Claire McAdams – Investor Relations Timothy J. Stultz – President and Chief Executive Officer Ronald W. Kisling – Chief Financial Officer.

Patrick J. Ho – Stifel, Nicolaus & Co., Inc. Josh Baribeau – Canaccord Genuity, Inc. Sean Kim – RBC Capital Markets LLC Edwin Mok – Needham & Co. LLC Graham Yoshio Tanaka – Tanaka Capital Management, Inc. Andrew Masuda – D. A. Davidson & Co. .

Good afternoon, ladies and gentlemen and welcome to the Nanometrics’ First Quarter 2014 Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, this conference call is being recorded today, April 29, 2014. At this time, I would like to introduce your host for today’s conference, Claire McAdams. You may begin..

Thank you and good afternoon, everyone. Welcome to the Nanometrics’ first quarter 2014 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 first 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 1:00 PM Pacific this afternoon. The press release and supplemental financial information are available on our website at www.nanometrics.com.

Today’s conference call contains certain forward-looking statements including, but not limited to financial performance and results including revenue, operating expenses, margins, profitability and earnings per share.

Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from the expectations due to a variety of factors, including timing of product acceptance, general economic conditions, changes in levels of industry spending, the adoption and competitiveness of our products, industry adoption of new technology and manufacturing processes, customer demands, shifts and timing of orders of product shipments, changes in product mix, our ability to successfully realize operating efficiencies and the additional risk factors and cautionary statements set forth in the company’s Form 10-K on file for fiscal year 2013 as well as other periodic reports filed with the SEC from time-to-time.

Nanometrics disclaims any obligation to update information contained in any forward-looking statement. I will now turn the call over to Tim Stultz.

Tim?.

Thank you, Claire and good afternoon everyone. We appreciate you taking the time to join us on our call today. Today my prepared remarks will address highlights of the quarter, some brief comments on the industry environment, and update on our business outlook and guidance for the June quarter.

From a financial perspective, the first quarter came in largely in line with our expectations. Revenues and earnings both top to midpoint of our guidance, largely driven by strong sales of our integrated metrology and Atlas products into the advanced memory in foundry markets.

Notably, our sales of IMPULSE, integrated metrology tool into the foundry markets hit a record high. In addition, UniFire sales reached a new quarterly record with business coming from both advanced packaging, as well as data storage customers.

And finally, our sales in the China were also at a record level, as we completed installation and acceptance of both Atlas and IMPULSE tools for Phase 1 3D-NAND production by a leading memory manufacturer.

But it is especially encouraging to us as the continued adoption and expanding news of our optical critical dimension or OCD, solutions for the most demanding applications of device, development and fabrication by an increasing number of leading edge customers, as well as a growing strength of our overall competitive position within the process control metrology market.

Let me highlight some of the key positions we have established, which positively contribute to our long range business outlook. First, our efforts to penetrate and benefit from increased spending within the foundry market has resulted in share gains in the development and manufacturing of leading edge devices.

Second, our role was a key player in the development and production of 3D memory devices, both for NAND, as well as DRAM with every company investing in 3D memory using our OCD tools. Third, our OCD tool of record position for current and next generation advanced logic development and high-volume manufacturing.

And four, the growing success of increased adoption of our UniFire platform for advanced 3D packaging and data storage applications. What is also very encouraging is that with our recent share gains, particularly in foundry, our business model and revenue mix across both price and market are becoming more balance than ever before.

In addition we have growing contributions from our integrated metrology and advanced packaging product lines.

This reduction in business concentration was revenue contributions from a larger set of customers and broader line of products license our overall exposure to swing those specific customers and our market sectors and gives us a more balance industry profile.

Now turning to the topic of spending shifts within the industry, in particular, in the second quarter, we see a strengthening in both our DRAM and foundry businesses.

DRAM investments are being driven by technology conversions to the 2y node, while foundry has been driven by capacity investments in 20 nanometer devices and technology ties for next-generation FinFET development. These increases in spending hour will be offset by process in 3D-NAND and advanced logic investments to IDM.

Last year, we expected that the middle of the year would be strong for us, characterized by sequential quarterly revenue growth.

Since then, there have been delays reported in a number of projects where we have strong participation, cheaply 3D-NAND, 60 nanometer foundry and 40 nanometer object were slightly from the comments of these projects would certainly impact our revenue outlook for 2014.

we still see significant year-on-year growth, which meaningfully outpaces the industry spending, largely driven by our share gains in foundry, integrated metrology and the growth of our UniFire business. Importantly, on our long-term basis, we continue to remain very optimistic about our business outlook for the following reason.

First, share gains and increasing – increase in the debt engagements on next-generation technology developments, which are expanding footprint – which are expanding our footprint of key customers and within the broader process control market.

Second, growing dependent upon OCD metrology in all areas of device fabrication from transistor formation to metal interconnect, which is increasing the demand for our tools and solutions on a wafer start per month basis.

Third, the expanding deployment of advanced process control strategies, using feed forward and feed backward metrology data to accelerate and improve the yield curve on leading edge devices, which is in terms growing the SAM for our products and solutions..

revenues are $47 million to $51 million, down 5% at the midpoint, and on a non-GAAP basis, gross margin of 47% to 50%, operating expenses of $22.1 million to $22.9 million and earnings between a $0.03 loss to an $0.08 per share of profit.

Ron?.

Thank you, Tim and good afternoon. Before I begin my comments I’d like to remind you the schedule, which summaries GAAP and non-GAAP financial results discussed in this conference call, as well as supplemental revenue segment information by product and market in geographic region is available in the investors section of our website.

First quarter revenues were $51.6 million, up 12% from Q4 and up 110% from Q1 2013. Product revenues increased 15% to $43.3 million, compared to $37.6 million in the prior quarter, driven primarily by strong sales of our integrated products into the memory end market and increase sales of our UniFire products.

Automated tool revenues increased 8% over the prior quarter and comprised 66% of total revenue. Integrated tool revenue increased to 127% over the prior quarter and comprised 13% of total revenues.

Materials characterization tool revenues declined 24% to comprise 5% of total revenues in Q1 and service revenues decreased 3% to comprise 16% of total revenue. By the end of market, the largest increase occurred in memory, which increased 53% comprised 64% of tool revenue.

much of this increase was driven by the significant number of tools shift to a new NAND fab in China, all of which were recognized for revenue in the first quarter. The increase in Q1 was driven by NAND while we expect Q2 memory revenue to be driven primarily by DRAM. Sales into the foundry end market increased 9% to comprise 12% of product revenues.

Sales into the logic, IDM and data storage end markets decreased 40% to comprise 16% of product revenues and revenues into the LED, silicon wafer and discrete end market increased 9% to comprise 8% of total tool revenues. Customers representing 10% or more of our total revenues for the quarter were Samsung at 52% and Intel at 13%.

As a reminder, our revenue segmentation information is available on our website, as I mentioned earlier. Turning to other P&L metrics, in my prepared remarks, regarding the income statement referred to the non-GAAP measures, unless identified the measure as GAAP based.

These measures exclude the impact of the amortization of acquired intangible assets. Our Q1 gross margin was 48.1% just below the midpoint of our guidance due to less favorable product mix.

Product gross margin decreased slightly to 50% from 50.6%, due to the aforementioned less favorable product mix, and service gross margin declined to 38.4% from 41.7% due to lower service revenues in the quarter.

First quarter operating expenses increased $1.5 million from Q4 to just over the low-end of our guidance, reflecting the normal seasonal increase in payroll and other expenses and the expected shift and timing of R&D program spending from the prior quarter.

Looking forward to Q2, the expected increase in operating expenses of $100,000 to $900,000 is related to spending on R&D program.

As we indicated in our last earnings call, we expect spending to begin to come down in the second half of 2014, due to the typical seasonal decline, the timing of R&D program spending and the realization of savings from the consolidation of our SPARK product line activities into our York, UK facility.

Our GAAP tax rate for the quarter was 26.9%, below our expected tax rate for 2014 is upper 30% due to a discrete one-time benefit of $300,000, resulting from an accounting standards update related to the presentation of unrecognized tax benefits.

Net income in the first quarter was $2.1 million, or $0.09 per share, compared to $1 million or $0.04 in the prior quarter. At March 29, our cash and investments were $88 million or $3.69 per share. Our DSO was 57 days, reflecting the impact of revenue recognized from the prior quarter shipments.

Inventory decreased $1.3 million to $40.1 million at the end of the quarter and our tangible book value was $194 million, or just over $8 per share. We ended the quarter with headcount of 543 employees, a net increase of seven employees in the prior quarter. And with that, I’ll turn the call over for questions.

Operator?.

Thank you. (Operator Instructions) Our first question comes from Patrick Ho of Stifel Nicolaus. your line is open..

Thank you very much.

Tim, given some of the new penetrations that you talked about at the most advanced nodes of the foundry; do you see any changes in the timing of their respective rollouts of FinFET that changes your outlook against in terms of both revenues and revenue recognition, as well as shipment of tools to those customers for 2014?.

Yes, Patrick, it’s a good question. Thanks for calling in. I don’t know if I have a shift in our outlook in terms of timing. We certainly see that there has been general struggle with getting FinFET yield across multiple players. What’s working for us though in a positive way is our engagement with multiple foundry customers all in FinFET.

So we have a broader base of foundry that’s not tied to just one large spender..

Great, that’s helpful. Second question, going to the memory side of things, when you briefly mentioned in your prepared remarks, so maybe you could give a little more color, as DRAM migrates to the 20 nanometer node, as you mentioned more double patterning.

Can you give a little color of where OCD and specifically, for you guys, where you’re seeing this type of applications and increased capital intensity as it moves to that DRAM node..

Yes. so I think there’s two things to think about it, as we talk about the benefits on the DRAM. the first one is we see something like a 20% to 30% increase in intensity of the use of OCD and moving to that next node.

DRAM is particularly demanding in the process sequences, I’m sure you know and the role of OCD is much more critical and more highly used in, say in Flash.

Within the DRAM fabrication process, the key areas for us or the key benefits are in the transistor and the capacitor formation where their critical lithography and multiple patterning steps that are being employed..

Great, final question from me. You mentioned some of the traction you saw in advanced packaging this past quarter. From a broader industry perspective, can you give us a little bit of color of the advanced packaging trend, there’s a talk out there about the high costs and the limited amount of market demand.

How do you see the adoption of overall advanced packaging this year and into 2015? Is volume more a 2015 story?.

Yes. I believe we’re kind of at the beginning of the S-curve if you will. Then we’ve been kind of bouncing along, we have quite a few tools. we have almost 3,000 tools out in the field as per – among multiple customers. But when you look at where the inflection is going to occur, most of the applications right now are in a microbump, micropillar area.

we expect to see more use on the Through Silicon Via and we will do see it picking up and becoming a meaningful, but more in the 2015 timeframe..

Thank you very much..

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

Hi, thanks. Maybe just a follow-up to that previous discussion. Tim, you had mentioned, I think you have somewhere around three dozen tools spread along the advanced packaging, those customers.

can you help us with maybe the mix between the foundries that are adopting some of those processes, as well as – or the mix relative to the OSATs?.

So most of our tools are actually with device manufacturers. we don’t have a large penetration in OSATs.

So it’s really between the advanced logic market where we have tool record position, as well as in the foundry markets and we also have them in the memory, but not – OSAT is really not a market for us, or an area where we’ve received any meaningful attraction..

Got you. And then on the 60 nanometer foundry, I believe the last quarter, there was a similar issue with the revenue recognition in China, not so much necessarily a new customer, not a new fab and a new customer.

Any – is there still some revenue recognition that we should expect or has that been mostly revenue at this point at that customer?.

So speaking for that revenue recognition, we recently highlighted in last quarter, Josh, was it represented a much larger percentage of our total outlook than was historical for us.

We always have some tool acceptance installations that we go through, but we have nothing extraordinary going into this quarter and pretty much should be plug and plays, once we get the tools delivered, installed. We don’t expect any unusual exposure, or risk against revenue recognition..

Great.

And then really, finally from me, and maybe, for Ron, anything that you can do or that you can discuss about potentially lowering your tax rate on a go-forward basis something about different income jurisdictions or anything like that?.

Yes. I think in the near-term and we’ve looked – there’s a number of strategies out there. The issue is there are buy-in periods to transfer the IP offshore, before you start to see the benefit. And so it’s very difficult to do anything in the short-term.

So we’re continuing to look at it, that I would expect in the short-term, we’re not going to see a substantial movement offered by our current tax rate..

Great. Thanks, I’ll pass it on..

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

Hi, this is Sean asking for Mahesh. Thank you for taking may questions. Hey Tim, I remember last quarter, you’ve mentioned that we don’t – we are not going to see a softness around mid of the year.

If I remember correctly, you said that Q1 is strong by memory, which was it exact – which to put or payout as you said and you said expect foundry to pick up in Q2 and the memory again, in Q3.

I’m just wondering, given your comments to your earlier questions as you said, DRAMs going to pick up and I just wonder has that deal changed?.

Yes. That’s a good question. Yes, our deal suddenly has changed somewhat, since we had our last call and particularly driven by the second phase – the timing of second phase, 3D memory investment, as well as some slowdown in spending on the advanced logic towards the end of the year.

On the other hand, I would like to point out that if you look at our quarter-on-quarter performance, our last quarter versus Q2 guidance. We’re actually within one tool, roughly one tool of being flat quarter-on-quarter.

So I still think of Q2 is a pretty strong quarter with its midpoint only being down 5% and really within striking difference of being flat with one tool..

Got it, thanks. And then one more question about market share in OCD.

Is there any change in competitive landscape? Can you provide more colors in there, because we all know that KLA is a leader in the market and then you are competing against more or less, Nova Measuring, can you just talk a little bit about competitive landscape now?.

Yes. to the extent, we can speak – we will speak to it in terms of the role. certainly, KLA is a very strong and is a leader in process control, and in overall inspection and metrology. but when you look into the served part of the market, which is our principal area of OCD.

We consider ourselves and believe that we can demonstrate that we are the leaders in that market..

Great. Thank you very much..

Thank you. Our next question comes from Edwin Mok of Needham & Company. Your line is open..

Great, thanks for taking my question. So Tim, I have a little longer-term question. So if I look at the two inflection point that we’ll talk about right, 3D-NAND as well as FinFET, right.

Can you kind of quantify roughly how much increased capital OCD intensity you get from playing in say 50 nanometer NAND to 3D-NAND, and also in logic from 20 nanometer of turning the gate to FinFET, anyway you can kind of give us some color on that?.

I’ll try to give a little bit of that. It’s a good question, Edwin. and I think we have a pretty good understand of what the increase in intensity of OCD is going into – from planer to FinFET technology, and that tends to be on the other order of 25% to 35% increase in OCD utilization.

We also see something similar in terms of the magnitude in the second generation DRAM, where there’s a lot of use. I think that the 3D-NAND, we see incremental usage, but it still has yet to play out. they don’t have a high volume manufacturing environment, where they’ve got a stabilized process.

so we see some increase, but it’s too early for us to tell you whether it’s 10%, 20% or 30% incremental to the planer devices..

So, is it possible that at some point on role, as that they develop and finally figure to how to run this 3D-NAND process, smoothly there might be some incremental, see the opportunity there, is that fair to you?.

Yes. I believe that our current perspective, if there will be incremental going from planer to 3D but I – we got, we just don’t have a sizing of it, since there is nobody really running a factory with any meaningful wafer starts..

Great. That’s very helpful. And then if I look at your outlook, the outlook actually looks pretty good. I was just curious, how much of that – are we seeing any shift within the product group in our work, I know you mentioned about a foundry being a little higher on the coming quarter.

But any shift between like OCD versus for example, UniFire or SPARK with more stuff?.

I make sure I understand a shift in share – in the market share….

No, I’m sorry, in terms of product or revenue mix rate from the first quarter to next quarter?.

Revenue mix, so the big drivers for us, as we mentioned are going to be foundry and DRAM. there is going to be a drop-off Flash, NAND, 3D and so on. And so we see a nice contribution in there, which came off a very strong quarter with UniFire.

so I think the place to look for what’s carrying this primarily in the second quarter will be the DRAM and foundry are parts of our business, supported largely by our Atlas platform, which is going to be hitting some pretty nice levels?.

Great, that’s very helpful.

And then last question, in terms of the SPARK, which have been delivering that two, I’m just curious where are we on that? Are we –can you give us a little bit of quick update in terms of – are you at one customer or five customer and in terms of progress, when do you think you can hit, call it high-volume ramp for that product?.

Yes, that’s a great question. We have multiple customers for the SPARK. we’re not nearly where we thought we’d be. We’re significantly behind what we thought would be on macro inspection part of the market. we have a couple of applications where we think there’s some demand.

we’re working on the platform to reposition to the areas of strength, and we have some work in front of us. so that’s one, stay tuned. We’ve got more to talk about. but right now, I don’t have anything great to tell you about it..

Great, that’s all I have. Thank you. .

Thank you again, ladies and gentlemen. (Operator Instructions) Our next question comes from Graham Tanaka of Tanaka Capital. Your line is open..

Hey, Tim. How are you? Just want to ask, if you could give us a pretty good view on the overall wafer equipment spending trends. We’ve had a little blip here this year, and I’m just wondering if you were seeing what your trends are that you see for the next year and a half or so, the rest of this year and into next year? Thanks..

Okay. Hey, Graham, thanks for calling, good to hear from you. I’ll tell you our view the world that I’m not sure that I’m standing on the tallest mountain to give you that.

but when we look at – I think that the most of us are reeling in our expectations of spending WFE from 2014, from the 15% to 20% numbers that we were talking about a couple of quarters ago, to somewhere between flat and 10%. for me, I think that that’s terrific news.

I don’t see that as negative business, or negative news, because we’re going into our fourth and potentially fifth year of $30 billion WFE spending. And that’s a very healthy environment without the huge swing. so I think that’s really great.

If I look at our technology engagements with a limited number of customers and where that – what the timing will be, for instance, in the advanced logic devices and the next generation of the 3D-NAND and memory devices, I think 2015 has the potential to be another $30 billion, plus or minus a couple of billion dollar a year.

So that turns out to be really great. and I think that some of the volatility we’ve experienced in the past is not a just reflection of what goes on between yields and capacity.

But I think there you see more rationale spending by larger companies that is more tied to market – market opportunities with some evidence of efforts to make sure they don’t loose market share, as opposed to the huge swings that we were subject several years ago..

And in an environment of modest growth in WFE spending, what do you think now that you’ve got some traction in – at SPARK that and what kind of growth are you focusing on for NANO versus overall WFE spending..

Yeah. I’ll tell you that I think that our growth is driven more by market share gains as point out, as well as emergence of some of the other products and their contribution of the revenue, adding the foundry right to our business is huge for us, since our business has been carried by advanced logic and memory for quite a few years.

I think that if you assume that the spending stays flat, at least there is no reason why we shouldn’t be in double-digit growth, based on our – on the incremental markets we’re serving and the incremental positions through share gains..

Good luck. Thanks..

Thank you..

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

Hi, this is Andrew Masuda, calling in for Tom Diffely. Thanks for taking the question.

I was just wondering if you could talk about your guys’ efforts to expand the automated metrology business within the foundry market?.

So could you be a little more specific Andrew, on that? are you talking about… Yes..

I mean obviously you guys are making nice traction on the integrated side. and I was just wondering if you made any traction on the automated side with the Atlas tools..

Okay. I understand your question. Actually, we have made some nice gains in the integrated metrology, coming off low numbers.

But the strength of our story is tied directed to our Atlas’ position, and our Atlas’ positions are the ones that are really gaining significant traction inside of their foundry, as well as playing a key role in DRAM and Flash and advanced logic.

so if I conveyed the story that our growth story is tied to integrated metrology, I’ve done a disservice to our Atlas platform, which is really the – is the big dog in our product portfolio..

Okay. Thank you..

You bet..

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

Well, thank you and thank you once again, for participating in our call. As always, I direct your recognition for all that we do well for the terrific team of employees and our business partners who make it all happen one day at a time.

We look forward to reporting on the results of our operational and financial performance for the second quarter in July. And with that, we conclude today’s conference call..

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