Nova Ltd (NVMI) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments first quarter 2006 results conference call. [OPERATOR INSTRUCTIONS]. With us online today are Dr. Giora Dishon, President and CEO of Nova, and Mr. Dror David, 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 Gelbart Kahana, Investor Relations, at 1 866 704 6710 or 972 3607 4717.

Dr. Dishon, would you like to begin?

Thank you. Good morning and good afternoon and, again, thank you for joining us for our quarterly conference call. And I would like to refer the discussion to Dror for reporting the financial results. Dror?

Hi, everyone. I will go over the main aspects of the financial report. Total revenues for the first quarter were $10.3m, with a 16% sequential increase over revenues of approximately $9m for the fourth quarter of 2005.

These revenues included approximately $1.3m recognition of revenues which related to fulfillment of upgrade commitments within the quarter. And these were also related to the restatement of 2004 reports, which was concluded a few months ago.

Breakdown by region was changed this quarter, with Europe increasing from approximately 10% in 2005 to 30%, which is mainly due to orders for 300mm --deliveries of 300mm and 200mm from single major customers in Europe. And Europe increased on account of the U.S., which was reduced to 20%, and Asia, which was reduced to around 40%.

We do not expect this trend to continue in the following quarters. And the United States and the Asia regions are expected to return to account to approximately 80% of this phase in the coming quarter, following proliferation of our products into some major accounts in these areas.

Sales through OEMs continues to account approximately 80% of the sales, with direct sales mainly in the 200mm segment and in the Europe region.

Service sales have continued to increase and we are very proud of our service organization, which is becoming a significant and profitable segment for our company. The quarterly revenues in Q1 were in the range of $2.5m, 25% of total sales. And customers continue to enjoy our good support and buying our service and support contracts.

As reported in the press release, the bookings in the quarter were up, actually by more than 15% from the previous quarter of –- fourth quarter of 2005, and the backlog at the end of Q1 was higher than previous quarters. This is attributed to a few factors. One is better cooperation with our OEM partners and operational planning of proliferation of our products into the end-users, which somewhat increases the backlog, as well as penetration to major accounts in the Asia and U.S. regions, which improve the backlog and bookings.

The gross margin for the first quarter of 2006 was also improved to 46%, relative to 42% in the previous quarter. We do not expect this trend to continue. We expect to -- in the following quarters to return to the 46 –- to the 42% gross margin. This quarter was a bit unique because of 200mm sales, which were with better margins in this quarter.

Total operation expenses were around $5m in the first quarter, slightly down from the fourth quarter 2005. We expect that to increase with the conclusion of the acquisition of HyperNex. Net results were close to breakeven, compared to a net loss of $1.5m in Q4 2005.

One thing to be noted regarding the results and the net results is that we have started to implement new accounting regulations for options expensing. However, since most, if not all, our options were already vested as of December 2005, the impact of this accounting rule is insignificant for our Company in Q1. And we will see some expenses looking forward, probably not material in 2006, as we continue to allocate options to our employees.

Cash reserves at the end of the first quarter were approximately $21m, and the cash position and working capital continues to be strong.

With that, I’ll transfer the conversation to Giora.

Thank you. So, in general, we think the first quarter -- Q1 of 2006 was an improved quarter compared to the previous quarters, generally speaking, in all terms. Of course, if we compare it to Q1 of 2005, this is a significant improvement. But I must remind ourselves that the Q1 of 2005 was something that we didn’t like, and we’re recovering from that quarter very gradually and we see that improvement -- that trend of improvement all the time.

And, for example, the booking level has been improved quarter over quarter for the last five quarters, very gradually but very systematically. And we expect that trend to continue.

So, overall, the quarter was a reasonably good quarter, with a lot of good news. Not as good as we would like to be, of course. There’s always a way to improve. Overall, the market is in a moderate upturn. Things are improving with all the major customers, ours and others; more fabs, more equipment, the significant advances. We all know our company touches Toshiba, Intel, [Ion Flash], Samsung, Hynix. So we definitely see an overall positive trend, even if it’s cautious, a positive trend in the market.

And, in that context, we are very pleased with the proliferation of our new NovaScan 3090 that we released last year, which is today formally released on all the platforms as a standalone, [on applied, on a barrier], on LAN, formally released and available to the market. And we see that proliferation progressing.

The percentage of revenues coming from that system continues to increase on a quarter-by-quarter basis. And if we look forward we see that our shift to, not only us, but our shift to a 300mm is increasing, and will increase as we progress in this year. And in the 300mm, the NovaScan 3090, for all the different applications, is, as I said, released, available and being sent to customers.

We had several very interesting major customer wins during the quarter, on a global basis. And this also is significant, and it’s with all OEMs, not necessarily just one OEM or the others. But there are more ways to go, more challenges, more customers that we are in the process of evaluations, and we hope to continue to gain market share.

Overall, the percentage of metrology -- integrated metrology systems for Copper CMP is growing. Not as fast, or it’s not becoming yet a standard requirement for Copper CMP, but the percentage is growing and we have there a very significant market share. And we think this will continue to accelerate as copper penetrates more and more high volume manufacturing.

Memory, for example, copper is not there yet. It’s starting to penetrate into flash manufacturing, copper as a process. And it’s primarily driven in the logic and DSPs, where we have -- we see good penetration.

The integrated optical CD is also a very –- or optical CD in general is a very high-growth market opportunity. We see growth there. Although the growth in the optical CD is slower than everybody expected, if you watch the standard research or industry research, that is Data [inaudible] or VLSI Research and others. The level of -- or the rate of adoption to high-volume manufacturing of optical CD is slower than anticipated, but it’s moving forward and we have several evaluations with very promising results. The same goes also for us on the standalone opportunities, where we continue to see gradual improvements.

So, overall, as we said, as Dror said, booking level has increased 25% in Q1 and the backlog at the beginning of this quarter, Q2, is better than the backlogs we have seen in all over last year at least, if not more than that.

So, having said that, with having that in mind, there is no question that we think that this year, 2006, is going to be a better year than 2005, significantly. And there is upside opportunities.

Overall, the thin film [scatterometry] market, which is gradually becoming one segment because it’s the same systems basically, us or competing, and similar platforms, we see that overall that market segment growing at a compounded annual growth rate by far more than overall the industry, or overall the metrology segment.

A side note on a side issue that I know that’s always interesting. As you know, we are in a litigation process against Nanometrics. We had a press release on that several weeks ago. Relating to one, we had a very significant win against a requirement, or request, of summary judgment by Nanometrics that was denied by the judge. And, as a result, Nanometrics filed a complaint against Nova on a different patent that we think is -- one, we don’t infringe, and two, has no real basis.

And the most significant event, even though it’s not -- did not happen during Q1, but it happened about three weeks ago, is the acquisition, the signing of definitive agreement to acquire all the assets of HyperNex. And we think this is a very exciting opportunity. I know the word exciting sometimes is a little bit -- it’s overused, but it’s really exciting because we think that HyperNex has a strong and differentiating technology for high-end manufacturing of semiconductors for technology nodes of 65, 45 and VO, with an enabling technology, currently with no straightforward competition to what they do.

So we are very excited in doing that. We think it’s the right thing. It will definitely be an opportunity to provide Nova with one, is another engine for growth, and two, a more balanced business model looking forward. So we hope to conclude the acquisition pretty fast and with that take it to the next step and provide this, as I said, growth opportunity.

That probably summarizes where we are at today and we will be glad to entertain any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] The first question is from David Fitzgerald, private investor. Please go ahead, sir.

Can you hear me?

Yes.

Great. My first question has to do with the HyperNex acquisition. Can we expect that to be closed in the second quarter?

Yes.

Okay. How much is that going to contribute? Can you give us any figures as to how much that could contribute to 2006 revenues?

Well, figures we cannot give. That’s too early. One, we have to close. Two, we have to finalize the plans before we can say more numbers. But we have a strong feeling, based on the information we have so far, that on a P&L basis this is probably going to be somewhere in the neighborhood of breakeven, and maybe slightly accretive. But that’s -- like I said, it’s premature to give anything beyond that.

I understand that. Could you speak to the available market for their products or can you not give any details on that right now?

Well, details is a little bit difficult right now. We need to close. But I would say, in general, that the technology they have is addressing the 65 and 45 nanometer technology nodes, which are beginning -- getting into high-volume manufacturing. 65 is by several companies, not that many, and 45, not really in high-volume manufacturing yet. Intel is probably the only one who is ramping up or starting to ramp up high-volume manufacturing for 45.

And, since it’s addressing that market, it’s a little bit more complicated to really quantify that. But we -- our understanding and our belief is that that technology addresses some critical issues and the processes for 65/45 for composite materials that have not been used in previous technology nodes. And therefore they did not have the need for that type of solution, what’s called a texture solution.

So we think that 65, 45 and beyond is -- can develop into a market opportunity across the industry for any manufacturing firm, and in multiple processes, so represents on the long term a very, very interesting and very high growth opportunity.

Yes, I agree with that. I was wondering what kind of a play you would make to get into the smaller nodes, so I’m encouraged by this. I look forward to more figures later on.

Could your CFO tell me again how much of the first quarter’s revenues were from -- or related to the restatements?

Approximately $1.3m.

So we’ll see the rest of what used to be $4m trickle in throughout the rest of the year?

Most of it, yes.

Okay. While I’m talking about that, could you tell me, will we see the amended SEC filings come through anytime soon?

Yes, it will be within Q2.

Okay. And I guess my last question is, previously you had said that the market -- available market for your core products was around 60 to 70m. Do you still feel like we’ll see gradual increases throughout the decade?

Probably the best answer is yes. That very much depends on the rate of adoption of optical CD to multiple processes. I’ll just give you one example. Currently, optical CD is using some specific processes, such as a gate mask opening in the gate area, or something like that.

But as technology nodes move forward, we see scatterometry, those kind of 3D-type measurements, we see that getting into other processes, because all of a sudden they become more critical, such as STI, that was not used before when scatterometry will get, and it’s not there yet, into [VO] openings and so on.

Generally we -- and actually that’s what I mentioned before, if you look at the market research, you’ll see that this specific segment of optical CD is growing at a very nice compounded annual growth rate. And I believe that optical CD and thin film, non-metal thin film, should be combined because the difference between them start to reduce, or they start to overlap, and systems are being –- and practically all the systems where there’s us or a competitor, the platform, the hardware, is very much similar if not the same.

So the combined market probably won’t see that combined market continue to grow beyond what I mentioned and what you mentioned, [quoting after] 60, 70. We see that growing.

Okay. That’s great, appreciate it. I’ll step out and see if anyone else has any questions. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. There is a follow-up question from David Fitzgerald. Please go ahead, sir.

I guess I’m the only one here. I had a follow-up question about the consolidation that we currently see in the industry. There’s been a lot of acquisitions and a lot of the conventional wisdom says that the smaller players are having a hard time, selling to fewer and fewer larger customers. Where do you see yourself in three years? Do you see yourself being able to have enough of a market niche that you’d survive as a standalone player? Can you speak at all to that?

Okay, that’s a good question, but that’s also a very tough question. And you’re not the only one on the call but you’re the only one asking questions. And I thank you for the questions, of course.

I would say the following. Very generally, because specifically, as you can understand, that’s more complicated to answer something like that, we have been asked, or we have seen questions like that asked not only to us for the last three or four years. And we have seen very little happening except for the last, maybe, six months, except for the Rudolph/August, we have seen very little activity.

In the last six months we have seen a little bit more, like the Nanometrics/Accent or [Soloris] or ourselves with HyperNex. And there are several non-public, small metrology companies out there that operate, and operate quite efficiently. So I’ll tell you a little bit how I feel about the market trends.

One, I think that in the metrology space, not in the inspection and not in the process equipment but in the metrology space, there is room for small companies that can do better than survive. And there are two reasons for that. One, there is always need for innovations in metrology. And if you look around, if you look at the private companies that you see around, the number is very impressive. I can mention to you but I don’t think we need.

So there is always the need for innovation by far more than you need in the main process areas. And we haven’t seen any innovation in inspection for a long time, just getting better and smaller, which is needed. But not in metrology. You see new metrology technologies coming in because the process changes, the dimension changes, and there are different needs.

So you see many small companies. If industry asks for innovation, it’s there. If industry asks for innovation they’re ready to pay for it, to some extent. And when you get to critical process steps, even if it’s consolidating or the number of significant customers reduce, because you know that the top 20 buys 90% of everything.

In that specific area of metrology, they are more ready to buy from a smaller company than in process areas or something like that. And that’s also because the dependency on failure from a process equipment to perform is much more –- has much higher impact on what they do.

So they take some risk working with new technology, they take some risk working with smaller companies, and I think we will continue to see, in the metrology space, small companies executing quite well. Because of the stock market and everything, we won’t see too much IPOs in that area, which means there will be opportunities for M&As, but for small M&As. Not conglomerate with a conglomerate, but small M&As that will create critical mass for a good number of companies.

And, in general, we see ourselves in that space of growing to beyond the critical mass needed to be profitable in long-term survival, because the opportunity is there. Same time, of course, if anything will develop to be very interesting, we’ll look in any direction.

I think that your HyperNex acquisition does definitely speak to the innovation that a small company can provide for the industry. So I agree that that’s a step in the right direction, and it will be interesting to see what color you can give us on the next call. I appreciate your answers. Thanks very much.

Well, thank you. It’s a good question.

Thank you. [OPERATOR INSTRUCTIONS] There are no further questions at this time. Before I ask Dr. Dishon to go ahead with his closing statements, 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, thank you very much for joining us. As I said, a reasonably good quarter in the right direction, and we look forward to talking to you even more optimistic at the end of next quarter. So thank you very much and have a good day.

Thank you. This concludes Nova’s first quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.