Onto Innovation Inc.
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good afternoon and welcome to the Nanometrics’ Third Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions) Please note this conference call is being recorded today, October 29, 2013. At this time, I would like to turn the call over to your host, Claire McAdams. Please go ahead.

[Claire McAdams:]

Thank you and good afternoon, everyone. Welcome to the Nanometrics’ third quarter 2013 financial results conference call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer; and Ronald Kisling, Chief Financial Officer. Shortly, Tim will provide a recap of the third quarter and our perspective looking forward. Then Ron will discuss our financial results in more detail after which we will open up the call for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1

[Dr. Timothy Stultz:]

Thank you, Claire. Good afternoon everyone. We appreciate you taking the time to join us on our call today. Today, my prepared remarks will address highlights of our third quarter performance, our progress against key corporate initiatives and guidance for the December quarter. Following my commentary, Ron will provide a detailed review of our third quarter financial results. In the third quarter, increased spending by our largest customers in both new technologies and capacity ads help fuel our second sequential quarter of revenue growth and margin improvement. Our quarterly financial results came in pretty much in line with our expectations with revenues, non-GAAP gross margin and non-GAAP earnings all at the higher end of or just above our guidance range, whereas we are certainly pleased with the continued improvement in our financial performance. Of particular note is the continued progress we have been making against our key business objectives of growing our business through pure-play foundry business growth, market share gains and expansion of our footprint within key accounts. I would like to briefly update you on each of these three important activities. Beginning with pure-play foundry, we continue to make significant strides in strengthening our position with the leaders in that sector achieving important competitive wins and expanding our market share accordingly. In the third quarter, our Atlas II was installed with a leading pure-play foundry customer to develop OCD recipes for 20-nanometer and next generation devices. This is a new position for us and adds to our previously announced 20-nanometer node integrated metrology win for critical layer etch applications and our UniFire tools application in advanced packaging all with that same foundry customer. During the quarter, our Atlas II was also selected by another global pure-play foundry customer and will be used for OCD metrology in critical transistor level applications at the 2y and 1x nanometer device nodes. This will be our second even Atlas OCD platform adoption by pure-play foundry, which means we have achieved two brand new customer penetrations with our flagship system in 2013. Turning to our objective of expanding our footprint within existing key accounts, our IMPULSE integrated metrology platform was selected as tool of record by a leading memory manufacturer for advanced CMP process control of 3D memory device production at its newest manufacturing location in China. This is a new product position for us and it’s incremental to our Atlas II OCD position in the state-of-the-art manufacturing facility. And finally, within the last quarter or Atlas was also awarded additional process control metrology layer, previously performed on a competitive tool for a leading-edge advanced logic application. This additional layer expands the usage and those applications footprint within this key account, where the Atlas is already tool of record for OCD. We believe these competitive wins, market share gains and progress against our long-term corporate objectives validate our strategy of increasing investments in R&D and applications during the recent downturn in our business, in order to expand our business opportunities and come out a stronger company during the forthcoming upturn in our business cycle. Now turning to a few comments on operations, business structure and target financial model. In 2011, we acquired Nanda Technologies a startup developer of a very novel inspection platform. Since the acquisition, we have been working with the Nanda startup team to develop commercial prospects for the product line, while also systematically integrating the products and operations into our core business units. Over the last several quarters, we completed the transfer of manufacturing of the products to our Milpitas factory, as well as the training of our global sales, service and applications teams. We also participated in a number of customer evaluations to better understand the applications best served by this tool, as well as its competitive advantages and positioning. In addition with the customer feedback we have received we developed a long-term product and technology roadmap to expand applications and serve markets. This quarter, we took the last step in this process by integrating the SPARK platform’s engineering and technology development into our UK engineering operations and closing down our Munich facility. As a result, we have incurred some one-time restructuring charges that Ron will address in more detail later. Importantly however, the tool, the technology and key members of the SPARK team are now fully integrated into our core business units, which in turn will strengthen our commercial and operational performance are also realizing substantial cost savings through operational synergies and efficiencies. Solid operational performance is a key objective for us as we return to profitability in 2014, which is forecasted to be a strong year for us and the industry in general. Over the last couple of quarters, we have delivered revenue growth accompanied by both product and operating margin improvement. We have also been consistent in communicating our goal and expectations that total margins would meet or exceed 50% once we surpass $50 million in quarterly revenues. Looking ahead to 2014, we fully expect to be on target with our gross margin model for the full year accompanied by improving operating margins as we also lower our operating expenses through the cost savings I mentioned earlier. That being said, in spite of anticipated growth in revenues in the first quarter of 2014 achieving our 50% gross margin goal is unlikely to occur until the second quarter, primarily due to product mix and timing of factory absorption benefits. A final comment regarding build versus ship and revenue recognition timing, we have been experiencing significant customer driven product shipment pull-ins, in particular for new fabs in new geographical locations. Our factory is incredibly busy building and shipping record numbers of tools including Atlases, IMPULSE integrated tools and UniFires to multiple new locations. Although many of our products will be delivered in Q4 of 2013, much of the revenue will not be recognized until the first quarter of 2014 due to our new fab, new location revenue recognition policy which requires us to obtain customer acceptance on the first tool before we can recognize revenue on subsequent shipments. All-in-all, the news and outlook going into 2014 is very strong. Our business is growing as a result of increased industry spending, meaningful market share gains and expanded footprints within our existing key accounts. So growth in our business will be accompanied by improved financial performance as we get back onto our business model and benefit from the leverage of incremental revenues on our bottom line results. Now, turning to our business outlook, we look towards – as we look towards 2014, we see further improvement in growth in spending for our process control products and solutions across multiple devices at 20-nanometer node and below. End use drivers continue to be mobile devices and server systems are 3D transistors, 3D memory and 3D packaging leading the way on the chip side. Our core business is benefiting as our major accounts are making investments in new technologies and ramping next generation devices. And our market share is expanding as we make meaningful headway into the foundry sector, while also expanding our footprint within key accounts. With that, our guidance for the fourth quarter is as follows

[Ronald Kisling:]

Thank you, Tim and good afternoon. Before I begin my comments, I’d like to remind you the schedule which summarizes GAAP and non-GAAP financial results discussed in this conference call as well as supplemental revenue segment information by product in market and geographic region is available in the investor section of our website. Third quarter revenues were $39 million, up 13% from Q2. Product revenues increased 14% to $30.2 million compared to $26.5 million in the prior quarter driven primarily by growth in sales of our integrated tools both in the leading foundry as well as to a large memory customer. Integrated tool revenue increased over 150% from Q2 which comprised 11% of total revenues. Automated tool revenue was essentially flat with the prior quarter and comprised 59% of total revenue. Materials Characterization tool revenue improved from historically low levels in the second quarter to comprise 7% of total revenues in Q3. And service revenues increased 11% on both increased core service and upgrade sales to comprise 23% of total revenues. By end market, the largest increase occurred in logic and IDM, which increased 64% to comprise 40% of product revenue. This increase was partially offset by a decline in foundry revenues which comprised 14% of product revenues. Sales into the memory end market were relatively flat with the prior quarter and comprised 37% of total product revenues with a slightly increased contribution from NAND compared to Q2. And revenues into the LED, silicon wafer and discrete end market increased modestly from historically low levels to comprise 9% of total tool revenues. Customers representing 10% or more of our total revenues for the quarter were Intel at 34% and SK Hynix at 23%. Turning to other P&L metrics, my prepared remarks regarding the income statement will refer to non-GAAP based measures unless they identify the measure as GAAP base. These measures exclude the impact of amortization of acquired intangible assets, restructuring charges and write-downs on inventory of discontinued products. Our Q3 gross margin came in above the high end of our guidance range at 48.4%, which is higher than we would expect at the $39 million revenue level chiefly due to favorable revenue mix and better than expected warranty and manufacturing variances. This gross margin excludes a $2.4 million write-off of all remaining inventories associated with our discontinued Mosaic product lines. Product gross margin improved to 48% from 44.1% due to the benefit of higher revenue levels against fixed manufacturing costs and the aforementioned favorable mix, warranty and manufacturing variances. Service gross margin improved to 49.7% from 42.7% due to both higher upgrades in core service revenues compared to the prior quarter. As we look to the fourth quarter, our gross margin guidance range of 46% to 48% reflects an expected improvement in product gross margin on higher sales volumes offset by lower service gross margin due to a forecasted decline in both core service and upgrade revenues. Looking beyond Q4, as Tim mentioned, we do not expect to see product gross margin improvement on expected higher sales volumes in the first quarter of 2014 primarily due to product mix. We also don’t expect the favorable variances we saw in the third quarter to be part of an ongoing trend. Third quarter operating expenses increased $668,000 from Q2, most of which was in R&D to a total of $21.1 million within the range of our guidance. And during the quarter, as Tim mentioned, we consolidated our SPARK product line activities into our York, U.K. facility. As part of this consolidation, we incurred severance and other expenses of $1.7 million as a Q3 restructuring charge, which is excluded from our non-GAAP operating expenses. As a result of this activity we will begin to see some savings by the second quarter of 2014. Our net loss for the quarter was $1.3 million or $0.06 per share compared to a net loss of $4 million or $0.17 per share in the prior quarter. At September 28, our cash and investments increased to $92.9 million or roughly $4 a share. The increase in cash was primarily driven by a decrease in receivables due to a higher proportion of early quarter shipments. We also paid off the remaining $4.8 million on our mortgage during the quarter. Our DSOs were 53 days reflecting the early in the quarter shipment I just mentioned. Inventory declined $2.8 million to $38.9 million at the end of the third quarter. Our tangible book value was $184 million or $7.88 a share. And we ended the quarter with a headcount of 540 employees, a net increase of seven employees from the prior quarter. And with that I will turn the call over for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question is from Weston Twigg of Pacific Crest. Your line is open.

[Weston Twigg:]

Yes, hi, thanks. Really I just was interested in the foundry traction and in particularly the new OCD win had I guess the pure-play foundry, just wondering if you can give us an idea of the timing of those sales and maybe the scope or scale of that win?

[Dr. Timothy Stultz:]

Hi West. Sure, I will try to give little more color to the extent we can. So the two high volume manufacturing wins that we spoke to in the integrated metrology. One in the pure-play foundry for integrated etch and then the other integrated metrology win was for the polishers in memory. With regard to the other wins those are our initial tool placements being used to develop new technologies. We believe that they are going to play out as we go forward, but we need to continue to leverage those positions and benefit from it. But the high volume manufacturing spending is at least a quarter to two quarters out.

[Weston Twigg:]

So those would be – they are still more than development tools but not quite process tool of record yet?

[Dr. Timothy Stultz:]

Right, while they have exactly, not their process tools have been adopted for a recipe development, but they haven’t launched the production investments. It’s a two different pure-play foundries as we have, so two different locations both in the Atlas tools, both for the 20-nanometer and sub 20-nanometer applications.

[Weston Twigg:]

Okay. I guess, what I am getting at is as those 20-nanometer processes ramp, would you the volume of those tools to increase accordingly?

[Dr. Timothy Stultz:]

We do expect to benefit from the ramp as they occur. Timing there is a – there is a little bit of a delay in the timing based on just the individual customer plans, but we think this is we got to put in the door. And I think we are going to do our best to try to benefit through some market share gains in those areas.

[Weston Twigg:]

Great congratulations.

[Dr. Timothy Stultz:]

Thank you.

[Operator:]

Thank you. Our next question is from Patrick Ho of Stifel Nicolaus. Your line is open.

[Patrick Ho:]

Thank you very much. Tim maybe can you give a little bit of color in terms of how your supply chain is managing the current environment given that you mentioned that you are seeing accelerated development, it sounds like Q4 is heading to be pretty good shipment quarter for a lot of chipmakers in terms of their tool deliveries. Given some of the issues in the past, what would be done this time around to make sure that one you aren’t going to incur some of the costs you did last time?

[Dr. Timothy Stultz:]

It’s a good question Patrick. So if you are referring to the Atlas II back in 2011, that was more of an accelerated launch of a new product that was not released, was not fully released in the manufacturing. In the case of the ramps that we are looking at right now, these are against fully released products with long-term and high volume supply chain commitments on agreements. We have worked very hard with our supply chain to make sure of the adverse capacity. That being said, we are pushing them very hard. Their whole valley is experiencing some growth in general with our industry. And as a result a lot of these subs out there are feeling the pressure of multiple companies doing pull-ins. We have got a team that works on this, its daily, making sure that we are tracking everything from what’s turning out through the machine shops through the receipts from the materials and making to our floors ready to do it. And we have gone on to a multiple shift in manufacturing to meet the customer demands.

[Patrick Ho:]

Right, that’s helpful. Maybe looking longer term, you have mentioned some of the wins you have had both at the foundries as well as your existing customers. Maybe if you could give little more color about some of the opportunities you mentioned that you integrate etch opportunities, what are some of the process segments that you see the greatest opportunities for expansion for your tools?

[Dr. Timothy Stultz:]

So I think that the areas where we have the opportunities which are as we have spoken to multiple times are at key inflection points, where customers are considering new tools or maybe new toolset. So clearly, the 3D, 3D, 3D, 3D transistors, 3D memory, 3D packaging plays a big role on what we have been trying to do or we have been focused. And it is those inflection points that we are using to leverage our both our installed base, our experience and the performance of our tools to gain some market share. On the integrated metrology, those are just the hard-fought competitive battles and the selection for us is for the high volume applications is a rewarding outcome of a lot of hard work on the Atlas platforms is getting into those accounts, in particular, the ones that are now in the foundry area where they are looking to go from the plainer to the FinFET technologies. We have a lot of experience. We have more tools, OCD tools that have been deployed in high-volume manufacturing for FinFET than any other company. And we are using that experience and the proven performance of our tools to gain some foothold in market share in those accounts.

[Patrick Ho:]

I guess maybe just then a little color, I mean what process segments, is it etch where you see the greatest opportunity, CMP or even in deposition, which are the process segments do you believe you have the greatest opportunities to gain I guess greater market expansion?

[Dr. Timothy Stultz:]

Well, that is certainly a big one, because we see that there is if you look at the FinFET world, they would kind of look at – it depends on the technology node and the device, but in the FinFET world without the number of litho steps and the etch processes surrounding them are increasing and therefore drive an increased opportunity for OCD. When I look in the deposition area, it’s really more aligned to what’s going on in the VNANDs, the vertical memory devices, where you have multiple repeat layers and we have a position in integrated metrology to support some of those activities and in multiple accounts. And so it’s certainly more around the etch. We have got the CMP win was incremental for us and that one in the memory side going into China. That’s a new position for us as well. But I think that the highest opportunity, are going to be around the etch and litho cells.

[Patrick Ho:]

Great, thank you very much.

[Operator:]

Thank you. Our next question comes from Mahesh Sanganeria of RBC Capital Markets. Your line is open.

[Mahesh Sanganeria:]

Thank you very much. Tim, just want to get a little bit sense of the magnitude of the shipment and revenue delay, can you give us an idea if your revenue recognition no doubt happened to a older fab, are we talking about tens of millions of dollars here. And what kind of magnitude are you shipping to the new product or new locations that is pushing out the revenue recognition into the next year, early next year?

[Dr. Timothy Stultz:]

So I am trying to understand the question itself, but we do see if I look at what the incremental benefits are moving from NAND to 3D memory, we see roughly a 20% to 25% increase in tool opportunity for that device architecture. And all those products that are going into that factory are although many of them are being shipped in Q4 will not be recognized until Q1, so that you have to look at the size and scope of the fab, I mean the stages when they add production. And if it’s like 20,000 wafer start per month initial launch, then you look at that anywhere from $5 million to $7 million worth of product – OCD product opportunity per 10,000 wafer starts. And so you have to kind of do the math yourself and look at what is the production starts based on their own public commentary and then our opportunity for the tool attachment that goes with it.

[Mahesh Sanganeria:]

Okay, that’s very helpful. And other question looks like you have some visibility into the next year based on the fact that you are so busy definitely not asking for the guidance, but how do you see that mix and the linearity into the first half of next year among different segments sort or customers or regional say whatever way you can give us some color on how does the – in terms of shipment how does the first half of next year compared to the Q4 of this year?

[Dr. Timothy Stultz:]

We see increased both shipments and revenue going into the first half of next year. Right now, we don’t have a lot of clarity on the entire year. We think the year at least our current perspective, that’s really it looks kind of flat quarter-to-quarter, maybe a little bit up and towards the end, but it’s really kind of the uncertainties as much as the potential growth on a quarterly basis. But we see it year-on-year to be a pretty – a nice solid growth. We are seeing the Q1, Q2 business going up. We see that being driven by some memory as well as some resumption for the logic spending. And importantly for us it’s less than the trend of typical spending, it’s really about benefiting from the market share gains we have gotten and the new positions we have. So when you look at one thing I did mentioned earlier, when you are asking about the OCD opportunity at 3D NAND that 20% to 25% increase in tool intensity is just an OCD. The integrated metrology, we want on the polishers is incremental to that. So what you really need to look at is, I think the way the math comes out is that the market share gains that we have gotten and ones that we are working on are going to actually dominate the performance going into next year and relative to the spending changes.

[Mahesh Sanganeria:]

And since you are on the 3D discussion, and that’s already you are gaining the market share and also growing of the SAM, are you having discussions with more than I mean one is very publicly known that the fab in China that is building 3D NAND, are you in early discussions with more customers about potential 3D fab populating 3D fab in the second half of next year or even earlier than that?

[Dr. Timothy Stultz:]

We are definitely involved with three other customers on 3D memory devices. I think its public commentary has been such that we know that micron this Toshiba and Hynix are also looking at 3D type architectures. And we are very involved with all those. I think they play out later than the business than their early lead coming out of Samsung. But I figured that it’s a serious roadmap and we expect to participate in – at each of those accounts.

[Mahesh Sanganeria:]

Thank you. Thanks a lot Tim.

[Dr. Timothy Stultz:]

You bet.

[Operator:]

Thank you. Our next question is from Thom Diffely of D.A. Davidson. Your line is open is open.

[Thom Diffely:]

Yes, good afternoon, first a couple of questions on the Nanda move, so did you retina all of the key people moving to the U.K.?

[Dr. Timothy Stultz:]

No, we have gone. We basically looked at the platform folks the key technologists associated with software and applications so we brought some of them over they will be joined in our term in York. But some of the other areas were not necessary in terms of like systems engineering and so on which has been now fully adopted internally. Manufacturing went down internally.

[Thom Diffely:]

Okay and is there and revenue to pick up at this point form this group yet?

[Dr. Timothy Stultz:]

Well we have revenue but it’s not as large as we would like it and we are working very hard on positioning. We are getting good traction on advanced packaging. We would like the where that market is and we would like the – where the tool is. But it’s not large enough for you had to breakdown it off.

[Thom Diffely:]

Okay. And then Ron what are you expecting from a cost savings point of view from this mover?

[Ronald Kisling:]

So I think while we expect to see quarterly savings from the consolidation of the NAND operations of approximately $1 million a quarter beginning in the second quarter of 2014. Some of these savings that we significantly from this are going to be offset by salary, profit sharing increases and some hiring in R&D and in applications as we get into 2014. And I think as you start to look at 2014 though it positions us despite the strong year on the expected increase in revenues, the overall level of quarterly spending expenses will be - actually down modestly in 2014 over our Q4 levels probably coming in somewhere between $21 million and $22 million per quarter.

[Thom Diffely:]

Okay.

[Dr. Timothy Stultz:]

It will vary depending on the timing of certain activities and programs, but despite the increase in revenues, we should see quarterly operating expenses actually down slightly because of these savings which is just on offsetting increases, smaller offsetting increases.

[Thom Diffely:]

Okay. So is there a variable component at this point in your operating expenses or is it mainly fixed?

[Dr. Timothy Stultz:]

I mean it’s primarily fixed. There is a small amount of commissions, its variable with sales, but it’s a fairly nominal amount largely the cost structure is generally fixed based on the headcount and investments we’re making in R&D around materials and those sorts of things which really drive spending.

[Thom Diffely:]

Okay.

[Dr. Timothy Stultz:]

You are welcome.

[Thom Diffely:]

And then you mentioned that the margin in the first quarter would be down a little or not quite to the 50% range due to mix. Could you explain or elaborate a little more on that?

[Dr. Timothy Stultz:]

So, I think one of the things if you look historically I mean our gross margins back in 2011 which were very strong were driven by a very significant rapid - ramp of our flagship product. Today our product line is much more broader - we had multiple Atlas platforms, we have the UniFire and we have various products, not all of which commanded strong margins as our Atlas XP did and based on the various mix of those we actually see more variability just driven on the mix of products from quarter-to-quarter. And that mix in Q1 happens to be a little bit unfavorable based on the product mix. I think the other data point is to keep in mind is that with the growth in revenues we set are absorption or manufacturing overhead cost become a lower percentage, but because of their variances get spread of our inventory turn, there s is some lag in the full recognition of those favorable manufacturing variances, So there is some carryover of unfavorable variances from the second and third quarters of 2013. So you have a little bit of that drag going into the first quarter as well. So we’re really - it’s going to be Q2 when we see us back on the North of 50% margins at greater than 50%.

[Thom Diffely:]

Okay. So but as you average $50 million a quarter for the year, you just got the full year to be about 50%?

[Dr. Timothy Stultz:]

Yes, absolutely.

[Thom Diffely:]

Okay. And I guess just finally lot of the other equipment guys have talked about little higher percentage of reuse on some of the logic players sounds like you had some pretty good logic business in the quarter. Is that degree is not applied to you because of where you positioned or maybe a little detail on that?

[Dr. Timothy Stultz:]

Yes, there certainly is reuse and we all are faced with different degrees. We don’t have quite as much reuse exposure at some companies because we basically became “tool of record” in the last technology node and most of those tools are heavily utilized. However there is some reuse and one of the things that we‘re doing and been successful in doing in offsetting a reuse is to win additional layers and for every layer we win, it incrementally offsets multiple tool of reuse exposure and with one, one layer we’re working on several more layers and if we are successful in getting those layers on to our platform for this current technology node we actually increase the tool demand in the node.

[Thom Diffely:]

Okay, great. And then finally what is your crystal ball say about the LED and some of those other markets that historically were much bigger?

[Dr. Timothy Stultz:]

Well my crystal ball is really fuzzy on that one. The couple of areas that - let’s I guess what we really are talking about this are different business units and it’s clear that our integral metrology business has come back with a big bang and that’s been great with market share gains. Our Materials Characterization Business, which has products for LEDs, solar and ferrosilicon wafer still languishing out there, so we hope to see some additional improvement. I don’t expect it to come out of solar with the push-outs, that the public push-outs for 450 millimeters we may see some increased demand for ferrosilicon wafer tools for the 300 millimeter. So the lifetime for the - or lifecycle for the 300 millimeter wafers is extended. And for LED we’ve actually – we’ve introduced a new product recently that’s directly tied to that market, we’ve got some initial traction and we’re hoping that the adoption and acceptance of the tool will help strengthen the (NYSE

[Thom Diffely:]

Okay, great. Thanks for your time.

[Operator:]

Thank you. Our next question is from Josh Baribeau of Canaccord. Your line is open.

[Josh Baribeau:]

Hi, thanks. As I’m looking at some of the presentations you’ve given historically, you’ve given a range for 10,000 wafer starts which you actually referenced a little bit earlier in the day. Could you tell us, you’re certainly winning a lot of applications within some of these let’s call it foundry applications or 3D memory applications. What I’m trying to get at is I’m trying to size some of the market opportunities you have I mean what percentage of let’s call it, let’s say the foundry at 2X you say $6 million to $10 million in your presentations. What percentage do you think you have of that opportunity with some of the integrated etch and integrated CMP of that opportunity?

[Dr. Timothy Stultz:]

Well, so we got two answers to that. So if we talk about the 20-nanometer wins on the integrated we actually won the – we won the full position for high-volume manufacturing integrated metrology on etch for some of the – (Lam) platform. And that’s – that was a very nice win and that we’ll get, that’s all incremental to our position. With regard to the OCD business, our focus has been on to win the 16-nanometer and sub 16-nanometer FinFET positions at that account. We got the tool in there now that they’re using the tool and they’re actually using it to develop some 20-nanometer recipes which has the potential and given us some share of the 20-nanometer ramp that, that would be – it’s like frosting our cake, we weren’t counting on that. I think we’re going to actually get some of that, but that’s above what our original target and strategy was, what we wanted to actually win a substantial market share in the 16-nanometer when they went through the FinFET architecture.

[Josh Baribeau:]

Are you able to share with us what types of recipes that they are developing with the Atlas tools, is it in etch or is it everywhere?

[Dr. Timothy Stultz:]

Well it’s primarily surrounded around the etch, the etch position which is where one of the highest leverage areas are. We’ve got some other areas that they are developing as well around some lithography steps but etch is a big driver in particular in the – with the FinFET architecture.

[Josh Baribeau:]

Okay. And finally from me and sort of on the same topic, this pure-play foundry if it sounds like you might get some retroactive 20-nanometer type of recipes. Is that something that they would add going forward because they’ve already build some pretty significant capacity already this year. Is that something that you would get on incremental capacity or would you get some retrofit of what they’ve already built?

[Dr. Timothy Stultz:]

So the full toolset in choice for the Metrology tools on 20-nanometer in high volume manufacturing has not been set. There is a lot of – we do a lot of tool matching and performance matching against other platforms in competitive environment which gives them the flexibility to put our product in line as they built up the new fabs. So we think we – if we win some of those we can actually go into these first build-outs. We don’t have to wait for the next phase. How that plays out is still uncertain. We’re working very hard to give them that experience. We think that the more experience they get on our tool of 20-nanometer strengthens our opportunities going into 16 and so we’re encouraging them to put a few layers on our tools both to exercise our tools, get experience of our tools, learn how to run our recipes and I think it just helps the continuity going into the next node.

[Josh Baribeau:]

Great, thank you.

[Operator:]

Thank you. (Operator Instructions) Our next question is from Edwin Mok of Needham & Company. Your line is open.

[Edwin Mok:]

Hi, thanks for taking my question. First question is with the new wins you got any deferred revenue that impacts the gross margin for this quarter or next quarter?

[Dr. Timothy Stultz:]

Actually did you clarify the question was whether we have deferred revenue that impact the margin?

[Edwin Mok:]

Yes because sometimes when you have new product that you are shipping and recognizing revenue more than normal deferred revenue that may impact gross margin, did you have any of that in the near term?

[Dr. Timothy Stultz:]

Yeah, so it doesn’t have a direct impact on gross margin. When we ship a tool and we defer the revenue we also defer the cost of that tool as well so that we don’t have the cost going through ahead of the revenue and then when we actually recognize the revenue then we would go through the cost of the tool. What you can’t have is that particularly in Q4 when we start to have a huge ramp of shipments as it can affect our manufacturing overhead and absorption that flow through the P&L, we’re manufacturing those tools ahead of when the revenue happens. But the impact is relatively small because we match the cost of the tool with the recognition of events.

[Edwin Mok:]

I see, okay. That’s helpful you clarify that. And then on the IMPULSE when did you mention, Tim just to kind of clarify is that on – I’m trying to understand is it a sound unique process that – CMP process that is needed for 3D memory or is it just generally a 3D memory that you think of - you secure some wins and obviously it is general then general CMP process then you can probably take that win and go out of customer. Is that the way to think about that or is it more just target for 3D NAND?

[Dr. Timothy Stultz:]

This was a specific win on the 3D NAND process cycle and sequence. We obviously try to leverage any win inside their customer accounts, but this was specific to Samsung, specific to the polisher and specific to the 3D devices.

[Edwin Mok:]

Okay. That’s very helpful. And then on – as to what you imagine you shipped (indiscernible) foundry, right. Are you working on that same customer on placing IMPULSE on those customers as well given that integrated that will own out seems to be working closely together?

[Dr. Timothy Stultz:]

Well we have won the integrated, one of the pure-play foundries already for the etch platform as you know. So we have the Atlas tool of this account, we have the UniFire of that account and we have integrated Metrology on the etch platform all at the same account. There is another account where we just – where our tool was selected, right now it’s a – it’s not only UniFire and our Atlas platform we don’t have any integrated Metrology position there yet.

[Edwin Mok:]

Okay, great. Thanks for clarifying that. That’s all I have.

[Dr. Timothy Stultz:]

Okay.

[Operator:]

Thank you. I’m not showing any other questions in the queue. I’d like to turn the call back over to Timothy Stultz for any further remarks.

[Dr. Timothy Stultz:]

Well, thank you once again for participating in our call. We all know we operate in a cyclical industry where demand levels can change dramatically of our very short periods of time. Responding to these rapid and dynamic changes effectively and with quality is extremely challenging. I thank and express my sincere gratitude to all our employees and business partners of Nanometrics who routinely execute against those challenges and turn them into a competitive advantage. Finally we look forward to reporting on the results of our operational and financial performance for the fourth quarter and full year 2013 next February. Thank you again.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You all disconnect. Everyone have a great day.