Nova Ltd (NVMI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Nova Measuring Instruments fourth-quarter 2003 results conference call. (OPERATOR INSTRUCTIONS).

With us on line today are Dr. 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 content of this conference call. If you have not received a copy of today's release and would like to do so, please call Gal & Kahana Investor Relations at 1-866-704-6710, or 972-607-4717. Dr. Dishon, would you like to begin?

Thank you. Good morning and good afternoon everyone. Thank you for joining us for our quarterly conference call to report the results of Q4 2003 and the annual results of the year 2003.

Before handing it over to Chai to report on the financial results of the quarter, I would like to remind you that this time we have a presentation for this conference call, which is on our web site that you can access and maybe to help both to deliver the message and show better the results. And it should be easy to get there.

With that, I will hand it over to Chai.

Thank you, Giora. I will start with slide number 2, with the title "fourth quarter 2003 financial highlights." You can see that the revenue in Q4 was 8.1 million, compared to 5.6 in the related quarter in 2002, which is about 45 percent increase quarter-over-quarter from the previous year. And they are compared to third quarter of 2003 -- 7.4 million.

Also, we see gross profits in 39 percent this quarter, compared to 33 percent in Q4, '02, and compared to 42 percent in the third quarter, 2003. The R&D in this quarter were at 3 million, compared to 1.8 million in the third quarter, '03, and compared to 2.3 million in the fourth quarter 2002. In this quarter, we had some extra expenses related only to this quarter. I will say a few words about it later.

Sales and marketing at 19 percent from sales; 1.5 million, compared to 1.7 million in previous quarter and compared to fourth quarter in 2003 -- 2002, sorry. And the income for this quarter is 0.6 million, compared to a loss of $800,000 in the previous quarter and compared to a loss of 2.4 million in the fourth quarter of 2002. In this quarter, we had some income -- the operating expenses of 2.2 million, reversal provision from the Chief Scientist Office.

EPS for this quarter is 4 cents profit, compared to a loss of 6 cents in the third quarter in this year, and compared to a loss of 17 cents in the fourth quarter of '02.

In the next slide, you can see a trend of the last ten quarters with increase from quarter to quarter, except for the first quarter of '03, and it is another sign of positive trends towards profitability. And also the gross profit improved from 24 percent gross profit in Q3, '01 to about 39 percent in this quarter.

If we are looking at the next slide, slide number 4, 2003 financial highlights, we can see that in 2003 the total revenue were results to 26.7 million, compared to 20.4 million in 2002 and 21.2 in 2001. And, gross profit improved to the average of 38 percent for the year, compared to 24 percent gross profit in 2001, and to 35 percent in 2002.

R&D for the year is at 8.6 million, 32 percent of sales, compared to 9.9 in 2002, and compared to 13.3 in 2001. And, net loss for this year, 2003, is 4.2 million, compared with a loss of 13 million in 2002, and with a loss of 16.9 million in 2001.

In the next slide, slide number 5, we can see a graph with comparisons of revenues and gross profits. We can see, again, that improvement, year-over-year, in revenues of Nova -- 31 percent over 2002, as compared to the total (indiscernible) market equipment, according to Dataquest, that increased year-over-year in 4 percent.

Also, we can see that in 2002, Nova, year-over-year, was minus 4 percent versus minus 33 percent of the total market, and the same comparison for 2001. The market was declined year-over-year 40 percent when Nova declined 56 (ph) percent. So, this year is a much better trend for Nova.

Some financial highlights in slide number six. The cash at the end of the year is about 33 million, and working capital -- 30 million. As I said, we have other income of 2.2 million, as a reversal of provisions made for royalties through the Office of the Chief Scientist. And, I would like also to relate to other issues.

Three major customers, according to installation in 2003, are about 35 percent of sales of 2003. And, we have installations and deliveries of 27 different sites, including first sales to four new major accounts.

The inventory level as of December, 2003 was 4.1 million, compared to 3.1 million at the end of December, 2002. Total investments of Nova was about $400,000, with depreciation of $700,000.

Geographical distribution -- we can see in slide number 7 the distribution of sales of Nova in 2002, which were 53 (ph) percent in the U.S.; 7 percent in Japan; 22 percent in Asia-Pacific. And the trends towards 2003 is increasing in the (ph) east. Japan grew to 19 percent and Asia-Pacific to 29 percent. Also, we can see at the top of this slide, the forecast of the industry, according to Dataquest, the geographical distribution of capital and spending in 2004, and our plans regarding distribution of Nova sales are similar to the total industry.

Slide number 8 -- the sales distribution was through production equipment manufactures and direct sales to end-users. About 65 percent of sales were through the production equipment manufacturers, and 35 percent of the systems and direct sales to the end-users. We sold 20o and 300 of the meter (ph) systems, retrofit and new. Most of the sales were on new equipment -- about 95 percent. Most of the sales were for integrating metrology dielectric and corporate CMC, with Applied (ph) and Bara (ph) and also a small number of stand-alone 200 and 300 mm CD (ph) systems for applications.

As I said, we did penetrate in the Far East and Japan in new major accounts, and now we are present at 18 out of the top 20 capital (indiscernible).

The next slide, you can see, is slide number 10 -- you can see our stand-alone 300 mm and integrated system for the CD.

During the fourth quarter of 2003, as a result of approval of the office of the Chief Scientist, with respect to royalties from the photography product, a reversal of provisions made in previous years led to the 2.2 million in other income in our P&L report. This was not a cash transaction. In parallel to this special other income, we have, in the fourth quarter, special expenses, such as $750,000 (ph) in the R&D and the initiation of the program for another generation of process control solutions. These solutions are aimed to meet the below 65 technology node requirements and also other expenses of about $700,000 spread in sales service and operations, which we do not expect to see in the next quarter.

Our breakeven point remains in the range of 8.5 to 9 million revenues in the quarter, depending on the mixture of products sold. We expect the R&D expenses in 2004 to be in similar range as 2003, which is about 8 million per year. We do see signs of increased production in end-user sites and also increase of equipment demand in semiconductor industries. But, our visibility is still limited. Our backlog at the beginning of Q1 '04 was about 3 million, which is a similar level to the opening of Q4, which was at the end of September.

As for December, 31st, '03 we have about 33 million in cash, and working capital increased one million from previous quarter to 30 million.

With that, I would like to return the call to Giora Dishon.

Thank you, Chai. First, of course, we are very pleased with the results. This was a good quarter with continuing improvements in every aspect of the operation of the company and revenue growth. Gross profit, though, is slightly lower than the previous quarter, on a season (ph) of a one-quarter basis. This depends primarily on the product mix that we sell. But, a similar number, and on the annual aspect, we see improvements in the gross profit, and we also see improvements both in absolute terms and on the relative scales, both on the R&D expenses and on the sales and marketing expenses. So, we definitely feel that we are moving forward to meet our basic business model that we've described several times before of 52 percent gross margins and bottom line reaching profitability of about 20 percent. This is the long-term, which probably is somewhere in about 2 years time frame. We definitely see the positive trends in that respect.

Looking forward, after Chai described the results and where we are, I have the pleasure to do the looking-forward aspect. Looking forward, first, we see that all the positive signs possible in our industry with Dataquest are projecting a 40 percent increase for 2004 with good results released yesterday by Applied (ph), who is a major customer for us, definitely another opportunity for us as well and all other indicators. So, we definitely feel confident that, moving forward, it is very positive.

In addition to that, we see the continued trend, one in moving east -- Japan and Asia-Pacific. And we are also doing very well in these territories. And, also with the introduction of new technology nodes, such as the 90 nm to high-volume manufacturing now, and the 65 nm in the (indiscernible) for the food selection. This also dictates, for us, when we introduce new systems, new models, such as introducing the LCD (ph) system last year, penetrating several accounts and working closely with a major process equipment (ph) manufacturer.

In addition to that, we are also developing a new generation of metrology distance (ph). That is part of the special expenses in Q4 of initiating the program, and we plan to produce that system in 2005.

So, looking forward, with the forecast of the 40 percent growth of the industry and the introduction of the new systems, and the fact that we see a very positive trend in the process control segment, which is one of the fastest growing segments in the wafer publication (ph) equipment market, together with litho and information, we definitely are seeing those trends moving forward.

Specifically, for the markets that we are addressing, the process control market in general and the integrated non- (indiscernible) and specifically, we see that market growing faster than the average process control, and especially the optical CD market, which is expected to grow from zero in 2001 to 100 million in 2006 or 2007, and we even think this will grow faster than the projections or the forecasting of Dataquest. Those two markets encompass a very large total available market for us going forward for the next few years.

So, looking forward, we have limited visibility, as Chai mentioned, as an OEM supplier. We suffer, so to speak, but that is part of what we do, from a limited visibility and a very fast (indiscernible) cycle. But that visibility there is a very high level of confidence in the opportunity to grow with the industry ramp-up, with the, as I mentioned before, the aggressive technology moves, with addition of 300 mm, where integrated process control takes a larger share, mainly in (indiscernible) and the OCD (ph) where we are. And looking forward in other aspects, other areas as well.

We also see, for next year, for this year 2004, a higher opportunity for retrofits, since most of the fabs have reached the 95 and above percentage utilization, especially in the leading-edge technologies. We already see signs of retrofit on existing equipment, especially with the second-tier customer who do not build new 300 mm fabs; they just do not have the budgets for that, but they see, in every cycle in which we are, we see very positive ramp-up and high utilization, which will provide the retrofit opportunity for us throughout 2004 as well.

And, we continue to exercise our cooperation with the major process equipment manufacturers, such as Supply (ph), Nevara (ph), Lynn (ph), and Novellus (ph), and (indiscernible). So, generally speaking, although we do not provide guidance for the next year, we see, for this year, 2004, we feel very confident this is going to be a year of growth for us along with the industry, together, and maybe even better with the introduction of the new products.

With that, I would like to thank you, and welcome any questions.

(OPERATOR INSTRUCTIONS). Stuart Muter, Adams Harkness Associates.

Thank you. Good morning or good afternoon, depending on where you are. A question for Giora. In terms of the retrofit opportunity you are talking about, I was just wondering about, with the high-fab utilization rates, that would present a challenge to take the tools down and do the retrofit. So, I am just wondering how you would work around that issue.

Thank you. Well, that is a good question. And, I would say that it relates -- there are two parts of that. One aspect of the retrofit is existing fabs that use our equipment, that they bought 3, 4, 5, 6 years ago, and we had one fab that operates our systems since 1995 or 696, so it is like eight years of operation. And, in those cases, they would replace existing NovaScans with a newer model because they need to meet new process requirements. In those aspects, the retrofit opportunity or the retrofit operation is relatively easy because part of our policy was gradability and the configuration of the system has not changed dramatically, so it doesn't take long to take the tool down, replace the NovaScan, and bring it up.

In other fabs, where we will see retrofit on equipment that did not have integrators metrology on them, it may take longer. But, in our previous years, not in the last couple of years, we have seen more of that. And, practically we developed, for most cases, a relatively fast turnaround to integrate the system. It is always adaptable to the existing process equipment with minimal requirements for modification. So, on the average, probably a day or two of tool down to do the retrofit. And, we expect that to be tolerated by the process equipment manufacturers. But, where this is not the case, this is the question. And sometimes may prevent some -- hopefully very small -- percentage of the opportunity.

So, it is really part of an (indiscernible) shrink program in the fab? Is that the way to view it?

Yes.

Okay. Just another question. If you could talk about the relative opportunity between copper CNP (ph) and oxide CNP?

Okay. Of course, the percentage of polisher (ph) being sold for copper versus dioxide is increasing all the time. The most advanced, like 90 nm or 65 nm technology nodes can reach up to one to four. Like, one dielectric CNP versus four -- copper CNP. So, the opportunity in copper is growing gradually.

From our perspective, one, the systems from the hardware aspect or the integration aspects are identical. So, with companies -- and we did see cases like that want to move dielectric polishers to copper polisher. Also in our aspect, does not require any modification.

Penetration of integrated metrology copper, which we started a couple of years ago with the agreement with Applied, and penetration to other places, has not been finished. In that respect, while in oxide CNP, we see probably penetration (ph) of integrations at the level of 80 percent or above. I believe that the 300 mm is close to 100 percent. Copper CNP is not there yet. It is in the process of developing the market penetration at present. But, with the introduction of low-K material, we expect that to reach a higher level because, in low-K material, you start to see the phenomenon. (indiscernible) low-K, where you start to see that 90 nm and below. It did not catch up at the .13. A phenomenon of cap layer (ph) removal or controlling the thickness of the cap layer and erosion of low-K, we expect, and we have already seen that -- that's part of what we presented with SP and Applied a few months ago. We expect the penetration there to get to a higher level than the levels of today.

Excellent. Thank you.

Christina Osmena, Needham and Company.

Good afternoon, in your time zone. That was an interesting comment that you were making about the low-K opportunity. I wanted to hear more about what kind of illumination technology you were going to use there. Or, is that actually using the normal reflectometry (ph) technology that you offer?

You mean the copper CNP?

No, for the low-K and the detection of low-K erosion -- (multiple speakers)

Basically, it is the same system. It is a reflectometry (ph) or a spectophotometry (ph). It is developing a more advanced optical modeling technique, and some of (indiscernible) measurement methods that we have to look at erosion on arrays (ph), not on solid sides, but looking on arrays. So conceptually, erosion is done by the existing system with deep UV (ph) illumination -- UV in deep UV illumination, based on the same platform. And a higher level, or more sophisticated, optical model (indiscernible).

Another question here on the retrofit. Now, this retrofit opportunity was one of the reasons that -- one of the things that has driven your business in the year 2000, the last time we had an upturn. And it drove quite superior growth. So, I wanted to see if maybe the retrofit opportunity has expanded beyond CNP, and if expect the magnitude of the retrofit opportunity as a percentage of your business to be the same as it was in 2000?

No, I do not think it would be the same. I do not think it will return to the happy days of the year 2000 in the (indiscernible) scale, for two reasons. One, we see much more activity in 300 mm. So, the retrofit opportunity now is more limited to, as we said, a second tier. Some of the first tier where they ramped existing fab, but smaller ratio, compared to what is was in the year 2000. And, the second tier does not represent the volume as the first tier used to represent.

So, we don't expect that to be the same ratio, or level, as it was in 2000, but we definitely expect, hope, and work towards getting to a higher level than it was, let's say, last year. Retrofit was like 5 percent. We expect this year to be a higher percentage.

Are you seeing the retrofit opportunities expanding beyond oxide CNP, or is it still mostly oxide CNP?

Copper CNP, maybe, as well, because it is in the penetration fab, and some of the polishers. Some of the polishers are online, so we can expect to see that. The other aspect, of course, is that the new segment of the optical CD, for example the etchers (ph), are definitely in place. And this would be, in our terminology, the retrofit opportunity as well for the integrated part of that.

Okay. A couple of questions about your model. Could you repeat what your breakeven revenue levels are? I guess, from this point forward. And also, I wanted to make sure that I was correct in what I heard. You said that your targets of 52 percent gross margins and 20 percent net profits, to have taxes, but what revenue level would that correspond with? And, if you could just make sure that I'm correct there.

This is Chai. I talked about the long-term financial model -- 52 percent gross margin and 20 percent profit. And, a range of revenues we should reach is about 60 million.

For the year?

For the year, yes.

Okay.

And about breakeven point, as I said, the breakeven point on a quarterly basis is between 8.5 million per quarter to 9 million, depending on the mixture of sales, because it has effects on the bottom line, what is the mixture of sales? How many from each configuration? So I cannot tell exactly that number.

Okay, maybe then, you can go a little bit into what took place this quarter? You had, I guess, a $2.2 million reversal of accruals that you were taking for royalties that you are expecting to pay to the Chief Scientist? Is that what took place?

Yes, and once we receive approval from the Office of the Chief Scientist to reverse this provisions, and to pay the royalties only from future sales of lithography products, we could recognize it in the other income.

And, as I said, in this quarter, we had also special expenses. Some of them we mentioned in our press release was a bigger significant amount of money in specific operations like the R&D, which we initiated and activated a few subcontractors to accelerate the development of our new generation towards the 5 nm and below. And, we had also some expenses in this quarter spread between other activities and the sales, service, and operations. We will not see these expenses in the next quarter. So, without the other income and the special expenses in the fourth quarter, we would have been at about one to two cents loss per share for this quarter, with 8.1 million revenues.

Okay. Could you tell us what the amounts of the other expenses were?

About 700 (multiple speakers)

That was spread between also --

Spread between the sales, service and operations and G&A.

Okay what was the amount? Probably about one million, I would guess --

No, $700,000.

700,000, that doesn't -- okay, so you're talking about 1 to 2 cents before taking out the stock-based compensation?

Yes.

Okay, so if I add back in the my stock-based compensation, you probably would have been breakeven then?

Probably, yes.

Now, the Office of the Chief Scientist, you were accruing these royalty payments under which expense item?

The royalties usually are included in the sales and marketing expenses.

Does that mean that, going forward, sales and marketing goes down?

A little bit, yes, not significantly.

Okay, it was already pretty low this quarter already -- so, I guess, these charges of 700,000 -- even if I take out the 750 for R&D, you're still spending a pretty healthy level of R&D. I wanted to know if maybe you could share with us what you think you're going to see in the model, going forward.

Sure, I will repeat it. I estimate, as I said before, that I expect, or we expect, '04 expenses in the R&D in similar levels as was an '03 -- about 8 million per year. On the average, around 2 million per quarter.

Okay. You did say that. I apologize, Chai. A couple of other questions. How many systems did you ship this quarter -- how many did you sell this quarter, rather?

This quarter, we shipped about 30 systems.

Were any of them stand-alone OCD systems?

This quarter, we did not ship stand-alone -- (multiple speakers)

(multiple speakers) What was the mix in your systems between oxide CNP and maybe the other categories that you might have shipped?

We did deliver -- sorry, I repeat again -- we did deliver stand-alone systems, but we do not recognize them in the revenues. The 30 systems are not including the deliveries of systems that are not included in the revenues.

Okay. What was the splitout of the 30 systems between oxide CNP and others like copper CNP and OCD?

About five systems were for copper and the rest were for oxide -- dielectrics.

Did you have any OCD systems ship in the quarter? Or, sold in the quarter?

We did ship -- we did deliver, but we did not recognize them as sales. They were delivered for evaluation and (indiscernible).

I'm sorry, I wanted to rephrase that, because you said you delivered one stand-alone OCD system, but did you deliver any integrated OCD systems?

Yes.

Okay, and that was also not recognized?

Right.

So, you had stand-alones and integrated delivery?

Yes.

Okay, what was your headcount at the end of the quarter?

We are stable around 215 employees at the last few quarters. And, I think that we will remain in the near future at this level of headcount.

Okay. You know, the other thing that I wanted to put in here, Giora, you pointed out the positive signal that (indiscernible) revenue growth and bookings growth, you know, indicates for you, but when do we start seeing the benefits of this? I mean, you're very heavily tied to (indiscernible) oxide CNP deliveries, and I just wanted to see when we're going to start seeing that kind of an uptick that reflected in your shipments?

It is a little bit difficult to answer because Applied reports booking and so on and delivery times are extending. And, we see the (indiscernible) much closer to deliveries. So, we may see some of that in this quarter, some in Q2, some of the deliveries (indiscernible). Some of the companies, as we read in the papers, (indiscernible) based on this for the entire year. Very difficult for me to say what will be the impact on a quarterly basis for us.

And finally, one last question. One of your competitors has been coming out with a number of press releases announcing their supplier relationships with an integrated supplier with several basically, I would say, second and third-place marketshare holders in some of the segments that you participate in. I think you're familiar with it, I just wanted to get your sense on what you think is happening there? And if you have had any increased pressure in the segment -- competitive pressures in the segments in which operate?

No. I mean, we have seen the press release, of course, and most of those are companies that we work with as well for a long time without press releases. The market -- one of the press release talks specifically about the open architecture. So, the market changed, probably, if you remember, from a few years ago where there was a drive towards exclusivity (ph) by several companies from the process equipment side. The market changed; it is an open architecture market, something we were preaching for a long time. And, it is a good competitive position. And, like a say, we worked with most of those companies. Not with all; some of them we kind of by-passed for practical reasons, like you said -- secondary and third place that we did not fully justify the expenses to get there.

Thank you, Giora, and Chai.

Joseph Asia (ph), Private Investor

(technical difficulty)

We can't hear.

Somehow, we got disconnected. I hope he will be back with us. In the meantime, before I asked Mr. Dishon to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available in two hours on Nova's website -- www.nova.co.il (ph). And I'm sorry, we do not have him back at this time. So, if you have any concluding statements --

Okay, so thank you very much for attending. Like I said, this has been a good quarter for us. We look forward very positively. We are very determined to work hard to achieve our objectives. And, we look forward to meeting you in three months from now. Thank you.

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