Rudolph Technologies' (RTEC) CEO Michael Plisinski on Q4 2015 Results - Earnings Call Transcript

| About: Rudolph Technologies, (RTEC)

Rudolph Technologies, Inc. (NASDAQ:RTEC)

Q4 2015 Earnings Conference Call

February 01, 2016 04:30 PM ET

Executives

Robert Koch - VP, General Counsel

Michael Plisinski - CEO

Steven Roth - SVP, Finance and Administration, and CFO

Analysts

Tom Diffely - D. A. Davidson

Dick Ryan - Dougherty & Co., LLC

Patrick Ho - Stifel Nicolaus

Farhan Ahmad - Credit Suisse

David Duley - Steelhead Securities

Operator

Good afternoon. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Rudolph Technologies Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]

Thank you. I would now like to turn the conference over to Mr. Robert Koch, VP and General Counseling. Please go ahead.

Robert Koch

Thank you, Amanda, and good afternoon, everyone. Rudolph issued its 2015 fourth quarter and year-end financial results release this afternoon shortly after the close. If you have not received a copy of the release, please refer to the company’s website at www.rudolphtech.com, where a copy of the release is posted.

Joining us on the call today are Michael Plisinski, Chief Executive Officer, and Steven Roth, Chief Financial Officer. As is always the case, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, particularly comments regarding the company’s future plans, objectives, forecasts, and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such estimates, whether expressed or implied, are being made based on currently available information and the company’s best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainties that can cause the actual results to vary materially.

Thus, the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Rudolph’s results are described in the company’s latest Form 10-K as well as other periodic filings with the SEC. Rudolph Technologies does not update forward-looking statements and expressly disclaims any obligation to do so.

Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. I will now turn the call over to Mike Plisinski.

Michael Plisinski

Thank you, Bob. Good afternoon, everyone and thank you for joining us. While this is my first quarterly conference call as CEO, I’ve had the pleasure of meeting many of you throughout my years with the company and met a good deal more of you at conferences over the last several months. For today, as we’ve done in the past, I’ll begin by reviewing strategic and operational highlights for the quarter and year. After my remarks, Steve will review our financials in detail and then I’ll briefly summarize, provide some guidance into Q1, 2016 and finally we will open the phone lines for your questions.

So let’s get started. I’m pleased to report that our Q4 revenues of $51 million complete a record year for Rudolph. 2015 revenues of $222 million increased 22% over the prior year, well exceeding the industry which was essentially flat in 2015. In advanced packaging, we saw strong year-over-year growth of 47% across our product suite of inspection, software and lithography. We see customers continuing to invest in our comprehensive solutions for a variety of advanced packaging technologies such as copper pillar, fan-out and several other promising technologies, all of which enable increases in device performance while lowering packaging cost.

As you know the advanced packaging market is particularly exciting to Rudolph given our broad product exposure to the market as well as the exciting growth rates which you all project to be in excess of 20% compounded annual growth over the next three years.

Our 47% growth in advanced packaging was bolstered by lithography sales of $16.5 million, which grew over 30% from last year and as guided, we recognized revenue on two JetStep Lithography Systems in the fourth quarter. Our core inspection business saw a very strong year-over-year growth of 20% in advanced packaging and an impressive 90% in the front-end primarily driven by market share gains in foundry, MEMS and RF manufacturers.

We are pleased to expand our revenue in the exciting RF filter market by 50% in 2015. Rudolph’s comprehensive solutions for this market, which combine inspection, metrology and software continue to demonstrate compelling value to our customers. These solutions are being used to accelerate production ramps and enhanced manufacturing yields of SAW and BAW filters with BAW emerging as the preferred technology to meet the multi-frequency signal filtering requirements of smartphones.

With the rapid advancement of Internet of Things and the increased filter content in smartphones manufacturing of these components will likely continue to grow dramatically and to that point several manufacturers have already announced increased capital spending for 2016. And recently Qualcomm and TDK announced plans to create a joint venture for RF chips called RF-360 Holdings, which in our view will likely provide them more scope to invest in and bring to market integrated RF solutions particularly for applications outside of smartphones.

During the year, we also extended our leadership in the growing MEMS market with the competitive win at Robert Bosch for inspection and software solutions spanning both frontend and back-end applications. The MEMS market is challenging from a variety of perspectives, including substrate handling as well as specialized software algorithms for detecting critical defects of interest. Bosch was particularly challenging because of their diverse product offering. Their fab not only manufactures MEMS, but other devices used in many critical applications such as automotive and machine controls.

As such Bosch is increasing their process control by adding more inspection steps around all fabs to ensure reliability and safety of their products. We were pleased that the world’s leader in MEMS manufacturing selected our unique solution of integrated equipment and software to meet their stringent requirements. Though still a fairly fragmented market we see increased growth in the MEMS devices driven by increasing usage in automotive as well as new applications under the catch all term of Internet of Things.

Turning to software, our business unit continues to drive product differentiation as customers require higher levels of fab integration to achieve quality improvements and tighter process controls. Through our integration of big data technologies which occurred several years ago our software solutions have increased the amount and speed of data collection and analysis both within the factory and across multiple factories. This provides customers with greater insight into their process and the ability to more quickly and accurately identify areas of improvement.

As an example during the quarter we received and installed a multi-fab order for our Discover Enterprise Yield Management System Software from one of the world’s top memory device manufacturers for their packaging applications, more commonly used in front-end semiconductor manufacturing, Discover technology is now being adopted for advanced packaging applications as IDMs and fab-less customers increase focus on improving the reliability of these devices. Discover was a large driver of growth for our software business in 2015 resulting in a record year with revenues, representing just over 12% of the company’s revenue.

Now turning our attention specifically to our Lithography business, as previously mentioned we added two additional JetStep customers this year, and with repeat sales we increased revenue by roughly 30%. In fact, we have expanded this business at a compounded annual growth rate of approximately 30% since its introduction. Not only are we expanding our customer base but we’ve also expanded our applications served from fan-out to the larger copper pillar market.

These two applications can be run on the same tool offering a significantly higher value proposition particularly for an OSAT as they are able to leverage their CapEx spending and flex their fab capacity based on the packaging orders they are receiving from their customers. We expect to maintain our momentum from 2015 as we look ahead to 2016 and underscoring that point this morning we announced that we added a leading OSAT based in Taiwan to our growing list of customers for our JetStep family of products.

This new customer is introducing higher IO packages with lower cost targets on panel using our JetStep S Series system. We are excited to be selected for this important pilot line and expect this will be just the start of a new and exciting market for Rudolph. We also believe further investments outside of Lithography in some of our other products will be necessary as the pilot line ramps to fulfill the required high volume manufacturing capacity in 2017. This panel system is scheduled to ship in mid-2016.

Lastly, our open valuation for JetStep W that shipped in the first quarter of 2015 concluded at the end of the year. We were able to demonstrate many benefits of our JetStep system it was not enough for the customer to change suppliers at this time. They have one stepper from our competitor and are still developing stepper based Lithography packaging technology. The customer believes changing their process at this early stage of their development in order to maximize the performance benefit from our JetStep created additional risk. We believe as this customer continues to advance we will have additional opportunities.

In summary, we are pleased with the progress of our Lithography business, we are committed to the success of our customers as they develop their next generation advanced packaging processes, leveraging our unique JetStep technology, and we’re encouraged by the feedback from our customers who recognize the added value our solution provides.

We expect further Lithography growth in 2016 driven by repeat sales from those customers we’ve already won as well as new customers from our growing pipeline such as the order announced this morning.

Before commenting on operations, I’ll provide an update on our acquisition of IP from Stella Alliance.

As you may recall in September we acquired Stella Alliance’s patented illumination, auto-focus and image acquisition technology. Stella Alliance’s technology significantly enhances our ability to identify critical defects that are difficult to image with currently used illumination methods. This technology also enhances our high-resolution capability with the patented focusing method to enabling inspection of highly worked rectangular panels thus complementing our JetStep S line of steppers.

With this technology Rudolph will offer more comprehensive advanced packaging solution comprised of printing, inspecting, and yield analysis in order to achieve the high productivity necessary for our customers to quickly migrate to high volume manufacturing. We expect to ship our next-generation inspection system in the second quarter of 2016 with revenues falling in the second half of the year. Early customer reaction to the system has been positive and we look forward to its added contribution to our growth including the potential to open up new applications to Rudolph.

Operationally we improved our operating income by 110% ending the year at $45 million. This is a result of the leverage in our operating model where our strong gross margins helped drop more to the bottom-line with increases in revenue as well as operational changes we’ve been instituting throughout the year.

We completed the transition of our R&D and manufacturing center in Europe to our Minnesota facility. We also formed a new centralized automation group that will accelerate our ability to respond to the unique handling and automation requirements we see in advanced packaging and MEMS markets. Our ability to deliver specialized automation solutions has been a key differentiator for Rudolph’s Inspection business, which we want to more efficiently leverage across all our product lines. Migrating all business units to our control works equipment control software will further enhance this leverage.

In summary, the global trend towards increased mobility drove Rudolph’s growth in 2015. Most notably from RF, MEMS, OSATS and foundry markets. In fact roughly 65% of our revenues came from these high growth markets. With the broad appeal of our solutions and products for both front-end and back-end and our diverse customer base, we are well positioned to ride the continuingly wave of growth and mobility.

Now, let me turn the call over to Steve, who will review our Q4 financials in more detail.

Steven Roth

Thanks, Mike, and good afternoon, everyone. In my remarks this afternoon, I will provide some details behind our Q4 and full-year results, and also provide some guidance on gross margin and operating expenses for Q1. And similar to prior conference calls all information discussed in my prepared remarks will be on a non-GAAP basis unless otherwise identified.

Quarterly revenues for Q4 were $51.1 million, down from $58.6 million in the third quarter of 2015 and in line with our previous guidance. Another strong performance by our software group and as Mike mentioned the sale of two Lithography tools in the quarter partially offset the usual fourth quarter seasonal decline in our back-end inspection business.

For the full year despite the challenges in the overall industry our focus on high growth markets such as advance packaging, RF and MEMS as well as our continued attraction in Lithography and the value our software solution provide to our customers all contribute to a record year for the company.

2015 revenues totaled $221.7 million, up 22% from $181.2 million in the previous year. Getting back to the Q4 details despite the seasonal weakness advanced packaging tools were still the largest portion of our revenue representing 38% of overall revenue. The driver for this was clearly through Lithography tools in the quarter with one coming from a new customer announced in Q3 and the other two from a follow on order from an existing customer.

Lithography represented 16% of revenue in the quarter. This helped offset the declining in our inspection business, which saw declines in both our back-end packaging market and front-end business. We also had another strong quarter in our software group, which represented 14% of revenue in the quarter and was driven by fab wide installations. As a result our software group also achieved record sales in 2015.

Finally our metrology group which is more geared to the front-end of the market represented 18% of revenue in the quarter. On a percentage basis front-end sales accounted for 53% of revenue in the quarter back-end sales the remaining 47%. For our front-end sales foundry and logic customers contributed the largest portion of our revenues in the quarter while specialty devices, which includes our RF filter sales and memory sales were down slightly from the previous quarter.

The percentage breakdown of our front-end business was 43% foundry, 30% logic, memory with 18% and special devices was 9% of revenue. This compares to a 2015 third quarter market split of 40% foundry, 22% logic and 19% each for specially devices and memory. Our back-end sales which were dominated by advanced packaging tool sales accounted for 81% of total back end revenues.

Switching to a geographical breakdown of sales for the quarter. Asia remain the strongest region representing 67% of overall sales, Europe remains strong in the quarter at 18% of sales and the U.S. was 15%. From a customer concentration perspective, we had only two customers that represented greater than 10% of sales in the quarter with one being a leading foundry customer and the other being an RF device manufacturer. In fact consistent with prior years, we had a broad customer base contributing to our overall 2015 revenues with over 146 different customers and none of them representing over 10% of our revenues.

Turning to gross margin, our gross margin for the quarter was 52% in line with our previous guidance. This compares to 55% margins in the 2015 third quarter. As I discussed last quarter we expected the increase in our litho sales would have a negative impact on our margins as that business segments has yet to achieve normal manufacturing volumes. Also contributing to the decline was the overall sales volume in the quarter.

Looking at the 2016 first quarter, we are forecasting an increase in our gross margin to the range of 53% to 54%. This guidance reflects a more favorable sales mix that includes an increase in our process control products. Looking at the details of our operating expenses, fourth quarter total operating expenses were $18.2 million and below our previous guidance. This compares to $18 million in the 2015 third quarter.

R&D for Q4 was $9.3 million a slight increase from $9.2 million in the third quarter, SG&A for Q4 was $8.9 million also increased slightly from $8.8 million in the third quarter of 2015. For the 2016 first quarter, we anticipate an increase in operating expenses relating to the kickoff of certain R&D projects, reestablishing our compensation plans and consolidation of two of our New Jersey facilities. Resulting in our operating expenses for the quarter to being in the range of $18.5 million to $19.5 million.

Net income for the fourth quarter was $5.1 million or $0.16 per share above the midpoint of our previous guidance of $0.10 to $0.18 per share. This compares to net income of $8.4 million or $0.26 per share in the 2015 third quarter.

To summarize our results for the quarter we saw a weakening through the quarter primarily in our inspection business, we have to offset some of that weakness with our strong software performance and continued traction we are making in our litho business. From a top-line perspective, we had an overall record year for the company and also a record sales year for our software group. Our continued focus on operational efficiencies, which includes a consolidation of facilities and leveraging our R&D programs has resulted in two years of overall declining operating expenses.

Now turning to the balance sheet, we ended the fourth quarter with cash and marketable securities increasing $6.2 million to $161.5 million. Our share repurchase program that we continued throughout the impacted our cash balance. During the fourth quarter, we repurchased approximately 273,000 shares of Rudolph stock under our authorized repurchase program bringing the total shares repurchase under the plan to 3 million shares. The cost of the fourth quarter repurchase is totaled $3.5 million. Excluding those repurchases, our cash balance would have increased $9.7 million.

Our Q4 accounts receivable of $55.5 million decreased from $61.3 million in the third quarter. Inventory also decreased to $71.5 million and working capital ended the quarter at $197 million. Finally to wrap up capital expenditure for the fourth quarter were $1.1 million and for the full year totaled $3.4 million. Depreciation expense for the Q4 was approximately $1 million.

Now I’ll turn the call back over to Mike. Mike?

Michael Plisinski

Thank you Steve. With regard to the first quarter of 2016, it is typically muted that somewhat in the early part of the quarter due to Chinese New Year offsetting the traditional software the previously announced ramp from a leading foundry in Asia provides a positive impact to the quarter. Accordingly, we are guiding Q1, 2016 revenues to be up between $51 million and $55 million with earnings to be between $0.15 and $0.20 per share.

Looking more broadly at 2016 despite the recent pause in the sales of smartphones and tablets we are encouraged by sentiment from customers in our non-traditional markets and as a result see continued expansion in advanced packaging, MEMS and RF filter markets suggesting that the growth in other mobile devices is picking up. In our more traditional markets we expect to benefit incrementally from expansions in V-NAND as well as 3-D memory and logic moving to 10 nanometers. Though this industry remains inherently difficult to predict the long-term growth drivers are strong and as we highlighted above we are encouraged by the optimism from our customers as they continue to discuss and plan for expansions in 2016.

In conclusion, I want to congratulate the global Rudolph team for a stellar performance in 2015 by supporting our customers with our unique blend of technology, software and applications knowhow we are playing a more important role in helping our customers overcome their challenges and drive their success.

Thank you and this concludes our prepared remarks. And now we will open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first quarter comes from Tom Diffely from D.A. Davidson

Tom Diffely

Good afternoon. First a quick question on the panel order that you received this morning, was this business that was driven by the OSAT for the flexibility of the system or was it driven by a key fab less player for just kind of overall long-term economics?

Michael Plisinski

It was driven primarily by a fab less for overall long-term economics. Yeah.

Tom Diffely

Go ahead, I’m sorry.

Michael Plisinski

I was going to say this customer sees a number of different fab less potential customers that they intend to add to their portfolio or customer base.

Tom Diffely

Okay. So at this point, are we waiting to see if this works well with the first OSAT customer or do you think there will be a fan-out, pardon the expression, expansion of this among other foundry players over certain period of time or how you think this rolls out over time?

Michael Plisinski

We’re encouraged by the number of different companies talking to us and planning for fan-out, panel fan-out. So there is a lot of fan-out going on right now. But on large square panels there is an increased amount of activity around that. This customer is early and getting a jump setting up their pilot line fairly aggressively in 2016. We -- I know their plans are to have production ramp in 2017 I’m not sure how many others will follow, but we are seeing other customers talk to us about panel lines. So I think as you see the chip content and the amount of devices being built continues to go up panel is the natural place to expand for them to continue to drive cost down.

Tom Diffely

Okay. And is there any technology risk with moving to the glass panel versus the semiconductor wafer or is that pretty well understood at this point? For the customer…

Michael Plisinski

For us, no. And for the customer there is trade-offs on both. So I think that’s part of what some of the research is about right now, trying to decide which -- what are those trade-offs and where best to apply and for what product types.

Tom Diffely

Okay, all right. And then moving to the RF side of the business, big increase in 2015. Sounds like you expect your continued volume increases at those customer sites to drive more traditional RF business for you. The lithography comment on RF is that layering on top of what’s already a very strong metrology business there? Are you -- do you expect the business both the metrology to grow as well as lithography to grow?

Michael Plisinski

So we don’t sell currently lithography into RF. So right now we’re selling inspection, metrology and software. And yes, we expect all three of those to be growing within new accounts, but also expanding within the existing accounts. So we might sell a metrology system or a handful of systems and then we add a YMS to that account some quarters later and then through the analysis. They start, the customer start to see that they are defect limited and we start to add inspection equipment. So we’re working with our customers to understand their problems and we happen to have a number of solutions that meet those problems.

Tom Diffely

Okay. I must have missed that this morning there wasn’t a talk about those guys using the litho system as well.

Michael Plisinski

No.

Tom Diffely

Okay, sorry.

Michael Plisinski

By that the litho group to do it, but the requirements are a little different.

Tom Diffely

Yeah, all right. And then just finally with the OpEx going up, are those consolidation expenses that are going into your non-GAAP numbers then? You don’t take them out.

Steven Roth

Yeah, Tom, this is Steve, we’re actually in the process of consolidating our two New Jersey buildings, there is some expenses in there, typically if they get significant we obviously non-GAAP them out. Right now they are just part of the increase, they are not significant just but one of the items that are driving the increase overall.

Tom Diffely

Okay, all right. Thank you.

Operator

And the next question comes from Dick Ryan from Dougherty.

Dick Ryan

Hey, Mike, on your Q1 outlook can you kind of give us what your assumptions are for front-end and back-end and do you anticipate Litho shipments in Q1 or Q2?

Michael Plisinski

We do anticipate shipments in Q2 as I believe we’ve announced one of the display tools.

Dick Ryan

Yeah.

Michael Plisinski

For Q1, I don’t have the number in front of me as far as the split, but I would guess based on my recollection of the orders we’re going to be a little more heavily towards the advanced packaging side.

Dick Ryan

Okay. And axing out the litho tool in the fourth quarter versus third quarter obviously you had some seasonal impact there, not surprising, can you kind of give us a sense of what else is going on in your AP side in the back-end with inspection and maybe software contributions as well?

Michael Plisinski

Well, we see actually increases in the need for inspection at advanced packaging we obviously had a very strong overall year for inspection. We’re also seeing the added benefit of our metrology capability, which we’ve integrated into our inspection further creating opportunities for us moving ahead the software has always been a strong differentiator for us. So in the advanced packaging world as you know it’s feast or famine, when everybody is expanding the guys buy, as soon as the few announcements come out from smartphones and tablets people get a little more hesitant, orders slow. So I think that’s really what was impacting us in the final part of the year.

Dick Ryan

Okay. And one other one I know China does have importance not only in business but on your R&D side there, can you discuss what your strategy is there and what your outlook is for your efforts in China?

Michael Plisinski

Yeah, that’s a good question. So we’re actually expanding our presence in China in fact I was just meeting with our GM of China last week, he was here, and we were talking about a variety of different plans to expand coverage and more effectively meet the growing number of accounts that are coming up in China as China continues to invest heavily the big region and with some of these investments the companies are not that large. So it’s not a large volume of tools becomes not so cost efficient to cover them. So we are looking at ways to do that efficiently, we are expanding and part of our plans in 2016 are to expand our position within China.

Steven Roth

We also have – Dick, you also know we have our R&D center in China also.

Dick Ryan

Yeah.

Steven Roth

…Which [indiscernible], we constantly look for opportunities to leverage those groups of people because they support the software business as itself but also can support some of our other products too.

Dick Ryan

Okay, great. Thank you and good execution, congratulations.

Michael Plisinski

Thanks, Dick.

Steven Roth

Thank you.

Operator

And your next question comes from Patrick Ho from Stifel Nicolaus.

Patrick Ho

Mike wish you the best of luck going forward. First off, in terms of the growing adoption of fan-out packaging applications in the marketplace over the next few years what are your broader industry impressions about the opportunities with TSV? Does this accelerated growth in fan-out maybe offset some of the opportunities with TSV or do you see TSV still growing over the next few years?

Michael Plisinski

Thanks, Patrick. We actually don’t see them as competitive. So the pay fan-out is obviously further long in a broader adoption and provides us certain value proposition. PSV has an increased value proposition for performance, but its challenging in the actual integration and bringing it together from a cost perspective. So as we see with the memory manufacturers they have been pushing PSV because they can control most through that interface, those interface points and then working with logic manufactures of which there is one or two variable to put together TSV packages that are more cost effective or with the capabilities.

We also see TSV and CMOS image sensing and we are seeing increased pressure on those manufacturers to shrink packages and bring packages together. So where they can control the controller drivers, the device controllers as well as the CMOS image sensor itself put those together, that could also drive increases in TSV spending. But we don’t see that taking away any business from the fan-out we look at these as two different directions probably on different cycles of adoption. But we are obviously riding a strong wave right now with fan-out that’s expanding more rapidly, but we are certainly keeping our eye on and staying in touch with the TSV, R&D as well.

Patrick Ho

Great, that's helpful. My second question, over the past few years you have been able to integrate a lot of your capabilities between your inspection and metrology tools to serve the growing advanced packaging market. However, customers as you know can see the demand more features, capabilities, things like defect review. Are these incremental add-on require the customers are coming to you with, are they all software related or does Rudolph need to develop new tool sets over the three years to meet these growing demands

Michael Plisinski

Another good question. Actually they are not all software related. So we have hardware, integration programs and technologies and requirements as well as software. I would say from an inspection point of view primarily they are software related. But not exclusively and part of the acquisition of Stella Alliance was to leapfrog or jump start programs that we think are going to be critical a year or two down the road and we’ll have tools already in place.

As far as the R&D spend goes, my feeling is we’ve got a strong enough -- we spend enough on R&D right now. Some of the things we’re doing are too improve the efficiency of the R&D. So some of the centralization you heard me talk about earlier so that we can leverage R&D across multiple product lines. We are working on more modular design so that we can fit metrology capabilities developed in one BU into a single common platform that gives us the ability to provide these unique solutions to customers in an integrated turnkey way. So and of course the software has been well integrated to these systems for many years, which highlights or let’s say accentuates the value from the hardware. So I don’t...

Patrick Ho

And the final question from me Steve just housekeeping, what was cash flow from operations for the quarter and can you repeat what the 1Q ‘16 gross margin guidance was?

Steven Roth

Okay. Let’s do this right from first, the gross margin guidance for Q1 is 53% to 54% and cash flow from operations is about $12 million.

Patrick Ho

Great, thank you.

Operator

And your next question comes from Farhan Ahmad with Credit Suisse.

Farhan Ahmad

Thanks for taking my question. Mike first question for you in regards to the specialty business. If I look at it in 2015, the business started off very strong and then kind of trended down through the year like Q4 was particularly. Now, when I look at your commentary for 2016 you expect growth and you kind of outlined various factors where you expect the growth. So as we think about the linearity of the CapEx or rather like the revenues from the specialty division it seems like that would be more in the latter half of the year because you are starting in the beginning. Or do you expect like it to be pretty strong in the first half as well? Would be really helpful if you can talk about how you expect the specialty portion of the business to play out in this year.

Michael Plisinski

So I think it’s a good question. I would also -- I would basically it’s in the middle, so it’s not we don’t see a big drive in Q1, between Q2 and Q3 is where we’re starting to see customers talk to us about expansions in RF and MEMS, partly this was because of the huge growth in 2015 and they’re bringing these tools into production, they are putting them in line and they’re obviously there is this digestion period that they’re going through to decide how much more CapEx and how much more they’re going to expand on. The reason we were excited is that a number of our customers have announced some pretty aggressive CapEx plans for 2016 of which we’ll certainly benefit. Now the timing of that as I mentioned it’s not a first half, so it’s almost right in the middle there what we see so far.

Farhan Ahmad

That’s really helpful. Then coming back to your software business, you mentioned that you were able to get some sales of your Discover software into the packaging customer, I just wanted to clarify is it a traditional OSAT company or is it like one of the front-end companies that is now getting into the packaging market?

Michael Plisinski

It was a large memory manufacturer. So it was a high-end memory guy, top tier memory manufacturer. I would say they’re now getting into they’ve have had packaging capability, but they wanted to take it to new levels. And the micro bump some of the things they are doing that required much tighter process control and they didn’t have well Discover provide them a way to take advantage of that.

Farhan Ahmad

Got it. And my last question is on the litho market. You had one sale of the display system that you announced one order for the display system that you announced. As you look at the litho opportunity in the display market is that something you’re going to pursue more aggressively or do you expect like just sales into the more legacy customers install base?

Michael Plisinski

Right now we haven’t changed our strategy from what we’ve said publicly which is we’re opportunistic with the display products, our focus is on expanding in the advanced packaging and bringing litho to help customers enable their advanced packaging technologies. Yeah, we’re always looking to see if there is opportunities out there for growth and if there is the right inflection point we certainly take advantage of it. But right now there is nothing changed from our focus.

Farhan Ahmad

Thank you. That’s all I had.

Operator

[Operator Instructions] Your next question comes from the David Duley from Steelhead Securities.

David Duley

Good afternoon, thanks for taking my question a couple of them. Could you help me understand how big you think the inspection market is and the lithography market is for advanced packaging?

Michael Plisinski

I think Gartner has the inspection market for advanced packaging at about $200 million I don't have the date in front of me but $200 million going up to $250 million over the next three years something like this. From the lithography perspective overall market is probably $180 million in last year in Gartner Dave, I really think they split it out between advanced packaging, but the stepper portion of that do you assume the steppers is going towards more of the advanced packaging techniques. It’s probably half of that.

David Duley

Half of the $180 million?

Michael Plisinski

Yeah.

David Duley

Okay. And when you look at you just have a big dynamic going on in 2016 you have a large Asian foundry spending 10% of the CapEx which is $900 million to $1 billion on a back-end type of process. How do you think that changes either the size of the market or the opportunity for Rudolph I’ll give you there is many ways you can answer that question, but I guess at the end of the day what I really like to know is of that incremental spending how much is available or what’s the TAM available to Rudolph?

Michael Plisinski

Well the TAM would be our entire product suite, so that’s the advanced packaging is the one area where our inspection, our metrology as well as software and lithography can play. So if we look at what their further expansion plans when they want to go down to two micron lines and spaces and below that’s another inflection point that we’d have to look at the volumes and things in order to understand the levels and how many tools that actually means, but as far as total number it would be pretty exciting for us.

David Duley

So essentially just looking at that $900 million to $1 billion of incremental CapEx from that customer, it’s all available to you it just depends upon where are you at winning slots or pieces of that spending.

Michael Plisinski

Yes that would be correct.

David Duley

Okay. Now don’t you think that that big chunk of spending in 2016 is going to drive the size of the inspection and lithography markets up pretty dramatically?

Michael Plisinski

Yes I mean it’s going to certainly drive it up, I guess I don’t know about dramatically, I think the overall volumes will drive it dramatically. So if somebody was packaging these we have told TSMC built this for a certain customer, that customer is taking business away from somebody and bringing it here. So the overall market has to grow and that drives the overall inspection growth or TAM. In this case we’re seeing more and more fabless customers starting to specify advanced packaging technologies for their next generation of devices and I think that’s having a bigger impact on the overall TAM growth than TSMCs or the foundries process here.

David Duley

Yeah well I guess that would be my next question is now that you’ve kind of brought that up you have big Asian foundry spending a big chunk of money to basically bring volume production to one or two customers, but the other customers assembly guys are all gearing up CapEx growing amounts of CapEx in ‘16 versus ‘15 and all of that incremental dollar are going to be spend on advanced packaging and I guess what I’m trying to say is there seems like there’s much more broader adoption of this info type package than just the headlines we see at about TSMC, which you tend to agree there’s a lot more customers that are in this packaging technology?

Michael Plisinski

I definitely agree with that. We’re seeing a lot more fan-out as you can see from our press releases with the JetStep each of those is going into a fan-out or fan-out and copper pillar line so those are all new lines going in.

David Duley

Okay, that’s it from me. Thank you.

Operator

And there are no further questions and I’d like to turn the call over to Mr. Mike Plisinski for the closing remarks.

Michael Plisinski

Thank you everyone for joining us today and for your continued interest in and support of Rudolph. We look forward to seeing you at our 2016 Investor Event, quick note the date for the Investor Event has been changed due to a conflict we discovered within Investor Conference. We wanted to make sure that as many of our investors as possible could attend. So we moved the date from March to May 9th at New York City at the Marriott Marquis. Please contact Investor Relations, Laura Guerrant at 808-882-1467 for details. And with that we will conclude today’s call. Thank you.

Operator

That does conclude today’s call. You may now disconnect.

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