Nova Ltd (NVMI) 2018 Q1 法說會逐字稿

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

First Quarter 2018 Results Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Miri Segal of MS-IR.

Please go ahead.

Thank you, operator, and good day to everybody.

I would like to welcome all of you to Nova Measuring Instruments First Quarter 2018 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 a copy of the release, please view it under the Investor Relations tab 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.

I'd like to welcome everyone and thank you all for joining our financial results conference call for the first quarter of 2018.

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

I will then share our view on the current market environment and conclude by providing guidance for the second quarter of 2018.

Following my commentary, Dror will review the quarter's financial results in detail.

As reported, Nova delivered strong financial results for the first quarter of 2018 with record revenue and profit significantly exceeding our guidance.

This strong start supports our outlook for another growth year in which we continue to enhance our value proposition to our customers to benefit from the market's growing demand for variety of semiconductors.

In this environment where better performance and scaling are required, advanced process control is becoming a key enabler and drives growth in metrology intensity across all segments.

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

The strong momentum we are experiencing is reflected in our diverse sources of revenue, which were driven by the geographical shifts towards China and the balanced segment mix with growth in memory.

These contributions were the main drivers for the significant surge in revenue this quarter.

The continuous efforts to grow our position in memory are proving effective this quarter as approximately 50% of our product revenue was generated by customers in this space.

This is a result of increased traction of both our dimensional and materials solutions.

Our continued success in memory is also evident by the customer mix this quarter, which included 2 leading memory manufacturers who contributed approximately 20% each to the overall product revenues.

As part of our growth, we are entering 2018 with a significant shift in Nova's geographical revenue mix.

While Korea continued its momentum in light of solid investment in DRAM and Flash, we are also experiencing persistent growth in China, which accounted for approximately 40% of overall product revenue in the first quarter.

To demonstrate the growing momentum we see in China, we announced this quarter that a leading domestic customer chose our dimensional and materials metrology solutions for the next phase of expansion, which we expect to yield $20 million in revenue over the next 12 months.

The investment in China, which is being fueled by a combination of domestic and global customers, including 10 new greenfield facilities that were opened recently, is driving growth in semiconductor CapEx.

We strongly believe that Nova is well positioned to benefit from this growth in the remainder of 2018 as we have significant position with these customers.

Although some of these customers are still in the early stages of development and capacity ramp-up, we believe that China is presenting us with a significant multi-year opportunity to expand.

Chinese domestic manufacturers will continue their investment with the central and local government support to reach a competitive technological threshold and process control will be a key area of spending to achieve this goal in 2018.

In the foundry logic space, while several customers are trying to ramp up their 10 and 7 nanometer slowly as their main objective this year, we also see incremental growth in contributions [for material] trailing nodes above 60 nanometers.

These contributions account for approximately 50% of our foundry product revenue and we expect them to continue being stable throughout the year.

Encouraged by the outstanding year we had in 2017, we continue steadily towards our long-term target to grow organically and reach $300 million in annual revenue.

A key component of our evolution into a bigger company is our ability to deliver enhanced value to our customers by developing a cutting-edge metrology portfolio of multi technologies coupled with advanced software for more accurate control and faster time to solution.

This strategy is already embedded in our product roll-outs for 2018 and 2019 when we plan to expedite our development cycle and launch multiple new solutions.

Our expected elevated R&D spending in 2018 supports our long-term growth vision in multiple ways: first, by funding investments in sustaining innovation in our traditional portfolio; second, by financing disruptive innovation to develop new differentiated products for emerging process control challenges; and third, by expanding our served markets, which we expect to happen as a result.

Our product roll-out is expected to contribute to our growth by gaining market share and adding approximately $150 million in served markets.

These efforts should yield better customers in 2018 and revenue by 2019 for both our optical and X-ray technologies.

This approach is already bearing fruits as evidenced by the latest Gartner publication for 2017 where Nova continued to gain market share in 2017 as well.

Despite the investment challenges, we continue to maintain our efficient and controlled financial model, which can accommodate elevated investment in R&D, while still supporting our long-term targets.

Based on this ambitious plan, we were excited this quarter to launch a differentiated software fleet of engines to accompany our hardware fleets.

Following the 3 newly launched metrology hardware systems to enhance both dimensional and materials metrology performance, we announced this quarter the launch of Nova Fleet, which include breakthrough machine learning software suite to complement the traditional physical modeling software that has been used in the industry for years.

Together with our big data fleet management infrastructure, Nova Fleet utilizes fleet-wide information to provide adaptive metrology solution based on continuous training.

The platform is also open to numerous other technologies and various hybrid metrology information to improve training and validation.

Our unique approach of combining physical software model with mathematical engines enables our customers to shorten production time of the most advanced 1x DRAM scaled logic in advanced phases of vertical NAND.

In this context, I would like to emphasize that these software additions to our portfolio are way beyond the simple analytics tools and deliver qualities that none of our competitors introduced.

The product is already generating revenue and should support our software revenue growth in the coming years.

While growing revenue organically, we're also looking at ways to maximize the company's current valuation and its cash position of approximately $160 million to keep pursuing various M&A directions.

Our goal is to complement our portfolio with other process control capabilities in the different semiconductor steps.

In our view, the successful acquisition and integration of ReVera proves the technological capabilities of the company to embed other technologies to offer a wider holistic approach to our customers.

Before concluding my part, I would like to share our thoughts regarding the macro environment in the different semiconductor segments as we see them in 2018.

We believe that the demand for semiconductors will remain healthy throughout the year, driven by strong catalysts that are dominating by -- sorry, dominated by the growing need for mobile data and data management infrastructure.

As a result, we see continued demand for advanced Flash and DRAM memory devices.

While VNAND investment will stay steady throughout the year, we expect DRAM investment to grow faster than in 2017 among all of our customers.

In the foundry space, while we experienced some softness at the beginning of the year in advanced nodes, we see incremental growth in the logic trailing nodes of 60-nanometer and above, which we expect to continue mainly in China in the following quarters as well.

Regarding investment in advanced nodes, the majority of spending in 2018 will cover 10 and 7 nanometer with early investments in 5 nanometer in the second half of the year as planned.

If we extend our outlook to include the overall logic environment, we think that the demand for more computing power as well as demand for performance-based sensors will continue steadily as more vertical applications are launched into the markets.

Finally, as I mentioned earlier, we see the Chinese market continue its development going forward, driven by investment of domestic and global manufacturers in variety of devices in both memory and logic.

In summary and based on our current estimates for overall demand, we expect the long-term healthy industry momentum to continue while the market benefits from solid catalysts which are fueled by continuous innovation in disruptive markets.

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

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

Our wider exposure to multiple customers in both the memory and foundry, the exposure to both trailing nodes as well as advanced logic and memory nodes and the traction that our differentiated portfolio is creating in the market position us to benefit from this environment and continue our growth as well.

For the second quarter guidance, we expect revenue in the range of $57 million to $63 million, diluted EPS on a GAAP basis in the range of $0.30 to $0.40 per share and non-GAAP basis diluted EPS in the range of $0.35 to $0.45 per share.

Based on this guidance, our revenue midpoint for the second quarter of 2018 suggests a growth base of approximately 10% in the first half of 2018 compared to 2017 and in line with our expectations.

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

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 quarterly revenues in the first quarter of 2018 were $62.6 million reflecting a 15% increase year-over-year.

This result is higher than the top end of the company guidance for the first quarter also as a result of a specific customer pooling of tools which were initially expected to ship during the second quarter of the year.

Product revenues for the quarter was $50.2 million, approximately 50% of which came from the memory sector and approximately 50% from the foundry sector.

It is important to note that the company could present these record revenue levels in parallel to a continuous decrease in high-end foundry investment of 10 nanometer and below technology nodes.

Actually, during the first quarter of 2018, foundry investments in 10-nanometer and below technology nodes were at their lowest quarterly level during the last 2 years.

We believe this is a strong evidence of the continued diversification and balance of the company revenue sources.

We also believe that the company will continue to enjoy this diversification in years to come especially when leading-edge foundry investments will resume.

During the quarter the company had 4 customers that exceeded 10% of product revenues.

Samsung accounted for 22% of product revenues, Hynix and TSMC accounted each for 19% of product revenues and SMIC accounted for 14% of product revenues.

Blended gross margin increased in the first quarter compared to the previous quarter and came in at 58%.

This increase was attributed to the higher revenues, better utilizing the existing infrastructure and to favorable product mix, which also included slightly higher software revenues.

Services gross margin came in at 33% mainly as a result of higher expense levels in the quarter, including material usage.

We expect a similar service gross margin in the second quarter before trending up in conjunction with an expected service revenue ramp up in the second half of the year.

Operating expenses in the quarter totaled $20.3 million on a GAAP basis and $19 million on a non-GAAP basis.

Most of the increase quarter-over-quarter was a result of higher R&D expenses.

Effective tax rate in the first quarter was 14% on both GAAP and non-GAAP basis and included the impact of the U.S. tax reform.

The combination of higher revenues, improved gross margins and lower tax rate significantly increased the company's profitability in the first quarter of 2018.

GAAP EPS in the quarter was $0.49 per diluted share and non-GAAP EPS was $0.54 per diluted share, significantly higher than the company guidance for the first quarter.

During the first quarter of the year, the company generated positive cash flow of $12.2 million from operating activities.

Regarding the company guidance for the coming quarter, revenues in the second quarter of 2018 are expected to be between $57 million and $63 million.

This revenue guidance includes the impact of customer pooling in the first quarter, which I previously mentioned.

At these revenue levels between $57 million and $63 million in the second quarter of the year, we expect the following.

Blended gross margin is expected to be between 56% and 57% and includes the impact of the expanded manufacturing clean room space in Israel, which started operating at the beginning of the second quarter.

GAAP operating expenses are expected to be between $21.5 million and $22 million and non-GAAP operating expenses are expected to be between $20.2 million and $20.7 million.

Most of the increase in operating expenses is expected to be in research and development.

This increase reflects the company efforts to accelerate its development plans in order to organically meet its strategic target of $300 million in revenue.

We expect these expense levels to remain stable during the second half of the year.

Effective tax rate is expected to be between 17% and 18% and remain stable over the course of the year.

Regarding the targeted long-term financial model of the company at a $300 million revenue level, we continue to target gross margins to be between 56% and 59%, operating expenses to be approximately 30% of revenues and operating margins to be between 26% and 29%.

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

Thank you, Dror.

Before opening the line for questions, I'd like to invite you all to join us for the Investor Day that will take place on June 14 in New York.

At the event, you will have the opportunity to meet Nova's management team as we provide more color on our strategic business plan and future trajectory.

With that, we are pleased to take your questions.

Operator?

(Operator Instructions) We'll go first to Edwin Mok at Needham & Company.

First question I have, it seems like on the OpEx side, you guys have to increase the OpEx now, right, to drive this revenue growth longer term, right?

Dror, you mentioned just kind of your long-term target, OpEx is going to be at 30%, right, versus to a midpoint of guidance more like [24%] this quarter now, right?

Is this kind of high level of OpEx -- should we expect this high level of OpEx to stay for -- even if you start to see some growth and probably kind of normalize longer term?

Or is it just kind of a step-up now?

You expect this is kind of a sustainable level over many quarters?

Or how do you kind of think about that?

I think that the right way to approach it is that we have a step function now.

And as I mentioned, it will remain stable across the remainder of -- expected to remain stable across the remainder of the year.

And you should expect this stability also going into 2019.

Edwin, I -- Edwin, it's Eitan here.

I would like also -- Edwin, [just again] it's Eitan here.

I would like also to add looking on the cycles that the company went through in the history, you can see that the 2017 results are actually the results of growing spending on the years before.

But definitely, we look on 2018 as an investment year because we want to start seeing results in 2019.

Okay, great.

Yes, I just wanted to clarify that.

On your commentary about the end market demand, right, I think you mentioned that you expect NAND to remain relatively steady throughout the year with DRAM increasing, right.

What I have heard from a [logic] manufacturer, right, [Lamp] come out and said that they expect, [call it], their shipment to be lower in the second quarter and probably modestly down in the second half.

And our understanding is that a lot of that is due to NAND.

Can you kind of [look to] reconcile why there's lot of different views there?

So I think that -- so I can elaborate from what we see currently.

So when we look currently on the fixed memory provider, part of them are providing NAND only and part of them are doing Flash and DRAM.

On those that are doing Flash and DRAM, we see that the DRAM spending is increasing.

So actually when we look right now on the first half, there are multiple expansions that we see.

I'm not so sure that the differences between our views are not shipment or lead time because the process control actually ships before the project process tool when you go into a new fab.

So I think it's only a timing issue.

But definitely when we look on the spending mainly by Samsung, Hynix and Micron, we see that the facilities that are producing DRAM are increasing capacity in Japan and Korea.

And it will continue in the -- continue in the second quarter as well and we will see some strength in the third quarter as well.

Great, that's helpful.

On the kind of new product offering as well as the new software, just curious where are those products right now?

Have you started to ship those?

I think you mentioned there is a few new hardware products that you guys announced and also a new software suite, right?

Just curious where we are on that kind of new product ramp cycle?

Do you expect that to be a growth driver as you get into the second half?

Yes, so you know that when we launch our products, our policy is to be conservative and make sure that we are getting revenues before we launch the product publicly.

So once we -- once we launch it in a press release or once we launch the product, it's something that already went through [data of selecting one customers] and it's generating revenue.

Therefore looking on the track records of launches, when we launched 3 new hardware products in the third and fourth quarter of '17, they're after data and generating revenue.

In regard to the Nova Fleet, the new software engine, so most of the market share that we gained in memory came from the combination of the software and hardware that we could actually bring a much -- sorry, better accuracy and a better time to solution in those memory customers so we could get in as part of the market share.

So definitely, the Nova Fleet is generating revenue.

And when we're talking about the fleet management and the big data, actually 90% of our customers are using that already.

So the combination of changes in infrastructure where we combine new hardware, new machine learning mathematical engine and the fleet management, which is actually a big data in the customer fab are connected together right now in all the leading customers.

So definitely the software revenue growth or a combination of all that.

So definitely, it's running revenues already.

It's part of our development of the software revenue and it will be part of our growth engines going forward.

Okay, great.

One last question I have [direct I'd ask].

Just -- you mentioned there were some pooling from second quarter to first quarter.

Any way you can now quantify how much that was and what kind of customer drove that pooling?

What type of customer?

So obviously, we can't detail the specific customer.

But I think most, if not all, the outperformance in revenues over the high end of the guidance that we gave for the first quarter is related to this early shipment.

And we'll move next to Jaeson Schmidt at Lake Street Capital Markets.

Wondering if you could just talk about if your overall visibility for the second half of this year has changed significantly over the past 3 months.

I would like to tackle this question by zooming out a bit and talking about the basis of Nova currently and the resilience of the exposure that we have, multiple customers, multiple products and multiple segments.

It's important because when we're looking right now on the first half revenue, actually as Dror mentioned although our biggest customer that we had in 2016 still don't spend a lot of money and moving to the 5 nanometer, still the company could reach record level.

So if we were looking right now on the second half, I think that the revenue mix will be a combination of DRAM spending, steady VNAND spending and there are some upside that probably can happen from the fact that there is a big customer who is going to spend some CapEx on the 5 nanometer roll out.

We don't see yet the fourth quarter.

But most of the revenue probably will come from the same sources as the first half with upside that can come from this leading foundry customer.

So currently what we see is a flat second half with an upside to be a bigger one.

Okay.

That's helpful.

And then just looking at gross margin kind of 56.5% at the midpoint for Q2, how should we think about any potential snap back in gross margin in the second half of this year?

So I think that first of all, our model is 56% to 59% on an annual basis for the gross margin.

First quarter was 58%, which is at the high end of this range.

And in general, I think that in a year of revenue growth, we should expect to be around the middle of this range or higher.

Okay.

Okay.

And then the last one from me and I will pass the baton.

I know with the additional clean room space in the first half this year CapEx is probably running a little heavy.

How should we think about CapEx throughout the remainder of this year?

So actually our investments -- capital investments in the first quarter were low.

I think it was even less than $0.5 million.

And we should expect CapEx in 2018 to be normalized around the $5 million level that we had in previous years for 2018.

And we'll move next to Patrick Ho at Stifel.

Dror -- excuse me, [maybe you can provide a] little bit of color (technical difficulty) growth in China that you saw in the quarter?

Patrick, you are disconnected.

Hello.

Yes, Patrick now it's better.

Okay.

I apologize.

Eitan, (technical difficulty) can you give a little bit of color between the mix (technical difficulty) versus the local domestics and how you see that trending on a go-forward basis?

Do you (technical difficulty) to those companies?

Patrick, I think that I can't -- that I caught your questions.

I'll appreciate if you go to a better reception area, but I'll try to answer regarding China in overall.

So when we're looking right now on the Chinese investment or the customers in China, actually we are looking on between 20 to 25 sources of revenue coming in, all right.

And as I said in my prepared remark, around -- out of those 20 to 25, 10 are new greenfield that just established from last year until Q1 2018.

And we still have some heavy investment that then started like GLOBALFOUNDRIES and some other customers that probably will come in.

In regard to the domestic investments versus the global investment, I think that there are pretty heavy global investments mainly by Intel, TSMC, UMC and probably the 2 Chinese -- sorry 2 Korean customers, the Xi'an by Korea -- sorry by Samsung and Wuxi by Hynix.

Besides that, regarding the domestic spending, you need to divide these groups in 2. You have the group of the main foundries like Huali and SMIC that are not a newcomer, but they are still spending capacity to mix the advance nodes.

And also you have several greenfield new customers that are coming, both in memory as well as in logic foundry.

Of course, we have YMTC investment in memory, we have couple of small ones that investing in the DRAM and Flash and also there are small ones that are investing in foundries.

If we look on the map and the location, actually it's becoming very distributed in many location in China.

So it's not anymore Shanghai and Beijing, it goes from -- goes from Dalian in the North with Intel, all the way down to JHICC and other small customers that we have in [Jinjiang] and those provinces.

Now when you're looking right now on the spending you see that each one of them getting support by the local government in each one of the provinces as well as the central government support.

So in [2018], you have multiple investments by all those segments.

We need to see in 2018 how those new greenfield spending R&D money are moving into production and ramp up, which is actually 2019 revenue or increase in revenues.

So this is, Patrick, the picture in China.

Great.

That's helpful.

And maybe as a follow-up question for Dror in terms of the increase in R&D spending that you said in your prepared remarks.

I know there's a lot of variables that go into R&D spending, new product development also supporting on the engineering side your customers.

Can you give a little bit of color of the breakdown, given how much your revenues have (technical difficulty) quarters?

What's being targeted for next-generation product development versus kind of the engineering support that you maybe need to provide for your customers given the revenue ramp you've seen in the last few years?

So I think that -- you said correctly that it goes to many elements of the company product portfolio and road map.

But in general I think we can say that 2/3 of the increase in R&D expenses, the expected increase in the remainder of 2018 is going to new products and new technology development and 1/3 is going to, I would say the next generation of products and sustaining the existing platforms.

(Operator Instructions) We'll go next to Mark Miller at Benchmark Company.

Congratulations on your record sales.

Time when semiconductor was significant in the quarter just reported, are you still expecting more greater contributions in the second half of the year from them?

You are talking about the overall semiconductor market?

The Taiwan semiconductor.

It was...

Yes, so the -- if you're looking right now on the advanced nodes, I think that multiple customers are investing currently in trying to develop and ramp the 10 and 7 nanometer.

It goes from Intel, Samsung and also TSMC.

Now there is a spike that we expect will happen in the second half which is the [pipeline] of 5-nanometer TSMC.

According to their announcement and according to what we see it's supposed to come in Q3 or Q4, the timing is not clear yet and also capacity is not clear yet.

But definitely we see it happens and once it happens, of course the TSMC contribution in the revenue will go up.

Okay.

Can you give us a little more color on what's X-ray expectations or their orders and sales this last quarter and also what's going on with the X-ray business?

So obviously we don't break down revenues to technology.

However, we can say that we see increase in both technology revenues in 2018 relative to 2017.

And that does conclude today's question-and-answer session.

At this time, I'd like to turn the conference back over to Eitan Oppenhaim, President and CEO, for closing remarks.

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

With that, we conclude our Q1 2018 earnings conference call.

We hope to see you all soon in our Investor Day that will take place on June 14 in New York.

Thank you and have a nice day.

And that does conclude today's conference.

Again, thank you for your participation.