Good afternoon, and welcome to Nanometrics second quarter 2011 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, July 28, 2011. At this time, I would like to turn the call over to Clair McAdams, Investor Relations/Council for Nanometrics. Please go ahead.

Thank you and good afternoon everyone. Welcome to the Nanometrics second quarter 2011 financial results conference call. On today’s call are Dr. Timothy Stutlz, President and Chief Executive Officer, and Ronald Kisling, 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 second quarter of 2011, the continued adoption and competitiveness of our products, the expansion of our 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 factors including a contraction in current levels of industry spending, shifts in the timing of customer orders and product shipments, slower than anticipated market adoption, changes in product mix, increased operating expenses and the additional risk factors and cautionary statements set forth in the company’s Form 10-K for fiscal 2010 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 statements. I will now turn the call over to Tim Stultz. Tim.

Thank you, Clair. Good afternoon, everyone, and thank you for joining us today. Joining me on the call is Ron Kisling, our Chief Financial Officer. In my remarks this afternoon, I will discuss the business and financial highlights for the second quarter of 2011 and our view of the near and longer-term business environment. Following that, Ron will provide a closer review of our financial performance, after which I will return with our guidance for the third quarter Today I am pleased to report another quarter of strong financial performance. With record revenues of $64.4 million, gross margins up 56%, and earnings up $0.47 per share. During this quarter, we experienced strength across all three of our business units, automated metrology, integrated metrology, and materials characterization, following another period in healthy investments by our customers, [inaudible] technology conversions, and capacity expansion. Our automated metrology business continued to benefit from the expanding adoption of optical critical dimension or OCD technology, both for advanced device development as well as deployment into high-volume manufacturing. We had growth and demand for our UniFire as more chip manufacturers invested in the emerging of advanced 3-dimensional packaging. Our integrated metrology business saw strength in CNP, and niche applications, primarily driven by semiconductor capacity suspensions. And our materials characterization business benefited from increased spending in bear silicon wafer and LED manufacturing. The real story behind Nanometrics, however, is not about the last quarter or again, the last series of quarters where we have consistently outperformed on the industry. Rather, it is about our business outlook and prospects for future growth, the strength of our business model and confidence that our execution and performance will continue to exceed that of the overall industry. The confidence we have in our business outlook can be readily understood by considering the…

Thank you Tim, and good afternoon. Nanometrics’ press release containing our second quarter results was sent out by business wire, July 28, at around 1 p.m. Pacific time. The press release may also be found on our website at Nanometrics.com. As Tim indicated, we achieved another quarter of record revenues and strong financial results. Revenues were $64.4 million, up 4% from the prior quarter and up 27% from the second quarter of last year, and we’re at the high end of our Q2 guidance of 62 to $65 million. Total product revenue of $54.2 million were nominally flat with the first quarter of 2011 and up 25% from the second quarter of last year. Service and upgrade revenues of $10.1 million increased 24% sequentially and were up 37% from the year ago quarter driven by higher upgrades and related services revenues. Service revenues comprised 16% of our total revenues up from 13% in Q1 2011. Sales of our automated metrology systems decreased slightly from Q1 and comprised 60% of total revenues. We saw increases in both our materials characterization and integrated tools business, which comprised 14% and 11% respectively on total revenues. Turning now to our end markets, revenues from logic, IDM foundry, and hard drive segment, decreased to 24% in the second quarter, from 34% in the first quarter. As a result, memory increased both in absolute dollars and as a percentage of total revenues to 59% of product revenues of which flash memory comprised 45% and DRAM 14%. The LED solar and silicon end-market segment also increased it’s share from 17 – to 17% from 15% due to increasing sales this quarter. Consistent with our historical reporting, we report revenue by geographic regions based upon the ship to or first in use destination, and breakout separately regions that…

Thank you, Ron. Summarizing this report, Nanometrics has delivered another quarter of solid financial performance and good operational execution. Customer confidence and trust in our products and services, has been rewarded with increased market penetration, gains in market share, and strong positions with leaders in our served markets. Recent news about shift and a pause in capital equipment spending by a few major semiconductors customers, has caused a near-term business horizon for capital equipment manufacturers. For Nanometrics however, though we are not immune, we are much less susceptible to those spending swings of many of our peers. Due to our position and growth markets, our limited exposure to foundry spending, which has seen the biggest drop off, and the benefits of continued investment and new technology patten by many of our customers. Accordingly, we entered this third quarter – when we entered our third quarter, our outlook was for a flat to slightly up quarter-on-quarter performance. Just three days ago however, we received notice from a key customer about a push out of a sizable portion of shipments scheduled for the third quarter. This short-term surprise notice, reflective of the high volatility of the current business environment, will result in a quarter-on-quarter decline of our automated OCD system business, somewhat offset by strength in other business units such as UniFire and material characterization. This shift in product mix will also put downward pressure on our gross margins. That being said, our quarter-on-quarter outlook and expected performance is still stronger than most in our industry for the reasons stated previously. And most importantly, we believe this is a short-term issue. The long-term multi-industry drivers and fundamentals are still firmly in place, that the needs for additional investments and technology conversions and capacity expansions still exist. The capital in density is increasing in response to the challenges of advanced technology notes. And thus, our business, business model and business outlook remains very positive for many quarters to come. So operationally, we will stay the course in building a new even better Nanometrics, focusing on expanding our business in growth markets, increasing our position with key customers, and developing next generation products and technologies, which will position for even further growth. With that as a backdrop, our guidance for Q3 is as follows. We see third quarter revenues coming in between 57 and $60 million, with gross margins up 52 to 53%. Expected decline in gross margin is primarily a result of product mix, and should rebound as the contribution to total revenues from our automated system grows in forthcoming quarters. Operating expenses are expected to increase slightly by 100 to $300,000, in support of on-going, multi-national payouts of our production platforms and continued strong customer demand going into 2012. And we expect our operating margin will be between 19% and 21%, our earnings per share will between $0.28 and $0.34, with a nominal tax rate of $0.35 – 35%. With that, we will now open the line for questions.

(Operator instructions). Our first question comes from Tom Diffele of DA Davidson. Your line is open. Tom Diffele – DA Davidson : Yeah, good afternoon. I hoping to get a little more color on the push out. Was that from a Memory or Logic customer? Is there any more information you can give us about it?

I will tell you that it was from a Memory customer, but we can’t give you any more specifics about the customer themselves. Tom Diffele – DA Davidson : Okay. Yeah, I was just kind of curious because, you know, it looks like, that your guidance for, you know, roughly 10% down in the third quarter is kind of in line with a lot of the other semicap guys. And you would think that they would see, you know, there’s Memory in addition to what they’re seeing from the foundries right now. But maybe it’s just a case where it just happens so quickly or so recently that’s not impacting them yet.

Yeah. I think that – I think this particular customer is making some of these surprise calls across the board during the last week, and I think a lot of us are all taking in the impact. Tom Diffele – DA Davidson : Okay. And is the customer just freezing the orders for the third quarter, or is it just a particular site, a portion of the orders that they’re pushing out?

No, it’s a large portion of a block of orders that were scheduled for shipment in Q3, and we believe that they’re going to be in Q4, but possibly some of them is slipping into Q1. Tom Diffele – DA Davidson : Okay. All right. And it sounds like it was almost all for OCD?

Yeah. It was all OCD automated systems, yes. Tom Diffele – DA Davidson : All right. So I guess stepping back, in general, are you seeing a difference in kind of order, booking trends between your integrated systems and your standalone systems?

Proportionally, we’ve seen a little more, you know, a little shift. We saw growth in integrated metrology, whereas the automated systems on OCD were down a little bit. We saw strength in the UniFire product and we saw strength and some improvements in materials characterizations. So the other business units are, you know, contributing nice to the total story here. Tom Diffele – DA Davidson : Okay. I just wasn’t sure if the integrated systems, because they may end up going to foundries favor a little weaker as far as the outlook goes as well.

No. Most of our integrated systems, themselves, also do not go to a foundry. Tom Diffele – DA Davidson : Okay. All right. And then I guess, you know, you look at the relative margins – oh, I guess, just stepping back, looking at the service composite, I was hoping you could us a little more color on the service and what drove strong margins in there previously and why the margins are going down a little bit?

Yeah. When you look at our service margins, a big piece of the driver and margins is up grades. And those tend to be pretty lumpy. And if you look back over the last couple of quarters, you see when we have a bump in service revenue, that’s almost always driven by upgrades and upgrades have a much higher margin. And some of the upgrades seem to be software only, and so we have really strong margins on those. So when you have a strong quarter of upgrades, you’ll get a pretty significant benefit in that particular quarter from – to margins related to upgrades. So one of the things that – if you want to look at sort of long term is, you really need to look at a trailing four quarter because the lumpiness of upgrades kind of gets isolated over that period of time. But they do tend to be lumpy and you know, events that occur on a regular basis, and that’s the driver to the margins. Tom Diffele – DA Davidson : Okay. So the outlook for the upgrades is not impacted by the push out then?

No, it’s not. Tom Diffele – DA Davidson : Separate issues altogether? Okay.

That’s correct. Tom Diffele – DA Davidson : Okay. Thank you.

You bet. Thanks, Tim.

Thank you. Our next question comes from the Gus Richard of Piper Jaffray. Your line is open.

Hello, Gus. Richard – Piper Jaffray : Just looking at the, you know, the sequential decline in gross margins, can you sort of, you know, disaggregate how much of that is a decline in upgrade business and how much of that is, you know, lower product margins?

You know, we don’t break out the specific breakdown, but I would say that there’s – the single biggest driver is the upgrade cycle in terms of upgrades being lower in Q3 than they were in Q2. We do have some sequential decline in product margins as Tim mentioned, and as we see in materials characteristic products, which typically are lower priced and have slightly lower gross margins making up a bigger percentage of the product mix, bring down product margins in Q3. But again, that’s sort of mixed driven, and the bulk of it, though is really tried to the fluctuation you see in upgrades in the service line. Gus Richard – Piper Jaffray : Okay, got it. And then – so product margins should hold fairly stable and it’s the materials characteristic and not the UniFire that putting the pressure on the product margins?

I think you will see some decline in products because we will see a bigger mix of the materials characterization products. I think if you were to look at it broadly, our automations tools have the highest margin, and so when you see that mix changing, you’re going to see product margins come down a little bit. And I think UniFire, we’re turning fairly low volumes from them, but it’s ramping, and we’re also seeing margins continue to increase on those. But we’re staring because of lower volumes at somewhat lower gross margins no those tools. Gus Richard – Piper Jaffray : Okay. And then just, sort of going back to the push outs, Tim, this is incremental to what people have been talking about over the last couple months in terms of delay of shipments?

Yeah. This is – I don’t know if I use the word incremental, Gus, it’s kind of a – it’s not one that’s been talked about actually. It was a surprise call from a customer that really hasn’t been discussed by most of the companies that we were listening to previously. Gus Richard – Piper Jaffray : Okay. Got it . Let me try the question this way. Clearly, at the OEM level, there’s some shifts in where some companies are sourcing. And it’s been a little bit confusing for your customers to determine if the shift in sourcing is going to be sticky enough and sort of causing some confusion in orders. Is this propagating from the guys that are losing share to the guys that might be gaining share?

I don’t – if I understand your question, I don’t think you’re on target, Gus. This is a memory customers, as I mentioned earlier. This is a, you know, one our key customers, and this is automated OCD platforms that were planned for the quarter, which have been moved out at least a quarter. Gus Richard – Piper Jaffray : Got it. Got it. All right. It makes complete sense. I just wanted to make sure. Thanks for taking the questions.

Sure, Gus.

Thank you. Our next question comes from Mahesh Sanganeria of RBC Capital. Your line is open. Mahesh Sanganeria – RBC Capital Markets: Thanks a lot, Tim. I would say congratulations on a pretty good guidance if I compare to the other guys, like Navaris is down 25% from the peak to the trough, and [inaudible] guidance is close to 37% down. So that’s pretty – your guidance is pretty strong, I would consider, for September. And so in fact, I have the question that besides Intel, what else is helping you maintain this high level of revenues?

Thanks, Mehesh. That’s a good observation. I think I’d like to just elaborate a little bit on that. You know, we do realize that we’re guiding 7 or 8% down in revenues Q2 and Q3. But that’s about 50% or less than what we’ve seen from some of the other companies that have a higher exposure to the bait of the market. And if we look at our annual performance and we look at the annual capital spending going up from flat – going from flat to 10 to 20% in the wafer fab equipment, you know, our business outlook and our business forms to date, there’s almost three times that. And it all ties into the theme that we’ve been trying to share, is that our – there’s strength in our business comes from the growth markets of OCD, the growth markets of wafer scale packaging, and the fact that we have been gaining some market share in some key areas. What’s supports our business is, in fact, the continued spending on the these technology conversions. You know, the technology conversions, I think are averaging two to three times more than on the capacity expansion as they drive down the nodes. And it’s putting a greater demand on metrology tools, and in particular the 3D arena for 3D transistors, 3D Nano devices and 3D packaging. And so we’re seeing a lot of pull and a lot of encouragement, and a lot of pressure on us to continue to evolve our technology road map to address them. Mahesh Sanganeria – RBC Capital Markets: So one more question on the push out, and you should have expected that everybody is going to ask that. And my question is, what is really driving that because what we thought – the foundries were quite [inaudible] to that. DRAM spending has been quite low and I just thought that there was not any room for push out there. And DRAM is the one that has been stable, but I didn’t hear anybody saying that there was an over capacity on demand. So what is confusing me is that what has changed that is driving this push out? And you can probably verify that. I would assume that there’s nothing in demands attached to the DRAM side.

Well, actually I would say it’s the other way around. It’s actually on the D-RAM side and it’s driven by the [inaudible] the weakness of the DRAM and spending of a particular customer was pulled back pretty dramatically in the last few days. Mahesh Sanganeria – RBC Capital Markets: Okay. Okay, that’s interesting. And in terms of your 10% customers do you say that there’s going to be a significant change in Q3 compared to Q2?

In terms of the mix, I would say. No, the mix should be similar, not necessarily in the same absolute numbers. Mahesh Sanganeria – RBC Capital Markets: Okay. Okay, that’s – that’s really helpful. Thank you, Tim.

Thank you. Our next question comes from Edwin Mock of Needham. Your line is open. Edwin Mock – Needham : Hi. Thanks for taking my question and I share the same view that you guys have actually done a pretty good job in this environment. So just one question, sorry to come back to the push out. I was just wondering, is that customer just shifting the capital spending to other parts of the fab network, or is it just something that they decide to delay in terms of expansion or investment?

Yeah. To the best of my knowledge, it’s not a shift at all, it’s simply a delay based on, you know, where are they going to put in capacity against, where’s the DRAM pricing, and the return for investment of a continued investment in capital for that market. We fully expected it to come back in in Q4 and maybe some of it slipping into Q1 Edwin Mock – Needham : I see. So it sounds like it’s more just timing. Are these – the way they’ve communicated to you so far is more a timing of third quarter versus the fourth quarter?

Yes. I should strongly point out that there’s been no cancelations, and you know, in this volital environment, I may come into the office tomorrow and find out they’re pulling the back in. It’s just – the behavior of some of the customers in this kind of environment. I mean, when you have a high concentration of customers, our business with a few key customers, then when they do a major ship like this, it’s hard to have it roll off your back. Even so, it’s only pulled us down between 7 and 8% against the quarter, which we still feel very good about. Edwin Mock – Needham : Yeah, definitely [inaudible] said something similar across the board. So I actually have a question on your UniFire product. You talk about one of them being qualified for 3D – basically a 3D packing application, I was wondering what kind of application is that? Is that Interposer, is that through a, you know, through the TSV, the Memory, the Logic? And also, any idea when you expect that customer has ramping production on that 3D technology?

Yeah. We do know that there’s actually some ramping activity taking place. We generally avoid going into the customer specifics. It’s in the packaging and primarily in the micro bumps and then some TST applications as well. Edwin Mock – Needham : I see. And that TST applications for a logic application or is it [inaudible]?

I can’t walk that close to the line or I’ll get my wrists slapped from my customer. Edwin Mock – Needham : I see. I understand that. That’s – okay. Thanks.

You bet.

(Operator Instructions). Our next question comes from Patrick Ho of Stifel Nicolaus. Your line is open. Patrick Ho – Stifel Nicolaus: Thanks a lot. And actually, nice work on the quarter as well, Tim. In terms of – I guess I’ll just avoid the push outs since I think it’s been beaten to death. But just looking longer term in terms of the adoption of OCD as the DRAM market goes, you know, it’s more of these vertical devise structure. Can you just give a little bit of color of how you see I guess the expansion of the market opportunity as DRAM goes from 4X and 3X and 2X? And you just give qualitatively like how many more tools, or what the market opportunity may be as we go down those technology nodes?

Thanks for the comment on the quarter. I know it’s not what we did yesterday, it’s what we’re going to do tomorrow. But it’s nice to hear the recognition of the performance on the quarter. Anyway, with regard to the OCD in the three-dimensional devices, there’s a fair amount of activity, actually, in 3D RAM right now. And we’re involved in technology development with our tools with some key customers. Most of this is occurring, you know, in the 1X and 2X nodes. I think that DRAM, you know, starts looking at this when it gets down below the 3X nodes, but our engagement on DRAM 3D devices is not as strong as it has been on both Logic and the MAM devices. Patrick Ho – Stifel Nicolaus: Okay, great. That’s really helpful. Now, obviously, like others have said, you know, you guys do not have as much foundry exposure as many of your other equipment peers. Having said that, at some point, they’re going to be also moving to, you know, 3D transistors or [inaudible] as well. I guess from your perspective in the works that you’re doing with the leading foundries, how do you see that adoption rate going? Do you see any of the issues that they face at both the 4X as well as the 28 nanometers in terms of transition [inaudible]. Did that delay any of their developments to get to 3D structures.

So the – as you point out, we don’t have a material position with the foundry, but I will tell you that our foundry position has improved and is growing, even though we don’t break it out yet. And it’s in tools – OCD as well at the UniFire and Integrated Metrology, in all three of these areas. In regards to your specific question, I think 3D structures are absolutely – will be – are currently being evaluated and will be embraced at foundry locations. And our tools are being used to both assess and to develop those capabilities, and we see that as kind of the door cracking open for us to make greater headway and benefit more from foundries in spending than we have in the past. Patrick Ho – Stifel Nicolaus: Great. And final question, maybe for Ron. I know that you stated that the buyback has been primarily to offset the dilution from the employees options. Is there a way that you guys can be more opportunistic, you know, given the current market environment, and especially if the group continues to decline, is there a way to be more opportunistic?

I think, as you stated, yeah, they are – the stated goal is to offset the dilution from options and other grant awards to employees. And we have about $5 million left under the board’s original $10 million authorization. So we still have a little bit of – a fair amount of authorization left. So we’re continuing to look at opportunities, would it makes sense to do a repurchase. So I think the short answer is, yeah, we’re continuing to look at all the factors and opportunities, would it make sense to repurchase that to meet that goal that we’re trying to achieve. Patrick Ho – Stifel Nicolaus: Great. Thank you, guys.

Thank you. Our next question comes from Tom Diffele of DA Davidson. You line is open. Tom Diffele – DA Davidson: Hi. Just a quick follow up on the push out. How quickly could you guys respond it did get pulled back in? Is that an intraquarter affair?

Oh, definitely. One of the things that we’re doing that Ron mentioned earlier is that we’ve actually increased our on-hand inventory. During the volital periods like this where the customers are leveraging and benefitting from short lead times, in order for us to respond to those business opportunities, we need to build some tools against forecast and outlook as opposed to simply by backlog. So we make sure that we can respond to those opportunities and take advantage of short-term changes in the tide, you know, when they occur. Tom Diffele – DA Davidson: Okay. So there’s not a lot of customization then for these platforms?

No, these are standard OCD platforms. Tom Diffele – DA Davidson: Okay. Great. Thank you.

You have no questions at this time. I’ll turn the call back over to Tim Stultz.

Thank you. And thank you, again, for joining our call. I take particular pride at this time to once again recognize and give credit to the employees of Nanometrics who have made it their personal mission to distinguish our company through above-average competitiveness, commitment and execution. And I thank you all for joining our call. We look forward to reporting to you on our third quarter results in October.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect.