Nova Ltd

NASDAQ:NVMI

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to Nova's Third Quarter 2022 Results. 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, Chief Executive Officer-MS-IR LLC]

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's third quarter 2022 financial results conference call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO; and Mr. Dror David, Nova's 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 a business update, followed by Dror with an overview of the financials. We will then open the call for the question-and-answer session.

Now I'll turn the call over to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, Miri, and welcome, everyone, to our third quarter financial results conference call. I will start the call today by speaking about our quarterly performance highlights and the market dynamics as they relate to Nova. Following my commentary, Dror will review the financial results in detail and present the guidance for the fourth quarter.

Nova reported another sequential gross quarter, advancing the agility and the expanding diversification we have built into our business model. Following the introduction of Nova's $1 billion plan and the strong execution of our targets throughout the year, we are confident in the company's long-term performance despite some near-term challenges.

Our achievements in the quarter and throughout the year were driven mainly by the unique value we consistently add to our customers and our growing position in the market.

Although, some of the traditional industry drivers like PC and mobile are showing some near-term weakness, we believe that long-term semiconductor demand will persist propelled by multiple evolving drivers, which are increasing the heterogeneity of the industry and its demand profile.

Since dimensional and material process control are becoming critical enabling factors for our customers, we continue developing our advanced metrology portfolio to capitalize on various horizontal and vertical emerging opportunities in the markets.

Our consistent outperformance in the last few years, driven by our unique organic engines and growing market exposure, support our expectations to continue our outperformance beyond the pure demand dynamics, which is a result of the near-term market cyclicality.

Specifically for the quarter our revenue result exceeded expectations and attained the high end of our guidance, including another sequential quarterly record, which represents around 28% growth year-over-year.

Our profitability outcome reached the top end of the guidance, reflecting the efficiency embedded into our operational model as revenue grows. Highlighting the financial results for the third quarter and given our guidance for the fourth quarter, we currently aim to grow revenue approximately 35% year-over-year overachieving our previous expectations while continuing to deliver strong outperformance versus CapEx and WFE growth numbers for the year.

During the quarter, we also held our Investor Day in which we discussed at length our new strategic plan to attain $1 billion in revenue in five years. The plan's fundamentals to achieve growth while strengthening our resiliency and agility were based on the company's consistent performance in diversifying its business across products, markets, customers and geographies. The achievement in the third quarter underscore a few of those elements.

First, the diversity of our customer base is well demonstrated by four major customers this quarter, representing our growing expansion in various leading players. Furthermore, the overall customer mix includes contribution from over 20 active customers across geographies, territories and even new industry segments like advanced packaging, back-end and PCB.

The second element is the continued diversification of our product portfolio and the adoption of new technologies. While we continue to proliferate our traditional OCD products and set new integrated metrology sales records, we also see growing traction with our new organic growth engines.

During the year, as well as in Q3, we continued the momentum of our SI technology and delivered a growing number of PRISM tools, both for R&D and high-volume manufacturing for critical 3D applications.

Today, we see that the PRISM capabilities are garnering more advantages as high aspect ratio applications become more challenging, specifically in Memory where SSD layers are added; nanowires, where 3D structures are fabricated; and TSV formation in front-end and back-end steps.

Since acquiring ancosys and based on our growing focus to lead the materials metrology space, we are encouraged by the solid contribution of our materials portfolio to the overall revenue mix this quarter.

While we continue moving our next-generation XPS tools to in-line and in-die measurements, we continue focusing on proliferating the METRION and ELIPSON systems to additional customers. Specifically, I would like to highlight, as shared in the press release during the quarter, that another Logic manufacturer selected Nova's METRION for next-generation IC development.

As part of our material strategy, we are also encouraged by the substantial progress in ancosys product portfolio introduction in several markets. Based on our Q4 guidance, we now expect a record year for ancosys, creating multiple growth opportunities for next year as well.

The third area to emphasize in our diversification strategy is the hardening demand in trailing edge nodes and Nova's solid positions in this segment. While some IC markets are softening, automotive, IoT and industry-related applications remain stable.

The continuous demand for mature generation devices drives new expansions to fulfill the demand. Nova is well positioned to capitalize on the growing opportunities among these customers whose contributions represented around 50% of our revenues in this quarter.

And finally the last diversification highlight is the growth in our service revenue contribution. Turning over 4,700 active tools to date in our installed base, Nova continues to develop and offer our customers a portfolio of services ranging from ongoing support to new upgrades and productivity packages to keep improving utilization rates, metrology accuracy and fleet matching. As a result, revenue contribution from services is expected to grow approximately 30% this year.

Before I move on to the market environment and its relevance to our business, I would like to address the latest export restrictions announced by the U.S. government. In October, the U.S. government issued new regulations to restrict some aspects of the U.S. semiconductor trade with China.

The regulations are mainly related to export control for advanced nodes in both Memory and Logic. As we continue to evaluate the impact of such restrictions on our U.S.-based activity and global export conditions, our initial assessment is that the direct impact on Nova's overall business plan for 2023 is marginal and estimated at around USD 10 million in direct revenue, mainly from our U.S.-based operations.

As the foreign wafer fabrication entities in China acquired their temporary license to continue manufacturing, we continue to carefully monitor domestic customers' investment plan going forward.

Furthermore, while the Chinese market becomes more volatile due to the new trade restrictions, we are encouraged by our growing business in the U.S., which demonstrates significant growth year-over-year. We anticipate this growth to continue next year as well, propelled by both new fabs and new expansions.

Finally, as we look at the industry demand environment, although our long-term growth forecast for the industry remains intact, we expect softness in the near term due to excess inventories driven by a slowdown in consumer electronics demand.

The impact on semiconductor pricing, particularly in Memory, along with other economic and geopolitical factors is driving our customers to be more conservative in the near term.

Although we are monitoring these trends carefully and increasing agility in our operating model, over the last few years we have consistently demonstrated our ability to outperform the industry by proliferating our new technologies, expanding diversification and market share gains.

Considering all aspects, we remain positive about the company's long-term growth potential and reaffirmed the strategic target we introduced on our Analyst Day in September.

With that, I would like to recap our third quarter results. Nova had a strong quarter against the backdrop of a dynamic market and an increasingly complex environment. Given our guidance for the fourth quarter, we are striving to achieve another record growth year for Nova.

We believe that the company fundamentals that were strengthened this year will support us in continued outperformance in an overcoming interim demand cycle in the years to come.

With that, let me hand over the call to Dror. Dror?

[Dror David, Chief Financial Officer]

Thanks, Eitan. Good day, everyone, and thank you for joining our 2022 Third Quarter Conference Call. Total revenues in the third quarter of 2022 reached a record level of $144 million, up 28% year-over-year.

Product revenue distribution was approximately 65% from Logic and Foundry and approximately 35% from Memory. Product revenues included four major customers and three main territories contributing more than 10% each to product revenues. Blended gross margin in the third quarter was 57% on a GAAP basis and 58% on a non-GAAP basis within the company's updated target model of 57% to 59%.

Operating expenses for the quarter were $43 million on a GAAP basis and increased to $38.5 million on a non-GAAP basis. Operating margins in the third quarter were 27% on a GAAP basis and 31% on a non-GAAP basis at the high end of the company updated target model of 27% to 31%. The effective tax rate in the third quarter was approximately 13%. Earnings per share in the third quarter on a GAAP basis were $1.10 per diluted share, and earnings per share on a non-GAAP basis came in at $1.24 per diluted share.

Moving into our guidance for the fourth quarter of 2022, we expect to see a strong finish for an exceptional year, led by the company diversified exposure to multiple customers, geographies and manufacturing technologies.

Revenues are expected to be between $142 million and $152 million. GAAP earnings per diluted share are expected to range from $0.99 to $1.16. Non-GAAP earnings per diluted share are expected to range from $1.15 to $1.32.

At the midpoint of our fourth quarter 2022 estimates, we anticipate the following: gross margins of approximately 57%, operating expenses on a GAAP basis of approximately $45 million, operating expenses on a non-GAAP basis of approximately $40 million. Financial income is expected to increase due to expected higher yields on cash reserves and come in at approximately $2.5 million. Effective tax rate is expected to be approximately 13%.

Moreover, including our fourth quarter guidance, the company is expected to present the following annual results on a non-GAAP basis. Annual revenues of more than $560 million, reflecting CAGR of 20% across the last five years and reflecting yearly revenue growth of 35% or more in 2022 relative to an expectation of single-digit wafer fab equipment growth in 2022. Gross margins of approximately 58% and operating margins of approximately 31% on an annual basis.

As conclusion to my prepared remarks, I would like to note that the company management is closely monitoring the different scenarios of market demand and customer investment plans for 2023. To mitigate these different scenarios, the company can activate several mechanisms, which can restrain expenses as needed.

In addition, the company cash reserves grew to over $500 million at the end of the third quarter of 2022. This healthy cash level allows us to continue and execute aggressive growth strategies and infrastructure investments as part of the Nova $1 billion strategic plan as well as to execute the $100 million share repurchase program, which was recently announced and initiated.

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

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you, Dror. Our prepared remarks are now concluded. We would be happy to take your questions now. Operator?

[Operator]

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

[Sachin Jain, Bank of America]

Hi, thanks for taking the question. This is Sachin Jain on behalf of Vivek. Congrats on the quarter. I know you said you outgrew WFE in 2022. But for next year, there seems to be a difference between a lot of your peers. KLA and Lam suggesting that it's going to be down 20%, whereas ASML is suggesting their sales can grow. So which one do you think is more indicative of your performance next year? Thank you.

[Eitan Oppenhaim, President and Chief Executive Officer]

Thank you for the question. As you know, we don't guide beyond the current quarter. And in this current environment, in this current timing, it will not be so responsible to forecast the full year.

I can relate though, to the market environment. And as I said in my prepared remarks, we are expecting volatility due to softness in Memory, which, by the way, we think will start to normalize and recover in the second half of 2023, where the demand will grow along with price stabilization.

As mentioned a couple of times in my script, the agility and diversity that we have built in our business model, along with the adoption of our newly introduced technologies and the growing expansion in several markets should support our consistency and outperformance beyond pure semiconductor demand.

I think that if we look at Nova, there are – besides the pure demand calculation, supply-demand calculation, everybody understand is volatile next year. We're also benefiting from some expansions in R&D line, some new fabs that are coming in play penetration into the materials world with new technologies as well as expanding our portfolio to other markets. So overall, we think that we are more resilient to the market volatility. And as I said before, we hope to outperform the market.

[Sachin Jain, Bank of America]

Great. And as a follow-up, I know on the Analyst Day, you mentioned services will be on track to reach $100 million this year. How resilient is that business into that downturn next year? And also, thanks for the color on the $10 million from the Chinese restrictions impact. Have you noticed any cancellations or order push-outs with regards to that?

[Dror David, Chief Financial Officer]

So regarding the services, obviously, the installed base of the company is growing. We currently have approximately 4,700 tools in service installed base, and this will continue to grow in Q4 and the following quarters. And as a result, we continue to expect to see growth in service revenues also in 2023.

[Eitan Oppenhaim, President and Chief Executive Officer]

Now regarding the second part of the question about China. So it's – when we're looking right now on the Chinese markets, we look on the on the straight restriction that came from the U.S. in regard to advanced nodes in both DRAM, Flash, NAND and also the Logic. And our estimation for those restrictions that are coming out from the U.S., because this is the restriction that we are part of, is around $10 million. This is the direct one.

Basically for our XPS tools that are shipped from the U.S. We don't have any currently direct impact on the rest of the shipment. Nevertheless, we cannot estimate right now if something will happen indirectly. Meaning if, for example, other process tools cannot ship their tools, and therefore, some of the line will be slowed down, and therefore, they don't need metrology. This one, we cannot estimate currently the impact.

I just want to say that most of the revenues of the company in China are coming from trailing nodes that are not part of the restriction on advanced chip manufacturing. So overall, we think that the overall impact on the company will be anyway marginal.

[Sachin Jain, Bank of America]

Great, thank you so much.

[Operator]

[Operator Instructions] Seeing that there are no further questions in the queue, I would like to turn the conference back to Eitan Oppenhaim, President and CEO, for closing remarks.

[Eitan Oppenhaim, President and Chief Executive Officer]

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

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.