Nova Ltd (NVMI) 2004 Q4 法說會逐字稿

[Operator instructions] Dr. Dishon would like to begin.

Thank you. Good morning. Good afternoon. Thank you for joining us on the conference call for summarizing Q4 2004 and annual -- fiscal year 2004. Before handing it over to Chai Toren to discuss the financial results, I'd like to remind you that the presentation of this conference call is on our Web site at www.nova.co.il, and you're more than welcome to browse through it as we go through the presentation. Chai?

Thank you. Good morning. Good afternoon. I'll say the number of slide when I am describing the good results of Q4 and 2004. Second slide. The revenues for Q4 were 10.8 million, with a profit of 0.2 million, about 46 percent gross profit compared to previous quarter of 47 percent, and compared to fourth quarter of '03, with 39 percent.

The third slide, we can see the trend of revenues and gross profits between Q3 '01 and Q4 '04, with gradual growth from quarter-to-quarter and the improvement of gross profit from 24 percent from Q3 '01, to 47 percent in Q3, and 46 percent in Q4 '04. Next slide, slide number 4, the 2004 Financial Highlights. Revenues for the year were 40.9 million, compared to previous year, 26.7, about 53 percent year-over-year growth. Gross profits for the year were 46 percent. Investment and expenses in R&D, 8.7, or 21 percent of sales, compared to previous year, 8.6 million, or 32 percent of sales. And net income for this year was 1.5 million, compared to a loss of 4.2 million in '03. And EPS for this year is $0.10.

Next slide, we see a comparison to revenue trends in Nova from '99 to 2004. Compared to the wafer fab equipment, year-over-year change in total industry growth was 5 percent; in Nova growth was 31 percent. Year-over-year in '04, wafer fabric equipment growth was 60 percent, and in Nova, 63 percent. Next slide, slide number 6, Geographical Distribution. We can see the trend in geographic distribution toward the Asia-Pacific region and Japan. Nova sales to Japan in '03 were 7 percent of the total sales and, this year, in '04, 18 percent. And Asia-Pacific grew from 22 percent in '03 to 38 percent in '04.

Next slide, the Sales Channels and Distribution in '04. The sales through the processed equipment manufacturers were 66 percent, while direct sales to end users about 34 percent. It's a mixture of all our sales, for 200 to 300 systems, millimeters, retrofit and new, and for CMP, Copper CMP and Optical CD, integrated systems and stand alones. The ASP increased this year to 191 compared to average sale price in '03 of 183.

And I'll summarize the '04 financials in slide 8. Revenues this year, 40.9, 53 percent increase over 2003. Service income was 7.5 million, or 18 percent of sales, compared to 5.5 million in '03, and 21 percent of sales. Improved gross margins this year from 39 percent to 46 percent. R&D net expenses 8.7, or 21 percent of sales, compared to 8.6 or 32 percent in 2003. Sales and Marketing expense is 6.9 or 17 percent of sales, compared to 6.5 previous year, or 24 percent. And profit of 1.5 million, or $0.10 per share, compared to a loss of $0.20 in '03. Our cash at the end of 2004 is 30.8 million, working capital 31.8, and we continue to maintain a tight inventory control despite the significant growth year-over-year of 52 per -- 53 percent. The inventory increase from previous year was only 1 million, from 4.2 to 5.2 million. And with that, I would like to hand the discussion to Giora. Thank you.

Thank you, Chai. Well first let me give a little bit of a summary of 2004, and then we'll try to look forward. So, basically, 2004 was a very good year. We improved our performance in any possible aspect of revenues, profitability, maintaining the expense level of the R&D and the sales at the similar level so it's lower a part of the percentage of the total revenues, and we maintained our strong cash position and also our market share, the ASP and also more balanced growth, because more products sold for Copper C&P, in addition to the C&P that is our traditional market. Copper C&P, a good number of systems for Copper C& P spread in a big number of fabs around the world. Optical CD systems both in stand-alone configuration and integrated configuration.

So, more balanced growth, more contribution of the new products into the revenues, and increase of our revenues coming from -- from the east. from Asia-Pacific, Taiwan, Korea, China, Japan, Singapore, and that's where with the general trend of the entire wafer fabrication -- wafer fabrication equipment as a percentage-wise. And if we compare, we see very similar trends, so we're moving in the right direction. We still have our strong position with most or all the major semiconductor manufacturers, especially those who spend more money on semiconductor equipment.

And in addition to that, I'd like to comment that new systems provide not only another revenue stream, but also additional capabilities to develop new applications and new capabilities that do not exist today, in order to provide better and more enhanced solutions to the semiconductor manufacturers, to meet the needs that continue to evolve from 90 nanometer and 65 nanometer technology node. And we continue to develop new models along with a very intensive development of the new generation of our metrology system that will be introduced this year and will provide even further capabilities towards the 65 and 45 nanometer technology nodes in the different application.

I would like also -- I would like also to point out that -- or maybe share with you a little bit where we are in the market today. Semiconductor wafer fabrication equipment today is within a transition. We see it in reports coming in every other day, and we see it in our company's reports and also we see it in the analysts' reports that we get. We are in a market which is declining, was not forecasted to decline three months ago, but months ago in December, you see the decline. It's declining, and the real question is: How far? How long will be this downturn? And of course there's a lot of confusion and different messages and different reports indicating one way or the other.

So there's a lot of uncertainty in the semiconductor equipment market today, and we believe that the general trend is that we may see a mild downturn within the next two quarters with a very, very, limited visibility of trying to understand where will it go the quarter after that. But, if we look at all the different parameters such as the semiconductor revenues, and different ratios of equipment to revenues of technology nodes; the number of 300 millimeter fabs that are in the middle of equipment and getting it to full production. We think -- and well, we agree with a lot of the reports, that towards the middle of 2005, this trend should change, and we should resume to see growth somewhere six months from now.

In addition to that, if we look into our specific segment, which is the Nonmetal Thin-film market, we definitely can see that this segment is either declining less, or sometimes growing without decline, such as the Optical CD. So the opportunities and the visibility -- feasibility and not visibility -- is still there somewhere, a little bit longer than the next -- next quarter. But, like I said, second half of 2005 we think that the market will resume growth, and this will impact everything -- everything we plan and everything we would like to do.

So we expect to continue to be a leader in the integrated market for all integrated products, such as we mentioned before: the CMP, Copper CMP, and the Optical CD, in the different application areas, as stand alone, as for etch, and some time down the road, lithography will enter that segment, as well. It's not there yet. We will, at the same time, because of the poor visibility, and the limited way of making accurate planning, and as you may be aware, I kept saying that before as an OEM supplier, our visibility is smaller or lower than the general visibility, and therefore we will continue to close monitor our operations, our planning, have a tight control on that. And yet at the same time continue to develop the relations with all the strategic customers we have, whether it's the semiconductor manufacturers, or the process equipment -- major process equipment manufacturers.

We will introduce new models of our systems during the year, and in the second half, the next-generation systems. And, therefore, on the longer term we are more confident on the things we can do. I know everybody is interested on our ability to give guidance, which is very limited. So -- and we had guidance that we gave at the beginning of the year. So, currently with the poor visibility, we expect some slight reduction compared to the guidance we provided in the beginning of the quarter, which was roughly flat. We may expect to see slight reduction in the first quarter. Second quarter is more difficult to see. Third and fourth quarter, as I said, we expect to resume growth. Well that concludes that, and we welcome any questions.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question-and-answer session. If you have a question, please press the star, followed by the 1 on your touchtone phone. If you wish to decline from the polling process, please the star, followed by a 2. I'll repeat the instructions. If you have a question press the star, followed by the 1 on your touchtone phone. One moment please. Our first questions comes from Richard Tulow [ph] of Gateway Research.

Congratulations, guys on an excellent quarter. My question is in regard to your expectations for CapEx for 2005. I've seen numbers anywhere from down 9 percent to up 10 percent for the year. What numbers are you planning on?

Thank you for -- for the question. I -- you know, the CapEx is big numbers, and that's for the big guys to provide the total CapEx numbers. We've seen numbers all the way from minus 17.5, to somewhere -5 percent. What I think is more important is that if you look at the numbers for last quarter and this quarter, and maybe the next quarter, based on the CapEx announcement of the big spenders such as Samsung, Intel, TMSC, and so on, the important factor is that even for the 17 -- the minus 17.5 percent or 17 percent decline for 2005, the only way to get to that number means that it needs to change the direction in Q3; otherwise, the dip will be much higher. So -- and if the dip would be higher combined with the semiconductor -- not the semiconductor equipment, the semiconductor spending the ratio of capital expenditure to semiconductor will go below any historical number. So our belief, our planning, is based on very small numbers, and we're not applied material looking at the overall trend, but looking at our specific segments. Nevertheless for the trend, that's very important. Our understanding and our belief is that in Q3, the trend must change and we should see growth from Q3 '05 onward.

Thank you.

Thank you. Our next question comes from Cristina Osmena of Jefferies Group. Please go ahead. Good evening over there, Giora.

Could you tell us what you think would be driving the growth in Q3, and when you make your comments about the industry, do you factor in any kinds of let's say, tenuousness, after Q1/ Q2 from the [inaudible] and number guide?

Well, hi, Cristina, and thank you for the question. I don't know. I don't think we are the experts on -- on the general trends of the industry and the segmentation between DRAM and Logic, and boundaries which we believe will be a major factor in the resuming of growth. I understand foundries, [inaudible] MSIC did hold back more than others, and if semiconductor spending will continue, they will have to resume growth in order to meet. We've seen reports of reducing prices in regard to continue to grow in volumes and revenues, so I don't have that much of a grasp whether it's DRAM or the foundries that will drive that, but I think the two major factors is overall semiconductor spending. It's the foundries that will have the strongest -- foundries indeed will have a strong impact. The big companies such as Samsung and Intel that stick to their plans regardless of exactly the small changes, and the overall semiconducting industry which should be a good year in 2005.

Thanks. Giora, now that you're looking into at least the few quarters of poor visibility, could you tell us what you are going to do with your costs and how you go about making a decision on whether or not you can submit to an R&D project or an engineering project? I'm particularly interested in that expense line.

I think -- I think if we have poor visibility, and we'll see the performance of course, for the next two quarters, and at the same time we think the market will resume growth in Q3/Q4 of this year, and we see how many 300 millimeter fabs are not fully completed not fully committed, but they have to be there in order to get -- to cross the line like Intel did. That 300 millimeter becomes more efficient manufacturing. All these factors for us mean that we should be ready with the new product in the new generation towards the end of the year, which means we should try and stick as much as we can, maybe more efficiently because there's also some ways to be more efficient, but stick to the plans and not sacrifice any significant R&D or development plan.

Giora, are you going to make money in Q1/Q2?

Well, I don't know. And, let's put it this way: Because we expect to see some reduction, maybe it won't be that busy. We did have some cost reductions, but it's not major to change, and our -- our break-even point is still around the $10 million. So that's the best answer or best estimate I can give at this point in time.

Okay. Now, I know that you are not breaking out the number of units anymore, about if you could maybe qualitatively give us a sense of the stand-alone component of your -- OCD stand-alone component of your revenues and also maybe a feel for Oxide CMP, Copper CMP, and OCD?

Well, I'll put it in percentage-wise. Roughly Oxide CMP accounted for 60 percent of our revenues; Service for 20 percent of revenues, OCD for about 10 percent, and Copper CMP also a little bit below 10 percent.

Were there any stand-stand-alone OCD system sales in the quarter?

Yes. Yes.

So, it looks like that OCD was basically all stand-alone?

No. It's a mixture. It's not a big number, so it's not like you fed 50 systems. It's a small number. It's 10 percent, or a little bit over 10 percent, maybe 12 percent, but it's a mixture.

When you do win, especially stand-alone OCD business, on what basis do customers decide to go with you?

I think it's -- it's three factors. One: it's strategic accounts, and you develop the capabilities. And, the basic thing -- basic thing is to develop the solutions because it's nice to say I have scatterometry, but the real thing is do I have a process control solution? So what you want to do when you work with a customer is provide a solution, whether you do scattero -- scatterometry for EPI, or you do it for gate mask opening or you do it for gate trimming -- so what you need to do is develop the application that the customer can benefit for the process control.

So the first decision, is being able to be there and develop the solution, and then they will buy more. Because once you have it, it's proliferated. Other aspect of that -- we have very capable both application group and application software and close relations with some of the strategic customers. The second thing, probably, is the combination of stand-alone and integrated, because for some of the applications, the ability to the integrated longer term and provide better process control, is a key decision even if you get only the stand-alone at the first step. Application development in scatterometry is more complicated, takes more time, and you need the time to do that and not to confiscate an etch or a track, depending on the application, or CVD system. So, that's probably the second. The third is still in the metrology capabilities.

I have another question, I guess for Chai, though. If he's there. What are the depreciation to CapEx to head count? And also, re you finished now with the stocks basis compensation? Are we not going to be that expense line going forward?

Yes, for the second question. We have finished with the stock-based compensation. Investments for the quarter was 750,000, and mainly for infrastructure for the new-generation systems, and depreciation 160, and head count about 242.

Where do you think head counts will trend in Q1?

I didn't hear the question.

Where do you think head count will go in Q1?

It will remain around -- around the same number.

Okay. Okay.

The head count reduction we did was in the beginning of December.

Okay. Thank you very much.

Thank you.

Thank you. If there are any additional questions, please press the star, followed by the 1 on the touch-tone phone. If you wish to cancel your request, please press star, followed by a 2. Hold on, please. We have a follow-on question from Robert Willow [ph] of Gateway Research. Please go ahead, sir.

Yes. Hi. In KLA's conference call they're saying some customers are still having issues in regards to yield at 90 nanometers. Are you seeing that as well, and are people approaching you to solve those issues?

Can you repeat the question?

KLA last week, they said that customers were still seeing problems with yield at 90 nanometers. Although not as much as last year, they're still seeing -- seeing issues and that some of their customers are turning to integrated controls to solve that problem. Are you seeing that kind of -- are your customers seeing those kinds of issues and turning to you for those similar solutions?

Basically, absolutely, yes. 90 nanometers is just for most companies, except, maybe, Intel and, I don't know, Samsung -- most customers are just renting 90 millimeters. They are seeing a lot of problems in the introduction of -- in the introduction of copper and Low-K. So there are -- there are yield problems and productivity issues, and in some applications, yes, we do see trend towards adding integrated capabilities to the current process control means.

Kind of as a follow up question as to the comments you made before, you said Asia-Pacific was pretty strong last year. In regards to 300 met-- millimeter fabrics, are you seeing growth slow down with those fabs as well, or is this growth outside -- outside of China?

China -- China has slowed down probably more than many other territories. It's not that big number of companies. The strongest territory still is Taiwan, with the largest number of 300 millimeter-protection fabs, either being equipped or in the planning with companies beyond [inaudible]such as Power Chip and Promise and Ninoterra [ph]. So definitely Taiwan is the strongest territory, strongest country in that respect. Samsung continues to be very aggressive in their plans. Japan did hold back slightly, not that -- they didn't put anything on the brakes, and in the U.S., you have a smaller number of companies. It's only four major companies in the U.S., and two out of the four -- or three out of the four did not hold back too much, and that's Intel, TI, and Micron. IBM is a smaller player -- is a big player of technology and collaboration, but a smaller player on the equipment side. Not smaller -- not small but smaller. So it's across the board. The slow down is across the board and not in this specific territory.

In regards to Flash, are you seeing memory business stronger next year, or do you see a slowdown in that as well?

I think that question needs to go to semiconductor and not semiconductor equipment experts. That's uh, I don't -- I think Flash is a target market for many companies. Intel won back their position versus Fujitsu. AMD [inaudible] but the real gross on the relative scale, I don't know if I can comment on that.

That's fine. Can you comment on your 200 millimeter sales versus 300?

Well, the major of sales was 300 millimeter. There's no question about that. I don't know the exact percentage. It's probably like two-third was 300, and one-third was the 200. Something in that neighborhood.

Thank you very much. You know we're going to have a challenging time period ahead, but it looks like you guys are positioned for the growth at the end of the year.

I sure hope so, and thank you very much.

Thank you. Moving on to the next question, Sergey Vastchonek of CIBC. Please, go ahead sir.

Hi guys. My first question is regarding the consolidation in your business. Lately your main competitor was bidding for August Technologies, which is a back-end company, and then we've seen that KLA would probably be interested in this business. The question is do you see an opportunity in back-end areas, versus front-end, and another issue is how do you see the competition going forward?

Thank you. Interesting question. I think it makes more -- in my mind there's more noise on this nano August/KLA thing. It's a small -- it's small transaction compared to the size of the industry, but with a lot of noise, or a lot of hoopla about that. So, generally speaking, I don't think that the back-end represents a big opportunity, bigger opportunity than before. It so happens that Rudolph has a very strong position, but if you read August's release of yesterday, financial results yesterday or the day before yesterday, you could see that close to 40 percent of their revenue is already coming from the front-end, and not from the back-end.

So if it's 40 percent front-end and then, probably another 40 percent from the back-end, and then 20 percent service. I'm guessing -- I don't have the accurate number. So I don't think the focus is only the back-end. The back-end still represents a smaller market segment and to remind you this is only inspection. This is not metrology. I'm sure that both Rudolph and KLA are interested in this segment, in the back-end segment, because the front-end they have already positioned that market so it's getting the competition for the front-end and expanding it to the back-end.

But I don't think this represents a very big opportunity. It's an additional interesting business of probably several 10 millions of dollars. Overall I don't think it will have a strong impact on consolidation in the industry. We didn't hear anything beyond that. Now, in general I agree that within the next six months if growth is -- will be visible, we should see more consolidation activity moving forward, and maybe this -- this August thing is the first -- first announcing the others that are in the pipe.

Okay. Do you see a challenge from your business here from this consolidation?

Well, I think -- well, some challenge, yes. Some opportunities, as well. Challenge because whenever there's consolidation in our industry and in our segment, and same size as we are. This may change a little bit the balance of power in the segment, which is typically a very fragmentized segment. We have a lot of small companies, and there's only KLA, which is big. So any consolidation is representing a challenge and opportunity in that context. From our perspective, because Dynametrics is a major competitor, there's no question there will be very busy in the merging or nonmerging activity, which without saying too much is a big opportunity for us.

Okay. Can you elaborate on the next-generation system you -- you said you're going -- going to launch in the second half of this year?

Not really. We'd rather keep it where it should be. What I would say is that the next generation is not a new model of the existing system but it's a new platform with much more advanced capability and long future. It's the beginning of another generation of metrology systems, different types, not just one system, and we definitely think this will allow us to expand much better in the future. But the details will come when we're ready.

Okay. Probably I didn't hear it well. What was your geography breakdown and the customer breakdown this quarter, and traditionally what was the ASP in Q4?

ASP was -- oh for the Q? For the quarter?

For the quarter.

The ASP for the quarter, Chai?

Yes. The ASP for the quarter was 239 and for the year 191. And, the geographical distribution for the year 18 percent to Japan versus 7 percent in '03, and 38 percent this year to Asia-Pacific, versus 22 percent in '03.

Maybe I can add to that that in the last quarter in Q4, 50 percent of revenues came from Asia-Pacific. Overall, during the year it was 38 percent, but this is a trend that continues quarter-to-quarter.

Okay. North America was what percentage of sales?

This year 35 percent, versus 53 percent in '03, and Europe, this year 9 percent, compared to 18 percent in '03.

Okay, and the customer breakdown, can you elaborate on it?

[inaudible]

Customer breakdown. The major customers. What percentage these represent.

I'm not sure. I didn't understand the question.

The customers of applied materials. The top customer--

Oh, customers?

Yeah.

Well, we don't break it down, but I can say that probably three customers accounted for a little bit over 50 percent of our revenues.

Okay. Thank you. Good luck.

Thank you.

Thank you. Next question comes from Gabby Berg of Apak. [ph] Please go ahead, sir.

Hello. Congratulations on the report. I just had it answered so, I have no further questions.

Okay.

Okay.

Thank you. There are no further questions at this time.

Before I ask Dr. Dishon to go ahead with his closing statement I would like to remind participants that a replay will be available in two hours on Nova's Web site, and that's www.nova.co.il. Dr Dishon, any closing remarks?

Okay. Well, thank you very much for joining us for the conference call. We definitely are in a very challenging time for the semiconductor equipment industry with the market turning down and hopefully turning up relatively not a long time from now. So, definitely very challenging environment for us, as well as for others, with hopefully some good surprises looking forward. And we had a very good year this last year, and we definitely look forward for this coming year. So we'll see you in three months from now. Thank you.

Dr. Dishon, a bit too late, Christina Osmena has a follow-on question. Will that be okay?

Yeah. Sure.

Okay. Please go ahead, ma'am.

Hi. Just a quick question. I just wanted to know what the ASP was for the stand-alone system, following on that those ASP questions.

Hi, Christina. It's Chai. We don't provide ASP for specific product. We just said that the ASP for all the products in '04 was 191, and for the quarter it was 238 -- 239. Sorry.

Okay, thank you.

Thank you.

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