Nova Ltd (NVMI) 2017 Q3 法說會逐字稿

Good day, and welcome to the Nova Measuring Instruments Ltd.

Third Quarter 2017 Results Conference Call.

Today's conference is being recorded.

At this time, I would now like to turn the conference over to Miri Segal, Investor Relations.

Please go ahead.

Thank you, operator, and good day to everybody.

I would like to welcome all of you to Nova's Third Quarter 2017 Financial Results Conference Call.

With us on the line today are Mr. Eitan Oppenhaim, President and CEO; and Mr. Dror David, CFO.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call.

If you have not received the copy of the release, please view it in the Investor Relations of the company's website.

Eitan will begin the call with a business update, followed by Dror with an overview of the financials.

We will then open the call for the question-and-answer session.

I'll now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO.

Eitan, please go ahead.

Thank you, Miri.

Let me add my welcome to everyone, and thank you all for joining our 2017 third quarter financial results conference call.

I will start the call today by speaking briefly to our third quarter results and performance highlights.

I will then provide guidance for the fourth quarter of 2017.

Following my commentary, Dror will review the quarterly financial results in detail.

Nova delivered another solid quarter, with revenue above the midpoint of the guidance range and both stability and EPS above the high end of our quarterly guidance.

During the quarter, we continued to effectively execute against our strategic targets, to diversify our markets, customers, and products with notable success in all of the key performance metrics.

Strength in both our dimensional and materials metrology products lines supports our expectation for a fifth sequential record year, exceeding our initial expectations.

Our revenue guidance for the fourth quarter suggests annual growth rates of at least 32%, well above the [consensus] expectations for the industry growth.

This significant milestone is supported by growth in all product lines, platforms, and technologies.

With another record year clearly in our sights, we are progressing steadily towards our long-term target to reach $300 million in annual revenue while enhancing our product offering and expanding our market presence.

This aggressive plan can be achieved through continuous growth of our organic product line, as well as inorganic future M&A additions, which are well supported by growing investments in developing new disruptive solutions and growing cash reserves to [find] our activities.

Our initiative to expand our presence in the memory segment continued to bear fruit this quarter as well, as we continued to benefit from growing contribution from leading memory customers.

As a result, the memory segment accounted for 45% of the overall product revenue.

In fact, our largest customer this quarter was a leading memory manufacturer that accounted for 30% of the product revenue.

This achievement is evidence of the attractiveness our portfolio is gaining with this growing segment, paving the way for further growth in 2018, as the demand for memory continued to surge on the waves of data growth.

The increasing quantities of data creates healthy demand for memory deep growth for the cloud-based data center, as well as for mobile and (inaudible) devices.

We support the development of advanced technologies like deep learning and artificial intelligence.

These new breakthrough technologies will fuel the need for better CPU and GPU performance, which, along with advanced memory devices will further support the demand for advanced semiconductors.

On the foundry side, all the (inaudible) digestion periods at our leading customer, while it continues building its 7-nanometer node in Taiwan and its new 60-nanometer node in China, we continued to deliver solutions to support various other foundry customers as well.

Our attractive offering to this segment supported our delivery to multiple technology nodes, ranging from 40- and 28-nanometer, mainly in China, all the way down to 7-nanometer, which has reached a commercial and technical tipping point for other logic customers to invest.

An ultimate achievement this quarter is our latest announcement about our most advanced XPS platform, the VeraFlex III, that was selected by the leading foundry in the world for in-line applications to be deployed in 7-nanometer and below technology nodes.

This reflects the progress we made in transforming x-ray metrology from a lab tool to a fab tool, and finally to in-line production tool, which increase our [touch] rate and expand our future business opportunity.

Another growth engine we continued to materialize during 2017, with strong results in our third quarter revenue mix, is the rapid growth in our China business with our entire portfolio, including XPS as well as (inaudible) integrated and stand-alone.

The investment in China, both by domestic and international players, is driving significant growth in semiconductor (inaudible), and Nova is well positioned to enjoy this growth in the next coming years.

Business in this region is expected to contribute significantly to our 2017 second half revenue and bookings, and we expect to see continued growth in 2018 as well.

The (inaudible) performance of our product sales is also complemented by ongoing strength in our service business, with new record high of approximately $30 million.

Our continuous investment in enhancing our (inaudible) is bearing fruits, with various solutions that enable enhanced productivity, better utilization, and improved metrologic capabilities in previous models.

This growing business is on track to deliver another record year in 2017.

As it relates to our financial results and specifically our profitability, the strong quarterly profits demonstrate once again the value our offering brings to our customers, the synergies we've built in our portfolio, and the operational efficiency we embedded in our financial model as we grow.

We believe that our efficient model will allow us to continue investing in our next-generation disruptive solutions and pursue long-term targets.

This strategy is already embedded in our product rollout, where we have expedited the development cycle and we intend to bring new disruptive solutions to the market faster in order to match our customers' aggressive development cycle.

2017 expected growth is driven mainly by our intensive efforts to evolve as the leading process control partner that delivers a differentiated and innovative metrology portfolio and appealing to a growing number of customers across the entire industry.

Following the final integration milestone of ReVera as our material metrology division, Nova today can offer a wider range of solutions, targeting both the dimensional and materials metrology challenges.

The ability to create synergies between the technologies and offer unique solutions is expected to yield another record year in 2017 for both the x-ray and optical products lines.

Following the expectation for continued growth and demand for semiconductors in 2018, we expect to continue our growth in both technologies next year as well.

As it relates specifically to our x-ray solutions, our efforts to increase our footprint in the most advanced sites are yielding good results, as major customers move our XPS tool into their most advanced in-line process steps.

The implemented solutions enable our customers to measure in (inaudible) thickness and composition parameters more accurately.

Measuring this property in-line and (inaudible) is a key (inaudible) and enables more sensitivity to process variations.

This is a unique capability that open up more opportunities in both the logic and memory space.

While our customers progress to advanced technology nodes, the metrology market is going through a rapid change to increase accuracy, precision, and reduced time to solution.

In order to meet these challenges, Nova keeps releasing innovative solutions to the market, solutions that are no longer based only on traditional hardware offering.

Our ability to couple growing hardware sensitivity with unique software algorithms in one bundled solution stretches the overall metrology envelope to meet growing challenges and solves wider range of applications.

Out of our success, with recent share gains in the third quarter in multiple customers is our advanced capability to integrate sophisticated deep and machine-learning engines to support the next generation of smart hybrid metrology, which can create predictive modes to improve customers' yields.

The unique ability to hybridize physical models with mathematical empirical models is the key to better solve the challenges arising from building vertical and 3D devices which create barriers to the traditional metrology metal.

This direction is supported by our elevated R&D investment to create disruptive techniques through the development of complementary software algorithms that exist in other data-loaded industries.

By taking this innovative direction, it has significantly expanded our addressable market, secured new customers, and increased our presence with key players in all segments.

As a result, we enhanced our system sales but also grew our stand-alone software sales, where we anticipate 2017 to be a record year for our software sales as well.

In summary, and based on our current estimations for the overall demand, we expect that the strong industry momentum will continue while the market benefits from solid catalysts, mainly in the (inaudible) that is key for continuous innovation in disruptive markets.

These trends are related to the way we use data in mobile devices, sensor and cloud-based data centers.

In order to meet growing challenges, the semiconductor industry should continue with its efforts to constantly improve performance and cost.

In this environment, where our customers are going through continuous inflection points, Nova is well positioned to benefit from the need to fabricate better devices in a shorter time to market.

Our strong year-to-date results, coupled with our outlook for the fourth quarter, indicates we are well on pace for another record year in 2017.

We are achieving these consistent results due to a well-executed business plan with clear strategic initiatives, which are based upon innovative offerings, tight partnership with our customers, and an efficient operation model to support our healthy growth.

Based on our 2017 accomplishments and growth trajectory, we expect another growth year in 2018 and we see a clear path to meet our long-term model.

Therefore, the fourth quarter guidance, we expect revenues in the range of $53 million to $57 million.

We looked at EPS on a GAAP basis in the range of $0.29 to $0.37 per share, and non-GAAP basis diluted EPS in the range of $0.34 to $0.42 per share.

Now let me hand over the call to Dror to review our financial results in detail.

Dror?

Thanks, Eitan.

Good day, everyone.

In my following prepared remarks, I will refer to both GAAP and non-GAAP results.

You can find a detailed reconciliation between GAAP and non-GAAP results per item at the end of the earnings press release.

Total revenues in the third quarter of 2017 were $54.1 million, up 23% year-over-year.

Product revenues in the quarter were $41.1 million, of which 55% came from the foundry segment and 45% from the memory segment.

The memory portion in the quarter has increased by 50% relative to the previous quarter, reflecting the significant inroads the company has made into the growing memory segment.

We expect memory portion to remain high in the fourth quarter of the year as the company continues to deploy its product and solutions into existing and new memory customers.

During the quarter, the company had four customers which exceeded 10% of product revenues.

Samsung accounted for 30% of product revenues; TSMC accounted for 16% of product revenues; and GLOBALFOUNDRIES and Huali each accounted for 10% of product revenues.

Service revenues in the quarter increased by 16% to approximately $13 million in all-time record levels for the company.

This increase was also driven by services fees related to tool relocations as part of a major tool relocation process between different territories, executed by the company's largest customer.

Blended gross margin in the quarter was exceptionally high and came in at 61% on a GAAP basis.

This outcome is better than expected, and was attributed to high margin revenue mix during the quarter.

This revenue mix included incremental softer revenues of approximately $2 million, which were pulled in by a major customer into the third quarter of the year, and included the earlier and higher-than-expected service fees which I just mentioned.

Overall, during the first three quarters of 2017, we experienced exceptionally high software revenue stream, which positively impacted gross margins across this period.

Actually, softer revenues in these three quarters more than doubled relative to the whole year of 2016 due to extensive adoption of the different software platforms by several customers, including the cross existing install base.

On an annual basis in 2017, we expect the company to be close to its target model of software revenues, accounting for 10% of product revenues.

In terms of the global infrastructure related to manufacturing and services, the company is in the midst of expanding its manufacturing capacity for optical CD in Israel.

The investment amount in this expansion is expected to be approximately $3 million and to be mainly endured during the fourth quarter of 2017.

Combined with the existing manufacturing facilities in the US and Israel, this expansion should enable to support more than $250 million in annual revenues for the whole company.

Operating expenses came in at approximately $18.3 million on a GAAP basis and $17.1 million on a non-GAAP basis.

The effective tax rate in the third quarter was 24% on a GAAP basis and 21% on a non-GAAP basis.

As previously discussed, starting 2018, we expect the effective tax rate on both GAAP and non-GAAP basis to be approximately 20%.

GAAP net income in the quarter was $11.5 million or $0.40 per diluted share.

Non-GAAP net income in the quarter was $13.1 million or $0.46 per diluted share.

During the third quarter of the year, the company generated positive cash flow of $9.4 million from operating activities.

In parallel, accounts receivables decreased by approximately $3 million, reflecting DSO of approximately 58 days, lower than the company target of 70 days.

Inventories have increased by approximately $5 million, reflecting inventory turns of 2.3 times a year, close to the company target of 2.5 inventory turns per year.

The increase in inventory during the quarter was attributed to the alignment of inventory levels to the current business volumes, as well as to the rollout of new products which are currently going through first article batches and customer evaluation processes.

Before concluding my prepared remarks, I would like to give more details regarding the company's outlook for the fourth quarter of 2017.

As Eitan mentioned, revenues in the fourth quarter of 2017 are expected to be between $53 million and $57 million.

At the midpoint of this revenue range, we expect the following: blended gross margin is expected to be approximately 57%; operating expenses on a GAAP basis are expected to be approximately $18.5 million; operating expenses on a non-GAAP basis are expected to be approximately $17.2 million; effective tax rate is expected to be approximately 28% on a GAAP basis and approximately 24% on a non-GAAP basis

With that, I will move the call back to Eitan.

Thank you, Dror.

With that, we will be pleased to take your questions.

Operator?

(Operator Instructions) And we will first go to Edwin Mok, Needham Company.

First question I have is, Eitan, in your commentary about (inaudible), you mentioned like two, three times on the call that you're pretty upbeat on 2018.

Can you help us dissect that?

Is that more to do with your product momentum?

It sounds like you have good momentum on both XPS and OCD, or is more just a upbeat market trend and what you hear from the customer in terms of the spending trends?

So I think that if we look on the 2018 market catalyst, the (inaudible) of the current technology development in some of the industries, we'll keep pushing the envelope to create better semiconductor devices in a lower cost.

All of us here (inaudible) technologies like machine learning, deep learning, artificial intelligence.

Definitely keep using those technologies will require better processing power and definitely more memory, either on the mobile devices, sensor or data management or data centers, and I think it keep on reflecting on our market, and this is why we see that the semiconductor will keep on being strong, or the demand for semiconductor will keep on being strong in the next year.

And so, from the market perspective, regard to that, we really believe that it will be another growth year.

Specifically, in the market in the segment, we believe that memory will continue being strong next year, both DRAM and NAND, each one of them from its own reason, with all players.

And we already know that actually almost all of them announced that next year CapEx will be almost on the same levels as this year.

Additionally, if we put memory aside, we see that China will continue its investments.

We predict that for us, China will keep on growing next year.

There are a couple of foundry customers that will keep on spending, and we started to see some memory investments as well.

Regarding the logic and the foundry, and according to the current sensibility, 2018 is supposed to be another year of growth.

I think that there are three elements in the foundry.

The first one is the continued investment in 28- and 40-nanometer, specifically or especially in China.

Second one is the investment in 7-nanometer.

I think that other leading customers looking on the tipping point and understand that it's going to be a very strong node, so we started to see other customers investing besides TSMC.

And finally, with regard to TSMC, although we see some softness in the second half of 2017, I think that it's just a digestion period for the next couple of months while they're completing the investment on the first phases of the 7-nanometer and 60-nanometer.

And I believe that according to their CapEx announcement, they will spend in 2018 the same amount as this year, but we're definitely accustomed by now that it might be on a different weight from the first half to the second half.

So looking right now on the market, I think that it's going to be, from our side, a strong catalyst.

Second, regarding the successes that we had during 2017, we feel that the penetration or the inroads into memory will continue to materialize next year, and the last one is the product mix.

I think that Nova can say proudly today that our product is totally differentiated from the competition, so we can compete on the same competitive landscape, but we also can generate new applications and new markets where we can expand the market.

And when all of these are coming together, the products offering together with the market, and the success both of the optical and the XPS, we feel it's a (inaudible) market next year.

Okay, great.

That's good color.

Specific on the software, I think, Dror, you mentioned that there was a $2 million increase in revenue this quarter (inaudible) and I think your comment implied maybe down a little bit on the fourth quarter.

Can you help us understand maybe how you think about your software mix beyond this year?

It seems like you're tracking ahead of that 10% target.

Do you expect that to continue, your higher portion (inaudible)?

Yes.

So obviously, as I mentioned during the prepared remarks, the increase in the software revenues this year was very significant.

It's more than double than last year.

Our goal is 10% of revenue, and we are going to pursue that looking forward, and we currently expect that this -- in terms of 2018, we can be, again, close to this target of 10% of product revenues for software also in 2018.

My last question is on the inorganic pipeline.

I think you mentioned on your prepared remarks that you guys are pursuing that as well.

Got any updates on that, and any kind of color in terms of which area are you guys targeting for that in inorganic growth?

I think that when we're looking on the organic growth, we are looking -- sorry, on inorganic growth, we are looking on two areas.

One is trying to enhance the technology with other process control technologies.

We think that today, the process controllers all see a lot of challenges in measuring those smaller and smaller devices and complicated devices, so we are looking on some technologies that would complement our offering, and will be able to be hybridized together with other optical and x-ray technology.

This is one.

Second, we are looking on companies in process control which can be in various phases of the semiconductor manufacturing.

It can be from front end all the way down to back end and other places.

I think that this is the area where Nova is specialized.

I think that we can bring a lot of benefits to those companies with our advanced technologies in the front end, so that's mainly the two areas that we are looking at.

Any thoughts of rough timeframe in terms of when you think it's possible to do an acquisition?

So we talked about it starting from January, you know that the market currently is in high valuations and it's going higher and higher.

So I think that the environment is becoming tougher.

Nevertheless, I think that we are looking in some areas that it's maybe a benefit to be in such a valuation, and therefore we will do it whenever we find the right targets.

We have the right cash, we have the right balance sheet, and once we will find a target like that, we will do it when we can.

And we'll next go to Patrick Ho at Stifel Nicolaus.

Eitan, maybe as a follow-up to the increasing memory exposure you guys are seeing, can you give a little bit of color of like the mix between DRAM and 3D NAND and how you see that moving forward as you look at 2018?

So we'll look in a second on the numbers and see if we have here the allocation between them.

I think that it's roughly 50/50 between them, and when we're looking right now on the second half, it started with a big growth in majorly vertical NAND or 3D NAND, and when you're looking right now somewhere at the end of the third quarter and the fourth quarter, we started to see increasing on capacity on DRAM.

So that's roughly the allocation.

And when I'm talking about DRAM and VNAND, I'm talking about all the players that are producing both.

So we see it both in Samsung, we see it in Hynix, and also we see it in Micron.

Great, that's helpful.

Maybe moving to the foundry side of things, there's obviously a lot of activity that's starting to emerge on the very leading edge at 7 nanometers.

How do you look at, from an industry perspective, do you see that being much more concentrated with one player in 2018?

Or do you believe that you'll see a kind of broader mix of 7-nanometer investments from multiple players in terms of 2018 as the year?

So I think that from the way that we look at that, all players are investing in 7-nanometer.

Each one of them is in a different phase.

But no doubt that if you're looking on 2018, there was this one dominant player in 7-nanometer.

Nevertheless, if you're looking towards the full year, there is investment going on both in the other foundry players, everybody understands it's going to be a strong node.

The expectation is that the transition from 10 to 7 will be much more robust and with more capacity than the transition from 20 to 16, and therefore if I'm looking right now on real competition, I think it will happen somewhere by the end of 2018, beginning of 2019.

(Operator Instructions) And we'll go to Mark Miller, The Benchmark Company.

For 2018, in terms of pure dollar amount, what product area do you think will show the most growth?

Will it be x-ray?

I think that we need to look -- so we don't break down the growth of each one of the product lines, but when we're looking right now on the 30-plus percentage growth that we had in 2017, it's actually divided almost equally.

So I think that in 2018, you'll see the same thing.

Okay.

Can you provide what China sales were last quarter, percentage of sales?

So what I can say is that in terms of booking in the third quarter, bookings were more than 30% from China.

Do you expect that to increase next year?

So we do expect it to increase next year, yes.

And we'll go next to David Wu, Indaba Global Research.

I was wondering, if I look at TSMC's historic profile, they tend to have very strong first and fourth quarters of the year, and calendar 2017 looks to be a different kind of a yearly pattern.

Do you expect TSMC to go back to historic patterns in terms of their capital spending first and fourth quarter loaded in calendar 2018?

So I think that we need to take 2017 as the base for the calculation or comparison.

If you're looking right now on 2017, it was very loaded on the first half when they took 10 and 7-nanometer capacity, and the second half is likely digestion and building the right ramp and yield, and converting 10 to 7. Another event that happened in 2017 on the second half was moving one of the 16 lines to China, so it was more on the first half weighted.

But the total spending will be around $10 billion.

If we're looking on 2018, it probably will be on the same amount.

They declare it will be roughly the same amount of more than $10 billion, but our expectations from the visibility that we have right now, it will be more weighted into the second half.

So (inaudible) has three events to invest next year.

They need to invest in expanding the 7-nanometer, which will not happen before they finalize this stage, they need to invest in the expansion of 60-nanometer in Nanjing, which will not happen until they will stabilize the fab in Nanjing, and they need to build a complete (inaudible) line for 5-nanometer.

The way that we look at that is that the first couple of months of 2018 will be digestion and building the current capacity, and then slowly they will pick up speed towards the second half.

The other question I have is on Samsung.

Their capital spending has been extremely strong, and do you see a yearly pattern to them as well?

Because your business with Samsung really boomed in the second half of calendar 2017, and I was wondering whether the yearly pattern would also be the same in calendar 2018?

Well, so you know, looking right now on the results or the earning that they talked about and the prediction that they discussed about, talking about the $26 billion in spending, and I think that they said the same thing going to be next year where they need to keep on expanding the DRAM capacity in some of the existing lines, as well as expanding the vertical NAND in (inaudible).

So according to their estimation, it's going to be the same standing next year as well.

Regarding visibility, we see that the first couple of months of 2018 is strong.

Beyond that, we just can see currently.

The other foundries besides TSMC are supposed to be ramping their 7-nanometer in calendar 2018, second half, right?

Each one of them is in a different cycle or stage.

I think that both the big foundries that are competing with TSMC will have a product released by the end of 2018.

I'm not so sure it will be the second half of 2018 or it would be the end of 2018, but currently looking on the development cycle, it's towards the end of the year.

Well, I was wondering, you know, if I look at your revenue run rate, you had a $220 million annual run rate right now, and it sounded like the first half of calendar 2018 will probably be approximately the same rate as you have in the last couple of quarters and then a growth phase in the second half.

Am I getting it correctly, that most of the growth in calendar 2018 on a year-to-year basis will be loaded in the second half?

Well, David, we don't guide beyond the next quarter, and really, the visibility will be there for the beginning of the year just in a couple of months.

So when you're looking right now on the guidance, we look right now on two things.

One, the guidance for the fourth quarter, and the second one is if overall 2018 is going to be a growth year.

I don't want to talk right now about how the quarters will be distributed.

I really don't see it yet.

And we'll go to a follow-up from Mark Miller, The Benchmark Company.

The share gains you reported this quarter, was that in memory, I assume?

You're right.

And Edwin Mok, Needham Company.

Hi, just a quick question on capital allocation.

I think previously you guys had done some buybacks.

Any thoughts around that?

As you said, the business is generating a decent level of cash.

Any thought around buyback or use of capital, or are you going to save that up for (inaudible) acquisition?

Yes, definitely.

We had a plan for buyback which we concluded I think in the beginning of 2017, and we are considering the next step in terms of such plans, and we will update on that in the next conference call.

And there appears to be no further questions at this time.

I will now hand over to Eitan Oppenhaim for any additional or closing remarks.

Thank you, operator, and thank you all for joining our call today.

By that, we conclude our Third Quarter 2017 Earning Conference Call.

Thank you.

And that does conclude today's conference call.

We thank you all for joining us.