Nova Ltd (NVMI) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Nova Measuring Instruments Fourth Quarter 2008 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.

(Operator Instructions).

As a reminder, this conference is being recorded February 18th, 2009.

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 and 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 release and you'd like to do so, please call GK Investor Relations at 1-866-704-6710.

With us online today are Mr.

Gabi Seligsohn, CEO of Nova, and Mr.

Dror David, CFO.

I would now like to hand over the call to Mr.

Gabi Seligsohn.

Mr.

Seligsohn, would you like to begin, please?

Yes, operator.

Thank you and thank you all for joining today's call.

We are today announcing our fourth quarter and overall year 2008 earnings.

2008 was undoubtedly a very challenging year for our industry and for the economy as a whole.

Unlike other industries, we started to experience a slowdown around the third and fourth quarters.

Semiconductor equipment started to feel the influence as early as the first quarter.

Clearly, the beginning of this cycle was a result of an oversupply and price erosion of memory chips, while during the latter part of the year, demand subsided as well.

To further amplify the influence of these business trends, the devaluation of the US dollar, which is the main currency of our income added yet another challenge, costing us around $3 million for the year.

As we mentioned on the last call, towards the end of the third quarter and in preparation for a very weak holiday season, we started seeing significant declines in fab utilizations at most of our customer sites.

This includes even major foundries, which historically held up quite well.

This situation has led to a very strong pullback in orders for the entire equipment sector as indicated in earnings posted by several leading OEMs in the last few weeks, a phenomena to which we are obviously not immune.

During 2008, revenues declined by 33%, going from about $58 million in 2007 to $39 million in 2008.

Obviously, at such revenue levels, gross margins took a significant hit and went from 43% in 2007 to 33% in 2008, though we were able to maintain product gross margins at a similar level to those of 2007.

Excluding inventory write-off and inventory purchase commitment losses of $1.4 million in 2008 and related to anticipated lower demand for older generation products, gross margin was 37% for the year 2008.

Faced with these challenges, our management team reacted swiftly to immediately reduce the running costs of our operation, conserve cash and minimize our losses.

These measures included a reduction in force, salary reductions throughout the Company, a reduction of ongoing expenses and very effective and collaborative measures involving our supply chain.

As previously stated, the measures taken were selective and despite the challenging environment, we maintained the pace of our product development programs and were able to continue our penetration into the standalone optical CD market.

Several important accomplishments made during the year are worth mentioning.

First, our penetration efforts continued to bear fruit and we doubled our customer presence in the standalone area.

These customers include both major foundries and major memory manufacturers.

We believe that these penetrations lay the foundation for future growth of our business.

Second, and equally important is the proliferation of our technology into more areas in the fab.

Our tools are now being used in the lithography, etch, CVD and CMP areas.

Collaborative work with some of our leading customers and key OEM partners has led to the introduction of novel process control schemes to support their move to double patterning lithography and advanced etching methods.

During the year, we also saw a continuation of the trend to move away from traditional copper measurements to optical CD-based measurements for copper CMP process control.

And we believe that with the continued technology strength, this trend will increase.

Third and worth mentioning is that during the year, we announced and shipped a record-breaking tool, the Nova T500, which offers our customers several benefits, the most important of which is industry-leading throughput and cost of ownership.

Judging by performance of the tool so far, I am happy to report it is meeting our stated goals.

Service gross margins saw significant improvement and revenues increased by 14% during the year.

Given the state of the industry, we expect service revenues will reduce somewhat in the near-term, but our hard work will eventually pay off when market conditions improve.

During the year, we also defended our market leadership in the area of integrated metrology despite new product introductions by our competitors.

As stated by several of our customers, our integrated metrology platform scalability and reliability continue to impress them and provide them an easy and cost-effective upgrade pass from 65 nanometer to 45 nanometer technology.

Now, I will turn to an outlook of the industry and the steps we are taking to deal with it.

Talking to our customers and reviewing industry trends, it is clear that our industry will continue to decline in 2009.

As stated, fab utilization rates are low and spending, in many cases, is below maintenance levels.

We expect lower services revenues near-term because, with low chip demand, customers are cutting their fab running expenses and servicing their tools less than before.

Despite the downturn, we still have opportunities.

Our customers' roadmaps have not slowed down.

On the contrary, they're dependence on delivery of advances is actually growing.

Printing more dies per wafer will continue to be critically important into the future and the drivers are primarily economic.

That being the case, we will continue and focus on improving our offering and solidifying the vote of confidence we have already received.

Because we have been proactive in adapting our operations to industry conditions, we will be able to continue and position the Company to benefit once demand improves.

A 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 standalone optical CD.

We believe we have laid the foundation to enjoy growth once fundamentals improve.

Successful customer interactions have allowed us to define critical areas of differentiation for our product and we look forward to introducing new products and features during the year of 2009.

While near-term visibility remains low, our position within the industry has improved and we will continue to take necessary steps to ensure we have adequate financial flexibility to support our operations and development efforts.

And with that, I would like to turn it to Dror for a closer look at the numbers.

Dror?

Thanks, Gabi, and hi, everybody, and welcome to our quarterly conference call.

As Gabi mentioned, we continue to experience a slowing industry environment in the fourth quarter of '08.

This environment resulted in a 30% reduction in revenues relative to the previous quarter to $6.2 million in quarterly revenues.

On a yearly basis, we witnessed a reduction of 33% in revenues from $58 million in '07 to $39 million in '08.

The reduction in revenues in the fourth quarter and throughout '08 was a result of lower demand for our integrated metrology product which are capacity driven.

Looking at sales by territories, product revenues in the quarter have significantly shifted from US and Europe towards the East, with Asia Pacific accounting for 78% of revenues in the quarter and the rest of the revenues coming from Japan.

On a yearly basis, we also witnessed a shift from the Western regions toward the Eastern ones as follows.

Asia Pacific accounted for 68% of revenues in '08 relative to 63% in '07.

US accounted for 18% in '08, relative to 23% in '07.

Japan accounted for 11% in '08, relative to 4% in '07.

And Europe accounted for 2% in '08, relative to 9% in '07.

Service revenues were similar to the previous quarter at a $3.2 million level.

On a yearly basis, despite the tough market conditions, we were able to increase our yearly service revenues by 14% from $11.7 million in '07 to $13.3 million in '08.

Looking into our gross margin performance, excluding inventory write-offs in all periods, blended gross margins declined from 34% in Q3 to 30% in Q4.

Per segment, product gross margin have slightly decreased from 48% in Q3 to 46% in Q4, while in the service gross margin, we saw an additional consecutive quarterly improvement from 11% in Q3 to 16% in the current quarter.

On a yearly basis, our ongoing cost control initiative and to mitigate the turbulent shift in revenues and the negative currency trends have enabled us to maintain the gross margins for each segment separately at the same levels, 49% for products and 9% for services.

During the fourth quarter, we reduced operating expenses to $4.4 million, an additional 8% decline relative to the previous quarter and a 30% decline relative to the fourth quarter of '07.

On a yearly basis, excluding one-time charges, we were able to reduce operating expenses by approximately 20%.

This figure understates our cost control accomplishments because of the unfavorable effect of currency translation during the year.

On a constant currency basis, we reduced operating expenses in '08 by approximately 30% compared to '07.

During the fourth quarter, following the full recovery and the sale of our [auction-wide] security investments, we reported a gain of $1.4 million.

In terms of the bottom line, the Company reported a GAAP net loss of $1.6 million in the fourth quarter.

Excluding non-GAAP items, as detailed in the end of the quarterly press release, we reported a $2.3 million non-GAAP net loss in the quarter.

Cash flow-wise, we reported a small negative cash flow of $0.7 million in the quarter as we focused on aggressive working capital management.

Overall cash reserves at the end of the fourth quarter of '08 were at the $20 million and looking forward, we will remain focused on limiting the impact of the industry turbulence on our cash position.

However, as Gabi mentioned, we also expect lower service revenues, supply chain adjustments and payments coming due.

In the previous conference call, we announced a cost reduction plan of $5 million on a yearly basis.

The full impact of this cost-reduction measure will occur in the first quarter of '08, further lowering our cash breakeven point.

As mentioned in the press release, we are continuing our fiscal discipline and we will take additional steps, if necessary, to ensure we are keeping proper financial flexibility to support our operations.

Gabi?

Thank you.

And with that, operator, we'd be happy to take questions.

Thank you.

(Operator Instructions).

The first question is from Neal Goldman of Goldman Capital Management.

Please go ahead.

Hi, guys.

Hi, Neal.

At the current level with reduced service revenues, what do you believe your current burn rate is on cash?

Obviously, there was some receivable reduction last quarter and inventory reduction.

So, I'm just trying to get a handle on a current burn rate.

Well, what I can say -- hi, Neal.

What I can say is that our cash break even point, in terms of revenues, has been reduced to around $8.25 million.

Okay.

And on the insole, if you did $5 million on a quarter, you're burning $3 million essentially?

Yes.

Okay.

All right.

Is there any -- I mean, will you talk to the foundries or other customers, obviously in the near term, there's no visibility.

Historically, when do these guys think that you should start seeing a pickup just because they're burning through, having -- aren't doing even replacement products?

Yes.

I think reference to history these days with the new world that we're dealing with is kind of difficult.

I'd say in normal downturns, I'd have a much clearer answer.

What I can say is, as I mentioned, that utilization rates have dropped quite significantly.

We're talking levels of probably 40% to 60% utilization.

And fabs, they usually run at 95% to 100%.

So, I think it's going to take awhile until they bring up the utilization rates.

What we do see, though, is that some of them are migrating to higher level technology nodes because of the economics of it and in some cases, there are more orders coming for that type of technology.

So, I think it's probably going to take awhile until the capacity increases come back.

I can't, obviously, these days give any sort of a forecast as to when I believe that is.

But with those level utilizations, staying low is going to take awhile.

Another phenomenon that's taking place, obviously, is consolidations.

Between foundries, maybe, but more on the memory side, to be sure.

And over there, the capacity it quite significant.

So I think, for the most part, business in the next several quarters is probably going to be focused primarily around the development area.

Buys -- incremental buys will be primarily focused on allowing transition to higher technology.

I think the Intel announcement of spending of several billions of dollars, which is focused on dealing with existing fabs and upscaling them is probably going to be the way people are going to try to approach this situation, when they need to migrate to the next technology node.

And I think upgrade capabilities and scalability will be beneficial to those vendors, including ourselves, that are able to offer those.

So, I think it's going to be primarily focused on technology for awhile and capacity-related buys will probably take quite awhile.

Okay.

And just as a last question.

In terms of the introductions of competitive products, do you still feel you have a significant advantage with your current products?

Yes, we do, I think, and I'm glad you bring that up.

I think one of the nice things that's happened over the last two years and especially in this past year, we mentioned in the press release that we've doubled the customer presence in the area of standalone.

And so far, in all these activities, we've demonstrated real advantages with our tools.

And so, it seems like we're able to maintain it.

If you remember in the past, I did mention that we have chosen more than a single area of differentiation because we believe that it's critical to have a few.

And there are four key areas that we continue to focus on.

And the product releases that we're planning for '09 will involve improvements in those areas so that we can further position ourselves.

So, I'm happy to say the answer, from a technology standpoint, seems to be quite good.

Great.

Okay, thank you.

Thank you, Neal.

The next question is from Robert Katz of Senvest.

Please go ahead.

Hi, Gabi and Dror.

Hi, Robert.

I have a few -- hi -- a few questions.

What do you think your expected burn rate and cash will be for 2009 and how do you keep your balance sheet, I guess, cash rich, if I can say that?

First of all, our cash is king, you're absolutely right.

We're not going to give guidance on expectation for the end of the year, but suffice it to say, in general, that all the plans that we have -- operational plans that we have for the year take into consideration the possibility of industry conditions remaining very, very low and still maintaining a good level of cash that we can continue to be strong on two counts.

One is still invest in technology and two, demonstrate to our customers that we have the financial strength and viability to stick around.

So, the plans are such that it is obvious that there will be some cash burning.

I will not say no.

But we're trying to control that to a level that's not going to put us in any sort of dangerous predicament.

Sure.

And do you have a feel for -- it sounds like you're getting some design wins with some new customers.

What's their threshold for, I guess, your balance sheet metrics are?

Like, do they care if you have $10 million or $20 million of net cash?

It seems like that in the past you've initiated that.

Is that no longer an issue because you've demonstrated that you have viable technology?

Well, I think, first of all, I think in this day and age, it's clear that people are more sensitive to different companies' balance sheets.

I'd be lying if I'd say no.

People are more sensitive to that and they look at it more.

But I can tell you that, first of all, we work closely with the customers.

I spend most of my time in the field with fab management and supply chain management.

And the situation, in that respect, I think is quite good.

They believe in the way the company is being managed.

They feel comfortable with our financial position and as much as we can share, we always do.

We believe in that type of relation with them.

So, I don't see that as a problem.

Okay.

How many employees do you have now?

220 right now.

How does that compare to last quarter and last year at this time?

Beginning of the year, I think, the beginning of '08, I think we had 285 or 290 employees, the beginning of '08.

And last quarter?

265.

And in Q1, you sounded like you were taking further cost measure?

We're not -- we're not -- there's nothing that we're planning and it's obvious we don't share these kind of plans anyway.

But there's nothing that is currently being planned.

What we're focusing on is operational costs, continue to manage operational cost and, as you saw, very, very significant cuts done in 2008.

Sure.

And the shekel recently has gone back above ISL4.00, almost ISL4.15 now.

What impact does that have on your -- the US dollar reporting about that?

Well, evidentially, this has a positive impact on our expenses as most of our income are US dollars and a significant portion is in the Israeli shekel.

So, definitely we will benefit from that if it stays at this level.

Do you hedge it or is that -- do you just [have it so]?

Well, we -- we're hedged at about 50% to 75% of the expenses on the first and the second quarter.

The exchange rate for Q4 was around -- the average was around 3.6%, 3.7% and the current exchange rate is 10% more.

So, we should benefit in Q1.

Okay.

And you're starting to roll that forward, so that should start gradually going up over the next [few] quarters?

Yes.

Okay.

And just a broader question.

It seems like in the near-term, the industry, as you said, is not focused on capacity expansion, but rather on technology advancement.

Looking at your current business plan, what does that mean for you?

Is that just less integrated stuff, more standalone?

Is standalone basically a technology play while integrated isn't?

Or is there also upgrades in the integrated side?

Can you elaborate on that?

Yes.

I think that's a very good question.

I'll try to give as much of a flavor as I can.

Definitely the standalone type of business -- one of the reasons we got in there in the first place is because of the fact that it does tend to be not just capacity related, but a lot of it is technology related.

And so, I do believe that the technology drive in the industry will lean more towards buying a few standalone tools rather than a lot of integrated metrology tools.

Having said that, we do see some upgrade business, both in 300 millimeter and in 200 millimeter with integrated metrology.

I'd say in the case of 300 millimeter, since we've done, I think, quite a good job putting a lot of tools out there already, where there are upgrades, they are more related to a technology advancement.

For instance, such as the move to double patterning and the need to do more advanced etching processes.

Okay?

So, we see some interest in the area of integrated metrology for etch.

We also see it in high volume manufacturing in copper CMP.

And so, there are some retro fits going on there.

The other thing is in the 200 millimeter market, you can definitely usually ignore the 200 millimeter memory manufacturers for the purpose of ongoing business because those fabs, a lot of them are being decommissioned.

But there are fabs of discrete devices and logic as well as in the hard disk industry, which we've been serving for many, many years, that are taking incremental tool orders for 200 millimeter.

And we are going back to what we sold very well several years ago, which is process control for 200 millimeter.

We're doing it, in some cases, directly with the customer, some cases with our OEM partners.

And so, there are opportunities over there.

They are sporadic in nature, as you can well imagine.

And they're very fab specific.

But a lot of work has been done in the last several months to qualify those opportunities.

And since it's a captive market for us, the 200 millimeter market, I believe there are chances and opportunities over there.

And how many standalone systems did you sell in the most recent quarter?

In the last quarter, we sold, actually, one system sold and recognized second in fab in an Eastern foundry.

And in all of 2008?

Should be five or six systems.

And looking into 2009, do you expect that to grow or is that also just kind of treading water?

I think we have opportunities which are even more significant than that number.

I think the biggest question is execution on the customer side, right?

Meaning, we've laid the foundation for more tool orders.

These -- many of these tools were penetrations, as you can well imagine.

Yes.

Therefore, most of these tools were penetrations.

And therefore, the follow-on business is what we're focused on primarily.

There are more penetration targets, obviously.

And I think it has a lot to do with suspending decisions that are made at the customer site.

If they will decide to spend, we have opportunities which are larger.

I'd even say significantly larger than that number.

Is there a [risk factor] the industry has gone to a capital freeze that when the customers do come back to spend for the new -- the new gains take -- kind of -- and that brings all the equipment up for reevaluation or is that a risk?

Reevaluation.

Well, usually what happens with evaluations is that what you get tested on is the most advanced technology nodes that they're working on, which are usually, in many cases, a distance from going to high volume manufacturing.

What we actually see is a combination of what they're planning on doing and what they're doing currently.

And in many cases, what happens is that we get back-filled into their manufacturing process and also demonstrate that we have capability for one or two technology nodes down the line.

So, it is a possibility, but I think it's not a very highly probable possibility just because of the method by which customers conduct evaluations, which are primarily forward-looking because they're looking to possibly change vendors or go a different direction than they did previously.

And one of their conditions usually is to have it looking significantly into the future so that they don't waste their time.

So, I think that the risk there is small.

Small.

You mentioned you doubled the number of, I guess, penetration that would be your customers.

How many customers do you have now?

We have 10 customers.

10 customers for the standalone?

Yes.

And then, I include there the number of fabs is significantly higher because many of these are global.

But customers are 10.

Okay.

That could be a significant change in your business in 2010, if one industry trends.

We strongly believe so and that's why all the development efforts are continuing over there.

And I think, Robert, the key thing -- and we've mentioned this in the past -- is to bring the maturity of this technology called optical CD to a level that it's easier to use and it moves more to mainstream.

And I think that's going to be the case.

Our roadmap is going to be focused on that.

And if we can influence that, I think that the addressable market is growing.

Because it's no longer a question that this is good technology, that it's necessary for high-end manufacturing.

Really, what's been holding things at bay is the difficulty of using it, the time it takes, et cetera.

And we believe we have several advantages in that area and that's where we're going to focus things.

So, I think that the foundations are all definitely there.

The cash that we have, the presence that we have in most leading edge manufacturers.

Really, the -- all of that is in place.

And as you probably know, with technology it takes time to even get to that position.

Therefore, we feel that there is a good projectory opportunity here when things change direction.

Okay.

Well, hold onto your cash as much as you can.

We will.

Will do.

We've got it in peaches and hamburgers.

Thanks, Robert.

Soon it will be humus.

Okay.

Bye.

(Operator Instructions).

The next question is a follow-up question from Neal Goldman of Goldman Capital Management.

Please go ahead.

Hi.

In regards to the standalone, what's the average ASP versus the full-blown metrology?

It's ranging from $800,000 to $1 million.

Okay.

So, if you have significant opportunity -- okay.

Thank you.

I appreciate it.

Thanks.

There are no further questions at this time.

Before asking 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's website, www.nova.co.il.

Mr.

Seligsohn, would you like to make a concluding statement?

Yes, thank you, operator.

As stated, this is a difficult period.

We expect the difficulties to continue for quite awhile.

As previously stated, the Company is in good position to capitalize on growth when it comes back.

We thank you all for joining the call and hope to see you in the next quarter.

Thank you very much.

Thank you.

This concludes the Nova Measuring Instruments Fourth Quarter 2008 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.