Nova Ltd (NVMI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Nova Measuring Instruments third quarter 2009 results conference call.

All participants are 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 November 3, 2009.

I would like to remind everyone that forward-looking statements for the respective company's business, financial condition, and the 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 the call over to Mr.

Gabi Seligsohn.

Mr.

Seligsohn, would you like to begin?

Yes, operator.

Thank you.

Hello, everyone.

And welcome to our third quarter of 2009 earnings conference call.

The third quarter of 2009 marked a real turnaround in our business on all fronts.

Not only did we see significant increase in our revenues, but we were also able to present record profitability of close to $2 million, a gross margin, which doubled to 48% compared to the third quarter of 2008 and a $1.9 million positive cash flow.

During the quarter, we were happy to continue and announce major market share gains and a first win for the latest model of our standalone optical CD product line, the Nova T500 to support 22 and 32-nanometer development and manufacturing.

As mentioned in recent calls, much of the increase in our business has come from capacity migrations of existing fabs.

Today, we are happy to announce that the continued improvement in business fundamentals across the electronic food chain has begun to translate into several orders for new capacity coming online, which provides us with an extended growth trajectory.

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

Coming into the third quarter, we had pretty good business visibility as a result of record standalone bookings reported during the second quarter.

The test for our sales force was to show a continuation of this trend, which in fact they did.

During the quarter, we continued to receive repeat orders from existing standalone customers as well as new ones on both the memory and foundry side of the business.

Winning the position of sole supplier of standalone optical CD for 22 and 32-nanometer at a technology-leading foundry was an important milestone for us and has already opened the door to more customer interactions.

We believe this win clearly demonstrates the leading-edge capabilities our systems and solutions offer our customers, solutions which cater to the world's most challenging applications across several areas of the fab, including CMP, thin films, etch and lithography, both in the back end and front end of manufacturing.

Taking a closer look at our financials, one can see that Nova is today a completely different company than a year ago.

Diversifying our revenue mix in the direction of standalone metrology has provided us with average selling prices, which are significantly higher than before, eliminating much of the pressures, which are inherent to OEM-driven companies.

This, as well as our effective product cost-control measures, has allowed us to come very close to our long-term objective of 50% gross margins, which is truly remarkable.

As part of the industry's return to growth, we continue to see improvement in service revenues as well as service gross margins during the third quarter.

Service provision and on-site customer presence continue to be an important part of our business.

And we believe it will continue to improve.

Dror will provide further insight in his remarks.

During our quarterly calls, I have on several occasions mentioned the disruptive nature of optical CD technology and its ability to replace existing measurement techniques.

Replacing incumbent methods of measurement requires a deep understanding of process variability and process control.

To illustrate the significance of this issue, I will use an example.

Having come from integrated metrology and having developed process control schemes for many years, our focus has been on studying process variability and inherent instabilities during both the development and high-volume manufacturing phases.

With the introduction of copper into several types of devices, ranging from microprocessors to high-end memory, the need for high throughput measurements of several types has been on the rise.

In studying these needs, it became apparent that our tools with specialized algorithms could replace measurements performed on several unique tools ranging from defect inspection, transparent and opaque film thickness, as well as electrical testing.

Through deep collaboration with our OEM partners and our customers over the last several years, we have established best-known methods that are now being adopted on a large scale by several customers.

This activity has been so successful that we believe we have attained the leading position in copper interconnect metrology.

A significant portion of our current revenues is coming from this area.

And given the extended deployment of copper into most processes, we believe this will continue to drive growth into the future.

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

Capacity utilization rates at our leading-edge customers continue to rise and are hovering above 90% in most cases.

On top of the orders received from leading-edge 300-millimeter fabs for the second consecutive quarter, we have started to see significant orders coming from our hard disk industry customers as well as from 200-millimeter second tier manufacturers.

As a result, our book-to-bill remains significantly above one.

On the foundry side, the struggle for leadership between the different players is very much alive.

The demand for low-power, high-performance microprocessors and graphics chips requires immediate improvement in manufacturing yields, which are not easily attained, given the complexity introduced by new materials used to produce such devices.

This in turn raises the demand for process-control solutions and provides us with more growth opportunities.

As stated, recent order trends show a return to capacity increases and not just investment in upgrades of existing lines.

Activities now include both expansions in existing lines as well as announcements of new fabs being built.

For the most part, customers are pulling in orders and demanding very short lead times.

On the memory front, significant improvement in average selling prices of memory chips have brought customers back to spending on wafer fab equipment.

We believe leading players, such as Samsung, Hynix, Micron, IM Flash, Toshiba, and Elpida, will try and use this situation to increase market share in their respective served markets.

Obviously, those with more spending power stand a better chance to leverage the changed landscape more effectively than others to increase their market share.

Being a strong player in the memory space, we fully expect to enjoy the proceeds of this trend.

Finally, looking forward, the significant increase we are continuing to see in our bookings and backlog will drive further improvement to our financial performance in coming quarters.

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 are very pleased with our financial performance in the quarter.

Revenue wise, we have seen 64% sequential increase to $11.4 million in Q3 relative to $7 million in Q2.

The improvement is across the board in all elements of our revenues, standalone systems, integrated metrology systems, and services.

Looking at sales by territories, product revenues in the quarter continue to come mainly from Asia-Pacific, which accounted for 87% of our product revenues.

The US and Japan regions accounted for 7% and 6% of our product revenues in the quarter respectively.

The significant increase in our revenues in the third quarter, coupled with an ongoing trend toward favorable product mix have contributed to a 183 basis point improvement in our product gross margin, which came in at 58% in the quarter.

On the service revenues, we have seen an additional quarterly increase of 15% to $2.7 million.

This increase in revenues is related to time and material activities at customer sites, which are gaining additional traction now that fab utilization rates have significantly increased.

Given the efficiency measures that were taken through recent quarters, we were able to move our service gross margins from 10% in Q2 to 18% in Q3.

It is important to note that in parallel to this improved financial performance, we have continued to maintain and enhance our on-site presence at strategic customer sites in order to facilitate continued successful penetrations into these customers.

Looking at our overall gross margin performance, blended gross margin in the third quarter was 48%, a major improvement relative to 41% in the second quarter of '09 and 24% in the third quarter of '08.

The blended gross margins in the third quarter present a major step towards reaching our target gross margin model of 50%.

We continue to work toward this target model through the introduction of new products and features and through effective management of our product and services supply chain.

During the third quarter and as expected, overall operating expenses increased by $1 million.

Most of this increase resulted from bringing employees back to full salary and working week.

Some additional impacts of the return to normal hours and pay practices will occur in Q4 but will be less than the third quarter of '09.

On that aspect, it is important to note that our ability to react quickly to the pickup in orders validates our decision not to make further headcount reduction earlier this year.

In term of bottom line, the Company reported a 15% net income of $1.7 million, or $0.08 per diluted share on a GAAP basis, an all-time record of quarterly net profits.

In order to illustrate as clearly as possible the fundamental transformation we have made to our business model over the past quarters, I would like to go back for a minute to the fourth quarter of '07.

In this specific quarter, we presented $16 million revenues relative to $11 million in the current quarter of '09.

Nevertheless, if we compare this quarter with the current quarter, overall gross margins increased from 43% to 48%.

Product gross margins increased from 51% to 58%.

And service gross margins increased from 13% to 18%.

In parallel, operating expenses decreased by more than $2 million from 38% of revenues to 34% of revenues.

As a result, non-GAAP net income increased from 6% of revenues to 16% of revenues.

We believe that this comparison demonstrates the depth and the strength of the change in our business fundamentals.

Cash flow wise, we saw a positive change in momentum.

And the Company generated cash flow of $1.9 million from operating activities in the quarter.

During the quarter, we also presented excellent working capital management through reducing DSOs to 42 days from 67 days in the previous quarter and through further reducing our inventory levels.

Overall cash reserves were $16.1 million.

And we continue to be focused on further adding to our cash position.

Overall, we improved our Q3 financial performance in each of the important financial parameters.

Looking forward, we expect that the quarter-end backlog and the strong booking pattern so far in the fourth quarter will drive further improvement in our financial performance and will produce strong finish to the year.

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 John Henderson of JBH Capital.

Please go ahead.

Congratulations, Gabi, phenomenal quarter.

Thank you very much.

Job well done.

Great job.

Few questions here -- most semiequipment companies are guiding for 20% sequential growth from Q3 to Q4.

Can we expect the same from you guys?

We're not giving specific guidance as far as percentage points, et cetera.

But we will say that we're going to see improvement in the important financial matrices.

So you can expect a continued improvement in the numbers at the end of the year.

Great.

Okay.

Clearly impressive job with the gross margins.

Going forward, any thoughts on where you can get on like a $15 million quarterly run rate?

Yes, I mean, plenty of thoughts of how we can get there.

I think what's remarkable and what Dror spent time discussing in his example of Q4 of '07, in that quarter, revenues were $16 million.

The number of systems we had to ship in order to meet that number was probably twice the number of tools that we shipped in this year's third quarter.

So that explains a lot about the change that I had mentioned also in the business fundamentals of the Company.

Reaching the $15 million level is not out of reach.

It's not a long distance away.

I think that what amplifies our positive feeling is, as we mentioned, the fact that now the industry is hitting a second wave, the first one being the migration of existing capacity, the second one being the spending on increased capacity.

And the announcement that you probably saw from TSMC I think is a good indication of that.

Hearing TSMC saying that they're actually going to be spending altogether $2.7 billion in '09, up quite a bit from what they had planned, and for that to continue into '10 is one indication.

As they had mentioned, they're going to increase the number of wafers output.

That announcement is not just from TSMC.

We heard similar things from Samsung as well.

And the nice thing is, as we mentioned in today's press release, that we're seeing these kind of orders coming to us as well because we're well positioned in these specific customers.

So it's not going to take a lot to get to that level of $15 million.

I think what's important for us and we're poised to continue is to continue basically enjoying the proceeds of the measures that we took during the downturn, which implies very good cost control measures that allow us to do a combination of manage the operation well enough to continue to be profitable but on the other hand also investing heavily into development of new technology, which is exactly what the customers are expecting right now.

Okay.

Just a last question, looking ahead to next year, can you give any guidelines as far as where the OpEx should be on a quarterly basis?

Well, as I mentioned before, we expect some increase into the fourth quarter.

And looking into 2010 in general, we expect this to stabilize around the fourth quarter level.

And looking forward, we should see some increase because of sales and marketing and research and development activities.

But this should be in general marginal.

Okay.

Very good.

Well, congratulations to you both.

Great quarter.

Thank you very much.

Thank you.

Thanks for joining the call.

The next question is from Yaniv Rahimi of Ramco Investments.

Please go ahead.

Hello.

Hi there.

Hi, Yaniv.

Hi.

First, I must admit I didn't expect such result in the third quarter.

So (spoken in foreign language).

Merci beaucoup.

Okay.

Now with respect to my question, with respect to Nanometrics, which also beat the Q3 forecast, the Company said they expect to continue the revenue improvement but at a slower rate.

Can you comment about the way you see the growth rate going forward?

I think it's a very good question.

As you probably know, I think you've looked at semiconductors for a while.

It's a very manic-depressive industry.

We're definitely manic right now.

And as a result of it, the increases come very significant.

We're still way behind where we were in 2007 as far as spending in the industry.

Just to give you a figure to go by, wafer fab equipment in '07 was about $36 billion.

This year, it's probably about $12 billion.

So we've still got a lot of growth potential coming forward.

Having said that, I think that what customers are trying to do right now is two phases as I have mentioned.

On the one hand, you see basically that they're migrating existing capacity.

And as I mentioned, they're adding more capacity.

But they very carefully are trying to manage this so that they don't go overly aggressively.

So I think that I agree with the general comment that we're not going to see -- I will say, even though we don't give guidance -- we're not going to see another 64% increase from Q3 to Q4 because simply that -- it's not going to happen that way.

Remember, the levels of Q2 for the whole industry were quite low.

Q3 is starting to inch towards the direction of where things should be.

So I think there is going to be slowness in the growth rate but still continued growth.

To give you a number which is very interesting, Gartner expects that wafer fab equipment in '09 will be down 50%.

And they expect next year for the industry to be up about 40%.

We haven't finished the year yet.

But you can understand based on these numbers and the very minimal guidance that we had given, we're going to be one of the only companies in the industry that's going to be pretty much flat with the numbers of 2008.

And again, the industry is shrinking by 50%.

Looking forward, with Gartner mentioning about 40% growth into '010, I believe we're well positioned to leverage that kind of growth and enjoy that level of growth, hopefully maybe even more than that.

I hope that answers your question.

Yes, sure, Gabi.

But you mentioned 2007 this year.

So let me understand.

How long is the average selling cycle compared to '07?

Of our systems you mean?

Yes.

The average selling cycles in semiconductors have stayed pretty much the same.

Usually if it's a new customer it'll take you -- or a new system -- it'll take you three to nine months if you need to evaluate improved capability, right?

If it's repeat orders and in most cases, given the fact that we're pretty much on a wide spread of customers, in most cases, the sales cycle is much, much shorter.

Actually, if you look back at our Q2 numbers and when we started announcing an improvement, which was basically the last week of March, the uptick, the significant uptick, in orders in the second quarter is basically based on the fact that we had already done a lot of the sales processes which were necessary for the technology migration that is now happening.

So we're actually seeing these orders coming in after we had already finished a lot of these sales cycles.

Having said that, of course, there's new sales cycles that are ongoing because we want to further our market share.

So generally, it's probably three to six months.

But what's going on right now is a result of sales cycles that have already completed.

Okay.

Thank you very much.

And good luck.

Thank you.

(Operator Instructions)

The next question is from [Jonathan Hath] of [Ion].

Please go ahead.

Hi.

Apologies, I jumped on the call a little late.

So I might be asking a question that you already discussed.

But from the last question, I understood that you're expecting 2009 revenues to be flattish with 2008.

Is that something that you said?

Yes, around those numbers.

Okay.

And then 2010, you gave the Gartner estimate of 40% growth.

And you're saying that you hope to grow within that range.

Correct.

Okay.

What kind of -- and then I heard some comments regarding the operating expenses in Q4 roughly in line with the Q3 level and growing slightly in 2010.

Actually, in Q4 because of the return to normal pay practices and work weeks, we expect to see an increase which is lower than the increase we saw in Q3.

I would model between $0.5 million to $0.8 million increase in Q4 in operating expenses.

And looking forward to 2010, we should see only marginal increases.

Got you.

And then just for modeling purpose, do you expect any seasonality quarterly in 2010, i.e.

Q1 lower than Q4 and then picking up during the quarter --- during the year or sort of -- ?

I think --- that's a good question.

I think that given where the downturn -- where we hit -- all of us hit the inflection point, it might be that this year some of the seasonality will be broken.

It is true that usually Q1 is a little bit lower.

I'm not sure that's going to be the case this year because I think that the upping of expenditure which is continuing right now is not going to be that much influenced by seasonality I don't think, much lesser than previous years simply because people have come back from spending nothing.

And they're just starting right now.

So actually right now without giving any specific statement on Q1, I can say that the visibility that we have right now leads us to believe that Q1 should be pretty good.

Great.

Okay.

Good luck.

And well done and thanks.

Thank you very much, Jonathan.

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 is available on a link from the Company's website at www.nova.co.il.

Mr.

Seligsohn, would you like to make your concluding statement?

It looks like we have one other question.

Can we allow it, Operator?

Sure.

The next question is from [Paul Adall] of [Mindscape Trading Fund].

Please go ahead.

Hello?

Yes.

Yes.

Hi.

Hi.

How are you?

Good.

Discuss if there's any other markets that you could -- that you're seeing growth in.

Are you -- do you deal with the LED space in any particular way?

Your question -- we could hardly hear you.

But you're asking whether we're in other markets.

And you gave LED as an example?

Exactly.

Yes, Nova is focused on front-end semiconductor manufacturing.

Our activity is in the front-end space.

We haven't reached into other markets.

We may look into that in the future.

But there's no current activity which is going on outside of the front-end semiconductor manufacturing space.

Okay.

All right, thank you very much.

Thank you.

Mr.

Seligsohn, please continue with your concluding statement.

Thank you, Operator.

I wanted to, again, thank everyone for participating in today's call.

And we look forward to seeing you in the next quarter.

Thank you very much.

Thank you.

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

Thank you for your participation.

You may go ahead and disconnect.