Good afternoon and welcome to Nanometrics First Quarter Financial Results Conference Call. A Q&A session will be held at the end of the call. Until that time, all participants on listen-only mode. Please note that this conference call is being recorded today, April 30th, 2019. At this time, I would like to turn the call over to your host, Claire McAdams. Ma’am, please go ahead.

Thanks, Justin. Good afternoon everyone. Welcome to the Nanometrics first quarter 2019 financial results conference call. Speaking on today's call are Dr. Pierre-Yves Lesaicherre, President and Chief Executive Officer; and Greg Swyt, VP of Finance and our Principal Financial Officer. Shortly, Pierre-Yves will provide a recap of this quarter and our perspective looking forward. Then Greg 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 P.M. 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, margins, operating expenses, profitability, earnings per share and expected market demand. Such statements may be identified by the use of words like believe, expect and similar expressions that look toward future events or performance. 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 year 2018. Nanometrics disclaims any obligation to update information contained in any forward-looking statement. During today's call, we will also refer to financial measures not calculated according to Generally Accepted Accounting Principles. Please refer to today's press release for an explanation of our reasons for using such non-GAAP measures as well as tables reconciling these measures to our GAAP results. I will now turn over the call to Pierre-Yves.

Thank you, Claire and good afternoon everyone. Thanks for calling in on this very busy earnings day. Nanometrics continues to operate with strengths and profitability in the current downturn in industry spending. Our first quarter results reflected a somewhat different revenue mix compared to our forecast, resulting in revenues of $67.1 million at the higher end of our forecast. Our gross margin of 52.5% were at the lower end of our forecast. The shift in product and customer mix took place very late in the quarter and as the higher-margin business will instead materialize in the current quarter, we expect to snap back in gross margin into Q2. During the first quarter, our outlook strengthened in the second half, which we expect will be up 25% to 30% from the first half. As such we made the decision to continue our level of R&D expenditure in Q1 in support of our longer-term strategic objectives. In combination, in spite of the higher revenue level versus forecast, earnings came in at the lower end of our forecast at $0.19 per share. It is important to note that the decision to maintain our level of R&D investments in Q1 reflect the stronger outlook for the year compared to our last earnings call. Our increase confidence that our revenue from the memory market have stabilized and will begin to recover from their Q1 low point, and a very strong second half forecast for the foundry, IDM and other device markets. The highlight of our first quarter was a successful introduction of the Atlas III+ which is the latest version of our flagship automated Optical Critical Dimension or OCD system. The Atlas III+ has rapidly gain traction with the world's leading semiconductor manufacturers with first quarter revenue is recognized from multiple customers across both memory…

Thank you, Pierre-Yves. Before I begin my prepared remarks I’d like to remind you that a schedule that summarizes GAAP and non-GAAP financial results discussed on this conference call, as well as supplemental revenue segment information by end market and geographic region is available in the Investor Section of our website The P&L metrics discussed are non-GAAP measures unless I identified the measure as GAAP-based. These measures exclude the impact of amortization of acquired intangible assets, costs related to acquisitions, severance and executive search and transition, as well as search and discrete tax and other items. As Pierre-Yves mentioned earlier, our first quarter revenues were $67.1 million, a decrease of 13% from the prior quarter and 18% from Q1 of 2018. Product revenues were $53.9 million, a decrease of 16% from the prior quarter and 24% year-over-year. Service revenues of $13.2 million were flat to the prior quarter and were up 17% year-over-year contributing 20% to total sales for the quarter. By end market product sales to the NAND segment were 30% of total product sales. DRAM sales were 20% and all foundry, IBM and other device sales contributed the remaining 50% of product sales. Our 10% customers in the first quarter are SK Hynix, TSMC and Intel. Our Q1 gross margin of 52.5% decreased 320 basis points from the prior quarter and was that the low end of our guidance – low end of our gross margin range due to late quarter shifts in product and customer mix and the timing of higher margin products that will revenue in Q2. These factors affected product gross margin which was 53.7% below our target range, but our service margins improved to 47.5%, an increase of 320 basis points from the prior quarter. For the second quarter 2019, we are guiding gross…

Thank you, sir. [Operator Instructions] Our first question comes from Quinn Bolton from Needham & Company.

Hi, Pierre-Yves. Hi, Greg. Congratulations on the better outlook. Wondering if you could start just with the stabilization and memory and give us a little bit more detail. Was that sort of across the board? Was it driven by either DRAM or NAND? And any comments you can make about geography would be helpful?

So it is across both NAND and DRAM. So we’re seeing -- and then from – there’s not really geography dependence at this point in time. So its across the board, across the customer base in NAND and DRAM. Maybe a little bit larger in NAND and then DRAM being maybe a little bit later, but these would be qualifiers.

Okay, great. And then second question just Lamp [ph], on their call last we’ve talked about a pretty good opportunity in their installed base business to upgrade process chambers. Wondering if you have sort of similar upgrade capabilities to improve the productivity tools in the field? Or are you seeing a stabilization in memory and node conversions to say 96-layer NAND or 1Y DRAM. Does that -- is that just driving new tool demand for OCD given the increasing intensity of OCD at those higher nodes?

So, we are seeing growth in our service business year-over-year, and it was even a quarter-over-quarter from Q4 to Q1. But what -- and one of the components of that is the upgrades business. Now, we are different than from lamp in the sense that we don’t have chambers that we replace. We tend to have a longer cycle in our upgrades in general because our tool doesn’t degrade as a niching or deposition chamber. So are continuing to drive the upgrade strategy and the growth in the installed base business, both the service and the upgrades and we expect that to be a contributor of growth this year over last year.

Great. And just last question, you introduced the Atlas III+ with enhancements, can you give us any more details on what kind of enhancements or these just better throughput or software improvements, any other additional color would be great? Thank you.

Yes. Its pretty comprehensive across the board. So it is as I mentioned improvements in the hardware both the spectroscopic ellipsometry and reflectometry, but its also improvements in what we call chorography stage movements which helps with the throughput as well as some software improvement. So, it is pretty much across the board improvement and its really a significantly higher value tool for our customers which explains the higher adoption rate that we’re seeing right now.

Great. Thank you.

Thank you.

Thank you. Our next question comes from Patrick Ho from Stifel. Your line is now open.

Good afternoon. This is Brian Chin on for Patrick. Thanks. I’ll ask a few questions. Maybe the first question, maybe digging into the outlook that you provided for second obviously very constructive. I’m wondering clearly I think there’s a strong lean there toward the foundry and logic additional strength, but Pierre-Yves, could you maybe attribute how much of that say 30, 40 million second half revenue increase might be attributable to memory? Give us kind of some sort of sense to that?

So for memory we are saying that the memory will be second half weighted. And right now what we’re seeing and of course this could change because there’s still a lot of uncertainty with memory in the second half, especially if you look at Q4. But what we’re seeing today is maybe the wait for the years would be for memory specifically will be low 50s in the second half and high 40s in the first half.

Okay. Also just curious in terms of that second half incremental pick up on, is it sort of – you see sort of like 3Q building, 4Q building off of that? Or do you see more like a higher slop kind of pick up or kind of bias one quarter or the other, 3Q versus 4Q?

So, with our current visibility we expect Q4 to be the strongest revenue quarter of the year, Now, this being said, in order to achieve the 25% to 30% growth in the second half we obviously would need to see strong sequential growth starting in Q3.

Sure, sure. One more question just about that and I have one more follow-up. In terms of the foundry spending, logic spending, you obviously think Taiwan, you think U.S. In the terms of the improving strength you’re seeing in second half visibility, is it a broader customer set may be inclusive of the reasons like Korea, China. Any color you could give would be great?

Well, it’s across the board. I mean, it definitely U.S. and Taiwan, but it's just across the board because memory as you know is very distributed. But if your question was specifically on logic foundry and others it is mainly driven by the U.S. and Taiwan.

Okay, okay. Maybe just one last thing just in terms of the gross margin permutations Q1 versus Q2. How much of that would you attribute maybe just having new product like Atlas III+ and potentially having more immature margins kind of an the initial get go before you hit stride there. Is that kind of a large attribution in terms with happened in Q1 and Q2?

No, that's not. What happened is, we had some grades that were planned at the end of Q1, that did not happened. That shifted in to Q2. And the mix were really a customer and products related. So, not specifically related to the shipments or adoption of the Atlas III+.

Okay. That’s it. Very helpful. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Tom Diffely from D.A. Davidson. Your line is now open.

Yes. Good afternoon. So just following up on the last question, in cycle cycles passed when a new product came out, a lot of times there was a bit a margin head but as soon as like the Atlas III was already fully design for manufacturer building all that, so the margins are inline with the expectations and in line with the predecessor?

Yes. You’re talking about the Atlas III+ I believe.

Correct, yes.

Yes. So the Atlas III+, yes, the margins are in line with our expectations in our model and this is why now with the adoption of the Atlas III+. This year we expect to get back to the financial model in terms of gross margins.

Okay, great. I think looking at the increase in demand that you’ve seen on the foundry logic side, is it skewed more to foundry or logic?

Well, what I would like to say first is that its – our strength in foundry logic is, first, most important I think that the most advanced technology knows for each customers. We don’t like to comment specifically about one customer or the other and with very limited number of customers in logic and in foundry we prefer not to distinguish that. But if we look at the Atlas III+ we mentioned the adoption in the foundry logic market which is an important part of this year’s growth story.

Okay. I guess what I was getting at is, I guess I worry a little bit that both foundry and logic are very strong right now and will be for a few more quarters. But what gives you comfort that there won't be a pause in that strong spending before memory comes back in earnest some time in 2020?

Its the visibility that we have already for Q3 and the relationship we’ve had with customers over the years that -- in particular this customers in foundry and logic they tend to be very reliable with their forecast and their sales plan – their plan to us, so ourselves plan. So we’re very confident that this is going to happen given the visibility that we have right now.

Okay, great. And then given that the memory is a little soft right now. Does that impacted at all your timing of unique product that you're working on? Or is there R&D spending or delivery times?

No, it hasn't. As I said we have continued to invest in R&D for new products. We had put a little bit more emphasis [ph] in the last few quarters on releasing the Atlas III+ and enhancing the current line of product, but that has – the current spending in memory hasn’t impacted our ability to conduct R&D and continue developing new technology.

Okay. And then just finally, when you look at some of the other markets, the material characterization, is that more for technology capabilities or is that capacity driven demand?

It is more about technology actually. Its – we have a few new products coming out there as well and it's adoption for Advanced Technology.

Okay. Thank you for your time.

As well as the activity at 4D you know the continued growth in 4D.

Yes. Okay. Thank you for your time.

Thank you.

Thank you, [Operator Instructions]. I'm showing no further questions. I’d now like to turn the call back to Dr. Lesaicherre for further remark.

Well, thank you for joining our call today. Together with the leadership team and all our employees, we’ll remain steadfast in addressing the challenges and opportunities in front of us and profitably growing our business to create incremental shareholder value. I look forward to updating you on our next earnings call scheduled for late July. And this concludes our call for today.

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.