Nova Ltd (NVMI) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments second quarter 2005 results conference call. All participants are 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, August 4, 2005. With us online today are Dr. Giora Dishon, President and CEO of Nova, and Mr. Chai Toren, CFO. I'd 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 yet received a copy of today's press release and would like to do so, call Gelbart Kahana, Investor Relations at 1-866-704-6710 or 972-36074717. Dr. Dishon, would you like to begin?

Thank you very much. Good morning, and good afternoon. And thank you for joining us for our second quarter 2005 quarterly financial results. Before I hand it over to Chai Toren, our CFO, I would like to remind you that this presentation can be found on our website, and if you wish to you can refer to that and follow the conversations with this presentation. And with that, I'll hand it over to Chai.

Thank you, and good morning and good afternoon. I'll start with Q2 '05 financial highlights. Revenue for this quarter were $7.7 million, about 65% increase over Q1 '05 with 4.6. Gross margin 32% compared to 22% in previous quarter. R&D net expense is $2.1 million or 28% of sales compared with previous quarter of $2.9 million net R&D expenses or 63% of sales. Sales and marketing expenses $1.7 million in this quarter and 23% of revenue compared with $1.9 million in Q1 '05, or 37% of revenues of Q1. And the loss or the net loss for this quarter is $1.9 million, compared with a higher loss in previous quarter of $4.1 million. And then it's about $0.12 EPS loss.

Generally, we see that we have returned to a trend of growth, and regarding the geographical distribution in the first half of '05, about 45% of higher revenues and deliveries were to the Asia-Pacific region, compared to 38% of revenues to Asia-Pacific regions in the total year of '04. In the -- this first half of '05, the other distribution were 30% to the U.S., 18% to Japan, and 7% to Europe. Our sales channels is both direct sales to end users and also sales through the [production equipment money sector], and the statistics for the first half of '05 is about 78% of our sales were through the [production equipment money sector] and 22% of our sales were direct sales to end users. So to summarize the financials, as I said, revenues for this quarter were $7.7 million, 65% increase over Q1. Service income at $2 million or 27% of sales, compared with $1.3 million in previous quarter. Quite impressive improvement in service income. Gross margin improved over Q1 from 22% in Q1 to 32%. R&D net expense $2.1 million compared to $2.9 million in previous quarter, mainly due to higher R&D income.

And the net loss $1.9 million or $0.12 EPS, versus net loss of $4.1 million or $0.27 EPS in Q1. The cash at the end of Q2 is at $23.9 million; it's a decrease about $4.2 million, mainly due to accounts receivable -- higher accounts receivable compared to Q1. And we continue to run the operations with tight inventory control. The inventory level in the end of Q2 is $4.8 million, compared to $5.8 million at the end of previous quarter. And before I hand over the conversation to Giora, just to summarize, I'm pleased that we have returned to growth in Q2. We have a stable financial status, with about 24 million in cash. Our ASP is above $200,000. We have penetrate with 3090 NovaScan series of product for application in corporate CMP and Optical CD, both [integrate] in metrology and stand alone configuration.

And the contribution to our system revenue is significant, and will continue to contribute in the next following quarters. We continue the trend of higher volume to Japan and Asia-Pacific, [INAUDIBLE] Taiwan, Korea, China and Singapore. And we continue our effort in the R&D, and [INAUDIBLE] we continue to develop new application and capabilities for the existing tools for the technology node of [1965] nanometers. And we continue to develop the next generation quality systems that will contribute to our revenues in the following year. I thank you very much. And with this, I hand over the conversation to Giora.

Thank you, Chai. Before I try to give some highlights and specific things, let me just refer you to a few key aspects in the summary that Chai just described. I think the three more important ones are, one, that we renewed growth in Q2 compared to Q1. We were able to very successfully introduce the NovaScan 3090 for multiple applications and generated revenues freshman that system; and the contribution was more than 20% of system revenues, and that we continue to develop new applications for new processes as technology moves forward. Before making some more insights on what we do, I'd like to say a few words about the market. Because our market is cyclical, volatile and changing.

So we'd like to share with you how we see the market. First, we see signs of recovery. The book to bill for the front end is still below 30. But the book to bill for the back end is about 30 and historically this was always a sign for recovery; also, the front end which always trends behind the back end, and also trends behind the back end after -- when there is a decline. So there are signs of recovery, but the visibility is still limited. And we definitely need to see the results with everybody else how it continues to move forward. But more specifically, process control is growing and will grow faster, primarily due to a longer -- continuous movement in the technology nodes, where the market is up or down; and the introduction of large number of complex process steps into the active manufacturing, such as silicon, metal [INAUDIBLE], [low-K high-K], copper and so on.

So all new processes are at the same time requiring more intensive process control. And if we try to look and analyze the Dataquest recent report from April, we definitely see that the -- specifically the [INAUDIBLE] from metrology and [INAUDIBLE] in metrology percentage within the process control is growing and is projected to reach 20% from the below 15% it was a couple of years ago. So we are operating in a market that is expected to grow faster than the rest of the semiconductor wafer manufacturing equipment industry. More specifically, if we look at our markets, [INAUDIBLE], growth will be accelerated by the introduction of the Optical CD, as the major metrology measurement with metrology capabilities and it converges with the traditional nonmetal [INAUDIBLE], which was just thickness. Now it's Optical CD.

But from a technology point of view, converged [INAUDIBLE] systems are simular. And we expect that market segment to grow faster. So this is something we will continue to see and we also like to see that, because that's the way we operate. And it's worth mentioning that we continue to see the move towards Japan and Asia-Pacific as territories that continue to be larger in overall in the market. So where do we stand in that market? We are retaining our leadership in the integrated process control, with difficulties or with more challenges. But with the introduction of the new system, the NovaScan 3090 and the expected introduction of the next generation, we expect to continue to lead this market. We managed to very successfully maintain our ASP. And if you look around, you can understand that this was an achievement -- not an easy one.

The new product, the 3090, was introduced successfully at Semicon West. It's integrated with multiple process equipments from [INAUDIBLE] and released. And we expect that to be an engine for growth. And as I said before, the next generation of systems will follow. Not expected to generate revenues in the near future -- only within 2006. We continue to develop new applications that I mentioned before, primarily based on the Optical CD or [INAUDIBLE[ technology, which penetrates hedge processes, lethal processes and complex tractions in the front end gate applications. And we continue to see gradually the introduction of integrated metrology to more process steps.

We had very successful penetration to the copper process, with copper [INAUDIBLE] volume in the sector proliferation. And we expect more proliferations like that to happen in the next quarter or two. And speaking, as I said, we expect that segment to grow faster than the rest of the process control segment. And we see more and more of the -- the synergies in between stand alone and integrated. And so we are positioned very well in this space. So to summarize, looking forward, as always, presenting results is always a little bit tricky issue. We can say 65% over the previous quarter, or we can say 25% below the same quarter last year. So it's -- we -- we did 65 better than the previous quarter.

We improved all financial parameters. Just to remind you that the R&D net was lower also this quarter due to our higher R&D income, because we continue to invest aggressively with the new systems. So having said that, we're encouraged with the results that we achieved this quarter. But we know we have more work to do in order to retain where we were and outgrow that and return to profitability that we were before. So in looking forward, we -- 2003 and '04 we managed to grow 40% year-over-year. We had five quarters of profitability. And we definitely target to get to that position as soon as we can. Q1 was a big decline. We hope it was a [INAUDIBLE] and the growth has been ruled. And the new product with the multiple system processes will provide the engine for that growth.

The market is improving gradually, slowly and with profitability. But it is going in that direction. And the total available market we are addressing, the nonmetal systems, as I described before including Optical CD, can reach about $500 million within a year or two. So we're addressing this big and very foreign market segment. We continue to grow while also strengthening our key positions. We had some key patents this quarter, very successfully. And we will continue to do so. And as you know, now [INAUDIBLE], this is becoming a key aspect. We have our own ongoing infringement complaint against Nanometrics and see other activities in that market.

Our balance sheet is still strong with about $24 million. We've had some reduction, but we feel this is -- keeps us strong and able to carry out our activity. And we maintain or even improve relations with both the major process equipment manufacturers I mentioned before, such as supply and [INAUDIBLE], and also with the top 20 semiconductor manufacturers. So summarizing all of that, we look forward -- cautiously optimistic -- but we look forward very positively. With that, I will -- we will be glad for entertain any questions you may have.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star followed by the 1 on your touch-tone telephone. If you wish to decline from the polling process, please press the star followed by the two. Questions will be polled in the order received. Please stand by while we poll for your questions. Our first question is from Ray Kukreja of WR Hambrecht. Please go ahead, sir.

Thank you. Good afternoon, gentlemen. I have actually three questions. And you touched on the lawsuit against Nanometrics. Can you give us some color in terms of the time line of potential resolution of that case? That's the first one. And I'll follow-up with a couple more.

Okay. Well that's a very difficult question, because we don't control the legal processes. The complaint has been -- is been moving forward. We had few attempts to look at settlements, not successful yet. But we think that's something that can be done in the future. I believe that it will take probably about another six months before we get to a major -- a major conclusion number this legal process, which is before you get to trial and then when you get to trial. So I think it's about six months before you get to trial.

Okay. And could you remind us what exactly are you seeking from Nano? You know, with regards to this complaint?

Yes. Well, we filed a complaint against Nano for infringing our patent for integrated metrology in-processes in semiconductor manufacturing, if I use the most general terms. If you want more details, you can find it in the actual complaint, which is a public knowledge and you can pick it up. Because, one, we pioneered and reinvented integrated metrology 12 years ago, and we felt we had the right to that. So our complaint was one, for damages for infringement and also looking forward, for royalty in using our technology.

Thank you. That's helpful. And my second question was -- if you could give us some thoughts on Tokyo Electron's acquisition of Therma-Wave's [OCD] integrated metrology business. Were you in that business at all? And if so, what does that do to you?

Good question. Well, we are in that business because Tokyo Electron acquired from Therma-Wave is [INAUDIBLE] separation, which is normal incidence spectrophotometry to do CD measurement in the lethal processes, [INAUDIBLE] tracks. So we are in that business. But we are not -- we were not integrated with them on the system, or on the track. It was not part of our short-term business projections. Although, that's an area we have been working with them the last few years. I am -- on one hand this is a significant event, because TEL who owns [INAUDIBLE], now also owns their hardware and can be a self-sustained supplier, which TEL was not until the acquisition of Therma-Wave -- of this census business unit of Therma-Wave -- or the Therma-Wave Optical CD normal incidence technology. From a technical point of view, the census systems are inferior to most systems in the market today for integrated technology, whether it's us or others. They're only non[INAUDIBLE] and non-polarized. So it's limited capabilities. So it's not taking entirely the market opportunity from us. But it definitely positions TEL in this situation that they are both hardware and software supplier. And so it remains to be seen how this will develop in the market.

You mentioned that it's inferior to the other offerings in the marketplace. Could you then, perhaps, speculate on the motivation of making this acquisition. Is it just to put some price pressure on potential second source suppliers?

Well, from our knowledge -- and I cannot go too much into details, as you can imagine some of that may not be public domain. The main motivation was to continue to supply. And that was, I think, in the press release. Continue to supply those systems to the customers who had been already receiving those systems before. And with Therma-Wave, a little bit in the position maybe not to be able to supply those systems. And TEL wanted to guarantee the supply. I don't think this was done for price pressure. But this will be speculation by me, as you can do.

And my last question is, you've been seeing a lot of consolidation in the equipment space in the last six months. And we also beginning to see some consolidation with the process control area. What are your thoughts on that? And, you know, the industry as a whole? And, perhaps, with regards with [INAUDIBLE], thank you.

Okay. Another good question. I think what we have seen in the last six months or even a year, we have seen a lot of talks about consolidation. Because it makes sense from a lot of different business aspects. But we have seen less activity than you would expect from the talks. Because in the process control segment, the only thing we've seen so far in this talk of all this Nano, [Therma-Wave], and we have not reached any conclusion yet. It created a lot of attention, but I'm not aware of any other significant consolidation event in the process controlled segment.

And this is a segment which is basically very fragmentized, with a lot of medium to small-sized companies, including us. But at least for the last few years, we haven't seen too much consolidation. This is another discussion that we can have. I can tell you why. I think it will not happen -- I don't know if it's appropriate now. I would say that one, we are in the process of discussing all kinds of those activities all the time. That's normal practice. Nothing specific on mind right now. But it's an ongoing discussion that everybody is having with everybody in general. And I don't think we'll see a lot of activity or a lot of deals concluded, because of other areas that are within that, including share price and premiums and where the industry goes, and also [what's the day] of entry for a small company in our space.

Thank you so much.

You're welcome.

Thank you. Is there any additional questions, please press the star followed by the one on your touch-tone phone. If you wish to cancel your request, please press the star followed by the two. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. -- Dr. Dishon to go ahead with his closing statement, I'd like to remind participant that a replay of this call will be available in two hours' time on Nova's website, www.nova.co.il. Dr. Dishon?

Okay. Thank you very much for participating in our conference call. And as I said before, we're encouraged with our results. We look forward to better results in the forthcoming quarter. And we hope to see you next quarter with more good news. Thank you.

Thank you. This concludes Nova's second quarter 2005 results conference call. Thank you for your participation. You may go ahead and disconnect.