Jul 30, 2013
Executives
Gabi Seligsohn - President and CEO Dror David - CFO Eitan Oppenhaim - Executive VP, Global Business Group
Analysts
Edwin Mok – Needham & Company Patrick Ho - Stifel, Nicolaus & Co., Inc. David Wu – Indaba Global Research Keith Maher - Singular Research
Operator
I would like to welcome all for you to Nova Measuring Instruments' 2013 Second Quarter Results Conference Call and Presentation and thank management for hosting this call. With us on the line today are Mr.
Gabi Seligsohn, President and Chief Executive Officer; Mr. Eitan Oppenheim, President and Chief Executive Officer-elect; Mr.
Dror David, Chief 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 a link on Nova's website at www.novameasuring.com. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statements outlined in today's earnings release also pertain to this call.
If you have not received a copy of the release please view it in the Investor Relations or News Section of the company's website at www.novameasuring.com I'll now hand over the call to Mr. Gabi Seligsohn, Nova's President and CEO.
Gabi, go ahead, please.
Gabi Seligsohn
Thank you, operator. Hello everyone and welcome to our second quarter of 2013 earnings conference call.
I will start today’s call with some personal remarks and then describe the second quarter’s business results. I will then turn it over to Dror for a closer look at the numbers and finally Eitan will review the current situation in the industry and provide an outlook for the third quarter.
Today will mark my final conference call as President and CEO of Nova. It is an exciting moment for me to sit here today and sign off after 15 years at a great company.
I take enormous pride in our many achievements over the last seven years while I was privileged to lead this company. During these years we went from being a single product non-profitable company to becoming a multi-product leading edge and highly profitable solution provider.
We went from having very limited exposure to one area of the fab to wide scale adoption of our products across multiple steps to semiconductor manufacturing. Today most of the industry leaders are our customers and rely on us to support their current and long term technology needs.
We have become a global company with close to 400 employees, expanding 10 offices around the world offering leading edge technology. We defined an ambitious vision and together we have been executing to that vision day-by-day.
It is my belief that I am handing over the leadership of the company at an excellent infliction point. The foundry sector is going through a broad-based ramp up which I believe will span through 2014.
Having become process [inaudible] of record at all leading foundries I believe no one now has the opportunity to expand its served addressable market with these customers. I believe we have the product, the infrastructure, the aggressive roadmap and the customer relationships needed in order to continue to outgrow the industry and become an even larger player in the process control market.
Eitan is inheriting a great management team and a great global team and I wish the whole team great success in the future. I would like to take this opportunity and thank our customers for their trust in Nova as their technology partner.
We are privileged to have them as our partners and I am sure that under Eitan’s leadership we will further deepen that partnership. Let me also add my personal appreciation for the support and the vote of confidence that you our shareholders have given us.
It is a vote which we do not take lightly and we feel privileged to be burdened by it. Finally I would like to add that I am confident that Nova’s greatest days are still ahead of us.
Now let me provide some more details on our achievements during the second quarter. The second quarter’s business activities were a combination of existing installed base upgrades and qualifications of our latest models for 20 nanometer pilot lines as well as shipments for 16 nanometer and 14 nanometer developments.
On the upgrade front we received a significant order of software to support the transition of an existing fleet of tools to optical CD measurements. We believe this transition will continue in cases where our customers would like to extend the use of production tools to technology nodes of below 20 nanometers whereby measurement complexity increases requiring more advance measurement schemes.
As mentioned in today’s press release several of our customers are busy preparing production lines for 20 nanometers and developing 16 nanometer and 14 nanometer processes. Accordingly, many of our activities during the second quarter included installation of our flagship standalone and integrated metrology tools the Nova T600 and the Nova i500.
Both have been selected as process tools of record in multiple customer sites for multiple process sets. On the service front we continuously see an increased level of revenues which in Q2 reached a record high of $5.7 million.
Service gross margin was also relatively high as the proportion of software upgrade revenues was higher than normal. On the product front we recently announced the introduction of the NovaMARS version 6.0, which represents a breakthrough in time for solution and ease of use.
Initial feedback from our customers to this new version is excellent and we fully expect to have a strong contribution to our competitive position. Finally during the second quarter we secured acceptance of another D2600 for a 3D interconnect.
Now let me turn it over to Dror for a closer look at the number, Dror?
Dror David
Thanks Gabi. Good afternoon to everyone and welcome to Nova's quarterly conference call.
Total revenues in the quarter were 28.1 million, at the upper end of the second quarter guidance, representing 3% increase quarter-over-quarter. Products revenues were stable quarter-over-quarter while service revenues increased to a record level of 5.7 million and included sales of software licenses for the existing installed base.
Product bookings distribution in the quarter was approximately 85% from the foundry section and approximately 15% from the memory segment. On a regional basis 55% of the bookings in the second quarter came from Asia Pacific, 36% from Europe and 9% from the U.S.
The product mix in the second quarter was different than the previous quarter resulting in product gross margin of 58%, 1% lower than the previous quarter on the same products revenue base. On the other hand service revenues increased to record levels and included software license and sales resulting in high services gross margins of 40%.
All these elements together accounted for a 1% improved in blended gross margins which came in at a very healthy level of 55% at the second quarter of 2013. It is important to note that quarterly blended gross margin tends to fluctuate based on a few factors.
These factors include and are related to the overall revenue levels the percentage of service revenues and their proportion of software sales and new products. As you know new products are shipping at a relatively low volumes which initially do not enable us to take full advantage of cost reduction measures.
Thus a larger proportion of new products in the mix mean a lower blended gross margin and this can vary from quarter to quarter. These fluctuations are an indication that our new products are being accepted by the customers which in turn lead to improvement in our market position.
In addition software sales tend to be lumpy as they depend on the way customers are using our systems and the pace at which they upgrade existing installed base to include high end software capabilities. Looking forward into the rest of 2013, we expect to continue to see fluctuations in gross margins based on the measures I mentioned.
Our model for the third quarter assumed blended gross margin of around 51% due to our expectations of a less favorable product mix in that quarter. Our reported operating expenses increased to 12 million in the second quarter but included impact of one-time items related to insurance proceeds on equipment damage and to employee retirement costs.
Ongoing operating expenses in the quarter were 12.2 million an increase of 0.5 million relative to previous quarter and all of this increase was in R&D expenses. As previously communicated this high level of R&D expenses is aimed to ensure on our roadmap according to the pace by which customers are implementing advanced technology nodes.
We believe the timing of these investments is important to maintaining our role as the key technology partner to customers. In 2013 our R&D plans include intake of prototypes related to the development of several new products and the exact delivery time of these prototypes can vary based on the project timeline and milestones.
As a result we are seeing fluctuations in R&D expenditures from quarter-to-quarter. Specifically in the third quarter of 2013 we expect R&D expenses to be lower than the second quarter and we expect total ongoing operating expenses to be between 11 million and 11.5 million.
Tax expenses in the second quarter of 2013 was 0.8 million and include mainly conversion of deferred tax assets created in 2012. GAAP net income in the quarter was 2.8 million or $0.10 per diluted share, based on a share count of 27.4 million shares.
Non-GAAP net income in the quarter was 3.8 million or $0.14 per diluted shares. These results were $0.03 better than the high-end of our guidance mainly due to favorable revenue mix which positively impacted gross profit and net income.
Operating cash flow in the quarter was 3.5 million. Moving into balance sheet key metrics, account receivables increased slightly to 19.7 million with DSOs at around 60 days.
During the third quarter of the year we are starting a penetration phase into next technology node et cetera existing customers. These customers are experiencing relatively high capital intensity and as a result we were requested by these customers to extend their regular payment terms.
Obviously, our strong cash position enabled us to support that and hence we agreed to do so in parallel to being selected as sole operator for their relevant technology nodes. As a result, we expect DSOs to increase in the third quarter of the year to a level of approximately 70 days.
Inventories decreased by 0.6 million during the quarter with inventory turns increasing to 3.1 times a year. Gross capital investments were 1.2 million in the quarter and depreciation came in at 0.9 million.
I will conclude with cash reserves which increased to approximately 98 million at the end of the second quarter and provide the company with the required stability to support the industry roadmap, the customer’s ramp up needs as well as to exploit business development opportunities. Eitan?
Eitan Oppenheim
Thank you, Dror. Let me add my welcome to everyone on the call.
My part would include some market overview related to Nova’s position, our Q3 business objectives and finally Q3 guidance. I will start with the market.
The 28 nanometer ramp up in foundries which we have been discussing in the last few quarters is currently taking place across broad base of foundry customers. The struggle between different foundries to supply the 28 nanometer market demand has accelerated the technical maturity of these customers in providing 28 nanometer wafer and has also triggered a faster transition to advanced technology nodes below 28 nanometer.
We expect to see additional orders for this ramp up in the second half of 2013. While ramping up the 28 nanometer line our largest customer also completed a thorough qualification process for its 20 nanometer technology nodes.
Systems were shipped for a pilot line that was established to accommodate the strong expected ramp up. We expect additional shipment of our standard on an integrated system for the pilot line in the next few months before the production ramp which is currently planned to begin at the end of the year or possibly Q1, 2014.
At the same time our main foundry customers are deeply engaged in the development phase of their FinFet gates for 16 and 14 nanometer. Their expectations for ramp in 2015 along with some customers demand accelerated development phase whereby we have started to see some initial tool shipments for R&D lines in those technology nodes.
Nova is well positioned with these customers with both standalone and integrated metrology tool for multiple critical process steps for the advance 3D gate structure. The combination of advanced 3D structure along with advanced partnering solution as well as actual shrinkage and unique material usage require additional process step that will present an increasing opportunity of around 15% to 20% growth in metrology demand when moving between tech nodes below 28 nanometer.
This number represents lot of potential, total available market growth in foundries when advancing between technology nodes below 28 nanometers. The foundry’s aggressive roadmap demands another development cycle, sorry a shorter development cycle from R&D to production for any advance node from 3 years to almost 2 years.
Additionally, during a period of 12 months the leading foundries are expected to ramp two major nodes while developing a third one. This aggressive roadmap also impact on our plans where we have accelerated our development and lead time as well in order to accommodate both the production and R&D lines.
As a result of accelerating our plans we are able to supply system to number of advance nodes at the same time. The acceleration of the roadmap plan as well as the transition to 3D FinFet structure require extensive efforts from our side as well to deliver an advance modeling software.
We will also enhance development of our hybrid metrology solutions to accommodate the increasing number of measured parameters in a number of process steps both in customers R&D and production environment. Additionally, ramp up of such magnitude require better control over the metrology fleets and we are starting to see demand for fleet management software for improved tool matching and [inaudible] management.
Overall, the foundry sectors continues to be positive in the long run with relatively high capital intensity. According to the latest development information most notable from PSMC we may see some order softness in the next few months until the start of the next ramp up cycle of 20 nanometer but overall the trend we see is positive and strong going forward.
Nova is well positioned in these segments and along with the industry projected growth in 2014 we expect continuous demand for our tool in the next quarter to come. We are well prepared with our product portfolio and design wind for the expected 20 nanometer and 1x ramp up once it happens.
On the memory front we have started to see some positive indication, both in the DRAM and flash segment. While it’s not yet translated to a sustainable investment cycle we do see some incremental flash memory expansion and transitions by the major players.
All of us are aware of the Samsung Xi'an well as Shibuya Kaichou expansion but we see some indications also from the others. These customers are still trying to accelerate the VNAND development and we may see some progress with that in the next month.
Though we believe it will be initial stages only while the full production is still two years ahead. With these expansions ahead in order to accelerate the VNAND development we do see major investments in the next several quarters in H tools and CVD tools to accommodate the unique development, requirement for this technology.
On the DRAM front we believe that the current mobile DRAM in the DDR [bright] scheme as well as some sign of supply insufficiency will trigger some capacity investment which will probably take place mainly in 2014. Both in foundry and memory the transition to 3D and infrastructure in advance tech nodes in 2x and below as well as the shrinkage in DRAM below 3x increased the process control and optical metrology intensity.
Nova is well positioned to enjoy these transitions and expansion. With this positive market atmosphere let me now provide some outlook about our major planned activity in the second half.
Although we expect orders from the industry leading foundry to continue to be soft in the coming quarter we are already experiencing some order pickup from the other foundries for the 28 nanometers ramp. These customers are under pressure to increase their 28 nanometer capacity and become an alternative supplier for this technology node.
And by that we continue seeing stand-alone and integrated metrology tools order for these customers in the second half of the year. In addition to the 28 nanometer continued ramp up.
In Q3, we will continue to deliver tools to the 20 nanometer pilot lines in order to be prepared for the extensive ramp up later this year or at the beginning of next year. During the qualification process that took place in last few months both our stand-alone and integrated metrology tools were certified for multiple process steps in the 20 nanometer tech node and we are well prepared to ship significant amount of tools once the ramp up starts.
Additionally, we will start shipping our high-end tools for 16 and 14 nanometer R&D lines for the FinFet development with major foundry customers. These tools will be shipped with our latest modeling software tool to allow extensive 3D development in R&D environments.
As mentioned before on the memory front we are seeing signs of possible pickup in demand. We expect some orders later this year from deals out by one of our major memory customer.
We also expect some orders from capacity addition with few other customers. Although these projects are not large in size we see this development as positive which can help to weight some foundry softness if will occur later this year.
During Q3 we would continue our effort to keep penetrating the growing 3D interconnect market where we are working on a gaining acceptance for our four tools. On our development front, we would continue our product portfolio diversification efforts with continued penetration of our software solutions both our hybrid metrology solution as well our integrated process control solution are in advance evaluation stages with major customers and we expect to finalize these evaluations by the end of the year.
We also expect to continue and see some additional upgrade and software retrofit opportunities as we saw in Q2 for our existing installed base. Finally, reflecting on our H1 revenue and the strong financial performance we have demonstrated for the last six months we are showing 10% year-over-year increase in our revenues in comparison with H1 2012.
With that in mind we believe we are well on our way to exceeding industry performance for a fifth consecutive year. With that I will move to the guidance.
Now let me turn to our guidance. For the third quarter of 2013 we expect revenues of $24 million to $27 million with GAAP diluted earnings per share of $0.03 to $0.08 or a non-GAAP basis which excludes adjustments of deferred income tax and stock based compensation expenses we expect diluted earnings per share of $0.06 to $0.12 for the third quarter of 2013.
And with that we will be pleased to take your questions.
Operator
Thank you, sir. (Operator Instruction) And our first question today which comes from Edwin Mok from Needham & Company.
Please go ahead sir.
Edwin Mok – Needham & Company
Hi, thanks for taking my question and Gabi, good luck with you next endeavor and thank you for your support all these years.
Gabi Seligsohn
Thank you very much Edwin and thank you for your support of the story over the years as well. I appreciate it.
Edwin Mok – Needham & Company
Thanks. So I guess my first question is on the guidance, right?
I am trying to understand if I listened to you correctly it sounds like there is a few projects one being a largest foundry customer that was maybe a memory project that you believe you guys have some position in and therefore beyond the third quarter business should remain pretty robust in the fourth quarter. Am I reading that correctly?
Eitan Oppenhaim
I don't think that we give any guidance beyond this closure and we are guiding right now Q3 only so the result we have right now and we guided for Q3. We don't have right now good visibility on the timing of the 20 nanometer ramp in foundry.
It may happen in Q4 or beginning of 2014 and also we don't have good visibility on the memory expansion level that will happen in Q4 so right now the guidance we are giving is for Q3 only for the $24 million to $27 million.
Edwin Mok – Needham & Company
So it’s fair to say that those projects is not 100% stepping stone that they would start in fourth quarter but if they do then all the way to 4Q this quarter, I think that….
Eitan Oppenhaim
Looking at environment going through 2014 we see a very strong market growth in the foundry and a very good pickup in the memory so the overall going in 2014 it’s a very good environment. The caution that we are taking for Q4 is due to the reason that we don't know the exactly the timing of the start of those two major projects either in the end of Q4 or beginning of Q1 2014.
Edwin Mok – Needham & Company
Can I ask you kind of more mechanical question? Is it possible that a customer will start some installations of those projects but because of where you guys are positioned in those customer relative to the installation that your equipment may not -- you just, customer just doesn't need your equipment until maybe later part that is build up.
Is it possible that kind of a scenario for you?
Eitan Oppenhaim
So let me start maybe with let’s talk about the 20 nanometer project. For example in TSMC then we will talk a little about the 16 and the 14.
When the TSMC during the project for 20 nanometer actually they started something like one year ago so we started shipping systems for R&D lines one year ago and we keep shipping systems in Q1 and also Q2 in increasing number of systems where we in the beginning we shipped for R&D lines later on we shipped for our pilot line and currently what we see with this customer which actually is increasing the ramp on the pilot line in order to be ready for the massive ramp. So we are going to see more and more tools for 28 nanometers even for pilot lines in Q3.
Edwin Mok – Needham & Company
I see, okay. Actually that's extremely helpful.
And then second question I guess other question I have is one of your pretty large customer was has forecast very low market share in the foundry area is not profitable that they want some position in both stand-alone and integrated metrology sounds like in more than one foundries. Are you seeing them making inroads into your foundry segment and do you see that as a competitive risk for you guys?
Eitan Oppenhaim
Well let me share with you our position in global foundry. Actually we are VKM, VQR and global foundry for multi process steps including edge from the beginning of the ramp both in new yard and in residents.
And we keep seeing orders coming in for 28 nanometers as well as 20 nanometers and 14 nanometers this date for those fabs in residents and new jobs. Your question was on global foundry correct?
Edwin Mok – Needham & Company
Well just in the foundry segment in general, right? So it sounds like that they have made penetration beyond that one customer, right?
Also you have lots of customers operate there.
Gabi Seligsohn
So we are looking right now, we are well positioned in TSMC and in global foundry and by the way NUMC and NSMIC and the other foundries in all the ramp of the 28 nanometer and we are actually positioned very well in global foundry and in TSMC well in all those processes in the last one year. So I won't refer specifically to my competitors but I can tell you that in order to be ready for a ramp that is going to take in Q4 you probably have to ship systems long time ago and we didn't see it.
Edwin Mok – Needham & Company
I see. Great, that’s helpful color there.
One question on the 3D interconnect product. I think you mentioned that you guys are working towards the fourth acceptance so I presume two got accepted and therefore you guys recognized revenue in the second quarter and in terms of beyond the fourth acceptance how do you kind of think about it position or penetration of that two?
Eitan Oppenhaim
So I will answer regarding the acceptances of the existing orders. So we practically started recognition of revenues from this product line in Q4 2012 and in each of the quarters Q1 and Q2 we had one or two systems probably one system in Q1 and one or two systems in Q2 and we expect to recognize the fourth tool in the third quarter of 2013.
Edwin Mok – Needham & Company
I see, okay.
Gabi Seligsohn
Now let me add on that one. Looking on the future projects you know of those tools we leverage a lot the four systems it will be accepted and during the next two quarters we have others customers part of them will start demo and evaluation and I hope that we will have much more news by the end of the year with few customers more.
Edwin Mok – Needham & Company
I see, great. One question I have on deferred revenue recognition.
I think we talked about some of these are new products and therefore you have some deferred revenue which result in kind of lower margin or exact lower bottom in the coming quarter, right? Is it phenomenon that you guys expect to continue to go on for the next few quarters because it seems like you know beyond just your quality product you have some software products and some you know and this 3D interconnect kind of a new customer so are we looking at this deferred revenue effect on gross margin drag out maybe for few more quarters before we start to see the benefit of these new product come in supporting gross margin?
Eitan Oppenhaim
Yeah that’s a good question. I think it’s very important to emphasize that the way to look at it is over a few quarters or year and as you can see the gross margin, the blend in gross margin in the first half of the year was quite robust, it was 54%.
Definitely on a quarterly basis we do see fluctuations in gross margin so we are look at our target model of between 52% and 55% for gross margins we definitely aim to be within this range on an average basis in specific orders were in that specific order we see higher portion of new products which is at the penetration phase and bear maybe higher cost because you cannot utilize volumes for cost reductions and also there are several costs related to the penetration phase. In these specific orders you would see reduction in gross margin in that quarter and as I mentioned before we do expect that to happen in the third quarter but then again gross margin would be around 51% which is very close to our model and looking forward we do expect on an average basis to be within the target model.
Edwin Mok – Needham & Company
I see, okay. Last question, I will go away.
On the software product since you guys have several products there I think you guys mentioned that some of them is already getting qualified for example your major customer. How do you think of all actual revenue impact of those products?
Is it going to be, should we expect to see some of those revenue benefit and probably margin benefit and those products start to come in and is it early 2014 or is it more longer term? Can you give us some color or timeframe or way of thinking?
Eitan Oppenhaim
So looking right now on our product portfolio and as we discussed in the last few months we are like very much to diversify the portfolio to have more software products and we are looking on the software product actually it has few directions, one is the modeling software it sells and the licenses that we can actually gain from retrofitting and installed base. This actually revenue we started to see in the last two quarters.
We had a press release about it and we are starting to sell more and more licenses on installed base. So this is one direction.
The second direction is what we call fleet management, what I referred in my notes regarding the large fleet. So if we will do the ramp of 20 nanometer that will require tens of systems we develop the tools the software tool that can actually manage all the fleet in one place through a software and his one has being shipped over and it's been evaluated and we expect it to be accepted by the end of the year so we might see revenue and in Q4 we might see revenue by Q1 it will be on the border there between Q4 and Q1 2014.
The third direction is the standalone software product that we're discussed long in the last few months, is one of them is the hybrid that already is installed and working in production in a very large customer and if we finalize the acceptance. So probably we’ll see revenue still this year.
And in this level also we have what we called integrated process control that we are right now doing evaluation with one of the OEMs in one of the biggest customers that we have. This one might take longer but definitely we are processing very and we will start to see some revenue at the beginning of next year.
Edwin Mok – Needham & Company
Great that’s a helpful color.
Gabi Seligsohn
Thanks Edwin.
Operator
Thank you. We’ll now move to our next question from Patrick Ho of Stifel, Nicolaus.
Please go ahead sir.
Patrick Ho - Stifel, Nicolaus & Co., Inc.
Thank you very much and I know it's been only a short period of time but first off Gabi I want to personally congratulate you on the work you’ve done at Nova and I think the accomplishments and where the company is today is a reflection of the great job you’ve done so congratulations again. And best wishes on whatever your next endeavor will be.
Gabi Seligsohn
Thanks a lot Patrick I truly appreciate that.
Patrick Ho - Stifel, Nicolaus & Co., Inc.
Eitan and good luck to you as well going forward and this question is for you in terms of the business outlook I think you gave a really good color in terms of how both the foundry and memory markets are shaping up for the second half of the year and in early 2014. I guess without getting so granular but can you give a little bit of color of how you think the mix between DRAM and NAND shapes up over the next couple of quarters.
Is there a bias towards one in terms of capacity buzz we've seen that more in the DRAM side or in terms of technology wise where you see NAND moving to 3D structures what’s the bias at this point?
Eitan Oppenhaim
Let me divided into two. I will talk a little bit about the DRAM and this, if you are looking right now the DRAM market there are signs of recovery in the market that are coming from various buyer settlement.
First of all the rollup of the DDR3 and 4 prices and the mobile DRAM the prices are held very nicely in the last few months. And actually with a very reasonable price of about $20 per chip which is that is back to a reasonable number to start thinking about the expansion.
Beside the mobile DRAM and the servers are accounting right now for more than 50% to 60% of the overall DRAM capacity which shows some transition to the mobile DRAM. And also we see some topline inefficiency that probably would create some kind of demand for expansion.
We have only three main players in this DRAM arena and we know that one of them is Samsung is actually both on 300 million chip from Hynix on existing capacity from Hynix. Such of magnitude that they account something like 15% of Hynix capacity this one together with this insufficiency of supply will create some kind of demand in DRAM.
And we're sure that we have seen 2014 expansion in DRAM fab, some of them in China and probably in Taiwan and of course in Japan so this is as I see DRAM and I think that it has a flavor of expansion. If I’m looking right now on the flash NAND and VNAND.
I think that it will start right now with the VNAND I think that the memory customers actually has four types of VNAND each one of them has its own complexity when going down for 1X, 1Y, 1Z some of them are easier to do some of them are more complicated to do. But we see some progress that actually move across the technical barriers at least on 24 layers.
And therefore I think we’ll see in the beginning 2014 some expansion in NAND that later on will be converted to VNAND at least in the basic level. Whatever I said in my comments I think that it will be only on a very low level, manufacturing will not start before 2015.
Patrick Ho - Stifel, Nicolaus & Co.
Right, that’s very helpful. Maybe second related question to the 3D NAND side of things.
What do you see your total available market opportunity growing between planer and the shift to 3D NAND? What’s the, I guess the growth opportunity there for you guys specifically?
Eitan Oppenhaim
So moving right now for 3D structure actually both the FinFet and the VNAND creating increasing process steps in all the steps by the way. It is a bit more intense in the foundry but it is also intense in the memory.
As a result I think that we do see some increase in demand for edge tools and CBD tools. What it creates to Nova once you increase the process steps and you increase the process steps in region where we are very strong in our stand-alone which is edge both backend and front end present a very large opportunity for us.
Now I said in my commentary that the intensity once you move from techno to techno below 28 represents something like 16% to 20% increase in total available market. I can assume that this is a number in memory as well.
Patrick Ho - Stifel, Nicolaus & Co.
Right, thanks again guys.
Eitan Oppenhaim
Thanks, Patrick.
Operator
(Operator Instructions) We’ll now move to our next question from David Wu from Indaba Research. Please go ahead.
David Wu – Indaba Global Research
Yes I have a question about, is there a uncertainty about how much production would TSFC ramping on a 20 nanometer planer versus the 20 FinFet and has that resulted in shop orders until they sold out how much they really want those two nodes for the second half of this year?
Eitan Oppenhaim
Right. Let me see if I understand the question right.
As we see right now the big foundry or the little foundry what we are doing right now is completing the ramp in 28 nanometer which is a regular planer. Moving to 20 nanometer, probably we will be regular planer the same as 28 but shrinking the device.
According to the capacity that they are going to ramp you know by the announcement that they have it’s going to be a regular mega slot like the 28 but we need to remember that later on in 2015 we will start to see the 16 nanometer or the 14 nanometer it will be partially the FinFet structure and the main question yet to be seen if the 20 nanometers will ramp fully or it will be ramp only in 2014 and then they will move strictly to 14 and 16 and will ramp more aggressively in those techno. I hope it answered your question.
David Wu – Indaba Global Research
Yeah for booking purposes really it sounds like it should not affect your bookings really from them for calendar ’14.
Eitan Oppenhaim
Let me answer that one. Actually it’s on the contrary.
There are few reasons. First of all only by reduction in size moving from 28 to 20, 20 to 16 we are present along 10% to 15% increasing metrology intensity between the techno.
So moving from 28 to 20 there are more process steps which will increase the demand for optical metrology and the software available market should increase only by the shrinkage by 10% to 15% available markets. Secondly, when those customers will start to do a FinFet structure, never mind if it’s frontend, backend, a mix or a full FinFet it’s going to be a demand for extra metrology because in order to create those structures you need more steps and you need more to basically standalone tools between the process steps.
So you have the 10 to 15% increase and on top of it once they will move to FinFet you may see more increase to the metrology intensity.
David Wu – Indaba Global Research
Okay. So it should help your orders whilst calendar ‘14 should be very good year for those kind of business.
Eitan Oppenhaim
Either technology will go in this direction and according to the expectation this next year semiconductor will increase between 10% to 20% is going to significantly improve our opportunities.
David Wu – Indaba Global Research
Yeah thank you very much.
Operator
Thank you. We’ll now move to our next question from Keith Maher from Singular Research.
Please go ahead.
Keith Maher - Singular Research
Hi guys good evening gentlemen, hi there. First question just trying to understand just the gross margin on the services line was helped by software sales and I just wonder have you guys clarify what software sales would run through the product line and which would run to the services line?
Gabi Seligsohn
Yes so normally what happens is that when we sell software on existing installed base this one goes to the service revenues and this is the situation in the second quarter and probably in the third quarter as well. And this relates also to the press release that Eitan mentioned before.
In cases were the customer is buying a new system which includes high-end software capabilities in such cases the software revenues are connected to the system and will appear in the product revenues.
Keith Maher - Singular Research
Okay got it. Next moving on to what you said earlier in I guess this is what you are always saying about the potential increase in DSOs and I just want you to expand upon is that your offering is better terms your customers and what was the motivation for that?
Gabi Seligsohn
Yes as I mentioned what happens in the second half is that three of our customers are moving into next technology notes either in 28 or 20 nanometer or even 60 nanometer and as you know the capital intensity in these technology nodes is significantly increasing and the first phase of the pilot line and till the customer see are the actual cash flow in revenues they do have some cash flow requirements and they have approached us that during this period we will give them some extended payment terms and we have agreed to that obviously our cash position is strong so we were able to accommodate for that. So we do expect that during the next six months because of these are the phases in which are customers are ramping these technology nodes we will see increase in DSOs in that period.
Keith Maher - Singular Research
And would that be so after the next couple of quarters with price see that go down and –
Gabi Seligsohn
Yes, yes we do expect that going into 2014 the DSOs will go down back again.
Keith Maher - Singular Research
Okay thanks. And I guess my final question you touched, it's been touched upon a bit here on the call just the overall total adjustable market in particular I’m taking now just on the foundry side.
I was little confused because of couple of different numbers we've drawn out. But how much I appreciate if you go through it again how much larger the opportunity is going to be in the foundries segment 20 nanometers versus 28 nanometers.
Gabi Seligsohn
So as we're discussed in the comments so far the number is either on 10 to 15% more okay just by the shrinkage. Where we're looking right now on the foundry behavior if we're looking right now on 28 nanometer probably the total available market for us is around 80 to $100 million.
Once you’re moving to 20 nanometer technology nodes it's immediately moving to around 180 to $200 million total available market. This is how basically we calculate the total available market in moving between technology nodes specifically between 28 to 20.
Keith Maher - Singular Research
Okay I’ll just look at these, because I mean in your slides you say or I guess the 28 nanometers you have it at 150 to 200, okay, alright, thanks.
Operator
Thank you. And we now have a follow-up question from Edwin Mok from Needham & Company.
Please go ahead, sir.
Edwin Mok – Needham & Company
Hi, just a quick follow-up on the operating expense. Dror, I think your guidance is just that your OpEx will come down in the coming quarter.
Can you minus how we should think about OpEx maybe not for this quarter but over a longer period of time?
Dror David
Yes so you know in the beginning of the year we did mention that we are seeing increase in operating expenses mainly in the R&D area year-over-year. So we did explain that we expect operating expense in general to be at a 12 million level on a quarterly basis.
As I mentioned in my prepared remarks we expect a reduction in Q3 because of some timing of prototypes we see for the R&D project. So generally for operating expenses you should expect the level of a normalized level between 11.5 and 12, looking forward in the third quarter it will be lower and it’s very important to note also that you know these investments are for the short term, midterm and long term projects that we have in R&D.
It’s very important for us that in parallel to these investments we are able to maintain very good gross margins and also SG&A within our model in a way that you know once revenues will pick up we will see the benefit of that going into the bottom line.
Edwin Mok – Needham & Company
Great. Thanks for clarifying that.
Thank you.
Gabi Seligsohn
Okay, I just want to clarify the question that was asked before regarding the total available market in the foundry, just want to make sure that it was cleared enough. When we are talking about 28 nanometer foundry swap of the 100 k wafer starts, we are talking about the opportunities thereon $150 million to $200 million in a 28 nanometer fab.
We are moving to 20, it’s actually jumping to 200 to 250.
Operator
Thank you, sir. (Operator Instructions) And it appears we don't have any further questions at this time.
Gabi Seligsohn
Well thank you operator. I want to thank you all for joining the call today.
Thank you.
Operator
Thank you. That will conclude today’s conference call.
Thanks for your participation, ladies and gentlemen. You may now disconnect.