Good afternoon, and welcome to Nanometrics Second Quarter 2010 Financial Results Conference Call. A Q&A session will be held at the end of the call. Until that time, all participants are in a listen-only mode. Please note that this conference is being recorded, August 5, 2010. At this time, I would like to turn the call over to Claire McAdams, Investor Relations Council for Nanometrics. Please go ahead.

Thank you, and good afternoon everyone. Welcome to the Nanometrics Second Quarter 2010 Financial Results Conference Call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer, and Jim Moniz, Chief Financial Officer. Before we get started, I would call your attention to the following Safe Harbor statement. This conference call contains certain forward-looking statements, including but not limited to statements regarding Nanometrics’ expected results for its most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of its financial statements, and periodic report on Form 10Q for the quarter ended July 3rd, 2010. The continued adoption and competitiveness of its products, the expansion of the company’s surf markets, and future revenue growth, profitability, and cash flow. Although Nanometrics believes the expectations reflected in the forward-looking statement are reasonable, actual results could differ materially from the expectation due to a variety of risks, including slower-than-anticipated market adoption, a contraction in current levels of industry spending, and the additional risk factors and cautionary statements set forth in the company’s Form 10K for fiscal year 2009, 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. Good afternoon, everyone. And thank you for joining us today. In my remarks today, I will discuss the financial and business highlights for the quarter, our view of the current and near term industry environment. And give some perspective on our business outlook for the next few quarters. Jim Moniz will provide a closer review of our financial results following my prepared remarks. By any measure, the second quarter of 2010 was the best quarter in Nanometrics’ 35 year history. During the quarter, we posted record revenues of over $50 million, had our fifth sequential quarter of product margin improvement, and delivered record high industry-leading operating profitability. Financial highlights for the quarter include revenues of $51 million to 37% growth over the previous quarter. And a 250% growth year over year. Gross margin up 55%. Operating margin up 25%. Earning up $0.51 per share. And $14 million in cash generation for our P&L, which increased our cash balance by $9 million after investments and working capital. The IC industry is experiencing huge big growth in chip demand, largely driven by worldwide consumer spending. And the world’s leading chip companies are aggressively investing to address this market demand. Although we are clearly benefiting from an overall increase in semiconductor capital spending, the real driving force behind our above-average performance is a growing importance and investment and process control metrology, and increasing adoption of Nanometrics’ leading-edge tool that serves the critical growth markets of optical critical dimension, or OCD, overlay, wafer-scale packaging, and high-brightness LEDs. Our growth in each of these served areas is a direct result of our marketing and engineering teams working closely with our customers to define and develop differentiated products and technologies that solve tough technical challenges. And enable those leading companies to meet their…

Thank you, Tim, and good afternoon everyone. Nanometrics’ press release containing second quarter fiscal 2010 results was sent out by business wire today, August 5th, around 1:00 p.m. Pacific Time. The press release may also be found on our website at nanometrics.com. In our release and on our website are reconciliations to non-GAAP operating income, which is management’s measure of cash flow generation from the P&L. That being said, all the figures referred to in my comments are GAAP unless otherwise noted. Second quarter revenues of $50.8 million were up 37% from the previous quarter. And were up 250% from the second quarter of fiscal year 2009. Product revenues of $43.4 million increased 52% quarter-on-quarter, and 450% year-on year. Service revenues, which include both upgrade and core service revenues were $7.4 million, down 14% from $8.6 million in the prior quarter. And up 12% from $6.6 million in the second quarter of fiscal year 2009. As Tim mentioned, we saw a stronger demand from customers worldwide. Revenue by geographic region is based upon the ship-to, or first-in-use destination. And during the quarter, the breakdown was U.S. at 42%, South Korea at 22%, Japan at 13%, Taiwan at 10%, China at 10%, and rest of world at 3%. Revenue by product type was automated and integrated metrology at 72%, service and upgrades at 15%, and materials characterization at 13%. Gross margin in the second quarter was 55.1% compared to 55.3% in the previous quarter. And 41.4% in the second quarter of fiscal year 2009. Product gross margin increased to 57.6% compared to 56.3% in the prior quarter. Service gross margin came at 40% in Q2 compared to 51.9% in the prior quarter reflecting a lower mix of technology upgrades. Total operating expenses in the second quarter came in $15.1 million, which…

Thank you. (Operator Instructions) Our first question is from Gary Hsueh of Oppenheimer. Your line is open, sir.

Great. Thanks for taking my question. Tim, if there’s one thing that we’ve kind of seen through earnings season this quarter, it’s that there’s definitely an increased sort of focus on chip makers on metrology, as you said, to get them to the next technology node. We’ve seen pretty big kind of order increases in metrology from KLA, Nova, and Rudolph, and you know, everybody seems to be pointing at share gains in the thin-film side. Can you kind of walk us through what the competitive environment for thin film, particularly OCD is right now on a standalone basis? And where, you know, NANO can continue to gain share and offset any kind of losses here and there in the second half and into 2011? And I’ve got a few more followups.

Okay, Gary. Thanks for call in. Let me see if I can try to respond. There were several elements to your question. I think the general nature of it is that with everybody claiming market-share gain, how does that add up. Our revenue numbers, our growth rates, in particularly in metrology, as compared to any other metrology provider is superior to their growth rates. And I think that the math speaks to itself with regard to market share and market-share opportunities. We’re all benefiting from an increase in investment in process control. We, individually, are benefitting from an expanding number of applications for optical critical dimension, which is now displaying CD-SEMS and as well as other more traditional things in metrology. And then we’re getting some nice contribution from the capacity, which would have been integrated metrology OCD applications as well as we mentioned, wafer-scale packaging and hi-bri new-cell LED.

Okay. Great. You know, one thing that we had heard based on some industry checks, that you guys had struggled a little bit, maybe in the middle of the year with tool-to-tool matching. Is that still the case? And you know, where are we in terms of the reliability of your tools at customer sites?

Gary, I appreciate you bringing that up. And you know, I think I would like to make a couple straightforward statements. The first thing is that we have not lost any business that we have won, nor our position with any key customer. I think that there’s some inconsistency, or inaccuracy in some of the models that might exist out there. But the most important thing is that they – any assertion that we have a performance issue that impacted either our near-term or long-term business opportunity with any account, in particular, our 22-nanometer positions, is categorically incorrect. Our outlook today is as good, in fact, it’s greater at all of our advanced node companies than it was a quarter ago.

Okay. Tim, you made a comment about integrated metrology. You guys haven’t spoken about integrated metrology in a long time. What’s happening there, and specific to the model – in the target model? Any kind of negative impact to that? Is this integrated metrology these days more of a direct business or is it still behind the vail of semi-cap equipment and OEMs?

That’s a good question, Gary. We’ve been working pretty hard over the last couple of years to modify our model to be more of a direct sale, direct support for a number of reasons. One is, it shores up our margins because there’s little less margin sharing. But most importantly, it brings us closer to the customer and allows us to hold ourself personally accountable for customer satisfaction and performance of the tool. So nor has our revenue recognition for integrated metrology is actually a result of direct sales through. And that business is starting to pick up very nicely. It’s actually very robust growth, primarily drive by capacity expansion at some of our accounts where we are the tool of record.

Last question from me for Jim. Jim, just a real small thing here. On the balance sheet, I noticed that the long-term deferred revenue account has gone up again in the June quarter. And it was up from the March quarter. Is that one tool? And specifically what application is that for? The fraction-based overlay, any kind of light you could shed there would be helpful. That would be great. Thank you.

Okay, Gary. Thanks for the question. And actually, the deferred revenue, almost the total amount of the deferred revenue, and especially all of the deferred revenue that’s in the long-term section of the balance sheet, is service-related revenue. There’s no tools in that revenue at all. It’s all long-term service contracts where customers who have purchased tools also have long-term service agreements with us.

Okay. Got it. Thank you so much.

Thank you. Our next question is from Mahesh Sanganeria of RBC Capital Markets. Your line is open. Mahesh Sanganeria – RBC Capital Markets: Congratulations on a very, very good results, Tim. First question, was the revenue you reported, 25% above censuses, was that your expectation going into the quarter? Or you were surprised as you went along? Or whatever you can add, maybe comment on what was the linearity of that upside if there was any.

Mahesh, thanks for calling in. Actually, it’s kind of split. Our expectations going into the quarter were higher than the general consensus. But the net result was actually higher than we had originally expected going into the quarter. We’re seeing a lot of aggressive advance investment in the equipment, and our customers are asking for shorter lead times in order to meet the ramping and their technology-node investments. So we just saw that, you know, there was a lot more demand to deliver tools with a shorter lead times, and we’ve done our absolute best to meet the requirements for our customers so they can stay on track. Mahesh Sanganeria – RBC Capital Markets: Okay. So the other question, one of your bigger customers, it seems like they have been investing pretty heavily on the D&M side and the moving more towards the foundry side. The same customer moving more the dollar-to-foundry side and the NAN side. As that mix changes, does your exposure to that top customer in demand and logic side, do you have a different exposure? Or do you see a change because of this change in the investment pattern?

I think you’re probably referring to the investment pattern of Samsung. And our experience here is that we, you know, they’ve been very aggressive in their D-line investment for several quarters. And usually there’s a shift. We saw a shift in their general investing patterns towards some of their foundry business, driven a little bit by the Apple chips, in fact. But more recently we’re seeing a shift on that back into the memory side, at least discussions with that customer as well as our observations of the reports, that the pullback in memory spending that looked like it was being diverted to foundry is actually being pushed back into some of the memory spending. And we expect to see some nice business out of them going forward. Mahesh Sanganeria – RBC Capital Markets: Okay. So the other thing you talked about was that you see the second half higher than the first half. But is it your expectation that business can continue to grow from here because second half higher than first half can mean multiple things. I just want to see if you can give us some help in modeling that quarter coming off of such a strong quarter. I mean, it’s hard to see that you can continue to grow for the next couple of quarters. If you can provide some help on that, that would be good.

Okay, well, obviously I’m not going to let you corner me into giving you specific guidance on us, but I would like to try to answer that by talking about what we’re seeing in the business environment. What we’re seeing in the business environment, capital spending backed up by the fact that there’s still a number of companies that are just coming on line, such as Toshiba has yet to really make any serious large-scale investments. Some of the [inaudible] activity are starting to pick up. Hynex is certainly started to participate. But you also have some additional tools – spending coming out of Intoterea, Nania, Smith and so on. I think that you’re starting to see the other large companies as well as second-tier companies picking up spending. Add that to the fact that there’s somewhere between 12 and 15 fabs, certainly not all of them are greenfield, but 10 to 15 fabs that have been announced that need tooling. I feel pretty bullish on overall capital spending. For those companies that are positioned, we’re those products that enable. So think that that favors areas such as lithography. I think it favors areas such as CNP. I think it particularly favors areas such as process control where you’re trying to improve yields, get more working dye out a wafer. And I think companies that have a product of record position, and have that type of tool should be able to enjoy continued growth in the rest of the year. Mahesh Sanganeria – RBC Capital Markets: Thank you, Tim. That’s very helpful.

Okay. Thank you.

Thank you. Our next question is from Weston Twigg of Pacific Crest Securities. Your line is open. Weston Twigg – Pacific Crest Securities: Yeah, I was just kind of wondering on the OCD side, if you could maybe explain in a little bit more detail about what some of the new applications and opportunities are? And how much you think the TAM actually grows for OCD over the next couple of years.

Yeah, thanks Wes. Well, I think we’ve spoken to this on a number of occasions. So when we look at OCD, I think one of the unfortunate, almost misinformation is to call it optical critical dimension because the application is much more broadly based and profound in terms of use in process metrology. It clearly is displacing CD SEMs. And I think many people have spoken to that for technology limitation reasons with regard to the CD SEM. But as we look at what an OCD platform can do by combining reflectometry and the ellipsometry, scatterometry, you’re able to select three dimensional information on multiple components or features within a single measurement in less than a second. So you’re looking at films, you’re looking at walls and slopes. You’re looking at pitch. You’re looking at wall angles. And all of those are falling under what we call optical critical dimension. Optical critical dimension is also, in that core technology, is now starting to address the overlay market to compliment the imaged-based overlay which has been a more traditional tool. So our CD as a platform is really an optical metrology platform that is growing of its own accord, displacing some other technologies and also being used in some areas that hadn’t been explored previously. Weston Twigg – Pacific Crest Securities: So that’s great. I’m just wondering how much is the growth opportunity for OCD in terms of TAM expansion over the next two years?

I don’t – Wes, I don’t have that percentage growth right in front of me. It’s an area that it’s clearly outgrowing all other areas in process control. One of the more difficult issues as we start to look at say the different analyst’s reports, or industry reports is what is captured under the OCD banner. We measure thin films and that’s still within an OCD platform. We measure critical measure OCD platform. And so it’s really difficult for us to quantify in a defensible way what that is. But I think that when you start to consolidate all the opportunities and applications that OCD can address, you’re probably looking at 40 to 50% growth in the TAM, for that technology. Weston Twigg – Pacific Crest Securities: Okay. Great. And then just, along the same lines, can you explain to us again maybe how your platform is a little bit differentiated from the competition?

Well, we have a number of ways. I mean, the first one is if you look at how you compete, you compete in a series of steps and the first one is always technical. But what you’re finding in a competitive environment is that it’s less dependent on the hardware and much more dependent no the intellectual properties that is contained within the software that’s used for analysis, modeling, yield management and yield control, and process control. So the key area of differentiation comes from the software, which is clearly a proprietary of the company which allows you to model complex devices with multiple free variables and do it rapidly, precisely and with repeatability. And that’s usually the deciding point that comes into the OCD decision tree. Weston Twigg – Pacific Crest Securities: Okay. Just changing track a little bit here, I’m also wondering, you know, it looks like foundries are spending a higher percentage of the capital equipment pie this year. And I'm wonder if that helps you in the same way it helps KLA Tencor, which has a higher percentage of sales to the foundries, and if there’s maybe some opportunity to wind some share in the foundry space.

So you’ve pushed your finger on our weak spot, right. So we’ve actually done quite well in the memory sector and the logic sector that we have reported, you know, in previous calls. But one area that we do not have solid and robust representation is in our position within the foundry business and obviously that’s TSMC, Global Foundries, TMC. And those are all opportunities for us. You know, you have to turn something that’s a negative into a positive. And for us, our absence of meaningful market shares are negative, but our strategic efforts to gain the market share is clearly an upside opportunity for us. Weston Twigg – Pacific Crest Securities: I guess they’re saying they have opportunity there. Are you in an active selection that could be finalized within the next 12 months for example?

We are – we have a presence in any account, and basically all the accounts with tools, going through evaluation where the door is open to a competitive opportunity. Absolutely. And then we’re using our strength in balance sheet and our resources, internal resources to try to gain market share in those areas. Weston Twigg – Pacific Crest Securities: Okay. Thank you very much.

Yeah.

Thank you. Our next question is from Michael Amari of Americo, Incorporated. Your line is open. Michael Amari – Americo, Incorporated: Congratulations for a great quarter.

Thank you, Michael Michael Amari – Americo, Incorporated: I’m still kind of livid of what happened on July 16th when your stock was sent down to eight bucks. And you courageously came out and with a statement saying that your business is good and everything is fine. I just want to make sure, I want to leave this to rest that you have not lost any business to Intel, and you’re not going to lose $0.40 in the coming year like some analysts, who are supposed to be a friend of the company, came out with an announcement that day. So I would like to know where you stand, and lay this to rest.

Okay, Michael. I can’t speak to any specific customer. And I tried to be clear at the beginning, we have not lost any business that we won. We have not had any performance issues that impacted in any way, negatively impacted in any way our near-term or long-term business. And our business with all of our customers, in particular with the advanced technology nodes, is stronger today than it was a quarter ago. Michael Amari – Americo, Incorporated: Well, let’s put it another way. I know you mentioned that, but what kind of 10% customers do you have right now? What are your major customers right now, if you can speak to that?

Yeah. Our three 10% customers this quarter were Samsung, Intel and Hynix. Michael Amari – Americo, Incorporated: Okay. Thank you. That should lay everything to rest. Thank you very much.

Okay, Michael.

Thank you. Our next question is from Paul Sweats of Capital Flows. Your line is open. Paul Sweats – Capital Flows: Congratulations on the quarter. Simple question. If the good results end up opening up a [inaudible] employees, what functional area would you focus on? Where do you need some shoring up?

That’s a good question. You know, outside of the, kind of the obvious ones, which are to make sure that we have the manufacturing capacity to address the growth, I would like to take this moment to once again really commend my operations team. We grew from 37 million to 50 million and they met all the customer requirements we shipped without incident, which is just a terrific achievement on their behalf. They just did a great job. But as we look at our continued desire, and you know, and direction of growth, you’re going to see that we’re going to want some technical support to add to our software area, our applications and modeling area, and some of our customer support areas where we’re putting more tools in. We need to have a – because we have a growing install base. Paul Sweats – Capital Flows: Thanks.

You bet.

Thank you. Our next question or comment is from Gus Richard of Piper Jaffray. Your line is open. Jen Baxter – Piper Jaffray : Hi, everyone. It’s actually Jen Baxter for Gus. Congratulations on the great quarter. I was actually wondering if you’re seeing any these supply constraints during the quarter?

No, good question. And that kind of goes back to what we mentioned earlier. We put a lot of energy over the last two years into having an outsourced model developing our supply chain. And also improving our capabilities and expertise in supply chain management, which we believe is core competency that’s necessary to address these ramps. Right now we feel very good. We stay very close with our supplies, and we haven’t had anything that we couldn’t respond to within the timeframe requested by our customers. Jen Baxter – Piper Jaffray : All right. Thanks a lot.

You bet.

Thank you. And I’m showing no further questions or comments at this time. I would like to turn the conference over to Mr. Tim Stultz for any further remarks.

Thank you. In closing, we continue to be very confident and enthusiastic about the business and business opportunities for Nanometrics in the foreseeable future. We move forward with result to distinguish ourselves through management and execution. And we are committed to delivering above-average performance and value to our shareholders. Finally, I’m ever grateful to the terrific team of employees at Nanometrics who continue to work tirelessly and with passion to grow a stronger and more competitive company, and one that we are all very, very proud of. I want to thank all of your for joining our call, and we look forward to updating you on our third quarter results in November.

Thank you. This concludes today’s teleconference. You may now disconnect.