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Nanometrics Incorporated (NASDAQ:NANO)

Q3 2011 Earnings Call

October 27, 2011 4:30 PM ET

Executives

Claire McAdams – IR

Ronald Kisling – CFO

Timothy Stultz – President and CEO

Analysts

Weston Twigg – Pacific Crest

Srini Sundararajan – Oppenheimer

Thomas Diffely – DA Davidson

Auguste Richard – Piper Jaffray

Patrick Ho – Stifel Nicolaus

Graham Tanaka – Tanaka Capital Management

Operator

Good afternoon, and welcome to the Nanometrics’ Third Quarter 2011 Financial Results Conference Call. A Q&A session will be held at the end of the call. Until that time, all participants will be in a listen-only mode. Please note that this conference call is being recorded today October 27th, 2011.

At this time, I would like to turn the call over to Claire McAdams, Investor Relations Council for Nanometrics. Please go ahead.

Claire McAdams

Thank you and good afternoon everyone. Welcome to the Nanometrics third quarter 2011 financial results conference call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer, and Ronald Kisling, Chief Financial Officer. Shortly, Ron will discuss our financial results for the third quarter. Tim will then share our prospective on the quarter and outlook going forward before opening up the call for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1:00 PM Pacific this afternoon and it’s also available on our website at nanometrics.com.

Today’s conference call contains certain forward-looking statements including, but not limited to, statements regarding financial results for the company’s most recently completed fiscal quarter, which remain subject to adjustment in preparation of our periodic review on Form 10-Q. The continued adoption and competitiveness of our products, the expansion of our served markets and future revenue, profitability and cash flow.

Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to a variety of factors including a change in current levels of industry spending, shifts in the timing of customer orders and product shipments, changes in product mix, increased operating expenses and the additional risk factors and cautionary statements set forth in the company’s Form 10-K for the fiscal year 2010 as well as other periodic reports filed with the SEC from time to time. Nanometrics disclaims any obligation to update information contained in any forward-looking statement.

I will now turn the call over to Ronald Kisling. Ron?

Ronald Kisling

Thank you, Claire and good afternoon. In the third quarter we delivered strong financial results in spite of increased industry volatility and concerns regarding consumer demand and the worldwide economy. Revenues were $58.3 million near the midpoint of our guidance, down 9% from the prior quarter and up 8% from the third quarter of last year. Total product revenues of $49.8 million were down 8% from the second quarter and up 12% from the third quarter of 2010. Service and upgrade revenues of $8.4 million declined 17% sequentially and 12% year-over-year primarily due to a decrease in upgrade revenues. In total, service revenues comprised 14% of sales down from 16% in Q2. Sales of our automated metrology systems decreased 12% over Q2 and comprised 58% of total revenues. Our flagship OCD tool revenue saw the largest decrease driven primarily by capacity pushouts in both memory and logic. This was partially offset by increased sales of our UniFire and overlay automated systems.

Our integrated metrology sales grew by 10% over Q2 our third straight quarter of growth mostly driven by flash technology spending and comprised 13% of total revenues. Our materials characterization business declined by 12% compared to the second quarter comprising 15% of total revenues primarily due to lower sales into the LED segment.

We believe automated metrology systems will continue to make up the largest share of our products, but we will see quarter-to-quarter fluctuations in the absolute percentage mix driven by buying patterns and fluctuations in customer fab rollout schedules.

The end market fluctuations in the fan out of our automated products of large customers also resulted in a shift in end market mix compared to last quarter. The most significant difference was in our sales to the NAND Flash market, which had comprised 45% of our product revenues in the second quarter. For the third quarter, Flash revenues declined by approximately 28% to comprise 35% of product revenues, DRAM sales declined as well by approximately 20% to comprise 12% of product revenues in the third quarter.

Product revenue into the logic IDM, foundry and hard drive segment increased from 24% in the second quarter to 37% in the third quarter. Notably foundry revenue was 10% of product revenues as included in the 37%.

The LED solar and silicon end markets segment decreased its share to 15% from 17% due to the industry softening, I mentioned earlier. Consistent with our historical reporting we report revenue by geographic region based on the shift to our first in use destination.

In the current quarter, revenues from South Korea were 39%, North America 23%, Japan and Rest of the World each 19%. Sales to Samsung and Intel each contributed over 10% to our revenues in the quarter.

Turning now to gross margins, our total gross margin for Q3 came in at 52.9% at the high end of our guidance. This compares to 56.1% in the prior quarter and 54.5% in the third quarter of last year with the decrease primarily due to product mix as well as lower sales volume in the sequential comparisons. Products gross margin was 54.1%, while service gross margin was 45.6%, still above our model but down a bit from Q2 levels.

Operating expenses in the quarter increased 2% over the prior quarter to $19.1 million primarily due to material cost and R&D associated with new products and increased professional services.

Our operating income was $11.7 million compared to a record $17.5 million in the prior quarter and $13.8 million in the year ago period. Our operating margin was 20.2% of sales slightly better than the midpoint of our guidance.

Net interest and other income were $600,000 compared to an expense of $700,000 in the prior quarter and an expense of $400,000 in the year ago period. The significant change was due to foreign exchange losses moving to gains in the current quarter of approximately $700,000 related primarily to movements of the U.S. dollar against the Swiss franc, yen and euro.

Our effective income tax rate in the quarter was 38% above our 2011 guidance of approximately 35% as a result of certain prior period items that were reflected in the current quarter. We continue to expect our annual effective tax rate to be approximately 35%.

Net income was $7.6 million or $0.32 per diluted share, just above the midpoint of our guidance of $0.28 to $0.34 per share. These earnings compared to $0.53 per share in the third quarter of 2010 when our tax rate was 8% and $0.47 per share in the second quarter of this year.

Turning now to the balance sheet, we grew our cash and investments by $8.5 million in the third quarter, ending the period with just over $100 million or approximately $4.36 per share based on 23 million shares outstanding at October 1, up from $4.04 per share at the end of last quarter. This was despite paying on our mortgage debt by $2.1 million. During the quarter we did not repurchase any shares.

Cash flow from operations was $9.7 million or 17% of revenues. Our accounts receivable at the end of the quarter were $45.2 million an increase of $1.6 million over last quarter as our DSO increased to 70 days in line with our model but up from a low of 61 days last quarter.

Our inventories increased by $5.2 million over the prior quarter due to purchases to support new tools shipping in Q1, to support increased placement evaluation tools beginning in Q1 and inventory build for forecasted sales that pushed out of the current quarter. As a result, our inventory turns decreased to 2.1 from 2.3 times at the end of each of our three prior quarters.

Our tangible book value increased to $201.5 million or $8.78 per share again based on 23 million shares outstanding at October 1 from $8.42 per share at the end of last quarter. We ended the quarter with head count of 518 employees a net increase of 34 from last quarter.

And with that I’ll turn the call over to Tim for his comments. Tim?

Timothy Stultz

Thank you, Ron. Good afternoon everyone and thank you for joining us today. Concerns about the global economy, the U.S. economy and lower overall consumer spending have dampened the outlook for the electronics industry. This has led to weaker spending by semiconductor device companies characterized by reductions in capital investments, slowdowns in planned fab construction and push outs the capacity expansions.

If we take a closer look at the industry and technology trends however, we see major opportunities were selective and timely investments and close partnership with our customers will lead to long-term growth and an expansion of our business. Because of the importance of this topic I would like to spend a few moments elaborating on these opportunities.

The advancement of semiconductor devices both in price and performance is typically defined by the advent of new technology nodes of shrinks. Importantly the last series of feature size reduction or shrinks. Notably from 65 nanometer through 32 nanometer have been primarily accomplished through traditional scaling that is reducing feature sizes with tighter process performances. While using fundamentally the same tool sets and methodologies.

However to meet the performance and cost objectives for the newest and most advanced devices and derived to the next technology nodes 22 nanometers and below. Radical changes and device materials architectures and structures are being required. Notably we are seen an increased and the use of exotic material combination such as high key metal gates. The advent of three dimensional transistor architecture such as Intel’s thin fab. The development of three dimensional memory self such as Toshiba’s BiCS architecture and new three dimensional packaging concepts such as Micron’s 3D Memory Cube.

In paralleled with the changes that are already underway delays in EUV lithography have forced many of our customers to revise their litho strategies and expand the use of conventional lithographic old methods. This is led to the development of technique such as double and quadruple patterning which in turn expands and amount of steps used for litho processes drives an increased in hard mass steps.

And thereby create incremental process control requirements. And finally with the recent announcement of a global 450 millimeter consortium. The industry has begin to procure initial tools to start the development work to the for the transition from 300 millimeter to 450 millimeter wafers. All told these technology inflections, delays in EUV and move to larger wafer diameter are driving the need for new tool sets and setting the stage for an increase in overall capital intensity.

These changes are technologically significant and disruptive, and in turn drive the demand for new products and tools to meet the process and process control requirements of the chip manufactures. For Nanometrics, these trends create significant opportunities, which we believe can be transformative to our long-term business prospects and outlook.

Demand for our leading-edge technologies, differentiated product pipelines and tools, which address to meet the current and future challenges of the industry are expected to further increase. And most importantly, the strong positions in trust we’ve established with the industry leaders have increased the breadth and depth of our engagements with them in planning and developing next generation products.

Specifically, investments by memory, logic and fabric customers and the use of our flagship technology, Optical Critical Dimension or OCD is increasing as a percentage of their overall capital spending. Our unified interferometry platform is being used as an expanding number of customer sites, which has increased at the rate of one new customer per quarter for the last year and a half and is fully engaged in the development and production of 3D package devices.

Our NanoDiffract software platform and applications packages are being used throughout the industry at an ever increasing rate to model, measure, analyze and control processing on the most advanced devices as well as to develop the next generation ones. And we have already received firm orders for 450 millimeter OCD tools for delivery to multiple sites around the middle of 2012.

These products will be used at the front-end of the development cycle to characterize new 450 millimeter process tools and fabrication processes. So, in spite of the current and near term weakness in capital spending, we are highly optimistic about the long term outlook for our business, demand for our products, expansion of our served markets and the growing investments in advanced technology pipelines.

Now turning to the more immediate challenges of managing through this industry pause. We’re engaged in large scale deployments and pan-outs of our tools across multiple geographic regions which require trained personnel and local support to meet the commitments of installation, integration and acceptance of mutuals into new fabs. We are also engaging multiple joint development programs with these same customers as well as some notable new ones to develop new products, applications and capabilities for their next generation devices in the low 2X and 1X nodes.

We have no doubt that successful execution of these programs will materially strengthen our position within the fabs increased to develop our tools and expand our share markets. These programs do however require continued investments in R&D and applications development which are the lifeblood of technology companies. That being said, we must and will continue to be prudent managers of our business, controlling spending, keeping tight controls on hiring and expenses and do have best to manage with this weak economic environment.

To do this we must strike a balance between continued to investment products and technologies tied to long term growth, spending to depend our established business positions while at the same time responding to softness and capacity expansion spending. Our current outlook is that we are in or very near the trough in capital spending with improvements in current order leads underway. And our global spending in 2012 was forecast to be down as much as 20%. We see strength in investments by our customers in advanced technology which plays an important role in fitting the stage for further growth.

Now turning specifically to the December quarter, like all the other companies in our sector, we’ve been experiencing softness in near-term capital spending. Beginning around mid-August and through mid-September, rescheduling of tool shipments from 2011 into 2012 was significant. Since mid-September, however, we have seen a stabilization of our business outlook and order rate.

For the economic climate, industry dynamics, seasonal pattern and company practice in mind, our outlook for the quarter is very cautious leading to guidance as follows. Revenues of $40 million to $44 million, gross margin of 50% to 51%, operating margin of 1.5% to 6.5% and EPS of $0.01 to $0.07.

In summary, we have delivered eight consecutive quarters of strong profitability and positive cash flow. During the last 12 months our business has outgrown overall capital spending by more than 30%. 2010 was an all-time record year for Nanometrics. In 2011, will be a record again. This performance has been against a backdrop of industry spending that is still below the spending of last industry cycle.

As a management team, we fully intend to continue to deliver the best possible performance within the constraints of the business environment, but always with a focus and emphasis on long-term opportunities and shareholder value.

With that, we’d like to now open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Weston Twigg of Pacific Crest.

Weston Twigg – Pacific Crest

Hi, yeah thanks for taking my question. First I just was hoping you could help us understand a little bit more some of the detail behind the decline, the revenue decline in Q4, which segments were weakest or appear to be weakest into the quarter, any additional color would help?

Timothy Stultz

Sure Wes. This is Tim, thanks for calling in. The biggest issue is been in the memory push-out area that we’ve seen as well as there was a cancelation of one fab this is slightly to a lesser extent but it played a role in it and it’s pretty much attributed to that.

Weston Twigg – Pacific Crest

Okay. The cancelation of the fab was that in the memory area?

Timothy Stultz

No, there was a planned fab for logic.

Weston Twigg – Pacific Crest

Got it, okay, good. And then I know in the press release you mentioned UniFire traction, just wondering if you give us a little bit more of an update their how many customers are using the UniFire product now in volume or development and what does that traction look like in terms of may be revenues or sales next year?

Timothy Stultz

That’s a good question; actually we’re pretty excited about what’s going on with UniFire. And as I mentioned during the commentary we’ve added a new customer every quarter for the last six quarters. We only have one customer that’s in significant high volume use of the tool which isn’t previously announced and actually disclosed at Intel in the advanced packaging area. But we have another half a dozen customers that are currently using both in the – for the through-silicon via and or micro bump application as well as some penetration into the hard disk drive area.

Weston Twigg – Pacific Crest

Okay, good, very helpful. And then just finally on the order rates you mentioned that you think they add in your trough. Just wondering what gives you the conviction that you think order rates should be troughing?

Ronald Kisling

Well, that’s a good question because we all are well trying and looking our crystal ball. We track our order and order rates and forecast tightly, we watch it very closely as most companies do, in our case on a weekly basis. And we look at the variability around what the outlook looks like on a week-by-week basis.

In the last six weeks it’s been very stable and very flat and against what we’re looking in the near-term, which is a good proxy for what we could expect going forward. So we don’t know what we don’t know, but right now we feel really good that we are in trough and that I think order rates are improving as we go forward.

Weston Twigg – Pacific Crest

Okay great. Thanks a lot.

Ronald Kisling

You bet.

Operator

Thank you. Our next question comes from Srini Sundararajan of Oppenheimer.

Srini Sundararajan – Oppenheimer

Hi guys, thanks for taking my call. In terms of the CapEx for next year, do you really believe that it will be done 20%? My feeling is that in terms of logic, it could be generally true that more was spent on buildings this year. So I think more equipment spending might likely come next year. You have any thoughts on that?

Ronald Kisling

Srini, thanks for calling in. Yeah I do have some thoughts on it. We try to pay attention to smart folks such as yourself. We have a – you look very closely at this. But if I look at it, I think one of the points you’re making is the difference between CapEx and wafer fab equipment. And I think that most of the folks who are guiding anywhere from 5% to 25% down on CapEx, but wafer fab equipment as a percentage of overall CapEx I think is actually going to improve and there is good indications and I have seen some early reports that it looks like Samsung spending will actually be up next year.

And if I kind of look across the board we think Samsung is going to be spending more money, I think that Intel is going to be spending a little bit less but they put in awful lot of bricks and mortar last year. TSMC, I think on that part of the foundry is going to be down probably a little bit but we don’t have this high bit of exposure. So being the eternal optimist I would like to see more like a flat CapEx or at least flat wafer fab equipment going out there and with that as a backdrop we think we can do it pretty well next year.

Srini Sundararajan – Oppenheimer

Thanks. I had just one more question. In terms of 450 millimeters tool vendors such as yourself for used beams of light advantage that has the throughput scales like the throughput scales linearly for you guys rather than in the squared form. So, in terms of that do you see any advantage as the company has moved to 450 millimeters?

Timothy Stultz

Yes, so that’s a good question, actually I think there was two parts to address that while I think that it’s good for Nanometrics. First just from a more global perspective metrology tools are generally needed at the front end of this whole process both to characterize tools either by the equipment developers to characterize the tools by the chip manufacturers when they’re looking at new process tools and then also to develop the new processes. So we’re usually one of the – a good leading indicator in terms of the traction and expectations on 450.

Specifically to our tools – our hard tools are let’s go on to step and repeat and so we’re not doing a whole area of processing but we really do step, we step across the wafer which means that the technical challenges and hurdles for going from 300 to 450 for us are generally less than for those people who do whole area of wafer processing. So we don’t really have a huge risk getting into that and we’re again pulled in pretty early and we’re pretty excited about the contribution to our business.

Srini Sundararajan – Oppenheimer

Thanks. Just one more question last one on the 450 millimeters would you be willing to tell me whether it was logic foundry and memory?

Timothy Stultz

No, I’ve got a pretty tight NDA bound by, but will be in multiple locations.

Srini Sundararajan – Oppenheimer

Okay. Thank you.

Operator

Thank you. Our next question comes from Tom Diffely of DA Davidson.

Thomas Diffely – DA Davidson

Yeah, hi good afternoon. I guess first question is if we assume a flat market next year for wafer fab equipment, what do you think relative growth would be for the OCD segment of it?

Timothy Stultz

Well first of all Tom thanks for calling in. I don’t have that number in front of me and I don’t really want to guess, but we do know that OCD is growing faster than the market in general especially in the process control area. And if you take that now that to what we are doing in the wafer the 3D packaging I just think – I think it would be a pretty great world for us if we see WFE flat next year against what we think we can do in performance of the company.

Thomas Diffely – DA Davidson

Okay. May be looking in a different way I mean what – how much does what an OCD market grow or the demand for OCD grow going from the 45 nanometer node down to the 3228 and below nodes? I think that will be a pretty almost a step function in demand for OCD tools because of the complexity of the transistors?

Timothy Stultz

Yes, if I have to give you kind of some response to it, it is probably 20% to 40% and it really depends on whether or not it depends on what the device technology is and what – whether they’ve implemented some other three dimensional structures but it’s at least in that range.

Thomas Diffely – DA Davidson

Okay. It just seems like next year a lot of the – what demand there is right now is offer 20 nanometer and below and that’s all a nice catalyst for your tools. If you look at outside of the Intel in the 3D transistor, what’s your guess for the timing for some of the other players, is this a couple of years down the road still?

Timothy Stultz

Well we are engaged was at least to another one that’s going to the 3D transistor right now and I think it’s probably in terms of when you say how far down the road, I think they are going to have working devices within next year I think full ramp production probably is a year-and-a-half.

Thomas Diffely – DA Davidson

Okay. And then you have just to look at the bookings – solid bookings to climb pretty big in the third quarter and actually think they’re going to come up off a pretty low base in the fourth. Are you seeing similar trends or do you think the fourth quarter is also weak bookings quarter for you?

Timothy Stultz

No, I think, right now and again I always have to qualify, I’m the eternal optimist the basics – looking at the way both these activities our business outlook and forecast, I really do feel like we are in a trough and things are starting to turn the corner for us.

Thomas Diffely – DA Davidson

Okay, all right. And looking at the model, it sounds like with all your potential new growth avenues OpEx is going be stable to even slightly upper over the next few quarters?

Ronald Kisling

The OpEx numbers we are telling about are looking up a little bit. Most of that is applied, our OpEx was up this quarter and it was tied both to some R&D spending as well as to some contract services. But right now unless we saw a radical change in environment, we are going to stay the course for the R&D investments. We’ve got some really exciting new tools we’re working on. We’ve got some exciting new applications we’re working on. In the last quarter, we’ve announced four significant wins as Tool of Record that a result of some of the work we’ve been doing. So that strategy of working with customers developing new tools and new applications is really laying a nice ground, based is first to count on some growth next year.

Thomas Diffely – DA Davidson

Okay. And I guess during the quarter we’ve talked about some of the foundry wins. Is that all for the foundry or have you expanded out to some of the other foundry players as well?

Ronald Kisling

We are benefiting from all the foundry players and clearly the emerging foundry player that we’ve had a very strong relationship with this been highly beneficial to our business, but we’re making I think what I consider to be a critical important inroads into the others that should start to play out for us in the forth coming year or so.

Thomas Diffely – DA Davidson

Okay and then finally on the balance sheet, obviously a pretty strong cash position, but it’s sound like your concentration is going be on growing some of these new opportunities and not on share repurchases and other avenues?

Ronald Kisling

So we do have a share repurchase, authorized share repurchase plan of $10 million, we’ve spend about half of that, we always look at that and we internally, but I think that we do our shareholder greater service if we take that money and turn it into growth of the business as opposed to just returning the share repurchase at this time.

Thomas Diffely – DA Davidson

Fair enough and sounds good. Okay thanks for your time.

Operator

Thank you. Our next question comes from Auguste Richard of Piper Jaffray.

Auguste Richard – Piper Jaffray

Yes thanks for taking my question. The fourth quarter is usually a softer quarter for you all, could you first disaggregate I think some customers have some financing issues, some customers tend to hold off ordering in the fourth quarter trying to get better pricing and then they spend some downgrading of demand for 22 millimeter wafers than others, can you talk a little bit about the impacts of those things on the current quarter?

Timothy Stultz

No, I think Auguste first I’ll talk – thanks for calling in. I think you’ve done a great job of covering the customers, you know it pretty well and all those factors are captured in our guidance for Q4. We have for the last two years as you know been faced with customers trying to leverage the end of the year, shipments to extract better terms and which we don’t capitulate to and we’re trying not to – we are trying to learn from our experiences there and be a little more active in our forecast. We have a customer that is going through a financing which is whose money has been managed by the bank. And as a result there is been significant push-outs there. And they play the biggest role in the softness as we look into Q4.

Auguste Richard – Piper Jaffray

Got it. Now do you have any thoughts as to the resolution about the financing and the bank control of the financing in terms of their ability to turn spending back on?

Ronald Kisling

I don’t have any insight but I know that when we talk to the people at the operating level, the engineers and the manufacturers they feel that they are behind the curve on this. They’ve got tools that they want immediately, they keep asking us about lead-time, they’re going to the banks trying to get releases on a two-by-two per basis. And we should sure like to see a break lose in the Q1, Q2 timeframe.

Auguste Richard – Piper Jaffray

Okay. And then in terms of you’re going to be shipping some of your first tools in 450, it sounds like in the middle next year. Can you talk a little bit I know it’s hard about gross margin and sort of RevRec is still going to be a quarter or two delay in that. I’m just trying to think of how the shape of next year is going to look?

Timothy Stultz

The gross margins of the tools would be in line with our other products if not better. And we’re also in terms of revenue recognition should be real straight forward in the normal timeframe that we ship tools and recognize them in another environment. Since these are tools that have been brought in for development purposes we don’t expect any form of acceptance issue.

Auguste Richard – Piper Jaffray

Okay. And then you did mention you built up a little bit of inventory in the quarter for tool placement, customer demos I am assuming maybe talk a little bit about how much, what dollar that represented in the inventory and sort of how many tools replacing on a customer for evaluation?

Timothy Stultz

So in general the increase quarter-over-quarter was about $5.2 million and I think the three main points that kind of drove all that was really purchases some of the new tools, new versions of tools that are shipping beginning in Q1, and increasing evaluations tide to some of those new tools as well as new customers and new users. I don’t have a specific number of tools but there is an increase with some of the activity that’s happening on the tools. So that was the big driver.

The other driver is we did make sure that we had inventory built for some of the forecast sales that ended up pushing out of the quarter that both leads into Q4 and Q1. So those were really the three big drivers.

Auguste Richard – Piper Jaffray

Okay. And then last from me just in terms of the UniFire, what’s application for the product sort of I’m interested in the Interposer technology and Micro-Bumps, I understand that there is some yield issues around that. And I was kind of curious how many customers you are working with and is that driving incremental demand in the short-term for the UniFire?

Timothy Stultz

I guess, the best information I had on right now is that in terms of who is using our tools in the Micro-Bump area, we’ve got two customers that are directly isn’t it.

Auguste Richard – Piper Jaffray

Okay. And are those folks having yield issues and is that helping out?

Timothy Stultz

I don’t know, they haven’t told me that. Now that the – that’s sound slipping, I, we just know we’re working with them on those applications. We look at new ways to use the tool. I know that our applications group is much closer to this and doing a terrific job and I see this playing out very nicely for us next year.

Auguste Richard – Piper Jaffray

Okay, got it. All right. Thanks a lot.

Timothy Stultz

Thanks, guys.

Operator

Thank you. Our next question comes from Patrick Ho of Stifel Nicolaus.

Patrick Ho – Stifel Nicolaus

Thanks a lot. Tim, can you just give a little bit of color in terms of post these push-outs you’ve got a little bit of inventory to meet if they return, but how quick and the company response should demand pickup say in early 2012, how is the responsive time in terms of both yourself as well as the supply chain?

Timothy Stultz

The – Patrick, thanks for calling in. The – actually we can respond quite quickly as you might imagine when folks – when we take a purchase order we always quote normal lead-times, but when you got a highly volatile environment like this we try to anticipate short term turnaround and pull-ins and that’s part of the reason that you see some of our finished goods inventory numbers are up a little bit that Ron mentioned earlier.

We can respond very quickly. We have the benefit of a strong outsourced manufacturing environment that allows to turn the system. We’ve been driving hard towards product platform commonality which gives us a lot more flexibility in the manufacturing floor and we’re just not going to let any business that we – that’s available pass this by.

Patrick Ho – Stifel Nicolaus

Great. In terms of the foundry business as a whole a lot of them are actually experiencing yield challenges particularly as though the new high-K metal gate material as well as each shrinking technology node. Have those challenges I guess stimulate potential new opportunities for Nanometrics particularly as we’ve seen these technology node migrations go on?

Timothy Stultz

Yeah, we are actually pretty enthusiastic about what’s going on in foundry. We do as we mentioned before a benefit from a very strong relationship with an emerging foundry company that’s making a substantial investments into their manufacturing both capacity as well as driving to the next technology nodes.

We’re seeing a growth in the use of the OCD platform in particular for this area and we’re starting to see some improvements in both – in our integrated metrology applications as well in the foundry space.

Patrick Ho – Stifel Nicolaus

Great and final question from me. With lot of the chatter among the memory suppliers about moving to vertical device structure, what are some of the potential opportunities you see there in terms of particularly incremental opportunities for OCD as the memory sector moves to those type of devices?

Timothy Stultz

I think it’s hand and glove with what we do. We certainly have to address some of the challenges of looking at some of these high aspect ratio devices like the that we mentioned earlier from Toshiba. But when you go into the third dimension it pretty much puts all the other technologies to the sideline. And OCD is one of the only buyable solutions and we may have some applications development to do to be able to optimize it for those. But this really falls into our sweet spot and why non-contact high speed optical techniques can be leveraged in that space.

Patrick Ho – Stifel Nicolaus

Right thank you very much.

Timothy Stultz

Okay.

Operator

Thank you. (Operator Instructions).

Our next question comes from Graham Tanaka of Tanaka Capital Management.

Graham Tanaka – Tanaka Capital Management

Guys thanks for your comments and Tim just wondering if you could talk a little bit more about the cycle and always wondering about the lead lags and what’s been going on in the different sectors, but it seems like in the last few months it’s been almost take out and that kind of thing. So I was just wondering if you can embellish a little bit more on how you are seeing your customer responding, what they are talking to you about and maybe utilization rates and that kind of thing.

Timothy Stultz

Sure, Graham, this is, thanks for calling in.

As I think everybody that’s reported so far is pointing out there is chip in push outs in the memory space. My feeling is that when I look at the technology and the technology opportunities, if I look at demand and when I look at the man device applications when I look at content rich mobile devices, when I look at the three dimensional devices and the technology moves. I can’t help that fall back that the macro issues are much more profound and affecting what’s going on our industry than chips in and technology and capacity. Those I think – those are almost secondary to the macro environment.

I think when you see the macro environment stabilize, I don’t to me have a major improvement but my personal feeling is that when the macro environment search stabilize I think that consumer demand changes, I think that the corporate company – corporations will start to look at PC refreshes and IT investments, I just think it’s all good stuff and we really feel, I mean, as close as we are with our customers we get very excited about what they are doing, what they want from our tool when we talk about when the next tool is available and what’s it’s going to be used for.

Graham Tanaka – Tanaka Capital Management

One thing I was wondering about is I’ve seen a comment about accelerated depreciation in some tool holders maybe being shifted this fiscal year versus next year sort of pulled in, I was wondering if that is really just the minor of that?

Timothy Stultz

Yes, I think the portion full things are relatively minor, in our case I know that there is always, there is usually chatter about for instance Samsung pulling in total tools towards the end of the year which is a pretty common practice for them as they try to wrap up at the end of the year. We’ve seen that before. We generally don’t find it as attractive because with those pull-ins they sometimes at the end of the year like to also extract an extra pound of flesh.

Graham Tanaka – Tanaka Capital Management

Right.

Timothy Stultz

In terms of – and we just don’t play that game. So we’ve done that two years in a row we’ve found that happen in two years in a row, we’ve found that the tool ship for first or second week of January that’s what it is, we’re going to continue to run the business that way.

Graham Tanaka – Tanaka Capital Management

Right. Okay, great. And nice to be able to deal some strength. So, the other is your tool what reckon the demand is, I was wondering if you could tell us a little more about those and what that might mean for sort of the ramps in the next 12 months?

Timothy Stultz

Sure. So this last quarter we announced four tool-of-record wins. We announced an integrated metrology tool-of-record win which was for Flash in Korea. We announced an OCD Standalone tool-of-record win which was for an emerging foundry in Asia. We announced an OCD tool-of-record win for hard disk drive and we announced the UniFire being adopt this tool-of-record by Samsung for packaging.

All of those tool-of-record wins are just at their early stages and as you start to see the investments in the new fabs for such as Samsung billing line 16 as well as developing their foundry business when we see what’s going on in some of the hard disk drive area, we see actually growth and strength in our integrated metrology, our wafer scale packaging, and our standalone OCD platforms. And we should see compounded growth that’s better than the normal capital spending as we go forward.

Graham Tanaka – Tanaka Capital Management

Is there kind of a – in your mind is sort of wrestle with someone either, what you’re telling the troop or you have anything on in sort of vision of the next say next year. If the (inaudible) does such and such a level whether it’s a flat or 20% decline, what kind of a delta you would have just by market share gains and the need to record wins?

Timothy Stultz

Yeah let’s – I’ll point to what we did, in the last 12 months we outgrew spending by 30% and I believe that that can be directly attributed to a couple of things, one is that we’ve been gaining market share and the second thing is that OCD is outgrowing other capital spending and also the wafer-scale packaging is starting to contribute nicely. I would expect that those growth factors continue to apply and although I won’t give an absolute number if the industry is flat I would expect to grow.

Graham Tanaka – Tanaka Capital Management

Thank you and congratulations.

Timothy Stultz

Thank you.

Operator

Thank you and I am showing no further questions at this time. I would like to turn the call back to Dr. Stultz.

Timothy Stultz

Thank you and thank you once again for participating in our call. It’s pretty evident to everyone that these are challenging times. However we clearly see significant opportunity to further grow our business by capitalizing on disruptive forces and technology inflections that are underway and we fully intend to execute on them. Our great importance regarding our ability to execute I have complete confidence in our management team and the employees of Nano who are fully committed and up to the challenge to take our company to the next level. We look forward to reporting to you on our fourth quarter and fiscal year 2011 results in February. Good-bye

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.

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