Nova Ltd (NVMI) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments third-quarter 2005 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 7, 2005.

With us online today are Dr. Giora Dishon, President and CEO of Nova, and Mr. Dror David, CFO, and Mr. Chai Toren, former 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 (indiscernible) Investor Relations at 1-866-704-6710 or 972-3-607-4717.

Dr. Dishon, would you like to begin?

Yes. Thank you very much and welcome to joining our quarterly conference call to report the results of the third quarter of 2005.

Before moving to the financial results for the quarter, I'd like to introduce our new CFO, Mr. Dror David. As we previously announced, Mr. Dror David has been appointed as the Company's CFO effective from this month, replacing Mr. Chai Toren, who will be seeking new career opportunities after 10 years with Nova in different managerial and financial positions.

I would like to thank Chai -- and he will say a few words later; he is on the call -- for his contribution to the Company all these years, of course including helping to take the Company public and maintaining the contacts with the investment community.

Dror has been awhile with the Company, for more than 27 (ph) years, also in financial and operation position, worked with Chai, and most recently served as the VP of Finance. So we welcome Dror and wish him success in his new and challenging role for the Company.

So welcome, Dror. and allow me to refer the conversation to him in order to report the financial results of the quarter.

Thank you, Giora, and, again, thank you all for joining us today. I'm specifically happy to join this phone call in view of the improved financial results of the Company in Q3 2005. The following are the financial highlights of the quarter.

Revenues for the third quarter of 2005 have increased by 20%, from 7.7 million in Q2 to 9.2 million in Q3, yet were 15% below the revenues in the same quarter last year. Gross profit has increased from 32% in Q2 2005 to 38% in Q3 2005, relative to 47% in the third quarter of 2004. The increase in gross profit as a percent of sales from Q2 to Q3 is attributed mainly to the increase in sales volumes.

R&D net expenses in the quarter were 2 million, or 22% of sales, relative to 2.1 million in the previous quarter and in the same quarter last year. The reduction is related mainly to higher R&D income within Q3 2005.

Sales and marketing expenses were 1.5 million, 17% of sales, relative to 1.7 million, or 23% of sales, in the previous quarter. Net loss in the quarter has reduced to 1 million, or $0.06 per share, relative to 1.9 million in the previous quarter and relative to profit of 0.8 million in Q3 2004.

Going back to the revenues, approximately 90% (ph) of Q3 revenues were from 300-millimeter product, stand-alone and integrated metrology. The trend of moving to Asia-Pacific and Japan continued, and these territories accounted for approximately 70% of our system sales. And revenues from our new product, NovaScan 3090 series, accounted for 15% of our system sales.

Average selling price in the quarter has increased by 5% and service revenues have also increased, adding also direct service contracts in Asia-Pacific and Japan.

Moving to the balance sheet, total cash reserves at the end of Q3 2005 were 24 million, at the same level of previous quarter, an achievement of its own. This was mainly achieved by tight inventory controls and efficient collection.

With that, I will refer the conversation to Giora.

Thank you. Before adding some few more comments and highlights for the quarter, I would like to invite Chai, who is on the call, to say a few words. Chai?

Thank you, Giora. I would like to thank Giora and Nova for a wonderful 10 years. I know that the CFO responsibilities are now in good, professional hands of Dror and I wish him great success.

I would like also to thank all the investor and investment community for the meetings with me and the time we have spent together, and maybe we will meet in future.

And I believe that I leave Nova as a Company with the best technology and people into, and that the Company is on the right path for success. So thank you, Giora.

Thank you, Chai. We will talk again, of course. And let me go back to a little bit of summarizing the results and a little bit about the market and looking forward.

So highlights -- with respect to the quarter, we continued the growth in Q3 compared to Q2 and, of course, to the very low revenues of Q1. So we feel we are on the right track and we won't have to continue to keep this growth trend. It's very -- as Dror said, a strong cash position at the end of Q3 of $24 million is very encouraging and is a strong asset of the Company.

Maintaining the average selling price in highly competitive markets above (indiscernible) is also something we feel will help us to move forward.

It's worth to note we had press release about that about a month ago, that we had made a very successful penetration and proliferation of the copper CMP systems into high-volume manufacturing in two major customers, one in U.S., one in Asia-Pacific. And I will say a few words about that later on, but it's a very significant achievement of the quarter.

As Dror mentioned, the trend was higher volume of sales, directly or indirectly, through the process equipment manufacturers to Japan and Asia-Pacific continues and we believe it will continue. And we haven't laid back with respect to developing the next-generation metrology system. I will say a few words about that later on.

A little bit detailed highlights that I think it's worth noting. Financial performance in general, not just revenues, was above expectation in many aspects, whether it's gross profit, whether it's expenses, the R&D in terms of expenses or the cash position. And we see results of the activities that we have taken in order to streamline the operation. We believe the breakeven point for the Company is today about 10.5 million. Of course that strongly depends on the product mix.

Service income, which is growing a significant source for revenues, but also a strong indication of the position of the Company in the market, has been growing steadily, coming from all territories. We have been successful in generating revenues also from the Far East, which is an achievement on its own. And those revenues are mainly direct with the end-users, but significantly in collaboration with the major process equipment manufacturers. And also that is a trend that we need to maintain and strengthen.

More to note that we continue and will continue in the next few quarters to support R&D support of the two product lines, the NovaScan family series that is a source of revenues for the Company, and with the introduction of the new NovaScan 3090; and at the same time, spend a lot of R&D efforts in bringing the next-generation platform, the new platform, sometime next year. And of course that has some impact on the R&D expenses, but we know it's worth efforts and the investment.

As I mentioned, copper CMP is taking a major position in our product offering, with high opportunities after the successful penetration or proliferation in two major accounts. We have at least four more evaluations going on. And it's worth to note that copper CMP or copper processing is very customer-specific. Each end-user may use different copper processors in their (ph) process, and therefore the process control solution may vary, and that is why this evaluation and eventual proliferation process is taking the time it takes.

Same time to note Optical CD, which is another major market segment for us, primarily in the etch market, is also widening -- growing, but a very low rate. We have a very conservative industry and we work very closely with the major process equipment manufacturers.

And taking a quick look at the market, semiconductor revenues has been increasing in all segments, whether it's for flat (ph), cellphones, games, utilization rate at the foundry has been improved and for advanced technology, it's about 90%. So this is always a sign for resumed growth in the equipment.

We have seen some epic (ph) announcements lately that show stability and slow growth rate. For (indiscernible) consumption same level as today's 5.6 billion appears to be growing -- (indiscernible) growing. So there is solid growth in the equipment market. But it's very cautious, so visibility will stay low and we will have to work out in making it happen and forecasting will be limited.

But the introduction of new technology nodes today, primarily 90 and 65 nanometers into high-volume manufacturing does create the opportunities. And we -- not (indiscernible), but we and (indiscernible) and others, we believe the process control will grow faster and (indiscernible) in the broader sense, including Optical CD, because it's the same system, different software, will grow faster than any other segment and can reach very significant total available market, in the range of $500 million a year, as a total available market. So we will continue to work in this market and grow and expand and adjust to the rate that things happen in the market.

Our specific position and we will continue to maintain our leadership. I think this quarter was good for us, but also in comparison to the competition, I think our market share increased, though I don't have specific data to offer that -- and the expansion to our etch, CD and copper adds value to that. As I said, both copper and CD do present an opportunity that we will have to make that choice happen.

And in general, the integrated majority will continue to expand in what we would call evolutionary rates, meaning not chance, and we have passed the high cycle, but it's a steady growth rate, and with a lot of collaboration with the process equipment manufacturer, something we believe we can do very well.

Another point to mention looking forward is that the central (ph) market is based -- will be based a lot on software, algorithms, physics, optical modeling capabilities, more than in previous years, and we are developing those -- we already developed -- of course, we were strong in that in the past, but we continue to emphasize that and invest resources into strengthening this aspect and the products as we can provide based on that, meaning primarily the right process control solutions.

As I said, all of that is with the existing system, integrated, stand-alone and more so for the next-generation system and platform that we will introduce next year.

And as a side note, we continue to be very active on IP field and intellectual property, both in the current (indiscernible) complaint we have and other opportunities in that aspect.

So to summarize, looking forward, the market seems to be in a positive trend, slow growth rate but it is growing. 2006 is forecasted to grow, I believe, about 10 to 15% compared to 2005, and reminding that 2005 was about 15% below 2004. And the total available market does represent an opportunity we can try and execute on.

Our balance sheet is very strong and with the 24 million cash, we have all what we need to execute our plans without any need for general funding. And we expect to return to profitability in the next one or two quarters. As I said, visibility is limited, so making accurate depictions is a little bit complicated.

So that is what we have to say today. I would like to note that next week, we will have a road show in the U.S. that Dror David and Chai Toren will have, so any more questions, insights and so on for those who are interested could be done. You can coordinate it Gelbart Kahana. With that, I will let you if you have any questions.

(OPERATOR INSTRUCTIONS) Ray Kukreja of WR Hambrecht.

Thank you and good afternoon, gentlemen. I have three questions for you. The first is, could you give us an update on the status of the patent infringement complaint that you filed against Nano, I believe in March? And my second question was what changes you may have seen in the past few months in the competitive landscape in the integrated metrology world, given some of the turmoil that Nanometrics was going through? And then I have one follow-up question. Thank you.

First question, the status is that the infringement process is a long and tedious process and also resource consuming process. You are right; we filed the complaint in March. We passed the step of claim construction, claim contentions, all this legal aspect, in establishing the complaint, and process moves forward reasonably. We don't have any other incorrection (ph) or experience any other complaint.

So we still feel very comfortable that this is a strong case. But I don't know exactly how to say that, but in Hebrew, we say the wheels of justice turn slowly. I don't know exactly how you say it in English. So it will take a few more months before we get to some significant step, such as the Markman Hearing and so on.

And generally speaking about the integrated market, while there was the turmoil of Nano-August, I don't know how much that affected -- it probably did cause some defocusing. We feel we are strong in the competitive landscape today with both systems and market presence. And we respect the competition in that context, but I think we do reasonably well in that, especially in the Far East, where we spend a lot of time and focus.

We haven't seen any significant newcomers into the market. As a matter of fact, Therma-Wave sold their lithography product line or lithography system -- the ICCDi, I believe it's called -- or CCDI to (indiscernible), changed a little bit of the landscape on the Optical CD landscape -- market space. And I don't think KLA is very active in the integrated.

So except that, I am not aware of significant changes, except for the fact that I think we are today better positioned than we were probably a year or nine months ago.

A bit more clarification on the patent infringement complaint, if you will. What is the next event we should be looking for as you go through this process? And also (indiscernible) to ask about integrated metrology. Could you elaborate a bit on any shift in market share in terms of the 300 millimeter equipment for integrated metrology in the past, let's say, 6 to 9 months? Thank you.

Okay. To the first question, I'm not sure I am the legal expert that's such a heavy experience in all kinds of litigation. So I will tell you what I hear. One, we didn't face any countercomplaint, so we are not infringing anything.

I think the main thing would be hitting (ph) on infringement in validity, which I think we believe our case is strong. Best of my knowledge, the next step that is significant, if anything -- things can happen in between -- and we did have some discussions, we will have the discussions in the future -- but my understanding is that -- well, two things.

One, time that has been set for probably more than a year from now. But before then, there is a significant milestone which is called, according to California rules, which is called a Markman Hearing. And best of my understanding, this is probably three or four months ahead. But don't take my word on it because I'm not that expert and you know delays can happen if someone tries to make cause for delays. Now, we are not interested in delays but that is the legal system.

But I think it's pretty rigid in the sense that there is some definite time until it gets to the Markman Hearing, which is very significant milestone in the process. Statistics say that probably up to this stage of the Markman Hearing, 70% are settled one way or the other. But that's statistics and we're looking at single case.

So that is with respect to the legal, to the extent that I can add value. And like I said, we think our case is strong and is very well substantiated.

Market share in the integrated market, unfortunately, there's no data for the last quarter because there was no official release by our competitor for unknown reasons. So we lack some information. We do collect the information from the field, but that is only a portion. So I believe that in the last six or nine months, we are probably still above the 50% market share. But like I said, I don't have accurate numbers that I can rely on.

And the market share -- I was looking more at the 300-millimeter market share. Could you give us a sense of what your share is and how that may have changed in the last six months?

Okay. In our revenues last quarter, 90% of revenues came from 300. Previous quarter, we had some more 200. In 200 millimeter, we have 100% market share. I don't think we have any competition in the 200 as of yet.

And by the way, we continue to work on retrofits in 200 because of some very interesting opportunities. As you know, there are a lot of fabs that work in 19 and 17 nanometer with 200, and they need to move forward with technology nodes. So there are opportunities working in that area, which are also more interesting from a profitability aspect as well.

For our (indiscernible) purposes entirely, it's probably -- like I said, this quarter it's 90%. The previous quarter probably was something like 80%. And since we compete basically only in 300 millimeter, because nobody is selling in 200 millimeter, I think also the tale for Optical CD for the track is also only for 300 millimeter on the new track (indiscernible).

So I would say that the market share at 300 millimeter is very close to our general market share. So somewhere in the 50%.

If I can just sneak in my last question on this patent infringement complaint. Are you trying to settle this out of court at all? And also, are you getting any indication from Nanometrics whether they want to try to settle this out of court at all? Thank you.

By the way, there was an announcement about a month ago about another infringement complaint against Nanometrics, not by us.

Yes, I'm aware of that. Thank you.

To some extent, it may strengthen our position, but not necessarily. But in any case, while we are always open for settlement and we had some high level or whatever discussions in exploring that, timing was not right so nothing happened so far. And we are open for that to look into the future. I am sure the other side may decide at some point in time that they may be interested.

So I'm sure this will be in the process and in the discussions, but I cannot project or predict -- I think there is openness in both sides -- when timing and opportunities will be right to explore it and not to get into what is outstanding expenses. As always, that depends on each side assessing where it goes and we are very determined that our case is strong and push forward, but not at all costs, of course.

Thank you very much.

(OPERATOR INSTRUCTIONS) Ray Kukreja of WR Hambrecht.

Thank you. I thought I'd put myself at the back in the queue after having asked so many questions, but it seems like on the only one here. I wanted to touch on the comment that you had in your press release about getting two major orders for the dielectric and copper CMP in the U.S. and Asia-Pac. Was this for a stand-alone system or was is it for integrated metrology?

(multiple speakers). It's just high-volume proliferation of integrated metrology, process control solutions for copper CMP -- all.

Okay. And was this as an OEM supplier or how was it structured?

Most of our revenues are OEM. So this was done in close collaboration with the process equipment manufacturers and the sales went through this OEM channel -- (indiscernible).

And are you able to give us an idea as to what segment of the end customer this went to? Was it a logic or a memory (indiscernible) or a foundry maker?

It's one and one; one in foundry, one in non-foundry -- IDM.

Okay, an IDM. I guess then my last question would be going back again to the patent staff. If you were to settle this outside, what kind of monetary compensation are you looking at?

Well, I don't know. I mean, I understand the question and I understand the curiosity, whatever it is. I definitely cannot give specific details of that. But I think it is very significant, because basically since our patents are infringed on the system, the damages that are provided conceptually by the law can and should be very significant.

So let me put it another way. Given your view that Nano has infringed on your patents, do you have some sense of how much revenue they may have generated from the patents that you claim that they have infringed?

Well, basically, you can make the calculation on your own, and I think it is better judgment. Patent is about one year old, and mainly all the integrated systems are infringing our patent.

That is very helpful. Thank you so much for your time and for taking my questions.

Are you located in Boston?

Yes, I am.

So Chai Toren will be in Boston next week, and if you want to explore a little bit more, I'm sure he's more than happy to do so.

I've met Chai before. I used to work with Jerry Fleming. I'm still at Hambrecht, but he is no longer with us.

Oh, he is no longer with Hambrecht?

No.

Oh, I did not know that. Okay. Like I said, if there is any interest, don't hesitate. Either way, thank you for your question.

Thank you, and you have a good day.

(OPERATOR INSTRUCTIONS) 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 of this call will be available in two hours on Nova's website, www.nova.co.il. Dr. Dishon?

Well, thank you very much for listening to our quarterly conference call. As I said, we feel very good about the quarterly results, but quarter has finished five weeks ago and we are (indiscernible) to making the next quarter happen, and hopefully better than the previous one.

So thank you for attending and hopefully we will see you next quarter with more good news. So, thank you.

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