Good afternoon, and welcome to the Nanometrics’ Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note that this conference call is being recorded today, February 07, 2016. At this time, I would like to turn the call over to your host, Claire McAdams. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to the Nanometrics’ fourth quarter and full year 2016 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 year 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, margins, operating expenses, profitability and earnings per share. Such statements may be identified by the use of words like believe, expect and similar expressions that look towards 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, shift 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 2015. 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 Tim Stultz. Tim?

Thank you, Claire. Good afternoon, everyone. Today in my prepared remarks I will briefly review some of the highlights of this past year, before sharing views on the current business environment and our outlook for the coming year. Jeff, will review the financial details of our recent results, and guidance for the first quarter of 2017, before turning over the call to Q&A. Our revenue growth in 2016 reflected a significant market share gains we have achieved over the past two years. On the secular tailwinds are increasing the demand for optical metrology platforms and solutions. Revenues of $241 million were up 18% from 2015, well outpacing overall industry spending. In 3D-NAND in particular, we continue to benefit from our leading market share and strong positions with every company ramping production of 3D NAND devices. These customers rely our tools to characterize, monitor and control the processes that enable them to develop next-generation devices, ramped a high volume manufacturing and drive incremental yield. In 2016, we achieved record 3D NAND sales, nearly doubling from the prior year record in 2015, which also help set a new record for total sales for the memory segment. Our market share gains in 3D NAND also contributed to all-time records in both thin-film and integrated metrology. And with the expanded presence of our automated and integrated products throughout the fab, in combination with our unique and proprietary NANO-diffract software and analytics capabilities, our customers are able to control process variation across multiple process steps using feed-forward and feed backward with advanced process control strategies. In 2016 our revenue profile continue to improve with a more balanced customer mix, and strong contributions to our business from NAND, DRAM and foundry logic. As a result, all six of the leading global semiconductor manufacturers are now significant…

Thank you. [Operator Instructions] Our first question is from Patrick Ho with Stifel Nicolaus. Your line is open.

Thank you very much. And Tim first off, congrats on the quarter and the strong 2016 results. As I look at your thin-film opportunity, you've talked about market share gains. Can you discuss first I mean, 2016, which mark you know, which application you saw last year and as you look for – as you look at 2017 as a whole, where do you expect additional gains to occur?

Hi, Patrick. And thanks for call, thanks for the comments on the quarter. You know, last year, our business is been heavily driven by 3D-NAND as you know, and continue to gain there - strengthen that market. The films business has grown pretty dramatically and although it started off at a slower number. And so we see a lot of opportunities to increase our position and the contribution from the films business itself. And you know, in terms of the rest of the products, we've got some opportunities in DRAM that we're pursuing and we have some additional share that we're going to go after in foundry. So we think that there is a lot of Greenfield area for us to continue to increase the contribution revenues in the lowest outperform the industry.

Great. And maybe as a follow-up question for either you or Jeff, the services business saw an uptick in the fourth quarter, which may be just seasonal aspect, but longer term as you've made the share gains over the last few years. How do you look at services both from a revenue opportunity and maybe more importantly from a margin and earnings contribution on a going forward basis?

Hey, Patrick, it's Jeff. Yes, I mean, we typically feel a little more of spares [ph] towards the end of the quarter. So that was some of the reasons why the margin was pretty strong. We're also seeing a higher level of utilization of the workforce, which is something that as you know, we dipped down a few quarters ago and we're going to grow back into. Long-term you know, we want to see this mid-40s and above. It's a pretty good driver. It should grow you know in excess of our installed base because I think we're still catching up a little bit, but it had a reasonably strong year. I think next year we think it will be a stronger level of growth than we saw actually this year.

Patrick, I'd also add that, we've got a lot of tools that we've been pulling out over the last couple of years that are coming off warranty. You know it's a captive market for us. We have a pretty significant focus on – maybe give you an incremental contribution from service and as Jeff said, we do have some seasonality, but Q4 was still an all time record for service and the margins are quite respectful and I think that we can continue to improve in that area.

Yes. And maybe as a follow up to that, I guess, what kind of wanted to get at is, you know, given all the share gains and growing core installed base. How are you keeping the customers on your service program versus them you know going out to potential third-party vendors, what's been the strategy there to keep them on your services business on a going forward basis?

That’s a good question. The first one is generally its difficult to find third-parties, these are pretty specialized piece of equipment and with uniquely trained folks at service. But we also put a fair amount of energy and that added to staff to look at our service products, we're trying to combine some value to our customers beyond PMs where our service - service performance prior the end, upgrade potential or even [ph] value for us to gain more service contracts, and more service revenues from our installed base.

Great. Thank you very much.

Thanks, Pat.

And your next question is from Tom Diffely of D.A. Davidson. Your line is open.

Yes, good afternoon. First, just history question, what was your previous record for shipments?

$64 million.

Okay.

I am sorry, did you – you asked difference to revenue?

Will, revenue was 64.4 right?

Right.

We don't announce shipment dollars – we don't announce shipment dollars. So…

Okay. Not even on historical basis? Not even on a historical basis? All right, let's get back to the business then. So 3D-NAND obviously extremely strong in the first half of year, I sound like you said that the strength continues into the second-half, are your comments basically that it just stays stronger or do they grows in the second-half?

Yes, we think it’s more of a 40-60 split between first half and second half. So it’s still a strong number in the first half, but we see an uptick in the second half for the NAND market product.

So why do you think you see a little bit different timing in some of other larger players, just for the NAND market?

I don't know what - where their timing comes from. We look at the way – if you look at the way our tools are purchased, typically the process control tools come in a little ahead of the process tool, so if you are comparing this you know, commentary from the process equipment commission [ph] you'd expect just to have a bit of a forward lead on that, as…

Yeah…

That’s what you compared us to and we've discussed some good positions in some fabs where they are adding capacity and they are expanding the – looking at some Greenfield areas, but it’s all on the upside for us.

Okay. And you mentioned China as well, is that domestic Chinese players or is that a larger international companies in China?

That’s a good question. We will be breaking out Chinese – when we speak to China, it will be the national companies. The multinationals are usually exhibited to the core companies.

Okay. All right. And then just talk about some – you demonstrated some really strong leverage in the model on a year-over-year basis, was there anything unusual, as far as you know, mix or costs in either one of those quarters that you referenced?

You're talking about in Q4?

Q4, yes.

Well, Q4, I mean, Q3 was a really strong upright quarter, so the upgrades were down a little bit and the margin was above the range we gave you, again, as Tim talked about our relentless drive for operational efficiencies, we saw some favorability in our warranty and that’s what kind of pushed us up and over that range. And then, as we talked about the mix will be less favorable in the first quarter, which is why it’s back in a similar range, as we guided going into the fourth quarter.

Okay. But the leverage is down either basis, it seems like a fair compel…

Yes, I think as we said, I think we're tracking well around model. We obviously raised the gross margin number. And so I think we're on track.

Okay. And finally, I had a little product question, it. I will probably question, the year was traced [ph] like you started with DRAM first, was there a reason to start with DRAM and has its steps gone to the other segment as well?

Yes, that’s a good question Tom. The reason we start with the 1X DRAM is because one single customer was our launch partner, they wanted it for that application. We work very closely with them to be able to speck out and bring the product to market. Once we got it through their account – through that account, cut the installation and sign off, then we were – we've got confident to deploy them to other accounts and for other applications.

Great. Thank you.

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

Hi. Thanks for taking my question. I have a couple actually. First, just wanted to come back to China, you said you did expect strength in the second half from China memory NAND -related and then you said that this is from domestic Chinese companies, more Greenfield fab. I am just trying to make sure I understood all those pieces, because it sound like what you are expecting is some of these new projects that have been announced to actually start equipping later in the year is that right?

That's correct. We do expect some equipment going into some of the recently announced fabs.

Okay. Good, very helpful. The other question I had was just on the model for 2017. You did raise your target model recently with higher OpEx, you talked about using R&D IRD develops and projects on the call today. But the gross margin does seem to be one of below the model, I know, you said it should improve on mix. But do you think there is a chance that at this $259 level in 2017, they might be running a little bit below your target model performance or do you think you'll be in line with the model from a operating profit perspective?

Yes, I think will be in line with the model. I think - I think you know how Tim I have run this and that we're pretty prudent. We wanted to raise - when we get confidence that were running much better in gross margin, we raised that data, so we can invest in R&D. So I think we are tracking. We have programs in place and we're continuing to drive the programs we had this year, as well as new efforts in the next year. So I think for the year it will be fine. As we've said, mixing kind of shift us 50 basis points or so, but I think we're going to track as well for the year, this time for the year.

So what if I add to that, what we - we put a lot of energy into our supply chain, in addition to our operational efficiencies, again, our supply chain line when we cut this new product that’s going out, pricing is much more aligned to value and I think that the combination between pricing, direct costs and indirect costs that were good real advisors of those margin target.

All right, very helpful. Thank you.

Thank you. [Operator Instructions] Our next question is from David Wu of Indaba Global Research. Your line is open.

Good afternoon. Just I want to clarify the – when I look at your SG&A in the fourth quarter they moved pretty sequentially. I was question whether this was due to variable compensation and you do a one-time adjustment at year end as opposed to doing it on a quarterly basis?

Now we had some variability in the quarters, but on the SG&A, but we did see a slight uptake in dot com [ph] but some of that is just the timing of when we have some of our corporate DNA type expenses. For example, the audit and things like that.

Oh, I see. As far as calendar '17 is concerned, I was curious about how much of the shipments - rough order meant to that when you're talking about that shifting from revenue recognition Q1 into Q2, are you talking about $10 million and above or below that?

So we don't – we're not going to give you that, this is Tim, David, thanks for calling in. We won't give that specific, but as I said it is record shipments for us and we are guiding that. We expect Q2 to be all-time record revenues and then we expect the second half of the - on par or even stronger than the first half. So things are lining up well and this is just getting new products to market. One of the primary difference is when you send a new product into a new fab for a new application we have to go through to the full customer acceptance before we do revenue recognition. Once we have an established position in a fab it’s going to the same fab, to the same application then its revenue on shipments. So the lead like on that could be anywhere from six weeks to couple of months.

Oh, I see. If I would look at - look at your second quarter revenue, whatever the number is, would that be the peak quarter for the year, because not only would it take care of Q2 demand, but also Q1 deferred revenues with the second, third and fourth quarter revenues recognition be higher than Q2?

So I'm not going to call out whether it will be the peak quarter, David. But I will do that if you take the current guidance for Q1 and you take our inferred guidance on Q2 and I combining as the first half and that we're expecting that the second half will be at least as strong as the first half, than that wouldn’t leave you with a peak quarter.

Okay. Last question I will try this one, there is a lot of talk about lower tax rate and I know you tax loss carryforward, but if the current administration implement a retroactive hope for tax reduction going back to January of this year. What kind of tax rate should we expect out of NANO?

David that’s a good question, I don't have an answer for. I mean, all we can do is tell you what we see today, with the logs we have today and what in place. What I would tell you is that, the bulk of our profits are generally US driven and so any reduction in the US tax rate would certainly be beneficial for us. But you know I - we still have a fair amount of our profits off shore, which in fact unless the rates change significantly. You wouldn’t necessarily bring that cash back to the US. But anything that our president is to do to lower tax rates will be beneficial to us, should he do it.

So, David, I would also add that, since we pay near the statutory rate, we as a smaller company will benefit probably disproportionate to some of the other companies in the industry who already have advanced tax strategies in place.

Oh, I see. The statutory tax payment US earning?

Yes.

Okay. Last one is there is lot of speculation about wedding plans in the future between you other company. What is your attitude towards M&A?

So our attitude remains unchanged. We believe that there is consolidation that does occur in the industry. We continuously look at ways to create incremental shareholder value, if something like that is appropriate for the company and shareholder value, we are open-minded about it. But right now we're re really focused on growing this company and creating value in a organic fashion.

Thank you.

Thank you. At this time, I see no other questions in queue. Let's turn the call back to Dr. Stultz for any for any closing remarks.

Well, thank you for joining our call today. 2016 was a very good year for Nanometrics and we expect 2017 to be even better. And say with deep gratitude that our accomplishments are directly tied to the terrific team of employees and business partners who make it happen each and every day. With that, we'll end our call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.