Good afternoon and welcome to Nanometrics Third Quarter 2010 Financial Results Conference Call. 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 is being recorded today, November 2, 2010. At this time, I would like to turn the call over to Claire McAdams, Investor Relations Counsel for Nanometrics. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Nanometrics Third 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 like to call your attention to the following Safe Harbor statement. This conference call contains certain forward-looking statements, including, but not limited to, statements regarding financial results for the company’s most recently completed fiscal quarter, which remains subject to adjustment in connection with the preparation of our financial statements and periodic report on Form 10-Q for the quarter ended October 2, 2010; the continued adoption and competitiveness of our products; the expansion of the company’s served markets; and future revenue growth, profitability and cash flow. 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 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 10-K 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 to Tim Stultz.

Thank you, Claire, and good afternoon, everyone, and thank you for joining us today. In my remarks today, I will discuss the business and financial highlights for the third 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, our Chief Financial Officer, will provide a closer review of our financial performance, following my prepared remarks. Last quarter, we announced the best quarterly results in Nanometrics’ history. Today, I’m pleased to report that we have raised the bar again by delivering record revenues and profits in the September quarter. Financial highlights for the quarter include revenues of $54 million; operating margin of 26%; earnings of $0.53 per share; and $14 million in cash generation from the P&L, which increased our cash balance by $9 million after investments in working capital, completion of our stock repurchase program, and partial pay-down of our building mortgage. In the first nine months of 2010, we have achieved revenues of $142 million, an increase of 182% over the previous comparable period in 2009 and notably 25% above the same period in 2007, which was the last cyclical peak in the semiconductor capital spending. Clearly, we are well on our way to achieving record revenues for 2010, and revenue growth that is significantly higher than growth in overall wafer fab equipment spending. Our continuously stated goal has been to outperform the overall sector through market share gains and expansion of our served markets, accompanied by strong financial performance. I believe these results combined with those of the last several quarters demonstrate that we are delivering against those objectives. The primary driving force behind our business improvement is the continued adoption of our leading-edge products and technologies that serve the critical growth…

Thank you, Tim, and good afternoon everyone. Nanometrics’ press release containing third quarter fiscal 2010 results was sent out by Business Wire today, November 2, around 1 PM 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 of the figures referred to in my comments are GAAP, unless otherwise noted. Third quarter revenues of $53.9 million were up 6% from the previous quarter and were up 109% from the third quarter of 2009. Product revenues of $44.4 million increased 2% quarter-on-quarter and 172% year-on-year. Service revenues, which include both upgrade and core service revenues, were $9.5 million, up 28% from $7.4 million in the prior quarter and flat compared to the third quarter of 2009. Revenue by geographic region is based upon the shipped-to or first-in-use destination. And during the quarter, the breakdown was: U.S. at 42%, South Korea at 25%, China at 12%, and Rest of World at 21%. Revenue by product type was: automated and integrated metrology at 71%, service and upgrades at 18%, and materials characterization at 11%. Gross margin in the third quarter was 54.5% compared to 55.1% in the previous quarter and 54% in the third quarter of 2009. Product gross margins were 56.9% compared to 57.6% in the prior quarter and 48.8% in the third quarter of 2009. Service gross margins came in at 43.6% in Q3 compared to 40.5% in the prior quarter, reflecting a higher mix of technology upgrades. Total operating expenses were $15.6 million, which was $0.5 million or 3% above the prior quarter. This increase was primarily from higher variable compensation expenses resulting from the increase in…

Thank you, sir. (Operator Instructions) One moment for questions. Our first question is from Gus Richard of Piper Jaffray. Your line is open, sir.

Tim, could you give a little bit of color as to the current environment, and is demand coming from flash, DRAM, foundry or logic?

We are seeing a little shift from DRAM to flash, which still represents almost half of our business in memory, a little less than that. But the balance is moving more towards the NAND side of it. We are getting some nice improvements with and contributions in the foundry, and the logic has just been pretty steady going through it.

Okay. Has that foundry business sort of picked up in the fourth quarter and going to be strong probably through the first?

Yes. We’ve talked about our foundry position for a while. We’ve been very candid about the fact that the contributions to our revenues from foundry have not been representative of the spending within the industry, and it’s been an important strategic focus for us. You’ll notice that the inventory went up again this quarter, and some of that’s tied to the fact that we are placing tools into strategic locations to penetrate those accounts. And we are gaining some movement there that we think is going to play out very nicely in 2011.

Okay and then on the overlay side, you had suggested that that was reasonably strong in the quarter. Is that image-based overlay or is that fraction-based and sort of how is that product line going along right now?

Yes, we actually had a nice uptick in the overlay business. It’s image-based overlay and the nice component of it is, that it’s being used in memory and logic and memory, both NAND and DRAM, as well as in the foundry applications. So we like what’s happening in the overlay side of our business.

Our next question is from Weston Twigg of Pacific Crest Securities. Your line is open.

A quick question here, you have a big customer ramping 22 nanometers starting late this year. And I’m just kind of curious what that trend looks like for you through 2011, how that business maybe ramps or does it stay level?

Yes, so our fan-out plans are going to be much more weighted in the Q1, Q2 timeframe compared to where we are now. We’ve been spending a lot of time on the technology development and pilot line development. And two fan-outs on a multi-fab environment, two of the multi-fabs really kicks in, in the beginning and middle of 2011.

Okay. And continuing to ramp through the end of the year or sort of leveling off around mid-year?

It probably won’t ramp four quarters straight in the row. It will step up to a decent level and then there is going to be some pretty nice contributions on a quarterly basis.

Okay. And then also just trying to dig into the service piece a little bit, a pretty big number, a little higher than your target of roughly 15% revenue. Does that maybe come down a bit in the out quarters or do you think that stays at current levels?

Well, the total service and in particular the service margins have been pretty close to 40% consistently on the margin side. In terms of total service revenues, we had some nice contributions from upgrades and historically upgrades have been a big part of our story as we’ve talked about them both being good margin business as well as being rather cyclical and inconsistent quarter-to-quarter. We’re still giving nice contributions, but as our total revenues increase, you’re going to see and less swing or impact from the changes in the upgrade contribution. And our service should look pretty steady and with a growth that is consistent with our revenue growth and our tool placements as these tools come off of warrantee and we establish service contracts for the installed base.

Okay. But is the gross margin target on service, 33%, is it the target model and do you expect it to come down closer to that or stay around that 40% level with good operating business?

When we put that model together we were pretty focused on our core service and we were driving core service to that range and we really hadn’t factored in the contributions of the upgrades and primarily because we weren’t sure what the duration of the contribution of the upgrades would be. I would say that that part of our business is becoming a consistent contributor to the service and I would expect that as a result that the service margins will be higher than our original target as we go forward.

Okay. And then just one final question related to margin in service again, it looks like from the target model which is product gross margin, 57%; service and upgrades, 33%; corporate gross margin, 54%, looks like you’re just over that corporate with the stretch going up to 56%, you’re just over that corporate gross margin of 54% on that revenue, but doing much better on the service side, it seems like maybe the corporate gross margin, are you getting closer to meeting that stretch goal of 56% in the next couple of quarters maybe?

We are certainly driving towards that. We would hope that if we drive revenues appropriately, we work our supply chains and we continue to have the established basis with the key customers then you’d see some improvement. There is some offset to that because as you are familiar we have a product line, the UniFire product line which addresses wafer-scale packaging where we have an OEM relationship that results in a slightly lower margin and as that becomes more successful, it actually has a little downward pull on our total margins. But we’re still set to reset stretch goal and we’re going to be doing everything we can to achieve it.

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

Hey, Tim, congratulations again on a good quarter in a pretty choppy kind of environment. The question I have is, when you say there’s some pause, can you give us an idea, because TEL, Tokyo Electron they guided orders down 10%, 15% and I think in general the guidance for orders is down 10%, 15%. So is it reasonable to assume that you kind of have a similar kind of pause in December on your systems business?

So Mahesh, thanks for calling in. As you know, we don’t give specific guidance on our own performance, but I will share with you my view of the industry in the world. The first thing is, I am very bullish and very positive and feel that 2011 is going to be a good year for most of us that are well positioned and I think that the first half is going to reflect some nice opportunities. I think that right now most of the companies are at a normally what I’d call a sustainable level, as I mentioned in my script; and I think that the uncertainty factor around that sustainability is portably no worse than plus or minus 5%. I think when all the dust settles and we get to have our calls, I think that everybody is probably going to be in that range and based on spending and our customers, and where things are going, and barring crazy things like who knows what this election is going to pan out, how it’s going to play out rather. But, if I look at the fabs and the fab developments and the new developments, the expansion activities that it will take a significant external event to hold back the second half or the first half of next year.

Yes, so actually, Tim, your comments are pretty consistent, because Tokyo Electron said the same thing that they have a pause in December and then their orders are going to resume growth. They actually said orders will be up 10%. So I think that’s pretty consistent from the overall industry perspective. And just moving on to material characterization, you had it down 10% in September; what are the puts and take heading into December quarter on the material characterization. Was there something specific that drove the revenues down 10% in September quarter?

I probably would rephrase the question as that in Q3 high-brightness LED spending helped drive the revenues up the growth. And I think when I go back and look at what’s going on right now in some of the other areas, there’s been a little bit of a flattening and slowdown on the high-brightness side of the sector and that’s wrapped up in our Materials Characterization group. I think overall it’s a growth market. I think it’s a great opportunity, but I think there’s been a little digestion phase underway.

Yes, I should have prefaced that by saying that you had a huge three quarters of huge growth and it looks like its flattening. So should we see that some digestion period in high-brightness LED for next couple of quarters and flattish kind of revenue for that segment?

Well, the two major components that contribute to the Materials Characterization, one is the bare silicon wafer inspection and the second one is the high-brightness LED. We certainly get contributions from solar, but that’s a pretty spotty one for us to get a good visibility on. I think that you probably do have one to two quarters of digestion of the MOCVD tools being put out by AIXTRON and Veeco, and our tools track with those installations and so as they ramp, we ramp and once their tools are in place, then it kind of flattens our business. So one might suggest that there’d be one or two quarters of flat LED contribution, and we’re still looking for some nice improvement in the FTIR product to look at bare silicon wafer, as the capacity that was put in place in 2007 starts to hit the wall and we see wafer production going up. But all that being said, it’s short-term, I don’t know. That level of granularity we’ve not only don’t see but we actually are less concerned about it. What we care about is what 2011 looks like. And I think that HB-LED is growth and I think that the wafers, basic wafer production is growth and I think that some of the other key sectors that we serve are growth.

Just switching the gear a little bit here on the OpEx side, is there any change on the OpEx side or we should be looking at that being flattish going forward? That’s how I have it and has there been any change on that front?

So on the OpEx, I’ll give you two answers to that and then I’ll see if Jim wants to add to that. But the first one is that our model is to run between 10% and 15% increase in OpEx or to control our OpEx spending to be within 10% to 15% of any increase in revenues. And so you’ll see that, it should track accordingly. Now that being said, we are bracing up for a pretty significant fan-out of new tools and are ramping some key areas where we have multiple fab installations. And in anticipation of that we are actually already bringing on some folks that we need to train to man those machines and man those activities out in the field. And so there will be a little front-end loading. I don’t think it is going to be huge and I don’t think it’s going to move the needle materially, but we are putting some of that in place because it’s necessary to meet the fan-out in the delivery schedule that we’ve been asked to do. Jim?

Yes. I would just like to add a little bit. I would agree with Tim. It is not likely to be flat and then also just remind those on the call that when you get to Q1, we usually see an uptick just because everybody resets their payroll taxes. So we’ll see a little bit of an uptick there, but I don’t think it will be flat. As Tim said it will be up maybe a little bit, but not much.

Thank you. Our next question is from Edwin Mok of Needham & Company. Your line is open. Edwin Mok - Needham & Company: Thanks for taking my questions. Just to kind of follow on the kind of different line of business; did you see any cost softening on demand on the wafer-level packaging market that some of the other companies are talking about?

No. For the wafer-scale packaging, actually we think that, for both Bump and TSV, we saw, the activity level, the engagements and the evaluations are actually stepping up right now. Edwin Mok - Needham & Company: I see. Great. Okay. Can I just get a clarification there? I think based on your comment on your prepared remarks and then your answer to I think it was Wes’ question regarding your largest customer, is it fair to say that it’s possible even if the industry doesn’t see a kind of softening first half or a moderating first half, you guys might have a stronger first half because one of your largest customer is going to ramp, have a pretty sizable order for you guys, is that how we should think about your business going in the first half of ‘11?

Yes. Just to go back on our customers, so we had three customers that crossed the 10% threshold, which were Samsung, Intel and Hynix. And obviously one is logic and the other two are memory. And there is also some foundry tied to the Samsung as well. With regard to one of our largest customers, their well-publicized fan-out plans going into multiple fabs, in multiple locations really kicks into gear it’s starting to a little bit in Q4, but it really kicks into gear Q1 and Q2, and we would expect to benefit from that. Edwin Mok - Needham & Company: And then last question I have is on the maturity side, I think you mentioned on the call that you guys have a number of eval placed on OCD and at the foundries and is it working through that? Anyway you can kind of quantify that, and kind of give us at least roughly where you are at, how many evals you have placed and where they are at in terms of those qualification processes there?

So, I’m not going to give you that level of granularity, it’s a good question, but we have tools and we’ve been very, as I’ve mentioned earlier, we’ve been very, very candid about the fact that we have to do a much better job at getting into the foundry areas. And so, in addition to certain new applications that we’re placing tools on, we are aggressively looking at, have taken advantage of and are working closely with customers in the foundry area to penetrate those accounts, develop new applications, and get tool qualifications. And we have put a substantial commitment both in resources as well as hardware to achieve that so that in 2011 that the revenue contribution to our total business is more representative of spending in the industry. Edwin Mok - Needham & Company: Great, and then I’m sorry one more question on the overlay, so it sounds like you guys have some uptick in the quarter, which is great, things are tracking well there, and you mentioned those are mostly image-based overlay, how do you look at the overlay market going forward? Do you think that it will remain mostly image-based or do you think some diffraction-based overlay businesses start to come?

Yes, I think it’s just the same way we see in every other technology transition, that the leading edge, the new changes will be applied to the most critical layers, so when you look at the other form of overlay, which is called typically referred to as diffraction-based overlay, that will be applied to some very critical litho applications. But image-based overlay is still the workhorse, and if you’ve got 35 layers that you’re looking at, it’s probably still going to have 28 of them with that image-based overlay.

(Operator Instructions) We have a question from Jacob Strumwasser of AYM Capital. Your line is open.

Good. Thanks very much for providing us with another great quarter of operations and execution. I wanted to ask a couple of questions if I could, have you guys talk a little bit more about the LED market. You kind of touched upon it I think two analysts ago. Could you just kind of expand upon what you’re seeing there? We are hearing some kind of mixed comments from companies in that market, so.

Yes. So I think clearly the driving force of high-brightness LED and the demand side of it has been in the tools that deposit the layers, clearly the AIXTRON and Veecos of the world putting out their MOCVD tools. And our part of that business is still relatively small for two reasons. One is that the average selling prices of the tools used in that environment are low compared to our other flagship products, typically in a couple of hundred thousand dollars as opposed to a $1 million to $2 million. Second thing is our tools are actually highly productive and very fast and could support anywhere from three to five of those deposition tools. So in the early stages of the LED world, we basically are putting tools in every location. We have over 30 customers. We put tools, there is not a customer we don’t have a tool in place with, and we are tied to all the deposition tools. Where we will benefit is when those tools shift from 4 inches to 6 inches, when those tools go to higher productivity and higher throughputs. And as the processes become more mature and they go from 3 to 5 mask levels and process control starts playing a more critical role in yield, that’s when our benefit comes in. As of 2011 late, maybe 2012, as they absorb and transition from simple jelly bean type LEDs to the higher value-added components. And they’re the dog and we’re the tail being wagged.

That’s helpful. Just one more then and then another one separately, I guess some analysts have discussed how these LED tool makers are, it’s kind of like a one-time sale and that machine covers X amount of life, and basically it’s an argument that the machines kind of live for a long time, and therefore there is only a certain amount of capacity that needs to come online. I can’t be more clear in kind of articulating that, but are you seeing, I guess you would see that in the sense that orders will kind of slow down and things like that, are you seeing that at all? Or is it kind of a natural progression like you’ll go from the current productivity and then develop a new kind of better productive machine or tool which will then kind of come in and replace what’s currently being sold?

Yes. I don’t claim to be an expert on the process side of the LEDs, but I think that we can use the history of the semiconductor industry to kind of give us a sense of what would typically occur. And if you go back and I think what has happened over 20 or 30 years of semiconductor industry, it’s going to be tracked with in many ways, the way the LED did but on a more contracted basis. So initially, it’s all about just putting in tools and get, making devices. When the capital costs start to burden the fabs themselves, then they started looking at yield and they start looking at the performance elements that allow them to charge the prices that allow them to get a premium for better devices. That’s when process control starts to play an important role is when the devices become a little more complex, when yield plays a bigger role on return on investment and allows them to charge premium for that. And so that’s our side of the equation. I don’t really have a lot more insight into the process side. Let the process side analyst give you more detail on that.

That’s helpful. And I just wanted to touch upon cash. You’ve done a great job in making accretive acquisitions in the past. Do you think the cash on balance sheet now is going to be use for buybacks?

Well, last quarter, we actually did some buyback...

More than $4 million worth of buyback?

We do look at that and I guess the question we have to ask ourselves and we ask our Board is, is the cash better spent doing buybacks or is it better spent on acquisitions that expand our serve markets and give us access to markets that we either are not in or that are under serve? And my personal preference is to buy more companies. That being said, if I can’t find good value through the acquisitions and use the cash, I’m sure there is going to be some dialogue of whether or not we should be return it to the shareholders through buybacks.

So in the world of M&A for you right now, are you seeing the right price?

It’s a mixed bag out there. I think that between the equity and the cash we have in place, I think there are a number of a very attractive targets. Right price is more there’s always two elements of that equation, price and value, right? So price is sometimes are all over the map, especially on the private sector and venture capital backed firms that we have to work through. Value to the business, so is another side of it and that’s the side that we discuss and look hard at. I think there are some value-based opportunities that justify our engagement.

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

Thank you. In closing, we continue to be confident and enthusiastic about business and business opportunities for Nanometrics in the foreseeable future. I’m fortunate to be blessed with a terrific management team and a wonderful group of talented and committed employees, who worked tirelessly and with passion to grow a stronger and a more competitive company. I want to thank all of you for joining the call and we look forward to reporting to you on our fourth quarter and year-end results in early February.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.