Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). The first question is from Robert Katz of Senvest International. Mr. Katz, please go ahead.
Robert Katz - Senvest Capital, Inc.
Hi Gabi and Dror. How are you guys doing?
Gabi Seligsohn
Pretty good, thanks Robert.
Dror David
Hi, Robert.
Robert Katz - Senvest Capital, Inc.
I have a few questions. One, do you think the gross margins mix will stay at these levels for product and service or do you see services is improving and products reverting back to lower gross margin. How should we model that going forward?
Gabi Seligsohn
Well, on the gross margin side, I think generally we've done a pretty good job on gross margins in the product area, around 50% this quarter they are up which is a good indication and obviously we'd like to see that continuing as much as possible. I think the burden, which creates the blended gross margin is obviously the size... the overall size of the business right now in this particular quarter and the fact that as you saw there has been a significant decrease of service revenues.
What we're hoping to see is of course an increase again in service revenues. I think the resulting or the decrease in service revenues is a direct result of the fabs trying to lower than ongoing fixed cost as much as possible. Throughout the industry, we're seeing a lot of cancellations of service contract because though there are fixed cost and customers are moving more to a time and material type contract with the suppliers, with utilizations being low for the first couple of months of the quarter, you didn't see a lot of time and material business, because the use of the equipment was lower than it usually is.
It's indeed this trend of increased utilization will continue, I think two things will happen. One is the requirement for time and material usage may increase; and number two, service contracts might come back although I have a feeling that usually these kind of decisions are decisions that are made in a wider decision base, and therefore they usually take about a quarter to reverse. So, I think it's going to take a little while until the service revenues come back.
We're obviously staying in contact with these customers, the installed base is quite significant. So we're not losing touch with the customers and the install base. So again, I think product gross margins, I think, will hold quite well. Service gross margins for a while will stay low until we see business volumes increasing.
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