Nova Ltd (NVMI) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Nova Measuring Instruments second quarter 2004 results conference call.

[OPERATOR INSTRUCTIONS]

With us on line today are Dr. Giora Dishon, President & 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 of this conference call. If you have not received a copy of today's release and would like to do so, please call Albert Climent, Investor Relation at 1866-704-6710 or 972-3-607-4717.

Dr. Dishon would you like to begin?

Yes. Thank you very much. Thank you every body for joining us for our quarterly conference call to report the results of second quarter of 2004. Before turning into Chai Toren, our CFO to summarize the financial results, I would like to remind everyone that you can view our presentation of today on our website, which is www.nova.co.il. Chai.

Thank you. Welcome everybody.

I will start with the second slide with the title second quarter of '04 financial highlights. Revenues for the quarter were 10.2 million compared to 6.4 in the same quarter in '03 and compared to the 9.2 million in the first quarter of this year.

Gross profit were 46% compared to the second quarter of '03 with 38% and compared to the previous quarter with 44%. The net R&D were 2 million about 20% of sales. Sales and marketing expenses 1.7 about 16% of sales and Net income our profit of 0.50 million compared to a loss of 1.5 million in second quarter of '03 and compared to 0.1 million net profit in the first quarter of this year.

In the third slide, we can see a graph with the last twelve quarters revenues and growth profit and the trend of improvement from quarter-to-quarter in revenues and in gross margin.

Next slide, number 4, Geographical Distribution, we see that our sales to Japan this quarter were about 21% and to Asia Pacific 29%, to the US 32%, and to Europe 18% compared to the distribution, geographical distribution in '03, we see the trend of increasing sales to the east to Japan and the Asia Pacific region.

Slide number 5, the sales channels in the first half of '04 in number of systems percentage about 56% were sales to the PEM related to the production equipment manufactures, our partners, and about 44% direct sales to the end user. The mix of sales were for CMP for Cooper CMP and for Optical Critical Dimensions, Integrated Metrology Systems as well as Stand-alone at 200 and 300 mm systems retrofit and new.

Slide number 6, the summary of the financials this quarter. Revenues 10.2 million increase of about 59% over Q2-'03 and 11% increase over previous quarter. The service income were at 2.3 million or 23% of sales. We improved gross margin over previous quarter from 44% to 46%. The R&D net expenses, 2 million or 20% of sales. Sales and marketing 1.7 or 16% of sales. Profit $0.50 million or $0.03 per share.

The cash at the end of Q2 at 29.3 million and working capital 31.5. Inventory level as of June 30, '04 at 4.4 million compared to 4.2 million at March 31 in '04. Our backlog and production slot were above 5 million at the beginning of the third quarter and investments in this quarter and capital rose about $160,000, depreciation are around one hundred thousand. And while handing the conversation to Giora, we lower just watch the presentation you can see on slide 7, beautiful picture of our NovaScan Optical CD Stand-Alone. Thank you.

Thank you Chai. What I would like to do is first is a little bit a summary of the quarter from different perspective and also try to look at it from a little bit higher level of where we think are where we see the industry is going.

So last quarter, we have seen, I noted a very wide spread of our sales and the sustaining growth because we have seen shares of 200 and 300 mm systems, we have seen new systems and net profit, we did a significant amount of sales also to Copper. So it's Oxide and Copper CMP system.

Optical CD in Integrated earnings Stand-Alone sales in all geography with more acquisitions in Taiwan and Japan and as we press released about 2 weeks ago - 3 weeks ago, we are very proud that we have now all the top 20 Capital Expenditure spenders is our customers. So we have definitely sustained our position. So we definitely sustained our position and spread the growth around the different products.

Overall, we see that continuous growth in these areas and we expect that to continue with some emphasis that we think that the Copper CMP and Optical CD will grow faster than the other segments for us. We will continue to see the in the Optical CD, sales of both Integrated and Stand-Alone systems and as we look at the industry, the move to 300mm and move to 65 nanometer Integrated Metrology for CMP is becoming a master, becoming a penetration level there is very high.

In (inaudible), we continue as the industry moves forward and I will mention it again to develop the new generation of products that we have. So overall, we look at the industry and stock markets does not behave or does not show the trend for its own reasons, but if we look at the overall, the market for semiconductor equipment market, one phenomena, which we mentioned before and we continue to see the trend is that the process control equipment ratio is growing as the overall market and we continue to see that trend and that change. If I use some of the industry research data, year 2004 is expected to grow at according to Dataquest at 63.4% and 13.8% next year. Even the worst scenario for this year talks about 68.5%.

So significant growth that we all are hope to see and expect to see and there is enough information if we look at the industry from worldwide semiconductor forecast that the demand will continue to be there, may be in spite of some of the tone that we hear in the industry and if we look at the leading edge technologies, 90 nanometer and 65 nanometer, utilization rate is very high it's close to 100%, so we definitely expect to see that portion of the market continues to grow and that's the market we serve, which brings the overall central -- non-metal central market, our potential this year to about $300 million and 40 million again according to Dataquest in 2006.

So we see growth there and we see growth there above the average growth for the Wafer Fab equipment market. So looking forward, first we expect to continue to grow and we maintain our projection provided two weeks ago that this quarter will grow at least 5% to 8%.

We continue to see the trend towards Integrated Metrology as I said before primarily in the Stand-Alone for CMP and Copper CMP for Optical CD and we see that penetrating both the Etch and the Lithography equipment market. We also expect to see continuous growth in the 200 and 300, 200 more rational figure opportunity, but as the utilization level is very high, we think and we have experienced continuous growth in this areas as well and with our strong brand recognition and the after market sector working with all the process equipment manufacturers and all the major semiconductor manufacturer everywhere practically whether its China or Malaysia or Singapore and so on we expect that to continue.

And we also continue to invest with the co-operation with all the major process equipment manufacturers as we have always said and we always do. I think its worthy to note that the integrate metrology very gradually is becoming more important more significant and as in a Dataquest forecasted we still grow at compounded annual growth rate of 23.4% for between year 2002 and 2008 while they Stand-Alone is projected to have a compounded annual growth rate including the decline to '05-'06 of somewhere between 2 to 3%.

So we guess we think that this is the right market to be and as I said before in all market segments worth to mention that Copper CMP is talking over Oxide on the polisher market and that's why we think that this represents another good opportunity for our products now dedicated products for Copper CMP and gradually Silicon Ash will gain their market share in the overall integrated market.

So as the process control market continues to evolve and grow as part of the overall industry growing to the 18% of the Wafer fab equipment in 2007 we will be ready also with our new generation of metrology products and leverage on this trend in the industry. With that confidence on us looking forward we would be ready to entertain any questions.

Ladies and gentlemen at this we will begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Our first question is from Jackie Chow, Jefferies Group. Please go ahead.

Yes I have a question on the headcount at the end of the quarter as well as a follow up question on the break out of our 200mm and your 300mm equipment sale?

OK. The head count for the end of the quarter was 223 people and the mixture of the sales we will not disclose Titan System. I can just give more details in general we sold about 43 systems and ASP the mixture of sales was about $184,000.

OK Can I ask the follow up question on the your health in maturities -securities. Can you tell us a little bit more about that? What does that entail?

We are using some banker's financial instruments without any risk with different days of maturity in order to increase the yield on the cash we have.

OK thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

We have another question from Christina Osmena of Jefferies group. Please go ahead.

Just wanted to get some follow ups on Endura you said you sold 43 systems but you had some Stand-alone. So maybe you could let us know what how many stand-alone systems of those 43 were in the quarter?

The majority of the sales of course where integrate metrology and we don't want to give more details on this.

Right. Could you give us an idea of what kind of issues you might be seeing now that you have already you know entered the OCD market and you are shipping both on stand-alone and an integrated basis, what kind of issues do you see in the adoption of OCD and where they being used. First you know FAB and you know how do you think the growth is going to play out there? And I know it's going to be hard growth but you know where would that penetrate first etc?

OK. Well first it's penetrating the Stand-alone system in different companies like the first ones in most areas not always is Stand-alone to see the capabilities to make judgments where it can be used.

But there is a strong tendency to look at the optical CD as an opportunity for an integrated sometimes as even the pooling of the stand-alone is based on the plans to integrate it at later stage. There was some change in the market trend in the last year and year and a half primarily everybody's logic was to go first to photolithography to do photoresist what we have seen is the change and currently most penetration as an integrated system goes on the edge equipment and first goes through the critical steps like the gate mask opening and so on where CD control is extremely important and can serve well.

So we definitely see that primarily going into the edge areas as integrated system I think all of the major players in the edge market are offering integrating system like as I said primarily or first as gate mask opening but also two of them is seeing is taking inroads in integrated and some of the polysilicon application.

Looking forward we expect that within 6 to 12 months we may see that penetrating also into the litho area slowly. I think my personal opinion is that its not yet understood how this tool be used as a process control tool as an integrated and that's why it will be slower on the photoresist track as you know and its been discussed in the past even if you do good CD measurement optical CD measurement on the track information needs to go back to the host because it needs to go the stepper, which makes the use of the data more complex and therefore it's a longer term type of penetration or proliferation to bring high volume manufacturing.

Did you think it's taking a longer time to penetrate the track because the track market the OEM is virtually a monopoly?

No. We probably thought that in the past I don't think so because there is no objection of the track manufactures whether its Tel or its DNS and we hear a little bit that DNS is making some inroads. But its more of the complexity of instrumenting it into the process the complexity of putting on the track feeding to the stepper doing some kind of ATC in between that the customer needs to do that.

So I think that complicates things and so it will take more time to prove it on a stand-alone basis and understand how it can be implemented and then go in of course it has the complexity of every integrated metrologist just remember the margins constraints the cooperation requirements from three parties and so on which will make it a gradual and slow growth compared to what you would like to see or what you expect to see only from a technology reason.

Now separate question here. You have generated cash from operations and yet your outflow cash levels went down it looks like you had used some of that to finance your receivables. Why did your receivables pick up so much?

Well it's an ongoing operation a mixture of different between accounts payable and accounts receivables and also preparation of inventories to finance the expected growth.

What are your targets in terms of DSO? Do you have a target?

Yes. Should be below 65 days.

And I also noticed that your mix in revenues. Just quite nicely to Japan and I don't think - I don't recall you having such a nice penetration in Japan before probably because that market wasn't that active. But are you getting better visibility and better customer penetration in Japan or is it just the overall market dynamics?

Well I think primarily its overall market dynamics because Japan is being active in the last year and it's done. To have the OEM supply, we are the last to see that happening so that's the main thing but we have good position in Japan. We have our subsidiary in Japan and of course a relation with a process equipment manufacture. So we get visibility and we act accordingly.

OK and finally among -- within your OEM revenues did you have more than one OEM that represents that more than 10% of those OEM revenues?

Yes.

Yes.

Well primarily we have two OEMs as we all know because CMP is applied and on a bar on the X side we have Lamison (ph) OEM.

OK so therefore X was more than 10% of the OEM revenues?

Yes.

OK thank you.

Thank you.

Thank you. Our next question is from David Wanetick of Gateway Reports. Please go ahead.

Thank you and very nice quarter gentlemen. One question I believe Chai said the cash levels were 29.3 million and I am just looking at this correctly on the announcement today that cash equivalent was 16.2. Can you help clarify that?

The press release says that the cash and the cash equivalent is at 29.3. If you look into the detailed books, there is cash and there is the long term and short term and that's accounting, so for all practical purposes, the cash and cash equivalent is at 29.3. There is a breakdown of long term and short term 16 cash and cash equivalent and then you see next item on the long term asset, you see 8.962 health to maturity, so for all practical purposes, in the press release, we have put it in under one number.

OK. And the previous caller asked about this too, but can you give us a little bit more detail as far as why the absolute cash levels declined from 26.6 million beginning of the year to little over 16 million currently?

Well, as like I said before, you need to look at the combination of the cash and cash equivalent and the long-term health to maturity because if you look where you see that they help to maturity this quarter is 8.269 and was zero in the previous report. That is just because we changed our investment policy and moved things from one place to other, so like I said from practical purposes, it is a decline of $1.2 million in cash and cash equivalent. It is just accounting reporting differences.

OK. Another question, as you continue to grow more of your business in Japan and Asia Pacific, can you tell us about the more about the nature of doing business there, are they more price sensitive, or you having to discount prices, or they less likely to buy additional service contracts, or do they take longer to pay their invoices?

Well, two things, first, most of our sales are OEM sales, so whether it has being sold Japan or to Taiwan or to Europe, sales goes to the OEM, which is either Japanese or American, but it's regardless of the territory.

So, for all the first part of your question, there is no difference selling to Japan or selling to anywhere else in the world or Taiwan. On the other part of your question, traditionally and we see the same thing, it is more difficult to get service contracts from Japanese or Asia Pacific, Taiwanese, Chinese than it is to get the service contract from US or Europe, but that is typical for everybody and that has been our experience for the last eight years.

In effect, you have to continue to provide service to the customers in Japan and in Asia without the benefit of getting revenues for those services, do you kind of bundled in future service guarantees with the initial sale?

That is a possibility, we don't do that much because we sell OEM and so we sell it this way, part of the service is provided by the OEM or the process equipment manufacture they provide the first line support and we provide the services in those territories more on the time and retail basis rather than on service agreement.

OK. And can you put a little bit more color on your expectations for growth in the copper part of your business and the Optical CD, what kind of growth rate, what kind of pricing trends you might see in those areas?

Well, I cannot I think, like I said, we expect to see that will grow faster than other segments, but I cannot quantify that in numbers. Price range, generally speaking, these systems have a better pricing, both the copper and the Optical CD, but that is a high cost and more expensive system to built, so we don't expect that to change dramatically anything in our overall performance.

OK and the last question for this right now, you said average selling price is about 184,000 on the 43 systems you sold recently, can you put that in context of where the average selling price had been a few quarters ago or last year, and if you can give any forward-looking guidance that will be helpful as well?

I can repeat the numbers from previous quarter, it was 168 and

160 in the first quarter.

Yes.

OK.

It was 193 in Q4 and 179 in Q3.

OK, thank you very much.

You are welcome.

Thank you.

Thank you. The next question is from Taylor Tomkins of Anderson and Starglick.

Yes, now that you are back in black and see sequential growth, any plans for a buyback stock at this level?

No

How come?

Well, we know we have a good cash position, but and we know that the share prices is very very attractive, but currently we do not have any plans. Our board did not decide to activate any buyback plans. This is only few quarters of profit and you need to be more profitable, we believe in order to start a buyback plan to justify that.

OK thanks.

Thank you. We have a follow-up question from Jackie Chow of Jefferies Group. Please go ahead.

Just I have a couple of follow-up questions, one of them is on stock compensation, I know that you guys don't have any stock compensation expenses this quarter. so when then are you anticipating any for the following quarter and so, do you have a breakup of that in terms of SG&A and R&D and cost (inaudible)?

We don't expect to see any significant stock compensation in the future quarters.

OK and then I guess one last question that I have is on your, looking at, since your quarter ended in June, just wondering if you comment a little bit on the month of July and first two week of August and what you see are out there right now in the fields in terms of last sales and whether there is any push backs from the OEMs and all that? How many (inaudible)....

Good question because that's the sum of the rumors we hear or not we hear, we read about in all the report and so on that there are some push backs or cancellations or whatever it is, we did not see any single cancellation or any single push back for the time being and we don't expect to see that.

I have to add to that, that our sales cycle is very short, so we are probably will be the last one to feel any of that because if someone is putting a purchase order for a system six months ahead, may be there is a higher opportunity when the market turns around. But we do not see that, and we do not expect to see that, so the first six weeks of the quarter, were good, good six weeks.

OK, thank you.

Thank you. We have a follow up question from Christina Osmena of Jefferies Group. Please go ahead.

But the, your, since you are reading up, and got the possibility of tougher times ahead, from some of these negative analyst. Have you made provisions for down turn?

Have you kind of walked through, may be, what you think your breakeven level would be during the down turn, and you know where you might if you, are you going to make, you know, take any costs or anything like that, and you made any plans like that?

Well, we. Ill put it in a very general sense. We always need to be prepared for a down turn because, we live in a market, which is very unstable and if year add to that all kinds of terrorist strike and so on. You have to be ready, and we are trying the best to be ready for that.

But at the same time, we are working very hard to leverage on the up turn, and on the expansion of the different products in the different market segment. So to answer your question, we did not make specific provisions, we do have the plans, if needed, how we want to do that, and hopefully bring down the break-even point if needed.

Where is your break-even right now, Giora you could remind us, and what do think it can go?

Well, the break-even now as you see it is around the $2.0 and $9.5 million. That's the average, and this is some of the increase in especially in, rebuilt are expanding the service organization, because now we are growing in (inaudible) breaking point to grow, not that significantly but grow a little bit 5% to 10% or so. If we keep the momentum for growth, and the expansion to other, to new territories, to new customers and so on, and new products.

And should goings get tougher, do you think you could take that break-even level down, and how quickly could you do it?

I don't know, if - have the detailed numbers for that, I think we have shown in the past that we can do it, so we will do it again, and when needed.

Thank you.

Thank you. There are no further questions at this time. Before I ask Mr. Dishon to go ahead with his closing statements.

[OPERATOR INSTRUCTIONS]

Well, thank you very much everybody for joining and for the interesting questions. I hope we provided the information that, you were looking for.

I am sorry to interrupt. We do have an another follow up question. Would you like to take it or another?

Sure, now we can take it.

OK, so we have a follow up question from David Wanetick from Gateway Reports. Please go ahead.

Sorry to extend the call. As far as the backlog, I think you have said your $5 million in backlogs now? Can you give us some context on that how that compares to historical levels of backlog and what is included in that backlog number?

We don't, we did not give in the past, any details about the content, generally it is higher than the previous quarter's backlog.

Can you give me a sense, as to what the, may be average backlog has been, and what it was, last quarter?

We don't have an average, backlog. We have seen the backlog growing from 2 million to 3 million to 4 million to 4.5 to 5. Its from our experience in this, the very specific experience is, it's a decent backlog, but as I said before, being an OEM, partially OEM supplier, with a very fine, say same cycle. Our backlog is not the best indicator of how the quarter will look like. And that's - part of being OEM supplier and that's something we live with.

Thank you very much.

OK so, I will go back to the closing statement. Thank you very much for joining us and now hope, really hope we answered all the questions.

We are looking forward to this quarter positively, despite the some negative atmosphere, and as we see in the stock market, but not in our industry.

And we look forward to seeing you three months from now.

Thank you.