Nova Ltd (NVMI) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments third quarter 2003 results conference call. All participants are at present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder this conference is being recorded November 13th, 2003. With us online today are Doctor Giora Dishon, President and CEO of Nova and Mr. Chai Toren, CFO. I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to all contents of this conference call. If you have not received a copy of today's release and would like to do so please call (indiscernible) Investor Relations at 1866-704-6710. Or 972-3607 [indiscernible] Dr. Dishon, would you like to begin?

Yes, thank you very much and good morning and good afternoon. Welcome to our year 2003 third-quarter conference call and as we always do I would like to hand it over to Chai who will go over the financial results for the quarter. Chai?

Thank you, Giora, and welcome everybody. I will start with third-quarter results. Revenues for the third-quarter were 7.4 million representing a 15 percent increase sequentially and compared to revenues of 6.4 million for the second quarter of 2003, an increase of 36 percent compared with 5.4 (ph) million reported for the third-quarter of 2002. About 79 percent of the quarter revenues are from [indiscernible] system and 21 percent from service and miscellaneous.

The net loss for the quarter was 0.8 million or about 6 cents per share and 0.7 million loss of 5 percent per share, excluding 0.1 million stock price compensation. This is compared to a net loss of 1.4 million or 9 cents per share in the previous quarter and compared to net loss of 2.7 million or 18 cents per share reported for the [indiscernible] period last year.

Gross profit for the quarter was 3.1 million - 42 percent revenue compared with a gross profit of 2.4 million - 38 percent of revenues in the second quarter of 2003 - and compared with gross profit of 2 million, about 37 percent of revenues reported for the comparable period in prior year.

Research and development expenses were 1.8 million - about 25 percent of revenues compared with 1.6 million, 25 percent of revenues in the previous quarter and compared with 2.4 million or 44 percent of revenues in the third-quarter of 2002.

Sales and marketing expenses were 1.7 million - about 23 percent of revenues and compared with 1.8 million, 28 percent of revenues in the previous quarter and compared with 1.8 million or 33 percent of revenues in the third-quarter of 2002.

The Company's balance sheet remains strong with cash and short-term investments of 31.8 million - about 0.2 million higher than in the previous quarter and the net working capital was reported -- recorded as 29 million.

Sales of the quarter included the delivery of the new NovaScan CDC [indiscernible] and standalone an integated configuration. We believe there is now a higher probability of increasing sales of the NovaScan CD in the next 12 months. In addition over the quarter the Company has seen some important gains of (indiscernible) system sales in several major accounts in Japan and Asia-Pacific and maintain its leading integrated in the quality market share of over 70 percent.

Just [indiscernible] redistribution statistics, 33 percent of sales are to end-users and 67 percent to production equipment manufacturers - also new equipment. And 56 percent of systems delivery was for 200 mm and 44 percent for 300 mm. The geographical distribution in year-to-date 2003 is 31 percent in the United States, 18 percent in Europe, 22 percent in Japan, and about 29 percent in Asia-Pacific. ASP is a result of the mixture of Integrated Metrology and stand alone sales. In Q3 the AC (ph) was $177,000 as vs. ASP of for 198 in Q2 and vs. 159 in Q1 2003.

Inventory level is at 2.9 million vs. level of 2.7 in the previous quarter. A backlog at the beginning of Q3 was about 3 million. The three major customers end-users are about 62 percent of Q3 2003 sales. Total headcount was 215 at the end of this quarter. In [indiscernible] Q3.

I'd like to add that the third-quarter results reflect a continuing revenue growth from the first quarter of 2003. The results also show a continuing reduction in the net loss from 2.6 million in the first quarter to 0.8 million in this quarter and we are close to the breakeven point which is around 8.5 million quarterly revenues.

Also part of the revenue growth is the result of higher level of upgrade activity which maybe the also positive signs for potential industry pickup. With that, I would like to return the call to Doctor Giora Dishon.

Thank you, Chai. First maybe I'll do maybe repeat a little bit some of the highlight that Chai mentioned for the quarter. Especially with the main achievement of the quarter and as Chai said we increased revenues beyond the industry average. We gained two new strategic accounts and we're now part of the manufacturing process at 18 of the top 20.

We maintained our dominant market share in the integrated [indiscernible] market segment. Sale of 300 mm system primarily with the major [indiscernible] supplier, one of the operating activities were primarily 200 mm and we expect this trend to continue.

With the controlling of the expenses and the inventory level as Chai mentioned, we were able to reduce the loss levels (indiscernible) 0.8 million and approach our objective as we indicated in our previous call to break even and after that, following that [indiscernible] profitability.

I can tell maybe better than Chai (ph) that the achievement of maintaining our cash position at above $30 million is another significant achievement. Nevertheless with all the results that Chai just mentioned, the industry is still cautious and the visibility is limited. So while the backlog as Chai mentioned is $3 million at the beginning of the quarter higher than the previous quarter still cannot provide guidance.

In addition, we saw [indiscernible] orders and as Chai said, and significant [indiscernible] and we expect more orders in the coming quarters, both standalone and integrated.

I'd like also to mention, again, some phenomena which I believe is significant is the increase in the activity of the operate (ph) and that's for two reasons. One, we believe this is a sign of the hopefully coming recovery and, second, because as the demand of end product, the semiconductor chips and the utilization of the (indiscernible) increase the need to move to higher technology nodes will require upgrades of existing lines especially those [indiscernible] limited to those customers that do not have the 300 mm plan and we all know who they are.

And they're moving to a 130 and 19 mm node technology as well.

Another point to highlight is the fact that the increase of sales was primarily arrived from more sales to Japan and Asia-Pacific, and this is in-line with a general trend in the semiconductor industry and the potential in these territories is still high and we expect this trend to continue.

Also, at the same time, we continue to increase or strengthen our corporation with a major (indiscernible) process equipment manufacturer and we maintain good relations as well as joint sales efforts.

Another point is the penetration of the copper system. This penetration process is still sold (ph) and is primarily due to two factors. First the number of companies that is high-volume manufacture with copper is small - a handful. And second the introduction of low pay dielectric material has been postponed from the [indiscernible] micron notes with a 19 nm technology node. In the 19 nm technology niode and the introduction of (indiscernible) dielectric the point of endpoint of [indiscernible] primarily using [indiscernible] the low pay dielectric has -- is posing new challenges in [indiscernible] manufacturing especially with respect to process integration.

This is due to the softness of the low K (ph) the adhesion issues and with respect to the cap (ph) layers that need to be maintained very precisely - integrity [indiscernible] is yet very thin.

These are trends and the introduction of 19 nm will require advanced process control and our copper system provides all these measurement capabilities.

According to our Dataquest recent report from October, in 2004, there will be a jump from 8 percent to 26 percent semiconductor equipment shipments for 19 nm. So this is turning to mainstream high-volume manufacturing and therefore we believe that the copper system has higher penetration opportunity looking towards 2004.

As developed news from service [indiscernible] about the plan or another proof that our strong position in the industry is maintained.

So. To summarize, we feel that the industry's providing the positive signs of recovery and we see it in most of the reports that do generate or we read from others. It is still very cautious but at the same time is quite optimistic and it's yet to be seen how fast or how aggressive this upside will turnout.

Based on that, we believe that 2004 will be a year of significant growth for the Company. And I would like and maybe as a last sentence to quote again Dataquest that said that IM is coming out from the trough of [indiscernible] in the high cycle and beginning the slope of enlightenment. So in other words we believe that we are at the right market at the right time and with the right product.

With that, we will be glad to entertain your questions. Thank you.

[Operator Instructions]

Christina Azira (ph) from Needham.

First of all, congratulations on beating your numbers quite nicely. Couple of questions -- I have a few questions here. Your backlog is always -- you run a very high turn business, your backlog is generally low and that should probably be the case throughout the upturn [technical difficulty] excuse me -- just gave very strong order guidance revenue estimates or revenue guidance is for growth, although it's modest in the next quarter, but it is coming up. Why -- what would cause us to believe that you wouldn't actually continue to grow revenues pretty substantially within the next couple of quarters? What would add risk to that scenario?

I probably would say the following. (indiscernible) speaking, when you look at the large companies such as [indiscernible] material, LAN (ph) and so on you get a lot of emphasis to the order guidance and the backlog they have and that serves you looking forward and making your focusing or assumptions. We fall into a different category because we do not have a large backlog. So it leaves us with would say one parameter less to rely on or to make adjustments and that's not (indiscernible) -- I think it's generally an OEM issue and we're OEM in that respect even though [indiscernible]. But looking at the numbers that guidance that [indiscernible] may give or [indiscernible] also give some guidance about two weeks ago the risk is lower.

I definitely agree. It doesn't -- it cannot give concrete numbers but trends as it is.

The trend is up and therefore we should probably be comfortable modeling you above 8 billion (ph) for the December quarter?

Now you are pushing against where we cannot be because we cannot provide guidance but generally speaking I think we are -- we are moderately optimistic.

I want to follow up in your comments about this upgrade activity. I think that's quite interesting. In 2000, your growth was pretty substantial or your unit sales were pretty substantial because you had end-users directly fitting their fabs with Integrated Metrology now. You had an increase into 200 mm. First of all is this upgrade activity 200 mm -- is that the same type of retrofit activity? Is there more to be done or was there a lot of it done in 2000, if you could just summarize what the opportunity is there?

That's a good question. I think it's a different one for two reasons. One, in 2000 we have seen new fabs, new lines, new activity. In 2004, let's say or end of this year and 2004, what we will see with respect to the upgrade and not retrofit, that's different, upgrade activity is, one, is some of the existing 300 (ph) mm lines that may have not been equipped with integrated but that's a very small number because [indiscernible] penetration rank is probably somewhere around the 80 percent (indiscernible) dielectric [indiscernible]. And two, the operating activities we start this quarter and we expect to continue to see upgrading our installed base meaning companies that four years ago, five years ago 200 (ph) mm are using our system down to let's say euro .13 nm when they tried to move 200mm lines to 19 nm and they are doing so, they will need to replace the upgrade -- actually replacing the integrated system and providing the same [indiscernible] tool additional capabilities needed for 19 mm [indiscernible] not [indiscernible] a retrofit activity primarily.

Why wouldn't that just be a software upgrade? Why do they need to upgrade the hardware.

Because they for example the NovaScan 24 it's not only a different software it's the fastest and has spector range so you can measure [indiscernible] so you need that for different processes and while the existing systems in NovaScan [indiscernible] even the 840 are limited in the measurement capabilities, all future layers such as [indiscernible] SDI, for example, SDI has gone to be very thin we cannot measure anymore accurately for [indiscernible] 0 with the existing -- or with the old model with NovaScan.

Do you think in general not just for integrated but for the entire thin film market you'll need to upgrade thin film metrology for the 90 nm node?

Well, with respect to stand-alone, that may be a bit different because I think the current generation of the major suppliers [indiscernible] I think the system [indiscernible] last couple of years are capable for the 90 nm so probably 65 nm there will be more of an upgrade or retrofit activity. Integrated also fitted [indiscernible] five years old like 90, 92,000 so we get to 2004 that's 8 generations difference from .25 to .18 to 19 nm - that is a big jump.

Also on the [indiscernible] materials call last night (indiscernible) basically said they're going to start -- their tools set -- basically the 300mm fabs or 200 mm fabs may have trouble extending past the 90 nm node. What do you think about that. Is that true?

I think so - yes. I think it's right and especially with respect to lithographies but not only, I think beyond 90 nm the old players may have some [indiscernible] challenges and seems more of the more advanced equipment is 300 we may see change in the [indiscernible] structure of the industry.

Question on your service. Your service revenues have been running pretty much at breakeven for quite some time. Do you have any intention to bring up the profitability levels of the service revenue and if so, what are your targets?

Definitely still one of our targets. When the number of new systems is higher, the objective is different. Because service is also getting warranty provisions and providing warranty services. Generally speaking, yes, it is the objective and it's becoming more efficient and, yes, down the road [indiscernible] will become profitable or P&L based activity.

I'll circle back and let other people ask questions and queue up again, Giora.

[Operator Instructions]

Christina Azira (ph).

Do you have a follow-up question? Please go ahead.

Just a couple of housekeeping questions here. I was wondering if you could give us the breakout of the [indiscernible] compensation by SG&A, R&D - I already have the number for gross margins. Chai?

Just a moment, please.

The stock based compensation for the R&D is $73,000 and SG&A 45 and cost of goods sold is 16.

And depreciation in CapEx?

Depreciation for the quarter 167 -- sorry yes -- depreciation is 167 and capital investment, 65.

Now would it be safe to say you sold 33 systems in the quarter?

Very close.

Okay. 32?

No.

What was the split between integrated and stand alone systems that you sold?

We have one stand-alone.

And among your integrated systems, how many of them were for CMP? And if you could give us the breakdown of [indiscernible] CMP, copper CMP, and also unit DVD and other potential applications - etch?

Well two reasons. There were no etch sales at this point, delivery yes but not sales. One of the interesting things we see emerging between oxide and the copper systems (indiscernible) the end-user market. So this differentiation is a little bit misleading. Sometimes offset systems is used for copper applications. Some of them I highlighted before looking at the low K (ph) cap layers issues and so on. So generally speaking, a breakdown is not a very significant number. But I still would say that most of the systems as I said the copper is slow most of the sales (indiscernible) almost all the systems were oxides or dielectrics.

What is the split between your D-RAM type applications and logic applications in your sales?

We don't segmentize it, we never did, so we have a very significant DRAM customer and very significant logic customers but you have (indiscernible) and then you have systems [indiscernible]. So this is something we don't we don't track.

What about the rest of your OCD customers? You had some deliveries. Are you delivering to several end customers? If you could share with us the numbers?

No I don't think so. It's [indiscernible] singles digit numbers small single digit but [indiscernible]

But several -- so more than 1.

Yes.

Did you have any sales in China?

This quarter I think yes, yes, we had. Yes. Two companies or maybe even three. Remember, our second (indiscernible) numbers are not that easy because it's the OEM PM type thing so we ship to [indiscernible] they ship so sometimes we know for sure where it goes sometimes we take a little bit longer to understand which systems [indiscernible].

[indiscernible] one major OEM but how many OEMs have you -- did you ship to in the quarter? [indiscernible]

We had two major OEMs. Definitely two.

so how many did you ship to in the quarter? I am sure there are more in addition to those two?

[indiscernible] I think maybe three but it's mostly the two major. The other PMs [indiscernible] here [indiscernible] there. I am not aware actually outside of (indiscernible) or in applying I'm not aware of (indiscernible) for any of the others whether [indiscernible] Novella. I'm not aware of big wings (ph) but we see signs we say evaluation going on but we don't see high-volume shipments of the others so that's where we are as well.

But once the OCD starts picking off the number of OEM should go up.

Yes definitely -- not talking about that -- absolutely right.

(indiscernible)

[indiscernible] glad to receive e-mails from you.

Thanks. There are no further questions at this time. Giora Dishon may go ahead with his closing statement. I would like to remind participants that a replay of this call will be available from tomorrow Friday November 14 on Nova's web site www.Nova.com. Dr. Dishon.

Well thank you very much for spending the afternoon or the morning with us. We feel we had a very good quarter and we look forward for the next quarters and we look forward to meeting you again three months from now. Thank you.

Thank you. This concludes Nova's third quarter 2003 results conference call. Thank you for your participation. You may go ahead and disconnect.