Nova Ltd (NVMI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Nova Measuring Instruments fourth 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 February 17, 2010.

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 affected 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 CCG Investor Relations at 1-646-201-9246.

With us on the line 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, sir?

Yes, operator, thank you, and thank you, everyone, for joining today's call.

2009 proved to be a defining period for Nova.

Facing one of the worst recessions in our industry's history, our business strategy was put to a real test -- how to grow profitably while also reducing expenses.

To do so, we had to rely on the strong foundation of customer relationships we have been building for the last several years.

While the industry experienced a double-digit decline in 2009, we managed to grow revenues by 1%.

At the same time, we improved our product gross margin by several percentage points and reduced our operating expenses 24% compared to 2008.

This fundamental transformation of our business model involved several elements.

First, relying on our wide exposure to the world's leading semiconductor manufacturers, we were able to expand our product offering, increase our footprint in the fab and displace traditional metrology techniques.

Second, during the year we significantly increased our market share in integrated metrology and more than tripled our share of the standalone metrology market.

Most notably, in the area of copper process control, we were able to attain the leading position by displacing traditional measurement techniques with both our product lines at the world's top foundries and memory manufacturing sites.

Thirdly, looking at the year as a whole, we were fortunate to be among a few companies to take an active part in the first phase of recovery which started at the end of the first quarter of 2009.

Our products allowed customers to migrate significant capacity to more advanced technology nodes at a minimal investment.

Later in the year, when the time came to further increase capacity, we were already designed in and continued to enjoy the incremental business.

Fourthly, 2009 was the first year in which our standalone metrology products generated close to half of our product revenues.

During the year, we also saw a strong move to selling our integrated metrology products directly to end users, providing us, as well as our OEM partners and end customers, favorable commercial terms.

This fundamental change in our business model and revenue mix allowed us to significantly improve our financial results and move to profitability during a very challenging period.

We were able to swing from a loss of $5.4 million in 2008 to a net profit of $2.6 million in 2009.

With these changes in place and with the vote of confidence we have received from several customers who are now ramping up their factories, we feel confident in our ability to continue and generate profitable growth in 2010 and beyond.

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

During the fourth quarter of 2009, we continued to enjoy the trend of improving business fundamentals we have experienced in the last several months.

Dror will give you the details of our revenue and profit growth in his prepared remarks.

Bookings during the fourth quarter were at a record high coming from all product lines and allowing us to start 2010 with a strong backlog.

As mentioned during our last conference call, as well as in a press release issued during the fourth quarter, our leading customers have resumed spending to support capacity increases at the high end of technology.

Given recent announcements, we clearly see benefit in having extensive exposure to both the foundry and memory capital equipment segments, which are supposed to grow by more than 70% and 50% to 80% respectively during 2010.

Now, let me turn to the industry outlook and also provide you with some specific guidance on our performance during 2010.

Analyzing inputs we have received from several customers as well as semiconductor supply fundamentals, we believe we are at the beginning of a positive cycle.

Having starved themselves of new equipment for a period of more than 15 months, our customers are not able to continue relying only on migration of existing capacity to leading edge technologies.

Demand for high end semiconductors for cellular, gaming, PC, and server markets as well as the general consumer electronic markets continues to increase, requiring technologies of 40 nanometer and below to become available at large volumes.

Meeting these market demands at competitive device yields requires the introduction of more process-controlled solutions, especially in challenging manufacturing steps such as lithography, etch, and CMP, all of which are at the center of our product focus.

Though there has been a lot of controversy between industry analysts as to the extent of growth to be expected in 2010, all generally agree that 2010 and 2011 are expected to be years of growth.

As is customary in our industry, positive upwards trends are perceived as opportunities for market share gains by semiconductor manufacturers.

Hence, the battle is already raging between memory manufacturers at all fronts to increase their manufacturing capacity and take a larger portion of addressable markets.

We also see the foundry segment becoming fiercely competitive and hear regularly of technological breakthroughs.

As stated, these junctures are opportunities for us to grow our presence and offer innovative solutions.

Now, let me turn to the financial outlook for 2010.

In light of the fact that almost three-quarters of our business is now direct with semiconductor manufacturers, we have better visibility than we used to.

Closer relationships with customers provide better insight into their plans and enable us to start giving specific guidance.

Given our current backlog, we have very good visibility for the first half of the year and expect strong growth versus the comparable period of last year.

As for the second half of the year, it is still too early to have good visibility, however, our expectation for the full year is based on the following -- first, further proliferation of our products as a result of repeat orders from existing accounts; secondly, successful penetration into new accounts; thirdly, market share gains; and finally and most importantly, the overall positive industry growth pattern.

Therefore, we are looking for 2010 revenues to range between $58 million and $63 million.

As you may have noticed, we have had to increase our operating expenses modestly in Q4 and will have to continue to increase operating expenses somewhat during the year in order to accommodate the growth of our business as well as secure the competitive position of our products.

Having said that, we expect expenses to grow more slowly than revenues and expect to demonstrate a further improvement in net profitability to 10% to 14% of revenues based on the revenue range indicated.

Finally, we are very pleased with the way we have exited 2009 and are confident in our ability to effectively leverage the changes in our business fundamentals and continue to profitably grow our business in 2010.

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 are very pleased with our financial performance in the quarter.

Revenue-wise, we have seen 34% sequential increase to $15.2 million in Q4, relative to $11.4 million in Q3.

The 145% revenue increase versus the year ago quarter shows the significant progress we have made over the past several quarters.

Looking at sales by territories, product revenues in the quarter continued to come mainly from Asia Pacific which accounted for 91% of product revenues while the US and Japan contributed equally for the rest of the revenues.

Looking at gross margins, blended gross margins came in at 49% in the fourth quarter of '09, reflecting an additional 22 basis points over the previous quarter.

This improvement was driven mainly by the significant increase in product revenue.

Product gross margins came in at 57% in the quarter, a slight decrease of 26 basis points relative to the previous quarter, which is in line with our expectations for product gross margins while penetrating new customers.

In the services, we saw a decrease to 6% gross margin as a result of the return of the service organization to its normal cost structure and some rollover of time and material revenues to 2010.

The Q4 service revenues run rate is approximately $10 million on an annual basis, significantly lower than our peak $12 million to $13 million annual service revenues in '07 and '08.

The reduction to $10 million service revenues in '09 is related to the significantly lower fab utilization rate in the first half of the year, which resulted in service contract cancellations and move to time and materials.

In recent months, we already see both return to and new service contracts and we expect service revenues in 2010 to increase to '07 and '08 levels.

At these levels and in consistency with the financial model we have shared in the past, we expect service gross margins to be higher than 50%.

During the fourth quarter and as expected, overall operating expenses increased by $0.7 million to $4.7 million.

Most of this increase is related to bringing employees back to full salary and working week and also to several year-end objective base payments.

In the next couple of quarters, we expect operating expenses to modestly increase as we continue to expand our investment in new product introductions and new customer penetration.

In terms of the bottom line on a GAAP basis, the Company reported net income of $2.7 million or $0.13 per diluted share, an all-time record of quarterly net profits.

This result shows the significant profit leverage that was built in the company during the recent year through introducing new products with higher average selling prices and through effective operational management and fiscal discipline.

Cash flow-wise, the Company generated cash flow of $2.1 million from operating activities in the fourth quarter.

During the quarter, we also presented excellent working capital management through keeping DSOs below 50 days and further reducing our inventory levels.

In the coming quarters, we expect inventories to increase by $1 million to $2 million as we align our inventory flow with the current demand level and as we proliferate into the field additional evaluation tools of our new optical CD standalone product, the T500.

It should be noted that even after the threat of significant inventory increase plan, we expect to present inventory turns which are higher than five times a year.

We have also recently closed a successful follow-on offering, adding valuable and well-known industry-specific new investors to our investor base.

With the net proceeds from the offering of approximately $17 million, our overall cash results increased to the $36 million level.

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 and compare our financial performance in year '09 to year '08.

In year '09, we presented revenues of $39.3 million, 1% higher than '08 revenues of $39 million.

This increase in revenues is, in itself, unique among our industry peers, but nevertheless, if we compare the operational perimeters of both years, overall gross margins increased from 33% to 45%.

Product gross margins increased from 44% to 56%.

Operating expenses decreased by approximately $5 million from 51% of revenues to 38% of revenues.

And GAAP net income increased by $8 million from negative 40% of revenues to positive 7% of revenues.

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

Looking into our next calendar year, as Gabi mentioned, for the full year of 2010 we are guiding revenues of $58 million to $63 million, a net profitability of 10% to 14% relative to revenues of $39 million and 7% net profitability in year '09.

This guidance is consistent with the financial model we have shared with you in the past and reflects the expanding operating leverage of the business transformation we have been pursuing.

Gabi?

Thank you, Dror, and with that, operator, we'd be happy to take questions.

(Operator Instructions).

Edwin Mok of Needham & Company.

Hi.

Thanks.

Congratulations for a great quarter.

Thank you.

Yes, let me first start with the service revenue.

You guys talked a little bit about declines, slightly, on the last quarter, but you do expect it to ramp back up in the coming year as utilization improves.

Can I ask how you look at the linearity of that going into a new year?

Do you expect some of the service contracts that jump into the first quarter to drive a bigger ramp of sequential growth in the first quarter?

Is that how I should look at that?

Two things.

One is, as Dror mentioned, some of the revenue that was expected in the fourth quarter rolled into the first quarter.

And secondly, yes, we expect some contracts to already come back in the first quarter.

I think that, as a whole, with utilization rates increasing, we should expect to see some further growth in the service revenues.

But overall, bringing us to levels of '07 to '08, which were between $11.5 million and $13 million is pretty much the range of revenues that we expect.

So, that's the way to look at that.

Great.

That was helpful.

And then on the product side, I think, Gabi, you mentioned that you expect at least first -- you have good visibility in the first half and you expect to have good growth over last year first half of 2009 or are you talking about good growth over fourth quarter of 2009?

I just wanted to be really clear on that.

And also to toss in the question how do you look at the linearity of that and what is baked into your guidance?

Do you expect a more modest second half?

Is that how you assume -- is that the assumption behind your guidance for the full year?

So first of all, to your first question, my reference was to the comparable first half of 2008 -- sorry, 2009.

So, that's the way to look at that, that we believe we're going to significantly grow compared to the first half of 2009.

Regarding the overall year, what we see right now, as I had mentioned, is that the first half is indeed very strong.

As I mentioned, we finished with a very strong backlog.

I'm happy to say that we still see healthy bookings in the first quarter albeit not at the levels of the fourth quarter which were really, very openly I'll say, very high peak bookings.

But we do see healthy bookings continuing in the first quarter.

So, our feeling is the first half is going to be very strong.

Regarding the second half, I think right now and I feel that this is pretty normal for our industry to have specific visibility.

Six months in advance is not something very normal.

We are encouraged by the number of projects that are springing up and the overall statements coming from customers.

But it's a little bit too early still to see those translating into actual orders, significant orders for the second half of the year.

So, I will say first half looks quite strong.

Second half, right now is still not completely clear.

But overall, our statement remains that we believe we're going to grow revenue-wise by about 49% to 62% in the year and that's the way to look at that.

Great, that was helpful.

And then, finally, on the integrated metrology side, I think historically there are some customers and like my (inaudible) [foundry] that's using integrated metrology for applications like CMP.

Do you see that changing in the coming year or do you have indication that maybe customers thought that -- more customers start adopting integrated metrology?

How do you look at that?

I'll avoid making statements regarding the specific customers out of confidentiality to them, as you can well understand.

What I can say is that integrated metrology is being used very, very extensively in both the foundry and memory segments.

That what has happened in '09, which we're very pleased with, is that more applications for integrated metrology have come on line.

We believe that that's going to increase the overall addressable market because simply there are more applications for it.

So actually, I think that integrated metrology is going to play a key role both for memory and for foundry.

It's already very well positioned there, but with these challenging design rules, we see more of that coming on line.

We see, in the memory case, even though there are only two layers, for instance, of copper interconnect, because memory is relatively new to copper, we see a lot of demand for integrated metrology on the memory side.

And I will say that, in the foundry, we are seeing a combination of both integrated metrology and standalone metrology for copper.

And that's something that we're very happy about simply because the way to look at it is that the more critical layers in which you see more significant variability, usually elects to go for wafer-by-wafer monitoring, which is integrated metrology.

And the less critical layers will go with standalone for a more sparse sampling regime which really helps us now with the combined product offering.

So, my feeling is actually quite good about those two segments of foundry and memory actually becoming bigger for integrated metrology and already being there quite strongly.

Great.

That's all I have for now.

Thanks.

Thank you, Edwin.

Robert Sussman of Bentley Capital.

Thank you.

My first question is can you give us an idea of what the book-to-bill was for the fourth quarter?

I will give a general statement.

We don't usually give -- actually, we don't give specific, but I will say it's significantly above 1.

Okay.

And then, my second question is that in your guidance about gross -- net margin, you talk about 10% to 14%.

In the fourth quarter, it was 17.5% and you've indicated from here margins will get better in service and that overall expenses will grow less quickly than revenues.

Why should the margin be lower next year than it was in the fourth quarter?

The reason is we're going to increase operating expenses in -- starting the first quarter of '10 in order to support new production introductions and the evaluations of the existing products.

And this increase has impact evidently on the net profitability.

So, we do expect to increase the profitability rate looking into 2010, but we do expect it to be between 10% and 14%.

The extent in which you should expect operating expenses to increase starting the first quarter of '10 should be around 10% in the first quarter.

A 10% operating expense increase versus the fourth quarter?

Yes.

Okay.

And will that -- should we -- so therefore, should we expect operating expenses to be up 10% for the year?

I guess they'd be up a lot more than that.

But overall, operating expenses will be up less in 2010 than revenue growth will be.

Is that correct?

Yes.

Okay.

Thank you.

Okay.

Thank you.

Just to draw your attention, Robert, to the issue here of operating expenses, one of the things that comes automatically with the significant market share gains that we have seen through the year is a need to deliver more on the roadmap side and technology.

And there is clear expectation from us to make several deliveries during the year, which we fully intend to.

And therefore, you're going to see a little bit of a ratcheting up of R&D expenses within the operating expenses and that explains the reasoning behind it.

That's true, but I've found your prior guidance to be very conservative and if the book-to-bill was way above 1 in the fourth quarter and you had a full snapback in wages in the fourth quarter, so that would imply that, based upon the fact that you normally deliver within three months of an order that the first quarter revenues could be higher than the fourth and the service margins are getting better and you'll get some leverage off of the volume.

So, it just -- it seems to me as if you're being quite conservative here.

I think that the way to look at it is that, from our vantage point right now and from what we see and forecast for the year, we believe that these numbers are a good range to look at.

Okay.

Thank you.

Josh Goldberg of G2 Partners.

Good morning, guys.

Hi, how are you?

If you'd talk a little more about your guidance for 2010, if your book-to-bill was significantly above 1 for the quarter, is it fair to say that your Q1 revenues will be higher than the Q4 revenues?

We're not going to provide specific guidance for the quarter.

I will say that unlike previous years in which you see seasonality in the first quarter, the cycle is behaving in a way which is kind of agnostic to the calendar year and therefore we see a good first quarter.

All right.

I guess my question is you seem like you have pretty good visibility for the first six months of the year and not as much visibility for the back half yet.

Based on the midpoint of your guidance, it's roughly a $15 million quarterly run rate.

Is it fair to say that you feel like the first two quarters will be higher than that with less visibility in the back half of the year?

Or just help us -- help me understand how you arrived at that guidance number of $58 million to $63 million.

Well, what I will say is that, as I mentioned, we see a strong first half, which could lead to a level which is possibly more than half of the overall revenues for the year.

But as I said, it's still too early to assess how strong the second half of the year is going to be.

It could be stronger.

Right.

What I'm asking is if you could help us understand how did you arrive at that $58 million to $63 million number?

Well, the way that we arrive at these things and, as I mentioned in my prepared comments, is by working closely with both our customers and with our business partners to understand what their demands are, what are their fab build-out plans, how much of our equipment they believe they're going to be needing, and as much as possible understand from them what their timeline is.

For the most part right now, what manufacturers are trying to do is to pull in as much of their demand because the demand for products on their side is quite significant.

So basically, there's a very thorough process which is ongoing.

It's continuous.

Nova is a completely localized company in each of the territories that we work in and so our people are actually physically with the customers on a continuous basis.

I myself spend most of my time with fab managers, understanding and assessing the situation.

So, this is how we arrive at these kind of -- at these kind of guidance numbers and these kind of results.

We take the aggregate and we analyze and we also analyze what our market position is.

The other thing -- and I mentioned this as well in my prepared remarks -- a lot of what's going to influence our performance is the continued penetration.

And what is very encouraging is that we see a continued -- nice levels of penetration and new evaluations coming on line as well.

So, this is kind of to give you a feel of how the process takes place.

Okay.

And were there any 10% customers in the quarter?

10% customers in the quarter?

More than 10%, you mean?

Yes.

Yes, absolutely.

I think that one of the things to understand about our industry is that in any given quarter or any given year, you're going to have customers that usually represent more than that level, and the reason is because of their spending patterns.

For instance, to give you a feeling, in 2007 about 70% of our revenues came from two leading memory customers.

So, these kind of things happen quite regularly.

So, you can't expect customers to --

How much were your 10% customers?

How big were they in the quarter?

How big were the 10% customers?

Well, generally, we don't give this on a quarterly basis, but rather annually.

I can say that in the fourth quarter, we had two customers which were more than 10% of revenue.

Okay.

Okay, thank you so much.

Thank you.

Thank you.

Edwin Mok of Needham & Company.

Hey.

Thanks for taking my follow-up.

I guess, first of all, with that last question is obviously, in 2009 you have one customer that was accounted for a big part of your business.

And based on the backlog that you have or the orders that you have received in the fourth quarter as well as so far in this quarter, would it be fair to say that your customer concentration will be less concentrated, at least on the first half given that you have good visibility on that business?

Yes, what's happened, really, in the industry is that more customers are back to spending.

I will say memory is back in a big way and I will also say that several foundries are back to the table as well.

So yes, that's a fair assessment.

That is not to say that that particular customer is not continuing to be a very important one.

He continues -- they continue to buy in large quantities.

But yes, your assessment is correct that there's a larger distribution and a larger variety simply because so many more customers are coming back to the table and ordering tools.

Great.

That was helpful.

And then, on the fourth quarter in the product side of your revenue, what was the integrated versus standalone mix roughly?

It -- we're -- again, we're generally not relating to this percentage on a quarterly basis.

On a yearly basis, revenues from standalone accounted for around 40% of product revenues for '09.

Great.

That's helpful.

And then finally, based on the orders that you have so far in this quarter, is it -- can you give us like some color of your backlog?

How much would that be versus your full-year guidance?

Any kind of color around that would be helpful.

Thank you.

Well, as I mentioned, we see a strong first half of the year and there is a possibility that the first half will represent maybe a little bit more than half of the year.

But it's still a little bit early to say simply because the back end of the year is still not clear enough.

But quite a healthy backlog that allows us to feel quite strong about the first half, I will say.

Great.

That's all I have.

Thank you.

Thank you, Edwin.

(Operator Instructions).

Cristina Osmena from Spinner Assets.

Hi, Gabi.

How much do you expect copper metrology to represent in your business in 2010?

And second question, different subject, is just about the revenue growth for the entire year.

If the entire industry is growing 50% and you have short lead times and typically, people spend on your kind of product later on in the cycle and you're getting market share, why shouldn't you be growing at a significantly faster rate?

First of all, I'd love to think that we should be growing faster.

I think that we've put in place the foundations to be able to grow and continue to grow nicely.

I think part of the question relates, as I mentioned, to the second half of the year and how it's shaping up.

So, when we look at guidance which is annualized we have to factor that in and to take that into consideration.

I will say that for copper, I think that copper is going to continue to represent a large portion of our business.

The nice thing is and the fundamental change there is that it's both for integrated metrology and for standalone metrology.

It's an optical CD application and so the content in the solution that we provide, both from the hardware and the software side, is a significant content.

Hence, these kind of systems sell at the higher level of our average selling prices.

So, that's our feeling about the copper, that it's really become a -- pretty much a BKM for a lot of the leading foundries and memory manufacturers to use our solution for copper metrology.

Ms.

Osmena, are you there?

Yes, I'm finished with my question.

Thank you.

Robert Sussman from Bentley Capital.

Hi.

Can you give us an idea of what the lead times are from the time you get an order to the time it's delivered?

I guess what I'm driving at is the fourth quarter orders, when should we expect the bulk of those to be delivered?

Will the bulk of those be delivered in the first quarter?

Well, in general, the lead times from our product -- for our product is between eight to 14 weeks.

These are the general lead times for the different products.

Regarding the first quarter, we expect to -- some lead times to shorten because customers are pulling in orders as much as they can, as Gabi explained.

So that -- you announced $17.5 million in orders in the fourth quarter.

You've made three different announcements that added up to $17.5 million.

I assume that orders were greater than that -- that there were some -- you only usually announce an order unless it's very, very large or it's unusual in terms of the technology or customer.

So, my question is you had to book over $17.5 million.

If most of that gets shipped in the first quarter, why would the first quarter revenues not be significantly higher than the fourth quarter?

Well, two things.

One, not all of these bookings and backlog will be shipped during the first quarter.

So, some of it is in the second quarter.

Okay.

Okay, thank you.

Thank you.

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 a concluding statement?

Yes, operator, I'd like to thank everyone for participating in today's call and look forward to seeing you on the next quarter conference call.

Thank you very much.

Thank you.

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

Thank you for your participation.

You may go ahead and disconnect.