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Operator
Ladies and gentlemen. thank you for standing by. Welcome to the Nova Measuring Instruments fourth quarter 2006 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 February 20th, 2007. With us online today are Gabi Seligsohn, 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 (indiscernible) 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 [Gelbert Gehanna], Investor Relations at 1-866-704-6710 or 972-36074717. Mr. Seligsohn, would you like to begin?
Gabi Seligsohn - President and CEO
(technical difficulty) the 60% in our revenues year-over-year versus 2005 and actually this is a six year record high an an almost all-time high just a couple of hundred thousand dollars shy of that number for us in 2006. Successful penetration in the Stand Alone optical CD market with a major win at a leading global memory manufacturer is just one amongst many achievements for this year and Stand Alone revenues are already accounting for approximately 10% of system revenues.
Increased market share in the integrated metrology segment against our main competitor with several major account wins in Korea, Taiwan and the U.S. as well. We have been able to both defend our position in key accounts and successfully displace our competition on several occasions. As an example a major memory manufacturer in Taiwan decided to back off from their dual vendor policy and move to All Nova for their integrated metrology needs and the decision was based on a combination of technology -- and I am glad to say -- the high level of support which that customer enjoys from us.
We estimate our current integrated metrology marketshare relative to our main competitor at around 60% for the year and about 70% for the fourth quarter of 2006. We showed cost control measures that were implemented and we have done that in order to speed the transition to profitability. There has been a major improvement in the bottom line and we are very close to break even as you'll see from the financial analysis for Q4 2006, with operating expenses down from 66% of revenues in the fourth quarter of 2005 to 48% in Q4 2006.
There has been a smooth transition to the new management structure and this, I am glad to say, has further stimulated the organization towards growth. The HyperNex acquisition integration is complete, allowing us to expand our reach into more segments and notably 21 of the 25 largest semiconductor manufacturers are, today, Nova customers. Existing relationships will be relied upon and new relationships as well in order to help speed up our acceptance of our new product.
With the addition of Stand Alone Optical CD and X-ray our addressable markets immediately expands from about $80 million from integrated metrology to at least $200 million in 2007 and about $350 million by 2009 according to Gartner Dataquest.
From a management perspective, as I said the management changes have gone smoothly and the structural change in business units has helped the Company focus efforts more in line with market needs. The 8% reduction in workforce although painful was necessary in order to reach profitability goals. And this has not affected our competitiveness and or response time.
Business and product update. Like to share a few pieces of information with you. 50% of our revenues in 2006 came from our new products. This includes a combination of revenues from the NovaScan3090, our Stand Alone optical CD tools, and our new industry-leading software called NovaMARS.
One benefit of increased software sales, of course, is going to be that it will help us improve our gross margins long term. The 3090 platform has been widely adopted for use in integrated metrology and to date 14 of the largest manufacturers have already adopted the 3090 as their platform for high-volume manufacturing and process developments. Our relationships with our key OEMs are excellent and we have built our partnerships over the years by continuously focusing on offering leading-edge capabilities, reliable products and an excellent field support infrastructure that our partners have learned to rely on.
As an indication of the depths of our collaboration, it is worth mentioning that we have shipped several units to our OEM partners to support their in-house development needs for the next-generation process development.
Notably, again in the area of OEM activity we have completed the integration of our integrated NovaScan3090 CD into the Applied Materials edge platform and shipped first units to a major customer. This adds to our already existing integration with Lab Research, both of which hold a large portion of the edge market. In the area of Stand Alone Metrology we believe we offer a very compelling solution with a very attractive cost of ownership model, market-leading tool to tool matching capabilities and the highest throughput available. We are continuing to enjoy marketshare gains away from our competition which is indication of our technological advantages as well as our strong customer support capabilities.
In the area of modeling software which is intrinsic to this area of critical dimension measurements, we have literally hit the ground running with the NovaMARS. Customers were looking for a very advanced solution allowing complex measurements on three-dimensional structures in a way which is user-friendly. This software seems to provide that solution.
Service revenues continue to grow and account for $10 million of our revenues in 2006, with most revenues coming from multiyear contracts with our customers who have enjoyed our service team for many years. We will rely on the strong support organization to penetrate and proliferate our new product going forward.
2006 was an outstanding year for our Asia-Pacific group which made huge penetrations and as Dror will mention accounted for a large portion of our business.
Gross margins have improved from 36% in 2005 to 41% in 2006; but we have set higher targets for the future. We believe that with the planned change of revenue mix, we can further improve on gross margins and our long-term plan.
Looking forward, we believe some of the recent M&A announcements and associated integration activities may actually benefit us. For example the recent announcement by (indiscernible) and Therma-Wave and the earlier merge between Nanometrics and Accent are such activities. Market drivers in our core business that we see are several but I would like maybe to mention some comments recently made by Applied Materials to illustrate, clearly, the growing importance of Integrated Metrology.
They said that cycle time is king and that it impacts about 50% of wafer manufacturing and that chamber-to-chamber and tool-to-tool matching is a must in order to have effective advanced process control. We demonstrated for many years and in particular in relation to the steep memory ramp up Integrated Metrology plays a key role in achieving these capabilities. Therefore our Company strategy continues to focus on aligning with our customers' key priorities in this important area of Integrated Metrology.
Going to Stand Alone Optical CD, more and more of our customers, the customers that we speak with expect their tools to provide throughputs that can match that of the process tools which in the case of lithography -- one of the most critical steps in semiconductor manufacturing -- runs at about 150 to 200 wafers an hour. We also hear frequently a request for simplicity, especially in the technology that has been notorious for complexity. Moreover, reliability is key once the sampling rates on the Stand Alone Metrology tool increase and the process tools dependency on measurement increases as well. With 150 wafers an hour, advanced modeling capability and reliability numbers, which we have brought from the arena of Integrated Metrology were just to mention reliability requirements are in order of magnitude more severe than on Stand Alone. With all those together we believe we have the right to succeed in the space of Stand Alone Optical CD.
In the area of x-ray we are pleased with the ongoing interest in the products. We were expecting an order but it is being delayed due to capital expenditure freeze associated with restructuring in one of our customer sites. In the meantime we continue to work with that customer in order to move forward. Beyond that customer, we have several interested prospective customers who are evaluating the technology by performing wafer demonstrations; and we are focused on initiating some field evaluationss in the near future.
Overall a very successful year for the Company and let me turn it over to Dror for some insight on the financial results. Dror.
Dror David - CFO
Thanks, Gabi, and hi, everybody. Good morning.
As Gabi mentioned, the major change in the financial results is increasing revenues, reflecting 60% increase in year 2006 over '05. 59% quarterly increase over the same quarter last year, and [13]% increase in Q4 '06 over Q3 '06. Total revenues for 2006 were $48 million and total revenues for the fourth quarter of '06 were $14 million.
On the yearly basis, revenues from Stand Alone Optical CD Systems accounted for approximately 10% of overall system revenues and 90% were from Integrated Metrology sales. On a quarterly basis in Q4 '06, revenues from Stand Alone Optical CD systems accounted for approximately (technical difficulties) system revenues and the rest 85% were from integrated metrology sales. Sales by territories as Gabi mentioned increased significantly in the Asia-Pacific accounting for 53% of revenues in Q4. Overall in the year 50% in Asia-Pacific in Q4 36% were from U.S., 6% from Europe and 5% from Japan.
On a yearly basis, 300 million (indiscernible) of sales accounted for approximately 85% of system sales, Integrated Metrology and Stand Alone and the rest was 200 million (indiscernible) on a quarterly basis Q4 '06 300 million (indiscernible) revenues accounted for 95% of system revenues and we expect this level to maintain in the coming quarters. (technical difficulties)
Sales from the NovaScan3090 product series, Stand Alone and Integrated, continue to increase and accounted for approximately 60% of our system revenues in Q4 '06.
Service revenues have increased to over $10 million in 2006 -- 21% of total revenues, 23% increased relative to 2005 and in the fourth quarter they increased to $2.6 million, approximately 20% of total revenue.
Gross margins in the quarter were 41%, similar to the previous quarters -- quarter. Cost for the quarter included year end compensation packages related to the major ramp up in manufacturing and service organization for year 2006, and also retirement costs related to the amount's headcount reduction that took place in November. Excluding these expenses, gross margins in the quarter were approximately 43%.
Operating expenses increased in 2006 to $23 million, relative to approximately $20 million in 2005. In the R&D during 2006 we have maintained expenses in the $9 million range, same level as 2005 and 2006 expenses included introduction of two major new products in this year -- the NovaMARS and the NovaScan3090 -- and also the cost of the acquisitions for approximately five months.
(indiscernible) marketing expenses increased significantly year to year by approximately $2 million. This reflects our investment in customer penetrations and additional safeguards in this year and investments which have proven to be worthwhile looking at our business results for 2006; and also the cost of -- also, federal marketing included cost of the acquisition for approximately five months.
G&A expenses increased by $1.5 million, mainly due to the legal costs related to the acquisition and the IP litigation.
Overall as Gabi mentioned, operating expenses were 48% of revenues in '06, a significant reduction relative to '05.
U.S. GAAP net loss for the quarter was $0.8 million, similar to the previous quarter. As mentioned in the press release stock-based compensation and amortization expenses accounted for approximately $0.6 million in the current quarter. In addition retirement costs related to the headcount reduction that was previously announced accounted for approximately $0.3 million in the current quarter.
Moving into the balance sheet, looking at our inventory levels they have increased by $2.3 million on a year-to-year basis, '06 over '05. Approximately $2 million of this increase is related to the acquisition of [Hypernex] which means that we have maintained our inventory levels for the central business on the same level year-to-year despite the 60% increase in revenues. This was achievable mainly by leveraging our (indiscernible) manufacturing and outsourcing methodologies and also by improving our planning and logistic capabilities.
As you can see we are way below the benchmark to follow the peer industry group in this area.
Finally our cash reserves decreased by approximately $1 million in the quarter to $15.2 million and the reduction is related mainly to the $1.3 million increase in our accounts receivable. Gabi.
Gabi Seligsohn - President and CEO
Thank you, Dror, and with that, Operator, we will be happy to take questions.
Operator
(OPERATOR INSTRUCTIONS) Robert [Cask] of [Sunvest].
Robert Cask - Analyst
Very nice quarter. I have a question about guidance. Can you sort of give us your best guess and more insight into (technical difficulties) the following quarters in the (indiscernible)? How that will play out for the Company?
Gabi Seligsohn - President and CEO
As you know we don't give forward-looking guidance. I will say in general how we view the industry in 2007. Our assumption is that the industry will continue to grow in 2007 albeit at a slower rate. Our understanding is the capital equipment grew about 20 to 25% in 2006 so I believe there will be continued growth in 2007, but of course not at that rate, what I see from analysts plus anything between 4 and 7% growth in the industry.
Our plan is to continue on our growth pattern and the move to profitability is a great focus for the Company right now. So generally do plan for 2007 as a year is continued growth and the plan is that if you will look quarter-over-quarter 2007 versus 2006, our plan is that quarter-over-quarter we will see continued growth in that aspect. So in general we will continue to grow. The extent of it I'm not ready to mention but definitely continued growth.
Robert Cask - Analyst
And the $0.8 million losses, does that include stock-based comp and the retirement costs or are those on top of the .8?
Dror David - CFO
No, it includes. The 0.8 includes the stock-based compensation, amortization and the retirement costs. One last question. When do you think you'll get first revenues on the x-ray? How much does that sells for?
Gabi Seligsohn - President and CEO
Well as mentioned before, we were disappointed by the fact that we did not receive the first bookings we were hoping and that is a direct result of a restructuring at a major account we have been working with. Revenue expectation, I can't say a specific date. We are working on several opportunities right now. And as mentioned, there is quite a bit of interest in the product.
So our plan is to shoot for revenues in the year but I'm not able to mention at this point in time exactly when.
Robert Cask - Analyst
And the price per machine? Roughly?
Gabi Seligsohn - President and CEO
I will give you a range of between $1.5 to $2.5 million.
Robert Cask - Analyst
Great job.
Operator
(OPERATOR INSTRUCTIONS). David Fitzgerald, a private investor.
David Fitzgerald - Private Investor
Great quarter. Things are going along very well. It does look like your foray into the Stand Alone market is going pretty well. In the first quarter of 2006, you did about .5 million and if I am doing the math right, you did almost 1.7 million in the fourth quarter. Does that sound right to you?
Dror David - CFO
It was 1.6.
David Fitzgerald - Private Investor
1.6. That's a pretty large jump. Do you see that success continuing? Your coming in on the back of integrated metrology and being able to place some Stand Alone machines?
Gabi Seligsohn - President and CEO
The major win that we had announced a couple of weeks ago, David, I'm not sure you saw the press release. We announced a major win with one of the world's largest [smelting] manufacturers. It's part of the business that we had enjoyed in 2006 and we will also enjoy some of that business in 2007. So been selected at profits full of record was very important for us in order to qualify ourselves as a real production worthy tool. We are currently working on several penetrations actually in all the territories that we work at and we expect revenues from Stand Alone to continue to grow in 2007.
So our focus actually is to grow market share and we are going to be leveraging the success with the move to production that we have done at that major memory site in order to proliferate it further. And part of the focus of the Company and part of the budget for this year is focused around penetration and creating market share which is more significant for the Company.
As mentioned I believe we have a very competitive product offering in that area and since all elements have been completed in that product now I think it is a good marketable product.
David Fitzgerald - Private Investor
Yes. Are the margins better for the Stand Alone tools versus integrated?
Gabi Seligsohn - President and CEO
Yes they are. (MULTIPLE SPEAKERS)
David Fitzgerald - Private Investor
Yes. What do you attribute the major success you've had over the last four or five quarters in the integrated market? Your revenues are up 50% versus the end of 2005, just for that segment alone. Maybe even more than that. What is that attributable to?
Gabi Seligsohn - President and CEO
There's a few things that I mentioned in passing and thanks for asking about this. I think, first and foremost, was the issue of technology. The 3090 platform has proven to be a wonderful production-worthy tool and able to deal with very, very high-end measurement needs. So we proliferated very strongly with that.
A lot of our revenue comes from the memory market. As you know over 60% of capital expenditure comes from [Memflash] and from (indiscernible). We have done an outstanding job capturing those markets. It has been mentioned in an analyst report so I can mention specifically. We've had major wins in Korea both at Samsung and at Hynex, which were very, very important for us of course to continue with that.
So first of all it's the platform itself where the technology is a lot better than what the competition was able to offer. Very high reliability. Very good capabilities and the other thing which is very critical that we always talk about is the service organization and the support that the customers have enjoyed.
I believe that our focus on those two has been helpful and as mentioned in passing as well I think that our focus on that area. Maybe some focus on other areas from our competition, such as M&A, has helped us even further increase the leverage on the market.
David Fitzgerald - Private Investor
It's been a major success. Your sales and marketing expenses have increased. (technical difficulties) Stand Alone and the new product -- the 3090, etc.?
Gabi Seligsohn - President and CEO
Well first of all, as you know our sales organization gets recognized in several ways so the expense associated with increase of 60% in sales is depicted very well in those numbers. The other thing, of course, is we have expanded the salesforce especially in the Asia-Pacific room. And it has proven to be the right stuff. So it's a combination of both. Still the salesforce is not huge but very effective.
David Fitzgerald - Private Investor
Yes. And a major success. Is the line item that reflects the ongoing litigation general and administrative? Is that where we would see the litigation?
Gabi Seligsohn - President and CEO
Yes.
David Fitzgerald - Private Investor
Will that continue throughout the year probably?
Gabi Seligsohn - President and CEO
Yes. (MULTIPLE SPEAKERS). As you probably know, we're going to trial in May so expense are at an uptick right now in preparation for the trial. That trial is for the case that we had brought against Nanometric. We feel quite confident about that case now going into it in May. And there are other expenses associated with other claims that competition has brought against us, as well.
So litigation expenses will continue to be quite high this year but we are hoping over time to reduce those, obviously.
David Fitzgerald - Private Investor
One last question about the investor conference. This is the first one you have had in a long time in San Francisco.
Gabi Seligsohn - President and CEO
Yes.
David Fitzgerald - Private Investor
What brought that on? Why the change to attend a conference?
Gabi Seligsohn - President and CEO
I have to say respectfully and also thank the audience on the call. I think the interest level in the Company has grown and has already contacted us. We had several meetings with them and we were convinced that this is a good venue to go to. We are very grateful for the opportunity. We hope this is the start of many; and may increase interest in the Company in general.
David Fitzgerald - Private Investor
I hope so. Great job. I appreciate it. Thanks for taking my questions.
Gabi Seligsohn - President and CEO
Thanks so much, David. Appreciate your attending.
Operator
There are no further questions at this time. Before I ask Mr. Seligsohn to go ahead with his closing statements I'd like to remind participants that the replay of this call be available in three hours on Nova's web site, www.Nova.co.im. Mr. Seligsohn.
Gabi Seligsohn - President and CEO
I'd like to say a word of thanks to everyone for attending the call. Looking forward to another successful year. We have several key objectives -- we are continuing to grow the Company and one of our key focuses is the move to profitability and I believe that the management team and the activities are such that we will align and provide that in that area. Thank you so much for attending. Bye bye.
Operator
Thank you. This concludes Nova's fourth quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.