Analyst: Victor Sula, Ph.D. Initial Report January

Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

01/15/09

NANO daily

1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.0

Nanometrics Inc. Nanometrics Incorporated 1550 Buckeye Drive Milpitas, CA 95035 US

0.9 0.8

volume

© BigCharts.com

Tel:408.545.6000 Fax:408.232.5910 Website: www.nanometrics.com

0.5

Millions

1

0

Nov

Dec

09

MARKET DATA Share Statistics

NASDAQ

2006 2007 %Chg

(12/23/08)

9m

9m

%Chg

2007 2008

Symbol Current price Low/ High 52 weeks Average Volume Market Capitalization Shares Outstanding

NANO

Revenues, $ Mn.

$1.50

Gross margin

96.4 146.3

51.7%

113.1

81.6

-27.9%

37.1% 42.1% 5.0 b.p. 41.6% 44.2% 2.6 b.p.

$0.80 - 8.50 Operating margin (23.0)% (2.8)% 20.2 b.p. (2.4)% (98.0)% -100.4 28,896

Net margin

(23.0)% (2.8)% 20.2 b.p. (2.4)% (98.0)%

$30.0 Mn 18.3 Mn

b.p.

-100.4

EPS, $

(1.47) (0.22)

n/m

(0.15)

(4.31)

b.p.

Source: Yahoo Finance, Analyst Estimates

Background Nanometrics Inc. (NANO) designs, manufactures, sells and supports process control metrology systems used in semiconductor manufacturing and compound semiconductor substrates, devices and integrated circuits. The Company’s systems are designed to monitor film thickness and dimensions that are necessary to control the manufacturing process and enable semiconductor manufacturers to improve yields, increase productivity and performance, and lower their manufacturing costs.

NANO’s metrology systems measure various thin-film properties, critical circuit dimensions and overlay registration accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Additionally, the Company’s metrology systems measure electrical and material properties, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility. The Company’s products can be divided into three groups: stand-alone, fully automated systems for Nanometrics Inc. (NASDAQ: NANO)

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Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

measurements of thin films in high-volume manufacturing operations; integrated systems used to measure inprocess wafers automatically and quickly without having to leave the enclosed wafer processing system that provides virtually immediate measurements and feedback to improve process control and increase throughput; and tabletop systems used to manually or semi automatically measure thin films in engineering and low-volume production environments.

The Company sells its metrology systems worldwide to many of the major semiconductor manufacturers and equipment suppliers, as well as to producers of silicon wafers and photomasks. Generally, NANO has a direct sales presence in the U.S., Europe, South Korea, Japan, Taiwan, China and Singapore. The Company gets around two-thirds of its sales outside of the U.S. The Company has been selling its systems since 1977, and has an extensive base of industry leading customers, including Applied Materials, Dainippon Screen, Ebara Technologies, Hitachi, Hynix Semiconductor (about 11% of 2007 sales), Ebara Technologies Inc., Intel Corporation, International Business Machines Corporation, Micron Technology Inc., Mimasu Semiconductor Industry Co., ProMOS Technologies, Renesas Technology Corp. Ltd., Samsung Electronics (nearly 16% of 2007 sales), SMIC and Toshiba America Inc.

Highlights Strategically important acquisitions designed to fortify NANO’s position as a key supplier of metrology equipment to the global semiconductor industry In order to address business challenges and opportunities, the Company pursues an active acquisition strategy.

In 2006, NANO acquired Soluris Inc., a supplier of advanced overlay metrology equipment, and Accent Optical Technologies Inc., one of the leading suppliers of compound semiconductor and advanced 200mm and 300mm overlay metrology equipment. These strategic transactions were made to allow the Company to become more competitive and to achieve greater financial strength, operational efficiencies and growth potential. The new business combination created one of the largest metrology and Process Control companies in the semiconductor equipment industry with a strong installed base of new customers.

In 2008, NANO acquired Tevet Process Control Technologies Ltd., an integrated metrology company serving the worldwide semiconductor and solar manufacturing industry. With this acquisition, the Company added one of the industry’s highest-throughput excursions monitoring IM product to its portfolio of metrology solutions.

Solid historical revenue growth offset by the semiconductor industry slowdown in 2008 and 2009 The Company has seen a strong revenue increase since the recession of 2002, reporting sales of $146 million in 2007. The main driver of growth was a high demand for NANO’s automated products as semiconductor manufacturers continue their conversion to 300mm wafer to achieve better production efficiencies and continue to increase their manufacturing capacity. The Company’s revenues also increased as result of additional revenues from the acquired Accent and Soluris, which contributed to higher sales of parts and services, due in part to a larger installed base of systems and more customers signing up for post-warranty service contracts. In the fiscal year 2007, NANO derived 86% of its total net revenues from product sales and 14% from services.

Nanometrics Nanometrics Inc. Inc. (NASDAQ: (NASDAQ: NANO) NANO)

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Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

Revenue, $ Mn

Source: SEC filings; Reuters.com

Adverse market conditions are likely to cause the Company to report a decline in revenue for FY 2008 and 2009.

Solid gross margins despite revenue decline in FY2008 Gross Margin, %

Source: SEC filings.

During the last quarters, the Company reported solid gross-profit margins in the neighborhood of 45%, mainly due to higher demand for NANO’s automated products, reductions in product cost structure and manufacturing expenses, a higher level of in-the-field tool upgrades, increased efforts on billable service and spare parts sales, and integration of Accent Optical Technologies Inc. and Soluris Inc. revenues, which naturally generated very favorable gross margins. NANO expects to maintain its gross margins at a high level, making a reasonable profit on sales by keeping overhead costs in control.

Nanometrics Inc. (NASDAQ: NANO)

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Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

Restructuring program to alienate the industry decline According to the Semiconductor Industry Association (SIA), the global semiconductor industry generated $255.6 billion in sales for 2007. Revenues were up 3.2% from $247.7 billion in 2006. Industry growth was driven by strong demand for semiconductors for personal computers, cellular telephones, consumer electronics, wired and wireless telecommunications infrastructure. However, the industry experienced a decline in 2008, and is likely to decline in 2009 as well. Gartner forecasted that the worldwide semiconductor revenue would fall to $219.2 billion in 2009, a 16.3% decline from 2008.

In these conditions, the Company has undertaken an important restructuring program to weather the decline storm. Particularly, the Company reduced the manufacturing sites count from five to two; integrated the sales and distribution channels; increased the outsourcing at systems level; sold the non-strategic product lines; shut down machine and plating shop; closed or sold facilities in California, Massachusetts and Japan; centralized the core competencies and introduced new products in key markets; and diversified the product lines, serving Si IC, Solar PV, HB-LED and compound semiconductor markets.

Launch of Caliper InSight metrology system In December 2008, NANO announced the launch of its Caliper InSight, a turnkey, image-based overlay metrology solution for advanced high-volume IC manufacturing. Following the success of the Caliper élan and Caliper Ultra systems supporting the 90nm, 65nm and 45nm technology nodes, the Caliper InSight takes the next step forward in platform and optical design to improve system precision and throughput for overlay metrology solutions down to the 32nm and 22nm technology nodes. Combining the InSight with an IMPULSE™ (OCD) module onto a Lynx platform, NANO offers to its customers a more complete solution for advanced lithography process control, all within a single system having the lowest cost of ownership in the industry, according to David Doyle, director of NANO’s Standalone Business Unit.

Strong cash position and working capital The Company has the strongest liquidity position in more than two years with $22 million in cash and $58.3 million in net working capital as of September 27, 2008.

Selected balance sheet data, $ Mn 29-Dec-07

27-Sep-08

Total Assets, including Cash and marketable securities Working Capital

207.1 14.9 57.1

131.2 21.8 58.3

Liabilities, including Debt Equity

31.2 1.4 175.8

35.4 13.1 95.8

Source: SEC Filings; year-ending December, 29.

The Company has approximately $13.1 million of borrowings for general corporate purposes and for future acquisitions or expansions.

Nanometrics Inc. (NASDAQ: NANO)

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Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

Changing trends in the semiconductor industry are increasing the need for metrology as a major component of manufacturing systems As the industry moves to sub-45-nm technology, new and emerging processes bring new requirements for measurement and control: wafer thinning and bonding, deep silicon etching, bond pad inspection and more. Whenever materials change, metrology must be revisited. Before a company can introduce a new material, it has to measure its critical features; then, in any new manufacturing process, a company also must find defects, and that is where automated process control metrology systems come into play. Overall, however, the major measurement problem is still unmet and the challenge for metrology companies is to anticipate industry’s needs and provide production-worthy, cost-effective solutions.

Investment sentiment NANO is an innovator and a leader in the design, manufacture and marketing of high-performance process control metrology systems used in semiconductor manufacturing. With offices throughout North America, Asia/ Pacific region and Europe, the Company serves the global semiconductor industry as its primary market.

The acquisition of Accent Optical Technologies Inc. and Soluris Inc. created one of the largest independent metrology company in the semiconductor industry with more than 6,000 systems installed worldwide. The Company’s revenues increased 52%, from $96 million in 2006 to $146 million in 2007 through a combination of organic growth and acquisitions. In addition, the strong base of revenues is expected to be improved by penetration of new HBLED and photovoltaic markets with recent acquisition of Tevet Process Control Technologies Ltd. The semiconductor industry, which is posed for the first back-to-back decline in annual global revenue, is expected to bounce back in 2010 and 2011, with worldwide semiconductor revenue reaching $251.2 billion in 2010, a 14.6% increase from 2009, and in 2011 revenue reaching $274.9 billion. Being optimistic about the prospects for NANO’s business in the following years, and considering the results of restructuring program that allowed to improve the gross margins we rate the Company as a “Buy.” Peer table Company Name 12.01.09 KLA Tencor Corp.* Lam Research Corp.* Novellus Systems Inc. Rudolph Technologies Inc. Applied Materials Inc.* Mattson Technology Inc. FEI Co. Veeco Instruments Inc.

Price Ticker per symbol Share, $ KLAC LRCX NVLS RTEC AMAT MTSN FEIC VECO

21.46 22.28 13.63 3.32 10.00 1.28 19.26 6.27

Mrkt.

Cap. $ Mn

2008

2009

2008

2009

2008

2009

%chg

3,723 2,936 1,344 109.5 13,780 67.4 729.7 210.8

69.23 n/m 194.71 n/m 41.67 n/m 28.32 12.80

20.83 445.60 n/m n/m 13.70 n/m 18.88 0.00

2.24 2.48 1.33 0.82 2.33 0.51 1.23 0.47

1.99 2.53 1.92 1.28 1.85 0.67 1.23 0.58

0.31 -0.12 0.07 -0.14 0.24 -1.05 0.68 0.49

1.03 0.05 -0.38 -0.40 0.73 -1.12 1.02 0.00

232% n/m n/m n/m 204% n/m 50% n/m

41.67

18.88

1.28

1.57

n/m

n/m

0.30

0.31

Median Nanometrics Inc.

NANO

1.50

30.0

P/E

P/S

EPS, $

204% -0.75

-0.48

n/m

*year-ending 2009/2010.

Source: Reuters.com

Nanometrics Inc. (NASDAQ: NANO)

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Analyst: Victor Sula, Ph.D. Initial Report January 15th, 2009

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All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Nanometrics Inc. (NASDAQ: NANO)

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