Nov 2, 2010
Executives
Kenny Green – CCG of Investor Relations Gabi Seligsohn – President and CEO Dror David - CFO
Analysts
Edwin Mok – Needham & Company Arnab Chanda – Roth Capital Partners Robert Katz – Senvest International Greg Weaver - Invicta Capital George Borayma - Private Investor
Operator
Good day, ladies and gentlemen, welcome to the Nova Measuring Instruments Third Quarter Results Conference Call. For your information, today’s conference is being recorded.
At this time I would like to turn the conference over to your host today, Mr. Kenny Green, CCG of Investor Relations.
Please go ahead, Sir.
Kenny Green
Thank you, operator and good day to everybody. I’d like to welcome all of you to Nova Measuring Instruments third quarter 2010 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 and 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 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 press release, please view it in the Investor Relations, on news section on 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.
Gabi will begin the call with a business update followed by Dror with an overview of the third quarter financials. We will then follow with the question-and-answer session.
I would now like to hand the call over to Mr. Gabi Seligsohn , Nova’s President and CEO.
Gabi, go ahead please.
Gabi Seligsohn
Thank you, Kenny and thank you everyone for joining today’s call. Q3 was another excellent quarter with record performance achieved in all aspects of our business.
Bookings during the quarter were at record high levels providing us a solid revenue foundation for the fourth quarter and well into the first quarter of 2011. As previously mentioned, the extended use of our products by leading manufacturers has deepened our partnerships with them and we are now part of a larger capital expenditure plan.
This state of affairs provides us with better visibility, enables operational flexibility and allows us to meet challenging lead-time requirements. During the third quarter, we continued to execute on our strategy of expanding our customer base with a standalone, metrology product line, adding two new Foundry customers and one new Memory customer.
This trend has continued throughout the year and provides an excellent platform for our future growth next year, which I will discuss later in today's call. On the Integrated Metrology front, we continue to enjoy leading market share and record level, business volumes with many fabs ordering and installing dozens of tools per fab.
Given the significant challenges experienced by our customers as they move to new technology nodes, the extent to which Integrated Metrology is being deployed is higher than it has ever been. The reason for this is that our Integrated Metrology tools allow customers to control their process much more tightly when combining our tools with process control software.
Customers have come to rely so heavily on Integrated Metrology that process tools equipped with onboard metrology will no longer run without them. With three-quarters of the year gone, it is clear that Nova's business has scaled to a different level.
Our strategy continues to focus on high value products, which are able to generate favorable margins and enable us to continue and present profitable growth. Today towards the end of 2010 we are a much stronger company.
Our business has significantly scaled upwards. Our addressable markets have expanded and allowed us to occupy a much wider portion of the wafer fabrication process.
Our market share is expanding rapidly and the technology we use is so disruptive that in many cases it is altering the way process control is dealt with. We have a very strong balance sheet, which provides us with the financial flexibility to further scale our business, and most importantly we have built a seasoned global management team, which gives me great confidence in our ability to carry the company towards further growth.
In addition to paying attention to excellent execution quarter after quarter, we understand it's vital to also plan long-term. The challenges to identify opportunities to reinvest profits in high return projects that will fuel continued profitable growth.
Our recent performance and positive outlook is due in large part to our determination to maintain our R&D commitment at a relatively high level during the down cycle. As challenges evolve continuously as the market matures, new initiatives are required in order to be able to capitalize on opportunities.
In the past year we have spent time and effort assessing opportunities as part of an overall strategy to grow the company to a much larger scale. Our approach to the issue has been simple.
First, in depth discussions with our strategic customers to qualify their current and future challenges. This is where the breadth and depth of our customer base is so important.
Secondly, narrowing the focus to areas that pose significant process control challenges and require advanced technological solutions. In other words, identify areas that exploit our strength.
Thirdly, to further sharpen our focus on differentiated products which support the customer’s needs as well as providing adequate returns to support our financial model. And finally, qualifying and introducing the capabilities for a joint development program with the customers themselves to insure solutions meet their needs and to secure their commitment.
We have done a lot of homework and I am pleased to say that there is no shortage of high potential projects, which merit a commitment of resources beyond our current R&D run rate. We have selected those we think will generate the highest return and will be devoting resources in the coming quarters.
As we said at the time of the secondary offering, we are confident that we have sufficient operating leverage being generated by previous strategic initiatives to remain highly profitable despite the need to moderately increase expenses. Dror will provide more insight into the related increased expenditures in his prepared remarks for today's call.
Meanwhile, we prefer not to give specific details at this point for several reasons including competitive considerations and our duty to keep customers plans confidential. We do want to emphasize that this moderate increase in our spending relates to new capabilities that customers will want to employ in the 2012 to 2013 time frame, not to work that is required to sustain our near term position.
Our excellent results, balance sheet and strong cash position that enables us to invest and grow profitably demonstrates that success does indeed breed more success. Now let me turn to the overall market trends as they affect us.
The last few months have demonstrated the importance of the mobile revolution. The Tablet PC market has exploded and reached numbers that far exceed anyone’s previous expectations.
Tablets are now the fastest growing electronic systems of all time and are apparently taking market share away from Notebooks and Net books. Also growing at an impressive pace are Smartphone’s, which today represent 33% of all IC's manufacturers and are expected to represent 64% by 2014 according to Gardner.
The need for low power technology to support this trend is evident and has made flash memory into a key component as well. With this consumer revolution comes a much larger need for bandwidth created by cellular networks.
Today, developed and developing countries lack infrastructure to support user volumes and the expectation is that high-end computing needs will grow as a result. At Nova we have been extremely fortunate to play an active role in all these markets.
For example, we have recently calculated that 80% to 90% of all chips contained in the iPhone come from wafers that our tools measured. This is no coincidence since we are so widely spread within the fab supply chain, which manufactures components for the iPhone.
The most significant beneficiaries of this mobile revolution are our key customers, namely Foundry and Flash Memory Manufacturers. According to Gardner, Tablet PC unit sales will reach close to 20 million this year, are expected to double in 2011 and reach close to 100 million by 2013.
Playing a critical role in these manufacturing processes solidifies our ability to grow with this market. Our belief is that capital intensity will have to continue to grow as part of design rules shrink and that the need for process control will grow even faster in light of process complexity.
Listening to TS&C's call last Thursday, I couldn't help hearing the statement confirming this expectation when Morris Chang, Chairman and CEO said that future generations will be increasingly more capital intensive. 28-nanometer capacity is already twice as expensive as 65-nanometer capacity.
28 is two times more expensive than 65 and this is a quote from his words. Now let me turn to our outlook.
In today's press release, we stated our fourth quarter and full year guidance. For the fourth quarter of 2010 we expect revenues of 24.5 to 26 million with net profitability of 26% to 29%.
In terms of the company’s existing 2010 annual guidance of revenues of 78 to 85 million and net profitability of 21% to 24%, we expect to reach or slightly exceed the top end of this guidance. Having doubled our standalone customer base during the course of the year we believe we have laid solid ground for further growth into the future.
We believe the stage is set for a good start for next year given the solid bookings received during the third quarter and in light of the fact that most of the penetrations with standalone will be recognized early next year. We believe the adoption rate of optical metrology will continue to grow at a pace that will outgrow the overall equipment market.
With several new fabs announced for next year in both the memory and foundry segments we already know the significant role optical metrology plays in these plans, which in turn provides us with a significant growth opportunity. And with that operator, let me now turn it over to Dror for a closer view on the numbers.
Dror?
Dror David
Thank you, Gabi and welcome everybody to our quarterly conference call. The last few months have been very exciting for us, shifting gears in each important element of our business, which has led us to present record financial performance in all key metrics.
Total revenues in the quarter were 24.2 million, up 25% quarter over quarter and up 112% over the comparable quarter of last year. Product revenues in the quarter increased by 28% over the second quarter of 2010.
Shipment distribution between customer segments was similar to the previous quarter. 75% for the memory segment and 25% for the foundry segment.
In parallel the service revenues increased 99% to 3.9 million. During previous discussions on our P&L models we mentioned that we are targeting (inaudible) gross margin of 55% based on product gross margin of 60% and service growth margin of 35%.
We are pleased to report that we have hit this target in the current quarter. During the quarter (inaudible) gross margins increased by 203 basis points quarter over quarter reaching 56%.
Product gross margin increased by 104 basis points to 60% mainly as a result of higher revenues utilizing existing infrastructure. Service growth margin increased from 31% to 34% as a result of the increasing revenues both in service contracts and time and materials.
As Gabi mentioned, we have well executed on our penetration plans during recent quarters. As a result our sales and marketing expenses have significantly increased during the third quarter and were the main reasons for the increase in operating expenses to 6.4 million.
We believe this investment is imperative to support further customer penetrations with each of our product lines. Given the extent of business opportunities we see in front of us and our plans to generate additional growth engines for the company as explained by Gabi, we will further increase our operating expenses during the coming quarter.
This increase is already banked into our profitability guidance for the fourth quarter of 2010. Most of the planned increase is expected to be in research and development towards its new and enhanced product development projects.
During the quarter we reported net income of 7.3 million with net margins at record level of 30%, reflecting our high operational leverage that continues increasing the value we offer to our customers and the rapid increase in business volume. EPS in the quarter was $0.27 per diluted share on a share count of 26.5 million shares.
Operating cash flow came in at 7.9 million in the third quarter. It is worth noting that the company generated over 20 million in operating cash flow in the last four quarters, reflecting significant operational leverage and effective working capital management.
Moving into balance sheet key metric, accounts receivables were 13 million, higher than the previous quarter, while DSO decreased to 44 days relative to 50 days in the previous quarter. Looking into inventory levels we saw an increase from $8 million in the previous quarter to $10 million in the third quarter of 2010.
This increase is comprised of two major elements. First, an increase in inventory to accommodate the market demand.
Second, an increase in inventory of systems, which were placed in new and existing customer sites for a brief evaluation period. This increase is comprised mainly of our latest products, the Nova T500 and the Nova I500, which are gaining market traction.
Inventory turns came in at 4.8 times a year. As discussed in the previous conference call, we moved to direct sales model with additional customers during the first three quarters of 2010.
In some cases this move changed the revenue recognition time of systems from recognition of shipments to recognition of full customer acceptance. As a result, the first revenues increased sequentially during recent quarters reaching 6.6 million at the end of the third quarter of 2010.
Capital expenditures and depreciation came in at 0.5 million and 0.4 million respectively, higher than the previous quarter as we continued to enhance our application, demonstration and manufacturing facility. During the quarter we did not increase our headcount.
Looking forward, we have plans to increase headcount mainly in research and development to support our plans for new and enhanced product development projects. I will conclude with cash results, which increased to 55 million in the quarter.
As Gabi mentioned, this cash level provides us with a needed financial flexibility to execute on our business plans for the coming years. Gabi?
Gabi Seligsohn
Thank you, Dror and with that operator we'd be happy to take questions. Operator?
Operator
Thank you so much, Sir. (Operator Instructions) Our first question today comes from Edwin Mok from Needham & Company.
Your line is now open.
Edwin Mok - Needham & Company
Hey, thanks for taking my question and congrats for a very great quarter, a great finish to the year also.
Gabi Seligsohn
Thank you.
Edwin Mok - Needham & Company
So first question I have is just in terms of what you guys talked about, you know memory being roughly around 75%? Do you expect that to change in the December quarter and also in terms of mixed or integrated versus standalone?
Any color you can provide us in terms of how much each piece was in the third quarter and going to the end of the fourth quarter?
Gabi Seligsohn
Yes. Regarding the spread between foundry and memory, I'll say that foundry's going to be a little bit up in the fourth quarter.
I think the ratio may change a little bit. You know, we had a quarter, which was 50/50, another one where it was 70/30.
Now it's 75/25. I see that foundry orders are coming back a little bit in the fourth quarter and a little bit beyond that so I think foundry orders will come up.
As far as the breakdown between integrated and standalone we won't provide those kind of details for competitive reasons but what I will say is that the Integrated Metrology business has come up very, very significantly and as I mentioned in my commentary, we have customers that are ordering really dozens of tools and installing them so I will say Integrated Metrology was very, very strong in the quarter. The penetrations continued and we had press releases during the quarter that spoke about the penetrations with standalone and as mentioned a lot of the revenue associated with the penetrations is going to roll into next year, which actually we're quite happy about that.
Edwin Mok - Needham & Company
Yes, going forward with that. Based on your commentary, it sounds like a lot of those wins that you guys have secured, it's more first half of '011 that you start to see revenue for those products?
Is that how we should think about that and did the (inaudible) questions, also to add, I think a few months ago you guys had announced a number of customers that you guys were working with and more than half (inaudible) the number was 10 customers? Did you have your (inaudible) store, you said I think, it looks like at least three of them to (inaudible) actually production order?
I was just wondering how many more customers that you guys are working with at this juncture that have not tended production yet and (inaudible)?
Gabi Seligsohn
Okay. Just to reiterate so, the question was related to the number of standalone penetrations and also regarding the revenues, whether you should see the revenues from the penetrations already happening in the first half of 2011?
Edwin Mok - Needham & Company
Right.
Gabi Seligsohn
So for the first question, indeed the revenues are expected in the first half of 2011 from the penetrations already made. As far as the number of customers that we have penetrated, actually we have exceeded our goal for the year and have reached the number that we thought we would reach in 20 (inaudible).
At the end of this year we're going to have 14 customers in standalone metrology.
Edwin Mok - Needham & Company
Great, that was very helpful and then just talk a little bit about application. I think before you guys, I think if I go back a year ago some of your applications were related to copper metrology and you guys had (inaudible) other applications as well?
Just wondering all these fall customers that you guys are penetrating, is that still mostly copper metrology or is it even more diverse and would that be incremental business so you can try for each customer given that (inaudible)?
Gabi Seligsohn
It's actually diversifying which is quite pleasing to us. What we're seeing is that the copper side is actually moving a lot to Integrated Metrology.
The move from 4x to 3x technology node is requiring many manufacturers on the foundry side and then when I talk about memory as well to move, but mostly in foundry I'd say, to move from star sampling scheme to wafer by wafer measurement which requires Integrated Metrology. So a lot of Integrated Metrology going to copper.
I will say that on the standalone front because as in the manufacturing process it is one-step after the other. The next area which is being controlled is the Etch area and therefore a lot of the optical CD applications are moving in the direction of Etch and so I see the Etch market as a growth segment right now.
We're seeing more and more activity right now in Etch, both in the backend which is related to the copper but also in the front end. And I will also say that we are seeing a lot of high-end Thin Film applications which are associated with the Gate structures that are being used today.
For instance in High K metal gates, we're seeing a lot of Thin Film applications coming to life as well. So actually the diversity is growing.
Also, some work continues in Litho and actually we have a few interactions that are increasing in Litho so I think it's actually expanding which is what we were hoping would happen was, we kind of knew what would happen because of the long term joint development programs that have gone on. And one of the nice things again is this technology and that's why we believe in it is so much, is able to measure things that in many cases are unmeasurable on other techniques.
For instance one of the areas that is becoming very difficult to control is silicon germanium, which is a very, very complicated, creates a very complicated structure and is hardly, if at all, any other means to measure it other than optical CD. So I think that overall this technology is really taking us to many more places in the fab.
It's been part of our strategy to expand into more areas in the fab and I'm glad to say that that's exactly the trends that's happening.
Edwin Mok - Needham & Company
Great. That was helpful and one last thing and just to draw, so if I look at your guidance right?
Basically your net margin for your guidance was lower than what you guys put up on the September quarter and I understand that as you said part of the increased operating expenses which you were planning to do that anyway to increase in R&D expense? However is that, am I to assume that gross margin will stay at this 55, 56% range or the increase will come from operating expense or is it some moving parts there that could lead to a more conservative guidance in the upcoming quarter?
Dror David
Well in general we do expect gross margins to stay at these levels. Evidently it depends on the mixture of products but in the coming quarter we expect it to remain at the same levels of 56%, hence the change in the net profitability relative to the third quarter is mainly related to the increase in operating expenses.
Edwin Mok - Needham & Company
I see and then on and actually it increased by sequentially already right? This $3.6 million, I think your comments is that increase on a lot of this comes from R&D.
If I kind of look longer term do I think that, should I assume that SG&A probably can stabilize at high 3’s, maybe $4 million range or you think there can be more increase in SG&A assuming (inaudible)?
Dror David
I think we should expect and our plan is to keep SG&A at the same levels, except expenses which are related directly to our revenue volumes so in general, SG&A should remain at the same levels.
Edwin Mok - Needham & Company
Great. That's all I have.
Thank you.
Gabi Seligsohn
Thank you very much, Edwin.
Operator
Ladies and gentlemen, our next question today comes from Arnab Chanda from Roth Capital Partners. Your line is now open.
Arnab Chanda – Roth Capital Partners
Thanks very much. A couple of questions.
First, Gabi if you could talk a little bit about, there's been a lot about, some of the fabs companies have reported slowdowns for Q4, if that has had, what you see in terms of capital spending both on the capacity as well as on the technology side from some of your Foundry customers and then if you also could talk a little bit about what's happening in your memory side with NAND and DRAM where there's obviously been some talk about pricing coming down as well as there's obviously the market share? Some (inaudible) guys are starting to regain market shares so if you could talk qualitatively about those current trends that would be great?
Gabi Seligsohn
Sure. So regarding foundry and our indications from fab companies I think there are a few things that are driving what’s going on in foundry right now.
part of it obviously is capacity related and we know the plans for capacity increases which are still moving forwards at several of the foundries but I will say also at the same time what's going on is that there's a transition which is moving at a faster pace than before to qualify 28 or 32 nanometer devices and at the same time develop 22 nanometers as well. We have frequently spoken about this war that's on right now between the top three.
In the foundry space namely TS&C or the top four I'd say even, TS&C, USC Global, Foundry and Samsung and we play in all those cases and what's going on right now is that there's a real race on yield and qualification of these processes in the next technology node so we actually two orders that come both from continued capacity increase albeit I will say that capacity increase that the current technology node of 45 and 65 has already slowed down but we already see that actually there's deployment coming in at the 3X's, a 28, a 32 nanometer technology node. So actually you know I think that foundry space is actually having to invest significantly into technology because of this race that's going on.
Those words I brought from Morris Chang I think are a good indication of how they look at capital intensity and how much money needs to be spent in that area. Regarding flash and DRAM, 2010 has been a huge DRAM year for us no question about it and also quite a bit of shipments into flash.
We also see what everyone sees on the DRAM side where you know after several quarters of ASP improvements things have slowed down and ASP's are coming down on the device level and therefore I think that DRAM is slowing down. There's still orders coming from that direction but it is slowing down a little bit.
On the NAND flash side I see quite, I see robustness looking forward and I think the order volume is quite good still so that's kind of a summary of what we see in the market. Hopefully that helps you understand how we see things.
Arnab Chanda - Roth Capital Partners
Yes, thank you and maybe a couple more questions. Like the first is for Gabi.
If you could talk a little bit about 2010 year and maybe not by quarter but year? Qualitatively where you see that, how do you see that year shaping up because obviously coming from the trial times of 2009 you've seen a lot of higher increases?
What you expect to be driving that is at capacity increase? Is it technology in Foundry?
Is it Memory? And then second question and it would be for Dror.
If you could talk a little bit about, if you look at your margins have actually come quite nicely up and you're talking about almost 30% operating margin for Q3? Do you think that's a sustainable level or do you think that's basically kind of, you're basically at your model and we should assume revenue growth is going to be the driver for earnings from hereon?
Thank you.
Gabi Seligsohn
Okay. So I'll try to, in your question you mentioned 2010 but then I understood you're talking about the outlook for 2011 as far as how we see things shaping up.
Clearly the way we see things is both the foundry and the flash memory space are the ones that continue to be strong next year and it's really for the reasons that I mentioned earlier on. foundry's, first of all because there's huge demand.
You know I mentioned obviously the Tablet market and the Smartphone market. It's driving quite a bit of that growth and then flash of course is impacted by that directly.
So I think that the foundry and the flash memory side is where the health continues. As we have always said we are exposed to foundry and memory, all types of memory and when things go on in that market we enjoy that.
As far as what all this works up to and as far as we're concerned right now, we believe we’re well positioned to continue to grow into next year because of the exposure to the right market, because of that fact that optical CD is displacing more and more technology and going to more places in the fab. And again as we have said before, these penetrations which we have succeeded in are expected to generate repeat orders and we see the level of design in and the incremental orders that come as a result of it which lead us to the conclusion that we're well positioned to continue to grow next year.
Dror, maybe you want to answer the other question?
Dror David
Yes. Hi Arnab.
With regard to the net margins evidently the increase to 30% net margin is related also to the steep growth in revenues. As you can see in our guidance for the fourth quarter we guided between 26% and 29% because of the need to increase operating expenses.
In general we feel comfortable with the net margins at around 25% and as Gabi mentioned we are committed to profitable growth and evidently to again reach 30% net margins will require higher revenues.
Arnab Chanda - Roth Capital Partners
Thank you, Dror. Thanks Gabi.
Gabi Seligsohn
Thank you, Arnab.
Operator
Our next question today comes from Robert Katz from Senvest International. Your line is open.
Robert Katz - Senvest International
Hi Gabi and Dror. Great quarter, guys.
Gabi Seligsohn
Hello
Robert Katz - Senvest International
Congratulations. Quick question about the OpEx.
Could you give a little more clarity on how much you expect R&D to grow over the next few quarters? Do you expect it to level off at a certain point?
Dror David
Yes, definitely. Every cent increases the bank into our guidance for the fourth quarter and this increase should bring us to between 7.25 million to 7.4 million and this is already, as I said banked into Q4 guidance.
Most of this increase if not all, will be in the R&D so we do expect significant increase in the research and development in the coming quarter and looking forward as you can imagine, we are in the process of designing our plans for 2011 and we will share with you our plans in the coming conference call.
Robert Katz - Senvest International
So just to clarify, your OpEx in Q4 will be in the 7 to $7.4 million, up from 6.4 million?
Dror David
Yes.
Robert Katz - Senvest International
This quarter?
Dror David
Yes.
Robert Katz - Senvest International
And then you'd expect R&D to level off there at that level?
Dror David
Yes.
Robert Katz - Senvest International
Okay and secondly, is there anyway to categorize how much of your revenues now are coming more from a capacity (inaudible) versus a node migration?
Gabi Seligsohn
There is a way. I don't have the number in front of me right now but we definitely understand when things happen, what they're related to.
I will say that a lot of it or even most of it is node migration but I'm happy to say that node migration happens with capacity increases these days because the speed in which manufacturers need to turn things around from moving to new technology nodes to actual capacity is very, very short and so I say sometimes these two categories combine with one another but everything we do almost these days is at the very highest end and therefore a lot of it or most of it is technology driven.
Robert Katz - Senvest International
All right and finally a question about, I know you were asked earlier to breakup the revenues between standalone and integrated but maybe there's another way you can talk about that in terms of what the future looks like for the company in terms of what role standalone will play in terms of revenue growth over the next year or two?
Gabi Seligsohn
You know, I think our long-term model without referring to when that's going to be, is to try to have the company in a situation where with the current products, it's about 50/50. That's the long-term plan as far as revenues are concerned.
Of course unit numbers would be different because of the ASP's which are completely different from one another. But that's our long-term plan.
As to when that actually happens, remains to be seen but I think with the number of customers that we have penetrated, many of which are actually at the top ends of semiconductor manufacturing capabilities, they have spending power to allow us to get a lot more business in the future. So I'm quite confident that these penetrations really do lay the solid foundation that I keep referring to looking forward and therefore I do believe that we will reach this long-term model, Obviously the hope is obviously at much higher revenue levels.
Robert Katz - Senvest International
And will the standalone ever become sort of an in process tool or is it mostly more of a back sampling tool?
Gabi Seligsohn
No, it's actually completely in process. I mean this is all inline monitoring where the standalone stands between the process equipment and actually takes and measures samples of wafers as they're being processed in a particular process step, be it CMP, Etch, Litho, CDC, so it is actually inline.
What I will say is that customers change their sampling scheme based on the variability of the process that they're dealing with and so you will see customers that only measure three or five wafers per cassette of 25 and in some cases in certain (inaudible) layers they will measure all the wafers, so the strategy has been to provide a product that's able to deal with all different types of scenarios and therefore indeed this is an inline monitoring tool and completely associated with the manufacturing process as it takes place in real time.
Robert Katz - Senvest International
And just one more question. The increase in R&D, is that related to a new tool that addresses a new market for you or it just sort of more a roadmap for existing tools?
Does it expand your market, address the market or is it just something that, yes, add more features to be competitive?
Gabi Seligsohn
It's a combination of the things that you had mentioned and therefore the ideas and that's why I had mentioned that quite a bit of the investment going forward will be for things that happen in 2012 and 2013. Some of it is associated with expanding the addressable market.
Some of it is associated with delivering more capabilities to the exiting markets.
Robert Katz - Senvest International
And will you be able to charge up for those capabilities?
Gabi Seligsohn
Charge up, meaning? Oh you mean increasing the average selling prices?
Robert Katz - Senvest International
Yes.
Gabi Seligsohn
Indeed, I mean our focus is to look at capabilities that offer more value to our customers and our industry is very, very much focused on analyzing the return of investment on anything that they do and therefore indeed, the idea is to add more content and more capability and as a result of it see the ASPs on a continuous increase.
Robert Katz - Senvest International
Right. Thank you guys and best of luck.
Gabi Seligsohn
Thank you.
Operator
(Operator Instructions) Our next question today comes from Greg Weaver of Invicta Capital. Your line is now open.
Greg Weaver - Invicta Capital
Good afternoon. Nice job.
How much is the shekel increase impacting the OpEx numbers?
Dror David
Well in the last quarter we have seen depreciation of around 4% because we are hedged around 6 to 8 months forward-looking, we did not see any impact in the client quarter and we will not see any significant impact in the fourth and probably the first quarter. In general, 4% depreciation in the exchange rate is equaling around half a million dollars a year so it's not a significant impact at the current rate.
Greg Weaver - Invicta Capital
Is that a rolling hedge?
Dror David
Yes. We have a rolling hedging policy and we're currently hedged on the previous higher exchange rates until approximately the middle of the first quarter.
Greg Weaver - Invicta Capital
Right and you keep rolling that forward. Okay and so in terms of the R&D increase here, so it's about 25, 35% sequentially depending, is that a function of headcount or are you spending other money on tooling?
Can you give us a sense of your hiring there?
Dror David
Yes, definitely it's a combination of headcount and additional tooling and materials for the development.
Greg Weaver - Invicta Capital
Any sense of how many folks are in R&D today and where do you see that going?
Dror David
Well I think we have around 70 people today in R&D and we expect to increase that by around 15% to 20%.
Greg Weaver - Invicta Capital
Over what time frame?
Dror David
The coming quarters.
Greg Weaver - Invicta Capital
Okay. Thank you very much.
Gabi Seligsohn
Thank you, Greg.
Operator
Our next question today comes from Private Investor, George Borayma. Your line is now open.
George Borayma – Private Investor
Great execution this quarter guys. Thank you.
Gabi Seligsohn
Thank you.
George Borayma - Private Investor
I've got a couple of questions. The first one is what do you guys estimate as the total market size in 2011 for standalone in dollars?
Gabi Seligsohn
2011 total standalone market opportunity is probably about somewhere between $120 to $170 million or so.
George Borayma - Private Investor
Okay and as you look out to 2011, at least as what you can say publicly, how do you feel about your technology leadership and what would be the risks, the main risks you see to growth in 2011?
Gabi Seligsohn
Well as far as technology I think that the number of penetrations we have made are a very strong indication that we offer leading edge capabilities and that customers are quite happy with what we're able to offer. As far as technology associated risks, I think that the way to deal with that is to have an aggressive roadmap and keep developing capabilities that actually outperform what other competitors are able to offer.
So that's kind of how we look at it.
George Borayma - Private Investor
Okay, thank you.
Gabi Seligsohn
Thank you.
Operator
(Operator Instructions) Since we have no further questions at this time, I would like to hand back over to your hosts for any additional or closing remarks.
Gabi Seligsohn
Thank you, operator and thank you everyone for joining today's conference call. Look forward to speaking to you on the next call.
Operator
Ladies and gentlemen this will conclude today's conference. Thank you for your participation.
You may now disconnect.