Nova Ltd (NVMI) 2008 Q3 法說會逐字稿

Welcome to the Nova Measuring Instruments Third Quarter 2008 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded November 5, 2008.

I would like to remind everyone that forward-looking statements for the respected Company's business, financial condition and results 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 securities authorities.

If you have not received a copy of today's press release and would like to do so, please call GK Investor Relations at 1-866-704-6710.

With us online today are Mr. Gabi Seligsohn, President and CEO of Nova; and Mr. Dror David, CFO. I would now like to hand over the call to Mr. Gabi Seligsohn; please go ahead.

Thank you, Operator; and thank you, everyone for joining our Third Quarter of 2008 Earnings Conference Call.

Q3 of 2008 was clearly another difficult quarter for our industry and the Company. While semiconductor equipment downturn has already been around for a few quarters, the events in the financial markets have led to a more severe state of affairs. It is clear that we have now moved from a supply-driven downturn, to a demand-driven one.

I spent the month of September with our customers in Taiwan, Japan and Singapore to better understand the impact of the sense of uncertainty they all shared. The picture I got was clear. In the wake of this uncertainty, leading customers decided to hit the brakes on capital expenses until market conditions stabilize.

Expansions previously planned for the memory sector in Taiwan, have been placed on hold. Furthermore, extensions of manufacturing capacity at leading foundries for 65-nanometer and 45-nanometer processes have also been dragged out.

The September quarter, which is usually a strong one in preparation for the holiday season, was very weak and capacity utilizations fell to about 70%. Many of our customers have by now reported quarterly losses or significant reductions in profit.

Given the fact that most of the equipment we sell is geared towards improving production efficiencies, our results are more a reflection of process equipment vendors, than of process control ones. Thus, we saw a further reduction in revenues of 20% from the second quarter of 2008, and a 36% decline from last year's third quarter.

Based on recently published data by SEMI, chip outputs are still showing a modest 5% growth this year, primarily as a result of strong cell phone and PC sales. We know the semiconductor market and applications will continue to grow into the future, so there certainly is light at the end of the tunnel; it is simply the length of the tunnel which seems unclear to all of us, at this time.

It is for that reason that we are happy to be in a financial situation that we're in, entering this period, with a strong balance sheet showing no debt and with cash reserves of $21 million.

Though product gross margins remain at around 48% and Service gross margins have further improved by 1%, the overall reduction in business has led to a very low blended gross margin of 34%, excluding an inventory write-off of legacy products we had to make, in light of higher expected demand for our later models in coming quarters.

Given the current environment, we have decided to take measures to reduce the cost of running our operation. These cost control measures include a reduction in force, a salary cut throughout the Company, and several other operational measures. These actions will reduce our 2009 expenses by $5 million after $300,000 of related charges in Q4. As a result of these cost reduction measures, we will also lower our cash breakeven point to around $10 million to $10.5 in revenues.

Despite the decline in overall business, our penetration of the Stand Alone Optical CD market is gaining further traction. In the third quarter, we received acceptance for a second tool at a leading foundry and received an order for another tool in its second fab. During the month of October, that tool was already accepted as well. Furthermore, I am happy to report that we are now part of that customer's process of record for 45-nanometer copper CMP and will continue to enjoy follow-on orders as that process continues to ramp both in our IM, Integrated Metrology, and Stand Alone product sectors.

Also in the area of Stand Alone Metrology, we shipped a tool to a second Japanese customer for evaluation and are in the process of installing a third tool at yet another customer site in Japan. Our existing evaluation in Korea is continuing to progress and the tool there is now part of the production flow.

During Q4, we will also be shipping a Stand Alone tool to a large US customer for their 32-nanometer process qualification. I am glad to report that customer evaluations initiated in the past 18 months of the Stand Alone product, have ended successfully and with repeat orders; and we are confident in our ability to continue this way.

As I have previously mentioned, the Stand Alone market is the Company's key growth engine. And we the progress in Stand Alone as clear evidence of the technological advantages offered by our products, and we are committed to continue and expand those capabilities, understanding that the vote of confidence made by these customers includes an expectation to continue and offer them market-leading performance.

To that end, during the third quarter and as stated in last quarter's conference call, we expanded the team of software and algorithm experts to further increase our competitiveness. As previously stated, we, as well our leading customers, believe that Optical CD is a technology going places. Its adoption and addressable market will expand and provide a cost-effective alternative to existing techniques.

The ability to expand this market further very much depends on making significant advances in reducing the complexity associated with using this technology in production, and in process development. Our vision for the future is based on our ability to innovate and lead that process, and thus our technology development efforts have not taken a hit in the overall cost reduction program, but have actually further increased.

On the Service front, we continue to see an improvement of gross margins; this despite a modest decline in revenues for the third quarter. We expect to continue to improve Service gross margins, given cost-reduction measures we have been taking, as well as through the expansion of our offered Service products. I am encouraged by the role our Asia-Pacific and Japan teams are playing in the expansion of our Service business now that a lot of our 300-millimeter install base, in those territories, are ending their warranty periods.

Given market conditions, it is clear that plant fab expansions will be delayed. Having said that, we believe that several of our customers will need to upgrade their existing tools as the need to further shrink and reduce geometries cannot be postponed. With an install base of more than 1800 tools in the field, a lot of our sales focus in coming months will be on upgrade business and we will be offering our customers new capabilities to improve on their existing tools.

Now moving on to the industry outlook; recent months have shown a continuation of consolidation between our customers. The development and manufacturing costs of chip production are significant, and having a profitable business model is not only hard to attain, but is also difficult to maintain. We believe we are well-positioned in most memory companies and will be able to enjoy business as these consolidations complete and fabs move to upgrades and further expansions.

In the foundry space, we have done an excellent job over the past few years; both on the Integrated Metrology and Stand Alone fronts, and are well-positioned to enjoy business from that side of the industry which is expected to grow as more companies become fab-less. An area where we will need to improve our positioning is Logic, and we have a strategy in that area as well.

Despite the downturn, our customers' roadmaps have not slowed down. On the contrary, their dependence on delivery of advances is growing. With that being the case, we will continue and focus on improving our offering and solidifying the vote of confidence we have already received.

Our strong balance sheet and well-managed business operation allow us to take a sensible action and selectively increase our investments in product development and penetration efforts, to ensure that we continue to grow our share in the growing segment of Stand Alone Optical CD and enjoy growth, once fundamentals improve.

With that Operator, I will turn it over to Dror for more insight into the numbers. Dror--?

Thanks, Gabi; and hi, everybody and welcome to our quarterly conference call. As Gabi mentioned, we have continued to experience a slowing industry environment in the third quarter of '08. This environment resulted in a 20% reduction in revenues, relative to the previous quarter to approximately $9 million. Most of the reduction is derived from lower demand for our Integrated Metrology products which are capacity-driven.

Gabi has also mentioned that in order to mitigate the influence of the turbulent market, we have implemented a company-wide cost reduction which I will discuss in more details, in a moment.

But first, some insight about the timing of our reported revenue stream; during the quarter, we received an acceptance for an additional fab at an existing customer for our banded hardware-software Stand Alone OCD tool and a follow-on order from the same customer.

The revenues from the accepted tool will be spread over the warranty period of 12 months. The total deferred revenues to be recognized from the banded hardware-software systems at the end of Q3, was $2 million and is presented in our balance sheet in the short-term deferred income item. We expect to recognize most of these deferred revenues during the next three quarters.

The repeat order for the Stand Alone OCD product from the same customer is a second in-fab tool and revenues are normally recognized from such tools upon acceptance. As Gabi mentioned, we have already received the customer acceptance for this tool in recent weeks and we would recognize the revenues fully from this tool in the fourth quarter of '08.

Looking at sales by territories; revenues in the quarter have shifted from Japan towards the US region as follows-- US, 32%; Europe, 4%; Asia-Pacific, 64%. Japan did not generate product revenues in the quarter, but Service revenues in this region are increasing and we are witnessing increasing evaluations activity in this region with our Stand Alone products.

Service revenues in the quarter were $3.3 million; lower than the previous quarter due to lower sales of spare parts in the quarter.

Looking into our gross margin performance; excluding the inventory write-off which is related to anticipated lower demand for older-generation products; blended gross margins in the quarter decline from 38% in Q2 to 34% in Q3. First segment; product gross margin declined from 52% in Q2 to 48% in Q3, as reflected in the decrease in the blended gross margin. In the Service gross margin, we saw an additional improvement from 10% in Q2 to 11% in the current quarter, and referred mainly to our previous cost reduction initiatives.

Looking forward, our recently announced cost-reduction initiatives will reduce our cost of goods sold by approximately $2 million on a yearly basis. Had these measures been in effect in Q3, our blended gross margin would have been 39%, while Services gross margin as a separate segment, would have exceeded 20%.

Operating expenses in the third quarter decreased to $4.7 million, a 7% decline relative to the previous quarter and a 14% decline relative to the third quarter of '07, excluding one-time charges in these previous quarters. This decrease reflects our ongoing cost-control initiatives which are continuing and our recent cost-control measures are expected to reduce our operating costs by an additional approximately $3 million on a yearly basis.

In terms of bottom line, the Company reported a GAAP net loss of $2.6 million in the third quarter. Excluding stock-based compensation and inventory write-off, we reported a $1.7 million non-GAAP loss.

Cash-flow-wise, we reported an overall negative cash flow of $2.4 million in the quarter. Overall cash reserves at Q3 quarter end, after the recently announced full recovery of all of our ARS investments, were approximately $21 million.

Looking forward, we expect that current industry turbulence, accompanied by an adjustment period of our supply chain, will continue to burden our cash position. We are taking all measures to closely monitor and maintain our cash, including the above-mentioned cost reduction plans which will reduce our expenditures by approximately $5 million, on a yearly basis.

The impact of this reduction on our results is expected to start in the first quarter of '09 and is expected to reduce our cash breakeven point to slightly above $10 million of quarterly revenues.

Overall, we do have a solid balance sheet and cash position; and together with our ongoing cost controls, we believe this position will enable us to continue the execution of our business plans for the coming quarters. Gabi--?

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

Thank you. (OPERATOR INSTRUCTIONS)

There are no questions at this time. Before I ask Mr. Seligsohn 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 the Company website www.nova.co.il. Mr. Seligsohn, would you like to make concluding statements?

Yes, Operator. Thank you. I want to thank everyone for joining today's call and we look forward to seeing you on next quarter's call. Thank you very much.

Thank you. This concludes the Nova Measuring Instruments Third Quarter 2008 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.