Good afternoon and welcome to the Nanometrics’ Fourth Quarter and Full Year 2013 Financial Results Conference Call. [Operator Instructions] A Q-&-A session will be held at the end of the call, until that time all participants will be in a listen only mode. Please note that this conference call being recorded today, February 4th, 2014. At this time, I would like to turn the call over to your host, Claire McAdams. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Nanometrics’ fourth quarter 2013 financial results conference call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer; and Ronald Kisling, Chief Financial Officer. Shortly, Tim will provide a recap of the fourth 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 also 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 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 2012 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 over the call 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 company’s 2013 performance, with a focus on execution against our key corporate initiatives followed by our outlook going into 2014 and guidance for the March quarter. Beginning with our fourth quarter results, revenues came in at the high end of our guidance with gross margins and earnings slightly better than our expectations. Q4 was also our third consecutive quarter of revenue growth which has averaged 24% per quarter since the beginning of the year, and marking earlier than expected return to profitability, these are better than forecast gross margins and or spending in operations. As we are certainly pleased with the trajectory and continued improvement in our financial performance, it is the progress we have made against our key strategic initiatives that strengthens our long term business outlook and sets the stage for what could be a very exciting year for Nanometrics. Starting with our efforts to gain market share in the foundry sector we had success on multiple fronts, we now have a total of four foundry customers using our Atlas OCD platform, three who have adopted our UniFire for advanced targeting and a key impulse integrated metrology tool of record position for advanced process control of critical edge applications at the 20 nanometer and 60 nanometer nodes. All of the new foundry accounts won this year are pure play foundry customers. A second key initiative in 2013 was to leverage our extensive experience in the OCD metrology used in the manufacture of FinFET devices in order to expand our OCD footprint and logic. Beginning with a strong position with a leader in the FinFET technology, during the year we…

Thank you Tim, and good afternoon. Before I begin my comments I’d like to remind you that the schedule which summaries GAAP summarizes GAAP and non-GAAP financial results discussed in this conference call as well as supplemental revenue segment information by product, end market and geographic region is available in the investor section of our website. Over the course of 2013, we saw a strong rebounded at business level with sequential quarterly revenue growth averaging 24% from the first quarter to the fourth quarter driven by growth in spending by our largest customers. Fourth quarter revenues were $46.2 million, up 18% from Q3 and up 52% over Q4 2012. Product revenues increased 25% to $37.6 million compared to $30.2 million in the prior quarter, driven primarily by growth in sales of our automated tools of our largest customer. Automated tool revenue increased 36% over the prior quarter and comprised 68% of total revenue. Integrated tool revenue decreased 32% from relatively high Q3 levels to comprise 7% of total revenues. Materials characterization tool revenues continued their improvement off of historically low levels in the second quarter to comprise 7% of total revenues in Q4, and service revenues decreased 4% on lower upgrade sales to comprise 18% of total revenues. By end market, the largest increase occurred in memory which increased 63% to comprise 48% of tool revenue. The increase in Q4 was driven by DRAM where the increase we see in Q1 will be driven by flash. In the fourth quarter, we shipped a significant number of tools to a new NAND fab in China, which we expect to recognize as revenue in the first quarter. Sales into the foundry end market increased 11% to comprise 13% of product revenues. Sales into the logic and IDM end market decreased 4% to…

[Operator Instructions] And our first question comes from the line of Weston Twigg with Pacific Crest Securities. Your line is open.

Hi. Thanks for taking my questions. First, just clarifying the Q1 revenue guidance, you said roughly half of the revenue in Q1 or almost half the revenue in Q1 was on deferred revenue on new tool shipments to new customers on your sites. Does that imply then the demand profile for Q1 is really only roughly half the revenue guidance or is there something else I’m missing, maybe more deferred revenue?

Wes, that’s a great question, I am not sure how to answer. So, we have had a lot of shipments of tools in Q4. We have one into the Q1 and it’s kind of a normal pattern with exception of the fact that a lot of tools require sign-up. We only wanted to highlight the uniqueness of the sign-up requirement as opposed to the normal acceptance procedure which is revenue recognition upon shipment.

Okay, all right let me try, let me ask another question then if you would, just on the OCD traction at the foundries, you said you have four foundry customers. Last quarter I think you gave us a little more color on the potential to win some business at 20 nanometer versus this entire process and you may have mentioned that at the beginning but I missed it. Could you give us an update on whether or not you are getting 20 nanometer traction or you need to wait for [indiscernible] to see that OCD business ramp up?

So, we have gotten some 20 nanometer business in the OCD area and at least one customer is trying to use similar tools both for 20 and 16 in the same fab, so we benefited from that even though we will target around 16 nanometer, they did post them and use it on the 20 as well.

Okay. So, we could expect a benefit from that earlier 20 nanometer ramp.

We are getting a little bit of that, that’s correct.

Our next question comes from the line of Tom Diffele with D.A. Davidson. Your line is open.

Yes, thank you. So, I guess looking at this year, what do you think the linearity of just the industry is going to be, it sounds like lot of players are expecting business to be obviously pretty strong here in the first quarter, maybe dying off a bit in the middle of the year, coming back again in the fourth quarter. Just wonder if you are seeing similar trends for the industry right now?

Yes, actually we are seeing a slightly different pattern. We’ve certainly had some improvement in the strength and demand but we actually see strength in the middle of the year, growing strength coming off of Q1 into the middle of the year. We don’t see it getting softer right now in the middle as some of the others ones have reported.

Okay. And do you see a certain pattern as far as memory early, foundry in the middle, memory late again or how do you see the mix that way?

It’s starting playing out. There is certainly -- as most folks know, there is a huge amount of investment, a lot of capacity going into memory in this first quarter then we start to see foundry picking up, in the second quarter we see some additional memory in the third quarter with foundry continuing and then a more balanced profile going into the fourth quarter.

Okay. And then what was your back end mix during the quarter?

We don’t have. I am not sure, are you talking about whether we -- in terms of like are you asking specifically to our advanced packaging in UniFire?

Yes, or if that’s a big enough segment yet to breakout?

It’s not -- we haven’t broken it out yet. We have to reach that 10% mark but it’s on track to me and something that we can start to talk about and we look forward to being able to break it out in the not too distant future.

Okay. And then just finally here, I wonder if you could quantify what you think this share gains mean to NANO versus the industry in a sense that if the industry grows 10% this year, how much additional would you get from the share gains from last year?

I don’t know, I don’t have a good answer to that. I know that our projected revenue growth year-on-year is substantially higher than the projecting spending increases, part of that as we came off a rather weak year in 2013. But a lot of it has to do with the incremental contribution from the foundry area, the continued strength in the memory. We've really done a nice job of expanding our pure play foundry and the UniFire’s growth is going to be a nice incremental contributor too.

Okay. Maybe just quickly for Ron, what do you see as the taxes for the year?

Yes, so for 2014 we see the tax rate probably between 35% to 38% if the R&D tax credit gets extended, that would come down by about 2% to 3%.

Okay. Then if you could make any comments at all about the margin progression beyond the first quarter?

Yes, I think as we talked about in the last call and this call mix is an important driver in terms of the margin in Q1. I think beyond that for a year as a whole, while mix will continue to drive quarter-to-quarter fluctuation as we're starting to see significant contributions from some of our other products. But the year as a whole, we expect to see gross margins above 50%.

Our next question comes from the line of Patrick Ho with Stifel. Your line is open.

Thank you very much and congratulations on a nice end to the year. Tim, in terms of 3D NAND that’s optioned in the capital intensity that’s rising in many of the process segments, do you see any bias for OCD metrology's adoption between automated versus standalone?

First of all thanks for the comment Patrick, I appreciate the sentiment. We actually are seeing incremental opportunity for OCD going from to the planer to the V-NAND, Awami ordered 20%. We are also seeing for ourselves, we've gained some market share and will have increased participation on the integrated metrology in addition to our position with the automated. So, we really like that space. We like what’s happening and I think it’s going to bode well for us going in the future.

Great. You also mentioned multiple patterning in your prepared remarks and the opportunities there. As the DRAM industry migrates to 20 nanometers and the likelihood that they will have to use double patterning at least with that node and giving you strong presence there. What are some of the opportunities you see in that transition and whether you think that’s more of a 2014 or a 2015 story?

Your question, the DRAM shrinks are starting to be a 2014 story and we’ll see with the multiple patterning going down to the 24 nanometer incremental demand for our tools but it does play into 2015 assuming that the DRAM pricing remains where it is and the big companies continue to invest in those technologies. But in either case multiple patterning does translate to multiple tools for us.

And maybe not to get really granular do you see kind of what the percentage increase from I guess the last, whether it was in the mid-20s or the 30 nanometer node, 220, what the incremental opportunity on a percentage basis is for you guys?

I don’t have it right in front of me but I know that we've seen like 20% incremental going I believe going from NAND to V-NAND, we've seen about 25% on a foundry and I would expect something on that order going into the DRAM that it embraces much multiple patterns as the other device types did.

Our next question comes from the line of Mahesh Sanganeria with RBC Capital. Your line is open.

Question on what you are seeing on the advance packaging? Is it based on your -- what you are seeing, does that become really a significant portion in next couple of years?

Yes Mahesh, actually I do believe as I said, I think we’re on track to starting to see the UniFire starting to create -- cross the threshold of the 10% contributor to our business. It’s primarily focused on advanced packaging plus we have some applications that our SPARK has gone to hold on. And so collectively I think that becomes an important part and contributor to our overall business.

Okay and on the answer on the discussion on the linearity, you said you are seeing something slightly different and you gave us pretty good indication how you are seeing it. Can you put that in context of that when is the 20 nanometer ending and when the 16 nanometer is starting on the foundry side and on the memory side a broader adoption of 3D NAND when do you see that? If you can talk a little bit more in terms of the technology adoption at different nodes that would be very helpful.

Okay, I will try. It’s all subject to changes above all -- the way it’s looking to us right now is I think it’s pretty obvious there is at least one customer spending an awful lot of money on 3D NAND, taking tools in Q4 and a lot of tools in Q1 and there will probably be a bit of a pause after that. Meanwhile there are other -- three other customers that are developing the 3D architectures and they’ll start kicking some tools for their development and our pilot areas. In terms of the foundry stuff we’re in the middle of the 20 nanometer, spends and ramps there is going to be probably some benefits to us as we get some of the 20 nanometer business. And then I think the 16 nanometer starts to -- will be realized towards the end of the year.

And one more clarification, your Samsung revenues were much smaller in 2013, I am assuming that is function of the fact that Samsung spent most of its CapEx in Q4, which you got the cash but the revenue recognition comes in Q1. Is that a good way to explain that?

Yes, I think you’ve got a really clear picture of it. Samsung spent roughly half of its total CapEx in 2013 in the fourth quarter. For them that’s a spend, for us it’s an order and shipment, we actually have collections but for revenue recognition it’s not until we get that first tool sign up. We just got a domino effect; we have a lot of tools that have been put in place. Once we have the first tool accepted all the other tools become recognized.

Our next question comes from the line of Josh Baribeau with Canaccord. Your line is open.

Could you help me out with the mix of the deferred revenue between memory and foundry? You kind of talked around it little bit, curious if you could share the mix between them.

We haven’t historically broken out the mix of deferred revenue between the two, I think as Jim talked about large portion of it is going into memory specifically with what’s driving some of the growth we expect to see in memory going into Q1 revenue in terms of NAND. So the biggest piece of growth was in NAND but we don’t breakout the specifics.

Maybe a same question but for the inventory at the customer side, is that a memory or is that part of a foundry?

Evaluation inventory, it is a mix across because the inventory customer size is typically evaluation was the deferred revenue or it can be deferred inventory directly tied to the deferred revenue, so it matches the deferred revenue mix.

Got you. And again this has probably been asked a couple of different ways but I'll try again in a different way. In looking at your presentations previously you have shown us a slide in terms of capital intensity for different next generation processes. A lot of that I think was sort of hypothetical whereas now I think we’ve got a quarter or two maybe more in terms of actual pilot production, mass production of these 3D memory structures in pilot production of FinFET, are there any changes to what you originally anticipated obviously with the hope that it would be to the upside of the attach rate for optical metrology from what you originally anticipated before they went in production?

Actually we’re pretty pleased with the work that our team did in putting together a stable considering what information they had, it’s played out pretty well. We’ve seen some incremental benefit on the advanced process control and some integrated metrology, but I think we’ve called the standalone OCD platforms and those opportunities pretty well.

Can you share how you think about the growth, let`s say in whatever time period you think about, let’s start with maybe '14 but maybe longer term can you be a little more specific, so it's not like giving guidance? Can you talk about the growth from market share gains versus just overall increase in capital intensity? How are you thinking about going forward?

I was thinking about it in three ways. The first one is what's the bate of the industry, what are the stunt patterns are going to look like, which rising tide generally raises all those. The second one is market share gains. And third is that secular growth that will benefit us. So we will put aside the spending patterns of the industry because the smarter people are trying to figure that one out. I think that we have a lot of opportunity to continue to gain market share. We’ve got our foot in the door on couple of new accounts, we’re very pleased with, but we don’t have the position in those accounts as strongly, we don’t hold positions quite as strongly as we have in the advanced logic and memory. And we really look forward to gaining more market share and give greater participation in the foundry business itself longer term. And then the second thing is that we have some nice and incremental contributions coming from the advanced packaging in UniFire, which we’ve been working for a quite a while, that should be incremental to the business and taken a bit of that market share and the integrated metrology which is also incremental. So our focus generally is the only way we can meaningfully outperform the industry is to gain market share and also in concert with that expand our footprint in a key account. And we just count on the spending patterns just to give us a little boost.

Right and then sorry, Ron, one last one for me. I missed the mix of automated versus integrated in the quarter would you mind just repeating that?

Automated tool revenue was 68% of total revenues and integrated was 7% of total revenues.

Great, thank you. I’ll jump back in.

[Operator Instructions]. Our next question comes from the line of Graham Tanaka with Tanaka Capital. Your line is open.

Hi, guys. Congratulations. If we just get a base feel for the market share as best you could guess for the last year now that’s in just we can sort of gauge what the growth might be for this year? Thanks.

So, I don’t know what the market share [indiscernible] Graham. Thanks for finding it. Thanks for the comment. We are confident that we have gained market share in the foundry business since we had almost none. We are confident we’ve gained market share in the integrated metrology because there are some slots and applications that we didn’t have before. And those are probably two most prevalent areas where meaningful and quantifiable market share has occurred. But we don’t have all the numbers from earlier accounts and how they account for their spending for me to give you an accurate number. I believe that, I still believe that we start leadership in OCD technology across the Board.

I didn’t hear, one of the other guys was asking, what percent lift you might get relative to whatever the industry CapEx gains are, equipment spends are? So say if equipment spend is up 10% would you expect through market share gains to get more like a 20% or 30% or bigger than that?

Well, I think the way I was trying to respond to those, the lift is actually a smaller percentage of what’s going to drive our revenues in market share gains and the contribution of the new businesses. The contributions in foundry are if you look at the incremental revenues that we will begin reporting on the foundry side of it as it starts crossing the 10% threshold are going to be dramatically overwhelmed any changes in actual spending year-on-year whereas current forecast on wafer fab equipment spending is only up 10%. Our outlook in our quarterly growth and our growth rates are substantially above that and naturally driven a market share and then the contribution of those other products.

[Operator Instructions] And I’m now showing any further questions, at this time, I would like to turn the call back over to Timothy Stultz for closing remarks.

Well, thank you once again for participating in our call. And as always I’d like to point out that the credit for all we do well belongs entirely to the outstanding team of Nano employees and Nano business partners whose talent, energies, and creativity help us successfully compete in a challenging and high competitive industry. We look forward to reporting on the results of our operational financial performance for the first quarter in April. And with that we conclude our conference call today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a good day.