Nova Ltd (NVMI) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Nova Measuring Instruments first quarter 2009 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, May 6th, 2009.

I would like to remind everyone that forward-looking statements for the respective 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 on line 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.

Mr.

Seligsohn, would you like to begin, please?

Yes, thank you, Operator.

Hello everyone and welcome to our first quarter of 2009 earnings conference call.

The first quarter of 2009 was yet another challenging quarter for the Company and for the industry.

But towards the end of the quarter we began to see some encouraging signs of a possible rebound.

While the industry as a whole is still in a state of overcapacity fabs have a growing need to selectively upgrade existing equipment and increase process control measures to support the transition to smaller design rules.

It is our belief that we are well-positioned to take advantage of this transition.

Now, to give you some additional insight, let me review what happened during the quarter.

Following the unprecedented low electronic sales during the end-of-the-year holiday season and with the anticipation of significant economic measures by the US administration, much of the industry continues to be cautious on wafer fab equipment spending.

Closely monitoring fab utilization rates at our key customer sites, we continued to see a decline to very low levels in the first couple of months of the quarter.

Interestingly, things changed in March and utilization levels climbed at a very steep rate in both the foundry and memory segments, some as a result of government stimulus supporting large scale cellular projects such as the one in China, some to replenish significantly lowered inventory levels as well as manufacturers taking advantage of a slight improvement in NAND Flash prices.

At the same time we have seen advanced technology announcements by most foundries each declaring major advances in their design rules, with the IBM alliance even mentioning availability of 28-nanometer high-k devices.

Recent announcements by TSMC mentioned doubling of 45-nanometer output in coming months to support high-end customers in a demonstration of an SRAM cell based on its upcoming 28-nanometer process.

UMC announced successful demonstration of 40-nanometer manufacturing capabilities and the Global Foundries Company, which used to be AMD, announced a 32-nanometer process.

Though we still saw an 8% decline in revenues during the quarter, integrated metrology orders for copper CMP process control at the world's leading foundry received just before the end of the quarter and multiple stand-alone metrology orders received right after the end of the quarter from the same customer are encouraging signs of a rebound.

These orders, which were recently announced in press releases, mark a significant event for the Company and we would like to use this opportunity to thank our field operations team for meeting the customer's requirements and instilling trust in our technology.

The combination of both integrated metrology and stand-alone metrology with our leading edge MARS modeling software to support an aggressive technology advancement at this customer's fab clearly demonstrates that we provide highly competitive enabling technology.

The increased interest in our technology to support process control needs in copper CMP is something we have been working on for several years.

The need has today been more obvious in the foundries and logics fab though recent customer interactions show that memory is finally transitioning to a copper-based process and this represents an interesting opportunity as well.

As previously stated, these signs show a clear change in customer sentiment to replace existing measurement technology, which suffers from lower throughput and is challenged by the shrinking design rules.

We believe this trend will continue and provide us with growth opportunities.

Also during the quarter we installed another stand-alone evaluation system at a leading memory manufacturer's site in the Asia Pacific region.

This is in line with our plan for this year to grow our market reach and increase the number of stand-alone customers.

On the financial front, as mentioned in the previous quarter's conference call, we saw an increased consumption of cash, about half of which was related to delays of prior payment which came due.

Further measures to reduce expenses without reducing headcount which were implemented towards the end of the quarter will come into effect in the second quarter and help further reduce expenses.

On the product growth margin side we have seen a notable improvement over the fourth quarter of 2008 as a result of a more favorable product mix and our continued cost-control measures, and Dror will provide some more detail on that.

As previously communicated, we have also experienced a significant decline in service revenues as a result of our customers' initiatives to reduce ongoing operational costs to a minimal -- minimum until things improve.

While we believe this trend is temporary it is still tough to estimate how long it will continue and we will focus on finding means to mitigate its influence.

Now, let me turn to the industry outlook as we see it.

Recent conference calls held by most leading equipment manufacturers show clear signs of improvement.

Most spoke of significant order increases in the second quarter.

Based on order traffic of the first few weeks of the second quarter we too are seeing a significant increase.

With so much latent capacity still available in many of the fabs our expectation is that orders this year will continue to be focused on technology advances.

In cases where customers want to extend the performance of process equipment to support their next technology node requirements our tools provide a useful and cost-effective solution.

Moreover, the introduction of double-patterning techniques adds either more lithography or etch steps, both requiring much tighter process controls and thus increasing the opportunities for optical CD technology which we provide.

We are encouraged by recent improvements in order levels and by the fact that the stand-alone product represents the larger part of these orders.

Since these products have longer lead times revenue recognition may spill over into the next quarter.

Though these are all encouraging signs we are still assuming that 2009 will see wafer fab equipment as a whole reaching a trough and we will therefore continue with our cautious and selective spending strategy while pushing forward on technology advancement opportunities at existing and new customer sites.

And with that I would like to turn it over 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 continued to experience a slow industry environment in the first quarter of '09.

This environment resulted in an 8% reduction in revenues relative to the previous quarter to $5.7 million in quarterly revenues.

The reduction in revenues in the first quarter was a result of an expected decrease of $1.2 million in services revenues, which was partially offset by higher revenues from our integrated metrology product.

Looking at sales by territories, product revenues in the quarter continued to come from the East, while Asia Pacific accounted for 65% of the product revenues and the rest of revenues came from Japan.

On the product revenues side we have witnessed a significant increase in the average selling prices of our integrated metrology products.

This increase is mostly related to the adoption of our new MARS software feature, which allow our customers to extend the use of our integrated metrology product to advanced technology nodes.

Evidently, this increase also helped us to maintain our overall gross margin performance in the quarter.

On the service revenue side we have witnessed a major reduction related to the closure of 200-millimeter fab and low utilization rate at most of the 300-millimeter fab which drove customers to reduce operating costs by lowering service levels.

The reduction in revenues came from both cancellation of service contracts and a reduction in time and material activities.

In parallel to this reduction we have taken necessary actions to align service costs and reduce service costs by $0.4 million or 15% within the quarter.

In parallel to our aggressive cost reductions it is clear to us that we need to maintain continuous onsite presence at strategic customer sites in order to facilitate successful penetration.

Looking into our gross margin performance excluding inventory writeoff in Q4 '08 blended gross margins in Q1 '09 were 33% similar to the previous quarter.

Product gross margin had significantly increased from 46% in Q4 to 57% in Q1.

This increase is related to the higher average selling prices and to our effective ongoing cost control.

During the first quarter we reduced operating expenses to $3.5 million, an additional 21% decline relative to the previous quarter, and a 34% decline relative to the first quarter of '08.

In terms of bottom line, the Company reported a GAAP net loss of $1.7 million in the first quarter.

Excluding non-GAAP items as detailed in the end of the press release, we reported a $1.6 million non-GAAP net loss in the quarter relative to a $2.3 million non-GAAP loss in the previous quarter.

The decrease in the non-GAAP net loss despite the 8% reduction in revenues is further evidence of our effective fiscal discipline.

Cash flow-wise, we reported negative cash flow of $3.6 million in the quarter.

Approximately $1.5 million of this reduction is related to payments of previous obligations mainly to suppliers, which is not yet concluded, and the rest is related to our ongoing operations.

Overall cash reserves at the end of the first quarter were $16.4 million.

As Gabi mentioned, looking beyond the first quarter of '09 and to date, we see improved bookings patterns and fab utilization rates.

In parallel to these encouraging signs, we might see a longer-than-before revenue recognition cycle related to the stand-alone business, which will hopefully become a more significant portion of our revenue.

Evidently, we plan to continue our strict fiscal discipline, which is focused on giving us proper financial flexibility to support our operations and our continued technological advancements.

Gabi.

Thank you, Dror.

And with that, Operator, we'll happy to take some questions.

Thank you.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

(Operator Instructions) The first question is from Robert Katz of Senvest International.

Mr.

Katz, please go ahead.

Hi, Gabi and Dror, how are you guys doing?

Pretty good, thanks Robert.

Hi, Robert.

I have a few questions.

One, do you think the gross margin mix will stay at these levels for product and service or do you see services improving or products reverting back to lower gross margins?

How should we model that going forward?

Well, on the gross margin side, I think generally, we've done a pretty good job on the gross margins in the product area, around 50%.

And this quarter they are up which is a good indication, and obviously, we would like to see that continuing as much as possible.

I think the burden which creates the blended gross margin is obviously the size -- the overall size of the business right now in this particular quarter and the fact that, as you saw, there has been a significant decrease of service revenues.

What we are hoping to see is, of course, an increase again in service revenues.

I think the result -- the resulting or the decrease in service revenues is a direct result of the fabs trying to lower their ongoing fixed costs as much as possible.

Throughout the industry we are seeing a lot of cancellations of service contracts because those are fixed cost and customers are moving more to a time and material type [8] contract with the suppliers.

With utilizations being low for the first couple of months of the quarter you didn't see a lot of time and material business because the use of the equipment was lower than it usually is.

If indeed this trend of increased utilization will continue, I think two things will happen.

One is the requirement for time and material usage may increase, and number two service contract might come back.

Although, I have a feeling that usually these kind of decisions are decisions that are made in a wider decision base and therefore they usually take about a quarter to reverse.

So I think it is going to take a little while until the service revenues come back.

We are obviously staying in contact with these customers.

The installed base is quite significant so we are not losing touch with the customers in the installed base.

So again, I think product gross margins, I think, will hold quite well.

Service gross margins for a while will stay low until we see business volumes increasing.

And in terms of the number of stand-alone units you have in the field right now, where is that and how much -- how many of those have been recognized or booked and how many are on trial?

Well, I don't want to actually refer to the exact number of tools in the call itself for obvious reasons.

So I'll say there are several tools out there of course.

There is a few tools out still on evaluation.

I think the most important thing that we are focused on right now obviously is the nice bookings that we got for several tools from TSMC and I think that's really where a lot of our focus is.

We are also excited about the new evaluation which has started with a major, major manufacturer in the Asia Pacific region.

So hopefully that will also yield some positive results.

So there is still a few evaluations out there from a revenue recognition standpoint.

If you remember when we started speaking about stand-alone, when we were at very early penetrations stages the revenue recognition was over a four-quarter period, a one-year period.

The situation is better now that we have already penetrated in most of these accounts and the repeat orders allow us to recognize much faster.

So as Dror had mentioned, some of the revenue may spill over, the revenue recognition may spill over to the next quarter simply because of the lead times associated with these products.

All right.

And this stuff about 800,000 ASP, is that ballparkish?

That and above.

Somewhere closer to $1 million plus or minus?

Yes, I don't want to go too much into that level of granular detail for competitive reasons obviously but as I mentioned it's higher than the number that you had originally mentioned so --

Okay.

And what areas or processes are being used for the stand-alone, copper --?

Yes, it's a very good question.

One of the things that I had mentioned in my prepared notes was with reference to the copper CMP area and we worked for years on penetrating that market, and we've had some success.

One of the things that's helping the success is the fact that the incumbent technology, which was based on measuring the copper itself directly with all sorts of acoustic measurement techniques, is falling short of the technological requirements.

An optical CD, we found quite a while ago, creates a very useful alternative and it provides a very fast measurement capability, it deals very well with the design rule shrink both in the integrated and the stand-alone arena.

The nice thing about the announced deals are that they are a combination of our overall product offering, integrated, stand-alone and obviously the modeling software capability.

So first of all the copper side is definitely something that we were very happy to see the progress, it's happening both in logic and in foundry primarily, but I think that there are early signs that it might start also in the memory sector.

And everyone has spoken about memory moving to a few layers of copper, it's finally starting to happen both in the DRAM and the NAND.

So I think there is more growth potential over there.

In the other areas of the fab, another thing that we are seeing is OCD applications in both the etch and the lithography.

And as I mentioned in the prepared notes the advent of double patterning -- and there is a few ways to do that but in general you could do it either by adding litho steps or by adding etch steps.

Both of those are providing very interesting opportunities for us and we have seen more applications being qualified in that direction because customers are finding it, again, a very fast non-destructive measurement technique.

It helps very much with double patterning because the tolerances of the litho and etch processes have become much, much tighter.

And the repeatability and precision which is offered by optical CD in many cases is either half or a whole order of magnitude better than things such as CD-SEM.

So those three areas are key areas for focus for optical CD and we are seeing customers going that direction also in high-end CVD applications as well.

Hopefully, that answers it.

And do you have any ideas of what you think demand will be this year for a number of units or base level?

Well, I want to make sure that it's clear that, again, 2009 is still a trough year for the industry.

Wafer fab equipment is going from -- it's pretty much still around the $10 billion level from three -- maybe two years ago.

So first of all, important to remember is that the industry is still quite smallish this year because of the degree of the economic crisis.

But having said that to try in general to answer your question, I think that these kind of wins, like the ones that we just recently announced, help us further position ourselves.

For us it is a huge vote of confidence.

It is very competitive out there and I think that the foundation that we've laid by the successful penetrations over the last 18 months allow us to be there when the customer decides to incrementally increase things.

And as I mentioned there is a ton of latent 300-millimeter capacity out there but just like we saw recently when they want to move to a different technology generation, for instance from 65 to 45 nanometer, this kind of technology, be it integrated or stand-alone, allows them to take the same process equipment and do the -- do a process with higher tolerances and move to the next technology node.

So I think to your question on how many systems you should model, we are targeting a few more accounts, I'll say that, and again the level of repeat orders or penetration very much depends on their specific plans within those fabs.

But I think we've laid the foundation from an applications standpoint that we are qualified to support that kind of decision when they make it.

Right.

What is your breakeven right now and how much cash do you anticipate burning if you continue at these levels, revenue levels?

Our revenue cash breakeven point is around $7.5 million.

We expect to reduce that a bit more in the next quarter.

Regarding cash level and cash consumption it pretty much also depends on our within-quarter collection and some obligation payments.

So it's very hard, right now, to predict.

The second quarter, we expect it to be lower than the first one.

Lower cash burn.

Yes.

Or do you expect cash to be lower also?

Lower cash burn, yes.

Cash -- cash levels at the end of the second quarter would be lower but we expect the cash burn in the second quarter to be lower than the first one.

Right.

And do you anticipate maybe exiting the year being cash flow positive?

Or is that too hard to say right now?

I think at the operational breakeven level and cash breakeven level that Dror described of about $7.5 million, if order trends continue as they have in the last few weeks we're not that far a distance from being able to do that.

So I think the next couple of quarters will be critical, obviously, to monitor and see if we are able to turn that corner.

I'm happy to say that it's not that long a distance away because we've been so aggressive on cutting costs in the last couple of quarters.

Okay.

You've done a great job at doing that.

Thank you.

Thank you very much, guys.

Thank you.

Thanks, Robert.

(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 Company's website, www.nova.co.il.

Mr.

Seligsohn, would you like to make your concluding statement?

Yes, Operator, thank you.

I'd like to thank everyone for joining today's call.

As I said the first quarter was a quite a tough quarter as far as the business volumes are concerned.

There are some positive signs over the last several weeks and we will obviously stay very close with our ear to the ground and keep working very closely and collaboratively with the customers to be there as hopefully things continue to change.

Thanks again, and we hope to see you on the next conference call.

Thank you.

This concludes the Nova Measuring Instruments first quarter 2009 results conference call.

Thank you for your participation.

You may go ahead and disconnect.