Nova Ltd (NVMI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nova Measuring Instruments second-quarter 2007 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 today, August 1, 2007.

I would like to remind everyone the forward-looking statements for the respective Company's business, financial conditions and result of its operations are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated. Such forward-looking statements include, but are not limited to; product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development, and the effect of the Company's accounting policies, as well as certain other risk factors which are detailed from time to time in the Company's filings with the various security authorities.

If you have not received a copy of today's release and would like to do so, please call Gelbert Kahana Investor Relations at 1-866-704-6710, or 972-36-074717. With us online today are Mr. Gabi Seligsohn, President and CEO of Nova; and Mr. Dror David, CFO. Mr. Seligsohn, would you like to begin?

Yes, thank you Operator and thank you all for joining today's conference call. Before going into earnings for this quarter's results, I wanted to thank those investors that took the time to attend our presentation at Unterberg Towbin's Emerging Growth conference held earlier this month in New York. We felt the conference was very effective and generated lots of interest in the Company, and we look forward to attending such conferences in the future.

Now moving to the results; Q2 2007 marks a long awaited return to profitability and we are delighted with this outcome. For our previously communicated plan, we have crossed the line and are today reporting a $1.1 million or 7% net profit for revenues of $14.8 million for the quarter.

In this quarter, we continue to demonstrate both sequential and year-over-year improved revenues; 29% above Q2 2006 and 11% above Q1 2007.

Gross margins have also moved a further notch up from 44% in Q1 '07 and 43% in Q2 '06, to 46% in Q2 '07. The improved margins are a result of a higher percent of revenues coming from software sales, coupled by a $0.8 million decrease in overall operating costs, mainly associated with the elimination of IP litigation costs last quarter.

Our successful cost-reduction programs have now brought our break-even point to a significantly lower point than a year ago. Specifically, it is around $12.5 million per quarter.

In this quarter, we continued to enjoy further market-share gains, especially in Korea and in China. Our penetration efforts into the stand-alone optical CD space I'm very happy to say are yielding further results and we will be starting another project in Q3.

We believe our platform, the NovaScan 3090, offers market-leading capabilities. The product, which received Semiconductor Magazine's Editor's Choice Award last month at Semi-Con, has been recognized by several customers as offering the best fleet matching capabilities and a very compelling Cost of Ownership model, coupled by industry-leading throughput.

As stated, software sales are increasing and we are happy to note that the NovaMARS modeling software, which goes with the optical CD platform, is continuing to gain traction while our other productivity-enhancement software utilities are enjoying increased sales volume as well.

With several earning calls already in place, coupled by numerous analyst meetings and reports, it is no secret that bookings in the area of capital equipment have decreased. Speaking with our customers who represent a spectrum of all types of IT manufacturing, we believe this reduction is related primarily to erosion of memory ASPs in the past several months and a much-related inventory buildup which customers are now working through.

Reports in the last two weeks suggest a price improvement in both the NAND and DRAM spaces and we note a few press releases made in the past few days by Powerchip, [in Atera] and Elpida, indicating CapEx increases and in the case of Elpida, a bottoming out of price reductions. The war for prominence in these segments continues with Taiwan playing a key role in the expansion and with a strong fight between Hynix and Samsung for the number-one position in the DRAM space.

DRAM still suffers in overcapacity for the next couple of quarters, [and it leads] to NAND FLASH, which has a better price position and better often capacity utilization. We believe these are indications that the latter half of H2 '07 may show some improvement. Also worth mentioning, is the stronger position foundries are playing with many independent device manufacturers and are now taking on production and process development.

Capital expenditure-wise, foundries were slow to spend in H1, and there is an expectation of higher spending in H2 due to lack in high-end capacity for 65 nanometer technology nodes. Given the fact that 21 of the top 25 are our customers, we believe we are well-positioned to capture business opportunities as they emerge.

With our cost reductions now at full effect and with our break-even point at a much lower point, coupled by our guidance that each quarter this year will be better than its comparable one in the previous year in terms of profit and bottom line, we believe we have positioned ourselves well to weather the said outlook.

On another topic, it is with great pleasure that we welcome Mr. Nick Bright to our Board of Directors. Nick has served as Executive Vice President of Lam research in the last several years, playing a key role in that company's (inaudible) growth. Nick joins our board at an important time for Nova. His industry background, distinguished career with some of the most-respected companies in the world and personal leadership skills will be a valuable asset as we pursue the next phase of our growth for the Company.

And with that, I'd like to turn it over to Dror to give some more insight on the financial results. Dror?

Thanks Gabi and Hi, everyone. As Gabi mentioned, we have very well executed our financial plans for the quarter, with revenue growth representing 29% over Q2 '06 and 11% growth over Q1 '07.

The revenue increase over the past year's comparable quarter continues the consecutive increase in our last 12 months with trailing revenues that started in Q1 '06, reaching $55 million in this quarter.

Revenues from stand-alone optical CD systems accounted for approximately 6% of system revenues, a decrease relative to the last few quarters. This decrease is related to orders flow from a specific customer which delayed its capital spending.

During the quarter, we received an additional purchase order from this customer with approximately 6 months lead time, and our backlog and deferred revenues for the optical CD stand-alone products have increased relative to the end of the previous quarter. We will recognize revenues from this backlog upon customer acceptance, which might vary as it also depends on customer internal processes.

During the second quarter, we started to recognize revenues from our new software product line, the NovaMARS and its related products. The accounting treatment for these total revenues is to spread it over the maintenance period, which is normally 12 months. These NovaMARS revenues, together with other software revenues, have supported our gross margins, as will be explained later on.

Sales by territory did not change significantly relative to previous quarters, with Asia-Pacific accounting for approximately 55% of product revenues, and with some shift from Japan to Asia. US accounted for 24%, Europe 14% and Japan 5%.

During the quarter, we concluded a 300 millimeter integrated metrology product upgrade process for an Asian-Pacific customer. Following the conclusion of the (inaudible) process, we recognized approximately $2 million of revenues during the quarter.

Service revenues were at $2.7 million in the second quarter of '07, a decrease relative to the previous quarter. During the second quarter, the portion of service-contract revenues relative to time and material revenues have increased and this had a bad impact on our gross margins from the service operations, as service contracts are labor intensive and present lower margins than time and material sales.

Blended gross margin in the quarter was 46%, an increase relative to the 44% gross margin reported in the previous quarter. This increase is related to the increase in overall revenues, as well as to a higher portion of revenues from software products which present high gross margins.

An important observation is the fact that our gross profits; in dollar value and not as a percent of revenue, have increased consecutively in the last nine quarters, and was an important element that led us to profitability in the current quarter.

Total operating expenses have decreased in the current quarter by $0.8 million. This decrease is attributable mainly to the decrease in out IP litigation costs which were settled in April of this year. The decrease in these IP litigation costs was higher than that, but was offset mainly by increased sales and marketing costs related to agents' revenue-based incentives and evaluation costs at customer sites.

The net result; the Company has presented $1.1 million profit, 7%; $0.06 basic EPS and $0.05 diluted EPS. The net profit resulted from the increase in revenues and gross profit, combined with a decrease in operating expenses following our cost-reduction activities.

Non-cash expenses in the quarter were about $0.7 million and included $0.4 million from stock-based compensation and amortization expenses, and $0.3 million from depreciation of fixed assets.

Cash reserves in the quarter decreased by $0.7 million to approximately $20 million at the end of the second quarter of '07. As mentioned in the press release, this is directly related to final payments of intellectual property litigation costs which were settled in April of this year.

Finally, moving into the balance sheet; as you can see, we maintained our inventory and accounts receivables in the same levels as previous quarters. During a period of growth this was done through effective lean manufacturing and efficient collections.

Overall, our balance sheet and our cash position continue to be strong with [above] $20 million in cash reserves and approximately $23 million of working capital; enabling us to have sufficient financial flexibility as we execute our plans for the coming quarters. Gabi?

Thank you, Dror. And with that Operator, we'd be happy to take some questions.

(Operator Instructions). The first question is from Yaniv Rahimi of Ramco Investment House. Please go ahead, sir.

Hello, Gabi and Dror.

Hi Yaniv; how are you?

I'm great. Congratulations for a great quarter. With your permission, I have one question. With respect to the software portion; should we expect the current product mix to remain the same or approximately the same in the quarter to come?

Well, we don't provide specific guidance on product mix, but what we have communicated in several meetings and at previous conference calls is that our intention is to try and grow the portion of software revenues, especially given the fact that the gross margin associated with that product is higher. At this time, we don't provide guidance but as we proliferate with the product, our expectation is that there will be more interest in the product itself.

Great, wonderful. Thank you.

The next question is from Robert [Cast] of Sunvest. Please go ahead, sir.

Hi, Gabi and Dror. David [Lovely] in for Robert. Congratulations on a great quarter.

Thank you very much.

I had a couple of quick questions for you. You discussed backlog on the stand-alone side of the business and I wanted to know if you could give us any color on overall backlog.

Generally, we do not supply backlog and booking numbers. But we can say that during the quarter that we had a [decrease] in bookings and the backlog thing- same as all the industry.

Okay and then I think you covered geographic concentration and I wanted to know if you could go over it one more time. I think I missed it.

Yes, definitely; US 24%, Europe 14%, Asia-Pacific 57% and Japan 5%.

Okay great. And lastly if you could give us a little color on your exposure between NAND and DRAM; you mentioned that NAND looks like it's going to be healthier market going into the second half of the year. And I wanted to see how guys feel about your current exposure (inaudible) the business.

Both in DRAM and in NAND, we've had a very successful last year and a half, which is something we spoke about in previous calls. It's interesting, while things were going wonderful; that was the key focus. Now things are a little bit more challenging. Having said that, we're well-positioned in both markets, both the DRAM and the NAND; our market-share gains have been a lot in the space of DRAM but quite a bit in NAND, as well.

And as far as the forecast is concerned, as I mentioned in the overall review of the industry, there is a lot of talk about DRAM investments continuing in Taiwan, the pace of which I think is one of the questions. There are very aggressive [plans] coming out of that territory which influences directly as we're quite well-positioned in that area.

In the NAND space, we are quite well-positioned with several of them. But we do have to pay attention to things that took place, for instance with companies such as Micron in the past quarter; but our expectation is that that area, specifically of NAND, will continue to grow. So the feeling on our side is we're well-positioned in both markets and as things come through we should be able to capture the business as it comes.

That's great, guys. Congratulations on (inaudible).

Thank you, Robert; appreciate it.

(Operator Instructions). Your next question is from Stephen Levey of [ION]. Please go ahead, sir.

Thank you. I also join in congratulating you on a great quarter.

Thanks very much.

Just a couple of questions, please; first of all, I joined the call a little bit late so you might have discussed this. But can you give a little bit more color regarding your channels this quarter? (Inaudible) through any partners; any sort of trends there, please?

As far as the distribution of revenues, OEM-based versus direct end users?

Yes.

OEM revenues in the quarter for products were approximately 85%, 84% from OEM and 16% from direct sales.

And it's one OEM?

No, it's actually a few.

Are there any OEMs that were 10%? I assume yes.

Dror David. Yes. Our largest OEM is Applied Materials.

Right, and that represents-?

We don't give specific numbers but they are most of it.

Most of the 84%?

Yes.

Okay. And also, I don't know if you discussed it. Can you discuss though, the outlook for the remainder of the year, what you're expecting in terms of revenue trend? Do you expect to grow sequentially Q3 and Q4? Or can you give us any sort of what kind of call you gave or are willing to give on that.

Sure. The guidance that we've been giving and we will continue to give is that every quarter this year will be better than the comparable quarter in the previous year. To that end, Q1 was 30% higher and Q2 was 29% higher than the comparable quarter last year. And that continues to be the guidance we're giving both for top line and for bottom line. That's the guidance we're giving.

So the guidance is better than the comparable quarter last year?

Correct; in each quarter of this year.

How about sequentially; do you expect to grow Q3 over Q2?

We don't give sequential guidance in the calls themselves. We discuss the actual fact but we're only referring to last year's time.

Okay. Good luck going forward and well done.

Thank you very much.

Thank you.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Seligsohn 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 the Nova website www.nova.co.il. Mr. Seligsohn?

Yes, thank you Operator and thank you all for attending this call. Again, we're very pleased to report these results each quarter and look forward to meeting you with results for next quarter. Thanks again for attending.

Thank you. This concludes Nova's second-quarter 2007 results conference call. Thank you for your participation. You may go ahead and disconnect.