Good day, ladies and gentlemen and welcome to the Nanometrics’ First Quarter 2015 Financial Results Conference Call. At this time all participant lines are in a listen only mode to reduce background noise, but later we will be conducting a question-and-answer session and instructions will follow at that time. [Operator Instructions]. Please note that this conference call is being recorded today, April 28, 2015. 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’ first quarter 2015 financial results conference call. On today’s call are Dr. Timothy Stultz, President and Chief Executive Officer and Jeffrey Andreson, Chief Financial Officer. Shortly, Tim will provide a recap of the first quarter and our perspective looking forward. Then, Jeff 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 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 timing and levels of industry spending, the adoption and competitiveness of our products, industry adoption of new technology and manufacturing processes, customer demand, shifts in timing of orders or 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 2014 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 over to Tim Stultz. Tim?

Thank you, Claire. Good afternoon, everyone and thank you for taking the time to join us on our call today. Today, I will speak to the highlights of the March quarter, comment on our initiatives and progress against improved operational and financial performance and will finish with our perspective on the industry outlook and guidance for the June quarter. As a company, we turn an important corner in the first quarter. Returning to profitability while also exhibiting strengthened financial performance, consistent with the business model improvements we shared with you last year. We came in at the high end of our revenue guidance and improved revenue contributions from every part of our business including optical critical dimension or OCD platform solutions, integrated metrology and advanced process control tools, material characterization products and system upgrades. The improvement and factory utilization, and increase in upgrade sales drove an increase in gross margin which were in combined with operating expenses at the low end of guidance resulted in our surpassing our earnings target. Of most importance is the demonstration of leverage in our business model that yielded greater than a 50% flow-through to operating profit from a 27% increase in revenues. Jeff will cover this in more detail shortly. On the commercial and competitive front, we are beginning to see results from our focused efforts in new account penetration, market share gains and expanded footprint in key accounts. Our Atlas OCD platform is now deployed into high volume manufacturing for every advanced 3D device. Demand for our integrated metrology tools is growing rapidly driven largely by an increase in use of our OCD software and algorithms. In our Uniform platform is used throughout the industry for advanced packaging applications. Particular importance with the competitive wins over the last few years we now have…

Thanks Tim. Before I begin my comments I'd like to remind you that a schedule which summarizes GAAP and non-GAAP financial results discussed on this conference call as well as supplemental revenue segment information by product, customer and market via geographic region is available in the investors section of our website. First quarter revenues were $50.4 million up 27% from Q4 and down 2% from Q1 of 2014. Product revenues increased 21% to $38.3 million compared to $31.6 million in the prior quarter while service revenues of $12 million increased 48% from the prior quarter on higher upgrades. The sharp increase in product revenue was driven primarily by increased sales into the DRAM and foundry segments partially offset by lower revenue to the NAND segment. By end market DRAM revenue increased 30% from Q4 to comprise 37% of product revenues in the first quarter. Foundry revenues increased 75% from Q4 to comprise 39% of product revenues in the first quarter. NAND comprised 14% of product revenues, logic comprised 4%, product revenues and the LED bare wafer silicon and discrete end market comprised 6% of product revenues. The total first quarter revenues were comprised of 61% automated systems, 9% integrated metrology systems, 6% materials characterization systems and 24% service and upgrades. Our 10% customers in the first quarter included Samsung at 30%, TSMC at 22% and SK Hynix at 13% of total revenues for the quarter. I’ll now discuss the remainder of the P&L which were non-GAAP measures unless I identify the measure as GAAP based. These measures exclude the impact of amortization of acquired intangible assets, restructuring charges and non-cash adjustments for tax assets. Our Q1 gross margin was 47.7% and increased 230 basis points from the fourth quarter. Gross margin was above our guidance, but remain below our financial…

[Operator Instructions]. Our first question for the day comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open.

Thank you very much. Tim maybe first of on the foundry logic side. You mentioned the CapEx cuts by some of your largest customers. Can you give a little color from your angle of the impact of reuse whether it's for a metrology tools or even for the process segments as a whole. And how if potentially is impacted your initial outlook of 2015.

Sure Patrick. Thanks for calling in. So we use this clearly one of the buzz topics in the industry and most of our customers are speaking to it without naming names we've got customer that have been doing very aggressive effort in pursuing to reuse. And that has some impact on the long-term logic area. Mostly other ones are pretty standard though and we're not seeing the huge amount because most of the techno product placements are going into some of the newer fabs with a newer device applications and so we don't see this as a broad from an across all customer areas, but at one particular customers is pretty aggressive.

Great. And my follow up question on the NAND flash side. I think in the past you've mentioned that the incremental capacity or the capital intensity increases for NAND or anywhere from 10% to 20% as you move through 3D NAND. Two part question there. From an industry perspective, are you more optimistic about the traction or the outlook for NAND flash spending particularly 3D NAND in the second half of the year. And secondly from a technology basis, is there any difference in terms of, I guess metrology use whether it's for floating gates or the charge trap particle that some of the suppliers employ.

So we'll try to address those. So first of all we do see increased intensity and use of metrology tools going from the planar to the 3D NAND and we see a little bit of increase of that as we go into second generation type 3D NAND. The increase in the intensity as you said it's in the area of 10% to 20% and if you kind of look at the capacity and put in place and you look at the opportunities for us and what we're trying to realize it. It takes pretty close for our model. So I think we're very close there I'm looking here. In terms of where it fits in on each of the mobile ones I think you're going to see smaller incremental demand when you start to go into this second third and fourth generations. Because a multiple layers don't drive large increase in process control or metrology. So there are small ones but not as dramatic as going from planar to 3-D.

Great thank you.

Thank you. Our next question in the queue comes from the line of Tom Diffely from DA Davidson. Your line is open.

Yeah good afternoon. Excuse my voice here, first question is I wondered if you guys were surprised by the recent announcements by the large foundry and logic players about a little bit lower CapEx because sound like in the last call you were little skeptical as to how much they're going to spend this year to start with. So one of your plans are in internal plan that change at all before and after those announcements.

Tom thanks good question. We've been skeptical for several quarters on the spending patterns. And we've try to do our best we don't have rather the visibility we'd all like to have over the multiple quarters. But when we look at the deployment of tools and we look at the new fabs been build. It was hard for us to tie together while we saw as capacity adds and the capital equipment budgets that were being discussed. So I would say that it was more of this coming out and telling the story the way we've sort of been seeing and we've been preparing ourselves accordingly.

Okay. And then based on the different segments outside of DRAM it looks like although the segments weren't and still are kind of planning to do more of a ramp in the second half of the year versus the first half?

Yeah, I think if we kind of walk through the biggest one I think that most of us are seeing in terms of a ramp is going to be in the 3D NAND and that's because you've got four customers out there that are now simultaneously putting in both technology buys and capacity and we are participating in every one of those customers and that's beneficial to us and because of coincidence I think that you're going to see a compounded round. I don’t see a ramp in the DRAM area. I expect a little softening at least for next quarter or two and then we'll have to see how it plays out at the end of the year although none of us have great visibility I think in the foundry, the foundry wars continue. We have seen some very strong foundry we have record foundry revenues record revenues at TSMC specifically and we see that we expect to see some continued investments there as the Apple chip plays out and who gets it between Samsung and TSMC. The good news for us is we're becoming more agnostic as to who gets the business.

Okay. Maybe just quickly on TSMC or the foundries are you equally strong in both the front end and back end of those places?

Tell me what you mean by the...

Packaging versus just the metrology I guess.

Okay. So I mean clearly our revenues are driven by our front end tools, our Atlas or integrated metrology tools. Our unifier is in a good position at the advanced packaging but we're on whole wafer advanced packaging which is a little different than advanced packaging that's in the outsourced assembling test or OSAT so even though I feel very good about that business it's not nearly as strong in terms of the contribution revenues as our front end tools.

Okay, that makes sense. Go ahead.

I just want to make sure I answered your question?

Yeah, no that’s it. And looking at the 3D NAND you talked about the four vendors there, customers there it looks like that’s all new capacity going to place it would be a transition from an older fab?

Well several from our new capacity, there is one fab that's been turned down on the ground built a new fab. There is new capacity in a couple of others areas and then there is going to be added capacities as a second and third phase investments on an existing fab.

Okay. But you wouldn’t expect to see any level of reuse then with those facilities.

No, we don’t see that although we always have to be a little bit careful when we look at the timing of investments between metrology and processing you've kind of been through this before with us when they're bringing new fab on line or new technology online there is a little heavier front end weighted investment in process control and then as a fair not more capacity you see get a little more weighted towards process tools.

Yeah, okay. Jeff you talked about a $0.03 benefit during the quarter I didn’t catch what that was from?

It was from foreign exchange primarily in Europe and some intercompany positions that we have there.

Okay. And then is there a natural exposure that you typically have in Europe that we should follow going forward?

Yeah, we have had an unhedged exposure but we are changing that now and taking a bit of a hedge on it now.

Okay, all right. And then finally on the operational expenses side, it sounds like you're going to try to hold that 20-25 even if businesses ramps in the second half of the year?

Yeah, we are going to try and stand in the range of 20 million to 21.5 million and I think we are doing a pretty good job we've kind of stayed at the bottom end of the range for the last couple of quarters.

Yeah, I would add to that we have the infrastructure in place to support a ramp and we feel comfortable with the investment profile there is always certain variable comp, variable expenses that go with ramping but those get mostly above the line in terms of where we would see the spending coming with a little bit on the commercial side from the sales which is percent of the revenues.

Yeah, I would say it's the kind of where we've been planning to use this as leverage and you can see flow through on the model in this quarter it was 51% when you look at next quarter it's even better.

Yeah, great, alright, thank you.

Thank you.

Thank you. Our next question comes from the line of Weston Twigg from Pacific Crest. Your line is open.

Yeah, hi, thanks for taking my question. First just curious on Q2 you called another strong quarter. To me that's a little alarming because revenue guidance is down a little barely breakeven as evidenced by the EPS guide. And I'm just wondering if you consider that a strong quarter, do you feel like you're getting toward a peak number at all or was there a lot of upside from here in terms of quarterly revenue opportunity. And if so how would you see that playing out over the next I don't know four quarters maybe.

Yeah. So that's a good point. The fact that we turned the quarter to profitability we feel good about it and we're trying to emphasize our commitment to stay there as best as we can give uncertain revenue level. Strong in my mind is that the flow through. If you start looking as Jeff mentioned we have 51% flow through on the operating performance in Q1 and we are at the top end of our guidance. We actually experienced some pull ins from Q2 into Q1 that helped us in that area. And going into the second quarter if you look at the numbers, we're not only stay profitable but if you look at the flow through it gets better. So strong from a terms of financial performance not just simply kind of the revenue number. In terms of what are we seeing in the second half? We're all looking hard at that. I think there is a lot of the changes in the outlook from the spending patterns and many of us are waiting to see how that plays out. We're all counting some 3D NAND investments and some foundry investments. Don't know if DRAM is going to come back strong and certainly the advanced logic or IDM has been pushed even further out.

Okay. Can you give us an idea where you think where you can revenue to on an annual basis organically from here?

Where could we get it organically?

Yeah I mean could you grow revenue to $300 million $400 million annually. Or can you give us sort of ballpark idea where you think you can grow this business organically.

Yeah well that's a good question that's actually a great analyst question but in terms of our internal objectives we believe with the tools and the market share opportunities and the expansions in some of the other markets, we know how to get to $300 million in revenues in terms of just how we apply these tools and so on. We think there is upside to that. I think you start pushing it beyond there we have to think about some other ways to expand our serve market whether it's through new technology environment and or possible M&A activities.

Okay. And then just finally on the DRAM activity you said you expect it to slow down over the next couple of quarters I think or maybe say second half. But can you give us some context on why you think it's flowing as it just did one large project is slowing down because it's still bad or do you see actually no transitions beginning to slow down at 20 nanometer.

I just think as the timing of the investment profile if you look at the last two or three quarters we've had really good DRAM, we've had DRAM contribution of revenue have been very, very strong actually stronger than in some of the other areas. I think there is an absorption of that and then I think the shift to the next technology now going to 20 nanometers starts the new ramp and we're putting tools into that space and then as that kicks in and the price in DRAM remains strong then we would expect to see some increased contribution.

Okay very helpful. Thank you.

Thank you. Our next question comes from the line of Mahesh Fankanariya [ph] from RBC Capital markets. Your line is open.

Yes thank you very much. Staying with the DRAM questions. I mean there have been some pushes and force and you just mentioned that you saw some pulling from Q2 to Q1 and we've heard about some push outs. Can you talk about what's happening in those terms push outs and pull ins. What is driving that?

Sure Mahesh I'll try to do. We actually really haven't experienced push outs we've don't experienced pull ins. And we've experienced the pull ins into Q2 to come out in Q2 in fact some of the step that was at even far throughout the year has been was brought into the first half we've given looking at like strong first half activities. And I think it's just kind of a natural or the flow of the investment cycle. Yeah on the other hand if the season strengthen the ultimate DRAM applications mobile and enterprise. If you start to see some of that then I think you may see a step up in spending. We're just not counting on right now because there is typically a low between technology nodes.

And so also on those terms we have two new projects on DRAM that is line 17 and M14 Tinx. Do you have a sense of I guess can you help us to get a sense of the split in first half of this year between the new capacity and conversion.

It's a good question. I don't have those numbers that way. We certainly participate with both the customers we speak with to. We have a tool record position. And we have a lot of activity with one of them in the fourth quarter of last year and the first quarter of this year. In terms of going into conversion I think that the bulk of - in the absence of significant drive to increase capacity in the capacity in the existing fabs such as the ones that you referred to. I think you're going to see the shift to the technology conversion and to a ramp of the new technology and I think it's started to shift in the third quarter going into the fourth quarter.

Okay and on the logic side I mean we've heard about the reuse and push out on the logic from the logic customers. But even if I take that consideration your logic revenue has gone down for last three quarters. is there if anything specific to do with that because I think before that there was probably eight quarters you had a very high continuous very high contribution from logic. So what's - can you comment on why such a discontinuity suddenly in terms of logic investment.

Yeah I think it's really straight forward. It's the customer spending patter it has nothing. Our market position has been is unchanged or the tool applications in terms of the going from 22 to 14 to 10 as we're applying that there is more levels more critical areas there is a lot of tool reuse there has also been a slowdown in some of those fabs and in fact some of those fabs didn't ramp to the capacity that they thought. And so it really mirrors the spending on the fabs bringing in both the technology and the capacity. No shifts in market no shifts in position and no drop in the utilization of OCD for the advanced applications.

So should we see that come back sometime in the second half of the year is that or it happen sooner.

I don't know for sure but we would I don't think it’s going to happen sooner because of the timing that has been disclosed by that company in terms of their fab investments. So if they come back sooner that's a wonderful thing for us because it just automatically comes to us. But there has been a fair amount of push out on the next generation fab and until they start tooling it up we won't see any significant revenues accordingly.

Okay. And then one last question on 3D NAND we have one customer which has ramped pretty significant last year and there is kind of holding pattern until get the price parity that's the sense. Then we had Hynix come out and they said that most of their DRAM spending most of their spending is going into DRAM with little on NAND and that too mostly on planar conversion. And so is it you talked about 3D NAND spending in the second half. Is it mostly for the pilot line or you're seeing some actual volume production. Because we don't see that based on what the companies are saying.

Yeah that's a good questions. So we have four players out there is one that's got fab running and there has been a delay in their investment ongoing expanding capacity. We see that there is a company that's finally got into it and that's starting to put some nicer spending. We've got one of the four customers that's put in very significant new capacity, technology investment and we're benefiting pretty dramatically from that and that's a new position for us. And the fourth company is kind of just going horizontal on their spend.

Okay. Alright thank you very much.

Alright.

Thanks.

Thank you. [Operator Instructions]. And that's all the questions that we have today. So I'd like to turn the call back over to Timothy Stultz for closing remarks.

Thank you once again for participating in our call. We're very excited about the opportunities in front of us and have an extraordinary team of committed employees and business partner’s working day in and day out to make it happen. Finally as a reminder our Investor and Analyst Day will be held in New York on June 3rd. Please contact Claire McAdams whose contact information is provided on the release for any questions. With that we conclude our conference call for today. Thank you.