Nova Ltd (NVMI) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments' third-quarter 2004 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 10, 2004. With us on line today is 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 contents of this conference call. If you have not received a copy of today's release and would like to do so please call [Gilbert Kahana] in Investor Relations at 1-866-704-6710 or 972-3-607-4717. Dr. Dishon, would you like to begin?

Thank you very much. Thank you everybody for joining us at this late time for you and even later time for us. Before transferring the call to Chai to discuss the financial results, I would like to draw your attention that today the on-call presentation can be found on our website www.nova.co.il. on the IR Section. Chai?

Thank you. Good afternoon and good evening to our audience. I will start with the third-quarter financial highlights with quarterly conversions. Revenues for the third quarter were at 10.7 million, about 45% increase over the third quarter of '03 with 7.4 and about 5% increase over previous quarter. The gross profit improved to 47% versus 42% in Q3, '03 and 46% in second quarter '04. R&D net expenses were this quarter at 2.1 million about 20% of revenue, compared with 1.8 million in third-quarter of '03 and 2 million in previous quarter. Sales and marketing were at 1.8 million, above 16% of revenues compared with 1.7 million third-quarter '03 and 1.7 million in previous quarter. The net income net profit for this quarter about $800,000, about 5 cents after share compared with the loss of $800,000 in third-quarter '03 and compared with the profit of 0.5 million in previous quarter.

If we look at the trend of the revenues and gross profits from Q3, '01 to Q3, '04 this quarter, we see continuous growth in revenue from about 3 million to about 10.7 million and improvement in gross margins in this period of 3 years from 24% gross margin to 47% gross margin. The geographical distribution year-to-date is 36% in the U.S.%, 9% in Europe, 17% in Japan versus 7% in '03, and 37% in Asia/Pacific versus 22% in '03 and this is in line with the whole industry capital equipment sales to the Asia/Pacific and Japan region. Our sales channel distribution year-to-date distributed about 63% sales through our PM's partner and about 37% direct sales to end-users, and this is relating to 200 and 300 mm systems retrofit and new for application and CMP, Copper CMP and Optical CD integrated systems and stand-alone. To summarize the Q3 financial results, revenues were 10.7 million, increased 45% over Q3, '03 and 5% over previous quarter, and revenues for the first nine months of '04 were 30.1 million, about 62% increase versus the nine of 2003.

This quarter, the service income were at 2.1 million, about 19% of sales and we have seen improvement in gross margins over previous quarter from 46% to 47%. R&D net expenses 2.1 million or 20% of sales, compared to 1.8 million and 16% of sales. Profit was $800,000 or 5 cents per share. Profit for the nine months of '04 were 1.3 million versus loss of 4.8 million in the first nine months of '03. Cash at the end of Q3, '04 was at 30.9 million, this is an increase of 1.6 million over the previous quarter. Working capital, 32 million an increase of 0.5 million over previous quarter. The investment in this quarter were $150,000 and the the depreciation $100,000. We continue to keep tight inventory control and with estimated growth in revenues over about 50% year-over-year. We succeeded to maintain inventory level in 4.5 million in the end of this quarter, compared with 4.2 million in the end of '03, which is in similar level and an environment of increasing revenue significantly. At this point, I would like to hand over the conversation to Giora. Thank you.

Thank you. To dwell one more minute on Chai's comments. First, the issue of cash which increased 1.6 million. This is the first quarter we maintained a positive cash flow and it is a nice achievement. Also I would like to draw your attention that because of accounting practice, some of the cash appears in the reports as long-term held-to-maturity, so if you look at that, it seems like the Company has $20 million cash, but actually it's about 30 million or precisely 30.9 million. And the other part that I would like to emphasize, of course, is the ability to maintain the inventory at very tight control and looking forward where the industry is, we think this is as Chai said, also an important achievement and good factor. So to summarize how we look at the quarter, this quarter and all the last 3 years, we've seen the last 3 years 13 quarters -- 12 quarters out of 13 with a continuous growth in revenues in the margins and the profitability. And we think this is very important achievement and we work very hard to achieve that.

As I said before, cash at the end of the quarter is positively at $30.9 million which represents a very strong balance sheet and strong cash position. We maintained our market share despite all kind of rumors and about 60% of the integrated market. And the gross we have seen is very balanced between CMP and Copper CMP and Optical CD in 200 and 300 in all territories and expanding east as the rest of the industry with nice introduction both in Taiwan, Korea, Japan, and Singapore, and China, of course. We continue to develop as technology nodes move forward, we continue to develop new applications for our existing tools, for 19 nanometers, for 65 nanometers. We build in a new model of our system and also continue to develop the Next-generation Metrology System. And more importantly, we were able to maintain our reasonable -- I would always like it to be better -- but reasonable ASP of our products under the pressure in the market.

So we know that the industry is -- recent research report that 2005 we are going to see a decline in the wafer fabrication equipment whether it will be 5% or 20%. We are going to see a decline. We expect the process control segment to outgrow or decline less than the rest of the market and then we also expect to see our results to continue to improve. The central market is definitely going to continue to grow as new applications, such as Optical CD are continuously entering to the market. My personal comment on that also that I don't think that the decline will be long or significant and probably whether it's in Q2 or Q3 of next year we will start to see the change because the last slowdown was long and deep enough and the needs are there.

As we provided the guidance at the beginning of the quarter, we expect the revenue for this quarter to be flat sequentially. Visibility is poor, so it may be better, but the expectations as I said are that we would see a flat quarter. We expect to continue this market, the integrated process control market, as for trend toward integrated in the thing from both CMP and Copper and the Optical CD and Etch and Lithography are continuing to benefit the market and the market of opportunity just grows. Grows for everybody and grows for us. And like I said, we think this will outgrow any decline in the wafer and fabrication equipment market as we say. And more importantly, we continue very close collaboration with the process equipment manufacturers, with all of them with the open architecture. Concept that we have and we will continue to develop the relationship and providing [indiscernible] to the market. With that I would like to hand over the discussion to any questions that you may have.

Thank you, sir. Ladies and gentlemen, [OPERATOR INSTRUCTIONS].The first question is from Christina Osmena.

Good evening over there. And congratulations on beating the bottom line and growing cash this quarter. Giora, I wanted to get a sense of your take on this cycle and why you think -- I know that there are a lot of theories out there and I just want to hear your take on it. Why do you think it ended so quickly? And if it isn't -- if it is the end the cycle?

Hi, Christina. Well, you think -- your question is why the uptrend cycle ended or why --?

yes, I mean what is your perspective?

-- will end soon?

Both of them.

Both of them. Well, I think that -- and I think it's -- what -- what I would say is probably quoting a lot different people that I read and I hear and so on and so forth. First, the uptrend this year was at least in the first quarter or two quarters was steep, 60%. This is very steep, and it beat all the forecasted you see last year that talked about 40, 45%, ended up with 65%. So it falls faster than projected and of course, when it's faster, also have the opportunity to level off or decline. That's one thing. The other thing in my mind is the scars from the recent downturn and when there are signs, there is a holding. But I think it is holding because utilization went down from 95% in the foundries and so on to 90%. In the recent downturns, they started to buy equipment when the utilization was 80%. Now the stopping or the -- not the stopping but the slowing down when it goes a little bit below 90, I think it is overreacting or it is over cautious. And for that reason, I think same time that this will change its direction relatively fast because the demand for semiconductor devices whether it's DRAM or for cell phone is whether it is logic or DSPs and so on, I think that the demand will continue to grow. I think inventories are already leveled off. So I think this is not -- this is going to be a relatively short slowdown, not even a significant downturn.

And Ghiora when you looked at the last 2 cycles then that have taken place, the 2000 cycle, the big driver for you was the oxide CMP application and this time around you have been able to diversify that a little bit. When you look into -- granted there is no visibility into the next cycle. Using your best guess, what do you think is going to be the biggest application drivers for you?

Well, good question. Two parts of that. First, we started and we are going to gradually increase delivery of stand-alone system. More in the Optical CD part, but typically this is combined depending on the application, it's combined with the evolution of the integrated, but separated from that on one hand. So we can see for us growth opportunity in the stand-alone, which is both the number of systems, but primarily also on the revenue side. The two other aspects to continue to grow, one is, of course, the Copper CMP. Copper is very slowly, very gradually much slower than everybody expected. It is moving in, and started at 0.13 moving forward at 19 [ph] nanometer and of course, 65, you find 8 and 10 Copper layers. So Copper CMP represents an opportunity because the process is not maturing fast and there is a lot of difficulties in making it production -- high-yield production process. So it is a growth opportunity that we think can be very high. The other part of that, of course, is the Optical CD. It is just beginning to penetrate. And if you look it is penetrating primarily to the Etch market, different Etch, the electric Etch for dual [devisene] and SDI or a lot for the gate Etch. And the Etch is a huge market. It is a very competitive market, which is in a way it's good for us. When there is a monopoly like you have in [lethal ] new things get in slower, as you know. So the Etch market -- and the Optical CD represent various applications beyond Etch from Optical CD, we know [ lethal ] track, although I think this will be very slow. And we know that it can get to other gate processes. So we see the Optical CD as a huge opportunity for everybody in entering with very advanced capabilities and including ourselves.

Okay, so following on that, you have OCD stand-alone, OCD integrated and Copper CMP. If we can focus just briefly here on Copper CMP, how stable is that process compared to oxide CMP and how metrology intensive is it, more or less?

Like always you have tough and detailed questions for the entire audience. There is a big difference between Copper CMP and oxide CMP. Oxide CMP was unstable and did not have a natural stop as part of the process, and that's why integrated penetrated it gradually, and today there is no oxide CMP and it is only 2 layers now, it's just the [ I & ILD ] But there is no interdilectic CMP without integrators. So penetration level is high, so market opportunities is there just because it is high level of penetration and a lot of 300 millimeter. Copper CMP, it's a different process issues because the phenomena you face is not end pointing, but residues of barrier or [dishing] and erosion phenomena when you overpolish and when -- and it is also very costly because of the flurry systems and so on. So the opportunities are different. The solutions are slightly different, but the overall potential for integrated is in Copper CMP is very high.

And one last question and then I will let it go for other people to ask. You said that the stand-alone systems of OCD was an opportunity. How many customers have you shipped to so far, different customers, where you are shipping both stand-alone and integrated, and then how many are you in discussions with?

Number of customers 3 and it is International, so it's not just one site.

So 3 where you have shipped?

Three customers, yes.

And then in discussions are there any additional ones?

Say that again?

Are you -- so you have shipped stand-alone OCD and integrated to 3 different customers. Are you in discussions with any additional customers in addition to those 3?

Definitely we are with -- between 3 to 5 more customers.

Gaddy Bergo of Apex.

Congratulations on the report. I wonder if you can speak about the next year and Q4, what you will see in the market, the lows said that they will be a decline in the market as some forecasters forecast, but if you can speak more about this?

Well, we said it before, yes, we see like everybody else we see the decline, general decline in the market. We read the reports, and hear the conference call of the other equipment suppliers, so, yes, we see a decline, general decline in the market. Of course in Q4 and also looking forward to '05, we see it -- in short-term, we see a very moderate decline. Some rumors about pushouts and some roomers about cancellations. We have not experienced either. So it is a little bit more difficult to get the orders we need to get. You need to invest a little bit more time and more creativity to get this. So we haven't seen a decline yet, but it is definitely going to be between stable to very hard to get next 2 to 3 quarters.

If you look at some of your competitors, they are saying that some of the diagnostic tools won't be hurt as much and they even see an increase, as you know. The big manufacturers will push out the heavy tools in performance and instead buy some optical machines that can help them increase their yield. So can't you see a turnoff from one side capital expenditure will be posted, but only for specific diagnostic tools instead of process tools?

I said something similar to that in the conference call. I think that within the decline, the process control segment will see less of a decline, maybe flat. It is very difficult to quantify that, but I agree that -- or I think that the process controller segment will see less of a decline. Nevertheless, it's still an overall atmosphere if companies are holding back investment and they are not easily shifting it from one place to the other and the short-term is just reduced. So if I spent -- if I plan to spend 1 billion and I reduce it to 800, the first step is I reduce it to cost abroad. And then I go back and do some homework and maybe prioritize it differently. So although, like I said, we will see less of a decline in process control equipment, I don't think we will see any reverse trend or any different prioritization on the short-term.

David Wanetick, Gateway Reports. Speak up, sir.

Very nice quarter. Congratulations on your financial success. Going forward, as -- if you do experience a little bit more pressure due to industry development, do you think you may be more inclined to compromise on ASPs and still try to maintain volume? Or do you think you are going to try to maintain your prices and maybe forgo a little bit of volume?

I don't think that on the short term it is very price sensitive. Yes, we'll see pressure on price and we may see some decline. I don't think on the short-term it is going to be significant, but it is going to be to some extent painful. But not that significant and -- but the longer term, that's a little bit different because on the longer term this may have an impact unless, of course, you come with better solutions that you can sort of little bit command the prices up again.

In the last quarter, actually over the last nine months, you have been very disciplined on the cost side, everything from research and development to sales and overhead, do you plan to maybe invest less in R&D going forward as --?

Good question. Thank you. We were cost conscious but we did grow throughout the year with the overall growth, so actually looking forward with the slowing down of the markets, we are going to implement some cost-cutting measures to the usual cost-cutting measures, nothing drastic. But, yes, something in the range of maybe -- I don't know the range, but implement cost-cutting measures so we can trim down the operation and be a little bit more ready for any slowing down.

Thank you, if there are any additional questions, [OPERATOR INSTRUCTIONS]. Christina Osmena, Jeffries Group.

Questions now for Chai, just a couple of numbers that I need to get from you. First of all, the stock-based compensation broken out by cost of growth and SG&A and R&D and then depreciation and amortization to CapEx headcount, the number of units in the quarter and the ASPs? And I will start with that.

First for the stock-based compensation, you can see that in the last 2 quarters, there are 0s, because we completed the depreciation of the previous plans and from now on, unless the SEC will change the regulation of relating to the effect of option plan on the P&L, we will not see any stock-based compensation. Regarding the investment and the depreciation, the investment in capital -- in this quarter was 150,000 and depreciation, 120,000. And what was the third question, please?

The headcount, the number of units that you sold on the quarter, and the ASPs, average ASPs?

ASP was 180. And headcount at the end of the quarter not including the self-contracting and the staff employees were 45.

And then -- I guess I can get the units.

Well, because there is a little bit stand-alone and integrated. And we don't provide the number of units.

Oh, okay. But that ASP is blended, that includes the stand-alone units, yes?

And, of course, if you take all the income, you should remember that there service income and so on. So --

I would like to add that we delivered more systems, but we recognize in the revenues are not all of the deliveries.

And then you did -- did you recognize some -- some stand-alone OCD units in the quarter?

Yes.

And then your OCD -- I know that you don't -- you no longer break out your units by your sales by which application; is that correct, right? That was a new practice last quarter?

Yes, that's correct, also, because it can also be interchanged to some extent. So it is not from -- it is not that meaningful.

Off the OCD units that you delivered, both stand-alone and integrated, how many of them were -- can you break it out -- or maybe you can just give us a sense of how it -- what customers are taking shipment on them by application, DRAM foundry, et cetera?

When you talk about 3 customers, that's very difficult. This is not a very meaningful breakdown because it's -- customer-by-customer and application-by-application.

Because it would give a lot of information? Okay, that's fair enough, especially with 3 customers, it might give them away. Okay. The last question I have here is, your current break-even revenue level.

It's about 10 1/2.

If you have -- you made 5 cents on 10.6 million --

You are right. Not for the previous quarter but we moved forward. That's why we are doing some tightening the belt so we will get to below the 10 1/2. And just to remind you, you talk of -- you talked a little bit about the number of systems and so on. As I said both on the revenue side and on the systems side I think we were about 60% market share.

There are no further questions at this time. Before I ask Mr. Dishon to go ahead with his closing statement, I would like to remind participants that a replay of of this call will be available in 2 hours on Nova's website, www.nova.co.il. Dr. Dishon?

Thank you so much, everybody. Thank you so much for staying up so late because tomorrow is Veteran's Day, so we had to move it forward. So it's been a good quarter, and we definitely hope to continue to keep the momentum of the last 13 years and it will require hard work to continue to do that and we expect to do so and hope to see you 3 months from now. Thank you.

Thank you. This concludes Nova's third-quarter 2004 results conference call. Thank you for your participation. You may go ahead and disconnect.