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Nova Measuring Instruments Ltd. (NVMI)

Q2 2011 Earnings Call

August 2, 2011 9:00 AM ET

Executives

Kenny Green – IR

Gabi Seligsohn – President and CEO

Dror David – CFO

Analysts

Edwin Mok – Needham & Company

Patrick Ho – Stifel Nicolaus

Marcel Herbst – Herbst Capital Management

Operator

Good day ladies and gentlemen, and welcome to the Nova Measuring Instruments Second Quarter 2011 Results Conference Call. For your information today’s conference is being recorded. At this time, I would like to turn the conference over to you host today, Mr. Kenny Green. Please go ahead sir.

Kenny Green

Thank you operator, and good day to everyone. I would like to welcome all of you to Nova Measuring Instruments second quarter 2011 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 today’s call. The presentation can be accessed and downloaded from a 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 pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations section or news section of the company’s website at www.nova.co.il.

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

Gabi Seligsohn

Thank you, Kenny, and hello everyone and welcome to our second quarter of 2011 earnings conference call. The second quarter was another remarkable quarter for the company. It marks the 10th consecutive quarter of growth in both revenues and profitability. Our net profitability came in at 31% and our gross margins at 57.7% both exceeding our long-term target model.

During recent quarters, we have generated significant operating leverage by also making investments into the development of new products and capabilities. Last month, we were pleased to announce two new ground breaking products with the Optical CD Metrology market, the Nova T600 and the NovaMARS 5.0. These products which are already shipping to leading customers, position us well to further strengthen our position and expand our footprints in the market. Our focus with these products is on the forefront of technological challenges currently facing the industry, namely the transition to three-dimensional gates structures, the move to High-k/Metal Gate materials and the vertical gates structure.

Furthermore as previously communicated, we are progressing well with our plans to penetrated the 3D interconnect market and have recently concluded the development of the first phase of that product. We have already received excellent customer feedback to the tool capabilities and expect to ship initial evaluation units during the second half of this year.

On the integrated metrology front, we announced multiple tool orders received during the second quarter from multiple customers for our Nova i500. This tool has served us well and further extending our technological leadership over our competitor. I am also pleased to report that our service group continues to demonstrate robust performance delivering record revenues at $4.7 million and gross margins of 39%. The changes we have made to our service business strategy to which we refer to several quarters ago has created a healthy mix between service contract, timing materials and system upgrades. With a continuously expanding active install base, we believe there is significant value to be extracted for us and for our customers going forward.

Now let me turn to overall market trends as we see them. During the second quarter and like many in our industry, we evidenced the reduction in bookings following our strongest ever booking quarter. There were several reasons for this softening in demand which included capacity utilization rates at the foundries which saw a decline. The transition to high volume 28-nanometer manufacturing has been delayed. DRAM orders were down as a result of a slower than anticipated PC markets. And inventory levels in the channels were high and expectation of reduced output from Japan following the March quake were in actuality the disruption seems to have been minimal.

Our current understanding is that the wafer fab equipment industry as a whole is already seeing a reduction in business volumes. At the same time given the strong market – the strong end-market demand which is continuing in the smartphone and major tablet market as well as in the high-end server markets, we believe capital spending should come back by the end of the year or beginning of 2012. In foundry, the transition to the 28-nanometer technology node cannot hold off much longer for competitive reasons. Despite the reduction in DRAM demand, cost considerations could dictate that the transition to the 3x technology node must continue.

On the NAND flash side, continuous growth depends largely on a tablet and smartphone markets which continue to grow nicely and the long awaited shift to low cost solid state drives which we believe must happen by 2012 as a result of competition between manufacturers bringing capacity online. All of these technological trends bring with them significant process control challenges. Challenges which we are well position to help solve with our advanced optical metrology solutions.

Recent discussions with all our leading customers have revealed that their biggest challenges are associated with etching steps, the number of which is growing steeply. These challenges drive growth rates for optical metrology which far exceeds those of other segments. In foundry, the move to three-dimensional gates structures create patterning and material processing challenges in Litho, Etch, CVD, and CMP. In DRAM, the move to the 3x technology node dictates a transition to vertical gates structures and double patterning. And in NAND flash, customers are talking about quad patterning rather than just double patterning as a means to deal with the needs of print lines at tighter densities and delay a little further the move to Extreme UV Lithography.

As we have said, Optical CD is an enabling technology and that it provides process visualization of key characteristics of the process which I just mentioned which cannot be obtained by further means. It is therefore our belief that we are well positioned to extract growth out of these opportunities as a combination of highly competitive products with widespread presence in leading memory and foundry customers mean that we’re spending growth resumes we will be there to take advantage of it.

Now let me turn to our outlook. In today’s press release, we stated our guidance for the third quarter of 2011. We expect revenues of $24 million to $27 million with net profitability of 20% to 25%. As stated, we are expecting a softer second half for 2011. Many previously planned expansions have been pushed out while a few of our customers who needs to bring capacity online in order to compete continued spending during the second half both in foundry and in memory.

Regardless of manufacturing capacity increases, the need to move to the next technology node dictates a significant need for our equipment which we continue to design into our customers next generation manufacturing schemes for collaborative efforts in their process development lines. Optical CD application continues to expand at an impressive rate. Accordingly, we expect the Optical CD market to continue to outgrow the wafer fab equipment industry for the next several years.

Our plan and current expectations show that we remain on track to grow better than the overall industry during 2011 and we feel good about our ability to perform within our long-term profitability model. And with that operator, let me now turn it over to Dror for a closer view on the numbers, Dror?

Dror David

Thanks, Gabi, and welcome everybody to Nova’s quarterly conference call. Before I start with an overview of 2011 second quarter results, I would like to note that the numbers presented in the press release and in all the following discussions represent GAAP based results.

Total revenues in the quarter were $29.6 million, around the midpoint of our guidance, up 5% quarter-over-quarter, and up 53% over the comparable quarter of last year. Product revenues increased by 4% driven by higher stand-alone Optical CD revenues in the quarter. Service revenues increased by 10% to a record quarterly level of $4.7 million driven by higher time and material activities in the quarter including upgrades.

Product bookings distribution in the quarter was 58% from the foundry segment and 42% from the memory segment similar to the previous quarter. On a regional basis during the quarter, we saw a shift of booking to the U.S. and Europe reflecting proliferation and repeat orders from recently penetrated accounts in those regions. As a result Asia-Pacific accounted for approximately 50% of bookings relative to approximately 80% in previous quarters, U.S. accounted for approximately 30% and Europe accounted for 15%. In addition to the above, booking wise we had four customers which accounted for more than 10% of our bookings.

During previous discussions on the target P&L model, we mentioned that we are targeting blended gross margin at or higher than 55% based on product gross margin of approximately 60% and services gross margin higher than 30%. Blended margins in the quarter increased by 9 basis points reaching record levels of 57.7%. Product gross margin came in at 61.2% slightly lower than previous quarter due to a different product mix. Services gross margin increased to a record level of 39%.

Following a few consecutive quarters of major increase in R&D expenditures, we have seen some modulation in the current quarter. This modulation is attributed to higher income from the Israel Office of the Chief Scientist as well as lower expenses related to purchasing of prototype materials which tend to fluctuate across the different stages of product development.

Overall operating expenses decreased by 2% relative to the previous quarter. During the quarter, we reported record net income of $9.2 million with operating margins of 30% well above our target model of 20% to 25%. Net margins were at the record level of 31%. Diluted EPS in the quarter was $0.35 up $0.04 over the previous quarter based on a diluted share count of 27.2 million shares. Cash flow from operating activities came in at a $7 million in the second quarter of 2011.

Moving into balance sheet key metrics, accounts receivables increased by $5 million in the quarter to the level of $20 million mainly as a result of sales to different customers with different payment terms during the second quarter of 2011. DSOs remained healthy yet slightly increased to 52 days. Inventories increased from $12 million to $14 million in the current quarter and as a result, inventory returns decreased to 3.9 times a year. The increase in inventories is mainly related new products which were recently announced and are expected to be placed at customer sites during the second half of 2011.

We expect inventories to remain at these levels in the coming quarter while on one hand we continue the proliferation of the new products into the field and on the other hand, we utilize inventories from existing products.

Deferred revenues significantly increased to $9 million by the end of the quarter. This increase is mainly related to collection of stand-alone Optical CD unrecognized revenues as the collections of these tools especially during the penetration phase sometimes proceeds final customer acceptance and revenue recognition. Capital investments and depreciation in the second quarter of 2011 came in at similar levels relative to the previous quarter.

I will conclude with cash reserves, which increased to $78million at the end of the second quarter of 2011 and provided us with an immense flexibility to execute on our business plans. Gabi?

Gabi Seligsohn

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

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) We will pause for a brief moment in order to allow the queue to assemble. Our first question today comes from Edwin Mok of Needham. Your line is open. Please go ahead.

Edwin Mok – Needham & Company

Thanks for taking my question and congrats on a good report.

Gabi Seligsohn

Thank you.

Edwin Mok – Needham & Company

Now first, I want to ask you about the booking, you mentioned that Asia-Pacific come down and U.S. has increased. Is that based on where you’re shipping the equipment or is it based on the headquarters of those companies?

Dror David

It’s based on the bookings…

Gabi Seligsohn

The question is actually if it’s based on where the equipment is delivered to, and indeed, it is. It’s not based on the headquarters of those companies. It’s based on the fabs in the territory that you’re referring to.

Edwin Mok – Needham & Company

I see, so I’ve been extrapolating that whether U.S. shipments goes to. Great, it’s very helpful. And then Gabi you talked about OCD a very large space that is outgrowing the industry. Obviously that is more along the current trend for the industry. In the back half, given that some of the foundries, really going back in terms of investment, do you see that potentially in the near-term, as impacting all the investment as well and as a result you’re trying more in in line with where the customer outlay of what’s going?

Gabi Seligsohn

Well I think first of all it’s important to note that my comment was in general, first of all, that as a trend that we see that OCDs continuing to outgrow wafer fab equipment. And specifically during 2011, we expect that to be a third consecutive year in which we outgrow the industry because OCDs growing so significantly. So whether it trends exactly as the industry or not in the second half is yet not clear. I will say as we did indicate in the prepared commentary that we are seeing softness in the market that will continue into the second half. Indeed you’re right, the foundries have dialed back, most foundries. There is at least ones that obviously I can’t mention customer names but there is at least one which is continuing vigorously to ramp up right now in order to bring capacity online. But in general, the trend has been a softening in the foundry space for the reasons that I had mentioned.

What is important though is that in all cases, in all foundries we have been working collaboratively and qualifying the next technology generation which right now is mostly the 28-nanometer technology nodes, the one after that we’re already involved in as well. And what we expect is that that proliferation of 28-nanometer is being delayed. Our expectation is that it cannot be delayed much further than what it is already been delayed because demand will start coming with the next generation of smartphones requiring 28-nanometer technology node. So that’s why our expectation is that this transition needs to happen within the next three to six months and so far, order magnitudes for that technology node has not been significant.

There have been – and our customers have worked through yield issues which I think they’ve now pretty much mostly worked through. And so they should be ready to ramp up and I think the demand needs to come back in order for that to happen. And so what we believe is that there needs to be a technology transition which will happen in multiple directions, one is in the foundry, again the 28-nanometer. Number two, as I mentioned in DRAM and we could discuss that later a little bit more but we do see a need to transition there, although the market in general is pretty soft for DRAM, we do think that there are cost considerations in NAND flash.

We see actually its continuing to be a pretty robust following the process now in the next three to six months.

Edwin Mok – Needham & Company

Great, it’s very helpful color there. So I have two questions, I have to ask what is your visibility going through the fourth quarter right now and based on your bookings that you have so far, we’ve seen – just deliberate pushed out through fourth quarter or you have less visibility than that?

Gabi Seligsohn

Well first of all we give guidance for the next quarter which is the third quarter which was stated quite clearly. Regarding the fourth quarter, I’d say the visibility is not as good as it was, let’s say six months ago. There is somewhat of reduction in visibility into the fourth quarter. We know what projects are supposed to happen in the fourth quarter, those have been communicated to us. But I think that customers have taken a very reserved approach in most cases, and have held back on actually issuing the orders and trying to delay those as much as they can.

So I would say that the visibility is not as good as it was before. The visibility was very good for let’s say five months going forward, it’s probably pulled back a little bit, one or two months. So that’s kind of the situation right now. Again when I say visibility, I mean actual orders on hands. I will say that again in general because of the depth of communication that we do have with our customers. We understand what it is that they need to order and what we’re looking and anticipating it to see that those orders actually come in, hopefully start coming in again towards the end of the third quarter and into the beginning of the fourth quarter.

Edwin Mok – Needham & Company

I see. It’s very, very helpful. So basically the customers are reluctant to release orders just similar to what other guys were talking about, based on your understanding on demand you might have a better order than how you’re looking at third quarter right now, is that fair to say like that?

Gabi Seligsohn

I think it’s still yet unclear and again it’s difficult for me to give you an indication on the fourth quarter and say that it’s going to be better than the third quarter. It’s not completely clear right now. So to me it’s a little bit early to say something like that. Again I think that the situation is developing almost on a daily basis. There was one data point which was interesting last week when Morris Chang of TSMC spoke about the fact that he believed that people are working through their inventory in the third quarter, which should be a good indication, but it’s difficult at this point Edwin, to say that we believe the fourth quarter is better than the third one. We’re not in a position to say that yet.

Edwin Mok – Needham & Company

All right, I understand that. Can I ask you about how your customer mix in terms of let’s say in the first half of this year versus second half just generalized term, all right, what is your customer mix between foundry, DRAM and NAND? And how do you expect that mix to change in the second half?

Gabi Seligsohn

Yes, foundry was very robust in the beginning of the year. As you remember many foundry customer had made a significant part of their spending maybe 60%, 70% of their annual spend took place in the first half, mostly I’d say probably in the first four months of the year. And DRAM has been softer this year. There have been situations in which we’ve had significant DRAM orders because some of the customers have initiated the transition to the 3x technology node.

For the second half, I expect that we’re going to see some foundry orders continuing specifically at least with one of our key customers that we see continuing to spend. And also I think on the NAND flash side, there will be some spending – trying to split it between NAND flash let’s say and foundry as well as some DRAM. Again as Dror mentioned in the quarter I think bookings was probably 60/40 in favor of foundries. And they turned to 50/50 or 60/40 in favor of memory. It’s a little bit difficult for me to say at this point Edwin, but again I think that as far as spending continuing and ramping continuing at some customer sites again, there is at least one significant foundry and there is at least one or two actually DRAM manufacturers that must continue spending right now and we’re seeing orders continuing from those.

Edwin Mok – Needham & Company

Great, one last question, and I’ll let you go. On the OCD side, previously you guys talked about basically the seven [ph] new customers that you secured since 2009 and some of them (inaudible) revenue in 2010 and would this year. So I just wanted to understand, if you’re now shipping revenues to all shipping customers. And you have announced in your OCD part, I was curious how many of these customers transition to this new product and do you expect that transition to drive some incremental growth there? Thank you.

Gabi Seligsohn

Sure. In all cases of penetrations, we have seen repeat orders which is I think a great indication. As far as the new product is concerned, there are actually almost a handful of customers or the leading customers all of which were the – actually these are both the new penetration accounts as well as existing ones that are taking the T600 and the MARS 5.0. Actually we’re extremely impressed with the traction that we’ve seen to announce the product at SEMICON [ph] and at the same time ship several units to the customers is something that we’re happy with. To us that’s a very strong indication of how the market is perceiving this core product. And it’s also result of the fact that we work very closely with these customers through the last year in order to introduce them to the concept of the product. They believe it could help them go to the 2x and the 1x technology node.

So we’re actually pretty pleased and again taking those tools are combination of the new accounts from the last six to nine months and older accounts that we’ve been working with for quite a while.

Edwin Mok – Needham & Company

So the T600 has better functionalities definitely and you had enabled sort of 3-D structure, I was wondering do you generate better ideas and therefore better margins for these products compared to its revenue [ph]?

Gabi Seligsohn

Well what has happened from one technology generation to another with our stand-alone product offering is that generally we have seen an improving ASP as a result of improved performance and improving cost of ownership. And so in general this is a more advanced product with more capabilities offering more advantages to customers and the general – you see that there is an improvement there but obviously the cost of these products is also higher, so I think we’re pretty comfortable with the product gross margins that we’re demonstrating right now. And again I think that in general what we’re doing on a multiyear process is that as products rollout more capabilities come online, more cost of ownership improvement, etcetera which allow customers to spend a little bit more on these products.

Edwin Mok – Needham & Company

Great, that’s all I have. Thank you, Gabi.

Gabi Seligsohn

Thank you, Edwin.

Operator

We take our next question today from Patrick Ho of Stifel Nicolaus. Your line is open. Please go ahead.

Patrick Ho – Stifel Nicolaus

Thanks a lot and nice quarter guys.

Gabi Seligsohn

Thank you Patrick.

Patrick Ho – Stifel Nicolaus

Gabi, just on a bigger picture basis, can you just describe the – I guess the industry transition to optical metrology and how you see it potentially displacing some of the acoustic [ph] based metrology that’s out in the marketplace right now, and maybe particularly, specifically in the DRAM market and how that adoption may be occurring?

Gabi Seligsohn

Sure. Well optical – the way that we have approached the use of optical metrology for the copper area has not been by trying to measure what the acoustic measurement equipment measures. Simply because the acoustic measurement is able to measure through opaque films which is something that with an optical instrument, you can obviously not do. What we have done in order to approach that market is to move the location of process control and where the measurement is actually performed further down the line in the manufacturing process. So rather than measured primarily before the CMP process and after PVD [ph], actually you measure after CMP.

The advantage of that software to the customers is very, very significant because now this has been case for the last two years where we have really taken a dominant position in the copper interconnect market. Now they are able to measure after CMP, it gives them an indication of the parametric performance across the wafer at a time where it’s very, very critical just before it moves into the lithography stuff.

And so the approach is been actually to look at the process control needs rather than look at the metrology or measurement technique and try to displace it. That’s been a very successful process for us. And again in doing so, process control schemes have been developed both in memory and in foundry which are very, very extensive. In some cases, it allowed customers to control the process on a wafer by wafer basis at very, very high throughput and with very, very good productivity numbers.

So that’s kind of what’s happened in the copper metrology sector. Your other part of the question if you could reiterate?

Patrick Ho – Stifel Nicolaus

No, you answered it because I was just wondering specifically on the DRAM market particularly some of the changes that are going there but I think your answer kind of covered it.

Gabi Seligsohn

Okay, very good.

Patrick Ho – Stifel Nicolaus

The second question I had in terms of the service margins that you guys posted obviously very, very strong. Is this something where it’s sustainable at higher levels versus your 30% target or do you see it coming back down based on the mix within services and upgrades and the actual kind of core [ph] services. Is this just kind of an aberration or is this something where it can be higher on a sustainable level?

Gabi Seligsohn

Well, I’ll say two things one is obviously you’re right, that it is associated with the mix of revenues in a given quarter, but also there is a critical math associated with it, meaning the fact that we have grown from about $4.2 million to $4.3 million to $4.7 million has also had an impact on the gross margin in that side of the business. On a sustainable basis, I think that we should be able to stay at between 30% and 40%. I don’t think that this is an aberration. I think that somewhere between 35% and 40% at these kind of revenue levels, we should be pretty comfortable.

You should also remember that a portion of the revenues in service are associated with upgrades. And we have a very, very significant active install base of about 1,200 tools. And so what changes from quarter-to-quarter many times is the degree or extensive upgrades and obviously there are quarters in which upgrades are more significant than others. And the impact is felt very largely on the gross margin side. But I think again Patrick, at these levels of $4.5 million to $5 million you should see us remaining within the 35% to 40% gross margin level.

Patrick Ho – Stifel Nicolaus

Great. And a final question, I did noticed that inventories picked up slightly but given the current environment and how many moving parts there are, is that inventory to give you a little bit of buffer in case the customers want you to respond pretty quickly if the demand environment and their wait for start forecast change, is that inventory buffered to respond quickly?

Dror David

Yes, definitely the level of inventories right now from the existing product gives us some flexibility should the market pickup. So and we have solid [ph] finished goods, but we do expect in the third quarter to see some reduction in inventories from the existing products.

Gabi Seligsohn

You should also remember Patrick that the inventories include systems which are on evaluation which is our business development growth engine obviously.

Patrick Ho – Stifel Nicolaus

Great, thanks a lot guys.

Gabi Seligsohn

Thank you Patrick.

Operator

(Operator Instructions) Our next question today is from Marcel Herbst of Herbst Capital Management. Your line is open. Please go ahead.

Marcel Herbst – Herbst Capital Management

Good morning and congratulations to strong execution in the quarter.

Gabi Seligsohn

Thank you.

Marcel Herbst – Herbst Capital Management

You have been increasing your addressable market list solutions for additional process tabs such as Etch, Litho and CVD. So my question is how is the pipeline looking in these particular areas and its adoption, what kind of progressing to your expectations and also to put this in perspective, how much of this quarter’s revenue came from those new areas?

Gabi Seligsohn

I don’t have a breakdown for you for the particular quarter. We can look into that, but I would say that on the stand-alone metrology front, a lot of the business has gone in the direction of Etch and high-end CVD in recent quarters. As I mentioned and maybe I’ll elaborate a little bit, one of the things that we have heard from our customers in all sectors that we serve, both the memory sectors and the foundry, is that one of the biggest challenges in being able to make the next technology generation shift is etching. Etching is becoming very, very difficult both in the backend and in the front-end. And the need to monitor the process more closely is increasing.

If you ask me, I believe that as a general trend, I think that the biggest growth for OCD will be happening in Etch over the next few years. I also believe it’s not just going to be based on stand-alone metrology but because of the fact that the tolerances for the etching process are shrinking so significantly, we are starting to see a situation where there is variability between the different chambers on the etcher and therefore there is going to start to be a need for more integrative metrology in the etching area.

So I think the next growth trajectory for OCD is definitely in the Etch area. On the CVD side, it’s very much associated with high-end CVD. Here even I would talk about layers such as atomic layer depositions as they are being deposited into complex structures and being able to characterize those as part of an overall structure that you’re measuring is becoming a very, very important need and it’s one of the most determining critical factors for yield of the gates structures themselves.

So I think in general that’s where a lot of the growth is happening. A lot of our collaborations with customers in the past year has been in that area. The penetration that we have had in at least a couple of the foundries has been primarily in that area. So I am quite pleased with the progress we’re making there and I think that there is a lot more growth coming from that area in the future.

Marcel Herbst – Herbst Capital Management

Speaking of Etch, when do you think this is going to ramp-up? What’s the projection – the growth projection there?

Gabi Seligsohn

You mean metrology for Etch?

Marcel Herbst – Herbst Capital Management

Yes.

Gabi Seligsohn

I think that the big change for adoption of Optical CD in Etch is happening in foundry at 28-nanometers and below. And in the NAND flash side, I think it’s happening in 2x. And so it’s actually pretty imminent. It’s already happening on a – I’d say on a pilot line level and as people move to high volume manufacturing I think the metrology for Etch portion coming from Optical CD is going to grow.

Marcel Herbst – Herbst Capital Management

So would high volume manufacturing be happening somewhere in the first half of 2012? Is that a reasonable assumption?

Gabi Seligsohn

I think I’ll say what I think, I think it needs to. I think it needs to because that when I think the market has to start to ramp up in those next technology nodes, the move to those technology nodes, we think must happen towards the first half of 2012 because of the different market characteristics that I had mentioned in my prepared commentary.

Marcel Herbst – Herbst Capital Management

Okay, one last question, a quarter ago, your working assumption was that the wafer fab could spending to grow at the expected rate of about 12% to 17%. What are your current assumptions on that?

Gabi Seligsohn

Well what we’ve been hearing reading materials, talking to CEOs of peer companies and talking to customers, I think it’s probably for the year 2011 it’s probably going to be somewhat lower than that simply the second half is expected to be slower than the first half. And so again what we’re hearing is ranges that are lower than that probably somewhere around 5% to 10% right now for 2011. That’s kind of what we’re hearing now for the whole year. And so it very much depends on the degree of softness in the second half, whether orders just start coming back in the fourth quarter or not.

Marcel Herbst – Herbst Capital Management

Excellent, thank you.

Gabi Seligsohn

Thank you, Marcel.

Operator

We take our next question today from Edwin Mok of Needham. Your line is open. Please go ahead.

Edwin Mok – Needham & Company

Hi, thanks for taking my follow-up question. So two question, one for near-term and one for long-term. So Dror, on the operating expense side, it came down a little bit on June quarter, and I understand part of it was completing this T600 product and the investment around that. Just wondering do you have any kind of guidance in terms of where you’re seeing OpEx going in the third quarter. And assuming things get worse before they get better, do you have more lever to reduce OpEx beyond the third quarter?

Dror David

Well regarding the third quarter and as Gabi mentioned before, we are rolling few major products into the field. So we do expect operating expenses to remain at the same levels more or less in the third quarter. Looking beyond that and what we should do in case things will change. Of course we have alternative, there are some expenses there which are variable. So we do have leverage to reduce operating expenses if we should.

Edwin Mok – Needham & Company

Maybe a different way to ask that is how much do you think – how do you quantify the variable piece and some company talk about incremental margin goes up and down. Is that where you can quantify like that?

Gabi Seligsohn

The question was what is the extent of the variable aspect of the OpEx, is that what you’re asking Edwin?

Edwin Mok – Needham & Company

Yes, that’s what I am asking, sorry.

Dror David

Yes, I would say that around 15% to 20%.

Edwin Mok – Needham & Company

Great, very helpful. Just to kind of at least have (inaudible) there. And then Gabi just one question, regarding your exposure to the foundry customer, before – where you can quantify how much – what’s the company like that talked about the design win that leading at 28-nanometer versus let’s say 65-nanometer in penetration in that that has been accumulated to the (inaudible) share gain and how as customer ramp could drive revenue for them. So I was wondering if you can help us maybe talk about your penetration in 28-nanometer versus 45 and 55 and any exposure for those technologies.

Gabi Seligsohn

Well you need to remember that that not all foundries are already at the 28 and 32-nanometer technology, not even at not at early stages. Those that are there Nova has had design wins, actually has won the design of those technology nodes already. And so we have been selected for those that are in the 28-nanometer technology node, definitely in the area of integrated metrology and also in several cases for stand-alone metrology. It’s difficult for me to quantify that for you for obvious reasons but I will say that we have had the necessary design wins there and a lot of that is associated with why we feel confident about our ability to continuing growing things turnaround a little bit because of the extent of design wins that we have had there and we do expect that the next round of investments will happen in those technology nodes. That’s why it’s so critical for us.

Edwin Mok – Needham & Company

Yes, so maybe a different way to ask that is if we think about like you said because not everyone will be 28 yet, so let’s say 45-nanometer and beyond, right, if you think about your first half shipment to all bookings to foundry and how much of that comes from 45 and beyond investment versus 65 or above investment, if that we can quantify just roughly the two-third 45 and beyond that half way beyond just what you can (inaudible).

Gabi Seligsohn

Yes, I’ll say that about 80% and above of Nova’s revenues this year are coming from 45 nanometers and below.

Edwin Mok – Needham & Company

Great, that is all I’m looking for. Thanks very much. It’s very helpful.

Gabi Seligsohn

Thank you Edwin.

Dror David

Thanks Edwin.

Operator

As we have no further questions at this time. I would like to hand the call back over to Mr. Seligsohn for any additional remarks or closing statements. Thank you.

Gabi Seligsohn

Thanks, operator. And again, I want to thank everyone for joining today’s call. We look forward to seeing some of you in the conference next week in the U.S. and communicating further as we see progress. Thank you.

Operator

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

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Source: Nova Measuring Instruments' CEO Discusses Q2 2011 Results - Earnings Call Transcript
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