Nova Ltd

NASDAQ:NVMI

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by. This is the conference operator. Good day, and welcome to Nova's Second Quarter 2022 Results Conference Call. Today's conference is being recorded.

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

[Miri Segal, MS-IR LLC]

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's second quarter 2022 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, I'd like to 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 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 turn the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you all for joining our second 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 and then conclude with the guidance for the third quarter of 2022.

Nova reported solid results for the second quarter, demonstrating strength in all our product lines across dimensional, materials and chemical metrology portfolios. While we keep gaining momentum from multiple industry growth driver in various semiconductor segments, we continue to expand our portfolio diversification and its market adoption to secure long-term growth and outperformance. This quarter results demonstrate once again the resiliency we are embedding into our operating model, which continues to be strained by multiple elements, including supply chain issues and various other macroeconomics and geopolitical concerns.

We believe that the fundamental changes implemented in the company over the last two years to meet our strategic goal of reaching $500 million in revenue will significantly strengthen the company position in multiple verticals and markets in the next few years. For the quarter, our earnings results came in well ahead of expectation and at the top end of our guidance, including another sequential quarterly revenue record, which represents around 45% growth year-over-year.

Reviewing the first half of 2022 shows a significant year-over-year growth pace in all financial elements compared with H1 2021, including revenues and profitability growth of 52% and 70%, respectively. Our solid performance over the last few quarters demonstrates our operational agility and ability to meet customers' demand in a constantly changing environment without missing a beat. Against the backdrop of the current global economic uncertainties, we still see strong demand for our products as a combination of manufacturing capacity demand, process control intensity growth, technology development in both memory and logic, growing adoption in other market verticals and continuous proliferation of our new organic growth engines.

As a result, our backlog while exiting the second quarter reached a record high, enabling further visibility for the second half of 2022 and the first quarter of 2023. Our diversification efforts across markets, segments and products continues to bear fruit this quarter as approximately 80% of our revenues were generated by 10 different customers compared to just five in the same period last year. Furthermore, these customers are spread throughout four main territories, which contribute more than 15% each.

As discussed previously and after the CHIPS Act approval, we expect significant growth in the U.S. in the coming years with multinational and national companies investment in the territory. We're already seeing progress this year with a growing contribution from the U.S. that led to a record revenue this quarter.

Even more diversification is generated by our newest additional technology, the chemical metrology portfolio. The second quarter is the first in which we report ancosys results in full. We are encouraged by the integration process that led to a record revenue quarter and will drive a significant annual growth this year. In this short period, since the acquisition, we have already grown customer's interest in our chemical analysis products, setting in motion intercompany synergies to increase market share still this year.

Furthermore, the efforts to diversify our revenue mix with other market segments were validated by the recent selection of our XPS VeraFlex solution by a leading analog device manufacturer. Adopting these multiple tools enables the customer to measure vital parameters unsupported by traditional optical tools. We expect more cases like that as the fast-evolving back-end markets will start adopting more metrology steps as part of its developing technology to meet chip performance requirements.

Finally, and there is another example of our continuous efforts to differentiate our solution as part of a more diversified portfolio, we saw this quarter record sales from our software and Optical CD stand-alone platforms. The stand-alone platforms and performance were driven by the growing adoption of Nova PRISM in high-end memory as the whole segment is preparing for a larger chip structure with hundreds of memory layers in multiple stocks. PRISM is prevailing in this complex high aspect ratio devices where physical limitation prevent traditional optical tools from providing extensive deep measurements.

The software portion was driven mainly by growing adoption of our Nova FIT machine learning offering, which can now provide real process insight and foresight by connecting fleet different tools in different steps to learn the inefficiency and train the metrology platforms to detect changes in materials and dimensional anomalies faster and more accurately.

Highlighting the financial results for the second quarter and given our guidance for the third quarter, we currently aim to grow meaningfully this year as well, overachieving our previous expectations and setting another record outperformance year. With the company revenues exceeding $500 million over the last four quarters and profitability rates hitting the higher mark established by our planned business model, we can delineate this quarter the realization of our Nova 500 strategic plan, which cemented the fundamentals to support our future organic and inorganic growth.

The strong momentum we have demonstrated is a result of our ability to execute a clear long-term strategic plan, which was introduced in 2018. The plan was built on pillars of technology differentiation, increased revenue diversification and inorganic growth. Our performance in each pillar, including the progress in developing both organic and inorganic engines, our strides in materials and chemical metrology areas, increased capacity in all manufacturing sites and growing exposure to more customers and segments, it is paving the path to our next strategic milestone, which we'll be presenting in our upcoming Virtual Analyst Day on September 21.

Before summarizing the second quarter highlights, I would like to refer to the market environment and semiconductor demand as it relates to Nova's performance. Overall, we believe that the long-term semiconductor demand will persist driven by several elements, including end markets megatrends applications, complex technology transformations and semiconductor self-sustained geographical buildups. While we are monitoring the latest issues with some of the consumer market and IC prices, we continue our delivery plans to accommodate the strong demand for the rest of the year. Although, capacity growth is a major factor in our planning, we still anticipate various other catalysts in the next few quarters.

The other main contributors are the new fabs and greenfield customers in various territories, major technology developments in both memory and logic, increased metrology attach rates in advanced nodes, [indiscernible] of in-line materials metrology requirements, proliferation of new metrology methods, growing demand for back-end metrology and finally, market share expansion.

Those supply chain disruptions remain one of our main concerns. We've begun to see incremental improvement in lead times by our suppliers this quarter and therefore, expect to meet all our customers' requests during the remainder of the year. Nevertheless, we are closely monitoring the optional delay of other essential process tool suppliers, which may impact overall ramp-up of our customers.

With that, I would like to recap our second quarter results. Nova had a remarkable first half of 2022, setting multiple records against the backdrop of dynamic markets and then increasingly complex environment. As we consider our accomplishments in the second quarter and given our guidance for the third, we are striving to outperform the market once again and achieve another record year for Nova. As we aspire to continue our strong momentum in the market, we will announce a new strategic plan during our Investor Day in September, charting a course towards the $1 billion company in annual revenues.

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

[Dror David, Chief Financial Officer]

Thanks, Eitan. Good day, everyone, and thank you for joining our 2022 second quarter conference call. Total revenues in the second quarter of 2022 reached a record level of $142 million at the high-end of the guidance and representing 45% growth year-over-year. Product revenue distribution was approximately 75% from Logic and Foundry, increasing mainly due to adoption of Nova Technologies in additional logic segments such as analog and IDM and approximately 25% from memory.

Product revenues included three customers that contributed 10% or more each to product revenues. Product revenues also included four main territories contributing more than 15% each to product revenues, reflecting an expansion of semiconductor capital investments into additional territories and the company diversified positions across regions and customers.

Branded gross margin in the second quarter was 57% on a GAAP basis and 58% on a non-GAAP basis within the company target model of 56% to 59%. Operating expenses for the quarter increased to $43 million on a GAAP basis, including $2.4 million for a one-time revaluation of contingent consideration presented in G&A and $1.5 million influent amortization of intangible assets. These expenses are mainly related to the ancosys acquisition and are adjusted for non-GAAP purposes.

Operating expenses on a non-GAAP basis increased to $37 million for the quarter, reflecting the company efforts to align its global workforce and infrastructure with the current business levels. Operating margins in the second quarter were 26% on a GAAP basis and 32% on a non-GAAP basis, higher than the company target model of 26% to 29%. The effective tax rate in the second quarter was 14%.

Earnings per share in the second quarter on a GAAP basis were $1.09 per diluted share, significantly higher than our guidance for the second quarter. The main reason for this outperformance was the positive impact of a revaluation of operating lease liabilities in the amount of $3.4 million related mainly to favorable exchange rates of the U.S. dollar versus the Israeli local currency. This revaluation is adjusted for non-GAAP purposes and therefore, does not impact the company non-GAAP results. Earnings per share on a non-GAAP basis came in at $1.24 per diluted share, slightly higher than the high-end of the quarterly guidance.

Moving into our guidance for the third quarter of 2022. Currently we expect the following: revenues to be between $137 million to $147 million; GAAP earnings per diluted share to range from $0.89 to $1.08; and non-GAAP earnings per diluted share to range from $1.06 to $1.25. At the midpoint of our third quarter estimates, we anticipate the following: gross margins of approximately 57%; operating expenses on a GAAP basis of approximately $44 million; operating expenses on a non-GAAP basis of approximately $39 million; effective tax rate of approximately 13%.

Before I conclude my remarks, I would like to note the following: Nova's first half 2022 revenues increased more than 50% over the comparable half year of 2021, outperforming the capital equipment market and the peer group growth rates. The company's solid guidance for the third quarter of the year, coupled with elevated backlog levels, position the company to continue to perform well throughout 2022.

During the quarter, Nova's 12-month trailing revenues reached $510 million, marking the fulfillment of Nova 500 strategic plan. As part of this plan, we targeted gross margins of 56% to 59% and operating margins of 26% to 29% on a non-GAAP basis. Our results in the last four quarters were gross margins of 58% within the target model and operating margins of 33% exceeding the target model and reflecting the leverage built into the company operations.

We have concluded the execution of the Nova 500 strategic plan with approximately $500 million in total cash reserves, which allows to continue to build an aggressive growth strategy for the future and simultaneously to execute the share repurchase program, which was recently announced and initiated.

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

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, Dror. Following our prepared remarks, we would be happy to take your questions now. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Vivek Arya from Bank of America Securities. Please go ahead.

[Vivek Arya, Bank of America Merrill Lynch]

Thank you for taking my questions. I had a few actually. So first one, could you give us a sense for what the ancosys' contribution is this year, so we can appreciate the organic growth rate? But the more important part of the question is, Eitan, what is helping you outgrow WFE this year? Do you think it's more share gains? Or is it that the metrology aspect of intensity is higher than what you thought it would be at the start of the year?

[Dror David, Chief Financial Officer]

So regarding ancosys' contribution, obviously, we are not disclosing specific numbers, but we expect, on an annual basis, the contribution to be slightly higher than $30 million.

[Vivek Arya, Bank of America Merrill Lynch]

And then on the organic growth rate?

[Eitan Oppenhaim, President and Chief Executive Officer]

I'll answer it and I talked about it in the – also in the prepared remarks saying the couple of elements that we feel give us the tailwinds in order to outperform because everybody is talking about the capacity and demand, but we need to remember some other issues with regard to Nova: one is, the new product proliferation, which are very unique and are starting to propel well this year. The second thing is the material growth. We feel that the materials metrology growth is starting to be a significant one.

The third one is, as you said, the intensity in the – the intensity is growing. If we can see the process control growth this year versus process tools, we can see the process control is growing in a higher pace because of the complex transition in the technology nodes – in the advanced technology nodes.

And as I said couple of times the logic intensity grows at around 80% to 100% from node to node and memory is around 50%. So definitely when customers are moving to new node, we see a growth in intensity. And the last item is the development of new node, which requires new steps that the customer didn't require those steps before. For example, if we move now to either gate all around structure or you move to a memory structure, which is at three stock profile with 500 layers, of course, you need to start doing process control a bit different and it's adding some steps to the measurement.

And the last thing is, of course, market share. I marked it again in my prepared remarks, said that, specifically this year, as we see it, by the end of the year according to the orders we have and following the market share that we took last year, we definitely see a growth in the market share.

[Vivek Arya, Bank of America Merrill Lynch]

Got it. So my second question on gross margin. So it's clearly within the target model, Dror, as you outlined. But what's creating this decline on a sequential and year-on-year basis? Why isn't the strong demand environment and your pricing power able to overcome? Is this a mix issue? Is this an input cost inflation issue? Why are gross margins down sequentially and year-on-year?

[Dror David, Chief Financial Officer]

So on a quarterly basis, I would say that the fluctuations are mainly because of the mix of products and the portfolio. So that's on a quarterly basis. On an annual basis, obviously, this year, we are experiencing a lot of pressure on costs in all elements. It includes the bill of material, supply chain and also, obviously, infrastructure and head count costs. And I think we are in a good position where the combination of introducing new technologies and new features and new products together with the growth of the business of the company is able to significantly offset these cost trends.

[Vivek Arya, Bank of America Merrill Lynch]

Thank you.

[Operator]

The next question is from Atif Malik from Citi. Please go ahead.

[Atif Malik, Citigroup, Inc.]

Thank you for taking my questions. And good job in achieving the Nova 500 plan. We look forward to the next plan in September. Eitan, I have a question on your comments about XPS VeraFlex being adopted at a leading analog chipmaker. Can you talk more about what is end application? Is it in power management? Is it in MCUs? What type of devices are these? And who is the competition? And what is the incumbent technology? Because it sounds incremental. Thank you.

[Eitan Oppenhaim, President and Chief Executive Officer]

Yes. So let me just say that I would like to stay in the border of the competition and not talk about competitors. And I can talk about the segment itself. I think that when we're going to those devices, those customers are starting to use some of the methods in the front end. For example, the usage of either very thin film or very thick films, okay. And the structures are becoming similar to the front end. And therefore, you start to have some kind of vacuum with the traditional optical tools that have problems either in the ultra thin films or the very thick films.

And X-ray is specifically defined to solve this issue and therefore, in every analog device, the advanced one that we start to see in the market, has potential to be measured by the X-ray capabilities because otherwise it will be very difficult to measure.

Regarding competition, it's everybody is doing thickness and thin films. And if the customer would like very much to compete with that with any kind of destructive way, he can actually cut the wafer. But if you're looking on a real method like the front end guys are measuring the X-ray and specifically they express this is the way to measure. It's non-destructive and it gives you the right measurement in line.

[Atif Malik, Citigroup, Inc.]

Got it. And as my follow-up, can you guys talk about the impact from expanding U.S. restrictions on China at sub-14 nanometer and below if that has an impact on you? And I know it's early, Dror, if you can comment on, have you seen any impact from kind of the political situation in Taiwan where the ships and flights are being rerouted? Is that could impact your shipments to that region? Thank you.

[Eitan Oppenhaim, President and Chief Executive Officer]

Yes. So I will start with the first part and Dror will take the second part. So regarding the U.S. deliveries and the CHIPS Act programs, I think that we started to see the development lines for those fabs already this year. And we expect that next year we'll probably see more of those deliveries happening in both Arizona and Austin and maybe later on in the East as well. And definitely, we see also the other CHIPS Act programs that were established in other places like Europe, mainly for the automotive in Germany with some of the new joint venture that's starting to invest in chip manufacturing, also in Japan, in Korea, Taiwan and definitely in China.

Regarding the political issue with the trade war, as I said before, the – Nova is an Israeli company. So therefore, we are – continue to ship regularly to China. The only effect that we have is by the XPS tools that has been shipped from the U.S. Over there, we are working to get the export license for new products. We got the licenses for services. And if we want to talk about impact, it's just limited to SMIC in Shanghai, which, in any case, is not large volume of the business for the XPS.

[Dror David, Chief Financial Officer]

Yes, I would say that generally the financial impact of these limitations because of the reasons Eitan mentioned is really marginal. In terms of Taiwan, we did not see any impact to date because of the recent announcement. And I would just add that the way we look at it is that, the company needs to continue and expand its presence across the globe in all territories. And I think that the results in the second quarter, which evidently we had four territories for the first time accounting 15% or more adding one new territory, it's a significant one relative to the Korea, Taiwan and China in – historically. It's very important in terms of, I would say, managing and operating in these situations.

[Atif Malik, Citigroup, Inc.]

Thank you.

[Operator]

[Operator Instructions] The next question is from Trevor Janoskie of Needham. Please go ahead.

[Trevor Janoskie, Needham & Company, LLC]

Yes. This is Trevor on for Quinn Bolton. Thanks for taking my question. I'm wondering based on your conversations with customers, do you have any preliminary thoughts on 2023 WFE? And given your new product ramps, do you expect to outgrow WFE next year as well? Thanks.

[Eitan Oppenhaim, President and Chief Executive Officer]

So Trevor, thanks for the question. Obviously, we are not guiding beyond the quarter and definitely now in this environment it's a bit – we want to be a bit cautious about predicting what exactly will happen next year. But definitely when we look – we're talking with customers and looking on the demand for our products and based on our outperformance in the last few years, we believe and expect to outperform next year as well. And when we plan our $1 billion revenue strategic plan, we are planning on growth in all those years until we get to $1 billion. So, definitely, we are looking on growth next year.

[Trevor Janoskie, Needham & Company, LLC]

And as my follow-up, how many METRION tools do you expect per advanced fab? And can you quantify how much revenue METRION may contribute next year?

[Eitan Oppenhaim, President and Chief Executive Officer]

So if we go and look on all the metrology technologies, not only the METRION, because those are very complex tools. Always it starts with the measurement in the laboratory. After that, when the requirements are going higher, it moves to be one or two per fab. After that it become one or two per phase and after that it become in-line. So when we're talking right now on METRION and on the latest successful penetration that we have, we are talking currently on one or two per fab, okay.

And the next step after those customers will get the confidence in that, we'll move it to in-line tool. I want to emphasize again that those – every tools that we are bringing to the fab or to the customer is planned to be in-line. The target is to be measured on attach rates and grow together with our customers in the number of tools. So the METRION in the second step where it was moved to the fabs, it will start to see one or two out of them in every new fab, it's a high price, high value tool. So we expect to see couple of them on a yearly basis.

[Trevor Janoskie, Needham & Company, LLC]

Very helpful. Thank you.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Eitan Oppenhaim, President and CEO, for any closing remarks.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you all for joining us today. We look forward to seeing you all at our Virtual Investor Day on September 21. A press release on the exact timing will be published soon. Thank you very much and have a nice day.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.