Miri Segal - Hayden IR Eitan Oppenhaim - President and Chief Executive Officer Dror David - Chief Financial Officer.

Patrick Ho - Stifel Nicolaus Edwin Mok - Needham & Company Josh Baribeau – Canaccord Keith Maher - Singular Research Tom Diffely - DA Davidson David Wu – Indaba Global Research.

Good day everyone, and welcome to the Nova Measuring Instruments Limited Third Quarter 2014 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of Hayden MS-IR. Please go ahead..

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments third quarter 2014 financial results conference call and presentation. With us on the line today are Mr. Eitan Oppenhaim, 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.novameasuring.com in the Investor Relations section.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today's earnings release also pertains to this call.

If you have not received a copy of the release, please review it in the Investor Relations or News section of the company's website. Eitan will begin the call with a business update, followed by Dror with an overview of the financials. We will then open the call for the question-and-answer session. I will now hand over the call to Mr.

Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead..

Thank you, Miri. Let me add my welcome to everyone and thank you for joining our third quarter 2014 financial results conference call. I will start today's call by addressing our results and our performance highlight for the quarter.

I will then provide a brief commentary on the industry trends as they relate to us and following that, I will provide the guidance for the fourth quarter of 2014. Following my commentary, Dror will review the quarterly financial results in details. For those who are following the presentation, please proceed to Slide number 4.

The third quarter was a solid and profitable one for Nova and our results were in line with our guidance. We posted quarterly revenue of $27.4 million along with $3.9 million or $0.14 per diluted share in non-GAAP net income, which exceeded the high end of our profitability guidance.

With that, our year-to-date GAAP profitability doubled from 2013 and our quarterly profit growth at 46% compared to a year ago. Overall our third quarter results demonstrate once again the operational leverage that we have built into our model.

Our improved year-over-year profitability demonstrates we can execute on our fundamental plans to grow while maintaining superb operational efficiency and flexibility that match the industry cycles.

Although we experienced some market softness this quarter, rather than [ph] our industry have, more than allowed us to continue investing intensively in our development and customer partnership program in order to maintain our innovation leadership which is a key to our growth in the next year ahead.

In addition, as part of our plan to optimize shareholder value, during this quarter we continued to execute our previously announced $12 million share repurchase program.

Due to our growing position in the optical metrology space and from the progress we’ve made with leading customers, this quarter’s results reflect more diverse customer base across both the foundry and memory segment.

Following the market dynamics and investment cycle this quarter, our booking numbers saw a substantial increase in memory orders compared to previous quarter. The customer mix during the last two quarters reflects also our growing position with our US based foundry that became more than 30% of our revenue mix along this quarter.

And while we keep experiencing some investment softness with our leading foundry customer, we posted a balanced quarter which reflects our solid position in the market. In fact, our growth in memory order is a direct result of our effort to increase market share and exposure in this segment.

During the quarter, we won two major DRAM selection with our [inaudible] for advanced device manufacturing in various locations. A strategic initiative to utilize our core modeming strength and diversify our hardware product portfolio with more software elements paid off this quarter with some significant software sales.

Thus far this year, our software revenue stream has surpassed our plans, delivering steady growth quarter over quarter. Now following our stronger than expected software sales in the third quarter, we expect software to generate approximately 4% of our total annual product sales in 2014, well above our internal business plan and initial estimate.

Our effort to maintain competitive technology edge in the foundry segment is get another successful technology partnership for future advanced nodes.

As reported earlier on in the quarter, our metrology solution was selected by a leading logic manufacturer to support the development in future manufacturing of its 10-nanometer and 7-nanometer technology nodes.

The selection solution includes our most advanced toolset and will be deployed in both content and back-end application in various process steps. Our success in this competitive evaluation is a lot of trust for our innovative approach and it highlights our broad understanding of the complex requirements maintained by our foundry customer.

We expect that our relationship with this customer will generate future benefits to Nova and our other partners of the world [ph] as they progress on their own transition to 10-nanometer and below.

Following our penetration effort into the TSV market, we successfully concluded another evaluation and won the first order for a major memory customer during the third quarter. Nova solution was qualified to be the production tool of record for both memory and logic application.

The planned implementation by this customer is expected to yield multiple orders over the next few years. Beyond this particular evaluation, we are currently involved with several TSV evaluation with bidding customers.

Overall our third quarter results largely reflect continued execution and mixed market conditions and the uncertainty we see in the industry today and although our customers are facing various technical challenges, we still expect that the complex transition to the most advanced nodes will continue in 2015.

We expect to see challenges such as cost, geometrical complexity and material stability which are [indiscernible] developing and yielding complex nodes to continue. This situation extends also the opportunity for optical metrology as a unique enabler.

Although Nova is not immune to the volatility and near term uncertainty as to timing and capacity that our markets are experiencing, we are confident that Nova is well positioned to benefit from the industry major transition in 2015 and beyond.

With the combination of technological innovation and operational efficiency, we believe we are well positioned to quickly adapt to changes in capacity cycles in the near term and still grow in the long term. Let me provide some more details on our product portfolio performance during the quarter.

Our main system deliveries during the quarter were to support various technology nodes at both foundry and memory customers. Due to the increasing demand in memory, as a result of DRAM spending, we witnessed a delivery mix that included more integrated tools for their most advanced DRAM sites in several locations.

In addition, in line with the next phase development of complex V-NAND devices, we continue to be involved in several evaluations with leading customers. We believe that our unique approach that combine software modelling solution with different hardware schemes, which bring us closer to the process, demonstrates unique value to our customers.

In the foundry space, we continued with system deliveries to support various technology nodes, including 28-nanometer and 16, 14 nanometer at several foundry customers. Also, we are deeply involved in several 10-nanometer evaluations which we expect to be concluded in the coming quarters with product tape-out at the end of 2015.

We are well positioned today with our advanced portfolio in all our foundry customers both for back-end and front-end of line in the most advanced technology nodes. We also delivered progress with our integrated metrology adoption in both memory and foundry customers for several new applications to additional processes.

As the market leader in integrated metrology, we are maintaining our investment in the tools roadmap to meet the increasing challenges arising from the technical transition in both memory and foundry. We believe that our strategy to deliver, standalone capabilities in integrated tool will expand our relevant market in various sub-locations.

Following our strategy to partner with R&D centers and research institutes, earlier on in the development cycle, in order to be better prepared and contribute to high volume manufacturing later on in the cycle, we signed recently another partnership agreement with Imec, the world-leading research center in nanoelectronics to assist them in developing the next generation technology.

This is yet another example that our business strategy is aligned with our customers’ decision flow to choose their metrology tools of record well in advance in their early research and development cycle. This partnership adds to other recent investment we had in this area with other research and development centers.

This approach allows us to have early engagement with our customers and prospects that are sponsoring this program. As we stated previously, while our customers keep investing to commercialize their advanced structures, we are still facing technical challenges in scaling their devices in high volume manufacturing.

The different complex issues are mainly around with the position and their processes which present metrology challenges that stretch our technical innovation capabilities to find solutions that are unique and core perspectives [ph].

We believe this environment actually provides us with more opportunities in the market and we believe that our current and our next generation tools which are being scheduled for the beginning of 2015, are addressing the growing needs of our customers in the transition to advanced nodes below 20-nanometer.

I have touched on this briefly but I would like to extend my commentary on the current market environment and our view for the remainder of 2014 and for 2015. Generally we believe that the demand for consumer and the high end mobility devices is growing.

And as a result, the different semiconductor segments will show a substantial growth as well in 2014 and 2015. That said, while the overall industry expects healthy growth during this year, we see some near term challenges with the transition to 3D structures.

While we don’t see any intention on the part of our customers, to slow their technical transition, we do see some timing issue with their capacity ramp up and need of improvement. Thus forecasting the precise timing and capacity of this complex transition in the near term is still a challenge.

Nevertheless we see the current conditions as near term challenges in what’s expected to be a healthy long term investment cycle that will continue into 2015. By our latest estimates, based on the current development [ph] and market information in capacity planning, we believe that wafer fab equipment growth in 2015 will be in the range of 5%.

We believe that the initial capacity added to the most advanced V-NAND and FinFET product line will be moderated and the overall investment in these nodes will stretch into 2015 as well. It’s fair to say that with the current uncertainty many things can still change especially with the upcoming transition to 3D gate structure.

We believe that we are well positioned to broaden our pipeline opportunities and benefit from 2015 growth as well. Looking a bit deeper into the different market segment we focus on, DRAM is currently the most active segment, driven majorly by increasing demand for mobile DRAM, and favorable supply demand scheme.

Besides this capacity expansion, customers are also investing in technical scaling to 2x nanometer node. And our view of growth we see in DRAM investment which includes also conversions and upgrade of existing toolset will continue in the first half of 2015 as well.

Meanwhile for non-Flash, while the overall market appears to be relatively healthy, we continue to see delays in bringing on production which is fortunately bolstered by increasing investment in scaling planner gate below 2x nanometer.

We continue to expect that V-NAND devices will become commercialized in high volume manufacturing in the second half of 2015. In foundry, our leading customers are moving closer to high volume manufacturing in 16 and 14 nanometer FinFETs.

With various product tape-outs expected by the end of this year 2014 and early next year, which will lead to moderate ramp-up towards the end of the first half of 2015.

Again we see some investment softness in the near term with our leading customer, but we believe that the recent progress made in the last month to improve its FinFET version as along with increasing investments and accelerating the 10-nanometer development has set up the stage for the healthy growth next year.

Across the board, we are witnessing extensive efforts by our both leading foundry customers to deliver productive FinFET devices in 2015. With increasing share of published [ph] IC sales on the overall semi sales, we are confident that the foundry market will continue a steady growth year over year.

Now let me share with you the guidance for the fourth quarter of 2014. Revenues will be in the range of $24 million to $26.5 million. Diluted EPS on a GAAP basis will be at the range of $0.05 to $0.10 and on the non-GAAP basis, EPS will be at the range of $0.01 to $0.06 per share.

This guidance reflects a lower than expected order trend from our leading foundry customer towards the end of the year which we believe will be restored in 2015.

Nevertheless with this guided results, we expect 2014 to be yet another record revenue for the company with annual revenue in the range of $119 million to $121 million, demonstrating continued profitable growth over the last three years.

Although we’ve experienced decreased visibility throughout the year, we managed to execute well our plans and expect to grow this year both in revenue and profits. Now let me hand over the call to Dror to review our financial results in details.

Dror?.

Thanks, Eitan, and good day everyone. Please move to Slide 9. Total revenues in the quarter were $27.4 million, 6% higher than the comparable quarter of last year. During the quarter, software revenues which are presented in the product revenue stream, crossed the 1 million mark.

In addition, the company presented all-time record service revenues which came in at 7.2 million. On an annual basis, in 2014 we expect software revenue to be approximately 4 million relative to 1 million in 2013. And service revenues to cross the 25 million of annual revenues for the first time.

On the booking side, product bookings continued to be strong in foundry which represented approximately 80% of total bookings during the quarter. However we did see some increase in memory bookings driven mainly by the increase in DRAM spending.

Geographically, 60% of the bookings in the third quarter came from Asia-Pacific and most of the rest from the U.S. This reflects the company’s deep penetration into an emerging foundry player in the US region. Product gross margin came in at 58%, similar to the previous quarter due to favorable product mix in the quarter, including software revenues.

Service gross margin climbed to a record level of 45% relative to 39% in the previous quarter mainly as a result of higher time and material revenues, utilizing the same existing infrastructure. Blended gross margin came in at 64% at the high end of the company’s target model and higher than expected.

For the fourth quarter of 2014, our guidance assumes blended gross margins of approximately 50%, lower than usual mainly due to the expected reduction in the revenue stream.

It is important to note again that we expect to continue to see fluctuations in the quarterly blended gross margins, mainly as a result of fluctuations in the product mix which now includes higher portion of new products, including software. On an annual basis, we expect to be within our target model of 52% to 55%.

Operating expenses in the third quarter came in at $11.5 million, a decrease of 0.5 million relative to the second quarter of 2014. During the quarter, we continued to be very aggressive with our R&D and roadmap investments while prudently managing SG&A to mitigate the reduction in revenue levels.

Looking forward into the fourth quarter of the year, we expect to continue to increase R&D investments in order to make sure our product roadmap is fully in line with the increasing customer needs in future years. As a result, our guidance for the fourth quarter assumed operating expenses of around 12 million.

Overall in 2014 we expect operating expenses to be approximately 47 million, the same as in 2013 meeting our goal to stabilize operating expenses while increasing revenues and profitability. Operating margins in the quarter were 12%, lower than the first half of the year due to the reduction in revenues.

Tax expenses in the third quarter were 0.1 million as we continued utilizing certain government incentive programs in Israel, which provides for zero tax rate in the first two taxable years. During the fourth quarter of the year and in 2015, we expect actual tax expenses to remain at the same level.

However during the coming fourth quarter, we expect to create deferred tax assets in the amount of approximately 1.7 million, reflecting potential tax savings which are expected to be realized starting 2016. Net income for the quarter exceeded the high end of the quarterly guidance.

This result is attributed to the better than expected gross margin levels and lower operating expenses. GAAP net income in the quarter was 3.3 million, or $0.12 per diluted share based on the share count of 27.8 million shares. And non-GAAP net income in the quarter was 3.9 million or $0.14 per diluted share.

During the quarter, the company generated approximately 4.5 million in free cash flow and in parallel we accelerated the execution of our previously announced share repurchase program. We expect to further accelerate the execution of this program in the fourth quarter of the year. Moving into balance sheet key metrics.

Accounts receivables decreased by 3 million at the end of the third quarter. DSOs increased to 81 days, higher than usual, due to shift between customers and the timing of system delivery during the quarter. We expect DSOs to normalize to lower levels during the course of the next two quarters.

Inventories further decreased in the third quarter as the company continued to align its supply chains to the current levels of business activity and inventory turns came in at 2.8 times a year. Capital investments increased 1.8 million in the quarter and depreciation expenses were 1.1 million.

Before concluding my prepared remarks, I would like to refer to Eitan’s comment regarding Nova’s revenue growth, which outperformed the peer group. Those of you who are following the presentation, please move to the next slide.

The chart in this slide presents the accumulated revenue growth of Nova during the last three years, including 2014, relative to its peer group and relative to the wafer fab equipment as a whole. As the chart demonstrates, Nova was able to increase its revenues by more than 15% during this period.

At the same time, peer group revenues decreased by approximately 15% on average and wafer fab equipment decreased by 12% according to Gartner. This is clearly demonstrating the significant market share gains of the company during this three-year period.

Specifically in 2014, on an annual basis and based on the fourth quarter guidance, we expect Nova to present record annual revenues of approximately 120 million. 2014 will be the second consecutive year in which Nova presents record annual revenues which is unique across the whole peer group.

In parallel, in 2014, on an annual basis, we expect to maintain gross margins at our target model. We expect to significantly increase profitability and we expect to generate over 20 million in free cash flow for the year.

These results are obviously unique among our similar sized peer group and represent the effective management and operational leverage built into the company model. With that, I will move the call back to Eitan..

Thank you, Dror. With that, we will be pleased to take your questions.

Operator?.

(Operator Instructions) It appears our first question comes from Patrick Ho with Stifel Nicolaus..

Eitan, can you give a little bit of color of some of the development work that you are doing at 10-nanometer node given that it seems like certain customers are accelerating their development work? How do you see the qualification process for you and how soon do you see at least from your vantage point right now, some of these opportunities turning into revenue?.

Thanks Patrick for the questions. So I will start with that – actually the only selection, the competition selection that took place in the market was, with the win that we have a few months back on the 10 and 7 nanometer, I think this was the first selection that took place in the market with this particular customer in the US.

If I am looking right now in the rest of the foundries, I think that particularly our leading foundry has accelerated the development process in Taiwan. What we have right now is actually this medium customer moved to a 24-hours, 7 days a week development schedule in order to be ready with the 10-nanometer takeout by the end of 2015.

This was actually also announced in their conference call and actually in the last few months, we see take-out of equipment to this development line specifically in Taiwan.

Regarding the rest of the customers, we see some development with the rest of two foundries, and I am sure that according to the competition rate going on between the foundries, we will see some more progress with these two customers in the first and the second quarters. .

Maybe sticking with the foundry segment for a second.

Given the struggles with the yield that the 16 and 14 nanometer FinFET node, how do you see 20-nanometers progressing? Do you see any pick up there that may give you some incremental, I guess, gains as we enter 2015 given some of the struggles at FinFET, do you see 20-nanometers kind of picking up a little bit near term that can help you guys?.

So you know, when looking right now in the foundry we have two groups of customers right now. We have those that are progressing on 20-nanometer and below, and we have those that are still struggling on 28 in order to fill the capacity on 28.

When we are looking right now on 2015, I think that most of the additions will come in the 16 and 14 nanometer FinFET – we still – and I think that it’s not clear if there’s going to be some extension on the 20-nanometer. I think it’s according to the high end mobility market and especially [inaudible].

In regard to the 28-nanometer, we do see in 2015 some moderated capacity in those customers, both in Taiwan and China. .

And final question from me, in terms of your software business. Obviously you had a really good quarter, this quarter and it continues to grow.

Can you give us just what some of the trends are and how that business kind of ramps – is that dependent on more tool sales, does it come afterwards, does it come before? How do we measure, I guess, the potential software trends for you guys going forward?.

Thanks Patrick. Let me shed a little bit of light about the software product and we talked about it before as well. Nova has actually three groups of software products. One group of software product actually depends on the installed base, this is what we call the fleet management.

And it has its benefit both on new [indiscernible] going to the market, as well as installed base – that are installed in the field. The second one and the third one, actually standalone software system that can be sold along with our system and also can be sold as a standalone product to our customers.

The first group is what we call the hybrid metrology, which actually – when we sell it, it has to be related to install bases we have already in this particular customer but it’s not has to be on the same timing.

So this is like selling the standalone software tools and the third one is not related, it’s all to our installed base which is using our modelling capabilities, in order to bring some benefits to other optical center in the process. And this one is a competitive standalone sales that is not related to the specific integrated or standalone forecast. .

Our next question comes from Edwin Mok with Needham & Company..

So first question, going back actually to memory, you mentioned that there is some pickup in DRAM and bookings were stronger. And I wonder if you can quantify how much of your bookings come from the memory side, that’s a first part of the question.

And it seems like the DRAM guys have been investing for the last two quarters, or three quarters already, right, but your commentary suggests that you expect them to continue that [ph] into first half of ’15.

What’s driving that? Is it just so much expensive or hard to shrink to 20 nanometer or what are the drivers – driving them to continue investing into 2015?.

So Edwin, there are two parts of the question, I will try to answer them specifically.

The first one – what we see right now with the expansion that we have seen with the DRAM, it has some expansion on the last quarter and what we see right now from our capacity addition we see going on into the fourth quarter and also the first two quarters of 2015, basically from new lines that is being added. So this is first one.

So we do see some increasing in DRAM in the beginning 2015. Regarding what is driving it, I think that there are two reasons mainly. One is that the demand in the market for multi-DRAM and also the enterprise DRAM or the server DRAM. And the customers are investing heavily in order to grow into the 2x nanometer device structure. So this is one side.

And I think that, that is the DRAM is very influenced [ph] from the price came into the market, so the demand supply right now in the market or the demand supply scheme in the market right now is very favourable in DRAM. So we do see both conversion to DRAM.

We do see also some investment in DRAM and with this, definitely I think that will continue in 2015. I have just to be cautious enough that it will not be on the same page as we saw in 2014. We think it would be moderated a bit and we will go in some kind of regular cycle somewhere in 2015.

In terms of the bookings in Q3, memory was 10% of bookings and – sorry, in Q2 it was 10% and in Q3 it grew to 20% of the bookings. .

And then on the foundry side, I remember, call it, the early part of 28-nanometer ramp, or actually I go back a step and call it, before that rate – eventually your customer base is kind of diverse and you have quite a bit of pickup in spending from what I call Q2 customer, right? But Eitan, your commentary – you have said in ’15, it was mostly concentrated in 14 and 16 which will be leading – two or three leading guys that are spending there.

Are we not seeing any kind of broadening of spending from the tier 1 guys and foundry, or at least haven’t seen that so far and do you expect that to happen as we get through 2015?.

So maybe I will shape a bit what I said before and I think that without getting into – is it tier 1 or tier 2, I think that there are – as I said, there are two group of customers right now, if you are looking right now in 2015, adding capacity.

One group is a 20-nanometer and below and we see right now three customers – according to our forecasts and plans, we will invest in both 14 and 16 nanometer. I think that one of the things that we see in the market right now, at least in the last few years, that there is a significant progress in the FinFET device tapeout.

As you know, both leading technology customers in the foundry space are taping out its second version of the product, it actually will be on a – with the advanced performance.

We see it progressed well and I think that by the end of 2014, and the beginning of 2015, those customers would be ready to yield and move to high volume manufacturing to syn the devices. That’s the first one.

Then I also said – and I would like to emphasize that one, because of timing issue, there is still a debate and we don’t see it yet in the market but there is still a question market about expansion on the 20-nanometer. And everything depends on the supply demand – from this specific customer. So this is regarding the first group.

The second group of customers that – actually started investment in 2014 in 28, and we saw part of it coming in 2014, actually we saw it according to the plan and both the foundry in Europe, the foundry in China, the foundry in Taiwan, and the other one in Korea, we saw some addition to the 28 nanometer capacity.

We will see some of this coming in 2015 as well but as we see right now 2015 shaping up from foundry point of view, I think that the majority add-ons that we see will come from the advanced nodes. .

Just to be clear, so if I understand your commentary about the tapeout progress at customer base.

I know that you guys don’t have a lot of visibility – but it seems to suggest that you think at least in first quarter of ’15 things would start to pick up on the foundry side?.

You know, Edwin, we don’t guide beyond the next quarter. And therefore we cannot share specific numbers for 2015.

Besides that I have said also few times in my prepared remarks and I think that it’s common on other vendors as well, it’s becoming extremely difficult to forecast precisely the timing and capacity of strategic expansion, and it’s becoming even harder right now in the foundry addition which we are exposed to.

And those advanced nodes are the key for our performance and growth.

Additionally due to the uncertainty that the market presents currently, with semi event or we’re part of this group, require to act differently, as lead time is becoming very short, backlog are basically consuming at faster turnaround during the quarter which make it even tougher to predict.

Nevertheless as I said in my prepared remarks I think that 2015 is going to be a growth year in the industry, and with customers coming closer to high volume manufacturing, to the advanced structures, we believe Nova has the ability to prevail and capture the growing opportunities in the market.

We saw and demonstrated the operation model as well, well in the long term model, we are performing well and we are executing well and it’s allowed us to adapt rigorously to the changing environment with minimum impact on our development plan and customer commitments.

And I have to say that even we had this visibility issue during the last few months, we still continue with our development plan, we still continue with our technology innovation [inaudible] will the key to win more market share in 2015. .

Just quickly squeeze in, what happened to the 3Q gross margin, why it came in better than expected? And then finally just on tax rate, you kind of walk through what will happen in the fourth quarter and how – what should we expect the tax to be for 2015?.

Yes, so in terms of the gross margin, we saw an increase in software revenues and services, which obviously better gross margins and this supported the gross margin in the third quarter despite some decline in revenue. So that’s the main reasons for, I would say, the better than expected gross margin in the third quarter.

In terms of the tax, again we have tax incentive in Israel, so practically in terms of actual tax benefit will be very low, it has been very low in 2014 and will be very low in – at more or less the same rate in 2015.

However we have some additional potential tax savings which will be utilized only starting 2016, we need to accounting wise – we need to create a tax asset in the fourth quarter in the amount of 1.7 million in the fourth quarter of this year.

This means that on a GAAP basis, this 1.7 million will be written as income in the P&L but again this tax asset will not impact 2015 tax expenses and during 2015 you should see the same level of tax expenses in general that you have seen in the second and third quarter of 2014. .

Our next question comes from Josh Baribeau with Canaccord..

Hi thanks. So everything is pretty straightforward and I think generally as expected with what a lot of your peers and the customers have said.

Just one question from your opinion, when we think about the 16 nanometer investment that happens at the beginning of next year, are you thinking – are you planning for a full investment node, are you thinking there’s going to be a lot of overlap in reuse of the 20 nanometer equipment and capacity?.

Thanks Josh. So I will try to answer – first of all technology wise and then on the other perspective. If we are looking right now historically on the transition from one technology node to another, looking on 28, moving to 20 and 16 we definitely see that the initial capacity that customers are investing are moderated and less from node to node.

So if we have on the 28 without getting to the right amount but if there are more than 100K capacity right now and moving to 20 which is probably something in the range of 50% of that, we think in starting 16 nanometer it even will be less.

The major reason is that I think that the technical challenges associated with fabricating those products is much more significant than they thought in the beginning and in my mind they would start with initial moderate capacity than what we started before, with less advanced nodes. This is first – and this is what I think we see.

Secondly, I think that over the last nodes from 28, 20 and 16, by the way this goes the same in other foundries as well. We see that those customers are becoming more efficient in using capacity and of course it depends on the high end user demand but lastly, if there is a place of utilization of existing equipment they are doing that.

So it’s not on the higher level of the percentage but we do see it happening from one technology node to another. That’s at least on the two parts. .

And maybe just as a follow up.

Are you prepared to disclose the names and percentages of any 10% customers in the quarter?.

On a name by name basis, we do not disclose the name but we can say that in this quarter we had three customers above 10%..

Josh, I have to, on that remark, I have to add on that – looking on the diversity of customers that we had in the last few quarters, one of the milestones that we are proud of is actually the second customer that used to be in the lower numbers in our portfolio came to more than 30% on the last few quarters.

So actually the portfolio right now is diverse over a few foundry customers, with one, leading one, which is not the usual one that we have on the previous quarter and also some DRAM customers. .

Our next question comes from Keith Maher with Singular Research..

I had a question – you mentioned on the logic – 10 and 7 nanometer logic sales. I think you’ve implied maybe in Q1, Q2, you could see some revenue, I think, that would be development activity.

Just trying to get a feel for when we would start seeing that production ramps for that – for those bidding customers?.

Okay. Thank you, Keith for the questions. So we started to see already shipments and revenues on the 10 nanometer equipment on the last few quarters, actually the small amount but we started to see that for more than one customer to the development and research line.

If I am looking right now on the cycle, and when exactly -- we expect production of 10 nanometer, I think it will not be a 2015 story.

Nevertheless I think that on the second half of 2015, we’d start to see more plans towards tapeouts of 10-nanometer product and we’d start to see some more equipment tapeout towards the end of 2015 for re-production line and maybe yielding some development line. So definitely it’s not a significant part of the capacity in 2015. .

On the $12 million stock repurchase plan, When would you – I know it stated in Q2 but when would that be expected to wrap up – what quarter of next year?.

Yes, our initial goal was to conclude this repurchase program 12 months from the initiation. So that would be around the first quarter of 2016. .

So – and you are still – I guess it looks like you spent about 4 million so far.

So you probably have to pick up the pace a little bit, sounds like in the next couple of quarters?.

Yes, definitely, we do plan to accelerate the repurchase in the coming quarters. .

And I had a question on software revenues. I know there is some situation where some of that might flow through the services line.

Is that the case?.

Generally yes, for legacy software products but in 2014 most if not all these software revenues that we are discussing were in the products revenues. .

So why would that through services – why?.

Well, you count the time when the product is – with the software products, already product is becoming a legacy product which is sold mainly as a support to the installed base and not as part of new sales and at that time we move into services. This has not yet happened with the new software products. .

And then just one question on the EPS guidance.

It looks – I guess it looks like the creation of the deferred tax asset is probably about $0.06 deduction, and then I guess we’d assume that maybe offsetting that a couple of cents of stock based compensation, is that how we should think about the difference between GAAP and pro forma?.

Yes..

Our next question comes from Tom Diffely with DA Davidson. .

First, a clarification, sounds like big percentage of the order booked this quarter was foundry, yet the fourth quarter looks a little soft in foundry.

Is that just because the book we’ll see there -- turns business or is it orders that are to go out after the end of the fourth quarter?.

No, the larger portion of bookings receiving in Q3 and reported in the distribution of our foundry and memory will be delivered in the fourth quarter. .

Okay, that’s how you refer to a little bit of softening in the foundries in the fourth quarter in your earlier comments?.

No, Tom, one of the things that we put in our remarks that we expected some higher order take from our leading foundry customers and actually slip to 2015. That was the remark. So those are not orders that we didn’t ship, in fact, the order that we sell – actually slip to 2015..

And then when you look at just the different served end markets, is there some way to handicap what your tool intensity, is your capital intensity for the OCD tool on a DRAM versus NAND versus foundry basis?.

Yes, I would like to say that although we see some uncertainty, some with seriously and also some visibility on our customer side and our market see the same. I think that we are solid with our statement that OCD is becoming an enabler when you move to the advanced structures both in foundry and in flash memory.

From our perspective, we see it right now along the 28, 20 and then 16 in the foundry. In fact, in the foundry the concentration is much higher and we see as I said before something without getting to high volume manufacturing in 16 and 14, we see something like above 16% increase in the OCD intensity.

If we are looking right now on memory, the intensity goes a little bit lower than that and we see something between 5% and 10%. Again this one looking only on the capacity that we have right now in the market because none of the – actually none of the customer went into a high volume manufacturing on high capacity.

So we need to wait a bit but if we are looking right now on what we have right now in the market, these are the numbers that we see.

By the way we know the reasons, the process is becoming very difficult to stabilize with the litho and the patterning issue, once the material has to be stabilized and also the geometrical scale, becoming an issue to stabilize when you move to 3D.

So this is what we see both in the V-NAND and FinFET, and you go to the flash and into the FinFET and foundry. Regarding DRAM, we see a bit intensity going up when they move to the 2x but I don’t think that this is something significant.

So I think that intensity in DRAM as we see, then you need to remember this in DRAM, we are more towards with the integrated, we don’t see much intensity going up. .

And then finally here, when you look at your tool, when you move down to maybe 10 nanometers and below, does the actual – the tool change itself or is it just software upgrades along the way?.

So looking right now on where we are doing evaluation of 10-nanometer, without getting into exactly the product types and how we do that, our tools can actually extend the capability from around the 30 and 28 down to the 10 nanometer. And with specific customers, actually the challenges are higher, or the density is much more bigger.

We will come in 2015 with newer generation of tools, it’d actually take us down to even below 7 nanometer. So regarding your questions, our existing installed base can take up down in 10 nanometer, of course, with some small upgrades. When we are going below the 10 nanometers, the next generation tools will address that one..

And I guess final here, as you move to the next generation nodes for each of these markets, how does your share between integrated and standalone shift do you think?.

So as I said in my remarks, we need to look on the advanced nodes where the difficulty is coming from. And most of the difficulties, if you look right now on general both in the foundry and memory coming from the Etch and CMP processes. In those processes most of the tools are standalone tools.

Although we start to see – also integrated for Etch, most of the tools in those two segments are standalone tools. And the growth over there, going from one node to another node in the advanced node is growing. Regarding the integrated, we are talking about the CMP process, which is increasing as well on the advanced node.

But the growth over there is not coming from more tools, that is coming from more applications, that’s becoming more OCD oriented and cannot be sold with regular thin film products. So it would be really difficult to compare the growth, if we are looking right now in 2014 as the expected results, actually the integrated metrology share grows.

It didn’t grow only on the traditional application but a mix of application or additional application in this and another and I have to mention that when we talk about the software products, one of the things that we see right now with the trends of the integrated metrology, we discussed them, and wanted to move closer to the process which means to be able to give chamber to chamber viability or qualification of the process, during the process which is a very unique way to do OCD and this is where we are going to concentrate as part of our product portfolio in the next years to come..

Our next question comes from David Wu with Indaba Global Research..

First, I would like to talk a little bit about your new customer and the design win was go for 10 and 7 nanometers.

Is that based on current tools or is it based on current tools plus your next generation metrology tools?.

Let me – I cannot actually go into the details of the specific deal that was done on this advanced technology node.

As I said before, in a question that was asked, our tools can take us from the beginning of 28 nanometer down to 10 nanometer, and with specific customers with actually their requirements are a bit higher, we plan to do it in a different way and I think that summarized my questions regarding the toolset in this customer..

The other question I have is – the yield problems that were reported from the commercial foundries out there, is that a function of them changing recipe and try to ramp the advanced version of their 16, 14 nanometer node, or is it basic very poor yields at the base process node?.

So I think if we are looking right now on foundry, the base for the overall operation and flexibility of the foundry is to create many recipes and many products. This is why the foundry was actually invented and came into the model in the market.

So I think that the foundry from day one, they’re starting to design the product and decide -- design the tapeouts they are going on multiple versions. We also had on multiple version with the cooperation of ARM with our leading customer. So in the foundry space, from day one, they are going for multiple products and multiple recipe..

That makes the top couple foundries have commitments to large --- of their customers to new generation of smartphones coming out, smartphone SoCs coming out in the middle calendar ’15.

Are there any slippage in the confidence that they can meet that delivery schedule?.

Well, in my mind, looking right now on the competition that we said between at least three vendors, I think that also with the capacity that came out with the 20 nanometer, I don’t think that there was going to be a big issue, with both design in and capacity.

If you are looking right now on the 20 nanometer there is one customer that’s actually – or right now even more buying this capacity and I think that it’s a proven model that will continue in the next year as well. If we are looking right now on the 16 and the 14 nanometer, I think that there are few customers are competing on this capacity.

I think that from what we see and also from the announcement that this big customer, big on yields, I think that they are not far away from starting ramping up 16 nanometer.

So I think that once the customer base will be shaped between these three vendors and the customer base which actually is the public, would decide where they are shopping their capacity for 16 nanometer or 14 nanometer FinFET, then we will start to see ramping up more faster than what we predicted in 2014 because then the supply and demand will be much more clear on the FinFET devices, the beginning of the year..

Our next question comes from Edwin Mok with Needham & Company..

Just quickly clarify two things.

What was the OpEx guidance and can you repeat your EPS guidance?.

The OpEx guidance for Q4 – in the fourth quarter we expect an increase mainly in the R&D as we continue to invest and we expect the level of 12 million for operating expenses in the fourth quarter. .

And then can you repeat the EPS guidance again for the GAAP and non-GAAP?.

The EPS guidance for GAAP is $0.05 to $0.10 and the EPS guidance on non-GAAP is $0.01 to $0.06. .

I thought your GAAP has this $1.7 million impact and therefore will have a lower EPS rate – did I get backwards?.

Yes, you did, because we are going to create the tax assets which will create income in the P&L. So it’s actually a positive impact on the EPS on a GAAP basis..

Our next question comes from [Jesse Kates with Makor Capital]. .

I would like to ask a bit more about the competitive environment especially in the memory sector, do you see NAND metrics [ph] coming in a bit stronger, what’s your perspective on the market in general?.

So let me try talking about the market and other competitors. If I am looking right now on the memory market, as I said in my remarks, there are two main segments in the memory, one is of course the DRAM and the other one is the flash.

And we can say that the DRAM, which is the current most dominant segment at least in the last few months will continue to grow at least, according to our forecast in a moderate pace but it will continue into 2015, at least for the first half.

In the flash NAND, I think that the overall market appears to be relatively healthy, and although we continue to see delays in moving to V-NAND, to high volume manufacturing, I think it’s been offset by increasing investment in scaling, the traditional planar gates below to 2x nanometer. We see that at least in two customers.

So I think there is an offset somehow between the forecast to go to V-NAND and the investment that we see in the 2x nanometer. And as we go into 2015, we think that as part of the DRAM pace, the growing DRAM pace that we saw in 2013 will be offset by NAND investments but we see that the overall memory growth next year will be slower than 2014.

This is how we see that. With that I think we are consistent with the messages that we had before that V-NAND devices is a second half 2015 story. When we are looking right now in the customers, I think that high volume manufacturing even on an existing V-NAND customer, will continue only in the second half of 2015 in high volume manufacturing.

And I think that somehow summarizing the memory market..

So in the end, you say that the memory market will not take bigger share in the future to come, or you think they will stay more or less the same level as we see it now or what’s your perspective on that in general?.

So in my mind, DRAM will – although it will be a – it will continue in the first half of 2015 I think that it will have moderated to a much lower pace.

And then in the NAND, I think that it will actually increase because customers will start to materialize their 2x nanometer planar gates and when we are looking right now on foundry, we think that it will continue steady in a pace growth of around 5% to 6%, this is how we see the market.

And if you summarize everything, I think that the growth pace that we have seen in the wafer fab equipment and I said it in my prepared remark will be at around the numbers of 5% and I think in 2014, 2015 the overall numbers will be somewhat similar in the wafer fab equipment number. .

That does conclude our question and answer session. I would like to turn the conference back over to Mr. Oppenhaim for any closing remarks. .

Well thank you operator and although we see some uncertainty in the investment in the market, we are really pleased with our yearly results and the growth that we saw in the market in the last two years. We appreciate your interest and your questions and we hope to see you in the next quarterly call. Thank you all and have a good day..

That does conclude today’s conference. Thank you for your participation..