Miri Segal - Hayden MS, Investor Relations Eitan Oppenhaim - President and Chief Executive Officer Dror David - Chief Financial Officer.

Edwin Mok - Needham & Company Patrick Ho - Stifel Nicolaus Keith Maher - Singular Research.

Good day and welcome to the Nova Measuring Instruments’ Second Quarter 2015 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 2015 second quarter 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 view 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’ll now hand over the call to Mr.

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

diversifying our growth with both organic and inorganic contributions broadening our customer base and expanding our market exposure to whole segments differentiated product portfolio and technology that include hardware and software solutions, customer technology partnership from early R&D stages.

And finally, resilient and flexible financial model this can yield operating margin of more than 18%. I will now turn briefly to the industry trends and market environment as they relate to our opportunities in the markets.

Based on our visibility to the remainder of the year we believe the different catalyst drive the first half and the second one, while the first quarter was driven by strong DRAM expansion. The second quarter was driven also by foundry expanding.

In the second half of the year we expect only moderate growth in DRAM that will be offset by some incremental growth in Flash and continued investment in foundry including 10-nanometer and 28-nanometer. The market indicators that we take show continued demand for leading edge devices that supports long-term growth trajectory for our leading customer.

Nevertheless our customers control investments, while carefully tracking their own limited amount of customers is well adopted by now and leads to spending fluctuations and variability’s during the year, which is not something new in the industry by now.

Consolidated markets with technology complexity drives higher volatility and lower visibility that allow process control vendors to predict exact deliveries only few months ahead. Our goal as a company is to be able to digest fluctuation in short cycle while presenting long-term growth with solid fundamentals.

Year-to-date we have been successful demonstrating that. Following the actual technology transitions we experienced across the industry, we believe that the geometrical complexity and material stability, which are associated with developing and yielding complex nodes expand our opportunity in the markets and the reliable market going forward.

Now I would like to share with our guidance for the third quarter of 2015. Revenues will be in the range of $38 million to $42 million, diluted EPS on a non-GAAP basis will be in the range of $0.10 to $0.20 per share and on a GAAP basis diluted EPS will be in the range of $0.08 to $0.18 per share.

Now let me hand over the call to Dror to review our financial results in details.

Dror?.

Thanks, Eitan. Good day everyone. Please move to Slide 9. The second quarter results include the financial results of ReVera for the first time. We closed the acquisition on April 2, 2015 and therefore the financial results are combined for a full quarter and are indicative of future quarterly results.

Nova has paid $46.5 million in cash for 100% ownership of ReVera. The current purchase allocation and amortization schedule is describing the quarterly presentation. This purchase price allocation has not yet concluded the external audit process and is subject to changes based on the results of this audit.

Obviously, GAAP results are significantly impacted in the first year of the acquisition. In the following years starting 2016 we expect the net impact of acquisition-related expenses to be approximately $1.5 million annually. In my following prepared remarks I will refer mainly to non-GAAP results unless otherwise specifically mentioned.

We believe that non-GAAP results are indicative of the company's fluent business performance and enable better comparison basis between the different periods. You can find a detailed reconciliation between GAAP and non-GAAP results, their item at the end of the quarterly press release.

Total revenues in the second quarter of 2015 were $40.6 million up 47% over the first quarter of 2015. Product revenue distribution was 65% from the foundry segment and 35% from the memory segment. During the quarter the company had for the first time four 10% customers.

Of the company’s overall product revenues PSMC accounted for 46%, Samsung accounted for 16% and Hynix and Toshiba accounted for 10% each. This is also the first time in which Toshiba has reached the threshold of 10% of product revenues.

We believe these results are strong indication of the progress the company made in its ongoing efforts to significantly diversify the customer base. We expect to continue to have four 10% customers in the third quarter of 2015.

Operating expenses in the quarter increased to $16.1 million mainly as a result of inclusion of ReVera results for the first time. Operating margins for the combined company came in at the healthy level of 14%.

Given our intention to stabilize operating expenses looking forward we believe we are on track towards our goal of achieving the target financial models of 18% operating margin for revenues which are higher than $170 million annually. Tax expenses in the second quarter on a non-GAAP basis were $0.4 million.

These low-level expenses is attributed to tax incentives in Israel and to tax credits and NOLs which were acquired with ReVera and enable us to reduce the tax rate on US-based profits. Non-GAAP net income in the quarter was $5.4 million or $0.20 per diluted share.

In parallel to the strong business and profitability results the company generated $4.2 million in cash flow from operating activities. As a result we have finished the second quarter of 2015 with $83 million in cash reserves which will enable the company to act upon business opportunities in the future.

Moving into key balance sheet metrics, this shows an inventory turns in the quarter continued to be healthy and are well within the company target levels. Accounts receivables in the quarter increased by only $3 million despite the 47% increase in revenues reflecting the effective working capital management of the combined company.

Inventory levels significantly increased in the quarter mainly as the result of the inclusion of ReVera inventories for the first time. During the quarter we have renewed our share repurchase program and to-date have executed 8 million of the 12 million share repurchase program. We plan to continue the execution of this plan in the coming months.

In terms of the third quarter guidance on a non-GAAP basis, which excludes amortization of intangibles, stock-based compensation expenses and adjustments of deferred tax assets we expect the following results.

Blended gross margin is expected to be approximately 53%, product gross margin is expected to be approximately 58%, and service gross margin is expected to be approximately 35%. Operating expenses in the third quarter of 2015 are expected to be between $16.5 million and $17 million reflecting some increase over the second quarter.

And finally, tax expenses on a non-GAAP basis, which excludes adjustments of deferred tax assets, are expected to come in at $0.4 million. With that I’ll move the call back to Eitan..

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

Thank you. [Operator Instructions] And we’ll take our first question from Edwin Mok with Needham & Company..

Great. Thanks for taking my question, so congrats for a great quarter and guidance. So first question I guess is just since you guys pre-announced ratio guidance range back in June, but you came in above that range.

What droved upside for - is it industry specific, can you give some color on that?.

Yes, I think that - Edwin thanks for the question. So it’s Eitan. I think that when you are looking on a quarter that is ramping so fast with your largest customer that always there is fluctuations between quarter and actually the ramp was faster than we thought.

So part of the tools that we planned actually too later was pulled into the second quarter and therefore we saw higher results..

Actually that’s helpful.

And then for ReVera for the quarter, is your ReVera revenue roughly around your run rate that you talk about the 25 should involves annual run rate that you talked about?.

Yes, so what I said in my prepared remark and we reiterated again that the two indicators that we said on the acquisition that one the revenue will be on an annual basis on $25 million to $30 million this we reiterated again, we see it coming and secondly that it will be accretive this year. So during my prepared remark I reiterated again.

So we approved that..

Okay, great that’s helpful. And then it sounds like you guys have made good progress getting them sure in the memory space. And if I listen to your commentary correctly booked to be over one, you have a new product that you are shipping, but won’t start revenue until the third quarter.

But your guidance is flattish sequentially, is it mostly because is that conservatism or is it just timing or when customer will take tools, why guide flat when you have strong book-to-bill?.

Well, I think the main reason for that is that part of the backlog that are bookings and backlog that we have at the end of the second quarter is already related to the fourth quarter related revenues and shipment. So that’s part of the reason..

I see, okay. Just timing of shipments. And then can I ask you about the new product, you mentioned that you’ve already placed some product at the customer site and you expect that’s not generating revenue in the third quarter.

So is this product qualified as your customer or at in the foundry side leases it qualify those 16, 40 nanometer FinFET, was it more target for 10 nanometer I’m just trying to understand was the product - how product was positioned in the market especially in foundry side?.

Yes, so Edwin it’s a continuation with the press release that we had before on winning some share and leaving customer for the 7, the 10 and 7 nanometer. This is part of our strategy to go to those technology nodes, which require in more advanced metrology tools to some high-end application is to come with this tool.

So when you are looking right now on where the target is from the perspective of the application is going to those high end application that can in order it can come out from the 10 nanometer as well as the 7 nanometer..

Okay, that’s helpful. So I’ll ask - so I’ll ask you more question. So just quickly on the ReVera acquisition, you guys talk about the strategic value as well as how it droved your business right to deliver this result, right. And then I think you guys recently talked about how is ReVera start to deliver.

Can you give us some color in terms of in the memory side? You mentioned - 10% customer. Did that help some pool in the memory side for your business already for your OCD business or is it still mostly driven by ReVera on the memory side at this point..

So when we’re looking right now on the synergy in ReVera we always said that there is - there are three elements that we are looking at.

First, if we are looking right now in the market currently yielding those advanced nodes with all the complexity that we have right now on those 3D devices we manufactured, we see those the materials and the geometrical parts are being drivers for organic growth of both company.

So we feel it’s right now the organic growth of both the XPS and OCD is actually becoming better and we see the growth coming in the rest of the year. This is one second we definitely see the synergies and having those two measures combined together in one technology nodes.

All of us understand physically the OCD or the optical has some limitations in measuring materials, so once you have those measurements in the same sub you actually increase each other growth trajectory both in the XPS and OCD.

So being able to do the models in OCD better with the materials injection of wise versa actually increase the total available market of the two technologies. And the third element that always we discuss is exposure to memory.

We are definitely looking on cross-selling opportunities, it actually will increase our exposure to memory and ReVera is actually doing good job and giving us those entrance point that we need in order to increase market share in those memory customers..

Okay, great. One last question for you Dror. I noticed the EPS guidance range is pretty wide for the coming quarter. If I take all the low end of that implied that you your cost will go up or margin comes down.

Can you give us some color why such a wide range, how should we expect cost or at least your OpEx trend?.

So on the OpEx I gave the details of the third quarter which is 16.5 to 17 which is somewhat of an increase. The reason for this relative wide range in operating expenses is related mainly to R&D expenditures and prototypes intake in terms of the timing of the intake.

And the second is item which has probably a strong impact on the earnings per share is the gross margin and this has impacted mainly by possible changes and product mix first of all between Optical CD and XPS and also is related to the level of software that can be solved at the third quarter.

So the two elements are these prototype intake timing and the product mix and this is why we gave relatively a wide range for the EPS. In addition, on a gross margin of around 60% on products and $4 million gap on the revenue range that’s a wide impact on the net profit..

Okay, great. That’s all I have. Thank you..

We will take our next question from Patrick Ho with Stifel Nicolaus..

Thank you very much and likewise congratulations.

Eitan, first in terms of the foundry spending that you saw, you mentioned some tool wins which I believe is associated with the 60 nanometer ramp? Can you give a little bit of color in terms of how the I guess the efforts and the work you are doing on the 10 nanometer front given a lot of the mixed data points that are out there right now.

Obviously, your lead customer is pushing very hard towards 10 nanometer? Can you give a little bit of color on how you’re work with them on that is going?.

Yes, so I’ll give some prospective on that and I’ll try maybe to start from the high levels so all of us understand that right now there is - beyond the FinFET ramp on 16 and 14 there is a race to come out as soon as possible for the 10 nanometer.

We have this race happening between the two big logic and foundry customers, but definitely we see some expedition on the other logic and foundry customers.

So we definitely see in the last few months increasing interest and increased intention by those customers who come out with tape out and bailout line as soon as possible, but we see those plans coming out with all the leading logic and foundry customer.

Specifically to the 10 nanometer RAM that we’re experiencing, we’re experiencing with our leading customer. I think that there are days to do the pilot line and to start take out the product is around the second quarter of 2016.

As I said in my prepared remark we don’t see small amount of tools we actually see 20% of our revenues coming from this 10-nanometer orders it’s coming by the way on multiple tools on integrated and standalone and the target right now is to try to ramp the 10-nanometer response as soon as possible together with this - in order to be ready on the second quarter of 2016.

This is the data point as we have on the market in regard to 10 nanometer..

Great that’s really helpful. And maybe then moving on the industry-wide set 3D NAND and the industry migration there. You mentioned that you are still going to see the same 10% customer or maybe I clarify you are going to see four 10% customers, which includes some of the memory guys there.

Do you see I guess a higher mix of memory spending next quarter relative to foundry spending or just still going to be that same percentage of about 65, 35 that’s you saw in the June quarter?.

I think that Patrick I think that the third quarter will stay around this number due to the ramp of our leading customer, by the way one of the things that I said in my prepared remarks that we will - in the third quarter we will see some 10-nanometer and there is - there are bunch of other customers are still expanding their 28-nanometer.

So we definitely we will see the same the same mix if we can take it to the extreme actually, we can see even the foundry going higher, but from the point that we are looking right now to the end of the quarter, it’s probably we will stay on the same mix..

Great that’s helpful. And I’ve got two questions for you Dror. First in terms of the ReVera integration that’s going on right now, which side do you see more efforts needed on year end.

On the cost of goods line or OpEx where you can get more out of the integration front?.

Well, I think in general the integration right now is focused on the element of which is related more to the field operations and sales channels.

ReVera has previously operated mainly through distributors and agents and we are in the process of combining that into the sales force field operations of Nova and this could create actual leverage in terms of the fact that ReVera is currently not really fully exposed to its install base of tools.

And as Eitan mentioned regarding the service revenues and profitability we do expect this to have some positive impact on synergies looking actually in 2016 once we conclude this year to sales channels integration. On the OpEx side we do not expect major synergies in terms of reduction from where the second quarter operating expenses where.

We do see some increase in third quarter, but as I mentioned we are planning to stabilize the operating expenses and actually looking at the fourth quarter currently we see a reduction in operating expenses mainly in the R&D area. But in the long-term I think we should expect the level which is represented on average on the second quarter of 2015..

Great and final question for me. Just going back to the services side that you talked about at least for your forecast for the September quarter your services gross margins are a little bit lower than you have been averaging in recent quarters.

Is that more related to the software comment you mentioned or is it because of ReVera and you I guess trying to integrate and kind of bring their services business line in yours?.

So the main reason for the reduction in gross margins in the third quarter is change reduction in revenues from services, which is expected at the third quarter, it’s not change in the cost basis or something that it’s made revenue shifting because of time and material revenues, which are fluctuating across the quarters, by the way including elements of software as well.

So that’s the reason for the third quarter the main impact positively impacted. We expect to see on expanding service revenues because of moving the install base of ReVera, I would say to the combined company control would have impact in 2016..

Great. Thanks again and nice work..

[Operator Instructions] And we’ll go next to Keith Maher with Singular Research..

Hello, I had a follow-up on the earlier question about the ReVera synergy in particular. I’m talking about the sales energy you mentioned two opportunities. One, it sounds like you sell more of your traditional products into ReVera’s memory customers and then the other opportunity.

We are doing some integration with your tools in ReVera’s products to make a more compelling solution.

How quickly do those translate into incremental bookings I mean it sounds like the first one could happen a little quicker and the second one sounds like there is some engineering involved?.

So Keith, thanks for the question.

So, yes looking right now on these two elements I think that as you said the first one is something that actually we are starting to see over in the third quarter were actually the exposure that we are getting to the type of application that they are doing and by that trying to leverage the position in OCD and something that we investing a lot in this quarter and we’ll see some results also next quarter.

Regarding the technical integration or the technical synergy between the two tools. So, first of all you don’t need to physically to put the two tools on the same platform, right. So if we have the exposure to the measurement and we know exactly how to transform it in order to advertise the information in a way that we can build the OCD models better.

Actually something that we don’t need to do physical integration as this project already started. So we’ll see the pieces of those elements contributing to the revenue starting from the third quarter.

I think that looking on actual integration in a way that we will fully combine the technologies in a way that we can fully utilize their benefit as an integrated portfolio, probably will come towards the end of 2015 and beginning of 2016..

Okay, thanks. That was helpful. Question about your production capacity, you mentioned your - I think 100 tools a quarter, it sounds like you are near kind of near max capacity and maybe I misunderstood that.

But do you need to change your investing in CapEx to meet its higher demand?.

First of all, in general we are not at the max capacity so we can expand further with the existing facility. However, we need to plan for future years and yes, we do plan to invest in a new facility and new [indiscernible] in the coming quarters.

This is not a major investment, it’s a couple of millions - it’s not significant investments relative to the activity of the company, but we are planning to increase our facility and expand the manufacturing facility in the coming quarters..

Keith, it’s Eitan I want to emphasize again regarding the remarks that we had that actually we are in big orders, but regarding the output of the factory it actually can increase and we are ready for that..

Okay. Yes, I misunderstood and sorry about that. On your long-term strategy slide, you mentioned logic making up a small piece of your business 5%. I’m just curious is what that was. You didn’t mention that in your prepared remarks..

So we discussed that briefly on the Analyst Day and as we mentioned there we believe in order to penetrate the logic which is mainly Intel it’s related to new emerging technologies.

We did say in the Analyst Day that approximately 20% of our combined R&D expenses and investments are going into what we call Blue Ocean technologies and once this incubate into products then hopefully we’ll be able to moving to the logic space as well..

Okay, did you discuss the timeframe on that?.

We did not discuss that exactly, but that’s probably not in advance for the next 12 months..

Okay and I had a question about the intangible amortization they are something called backlog or it seems to be you are writing that also pretty quickly I just trying to understand what that was..

So practically when accounting wise, when you acquire a company and this company has a backlog which is not yet shipped to the customers you need to give economic value to this backlog and we acquire ReVera with backlog which was higher than 10 million in bookings in backlog actually and this 4 million is related - the economic value for this backlog and it will be fully depreciated during 2015..

Okay, it just kind of change [indiscernible] should be intangible. Yes, okay that’s all I had. Thanks a lot..

Thanks. End of Q&A.

And there are no other questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks..

Thank you, operator. I would like to thank everyone for joining our 2015 second quarter financial results call today. Have a nice day. Thanks.

Thank you everyone. That does conclude today's conference. We thank you for your participation..