of record with those customers in two years from now, we need to start cooperating with the customers especially with them currently. So in two years we will start to be the BKM and PTOR.

Patrick Ho - Stifel Nicolaus

Great. Final question from me, maybe for Dror, in terms of the stock buyback. You mentioned in your prepared remarks that you will be a little more aggressive in the third quarter. I just want to touch the magnitude are you looking, because I guess based on your results this quarter, you started the buyback in the June quarter. How much of kind of step-up are you looking at between June to September?

Dror David

Obviously, we cannot disclose the exact intentions but in the last quarter, we did buy approximately 100,000 shares at $1 million. And we will be accelerating the plan in the third quarter also because the window for opportunity to buy is only between the quarter and the blackout period we will be accelerating the plan in the coming months.

Patrick Ho - Stifel Nicolaus

Great. Thank you again.


And our next question comes from Edwin Mok with Needham.

Edwin Mok - Needham & Company

Hi, great. Thanks for taking my questions. Dror, first question is – I know the visibility is somewhat lower right now, but can you guys have any insight into the fourth quarter? And how do you think that business will shape over in the fourth quarter as if directionally?

Eitan Oppenhaim

Thanks Edwin, Its Eitan. Hi. We had the same phenomena last year. And we know that when customers like our leading customers are increasing the intensity in the first half, then they have few months of [indiscernible]. And whenever we're going into those months of the [indiscernible] we can't have possibility in what happened on the quarter.

So therefore visibility right now is not so clear in regarding to the fourth quarter. And we guide on the third quarter.

On this remark, I have to say that as we see that one it's soft Q1 in a very solid growth here in the semiconductor. We see solid growth in 2014. We see solid growth in 2015. And we are expecting to be able to spend.

If you're looking right now on the six month, we just finished with the June quarter. And you take into account the mid range of the guidance that we just gave, its actually reflecting around 17% growth in nine months compared with 2013 which was last year.

So, definitely if you're looking right now on the 15% that we have on these nine months, it's outperforming the industry, it's outperforming the wafer fab equipment and we are preparing ourselves for another growth year.

The question right now on the fourth quarter is exactly what will happen in the rate between global foundry and [indiscernible] and the rest of the foundries when they are going into the same set.

And you know, the key for this rate will be their customers and what will their choosing criteria in the foundry, where they want to invest get further interest.

So, this is why the visibility is becoming not clear. Typically on that point over the foundry, it's very important to say that, our leading customer actually started few months back. And although we saw that one, we could mitigate this softness with other revenues that came from other foundries because of our strengthened foundry and it will continue in the next few quarters.

So we do see broader customer base of investing. We see broader amount of revenue coming in order to mitigate the softness of our leading customer. And I personally think that we should expect some time between Q4 and Q1 2015, but I do suspect that we'll see some expedition in our leading customers coming towards the end of the year.

Edwin Mok - Needham & Company

Great. That's extremely good color. Just [indiscernible] foundry, your largest competitor KOA had recently announced a big quarter from - I guess the U.S. foundry is that right?

And I was wondering, our understanding is that, that basically that foundry has come [indiscernible] in terms of the two steps that they are going to purpose for the 14-nanometer ramp, right?

I was wondering do you see any [indiscernible] at that foundry, especially with the change in direction and the technology. Or do you think that you can continue to capture that high share in that foundry?

Eitan Oppenhaim

Looking right now in our results without getting into details, as I said, we do see revenue coming from 14-nanometer and 16-nanometer. Okay, so we do have systems in both 14-nanometer and 16-nanometer. So, I do expect that whenever just the full ramp will take place, we will enjoy and get benefit from that as well.

You need to understand also that there is a lead time gap between us and our leading competitors and what they seek, six to seven months ahead, I probably will see in the next few months. So it's very tough for me to talk about market shares and things like that.

We are in a very strong position in all the leading foundry beside as the leading one. And once we'll see the ramp coming in to the 14-nanometer 16-nanometer, we are well positioned for that as well.

Edwin Mok - Needham & Company

Okay. Great, that's helpful. And then, I think on the memory question that Patrick had for you guys right. You mentioned some of you [indiscernible] TSV as was announced last year, right? If I've understand your commentary, it sounds like at least for a TSV it would take some time before the customer go down to production.

And then the announcement you made last year for that customer, also seems like that - might take some time before we start to see actual production revenue? Am I thinking over the right way or the opportunity closer than I think?

Eitan Oppenhaim

I think that from what we see and I talked about it in the previous call, I think that we see some, as we see customers expediting the TSV. Right now there's two technologies out there, semi technology one is the 3D and other one is the 2.5D, one is with interposer and the other one through TSV.

We do see some more expansions and some more spending in that one. Currently as I said we have five customers that are using our TSV. We are having more evaluations as we are doing currently. Right now that the entry point to the market is pretty much pressurized by the pricing of the TSV devices.

But I think that when customers are shrinking the devices one of the options for them to increase the productivity of the devices will be to go to TSV devices effective. And I clearly think that in the second half of 2015, we'll see much more capacity coming in.

By the way, both end foundry.

Edwin Mok - Needham & Company

Great, that's helpful. And then talk a little [indiscernible] product right. I think you mentioned, that you will slightly generate both fleet as well as [indiscernible] metrology product, right?

I was wondering, anywhere you quantified in terms of magnitude roughly what level of revenue are we looking at for first half of this year, for this year, next year, any comments [indiscernible].

Eitan Oppenhaim

I think that what we can say is that in 2013, we have very incremental structure revenues. In 2014 our goal is to reach very close to the 5% of total of product revenues and grow from there.

Edwin Mok - Needham & Company

Great, that's actually useful. And then I'll stay [indiscernible] then talk about cost control you mentioned that you expect OpEx to come down a little bit this quarter. Is that just because of the [indiscernible] top line and [indiscernible] related CapEx and spending how do we seeing OpEx beyond this quarter in longer term.

Dror David

As always we are committed as management to the profitability and now that we see that revenues are somewhat declining in third quarter, we've taken a decision to impose cost control mainly in the overhead and G&A expenses. So, you will not see reduction in terms of marketing in R&D this is mainly related to the - I would say other areas.

In terms of R&D specifically, you might see even an increase in the fourth quarter, in the third quarter sorry. And I would also say that once we cross this hurdle of the third quarter, you should expect operating expenses to again pick-up to the level of between $12 million and $13 million a quarter in the coming quarter.

Eitan Oppenhaim

Edwin, I want to clear something, because I want to put some color on where we invest and where we don't invest. Actually when we look - and it's related to the market. When we look on the market right now as I said, it's a solid growth yield for 2014 and 2015 where we need to observe some softness in the next few months.

Coming by the way from the capital intensity reduction in both Flash, V-NAND and foundry FinFET. Therefore this is, our attitude is on one side to use our efficient P&L in order to continuously [indiscernible] we are known for that, and we have the efficiency to do that.

The other side is we are keep on investing in R&D project. Actually we are investing a lot in those software directions. We're investing a lot in our next generation OCD product that will come to the market in the second half.

We had few other initiatives as we just started. So, for us when we're looking right now on the next few quarters, we will keep on fighting those opportunities with new initiatives, new technology and we keep on investing in R&D. This one will not be demonstrated in the next few quarters.

Edwin Mok - Needham & Company

Great. That's very helpful. Thank you.


And next we'll hear from Keith Maher with Singular Research.

Keith Maher - Singular Research

Good afternoon. Dror, you mentioned that product mix helped the gross margin this quarter. Just wondering if you could give a little bit more color there in terms of what product? And also the service gross margin up quite a bit sequentially. I'm assuming that services but just a little more information there would be helpful?

Dror David

On the services gross margin portion, actually service revenue has increased mainly in time and materials in this quarter and significantly increased relative to the previous quarters. And all that was done on the same cost basis because the services are more or less characterized by fixed cost. And this is the main reason why - a major increase in service gross margins, more revenues on the same cost basis.

On the product gross margins, we did see favorable product mix in terms of which kind of product have been recognized for revenues in the quarter including some incremental increase in the software portion of the revenues. So, that was the main reason for the increase.

Keith Maher - Singular Research

Okay, thanks. Also, congratulations on the V2600 orders in the quarter. I am wondering if you could talk a bit about what the sales cycle looks like to that? When the customer started evaluating it, how long it takes? And also, if you could talk about the number of any other customers that might be looking at that product?

Eitan Oppenhaim

This is, Eitan. Two issues. One, as I said in my prepared remarks, we have already five customers that are using this technology.

I think that if you're looking right now on the overall OCD space, we came with a very unique technology to measure those TSVs. I think that according to those evaluation, I think that it's unmatched by any other competitors in this direction where you can actually take in OCD technology and convert it to a single via which is not a [indiscernible] structure and give the full profile and give the top CD, bottom CDE and everything that is going in the [indiscernible] a very unique technology that is giving to those customers.

And I think that when you're looking right now in evaluation like that, it's not so different for many OCD evaluation. OCD evaluation takes between three to six months. For a new customer it is, for an existing customer it takes around three months. And because we use much of the OCD that we used on our OCD tool, I think that we, - in the first demo and second demo we actually show our benefit to the customer.

So decision criteria are made early on, on the process and then you need to qualify that one in production.

Keith Maher - Singular Research

Okay. That was helpful. And another question just certainly back repurchase program, the $12 million program. Is there any timing overall as to when you would try to buyback that, that $12 million worth of shares?

Dror David

Yes, we did mention on the previous conference call that in general our plan is to conclude this plan within 12 months from the initiation. It could take little bit more but this is, - these are our plans.

Keith Maher - Singular Research

Okay. You mentioned the window, the actual window you have to buy isn't that wide. What actually so for coming up in the next whenever quarter, what is the actual kind of window when you're actually buying share?

Dror David

The share repurchase program are controlled by legal rules of how you can make it. So, there are restrictions of how much you can buy relative to the daily volume and so forth. And there are also some restrictions where, - legal restrictions where we do not actually perform the stock buyback during blackout periods which normally are starting at the last two weeks of the quarter until the announcement itself.

Keith Maher - Singular Research

Okay. And then maybe, one final question, you mentioned the receivables picking up [indiscernible]. I was wondering in your last year you provided more favorable [indiscernible] on for some of your customers, could we see that effecting receivables later in the year?

Eitan Oppenhaim

No. The reason for the change right now is not related to the change in payment terms to the customers. This was a one time event in the end of last year. So, we should now view that in terms of giving extended payments during, impacting our result looking forward.

Keith Maher - Singular Research

Okay. Thanks. That's all I have.


And now we'll hear from David Wu with Indaba Global Research.

David Wu – Indaba Global Research

Good morning. I have a couple of questions regarding little bit on the [indiscernible]. At this early stage, can you estimate what, how much of an increase in metrology intensity confirm with the current 14-nanometer, 16-nanometer node?

Dror David

David, can you repeat again, we didn't hear you very well.

David Wu – Indaba Global Research

Yes. Can you hear me now? I was wondering, [indiscernible] at this early stage, could you estimate how much more intensive metrology will be used in 10-nanometer inside node versus the current 14-nanomter, 16-nanometer node?

Eitan Oppenhaim

We don't have right now the current actual numbers in regard to the 10-nanometer because it just started. When it started, you need to identify the problems, you need to identify the complexity and over the period of - I think some months from now, customers were identified exactly there, [indiscernible] rate and exactly in which process step they would like to add OCD solution.

Nevertheless, I mentioned in my previous calls and this is something that we can say about the movements from 20-nanometer to 14-nanometer and 16-nanometer. And we said that metrology intensity can grow in a transition from 20-nanometer to 16-nanometer, 14-nanometer that around 10% to 20% when they move to high volume manufacturing. And this one we see already in the foundry because we are right now in a position between 20-nanometer to 16-nanometer and 14-nanometer.

David Wu – Indaba Global Research

Okay. So, the same thing assumes that that ratio roughly would be the same. [indiscernible], you mentioned something I think in your comments that the gap between internal and the rest of the concrete players, - when we reach the 10-nanometer range. [indiscernible] which calendar year would that 10-nanometer from the foundry customer scored your production and roughly I think your lead times is not that big, I assume the same calendar year would the orders result from?

Eitan Oppenhaim

There are few questions in what you said. The first one, we didn't say Intel but roughly when then time gap or the time to solution is being shortened, I think that all the logic, our logic customers are racing in order to get with the starting point on the same time. And as complexity is becoming an issue and process becoming an issue, I think that we will not be, one of them is coming well in advance than the other.

And therefore while situation like that will take place, I think that metrology or optical metrology will benefit from that because all of them will run with the 10-nanometer. But what I do said in my prepared remark, then maybe this is applying to what you’re saying, that the 10-nanometer probably would be broadened with other customers as well and therefore is benefit for Nova.

David Wu – Indaba Global Research

Roughly which calendar year do you think that volume in production will occur and therefore orders have proved to you?

Eitan Oppenhaim

We can look on the analyst and all the market we said this was done on 10-nanometer which I am not for sure that it's still accurate in this stage where we just started. But everybody is talking right now on the virtue of 2017 to 2018. That's what the estimation is.

I just want to take it into a cautious note, that the 16-nanometer and the 14-nanometer is not yet in high volume manufacturing and the customer base, the public customer base didn't get into the metric where they are buying from.

So, therefore it will be a very aggressive for me to point exactly in which year it will start. But if everything goes right and the [indiscernible] keep on being strong in the next few years, we probably will start to see that at the end of 2016 beginning of 2017.

David Wu – Indaba Global Research

Okay. Thank you.


We have no further questions at this time. I'll turn the call back to Eitan Oppenhaim, for closing remarks.

Eitan Oppenhaim

Thank you, operator. I would like to thank everyone for joining the call today. We appreciate your interest and your questions. We hope to see you in the next quarterly call. Thank you and have a good day.


Ladies and gentlemen, that does conclude today's presentation. Thank you for you participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

This Transcript
All Transcripts