Q1 2020 Earnings Call

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Good day, ladies and gentlemen, and welcome to theme for measuring instruments.

First quarter, two talked so much Brent Ti results conference call.

For your information today's conference is being recorded.

I'd now like turn the conference, which your host memories to go off and as I go. Please go ahead.

Thank you operator.

To everybody.

I'd like to welcome all of you know, but first quarter 2020 financial results conference.

Yeah. That's on the line today are Mr., Dan Oppenheim, President and CEO and Mr. drawer, David see if so.

Before we begin.

That's certain information provided on this call may contain forward looking statements.

It's harbor state.

Outlined in todays earnings release also pertains to be cycle. If you would not received a copy of the release please.

So relations section of the company's website.

I think we'll begin the call with the business update followed by drawer, we've been overview of the financials. We'll then open the call for the question answer session.

I'll handover the call Mr., Dan Oppenheim, Nova's, President and CEO.

Dan. Please go ahead.

Thank you Marianne. Thank you all for joining all first quarter financial results Conference call.

I sincerely hope that you and your families are safe and healthy.

These extraordinary dying times.

I would like also to extend my wishes to all partners suppliers and customers.

It was supposed to close today by speaking about all first quarter results and performance highlights, including our extensive plan.

To meet the Companys strategic target targets, they need the global spread with 419.

Wondering my commentary.

Totally viewed the quarter's financial results in detail.

And I want to conclude the Guy that concludes already with the guidance for the second quarter of 2020.

No one delivered strong results for the fourth quarter of 2020.

Both revenue and profitability exceeding the high end of the previously announced guidance.

These results demonstrate or sawdust execution capabilities.

As the window, so our joint operating models, which allow us to adopt quickly to volatiles markets conditions.

Or sound to choose mens in diversifying old customers and products in recent quarters. They love wants to successfully mitigate cycles in the different market segments.

Oh sustainable operating model and long term strategic objectives, we continue to provide us with a solid framework to meet our customers demand.

Even in these unprecedented times.

Before I discuss all performance highlights for the quarter I would like to share with you all main actions and priorities.

We're seeing the challenges caused by the spread of corporate 19.

Oh, well organized comprehensive plan is aimed at confidently navigating the company to market uncertainties in constant changes.

Collective experience in managing freedom delivery challenges in Israel.

Two other reasons and low dose these times do responding effectively to.

Well, they're voting situation by adopting Oh, well proxies disaster recovery plan.

Our plan is focused on four elements that have been implemented since the beginning of March.

First and foremost or support Yorkie remains the health safety and financial was being well for employees partners and their families.

You are complying with all caught in global Directv in order to prevent inspections and spread over the disease.

It's wonderful slots to respond.

We all for them to leaves remote working good range that's.

We were stick to work related swaps is [laughter] and limit this customer interaction.

Besides the house measures. We implemented we are also proactively offering financial support to all employees and partners that may be affected from dependent that makes economic on aftermath.

Second we took proactive measures to secure supply chain and visas discontinuity in order to meet customers very demands.

Although the Pandemics as a global impacts we have worked extensively to strengthen our supply chain, including quantifying your suppliers responsible for mitigation plan for on predicted the risks.

Part of this plan.

Also securing inventories and spare parts throughout the year and aiming to maintain food production capacity to mitigate volatility and shortage once the situation recovers.

This meet this may be reflected in the company inventory levels in the coming quarters.

Additionally, we have moved all our production team to work in Chile, and sleep disturbance isolated from the rest of the company with a clear mindset to meet any customer needs within a reasonable Lisa.

Stores.

Focused on strengthening the capabilities and expertise.

Well for original games and offices.

Let me talk some about local requirements.

Although we anticipate cross regions Robins to lives your what's really only in the third quarter, yeah, working closely with our customers to minimize the late in installing new products.

Finally, it's not what plays a major airports in the local communities around the globe.

We are proud to have more people is what I'm hearing initiative in various places.

Including medical equipment and funds contribution.

This is part of our corporate social responsibility policy and I'm proud of all the projects. We led in the last three months to support the fight against the Corona spreads.

Turning now to all performance highlights during the first quarter of 2020.

Oh performance continued to be supported by a diversified customer portfolio.

Which drove a box revenue mix between memory and foundry logic.

Our customer mix for this quarter comprises three major customer.

I think the largest found during the war and two leading memory customers.

During the quarter, we achieved a major milestone you know continued afford to strengthen our position with the top tier customers.

Following all press release, so may see if we are proud to have selected by the world's leading logic won't affect your voice global manufacturing sites.

The customer selected Novos optic custody solution.

Due to its unique combination of advance the hardware and software.

Moving to advance Dipstick I'll go with it.

You have already received well Dupont order and recognized initial revenues this quarter.

Following the strong customer instruction.

We had during the first quarter, we entered the second quarter.

Significantly improves book to Bill pace, driven by record quarterly bookings.

He said treatment.

Simplifies the important draws nobody nobody plays you know customers arent. These days in the most leading edge nodes.

As a result at decent portion of our revenue.

Came from customer investments in strategic development, which are more resilience to the current market volatility.

These encouraging milestones demonstrate solidly the contribution.

<unk> diversified product offering and bottoms customer mix brings to the company resiliency.

However, we believe this once markets.

40 recovers from depend on demick implications, our growing position will support our profitable growth plans in the future.

Let me now turning to our product portfolio and development highlights.

As we discussed in the last several earning calls we are in the process [laughter] well for introducing new dimension.

And material solution for their advanced Frontend semiconductor.

The first harbinger was the president will pick up platform.

Was introduced in the third quarter of 29 thing.

Since then we have conducted several of the valuation see moved honestly with leading customers and we are pleased to inform today. That's an issue on revenues were recognized already in the first quarter.

In addition to the Prism, we are extremely focused on introducing two new platforms.

It's aimed at converting laboratory techniques into semi conductor high volume production tools.

By nature.

Very long devaluation as they changed the way the customers are working and quantifying it though devices.

Although we see good progress with several seeds evaluations.

We are experiencing some schedule deviation.

Due to the coffee 19 restrictions, including customer sites installations and probably limitations.

In other meaningful what exports to mean to mention in regard to our product roadmap. He's all software and advanced algorithm development.

It's part of our strategic approach to answer more into the deep stick a couple abilities.

We are seeing increased adoption will fall machine learning and molding solutions in high volume manufacturing.

Currently our main investment is to bring together combined hardware and deep Tech solutions like machine learning Big data and adoptees training into the heart of semiconductor manufacturing.

You know what also lost wins, we proved that this combination allows our customers to tighten their process control improve in foster and shorten time to market.

Before I conclude my prepared remark.

I would like to briefly highlight some market dynamics and their relevance to know how to performance.

No. We are very encouraged by the business. They seem to first hospitals 2020, which is higher compared to the same period last year.

The the visibility for the second half is still though.

Despite several announcement of coffee 19 exit plan.

As you I neural.

The recovery pace and be might be demands behavior are still hard to predict.

Nevertheless, we still believe that in the long term.

Demand fundamentals remain solid and will continue fueling the markets beyond the extreme conditions.

Amplified by the current environment.

We believe that demand for enterprise and cloud applications will grow.

With the months for advanced data infrastructure in Fiveg ecosystem.

Summarize you're dealing with a challenging period.

Facing global uncertainties and freaking dynamic changes.

But against that holding back drop off dependent datamyx nobody has proven its ability to adapt quickly.

Without compromising either the safety off all people.

For the aggressive execution plan to meet those strategic goals.

Why do we should keep being prudent in our approach to the current economic environment.

We strongly believe in the Companys longstanding prospects.

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I would like to conclude my remarks will stay think again Oh main focus today.

Which used to secure the safety in house with all employees and their families.

While ensuring the business continuity of the company.

Now, let me hand over to close the door to review our financial results in detail door.

Thanks say time good day everyone.

Revenues in the first quarter of 2020 were 61 million exceeding the company guidance range for the quarter.

Revenues included revenue recognition of the first two sold to a new logic customer in connection with the selection when we announced several weeks ago.

Product revenue distribution was approximately 55% some logic and foundry and approximately 45% for memory.

Totaling an uptick in service revenues in the previous quarter service revenues into first quarter came in at the normalized level of 15.3 million.

Blended gross margin increased into first quarter of 20, 20% to 56% on a good bases and 57% or they don't get basis.

The increase in blended gross margins was attributed to improved product mix into quarter into higher service gross margins, which came in at 44%.

Operating expenses into first quarter of 2020 totaled 21.5 million Wanna get bases and 19.8 million when they're not get on the not get basis.

Gross R&D expenses were stable during the quarter, while R&D income came in at the normalized level of 1.5 million relative to 3.7 million in the previous quarter.

Sales and marketing expenses reduced significantly mainly due to a different regional sales distribution and related lower sales commissions.

Operating margin into first quarter of 2020 was 21% on the good bases in 24% when they don't get basis.

The effective tax rate during the quarter came in at approximately 16%.

Company profitability into first quarter of 2020 was better than expected. Despite the cobiz 19 influx.

This result was driven by strong demand for the company products, leading to our performance in revenues.

<unk> product mix and related gross margins for products and services.

And lower international travel expenses, which more than mitigated increased costs related to covina thinking.

Isn't resolved earnings per share in the quarter were 41, centsper diluted share on a good bases and 47 cents [noise].

Diluted share on the non get bases exceeding the high end of the company guidance.

Moving to the company outlook for the second quarter of 2020, we expect the following.

Revenues between 68 million to 66 million.

GAAP earnings per diluted share between 29 cents and 43 cents.

Non-GAAP earnings per diluted share between 37 cents and 51 cents.

At the midpoint of the second quarter guidance, we expect the following.

Blended gross margins are expected to be approximately 56%.

Given the called it 19 pandemic the company is working diligently to great backup resources across its global workforce.

In addition, the company is gradually increasing its supply chain commitments and related inventories in order to secure the ability to manufacture and deliver products and services as much as possible across different locations and territories. It throughout the year.

That's respect operating expenses are expected to increase into second quarter, two approximately 23 million on they get bases and approximately 21.5 million on they're not get bases.

The majority of the expense increases are expected in R&D and sales and marketing.

Gee any expenses are expected to reduce.

With that I will turn to called back to wake them he done.

Thank you draw we definitely will be pleased to take your questions operator.

Thank you, ladies and gentlemen, if he would like to ask a question at this time.

Please press the star or ask tricks case, all that but did you want on your telephone.

Please ensure that the mute function on your telephone is switched off to allow you signaled to reach our equipment.

If you find that your question has already been onstage you maybe moves yourself some to keep by pressing star too.

Once again, please press star one to ask a question.

Thank you My first question comes to say from Patrick Ho Stifel. Please go ahead.

Oh, Thank you very much and congrats on the nice quarter out look and glad to hear everyone's well.

Maybe for.

Oh, you eight Andrew or <unk> as it relates to cope with 19 can you give a little more color or some of the I guess supply chain <unk> trimming and parts procurement challenges you faced.

And and you didn't mention in your prepared remarks, some of the issue you try to do to mitigate it on a going for basis. What are some of the restrictions that are still a potentially kindermann you as you go into the June quarter.

Thanks project for the for the question so.

There are less fuel that for the fall into questions and I'll answer each one of them. So first of all regarding the production facilities.

The production facilities, we are.

We moved to work in chips and stuff there on the wrong the Clark.

So we don't see a any damage to any supply chain capabilities as a result from the production.

We did he is on our clean rooms and production facilities fold. That's we are.

During the up most in order to isolate those are those types of so nobody can enter and.

And they could damage or just to do something that we don't want. This is on the first live a second live in the supply chain.

So every plays that we thought that we have a risk we have you quantified already a second vendor.

Which is a very a challenging good discipline I've done it because if I've done it gives a affecting globally. So at the beginning we try to find.

Some sort says to the Chinese supply chain and also that we came back to China, but nevertheless.

We currently have secured the was endorsement to a the whole critical parts.

And therefore, we are pretty safe one that's we of course that having a risk management plan, where we tracing those that those suppliers and even offer them. Some financially help you know there for them to Ah to supply the.

The whole capacity. So this is the second one the third one.

As I said in my prepared remark indoor mentioned needs as well.

Are you probably see some are dynamic changes in our inventory going forward. The because our belief is that a the targets right now is to produce as many systems weekend in our production line.

Are you know the philosophy if their parents.

Good day, when everything will be finished so everybody will go to the same suppliers. So that's why and right now to secure as much inventory as we can until the end of the year.

So we will not be dependent on.

Any at Cornell meal any.

Any hate to that will happen doing this disappeared. So I think that did those three levers shoot secure.

The deliverables that we have for a until the end of the year.

Oh talking about that's willing to take it a with a very prudent approach that a that make it everybody everywhere.

So I, Dan Dell might be some supplies that we'll have Ah some hits and maybe it will delay some of their parts, but currently when are we looking at least for the next quarter, we don't see such a problem.

Great. That's that's really helpful. Maybe as my follow up question I was great to see the recent announcement of the wind by the logic customer obviously, that's a great penetration on your Iran.

Do you look at dish application opportunities you know given their strategy.

Using basically a copy exact formula across the globe.

What's your efforts now to get additional applications with this customer.

So I want to public I want to be very careful with my my answer because though we are.

Going to reveal anything or competitive lies with this specific customer.

But the I think that a it's a great achievements going over entering into this customer it was.

A real bottle for the last couple of years.

And the June into Crown was always getting in into the logic parts. Because we are partners these customers into memories.

So when we went in the logic side of course, we went in in a very challenging applications.

And we are now and we will be in the next couple of quarters.

A war King will discuss them as evaluating other applications as well what I'm, saying other application it's not the only helps because so this customer is very advanced in materials metrology as well.

And there is a match between the demand for these customers on the requirement to our portfolio.

So I'm pretty sure that we will see more application coming in on those city platforms.

I can look like now into strategic partners with this customer does that a lot of potential on that on the materials as well.

Great. Thank you very much.

Thank you we take our next question from Quinn Bolton also any time. Please go ahead.

Congratulations on the nice results and outlook in a challenging environment. One follow up on Patrick's question about the new customer sort of a couple of questions. There.

It sounds like.

The wins the applications were critical applications, but just wanted to confirm <unk> critical.

At this customer rather than chasing my critical and then a follow on you mentioned that.

We have multiple repeat orders from this customer just wondering or those orders scheduled for delivery later this year.

Those potentially further out.

Into calendar 21.

So green I will answer the first one indoor will take the second one so I can tell you know very shortly the this win is on the most advanced reduction application.

Well discuss them.

In the logic advanced nodes okay.

So it's not any R&D or a small when it's a win in the center of the activity and discuss them as production.

Not doing with until you regarding the daughters, Yes, we definitely a high clean we definitely expect a additional revenues Ah Ah throughout a throughout the year. Additionally, the delayed deliveries and revenues from disgusting.

Great and then just my follow up each on you'd mentioned the new.

Materials and dimensional technologies, we're facing some perhaps qualification or email delays just.

As a result.

I'm wondering if you might be able to update us on any expectations. When you think.

She's might be able to Rev. Rec is that something now that might push into the second half a year.

Worst visibility just trying to time, when those tools and new applications me Rev Rec.

So we're not we're not talking here on major delays. So I think that we can expect a them to be recognized into second into second half.

Great. Thank you.

Thanks.

Thank you we take our next question from Mark Miller Benchmark Company. Please go ahead.

Thank you for the question congrats on another good quarter.

And I'm glad I'm wondering what's been saying.

No.

Trying to get several more color on on revenues in particular.

In terms of software related.

Extra characterization related revenues can you give us a little more called the older ones rather than it was probably been trending <unk>.

So oh, obviously, we don't we do not break it down a the revenues for Oh, you know product line in general Doug revenues. This the first quarter wall.

A little bit more lenient or to the.

Softer revenues and exhaust products, which include a it'd be more oh product. So the high end with higher gross margins are we should remind that saw we have like target model for softer revenues to oh to become a up to 10% of our product revenues.

We hope that this year, we will be able to see a some growth in sulfur revenues than it already started a into first quarter.

Thank you well there's been some you know talk you more U.S. restrictions, especially shipping into China, you see that is having any impact from yourselves.

So there are a two things on that so first one is the is the the oldest extends all the previous a previous situation with its very door between the U.S. and.

In China, we are doing all we have a facility both in the U.S. and then as well and we must do restricted in the U.S. and we follow that.

That's a time there was the only one customer J.H. ice you'll see that was in the big issue from the U.S. administration to ship tools and we were banned.

I'm doing anything according to the federal rules are we just customer as well.

Nevertheless, there are leased a lesser restrictions on the Israeli entity and therefore.

We don't expect any.

Any kind of effect on that one day, everybody started shipping good equipment to China, we're definitely looking on learning and analyzing all the time.

The new rules coming from a coming from the U.S.

I just want us to say that ER.

I'd like to be able to put you into fourq to enjoy for more awards because we have less restriction is a therefore, we can compete more.

And as a result of this those with fiction, we might see more cynical dr. Fabiano U.S. and then we enjoy again. So I think that this is not then healthy situation, but I don't see an impacts on our strategic plans. Following those kind of for 16 and unless it will go into some kind of economic Oh.

Global economic crisis that will affect the whole semiconductor.

Thank you.

[laughter].

Thank you we move now to Chris Sankar of Cowen and company. Please go ahead.

Yeah, Hi, Thanks for taking my question that duals, Dan Swenson gift to pull up in your comments.

Is this further given that seemed to get words, the U.S. China relations.

So your.

Product line, which is the let's would be impacted not the optical CD line and then at Apollo.

Oh, yes.

Well, yes, so most of so actually tools all going out from the U.S. and they will have the older. Adults was six cents, we need to lend them carefully and they will have ever such unlike other U.S. based company.

Regarding the usually facilities. So these are they sort of facilities not to producing only helps because it is producing optical do is some of them are doing what they're some of them are doing thus it is.

Well, they usually there's I said before the Israeli facility is not.

Totally are obliged to or do they said to those old coming from the tradeoff.

Got it let's say helpful and then as a follow up.

They depart sorry, Youre. Your Q1 numbers you know goes the other we got how much of that was done like industry goes how much of Oh good books.

Again.

Can you repeat the question.

The March quarter revenue strength, you saw the yodle, we got to be since it was up 8% year over year, how much of that works the ministry good how much of it was from your share gains.

I I think.

I would assume that most of it is related to a either a new products or a penetration into new customers rather than being the suit girls.

Chris its eight on so a it's a stronger quarter in a very cyclical environments. So you can imagine that both the marketshare.

And the position of strength, sending a lot of doing this quarter. So you'll see like now the rest of resolves and I assume that decent portion.

The revenue, Okay, hi, there for a from selection to a strategic investment by our customers that are less.

Influence bye bye bye bye does but the core of it as well as a as as a great portion coming for marketers.

Got it thank we've done in Jordan congrats on the influence of themselves.

Thank you very much.

Thank you, ladies and gentlemen asked about nine Terry ask a question. Please press star one.

We don't take a question from Jason Smith, Oh snakes Chase. Please go ahead.

Hey, guys. Thanks for taking my questions. Just curious if you could quantify it'd be involved here I knew that was impacted in Q1 due care supply constraints.

So just one way or the impact that we see on to supply chains ours.

The most of it it's maybe delays from one quarter to an order so we don't see.

Any couple of anything that was damaged so far by the supply chain I think that starting from the crisis in China somewhere in January and beginning of February.

We started immediately to elevate all inventory and chasing after our suppliers.

They are suppliers that we buy Norfolk kept a alive and opened during the crisis in order to supply or.

Our <unk> production at a couple of entities and supply chain parts.

Well, there's some kind she some challenges into away.

But if I'm looking right now on the damages or some challenges as we head into first quarter just.

Delays that most of the second quarter I, we don't see any cancellation, we don't see any major all delays right now from the customer demand that we have.

Okay. That's helpful and looking at the Opex line understanding sorry, the moving parts in Q2 should we expect this or elevated level to be consistent throughout their major at a year or is this sort of a near term and then going back to more normalized levels.

No. So a as I mentioned that we are increasing guar I would say redundancies across the world to ensure delivery a and a customer presence. So I would say this is a new 11 any shoot 11, and you should see across the second half or maybe.

So low single digit growth every quarter or starting Q3.

Lets Indiana.

Thanks, a lot guys.

Thank you.

Thank you I'd now like to turn the call tobacco for Tim Mr. attain Oppenheim, President and CEO for his closing remarks.

Thank you operate Darren Thank you all for joining the call today.

I really hope that you and your families remained safe and state health in the next spirit by death, we conclude <unk> first quarter earnings call. Thank you very much.

Thank you, ladies and gentlemen that will conclude today's conference call. Thank you for your participation you may now disconnect.

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