Nova Ltd (NVMI) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Nova Measuring Instruments Second Quarter 2009 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 August 4, 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 security 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 go ahead?

Yes, thank you, Operator; and hello everyone and welcome to our Second Quarter of 2009 Earnings Conference Call.

The second quarter of 2009 marked the momentous change for the Company on all fronts.

From the product side, we gained impressive recognition for our stand-alone optical CD product line, having received all-time record orders from several leading customers.

Through orders received during the second quarter, we have evidence of significant increase in our market share in both the stand-alone and integrated metrology product sectors, serving high-end memory and foundry customers as they migrate to more aggressive design rules.

On the financial side, we were able to rebalance the operation and show breakeven numbers with very impressive improvement to our gross margins, bringing us back to the more normal levels of above 40%.

Given the way the second quarter ended and in light of the continued strength in orders evidenced during the first months of the third quarter, it is clear to us that the second half of the year will be stronger than the first, after several quarters of decline.

Having recently visited our key customers in Asia/Pacific, Japan and the U.S., I got a common theme from all.

Their focus is clearly on rapidly migrating to the next technology node by utilizing as much of their existing capacity as possible in order to control cost.

Our combination of stand-alone and integrated metrology products provide them with a cost-effective means to extend the life of existing process tools and tighten their performance with advanced process control solutions.

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

As mentioned in our May conference call, we continued to utilization rates at key customer sites rapidly climbing to above 90%, most at the high end.

This immediately led to improvements on the service side of the business with repairs, held off for months, being pulled in for immediate installation.

Dror will provide more insight on this front during his prepared commentary.

After years of expectations, the high-end memory sector is finally migrating to copper as its choice of material, for interconnect layers.

Both high-end NAND Flash customers, as well as high-end DRAM customers, are adding a couple of layers of copper.

Right after the end of the quarter, we announced that two major Flash manufacturers have decided to deploy our integrated metrology product on their CMP polishers and that by doing so they were able to tighten their process performance by 30%.

This adds to the success we have recently enjoyed in the area of copper at major foundries where both our integrative and stand-alone products are utilized in conjunction with one another to improve yields.

During the second quarter, we also announced an additional capability for our NovaMARS modeling software which provides a revolutionary solution for one of the key challenges of optical CD measurements; namely material characterization on pattern structures on the wafer itself.

This capability was at the center of a joint publication made with IBM and Global Foundries earlier this year.

Later, during the month of July, NovaMARS received the Product of the Year Award from Semiconductor International Magazine, an honor bestowed on companies who win the vote of leading customers.

Through a focused effort made by the management team, we were able to selectively cut expenses over the last several quarters, carefully making sure our product development and customer support efforts remain intact.

Though second quarter revenues were 37% lower than the parallel quarter last year, we were still able to bring an impressive improvement to our gross margins, taking them from 39% to 41%, respectively.

Looking at the extent and type of customer interactions over the last few months, it is clear to us that our product strategy has proved right.

Our unique ability to provide fully-matched integrated and stand-alone metrology products with highest reliability, highest throughput and shortened time to solution, make us a very attractive choice for our customers.

Through these customer interactions, we have widened our reach in the fabs to several more areas of manufacturing and development, allowing us to broaden our addressable markets.

During the protracted downturn, we worked closely with leading-edge customers on developing their next technology node with our products embedded.

Now that these customers are moving forward with their new products, we are capitalizing on that joint development work and enjoying a significant increase in orders.

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

Several months ago, our industry experienced an almost complete halt in business.

Fabs which were battered by the steep decline in business fundamental took defensive measures and decided to cut all spending to below-maintenance levels.

It was towards the end of the first quarter of this year that we, as well as our peers, started to see an increase in business.

So far, from what we have seen and heard from our customers, all spending is focused on transitioning existing fab capacity to be able to deal with more advanced technology nodes.

While this implies a reduced level of overall wafer fab equipment purchases, given the lack of new fabs being opened, the selective nature of spending creates a unique opportunity for Nova on both of our product fronts.

On the integrated metrology side, customers can retrofit existing process tools which were purchased for 65-nanometer technology, and extend their capability down to 45- and 32- nanometers by measuring all wafers and adjusting process parameters on a wafer-by-wafer basis.

They do this in order to meet tighter process window requirements.

This is done on layers which are considered critical.

On the less critical layers, customers can elect to use our stand-alone products and sample three to five wafers out of every batch of 25, which still allows them sufficient information to be able to adjust the process on a less-frequent basis.

Another interesting trend we are seeing is that customers are upgrading older-generation Nova tools to later models and with optical CD software.

With an active install base of over 500 300-millimeter tools, upgrades are becoming an interesting opportunity as well.

Given the revitalized increase in computer spending, we have recently seen a significant amount of orders from hard-disk manufacturing facilities as well.

With the continued technological advances in the hard disk space, and the competition it faces with solid-state drive technology, more process monitoring control has become necessary.

Finally, our addressable markets are also growing.

We are now seeing a proliferation of our technology into more areas of the fab, beyond our traditional CMP applications.

Given the capability of optical CD to perform multiple layer analysis, we can now provide process visualization in lithography, edge, CVD, and CMP areas.

Our more-advanced customers are feeding this information forward and backwards, to provide even tighter process control across the fab.

Looking into the remainder of the year and as mentioned in today's press release, the significant increase in bookings will lead to stronger financial results in the second half of 2009.

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.

Welcome to our quarterly conference call.

As Gabi mentioned, we are very pleased with our financial performance in the quarter which showed significant progress in all important elements.

Revenue-wise, we have seen a 22% increase quarter over quarter; $7 million in Q2, relative to $5.7 million in Q1.

The increase in quarterly revenues is related mainly to our market share gains in the Optical CD stand-alone segment, as well as to a slight yet encouraging, improvement in revenues from services.

As stated in our May earnings call, the larger portion of the second quarter bookings was not yet delivered or recognized within the second quarter, and we expect it to be delivered and recognized in the third quarter of the year.

Looking at sales by territories, product revenues in the quarter continued to come from the East, with Asia/Pacific practically accounting for all of our product revenues during the quarter.

Looking forward, based on our end quarter backlog, we expect that U.S.

and Japan to start coming back as well.

On the product revenue side, following stand-alone sales becoming a more significant portion of our revenues, we have witnessed a significant increase in the overall average selling prices.

This enabled us to maintain our product gross margins at 56% levels, similar to the previous quarter.

On the service side, we were happy to see a 12% increase in revenues.

Service contract revenues continued to decline in the quarter yet were more than compensated by time and materials revenues.

In addition, in light of the fact that we further reduced our global service costs by an additional 9%, we were able to show major improvement in service gross margins quarter over quarter; from negative 10% in the first quarter to positive 10% in the second quarter.

It is important to note that in [parlay] to this improved financial performance; we have continued to maintain our on-site presence at strategic customer sites in order to facilitate continued successful penetration into these customers.

Actually, we also received supplier service awards from two of these strategic customers in recent months.

Looking at our overall gross margin performance, blended gross margins in the second quarter were 41%; a major improvement relative to the 33% gross margins in the first quarter of the year, and also better than the 39% gross margins in the comparable quarter of last year.

During the second quarter, we reduced operating expenses by an additional 14%.

The majority of this decline was driven by the decrease in our net research and development expenses, related mainly to higher income from the Office of the Chief Scientists during the quarter, due to final approvals of yearly programs.

Gross research and development expenses remained stable during the quarter, relative to the previous one, and demonstrate our decision to continue to aggressively invest in product development programs.

In terms of bottom line, the Company reported breakeven results, with a slightly positive net result on a non-GAAP basis.

Cash flow-wise, as we communicated in the Q1 conference call, we still saw a negative operating cash flow of $2.1 million in the quarter, which is an improvement of $1.5 million from the previous quarter.

Most of the cash used for operating activities during the quarter was related to the increase in accounts receivables due to the increase in revenues during the quarter.

Overall cash reserves at the end of the second quarter were $14.2 million.

As Gabi mentioned, looking into the second half of the year, we expect that the backlog we had entering into the third quarter and the booking patterns at the beginning of the third quarter and to date, will drive further improvement in our financial performance.

We believe we have crossed the bottom of the cycle and we plan to continue our fiscal discipline in parlay to technological and penetration investments.

Gabi-?

Thank you, Dror.

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

Thank you.

(Operator Instructions).

The first question is from Robert Katz of Senvest International.

Please go ahead.

Hi Gabi and Dror.

Congratulations on a nice quarter a good outlook.

I have a few questions.

For starters, what are your expectations for R&D going forward?

Was this a one-time event with the Office of Chief Scientists?

Yes, this is related to a final approval of programs which happened in May.

So we expect next quarter the income from the Chief Scientists to become more normal, which should add to the net research and development expenses around $400,000 a quarter.

In general, as you know Robert, these are yearly programs that we've been very effective at getting the assistance of the Office of the Chief Scientists.

So this is something that's somewhere around between-- around these numbers on an annualized basis, so yes.

Great.

And what was the book-to-bill for the quarter?

We don't want to say specific numbers, but it was significantly above one.

Significantly above one; okay.

And how many stand-alone units did you ship and recognize?

Well, how many did you ship and how many did you recognize in the quarter?

Again, we're not going to talk specific numbers on how many we shipped and recognized, but I will say that most of the shipments-- or actually most of the recognition for the orders received will take place in the third quarter.

So what you saw is the smaller portion in the second quarter.

The larger portion will happen in the third quarter.

Okay.

And of the non-stand-alone revenue, how much came from integrated that was sold through the OEM and how much is through direct sales [now]?

I'll say this; in general, what we're seeing is a trend more towards direct selling to end users in the last two quarters.

The reason is that, as I mentioned in my commentary, a lot of the business now on the integrated front is retrofit business of two types.

One is a situation in which there is no Nova tool integrated on an existing process tool, and then the customer buys a brand new tool and integrates it onto an existing tool.

In that case, there has been a preference to buy that directly from us.

There are also cases in which it's an existing older version of a Nova tool and yet again they want to upgrade to a later version.

So most of the business that we're seeing these days is actually retrofit business; they are the-- obviously the equipment sector is still alive, even though we have seen reductions in the amounts in process tools versus previous years.

So there are situations in which brand new tools are shipping, and in those situations, in most cases it's sold with the OEM themself for now.

But I think in general, this has been generally an improved business model for us.

And I think that this trend will continue.

I think that the business relationships exist such with both the OEMs and the end users, that this is something that has proven to be successful for everyone.

Great.

And how many customers do you now have for the stand-alone?

By now we have 10 customers.

How does that compare to last quarter?

Compared to last quarter-- we added one customer in the last quarter.

And that was the announced customer or that was a different customer?

It was a combination, but yes; so it was one addition of a new customer.

I think the biggest thing that's happening is the extent of deployment now.

Because we started this process of penetration awhile ago; and the big success and the reason for the press release in the quarter itself for a record quarter for stand-alone, was mostly associated with churning already existing penetrations into multiple tool orders, and that's really the big story.

Having said that, it's critical also that we added another customer in the quarter.

which brings it altogether to 10 customers.

Great.

And in terms of the numbers-- you mentioned quite a few processes that you now address within the fab.

What would your dollar content per, let's say 10,000 wafer starts, be?

Is that a way to look at this-- in terms of--?

I'll try to help a little bit.

As you can imagine, as frequently is the case, it's customer-specific.

Foundries behave differently from memory customers-- memory also is not just one type of memory.

It also depends on the process stability or instability that a customer is suffering.

So you can see a variability there.

What you will also factor in is things such as the extent of deployment of optical CD technology.

Some customers are very aggressively deploying it, and therefore displacing tools such as CD-SEM tools or opaque film thickness tools and things of that nature.

So it really depends on the specific customer.

I will say that some customers will take a stand-alone tool for every 3,000 to 5,000 wafer starts.

Some will take a little bit more than that, if that gives you some indication.

Yes, yes that's helpful.

And if you look at last cycle, your revenues peaked-- the product revenues peaked around-- was it $13 million, roughly?

Last year, you mean?

In '07.

'07 was $16 million in Q4.

In Q4 and of that $13 million was product revenue?

Right, correct.

And you address a much smaller [TAM] I guess.

In this cycle, what do you think in terms of a multiple of that market size do you think you address now?

Well, it's an interesting question because there are two ways to address it.

On the one hand, as you know wafer fab equipment has declined very significantly.

I mean this year Gartner is saying it's $8 billion to $10 billion and most of our peers are agreeing.

We also tend to agree.

And in '07, it was $32 billion.

So that's one thing to remember, right; that the overall market has contracted very significantly.

Having said that, when I look at addressable market and I leave alone millions of dollars for a moment and just say-- what areas that we're addressing; we're definitely addressing a much wider market opportunity, right?

We're addressing and we are displacing, as I said in many cases, tools such as CD-SEM which in a good year like 2007 was a $350 to $400 market.

The metal thickness measurement tools are set to be anywhere between $50 million and $100 million markets in 2007.

Integrated metrology that year was about $80 million.

So this year we have the forecast that we got from people like Gartner.

It's very difficult because things had changed during the year to say how big the market is going to be.

The way I like to look at it right now is to look at addressable markets and see how much of those we really cover with our technology footprint.

And I do know one thing; that these are growing segments, because optical CD technology is being deployed very aggressively.

It's taking more and more layers in the fab because it's useful.

It's very high throughput.

It's non-destructive.

The cost of ownership is very attractive as well.

So I see that the technology actually is going to lead to extend the deployment and as I gave these examples of-- be more areas in the fab being covered by this technology.

The other thing that's happening, as I mentioned, is the migration to copper interconnect in the memory which everyone thought was going to happen a little bit earlier on.

It's really starting to happen right now.

And again, this lays foundation for a wider market opportunity for these tools.

So I think that in general, overall addressable markets are going to grow.

I think that-- and again as I mentioned in my prepared comments, process control in general as a segment, is going to continue to outgrow process equipment and actually in this financial situation in which it's scarcely the case that new fabs are being built; the portion of the available spending going to process control I think is going to continue to grow.

And that's what we've been seeing in the last two quarters.

Alright.

And do you expect your ASPs to continue to grow on the integrated as well, because of your direct strategy?

You know really, I think it depends on the mix that's going to take place.

So it really depends on the mix and the extent of new tool proliferation versus older one.

I think in general, the trend has been a positive trend and it works actually in favor of everyone.

I think the customers are quite happy with it, as are the OEM, as are we.

So there's a good chance that it [can] continue, but the rate of it very much depends on what happens in the industry.

Sure.

And is there an opportunity to take market share on the integrated side or would your competitors' customers basically turn to them for an upgrade of their older products?

Our market share is very significant in the integrated side and the previous cycle created a huge install base for us.

One of the things we've done very effectively with the customers is work with them to continuously upgrade that install base.

So I think our product is quite competitive.

I think the competition has lost quite a bit of the market share in the last couple of years.

There will always be continued attempts to take market share.

But I think our products and the capabilities that we keep on launching still allow us to maintain a strong technological advantage.

But it's not just the technology.

One of the things that we have shown, and I think that's where we excel and that's where we carry a lot of pride; is that the business model of integrated is so unique and complicated for some other companies, that we have been able to provide an overall package which is quite attractive.

And Dror mentioned, for instance the service awards that we received; it's part of what the customers look at when they make their decisions on what to do next.

So we've been there with them, as I mentioned on the call, when they developed going from 65 to 45 in foundry or going from 80 to 50- nanometer in DRAM or going from 50 to 30 in [NAND].

We've been there and we continue to enjoy the incremental business so far and we're not ever overly confident.

We understand we need to continue functionality and capabilities and that's what we'll do in order to defend our market share.

Excellent.

One last question; do you expect to be cash flow positive in Q3 and Q4 or ramping revenues will continue to absorb cash from operating working capital?

As we mentioned in the press release, the second half of the year looks better on all parameters; be it revenues, gross margin, profitability, cash; so they look better.

For the third quarter, we feel things are quite clear right now and we feel confident that the answer is positive on the cash flow.

For the fourth quarter it's starting to shape up already.

I think we will know more within the next month and make a clear assessment for ourselves as to whether that will continue for the fourth quarter as far as the cash in concerned.

Excellent; congratulations, guys.

Thank you very much, Robert.

The next question is from Neil Goldman of Goldman Capital Management.

Please go ahead.

Hi; good morning, guys; great quarter.

One question on the licensing attempts; have you set up a methodology or are you trying or where do we stand on that?

You're talking about IP licensing?

Yes.

For IP licensing we continue to look at that.

There is some activity going on which is generating some interest already.

Just to remind everyone that maybe doesn't remember, we did do IP monetization in the year 2007 by selling a license to a leading IC manufacturer.

That activity in the last few months has regained some momentum.

There's nothing to report at this point in time, but it is generating some interest.

Okay, thank you.

Sure.

(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 wanted to thank everyone for continuing to take an interest in our activities.

Obviously we're quite pleased to see the results and we look forward to speaking to you in the next quarter.

Thank you very much.

Thank you.

This concludes the Nova Measuring Instruments Second Quarter 2009 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.