Aug 3, 2010
Executives
Gabi Seligsohn - President and CEO Dror David - CFO
Analysts
Edwin Mok - Needham & Company Arnab Chanda - Roth Capital Robert Katz - Senvest
Operator
I would like to welcome all of you to Nova Measuring Instruments' Second Quarter 2010 Results Conference Call and presentation, and thanks management for hosting this call. With us on the line today are Mr.
Gabi Seligsohn, President and Chief Executive Officer; Mr. Dror David, Chie Financial Officer.
I'd like to draw your attention to the presentation that accompanies today's call. The presentation can be accessed and downloaded from the link on Nova's website at www.nova.co.il.
Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it on the Investor Relations or our news section of the company's website at www.nova.co.il.
In addition, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results and evaluate the company's current performance.
Management believes that the presentation of non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.
Dror will begin the call with an overview of the first quarter financials followed by Gabi with a business update. We will then follow with the question-and-answer session.
For your information this conference would be recorded. I would now hand over to Mr.
Dror David, Nova's Chief Financial Officer.
Dror David
Thank you operator and welcome everybody to our quarterly conference call. The last first months have been very exciting for us.
Shifting gears in each important elements of our business, which has led us to present exceptionally strong and record level financial performance in all key metrics. Total revenues in the quarter were $19.4 million, up 22% quarter-over-quarter, and up 179% over the comparable quarter of last year.
In the second quarter of 2010, 70% of our product revenues came from the memory segment, up from 50% in the previous quarter and 30% came from the foundry segment. Looking at wafer fab equipment spending forecast for 2010 and 2011, the foundry and memory segments are taking the major portion of these investments and the distribution of our product revenues indicate our excellent position to enjoy this investment trend.
In parallel, service revenues increased 15% quarter-over-quarter to $3.6 million. Overall gross margins increased by 290 basis points quarter-over-quarter reaching 54% mainly as a result of higher revenues utilizing existing infrastructure.
Product gross margins increased by 121 basis points to 59% and services gross margins increased to 31%. Operating expenses increased by 6% to $5.8 million in the quarter.
This increase was mainly driven by our efforts to accelerate introduction of new products, some of which were already announced during Semicon in July. Given the extent of business opportunities we see in front of us, we plan to increase our operating expenses during the coming quarters up to a level of $6.5 million a quarter.
This increase is already baked into our updated profitability guidance for year 2010 and as you can see the expected business volumes will more than offset this increase. Most of these increases in operating expenses is expected to be in R&D expenditures forward introduction of new products.
The timing of reaching the full extent of this operating expense level could vary based on the rate of product development and introduction. However, we believe that once we reach this level of expenditures it should be sufficient to accommodate for our expected business needs in 2010 and 2011.
During the quarter we reported net income of $4.7 million. Operating margins reached a record level of 24% reflecting the high operational leverage built into our operations as well as the continuous increase in the value we offered to our customers.
GAAP EPS in the quarter was $0.18 per diluted share on share count of $26.4 million shares. Operating cash flow came in $6.3 million in the second quarter and approximately $1.8 million of this sum is attributed to collection of unrecognized revenues.
Moving into balance sheet key metrics, accounts receivable were $11 million similar to the previous quarter while we saw this decrease to 50 days relative to 64 days in the previous quarter. This still depend on the mixture of customer receivables and the timing of collections in the specific quarter and we expect it to range between 50 and 70 days looking forward.
As discussed in the previous conference call we moved to a direct sales model with additional customers during the first half of 2010. In some cases the smooth change to revenue or (inaudible) timing of systems from recognition of shipment to recognition upon customer acceptance.
The impact upon recognized revenues related to such cases is also evident in balance sheet items such as inventory and deferred revenues which increased during the quarter. Looking into inventory levels we saw an increase from $6 million in the previous quarter to $8 million in the second quarter of 2010.
This increase is comprised of two major elements. First, increasing inventory of systems related to deferred revenues, second, increase in inventory of systems which were placed at new and existing customer sites for the evaluation period.
This inventory increase is mainly from our new standalone product, the T500 which has gained and is gaining very strong market traction. Inventories related to regular operations of manufacturing and service increased only marginally in the second quarter despite the increase in business volumes as a result of successful efforts of our supply chain growth to continue with our lay manufacturing policy.
Given the continued demand to evaluate our new product which is a critical market share gain opportunity for us, we expect inventory levels to further increase yet at a much slower pace than in the last two quarters. Inventory turns came in at 5.1 times of the year, a high turnover relative to our peer group and we expect them to remain at these levels throughout the year.
Deferred revenues increased from $3.9 million to $5.7 million reflecting the collection of receivables related to unrecognized revenues. Capital expenditures and depreciation came in at $0.3 million, similar levels to the previous quarter.
In the coming few quarters we expect capital expenditures to increase following our plant enhancements for applications, demonstration and manufacturing facilities. During the quarter we increased head count by approximately 4% and our current head count is 260 employees worldwide.
I will conclude with cash reserves which increased to $47 million in the quarter. We believe this cash level is sufficient and is important for the support of our expected growth and also provide us with a little financial flexibility to execute on our business plans for the coming years.
Gabi?
Gabi Seligsohn
Thank you Dror and thanks everyone for joining today's call. Q2 was another excellent quarter with record levels of revenues, profitability and operating cash flow.
Given the fact that our business continues to be focused on the two largest segments of foundry and memory, we continue to receive large scale orders throughout the quarter. As indicated in the guidance provided in today's earnings press release, we expect this trend to continue at an even higher pace during the second half of the year.
The fact that Nova now plays a much more significant role for the semiconductor manufacturing arena is clearly driving the company to an exceptional growth rate. The vision that we have held for quite some time that optical CD will play an enabling role in technology transitions below 65 nanometers is becoming a reality.
Moreover, the number of manufacturing steps relying on optical CD as a means to control and meet tight process control tolerances is continuing to rise as well. It is our belief that our product strategy is well aligned with customers' needs and as a result we are getting such a significant vote of confidence.
More specifically, during fast technology transitions with large volumes being manufactured, our customers look for a variety of capabilities which we are able to offer. High reliability, high throughput and excellent cost of ownership and ability to deal with and measure significant process variability, full technical support at customer locations around the world.
To be ready for this kind of ramp-up, we spent the last two years in collaboration efforts with leading customers, we optimized our supply chain to facilitate short lead times and we trained our service and applications engineers thoroughly. As indicated by recent announcements, we have continued to increase our new customer acquisition rates in both the integrated and standalone metrology segments.
Getting the Nova T500 standalone tool installed at seven leading customer sites by the middle of the year significantly exceeded our expectations. We believe these penetrations laid solid foundation for further growth in the area of standalone metrology as we continue on our quest to become the number one player in the standalone optical city market in 2011.
In last quarter's earnings conference call, we spoke about an effort to revise our service business model. This effort is clearly paying off as demonstrated by the 15% increase in revenues and the improvement in service growth margins.
Given the transition of more customers to direct purchasing of our products, many of them are now coming to us for extended service delivery which in turn offers us the opportunity to further expand this important business sector. Becoming a multi-product company has meant that the number of customers now ordering both our integrated and standalone products to support a variety of needs is continuing to grow.
At the same time we have been focused on introducing new features and products. The recently announced productivity enhancement packages offered by our service organization for our existing customers have met significant customer interests and are being installed at multiple sites.
During July we also announced the new integrated metrology product called the i500 which is geared for the 20 nanometer technology node and will help us continue solidifying our leading position in this market. Another recent announcement was for the fourth generation of our metrology and application development software the MARS 4.0 which offers important technological advancements allowing measurements to be made in more complex three dimensional areas with a very short set of time.
Clearly, further solidifying our market position depends heavily on an aggressive product roadmap. We believe our market share gains over the last several quarters are a good indication of our ability to tune our product roadmaps to market demand and to that end you can expect us to keep rolling out new products.
Going after the number one position requires extending our R&D spending over the next couple of quarters. But as our guidance indicate we will maintain sufficient operating leverage to absorb this investment.
Now, let me turn to our outlook. 2010 is proving to be a remarkable year for the entire industry.
General consensus in January of this year was that wafer fab equipment would reach of 15% increase and end up at about $19 billion for the year. Today, most key OEMs are talking about an industry of 27 to 29 billion and an expectation for further growth into next year.
To remind everyone, our previous guidance was $61 million to $66 million with an operating profit of 13% to 17%. The three month since our last call brought a significant change to our business momentum and working assumptions.
You may recall the degree of uncertainty that was shared by many in April of this year as to the second half of 2010. Though we knew and reported an expectation of a record year, a lot of what we know today was not then present on our charts.
Specifically I would mention four factors, first, a significant and unexpected increase in the rate of 65 and 45 nanometer expansion at a key foundry customer, second a huge increase in orders from our largest memory customer, third, an extended deployment of our integrated metrology products at two memory customers facing challenges and the technology transfer process, and fourth, delivery of tools to a field the recently announced fab expansions. As a result, in today's press release, we were very pleased to significantly revise our annual guidance upwards.
We expect revenues to range between $78 million and $85 million and then our operating profit will range between 21% and 24% for those numbers. Looking further, we believe there are several factors that position us well to demonstrate further growth in 2011.
First, the number of new customer penetrations we have made this year, which we expect will turn into repeat orders. Second, our ability to integrate optical CD measurements throughout the fab, third, the large scale deployment of integrated metrology into more process steps requiring closer and tighter process control, fourth, our very competitive product offering, and finally, our cost structure and operating leverage.
On the foundry side, we see the rates for prominence continue to dominate and in line of the fact that all major foundries are our customers we feel confident in the role we will play. On the memory side, design shrinks continue to be a key factor and we are already engaged in measuring the 20 nanometer devices.
Many of the recent announcements speak of an even larger spent by leading memory manufactures next year, and again, almost all leading memory manufactures are Nova customers. From an organizational standpoint, we feel ready to support this significant growth.
The investment we made in our infrastructure and mid level management team around the world over the last several quarters is now paying off. Having fully localized and highly motivated teams of veterans in every location is what allows us to install dozens of tools uneventfully and continue this rapid growth further.
Speaking on behalf of the entire management team, I can say there is today a sense of great achievement within our ranks and strong motivation to continue on the path of further growth and profitability. And with that operator we would be happy to take questions.
Operator
Thank you. (Operator Instructions) Our first question will come from Edwin Mok from Needham & Company.
Please go ahead.
Edwin Mok - Needham & Company
Okay. So the first questions I have just quickly on the path of second quarter as well as for the full year, how do you kind of think about integrated versus standalone, was integrated more of the driver for the growth in the past quarter and for the full year how do we think about that mix?
Gabi Seligsohn
I think that indeed for the first couple of quarters revenue-wise integrated was the larger portion. And so, yes, for the first half of the year the integrated side of the business was larger on the revenue side.
Standalone still continues and will continue to play a key role and I think that in the second half we will see more standalone revenues coming in. I think the ratio will still stay in favor of integrated metrology this year without giving an exact split which we'll probably do at the end of the year.
But I will say that our expectation is that standalone next year will play a much more significant role in light of the penetrations that we have made and the expectation of repeat orders coming from that area.
Edwin Mok - Needham & Company
Great, that's was very helpful. And then, you announced that the new customer site that you are installing for stand-alone, I guess my question is how many of those are in evaluation and if you can give a rough timeline of how long do you think it will take for you to go for those evaluation, just kind of get a gage on that progress there?
Gabi Seligsohn
Sure, our expectation is that most of the evaluations that are ongoing will be completed over the next couple of quarters, and so that's just to give you a feel. Some of them will probably be completed in the third, some of them in the fourth.
So, that's kind of to give you a feeling there. As far as our recent announcement of customer acquisition, I think probably it's a ratio of around two-thirds, one-third in favor of actual tool purchases.
Edwin Mok - Needham & Company
I see, and just because and one thing that I want to figure out is, do you expect to kind of layer in every quarter, you have one or two customer that you have got (inaudible) do you expect all these project to go in the same time and that it might be two or three quarters from now that you have one big quarter where you have (inaudible) and then you start to ship on more revenue, how do you kind of think about that?
Gabi Seligsohn
Well, I mean our focus has clearly been penetrating as many key customers as possible. As we indicated in the press release just before Semicon seven customers we mentioned represent about 70% of overall wait for (inaudible) equivalency, you can just feel from that that we are talking about very big customers.
Overall, our expectation is that by the end of this year we will probably have about 12 standalone customers all of them are pretty significant customers. So, as far as more evaluations, I would say that the new evaluations going forward would probably be associated with penetrating more areas of the fabs that we have penetrated, there maybe one or two other customers that we are looking to penetrate beyond that list.
I think now the time has come in order to expand the footprint even further with this and what we see happening is sometimes the customer will bring wafers from other areas of the fabs to be evaluated on the tool that's there. Sometimes they will say, you know what we want to start a whole new evaluation for a new technology note but in most cases that will probably already be an existing customer.
At the stage that we are in now where we penetrated so many accounts really as I said the focus will be extending footprint more than anything.
Edwin Mok - Needham & Company
Great, thanks for clarifying, and then on the surface side very strong gross margin, how do you think about that going forward and is that part of or partially driven by (inaudible) have some project that you guys are doing and do we kind of think about that being onetime or is it ongoing, how do you kind of think about that?
Gabi Seligsohn
Sure I'm glad you bring up that question because indeed the area of service is something that we have been focusing on in the last year and reassessing our position in that area. So there is a few drivers and the fact that we are now selling mostly direct, has created direct relationships in locations where sometimes we were doing service contract through an OEM, so that's one side of it which isn't very helpful.
The other side of it indeed is the revenue mix and we are just in the beginning of shelling revenues coming from the upgrade packages. We expect that to grow significantly more in the future and provide us more leverage and as a result of it even an improved gross margin going forward.
So in this quarter we saw a 15% increase in revenues, most of the gross margin improvement was a result of that, some of there was also a result of these upgrades that we have been talking about. I expect going forward the portion of upgrades that will probably increase and that will allow the gross margins and service to further increase as well.
Edwin Mok - Needham & Company
Great, very helpful. And lastly, Dror, I just want to comment on the operating expense side you mentioned $6.5 million as kind of a near term target if you will and mostly driven by our R&D program.
But given all that you guys are doing wouldn't you expect to have more expense on kind of just supporting the eval as well, and I assuming that you have work for the bunch of those eval for some time, you guys have quite a number of them, we got to help you in kind of moderate operating expense, you know, if we look beyond and look into 2011?
Dror David
First, on the aspects of the R&D expenses and marketing. In general, the infrastructure to support the evaluations from the field side is already there.
So, we don't expect a significant increase there, mostly in the R&D for introducing new product. So, in general, I would expect that most of this increase would be concentrated in the R&D.
Edwin Mok - Needham & Company
I see, so it sounds like you already spent, you already invested in the cells and marketing (inaudible). Lastly, on the deferred revenue, you mentioned, let me see it went to $5.7 million in the last quarter.
How do we think about that going forward is that something, is it just a function of timing because your shipment increase so much or should we expect it to come down, how does it (inaudible) about that?
Dror David
I think that we should see it coming down a bit in the next two quarters.
Operator
We will take our next question from Arnab Chanda from Roth Capital. Please go ahead.
Arnab Chanda - Roth Capital
Gabi, if you could talk a little bit about, it seems like you are seeing a pretty significant increase in the random memory, could you talk a little bit about the drivers from there, is it more on the NAND side or the DRAM side, is it kind of multiple customers and what do you see the trajectory of that spending surge. Thank you.
Gabi Seligsohn
A lot of the spending in the last quarter has been DRAM related, I'd say most of it. But we are seeing a spending increase now on the NAND side as well, I believe that going forward and into next year, since a lot of the investment has been around DRAM from what we have seen so far, there will be an increase in NAND/investments, there is new projects that have been announced.
As you know people like Intel, Micron, Flash are moving forward with their project. Hynix is investing again as well Toshiba which we're now facing as well.
And so, I would say that the NAND side I think is going to start getting bigger but so far DRAM has been the larger part.
Arnab Chanda - Roth Capital
Okay, great. And then, if I could talk a little bit about ask question about foundry business, it seems like largest foundry reported a very strong utilization rate, it seems like you would expect to see a similar increase there.
Could you talk a little bit about what you're seeing in the foundry market and maybe if you can get a little more specific like TSMC or global foundries or other foundry suppliers?
Gabi Seligsohn
Sure, I'll do my best. So, in general, as I mentioned, when I spoke about the four elements that influence this very significant increase in guidance, the first factor I mentioned was actually associated with a big investment indeed the largest foundry and that was related mostly to investing more than expected in 65 and 45 nanometer and that's a direct result of the fact that the devices that our manufacturers today are mostly within that technology note, if you would look specifically at TSMC later in the investor presentation which is publicly available you will see them talking about the fact that they've increased their revenue coming from 45 and 65 significantly to about 45 or 47%.
So I'd say that as far as revenue generating output from the FAS right now, 45 and 65 are definitely very, very significant. As far as what's going on beyond that, what we have seen is definitely this war going on in a significant war between the foundries, UMC has come back quite significantly.
They are investing heavily and moving to the next technology nodes. We're seeing that.
We're also seeing activity again in China SMIC as well as Huali, the new foundry which is coming to life and we're there as well, and so that's happening also. I'd say that what's very interesting to watch right now is actually the 3X races, the 30 nanometer race and here I would mention three players, TSMC, global foundries and Samsung.
Samsung has announced the new fab in Austin, there is rumors and talks a lot about the fact that that will be focused a lot on Apple products and it's being done on US soil which is obviously great news for semiconductor manufacturing in the US, but I think that's where the big race is right now, who can yield as very good levels that 3X is what's going to determine I think the next (inaudible) global foundries in Samsung. And each of them are providing themselves with certain levels of credibility and readiness for that and I think that's where we're very, very deeply engaged in and I think that's what's going to drive growth further is this rate, but right now if I would look what the output is, most of the output from foundries is 65 and 45 nanometers and I think yield numbers are now much better than they were earlier on.
Arnab Chanda - Roth Capital
Well, the last question maybe for Dror. Could you talk a little bit of given your revenues include quite dramatically what are your target for operating margins and is that the timeframe for that maybe has bought forward a little bit, could you just kind of remind us about what your target are and what kind of timeframe.
Thank you.
Gabi Seligsohn
Well I'll take that question if I may Arnab. The way that we would look at this is maybe try to give a simulation, and take a revenue target let's say what the company looks like at $100 million and if you look at $100 million revenues, what you should expect is growth margins to be around 55% and net profitability to be around 25% and so and again that's just a simulate if you take that number let's say $100 million.
Operator
We will take our next question Robert Katz from Senvest. Please go ahead.
Robert Katz - Senvest
I have follow on question to something you commented on about increasing your footprint in the fabs. Can you elaborate on how you have been progressing so far and what is that going on a given line to click the line of 10,000 wafer starts?
Gabi Seligsohn
Yeah, I will try to and give some insight on to that. So, I think the initial steps of penetration into the standalone area, a lot of it was focused on the copper CMP area, which is an area which we very much focused on, we change the process control scheme in copper CMP and then the copper interconnect area altogether working against opaque film thickness measurements changing it to an optical CD measurements.
So that's been a very significant success for us both in standalone and integrated but a lot of the market share gains are standalone came from that area to begin with. The next step has been a penetration which is becoming more significant into the backend etch and front end etch area and also what we are started to see what is called ADI or After Develop Inspection in the litho step.
So I think that, you know, the next growth trajectory beyond further deployment of copper which I think is going to continue quite significantly and it actually is happening not just in logic or foundry but it's happening in memory is going to be the backend etch because what we see with process, you know, with the process challenges that happens at the 4X and 3X technology nodes, we see after CMP a lot of issues coming from etch and therefore more measurement is going to be required coming from the etch area. So I think the next growth opportunity is etch in lithography or what is called the pattering area of the fab, as well as also high end CVD process steps.
In the past we communicated our total addressable market on a pro-fab basis and we gave an example of 65 nanometer foundry with a 100,000 wafer starts per month looking, you know, at that and what our overall opportunity is for a fab like that and we said it's above $30 million. My belief is actually is going beyond that right now, and with the deployment and further steps I believe that specific example and nowadays we are talking more about 45 and below, is actually more in the direction of $40 million and above for 100,000 wafers on fab.
Now obviously the way these things work is that fabs actually ramp up in phases sometimes 20,000 wafer starts, sometimes 40,000 wafer starts and so the example I gave is for a fab that's already running at about a 100,000 wafer starts. Therefore, this would be over a certain amount of time.
Robert Katz - Senvest
Excellent. And you also made one other comment that you were facing more than the NAND-memory customers.
How significant is that penetrations today and where do you see that going?
Gabi Seligsohn
Well, we have always been very strong in the NAND-market apart from very admittedly that we did not have business with Toshiba. But everywhere else Nova is very well positioned in the NAND-flash, with integrated metrology and actually now starting to be stronger and stronger with standalone.
So I think we are very well positioned to enjoy that growth. What those customers as well as the DRF customers are very focused on is very high throughput, very, very good cost of ownership and wafer output as well as something that's very critical and where we are differentiated is very, very high reliability.
And so, customers continue to come to us. What we are really excited about is that as we announced the i500, the new integrated metrology tool, actually a couple of customers immediately has to receive these and both these customers are memory customers, which to us is a very good indication.
So, I think I see the NAND opportunity as a very good, very solid opportunity for us.
Operator
(Operator Instructions). We will take our next question from Edwin Mok from Needham & Company.
Please go ahead.
Edwin Mok - Needham & Company
Just quickly on the full year guidance of the margin guidance on 21 to 24%, it seems somewhat conservative given that you already reported 24.2%. If we are to kind of talk about a scenario where margins are declining a little bit on the second half to get to a full-year number, where do you think the incremental calls come, realizing that margin might be opposite to a gross margin on products, gross margin on service or is it operating expenses growing, how do you kind of think about that?
Dror David
Well, I think our assumption is that because in general the gross margin strongly depends on the mixture of products, our assumption was that in this guidance, that we keep the same margins as in the second quarter, and because of the expected increase in operating expenses we in general improve our net profitability but if you look at the year as an overall year with approximately 17% in the first quarter, so it should stabilize around 21 to 24% for the year, so.
Edwin Mok - Needham & Company
I see, great. Thanks for clarifying that.
And then just quickly for you Gabi, I know, on part of your prepared remarks you talk about one of your memory customer having issue with converting the line and therefore that increased adoption of metrology, is that customer specific issue, or do you start to see that in other memory customer, and can you clarify that with the RAM or NAND?
Gabi Seligsohn
So, actually here I want to explain this a little bit because I think it's an important point and it helps understand what role Nova plays and we also saw that in the foundry last year as well. When you have process or the ability which is larger than is allowed customers will go and deploy integrated metrology more extensively because they could measure every wafer that's being run and actually control the process on a wafer by wafer basis, and that's exactly what happened with this couple of memory customers.
Out of respect to them I won't say if it's NAND or DRAM, because it might now the field have to be very cautions here because these are critical customer issues. But, again, I will say that what surprised us was the extend of integrated metrology deployment, we were already there we were already receiving orders but there was a huge jump in orders again which reflects the fact that people want to control the process all the more tightly.
And I think, you know, for us as I look at our business and what's changed fundamentally and it's very interesting and this is maybe a conclusion of 2009 already. Whereas in the past I would say that in integrated metrology purchase is only related to capacity increases it's become the case now that it's also associated with technology transition, and it's become a key enabler for that as well which very pleases us because again it helps us mitigate to an extend the influence of the cycles when actually capacity decreases significantly.
So we used to take a much more significant hit on integrated metrology sales when capacity would go down and as last year showed when we were pretty much the only the company that held on to its revenues a lot of that was associated with the fact that we held with the technology transition and it allowed people to actually retrofit existing tools even during a downturn of the year. So integrated is actually playing a very important role in our life and I think that again we are happy to be a source of help in a situation like that and be able to react very quickly to such an increase in orders as we had experienced in the second quarter.
Edwin Mok - Needham & Company
And just clarify on how integrated metrologies that we are referring, is that still most in CMP area or you guys seeing some adoption in other areas as well.
Gabi Seligsohn
The order that we have seen have been mostly in CMP. As I mentioned in the last conference call and we are seeing a little of that continuing, there is activity now starting again in integrated metrology for etch.
I would say that mostly in the foundry space that the 3X technology node and below, it's still not a big portion of revenue, so still not something to factor in too much, but I think that for now revenues on that will remain lumpy for a while but I think that long-term that will also become a nice source of growth for integrated metrology.
Operator
(Operator Instructions) We will take our next question from (Jonathan Hops) from (IM). Please go ahead.
Unidentified Analyst
You guys are obviously doing something right. You explained all the drivers of your business, I wanted to get a sense, you are obviously growing much quicker than the industry is growing, I want to get sense from you, to the best of your ability, what do you think you guys can grow at over the next couples of years assuming the industry is flat, just based on all the drivers that you explained in this call?
Thanks.
Gabi Seligsohn
That's a very interesting question, our industry is having a long-term crystal ball is not something that is handy, and if you know where I could buy one of those I will immediately today for a lot of money. I'll tell you what I feel and it would be difficult for me to quantify that and I apologize for that.
What I do feel is that because of the rate of penetration and the number of customers that we are now engaged in, especially with the standalone metrology because with integrated we've really been there for quite a while and we have been by far the leader of that market for quite a while. Becoming the number one player in standalone optical CDs I think something that's going to drive more growth into the future.
Will that allow us to grow in a year when the industry is flat, it is possible, it depends on the extend of deployment. And therefore, it's tough for me to forecast the extent of it.
But, I would say that, yes, indeed our market share gain story frequently allows you to grow at paces that are faster than industry. And therefore, that is indeed a possibility.
The percentage rate of it or the extend of it, I apologize but it's very difficult for me to foresee right now.
Unidentified Analyst
Okay. And just a follow up on that.
How far out can you see right now, in terms of your business. I mean you gave some you upgraded your numbers quite significantly for Q3 and Q4, how do you see the beginning of the next year shaping up?
Gabi Seligsohn
Well, what we saw in the last several weeks and it was interesting we just came back from Semicon West and I attended some executive, an executive summit and listened to what the major OEMs are feeling and spoke to them personally and then added my feeling from having visited customers in the last few weeks. What we all saw was several announcements, people are talking about 14 or 15 new projects that have been announced which altogether add about 900,000 wafer starts per month for all markets that are covered by that plan, apply materials mentioned that as being a 45 or 50 billion wafer fab equipment opportunity for the next six quarters or so.
So I have heard all sorts of numbers being mentioned here and there. I will say that our visibility is indeed about six months, which is very good right now and when we look into next year what we do see is the fab announcements that have been made, we are made privy to the extent of ramp that these people are planning for next year and therefore from that we can calculate what our expected business should be and that is what helps us also mentioned in today's commentary that we think 2011 should be another good year.
But that when I say visibility into next year it's based on that, it is based on customer discussions that do give us some visibility into what their plan would be and how much of our equipment they would need for the wafer starts and technology nodes that they are planning but that's the way you should look at that.
Operator
(Operator Instructions). We will take next question from Robert Katz from Senvest.
Please go ahead.
Robert Katz - Senvest
In terms of an upgrade cycle, seeing that the adoption of optical CD is now becoming more prevalent how do you monetize when your customer moves from like 3X to 2X to a 1X note? Are there any dollars to be made in that type of move beyond just increasing the pervasiveness of metrology?
Gabi Seligsohn
I would say that as a whole indeed as process control continues to play a significant role and if you look at compound annual growth rate numbers of process control they have always been higher than the equipment sector because it's all the more difficult to achieve the process requirement as you move from one technology node to the next, how that translates itself into actual orders in our case, I just used that example about the two memory manufactures deploying more equipments and with previously expected. So these situations indeed do offer us an opportunity for more business.
The way we go about addressing that is to try to be there at early stages when the process development begins and try to get designed in and that's again what I mentioned in today's commentary, the fact that we are able to grow so significantly this year is the direct result of exactly that. This is the work that started many times six, 12 or 18 months earlier than when you see the volume orders happening.
So the way to do this is to collaborate with the process people, not just the metrology group, the process people are the ones that are driving everything and the metrology people need to provide a service. I think we have done a good job in addressing it from that direction is to understand the process characteristics early on and understand what is the value that we can provide for a certain step and make that understandable, available to the customer when he makes his capital decisions and capital plans.
So that's how we look at it, I would say that indeed from one technology node to the next we see more and...
Robert Katz - Senvest
Right, I guess my line of questioning is if you were, if you have a line that was fully penetrated, is there or would something that you know would there be more of a software sales upgrade, just an equipment in line to address the next node or do they have to buy new equipments or upgrade the equipments?
Gabi Seligsohn
It's a combination of all the above and I think that's what's help in both sides of our business, both systems and service grow right now because one thing that we have always done and we have never looked at the new technology node as something that we should not try to offer and upgrade for. Some people say let's go with the next tool once we move to the next technology node.
If we can extend the life of an existing tool we do that for the customers. And that's really helped us maintain long-term relationships with customers.
So many times, this will be an upgrade just like the productivity enhancement packages that we spoke about. Many times it will be a move to a brand new tool.
I will say also that another key driver has been the fact that we are displacing existing techniques. So things such as CD-SEM, things such as opaque film thickness measurement, things such as older thin film standalone tools.
So another growth trajectory comes from displacing other techniques and providing better cost of ownership on the new techniques that we bring in.
Robert Katz - Senvest
And on another front, how do you see yourselves in terms of taking market share, displacing any of your peers?
Gabi Seligsohn
Yes many of the evaluation included and those that have turned into real business and included head to head evaluations, some of them are offsite where the wafers are sent to our facility and to our competitor and then a decision is made and basically when we do the evaluation, it's a validation process. So you have already won the business but you are validating the fact that you are production worthy in that particular fab.
So those are many of the situations that we see and then and as far as market share gains are concerned as I stated our goal is to become the number one player in the stand alone optical CD market by 2011. To be able to do that we will have to exceed the 50% market and that's our goal.
Operator
As we have no further questions in the queue at this time, I would like to turn the call back over to the host for any additional or closing remarks.
Gabi Seligsohn
Thank you operator: Again, I want to thank everyone for joining today's conference call. We look forward to continuing and communicating next quarter and continue to deliver very good business result.
Thank you everyone, bye-bye.
Operator
That will conclude today's conference call. Thank you for participation ladies and gentlemen, have a good day.