Nova Ltd.
Q3 2012 Earnings Call Transcript

Published: 1 Nov 2012

[Operator:]

Good day and welcome to the Nova Measuring Instruments’ Third Quarter 2012 Results. Today’s conference is being recorded. At this time, I would like to turn the conference over to Kenny Green. Please go ahead.

[Kenny Green:]

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments’ third quarter 2012 results conference call and presentation, and thanks 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 the link on Nova’s website at www.nova.co.il. Before we begin, may I remind all listeners that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statements outlined in today’s earnings release also pertains to this call. If you have not received a copy of this 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 follow this with a question-and-answer session. I will now like hand the call over to Mr. Gabi Seligsohn, Nova’s President and CEO. Gabi, go ahead, please.

[Gabi Seligsohn:]

Thanks, Kenny. Hello, everyone, and welcome to our third quarter of 2012 earnings conference call. I will begin today’s call by describing the main aspects of our performance during the third quarter. I will then provide some color on the current state of the industry as it relates to us and, finally, provide an outlook. Revenues for the third quarter were in line with our expectations and reflected our strong exposure to the foundry segment. EPS for the quarter modestly exceeded the high end of guidance due to tighter expense control in light of recent market conditions. During last quarter’s conference call, we mentioned our largest customer, TSMC, recently reaffirmed its commitment to more than double its current 28-nanometer capacity by the middle of next year. We also mentioned their plan to spend most of their CapEx next year on the 20-nanometer technology node. Our recent check revealed a continued commitment to that plan, though at the same time, orders have been delayed by about one quarter. Plans to increase capacity at 28-nanometers also include most of our other foundry customers who are focused on increasing their market share in that critical technology node. These customers are also working towards qualifying a 20-nanometer process during the coming year. Another leading customer of ours is initiating an upgrade at an existing fab to support the 28-nanometer ramp-up and we expect to get multiple standalone and integrated metrology orders to support this project. The competitive landscape in the foundry segment is fueled by continued lack of capacity at the high end. At the same time, diversifying the semiconductor supply chain as a means to overcome this gap is proving to be difficult as yields are not easily attained. Meeting certain yield targets are a pre-condition for continuing a capacity ramp-up and therefore, the pace of the ramp-up has been compromised and affects our short-term business results. Another aspect of the current environment is that each of the players needs to demonstrate an ability to develop and later produce semiconductors at even more advanced nodes. As a result, we find that all of our foundry customers are actively engaged with different stages of developing three to four technology nodes. Though tool purchasing volumes for these efforts still remain low, support in application development efforts are in place in order to secure our position for such time when those technology nodes ramp up. We gained a lot of confidence for our future growth potential in light of how deeply we are designed into these plans. On the product side, we were very pleased to announce multiple orders from multiple customers for our recently-announced new product, the Nova V2600. We are in the process of adding a few additional customers and expect this product to gain significant momentum as the industry transitions to high volume manufacturing using 3D Interconnect technology. The level of interest and engagements we have received so far are a direct result of the differentiated capability that we have introduced with this new product which offer us significant competitive edge. We also recently shipped our first 450-millimeter tool to a key OEM to support early development efforts. Looking at the current environment, we believe there are several drivers that will fuel continued growth in foundry spending in 2013. We believe that the tablet and smartphone markets will continue to remain robust. New major entrants into these markets will offer a diversity of choices with a variety of price points and hence, a larger number of relevant consumers will join. Smartphone sales next year are expected to increase to more than 850 million units, and tablets should ship 140 million units or more. Thirdly, Apple and Samsung’s preference to use discreet application processors drives up the die size compared to integrated processors and as result, the amount of consumed silicon needs to continue to grow. It will be interesting to see how Microsoft, Google, Nokia and others decide to differentiate themselves. By the way of example, the transition from the Apple A5 processor to the A6 has enlarged the die size by a multiple of 1.4, and hence requires more wafers to be produced. The steady ramp in 4G LTE penetration is leading baseband chip vendors to transition to 28-nanometer technology in order to mitigate the significant increase in die size, again, driving demand for wafer capacity. With the move to 4G compatible phones needs to come a continued upgrade of cellular bandwidth and capabilities, which should drive both server and with it, logic and memory consumption ultimately. The transition from 28-nanometer to 20-nanometers, which we expect to gain momentum towards the end of the first half of 2013, will drive another increase in capital intensity. From about $100 million in capital spend for every 1,000 wafers per month added, we believe it will grow to about $130 million of capital invested. At the same time, some markets, such as PCs, have remained low. Most influenced by this are our memory customers. DRAM spending on capital equipment has remained very low for the last several quarters. We believe the resumption of spending in this segment will take longer than we had originally anticipated. The transition to 20-nanometer design rule in DRAM offered several power consumption advantages that are critical for mobile devices, and we therefore believe that a ramp up to that technology node is inevitable, but could take longer due to the tough business environment in memory over the past year, as well as the process complexity associated with such technology shrink. On the NAND Flash front, it seems that the current existing capacity is sufficient to meet market needs. As a result, we believe spending will remain low in the coming months. Key drivers for that market are, again, the mobile devices and on top of it, cloud computing, which is poised to rely on solid state drives for data storage, given the significant energy consumption advantages offered by that technology. That transition is just starting now, and we believe it will gain momentum during the coming years. The move to next generation NAND technology depends on the introduction of 3D gate structures. Collaborative work that we are doing with leading customers in that area shows that the process complexity, especially in the etching steps, is very significant. Optical CD is the only way to measure and control these steps and we expect to enjoy an increased adoption rate as customers overcome development challenges and move to high volume manufacturing with this technology. In light of these overall market conditions, we will continue to remain focused on our key customers. The amount of collaboration engagements with our customers continues to increase as they invest heavily in technology transitions. Our experience demonstrates these collaborations – collaboration efforts pay off nicely, as they secure our position for when the customers are ready to ramp. Our customers expect us to continue and be innovative by increasing the information content coming from our tools and software, by continually improving our cost of ownership and by allowing them to extend the sampling rate of wafers on our tools without slowing down their process. A recent trip I have made to our leading customers reaffirmed that we are at a positive inflection point for process control. Several elements contribute to this assessment. Within-wafer and wafer-to-wafer non uniformity specifications are nearing the edges of process tool capabilities. Secondly, wafer patterning governed by etch in lithography is becoming increasingly difficult, requiring customers to invest significant changes to the manufacturing flow. The repeated delay in the transition to extreme UV lithography increases that challenge exponentially. Thirdly, very subtle process drifts in one step of the process leads to significant drift as the wafer progresses to later manufacturing steps. The impact on process control is very clear. Customers are looking to sample more wafers, customers are looking to control the process more tightly and want to do so as the process takes place and not retrospectively. And finally customers are not willing to tolerate a decrease in wafer output in order to achieve higher yields. We believe we are very well-positioned to take advantage of this state of affairs on several accounts. First, we continue to be the market leader of integrated process control. We continue to secure that position by collaborating very well with both our process equipment manufacturing partners and end-customers. Secondly, we are in the process of developing several new software capabilities to enhance our offering for integrated process control and further solidify our market position. Thirdly, our standalone metrology tools have been qualified for the most complex technology nodes and are the fastest and most reliable out there, allowing us to meet those, the metrology and process output requirements of our customers. Fourthly, our strong field presence physically places us where the action is taking place and that customer intimacy is what counts when customers look to solve issues. Looking forward, we will continue to expand and enhance our product offering to further distinguish ourselves. Now let me turn to our outlook. Current end market demand continues to require an addition of significant capacity at 28-nanometers and foundry. Discussions we have recently held with our customers reconfirmed our theses that current wafer capacity in that node will need to almost double itself during 2013. This is a high stakes game for our customers and the timing is taking to close that capacity gap is indicative of just how difficult it has become to perform design rule shrinks. Optical metrology plays an enabling role. In the extents of its use, it’s continuing to grow from one technology node to the next, and we believe it will continue to account for a higher share of overall capital expenditures. We expect memory spending to remain weak in the near term. Our recent technology wins will secure our position once spending in that area resumes. Dependents on optical CD will continue to grow, given the design complexities being introduced. We expect foundry order momentum to resume during the fourth quarter to support the next phase of ramp up. Finally, in today’s press release, we stated our guidance for the third quarter of 2012 – excuse me – for the fourth quarter. For the fourth quarter of 2012, management expects revenues of $18.5 million to $22 million with diluted earnings per share of $0.00 to $0.08 on a non-GAAP basis. 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 third quarter results, I would like to note that the numbers presented in the press release and in my following comments represent GAAP-based results, unless specified as non-GAAP. Total revenues in the quarter were $24.4 million in the upper range of third quarter guidance, representing 10% decrease quarter-over-quarter. Most of the decrease was in the integrated metrology front, which is usually linked to capacity expansions. Service revenues remained stable at the $5 million level. Product bookings distribution in the quarter was approximately 60% from the foundry segment and approximately 40% from the memory segment. This distribution is a change relative to the first half of the year and is related mainly to spending patterns of our main foundry customers. On a regional basis, approximately 78% of the bookings in the quarter came from Asia Pacific and the rest from U.S. and Europe. Blended gross margins in the quarter were 53%. Product gross margin came in at a healthy level of 59% similar to the previous quarter. Services gross margin was within our model of 30% or higher, yet 2% lower than previous quarter due to higher employee-related expenses. Operating expenses came in flat with previous quarter at $9.9 million. This level is lower than previously communicated and reflects our selective approach towards expenditures during the current business conditions. Operating margins came in at 12% higher than the guidance for the third quarter. GAAP net income in the quarter was $2.9 million or $0.11 per diluted share based on a share count of 25 – 27.5 million shares. Non-GAAP net income in the quarter was $3.7 million or $0.14 per diluted share. Cash flow from operating activities was $4.3 million in the quarter, with cash reserve increasing to $94 million. Moving into balance sheet key metrics, accounts receivables reduced to $15 million with DSOs at a stable and healthy level of 60 days. Inventories significantly increased from $16 million to $19 million during the quarter, mainly in the new product platforms area. The manufacturing cycle of these new product platforms is currently taking longer the legacy product and in addition, most of the tools which are already installed at customer sites have not yet received final customer acceptance, leading to a higher level of inventory. Gross capital investments came in at $1.2 million in the quarter, similar to the previous quarter and depreciation came in at $0.8 million. In that aspect, given the increase in working capital requirements and the need to continue and enhance the company’s infrastructure, which at this stage are combined with soft business environment, we expect cash flow to be negative in the fourth quarter of the year. With regard to the guidance for Q4, the current business environment is characterized by lower business visibility. In addition, in the coming quarter, we expect to recognize revenues from new products, the T600 and the V2600, while the timing of recognition depends on customer’s formal acceptance. Evidently in such cases, the visibility of exact revenue timing is lower and as a result, the revenue guidance range for the fourth quarter is wider than usual. As Gabi explained, we continue to be selective in planning our operating expenses. In the coming quarter, operating expenses are expected to increase by 5% in order to enable us to properly address the coming industry transitions and opportunities. On the tax front, in the third quarter of 2012, we have fully utilized the deferred tax assets created in 2011. Given the fact that NOLs at year-end will be approximately $15 million, we will, again, be required to create a deferred tax asset at the end of 2012. The guidance for GAAP EPS in the fourth quarter is assuming creation of a deferred tax asset, yet the final number may vary based on the next year planning and forecast. The changes in deferred tax assets are considered as a non-GAAP adjustment and therefore, do not impact the company’s non-GAAP earnings per share which are expected to be breakeven to positive $0.08 in the fourth quarter of the year. With regards to the company’s overall tax position and plans, it is worth noting again that the company is part of an Israeli government incentive program which provides zero tax payment in the first two years after fully utilizing these NOLs. We expect this program to be relevant for most of the taxable income in the relevant years and hence, we do not expect the company to pay meaningful cash income taxes in Israel in the next couple of years. For the long term, the tax rate for industrial companies in Israel is expected to be 12%, so our business model assumes an effective tax rate of 15% for the consolidated company in the long term. Gabi?

[Gabi Seligsohn:]

Thank you, Dror. With that, operator, we’d like to open it to questions Thank you. (Operator Instructions) Our first question comes from Edwin Mok from Needham & Company.

[Edwin Mok:]

Hi, guys, thanks for taking my question. So the first question I have is just kind of roughly on book-to-bill. I know you guys don’t give a number, but in the third quarter, would you characterize book-to-bill as less than one, in the fourth quarter you said booking is recovering, so would you characterize that as going back to above one?

[Gabi Seligsohn:]

I would say that in the third quarter definitely, it was below one. And looking forward, our expectation in the fourth quarter is that direction changes.

[Edwin Mok:]

I see, okay, so – okay, that’s helpful.

[Gabi Seligsohn:]

Edwin, just to clarify. Right now, our expectation is that book-to-bill in the fourth quarter goes above one.

[Edwin Mok:]

I see. That’s helpful. And then on your commentary, Gabi, you mentioned that there’s an existing foundry customer that you guys have recently won some business and that there will be an upgrade option, that is – that you guys are expecting from that both in integrated and (inaudible) as well as standalone. I was curious what is the timing of that and is that baked in your fourth quarter guidance or is that more your commentary related to first half 2013?

[Gabi Seligsohn:]

It’s actually as far as whether it’s baked or not in the fourth quarter, very, very minimally. And so this is more – on the revenue front, this is more something that will become more evident beginning of next year. But the action is already taking place and it’s significant. Therefore, I decided to mention it. So we’re very happy it is an existing fab. They are upgrading it. We have in the past enjoyed these opportunities where existing fabs try to extend their capabilities. And we’re well positioned to enjoy it. And in this case, yes, it will be significant for the integrated and standalone.

[Edwin Mok:]

Okay. That’s helpful. One of your competitors Nanometrics reported their result yesterday and then on – and their result is just that, they had made actually really good progress in foundry and especially TSMC, which they mentioned as a customer. They have won a few positions there. I was wondering where do you think your competitor position is right now relative to that competitor as well as KLA and do you see intense – competition intensifying and is there any risk on pricing?

[Gabi Seligsohn:]

Yeah, good question. And of course, the foundry is a target for everyone. And it’s no secret that everyone wants to be a part of that business and make significant efforts in order to penetrate those accounts and Nanometrics, of course, has been trying to do that, I think, for quite a while. The keys and points matter is that the foundry is a very significant part of our business. And I am very, very confident in our ability because I see how many technology generations looking forward Nova is fully designed in and actually from the visit that I just came back from, we’re working our way into more of the manufacturing stuff. So, to begin with, we feel very confident about our position with that customer and it continues to be the case. And if anything, I was very, very much impressed by the extent of expansion that the customer is looking to do with us on interactions in the future. As far as the penetrations that they have made, I think you should probably refer to them and talk to them about that. But I can tell you that as far as we’re concerned, market share-wise, position-wise, we are actually only increasing right now and we have not seen any decrease in market share. I believe that the things that are being talked about is, where a single tool gets in and there has been some qualification processes going on. But we feel very confident about our current market share over there as well as the coming generations and we are involved, as I have mentioned in previous calls, not just the 28-nanometers, but 20-nanometers, 14-nanometers and other generations as well, and this is just one example how these foundries are working on several technology generations at any given moment. So we feel very strong. Regarding your question on KLA-Tencor, obviously we’ve been competing for quite a while and we continue to do so, I think, very effectively, and they are with us in that particular account. So we continue to focus on winning market share in that aspect. So these are the answers, hopefully, to the questions.

[Edwin Mok:]

Okay, great. That’s very helpful. And then one last question, I guess on the financial model. If I take the midpoint of your guidance, it seems to imply the margins will be down a little bit. How much of that has to do with this new tool that you guys expect – or possibly customer acceptance in the fourth quarter, and how much of that is just to do with volume?

[Dror David:]

Well actually, on the gross margin side, if we differentiate products and services, we do expect product gross margins to continue and be robust in the fourth quarter from several reasons, and services to remain within our model of around 30%. So in general, there is a reduction in gross margins because of the combination of these two in the reduction in product revenues. But segmenting them separately, we do expect gross margins to be robust in the fourth quarter.

[Edwin Mok:]

I see. It was just the mix then. Okay, great. That’s all I have. Thank you.

[Gabi Seligsohn:]

Thank you.

[Operator:]

Our next question comes from Patrick Ho from Stifel Nicolaus.

[Patrick Ho:]

Thank you very much. Gabi, first off on the memory side of things, obviously, that marketplace is depressed at this moment in terms of new capacity buys. But that segment has also been one that has a high level of reuse among technology nodes. I guess two-part question on that is, one; what are you seeing in terms of the memory customers, in terms of their reuse of overall tools? And then secondly, how does it relate to possible reuse for your tools that are in place with those customers?

[Gabi Seligsohn:]

Well, the way it usually plays itself out, Patrick, is by the customers, when they look to reuse, so what was a critical layer in a previous technology node becomes a non-critical layer in the next node. So, the way that they do it is basically to try to reuse tools to help them in the non-critical layers. And in the critical layers, they find themselves compelled to add new tools or new features and functionality. This has been generally the lay of the land. What we have seen in the last several months, and again, as you heard from Dror, it’s not that memory is dead. It was 40% of our bookings, obviously, on a low-bookings level as we have stated, but it’s still there. And what we’re seeing continuing is an incremental set of tool buys where they incrementally upgrade the fabs. And so this goes well – bodes well with what you’re saying, in the sense that they incrementally do tool purchases in order to allow themselves to move forward. At the same time, if you look at the DRAM side, this transition to 20-nanometer is very, very difficult. The gate structure change is very tough for the customers and also the financial situation in their markets, those things are delaying the transition. I believe that that transition will require significant new capabilities, because the complexity of a lot of the things they’re doing grows. So, once they do that, I do expect that orders for measurement tools will be back on the rise. On the NAND Flash side, again, the markets are what they are, as we all know. Which, they’re very soft and there, customers are trying very hard to move to three dimensional NAND structures, which is extremely complex as well. So my expectation is that the next round of investments, significant investments, if you will, in memory, will be such that requires quite a few tools and in the meantime, yes, indeed, they can work in order to make incremental buys for what remain to be critical layers for them. Hopefully, that’s clearer.

[Patrick Ho:]

No. That helps. Moving just to the foundry side, it sounds like you guys continue to maintain a very strong presence there. As you mentioned, you’re working on – not only 28-nanometers, 20-nanometers but also the next few nodes. Obviously, down the road in a couple of years, the foundries are eventually going to move to FinFET technology for their devices as well. Can you describe what work you’re doing there on that process technology and what you feel – I guess your confidence level of – or maintaining or even increasing your position with the foundries?

[Gabi Seligsohn:]

You’re right that the transition, and this is public knowledge, so I’m not divulging any confidential information. You’re right that the foundries are delaying the transition to FinFET, and that is a unique situation. We have been collaborating and again, I can talk about this openly, because it’s been publicized at professional conferences such as SPIE, we’ve been working with at least one of our foundry customers. Again, it’s public so I could speak about it, it’s IBM, for many, many years on FinFET structures. We have developed significant capabilities in that area and feel confident in our ability to support our customers’ needs when it comes to transitioning to FinFET in high volume manufacturing. So, we think this offers a great opportunity. As mentioned and as everyone knows, it requires a lot of, I would say, interim steps, meaning more steps of manufacturing are being added in order to be able to do these FinFET structures. And as a result, the need for optical CD grows. And as I’ve mentioned on several occasions, really, optical CD’s the only way to measure these three-dimensional structures. So, we feel very confident about our ability. We’ve been involved in this, the technology nodes that we are doing this measurement. Of course, I will not specify with some of our customers, but they are very advanced nodes, of course, very early stages. So, I think that we’re in very good shape for several technology node generations down the line. And once they’re ready, we’re ready for them.

[Patrick Ho:]

Great, final question for me on the business model side in terms of OpEx. I’m not surprise that it’s going up a little. Can you give a little color in terms of where that’s going to be focused on? Is that primarily for 450-millimeter, or are there other projects within that increase in 4Q, 2012?

[Gabi Seligsohn:]

First of all, there’s several projects that we’re working on. As I have said, we’re expanding our activity in the software area. What we’re learning is, as I had mentioned, that integrated process control and process control as a whole, the needs and requirements are changing, and we’re innovating several new products that we’re investing in right now. These products will be primarily software products and so, not only are they’re going to offer specific and significant advantages for integrated process control, they’re also going to do very well for our margin profile in the long term, once they start becoming part of our revenue, which I believe will start probably somewhere towards the later part of 2013. So we’re spending money on that. We’re looking, of course, at the 450-millimeter and spending as we need. As you heard, we shipped an initial tool for initial development efforts that one of our key OEMs is doing right now. We are, as you know, rolling out a new product and it’s going extremely well, which is the V2600. As I mentioned, we are already in multiple customers and we are already engaged with several more, we think we’re going to gain market share and momentum in that area very, very fast. And so, there’s spending that goes on in that area as well. So, these are some of the things that we’re spending on. Again, as you heard from Dror, it’s still – this 5% increase is still within the range of overall operating expenses that we were targeting for this year on a quarterly basis. And as we’ve always done, I think, as a responsible management, we carefully manage situations when we deal with seasonality in order to be able to generate, I think, a very good P&L.

[Patrick Ho:]

Great, thank you very much.

[Gabi Seligsohn:]

Thanks.

[Operator:]

Our next question comes from Keith Maher, Singular Research.

[Keith Maher:]

Good morning, gentlemen – or afternoon, I guess, for you. I think you mentioned that TSMC might have delayed some orders and I didn’t know if you could provide any more detail about that?

[Gabi Seligsohn:]

Well, this is – the situation is being talked about throughout the industry. They have said publicly that they’re planning on doubling 28-nanometer capacity and initiating a ramp up at 20-nanometers. And what I was doing in the call was reiterating that statement. But what I said also was that their plans had been delayed by about a quarter. And therefore, we see the results that we’re dealing with basically the reduced bookings in the third quarter and an expectation for an increase in the fourth quarter. So, that’s what I can say about that.

[Keith Maher:]

Okay, thanks. And I guess this is more a question for Dror; with regard to inventories, I think you mentioned that a couple of issues related to the build ion inventories, one was manufacturing and I think the other is just the ongoing issue with product – data customers and customer acceptance. I was wondering if you could kind of break down the impact of both of those and when you thought we might see an improvement in inventory days in particular, which have been growing for a while?

[Dror David:]

Well, I would say the following. We did see a major increase in the inventory which is installed at customer sites and either waiting for acceptance or evaluated as a new product, such as the TSV V2600. I can’t break down specifically the numbers. But I would say that we are working towards improving the manufacturing cycle times and, of course, towards receiving the acceptances. And during the next two quarters, we should see, of course, depending on sales levels, we should see improvement in that area.

[Keith Maher:]

Do you have any kind of goal in mind for inventory days, like a range?

[Gabi Seligsohn:]

Yeah, definitely.

[Dror David:]

Historically, we have been able to be above four inventory turns a year, which is around 90 days. I would say that currently, our target for next year would be inventory turns of around three which should be sufficient.

[Keith Maher:]

Okay, thanks. And finally, with regard to the negative cash flow in Q4, where – was that the result of where – what areas are you making investment?

[Gabi Seligsohn:]

Could you repeat the question? There was some noise, some static on the line, I apologize.

[Keith Maher:]

Okay, sure, no problem. In terms of – you talked about negative cash flow in Q4, I didn’t – I just want to understand where you’re making the investment in terms of working capital or CapEx, and just what’s causing that?

[Dror David:]

Yeah, well, evidently, the increase, for example, in inventories in the third quarter is going to be translated to cash payments in the fourth quarter. And also the timing of specific deliveries for revenues and within quarter collection have impact as well. So these are the main reasons that are going to impact the cash flow in the fourth quarter and we do expect it to be negative in the fourth quarter.

[Keith Maher:]

Okay and I guess, maybe one final question, just overall in terms of the 3D Interconnect market, is that kind of – is it coming along, how you expect it? I know you’re looking for some revenues this year, but most of the rollout just continuing into 2013. Is that really still the case or any changes there with what’s going on overall just to – and the market being somewhat weak?

[Gabi Seligsohn:]

For 3D Interconnect, for your question, first of all, we are on track to meet the objective of – four customers with our tools by the end of the year. That is going very well and there are several new engagements coming. Only a little bit is showing up in revenues in the fourth quarter and you’re going to start seeing some revenues next year. We don’t expect there to be a serious ramp up yet in 3D Interconnect in 2013 because we think that the industry is taking more time than had been anticipated. At the same time, this will start becoming part of our revenue because not only are we penetrating these few accounts that I spoke about, there’s a few others that are actively engaged with us. So there will be some revenues there. We’re not yet in a position to say what’s going to be the extent of it. I believe and this is our current working assumption that this should start ramping up with some of our customers towards the end of 2013, probably more in 2014.

[Keith Maher:]

Okay. Thanks. That’s all I have.

[Dror David:]

Thank you, Keith.

[Operator:]

Our next question comes from Krishna Shankar from ROTH Capital.

[Krishna Shankar:]

Yes, you mentioned a book-to-bill ratio potentially getting above one in the December quarter. Would you expect – in the March quarter, I’m sorry. So would you expect bookings to improve sequentially in absolute dollars in the December and March quarter and would that be from foundry customers?

[Gabi Seligsohn:]

I think there was a misunderstanding, so let me clarify. My comment was about the fourth quarter and that may have been misunderstood, where we expect book-to-bill to be above one. I did not make any comment or reference (inaudible), Krishna. So I apologize if there was (inaudible).

[Krishna Shankar:]

Okay, so you didn’t make any reference to absolute to bookings levels for the fourth quarter.

[Gabi Seligsohn:]

No, I didn’t make any absolute. We don’t generally guide on bookings and we did not make reference to the March quarter either. Again, just to reiterate, I mentioned that in the fourth quarter, we expect book-to-bill to improve and go above one again.

[Krishna Shankar:]

And then regarding the memory market given (audio gap) NAND smartphone and tablet customers, do you see the NAND Flash memory customers potentially reviewing their CapEx and the potential for them to start spending on sub 20-nanometer capacity again?

[Gabi Seligsohn:]

Well, I think that what is standing in the way is two things. One is current capacity sufficiency for the current versions of products that NAND Flash is serving. And number two, the customers are not having an easy job transitioning to below 20-nanometer because of the – such significant process changes that are being made in order to move in that direction. So, as I said in the call and I think that comment was mostly on foundry, but it applies to memory just the same, you’ll need to reach a certain yield level before you can actually ramp-up a product. So, I think that’s holding back the investment in next generation NAND technology as well as I have stated the current market condition. So, right now we are thinking that this starts coming back, hopefully, by the middle of the year. We believe that our customers and today actually we are an all four NAND manufacturers. We believe our customers are going to start investing probably at that time because hopefully, they will have overcome many of the issues that they’re dealing with.

[Krishna Shankar:]

And your 3D Interconnect, your new equipment will help them address some of those yield issues, the one that you’re just seeing (inaudible) now?

[Gabi Seligsohn:]

Well, I think that the optical CD product is where a lot of that focus is going to be simply because there, as I mentioned the challenges, the new gate structures, vertical gate structures that go into the next technology shrink. The TSV aspect as well because some of these actually include chip stacking. So I think, yes, this will also be there. It’d probably be a combination of the two, OCD as well as TSV. I think OCD right now is already being deployed seriously and that will probably extend as they overcome the initial yield issues. And with TSV I think, that as they start shipping products that are TSV capable, yes we will start seeing some improvement there as well.

[Krishna Shankar:]

Okay, great. Thank you.

[Gabi Seligsohn:]

Thank you.

[Operator:]

We have now one question from Edwin Mok from Needham & Company.

[Edwin Mok:]

Hi, thanks for taking my follow up. So, first question is on reuse, right? Do you expect to see more reuse on the integrated side because my impression is that, for example CMP, there’s all more reuse than other process technology?

[Gabi Seligsohn:]

Well, it’s tough to say. I think that each fab has its own story and a lot of it depends on how many generations a certain piece of equipment has already been in a particular fab or how new it is. So that has significant implications many times. Sometimes the integrated introduction is for the first time, so it’s brand new. Sometimes it’s an existing tool where they want to buy an upgrade for an existing tool. And sometimes, it’s the capacity need where they say, okay I need a new tool for another layer. So I think everyone is going to be a combination of all of them. I don’t think that – I hear the question in general about reuse. I don’t see that the needs of the industry right now will be primarily served by reuse. That’s my state of mind right now. I think this is mostly new tools that are being supplied. And, yes, indeed, we have done this quite effectively. It’s helped us very much with our customers that we have supported their wish to extend the usable lifetime of our equipment, and that’s why we have developed all sorts of upgrade kits, et cetera. So, when they want to do that and we have solution. When they want a new tool, we have that as well. And we evaluate it on a case-by-case basis.

[Edwin Mok:]

Okay. Actually, that’s helpful. And then last – just my last question, so recently there was a news article in Israel talked about an acquisition that you guys tried and didn’t happen. Any color you can share on that?

[Gabi Seligsohn:]

Well, we don’t have any comments to make about specific acquisitions that people are saying that we’re in a process of doing. I have communicated in the past that we are actively looking at several potential candidates. The way we look at those candidates, we look for products that will be complementary to what it is that we do to expand our product offering and allow us to even expand our presence in our existing customers, and that have equipment that sells for similar types of prices that we’re used with advantageous margins, which all always flow from the amount of information, as well as the manufacturing needs that’s being addressed. But as far as specific commentary about things that come up in the press, as I’ve stated to the press, itself, we never make any specific comments. So we are active in that area and we hope to – hopefully, at some point, execute on this strategy.

[Edwin Mok:]

Great. That’s all I have. Thank you.

[Gabi Seligsohn:]

Thank you.

[Operator:]

(Operator Instructions) We have no more questions.

[Gabi Seligsohn:]

Okay. With that, I’d like to close the call. I want to thank everyone for joining today’s call. And especially, in the current circumstances with the hurricane and everything, we appreciate people’s attendance. And we look forward to speaking to everyone in our next quarterly conference call. Thank you.

[Operator:]

That will conclude today’s conference call. Thank you for your participation. You may now disconnect.