Nova Ltd (NVMI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments fourth-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 April 11, 2006. With us online today are Dr. Giora Dishon, President and CEO of Nova, and Mr. Dror David, CFO.

I would like to remind everyone 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 Gelbart Kahana in Investor Relations at 1-866-704-6710 or 972-3-607-4717.

Dr. Dishon, would you like to begin?

Yes. Thank you very much. Good morning and good afternoon to everyone. Thank you for joining us for our, actually, annual 2005 annual call. And thank you for joining with the short notice that we had to have for this conference call and for this unusual, a little bit delayed, call for the results of 2005.

So before turning the conversation to Dror David, our CFO, I would like to remind us all that this is, as I said, a little bit unusual circumstances of the delayed reporting, which was the result of the process of reviewing our 2004 financial results as we have press released back in February 13, and that we are very pleased that we concluded this process in a very timely manner and in a very efficient manner, within less than two months and with everything that needs to be done. And we are very able, one, to report the results, and two, resume our normal course of reporting financial results in a timely manner, as we always did.

So having said that, I would like to refer the discussion to Dror David to report the financial results.

Hi, everybody, and good afternoon. Before going into 2005 results, I would like to say that, as mentioned in the press release, the full reports related to the restatements are available at the Company's website and to note that the comparable figures that we will discuss in a minute are the restated figures.

Looking at 2005, total revenues in Q4 '05 were 8.8 million, similar to Q3 2005, and total revenues for '05 were about 30 million relative to 36 million, 37 million in 2004.

300 millimeter system revenues in '05 accounted for approximately 70% of the total system revenues, representing approximately a 10% increase on a yearly basis from 300 millimeter sales relative to 2004. In addition, Asia-Pacific sales accounted for approximately 50% of the total sales throughout 2005 relative to 40% in '04.

Integrated metrology sales through process equipment manufacturers have increased from approximately 70% in 2005 to approximately 80% of system sales. And this is mainly due to our 300 millimeter systems.

Gross margins in Q4 2005 were approximately 42%, better than the 39% in Q3 2005. And the improvement in Q4 gross margin is attributed mainly to the mixture of the sales -- sales from systems with better margins.

Q4 '05 R&D expenses were similar to Q4 '04 and have increased relative to Q3 '05. And this is mainly due to changes in chief scientist participation. The gross R&D expenses were similar between the quarters. The total R&D expenses in 2005 has increased relative to 2004, and this is reflecting our increased investment in new products and platforms in this year.

Q4 2005 sales and marketing expenses have increased relative to Q3 '05, mainly due to enhanced evaluation processes of our new and existing products for stand-alone and integrated metrology and [capital sites], as well as expansion in the Asia-Pacific and Japan regions for service and sales. Total 2005 sales and marketing expenses were similar to the total yearly expenses in '04.

Looking at the G&A, Q4 2005 expenses have significantly increased relative to Q4 2004. And this is mainly due to expenses related to our IT infringement lawsuit against a competitor, which is stepping forward in the legal proceedings. These legal expenses are expected to continue through 2006.

Total year 2005 G&A expenses increased over 50% or approximately $1 million year to year, and this was again due to the IT litigation and also senior executive retirement in Q3 '05.

Net loss for the fourth quarter of 2005 was 1.5 million, an increase relative to Q3 '05. And this is mainly due to the mentioned operating expenses increase, which was partially offset by better gross margins in this quarter.

Looking at the balance sheet, the Company's cash position remains strong, with approximately $23 million in cash reserves at the end of '05. And deferred revenues, short and long term, were approximately $4 million at the end of the year.

With that, I will transfer the conversation to Giora.

Thank you. So let me say first, let me say again, that I would like to express the Company's appreciation for the timely and efficient manner of executing the review of the financial results and the firm conclusions of those results, as we just have reported. And the appreciation and thanks goes to everybody within the Company, our auditors for their full participation and the audit committee of the Company.

So we are confident these are the right results. We apologize, in a way. I have seen some rumors on the Net, so we kept quiet during this process and tried just to do it as efficient, as accurate and as thorough as needed, completed and then come back and report to the market where we are.

And like I said, we are confident of the results as stated. Revenues, the deferred revenues will be most likely recognized during this year. And the [consolidated] reporting measures that we have taken are more than adequate to avoid any recurring events like that.

With that, I would like to move to the main things, move a little bit to the market and the market trends. In general, as we said in the press release and mentioned before, we see a gradual and very positive trend of -- both in the general in the market and booking trend for us. Since Q1 of last year, we have seen a very gradual, consistent improvement in the booking level. And we expect that level, that trend to continue.

On the technical side, in 2004 we found ourselves a little bit with an insufficient product to meet the most advanced market requirements. Although we had the technology, the product was not ready for that. So we have launched a very aggressive product development in order to catch up, so to speak. And we have accomplished it very successful during 2005.

So the bottom line is that 2005 eventually was slightly better than expected and set the stage for 2006. You may note that most of -- or the last portion of the loss reported for the year is actually attributed for the first two quarters. So the financial position is also gradually improving.

But going back to the technical market side, our new product, the NovaScan 3090 series, which is addressing several market segments, as CMP, copper, ash and stand-alone and generally optical CD measurement, is currently, to the best of our knowledge, the best-performing, both in the measurement and accuracy and speed, integrated metrology system in the market.

It is being released with most of the major PE -- process equipment manufacturers, both for CMP and EDGE, and starting their testing -- carried out recently by Sematech, evaluating all metrology suppliers. And we have participated in that study.

It is very much concerning my statement we have made that we are very well-positioned in this market, for the study is available for Sematech members or ISMI members. But the result, as much as we are aware of them, and we know only about ourselves and the general trend, is very promising and very good. So we are very pleased and we are confident we are well-positioned technically in the market.

Overall, the market trends is, as I said before, is in a very gradual but positive trend. It is cautious because it certainly doesn't want to go back to this height that it used to be.

It is an interesting note also, an interesting thing to note that geographically we currently see this year a more balanced trend than we have seen in the past, the U.S. taking a larger portion, at least from where we see it, with Intel and TI and the new IMFLASH. Some more business is growing in the U.S., and we are very well-positioned in the U.S.

Asia-Pacific is still growing with both Korea, Samsung and [Heinix] in Taiwan and China, [HHSAS], and Japan is also. So we see a more balanced growth trend everywhere in the industry, 300 millimeter of course, Flash with Toshiba, for example, are very aggressive on that, Flash memory. And with most of those customers, we think we are positioned very well to leverage on the growth opportunities.

So overall, for trying to give some sense on overall how we look at the future, I would like to say a few words, use this opportunity to say a few words about the IP litigation status. We had some press release on that, and just a few words to elaborate on that.

About a year ago, or 15 months ago, we filed an infringement complaint against Nanometrics, infringing one of our major patents, and determined to protect our intellectual property that we developed, invented and developed.

This process is going on, and it is a long and tedious process. We all know that. Recently, two weeks ago, Nanometrics filed a sort of a countercomplaint -- because it's a year later, I don't know if you can call it a countercomplaint -- a complaint on us infringing on their relatively very old patent that was never practiced against anyone else.

And we know we don't infringe it. And we're going to -- of course, we are going to defend ourselves. And we think this is maybe as a result of us making a very important step with the judge denying the summary judgment requested by Nanometrics. So this was maybe a tactical move in the overall [measure]. So that is where we are. We don't want to make those legal fights in the press, in the courtroom, but at least an update, since it is there.

So going back, overall, we are very positive looking forward, looking this year toward a very gradual and healthy growth in all aspects, primarily, of course, for the 3090 family of products in all market segments, including stand-alone.

Well, we are, yes, we are still, or at least last quarter, reporting Q4 2005, we are still losing some money, not that much. Our cash position is strong, as Dror said, and we think we can carry out our plans and we can grow profitability, again within a few quarters.

So with that, we will be glad to entertain any questions. Thank you.

(OPERATOR INSTRUCTIONS). David Fitzgerald.

You said there was about 4 million --

Could you raise up your voice a little bit?

There were around 4 million in revenues from 2004. How will those be recognized in 2006?

Well, we expect the larger portion of these revenues to be recognized in '06, some also in Q1. And these will be recognized when the [ad rates] are levered or expired.

If I was to exclude the $4 million from the 2006 revenues, would you still be predicting moderate growth throughout the year?

Yes, absolutely.

Okay, fabulous. My next question is, with regards to the growth in accounts receivable and accounts payable, I saw those jump significantly. Is this part of the restatement?

In which period?

From the third quarter to the fourth quarter of 2005. It looks like they both jumped about 1.5 million.

No, the accounts receivable is not related to the restatement. The accounts payable also do not.

So that is normal fluctuations in the business, I guess?

Yes.

Could you tell me what percentage of your sales from 2005 were stand-alone systems? Is that going well? Are the stand-alone systems being adopted by the customers?

Well, the answer, actually, to that is a little bit more complex. Our stand-alone -- our system is, as I said before, very adequate or the most best-performing integrated system. This definitely turns into an advantage selling stand-alone systems. But in most cases, the sales of stand-alone systems is related, and we are glad of it in this context in the long run, is related to sales and adoption rate of integrated as well.

So the stand-alone systems are well-accepted, but the sales or revenue growth in that segment, in most cases, not all -- sometimes we have [more] -- it is related to penetration level and integrated before or during. So to summarize that, the ratio of stand-alone systems in overall revenues is not high yet. We expect that to grow. We know it will grow this year. We already have some potential bookings on that. But the growth will be gradual, as I said before, as part of the overall penetration of optical CD to mainstream manufacturing.

Taylor Tompkins, Anderson & Strudwick.

Do you expect to resolve the patent lawsuit by the end of the year?

Well, that is a good question. What I can tell you is the process. And definitely, we would like to try and settle that, sooner the better, of course, with satisfactory results because we think our case is strong. But that's the legal system -- and hear what we have been saying, the windmills of the legal system are working very slowly, grinding slowly. But we have a scheduled settlement conference in July and the [Markman] hearing in August. So we think these are two very positive milestones that can facilitate settlement.

And your normalized operating [spits] level is about 5 million a quarter. Is that right? Without the lawsuit? Or 4.8 million, or roughly --

Yes.

What is your -- so your revenue breakeven level is about 10 million a quarter?

Slightly higher, I would say, depending on the product mix. For us, because of the partial stand-alone, partially OEM and so on, it's a product mix. So I would say more closely to 10.5, maybe sometimes maybe closer to 11.

And then your other remarks, you said you might be profitable within a few quarters. Is that by the end of the year or is that, like, Q1 of next year?

Well, that's the goal. I think it's a little bit difficult to make more accurate between Q4 and Q1. It's a little bit more complicated today. But that is the timeframe we are looking at.

Robert Katz, [Sunvest].

Can you kind of size up the market in terms of number of units that you expect to sell or the number of units the market has demand for, what your unit pricing is? So what the addressable market is for your product?

Well, that is a little bit more complicated because there's a product mix of 200 and 300 millimeter copper EDGE. The EDGE market is a growing segment. The copper is already a good portion of our sales. So the market is not very well-defined.

Generally speaking, I would say probably that the -- I'm trying to make some guesses now since you asked the question. I probably would say that the overall market for integrated metrology today is something in the range of 60, $70 million a year, translating -- depending of -- that's OEM prices and not necessarily -- not including the markup of the process equipment manufacturers. I would say that translates probably to between 200 to 300 systems a year, maybe closer to 300 a year. And we expect, we would like -- we expect to be over 60% market share.

And looking forward a few years, do you anticipate that the stand-alone will be as significant as the integrated for you? Or do you think the integrated business will grow in terms of units or market penetration?

It is both. It is combined. But in summary, I think we expect the stand-alone to become a larger and larger portion in our revenues. And there is more synergy today between integrated and stand-alone than used to be in the past because in the CMP area, there was not much of a need for a stand-alone system to match the integrated in the optical CD market, both for CMP today also, but copper and also to EDGE. There is more need for a perfectly matching stand-alone system. So we definitely see that as a growth opportunity and a gross percentage of the overall revenues.

In terms of the integrated side of the business, are you getting more design wins with new OEMs? Or is that how it grows? Or is it just those OEMs are more successful on your platform?

Well, there's not that many design wins because there's not that many process equipment manufacturers. When you look at CMP, there's [Nanometrics] and there is Ebara. And that's it, practically, with some small companies we are working with, but that's not a revenue engine.

In the EDGE side, there are three major players that supply LEM and [Dr. Electron and a small Hitachi] in the EDGE -- not for Hitachi in general, of course. So in the CMP, we are with the two majors. In EDGE, we are two out of three. So the growth would come primarily from growth of the segment rather than growth of getting more design wins.

And are your OEM partners becoming more progressive in pushing the integrated solution?

No. No, they are not. It is still a [pull] type of market segment. It is the end user. We do the evaluations directly with a lot of the end users. We do a lot of the presales and it is still a pull market.

What catalysts in the industry would change that -- I guess how wafers are processed? Are there any catalysts that would change that?

I think primarily it is the growth in the expense -- the capital equipment expense. When the piece of equipment, the process equipment becomes more expensive, cycle time and overall equipment efficiency becomes more expensive and the benefits from integrated becomes more evident. But that is a very gradual process. So it will continue to be a very gradual evolution. It won't be, so to speak, as a revolution as we saw in CMP 10 years ago, eight years ago.

(OPERATOR INSTRUCTIONS). David Fitzgerald.

I wondered if you were or would ever consider using your cash to make an acquisition to grow revenues through acquisitions instead of pursuing organic? Do you have any comment on that?

That's always a good question. And it always gets a general answer. I would say two things -- one, we are looking at expanding inorganically. Two, we would rather not use our cash to do that because we want to use the cash to grow the operations, whether it is ours or [indiscernible]. But we are primarily -- we are very active in looking for acquisitions. And we will try not to use the cash for that.

Since there are no further questions at this time, before I ask Mr. -- 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 three hours on Nova's website, www.nova.co.il. Dr. Dishon?

Well, again, I would like to thank everybody for joining our conference at the very, very last minute announcement that we had to, was forced on us in order to meet all the requirements. So thank you very much for joining us. Thank you very much for all the good questions.

We are, as I said before, we are looking forward very positively and we know we left behind any interruption in our main business. And we are ready to get back to work as good as we can from now on. And everybody is welcome to any questions in the future. And we will have a phone call not that long time from now because once we get the first-quarter results. So hopefully, we will see you all then. Thank you.

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