Nova Ltd (NVMI) 2019 Q3 法說會逐字稿

Good day, and welcome to the Nova Third Quarter 2019 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's Third Quarter 2019 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 in the Investor Relations section of the company's website.

Eitan will begin the call with the 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, and thank you all for joining our third quarter financial results conference call.

I will start the call today by speaking about our quarterly results and performance highlights.

Following my commentary, Dror will review the quarter's financial results in detail, including the guidance for the fourth quarter for fiscal year 2019.

In the third quarter, Nova delivered solid financial performance with revenue reaching the high end of the guidance and profitability outperforming the EPS guidance range.

Our results for the third quarter, along with the guidance for the fourth quarter, demonstrate our strong execution capabilities and the continued progress we are making on our strategic priorities.

Although we are still facing some industry headwinds in few segments during 2019, we continued strengthening our position in our sales market as well as expanding our reach to new emerging markets.

We are pleased with this results, which reflects the efforts we are making to leverage our operational model to persistently continue funding new technology innovation during different industry investment cycle.

We remain committed to the development of our growth engine, which will position us to outperform the market and will enable our long-term growth.

Our continuous efforts to balance our customers' exposure, which now includes leading customers from different segments have strengthened the company's position and its resiliency to various market scenarios.

Our position today enable us to better compete and will allow us to capitalize on more opportunities when the market is fully recovered.

From a business perspective, our performance this quarter drove to a balanced revenue mix, which reflects our evolving position in Memory and our strong position in Foundry.

Our business results highlight several notable achievements.

First, following the growing demand for Logic devices, mainly for emerging solution like 5G and AI, we saw growing demand for our complete dimensional and materials metrology portfolio.

Revenues from the world's leading Foundry for its 7-nanometer and 5-nanometer expedited ramp-up increased this quarter with further growth expected in the fourth quarter.

Nova's application footprint has expanded in these nodes to include both front end and back-end applications in multiple steps.

This includes both the integrated and standalone platforms as well as our state-of-the-art algorithmic solutions and machine learning capabilities.

Furthermore, Nova Solutions were selected for the development of the next-generation node beyond 5-nanometer.

The growing demand for our tools in this advanced logic nodes is the results of a close collaboration with this leading customer over many years and many technology transitions.

All 3 nodes will continue generating revenues for us in 2020 as well.

Second, Nova's growing position with key memory customers has positioned us to benefit from their advanced technology development and will enable us to accelerate our growth once the sector fully recovers.

One example is the major enrolls we are making into a large global memory customer across multiple sites and multiple technologies, which have yielded higher revenues in 2019, with expectation for continued growth in 2020 as well.

Third is our steady progress in China.

We achieved multiple wins in both domestics and global customers for both Memory and Logic node during the quarter.

With this significant share gains, we now serve these customers with both our materials and dimensional portfolio.

We expect China to continue to be a solid revenue generator in 2020, while domestic memory and Foundry manufacturers continue to expand their capacity in both middle and high end devices.

Turning now to our product development progress and the challenges ahead of us.

We are currently focused on addressing 3 major technology inflections including 3D scaling, new device architectures and local materials introduction to support architectural limitations.

In order to improve customers yield and assist them with shortening time to markets, we are concentrating in bringing near and inline solution that will be close as possible to the fabrication process.

Our unique approach to the growing challenges, including interlacing hardware and software, dimensions and materials and our growing investment in emerging technologies has proven itself to be very attractive to our customers.

This differentiated approach allowed us, even in a volatile year like 2019, to penetrate accounts that were crowded with our competition.

Following the successful launch of several new models of dimensions and materials metrology solutions this year, we also recently announced the launch of the PRIZM.

PRIZM is the first of its kind metrology platform, that combines traditional optical spectroscopy technologies with Interferometry and optical technology that is currently widely used for imaging and topography measurement.

Following the shipment of several tools and the progress with this unique platform in the last quarter, this new platform was also selected by a leading foundry for its most advanced technology node.

Based on our strategic approach to take part in future IC development, we continue to proactively invest in partnership programs with multiple parties across the semiconductor industry.

As part of our commitment to innovation leadership in emerging applications, IBM Research selected Nova’s products to support next-generation chip development across Logic, Memory, heterogeneous, integration and AI hardware.

The collaboration will rely -- sorry, relay on the use of Nova's most advanced product portfolio for both materials and dimensional metrology, combined with Nova's advanced machine learning solutions.

We are proud to be a partner of IBM Research, advancing our product portfolio to meet the demand of an ambitious road map for AI computation from the data center to the edge.

In addition, as discussed previously, we continue to execute our plan to productize new technologies that are differentiated from the competition.

Following multiple engagements with leading customers, we are encouraged by the traction these platforms generate and the value it brings to our customers.

We expect these positive results to be translated into revenues already in 2020.

Before I conclude my remarks, I would like to refer to the market environment as it relates to Nova's performance.

From an overall demand perspective, our long-term territories remains intact regarding the growth of semiconductor fundamental drivers.

The combination of demand for powerful computing and advanced Memory will create more opportunities for process control as metrology intensity grows while customers improve device performance and time to market.

With regard to memory, as discussed previously, we expect that the market's soft demand will be better optimized through the next few months.

The bit supply growth for NAND is starting to stabilize according to our current indication, and as a result, we expect prices and inventory levels to improve.

While it's difficult to predict the exact timing of equipment spending, we believe that the environment is improving as we approach 2020.

Since DRAM inventories currently remain elevated, we believe that NAND will recover ahead of DRAM.

In Foundry and Logic, demand has strengthened throughout the year with customers accelerating their investments in advanced nodes.

Demand for diverse applications, including 5G, AI and advanced CPUs fuels the expansion of 7-nanometer and 5-nanometer nodes and beyond with several customers.

Based on our quarterly healthy results and the guidance for the fourth quarter, we believe that 2019 is shaping up to be a significant year for Nova in multiple aspects.

Our widened exposure to multiple segments, customers and geographies, combined with the investment we are making in a new innovative portfolio has positioned us well to benefit from the long-term potential growth as the market turns favorable.

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

Dror?

Thanks, Eitan.

Good day, everyone, and thank you for joining our call.

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

You can find a detailed reconciliation per item at the end of the earnings press release.

Total revenue in the third quarter of 2019 was $52.5 million.

On the product revenues front, the distribution was approximately 60% from Memory, and approximately 40% from Foundry.

The increase in the Foundry portion of product revenue was driven by increased deliveries into the most advanced Foundry technology node.

Service revenues remained stable quarter-over-quarter.

Blended gross margin in the third quarter was 52% on a GAAP basis and 53% on a non-GAAP basis.

Operating expenses in the quarter totaled $21 million on a GAAP basis and $18.6 million on a non-GAAP basis, 3% lower than the previous quarter reflecting reduction in net R&D expenses, which was partially offset by increase in SG&A costs.

Operating margin in the quarter was 12% on a GAAP basis and 18% on a non-GAAP basis, similar to the previous quarter.

During the quarter, the company finalized several tax reporting and planning processes.

As a result, the company recorded a significant tax benefit and presented net income taxes of $1.2 million in the third quarter of 2019.

Earnings per share in the quarter were $0.30 per diluted share on a GAAP basis and $0.40 per diluted share on a non-GAAP basis, both exceeding the upper end of the company guidance.

As previously communicated, the company has transitions to new offices in Israel and the U.S. This transition was concluded in September 2019.

During the office transition period, the company is bearing duplicate office lease costs.

And in the third quarter of 2019, lease costs amounted to USD 888,000.

Lease costs were adjusted for non-GAAP for presentation purposes under the item facilities transition costs.

With the distribution of these costs across the company expense items in the profit and loss statement is detailed at the end of the company's quarterly press release.

We do not expect such costs in future quarters.

On the cash flow front, the company generated $9.2 million in cash from operating activities in the third quarter and invested $7.9 million in property and equipment, mainly in the new facilities.

Regarding the company outlook for the fourth quarter of 2019, we expect the following: revenues between $56 million to $62 million.

GAAP earnings per share between $0.32 and $0.42 and non-GAAP earnings per share between $0.40 and $0.50.

At the midpoint of this fourth quarter guidance, we expect the following: Product revenues are expected to shift to Foundry as the company continues to deliver tools to leading-edge 5- and 7-nanometer Foundry as well as trailing edge foundries in China.

Service revenues are expected to pick up to the $15 million and above levels as a result of an expected uptick in time and materials activities towards the end of the year.

Blended gross margin is expected to increase to approximately 55%.

Operating expenses are expected to be approximately $20 million on a GAAP basis and approximately $18.5 million on a non-GAAP basis.

This level of operating expenses includes the full impact of the fluent costs related to the new facilities.

In addition, this result is after an offsetting of an expected income from the Israel Innovation Authority in the amount of approximately $3.5 million in the fourth quarter of 2019.

This $3.5 million of R&D funding in Q4 is relative to a normalized income level of approximately $1 million a quarter.

On the tax front, we expect the effective tax rate in the fourth quarter to return to a normalized level with GAAP effective tax rate of approximately 20% and non-GAAP effective tax rate of approximately 16%.

Eitan?

Thank you, Dror.

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

Operator?

(Operator Instructions) Our first question comes from the line of Quinn Bolton of Needham.

Congratulations on the strong third quarter results.

Eitan, in your comments about the new technologies, you mentioned revenue expected now in 2020, I just wanted to confirm that the guidance that you're providing for the fourth quarter does not include any rev rec from either of the 2 new technologies you're developing.

Is that correct?

Yes, that's correct.

Okay.

And I guess, given the delay from kind of late '19 into 2020.

Can you -- is this just sort of longer qualification cycles.

Is there anything about that delay that we should be nervous about?

Or do you think it's just sort of -- is the calls are just taking a little bit longer than previously expected?

So Quinn, thank you very much for the question.

So the plan is going according to what we plan in productizing them, and we knew up front that it's coming on the wire for the last minutes on the quarter, okay?

So obviously, to be conservative, we didn't take those numbers in the revenue.

Therefore, if something happens, it can be an upside.

But in order to be conservative in order to see what happens.

By the end of the year on the borders between Q4 and Q1, we didn't want to commit for the fourth quarter.

But according to our plans, everything has to happen on this period of a couple of months from now towards Q1.

Okay.

Understood.

And then you made some encouraging comments about receptivity to the new PRIZM tool with multiple customers.

I think you said shipments.

Is PRIZM already starting to generate revenue for you?

Or you -- or should I say, are you recognizing that revenue on PRIZM?

Or are you just shipping those tools into eval and rev rec as more of a 2020 event for PRIZM?

So the PRIZM is already installed in several customers.

But in terms of revenue recognition, we have not yet recognized revenues from this product, and it is not yet embedded into the Q4 guidance as well.

Great.

Okay.

And then last one for you, Dror.

If I did the math right, you talked about the $3.5 million credit, I think, in December R&D offset.

So OpEx down about $18.5 million.

If I do the math, it sounds like you typically get more like $1 million a quarter.

So should we be thinking about OpEx, kind of a natural run rate probably back in the $20.5 million to $21 million level for the March quarter?

Yes.

We will now take our next question from Patrick Ho of Stifel.

And congrats on a very nice quarter and outlook.

Eitan, maybe first off, you gave some very encouraging commentary regarding China and some of the emerging opportunities there.

Given that, that's a growing region, but on the Foundry side of things, they are at the trailing edge.

And Memory, they still lag the leading edge guy.

What type of products are you selling them?

And how can you expand to, I guess, both your newest products as well as some of the integrated OCD and X-ray products that you're selling to a lot of the more advanced chip makers today?

So I think when we're looking on our portfolio, we're trying to have a common as possible on the tool types.

So if you're looking right now on China and the share wins that we talked about is around middle to high end technology.

So if you're looking right now on some of the logic or Foundry domestic China, we're talking about customers that are investing in 28 and below, which for us, it's the same tools as we ship for 14 or 10 and even 7. So when I'm looking right now on China, it's a growth potential, exactly as the rest of the world in the matter of tools.

Obviously, when we're talking about the new technology and mainly on the high end, dimensional and materials metrology capabilities.

It's probably will not be installed first in China.

Great.

That's helpful.

And maybe a very follow-up question...

Go ahead, Patrick.

Yes.

Okay.

As my follow-up question, in terms of some of the emerging opportunities in 3D NAND, particularly, as we go to 128 layers.

Obviously, the more layers, the more metrology intensity.

And obviously, some of your other product intensity increases as well.

How do you see the industry migrating, again, to 128 and above layers?

And some of the opportunities ahead for both your existing product portfolio as well as some of the new ones on both dimensional and material side that you've talked about?

So what we're looking right now in Memory, there are separate challenges on the dimensional side and separate challenges on the materials side.

Nevertheless, when you're looking right now on increasing the number of memory cells.

Both sides are befitting from the challenges, mainly when we're looking right now on the CD side, on the optical side, is once the high aspect ratio is growing and once you have more layers, you have challenges around the bottom CD or the profile of the device.

As well as the new challenges that are coming from the fact that almost all customers are doing it in multi-stack capability, and then you'll start to have tilting issues and all kinds of other challenges that are increasing actually the intensity.

If previously, you had only one hole to measure, now just imagine that you have a couple stacks that are starting to be not aligned to each other and you have more challenges to measure.

So definitely, when you are looking on the optical side, and this is why we came with the PRIZM, is that you need to start evolving the OCD part to start measuring challenges that are really growing in multiple layers.

And this is why we brought the PRIZM to the market.

This is one.

Second, on the materials side, it's a whole encouraging story.

There are new materials coming in, the thickness of the layer is becoming much thinner and you have multiple cells to measure the materials in.

And a couple of the last shipment that we had on the XPS side, is coming on the fact that the intensity for materials in memory, especially in VNAND, is increasing tremendously and we are encouraged from the fact that looking right now on composition on those layers the only solution that is right now provided for inline or in production capabilities is the XPS capabilities.

So measuring today composition can be done mostly by XPS and as you have more layers and you have more evolving VNAND memories capabilities or production, you need more and more XPS capabilities.

So the -- everything that I said right now is supported by the results, which you see right now that even in a weak Memory year, where Foundry, actually, is not fully offsetting the Memory, Nova still have 50% of the revenue coming from, at least 50% coming from Memory.

Great.

That's really helpful.

And maybe a final question for me for Dror.

Gross margins has some variability depending on the quarter, product mix and things of that nature.

As you look at 2020, and with the potential of a recovery in WFE and higher volumes.

How do you offset, I guess, some of the new product introductions?

Some of maybe the lower margin initial tool shipments that you're sending to customers versus some of the benefits of a higher revenue outlook for 2020?

Yes.

So that's a good question.

As you know, currently, we expect the markets to remain, in general, volatile.

And in addition, we are proliferating new technologies and projects, which margins can fluctuate based on the final selling price and initial cost structure.

I think that on top of that, customer and product mix are constantly changing, also due to the investment pattern of large customers in specific quarters.

Therefore, gross margins will continue to fluctuate as the same as we've seen in recent quarters.

And again, we are keeping our targeted gross margin model of 56% to 59% on an annual basis.

But again, quarterly gross margins will continue to fluctuate.

(Operator Instructions) Our next question comes from David Wu of Indaba Global Research.

Can you talk about any other than TSMC, as a 10% customer in your third quarter?

And I got a question on -- in Memory, it sounded like Nova's exposure to NAND is a lot more than its exposure to DRAM, can you sort of quantify roughly the 2:1 ratio of NAND versus DRAM or even higher?

Well, I would say the following.

First of all, we do not disclose the specific 10% customer names.

But what I can say is that during Q3, we had one 10% Foundry customer and three 10% Memory customers.

On another note, regarding NAND and DRAM.

The portion is, I would say, in Q3, specifically, it was approximately 60% DRAM and 40% NAND.

We will now move to our next question from Mark Miller of Benchmark Company.

You see Foundry and Logic strengthening, you had very good sales considering that Memory companies talking about cutting CapEx.

I'm just wondering in terms of the margin profile Foundry versus Memory.

Do you -- do you ship a similar array of tools.

There's a real difference?

Or do you ship the higher-margin tools into either of those spaces?

Yes.

So in general, we do not see a major difference between Memory and Foundry in terms of margin.

Okay.

What about the X-ray.

You didn't break out X-ray, how is the X-ray tools selling?

Yes, we do not breakdown the revenues between dimensional and materials.

We discussed that before.

Average selling price is high.

And this is, for us, competitive information, so we do not disclose this breakdown.

Mark, this is Eitan.

Just to add on Dror comments, the reason that we are not breaking down the numbers between the X-ray and the optical, it's because of the reason that the synergy between the products, allow us in some application to measure with the X-ray, some application that was measured traditionally by CD and vice versa.

So it's a complete competitive information that once we break it down with customers competitively enough, people will understand exactly what are duplications.

So we are not breaking it down.

As there are no further questions in the queue.

I would like to turn the call back over to Eitan Oppenhaim for any additional or closing remarks.

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

With that, we conclude our Third Quarter 2019 Earnings Conference Call.

That will conclude today's conference call.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.