Q2 2020 Nova Measuring Instruments Ltd Earnings Call
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Greetings and welcome to know by second quarter Twentytwenty results Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Mirror Seagal and that's IR. Please go ahead.
Thank you operator, and good day to everybody I would like to welcome all of you didn't know, but second quarter 2020 financial results Conference call.
Yeah. That's on the line today are Mr., Dan Oppenheim, President and CEO and Mr. drawer, David Yes.
Before I begin may I remind our listeners.
Information provided on this call may contain forward looking statements and the safe Harbor statement outlined in todays earnings release also pertains to this call.
Not received a copy of the release please.
That's a relations section of the company's website.
Eight and we'll begin the call with the business update.
By drawer with an overview of the financials. We we'll then open the call for the question and answer session.
Now handover the call to Mr. Aten Oppenheimer Nova's, President and CEO eight gun. Please go ahead.
Thank you Mary and welcome everyone to our second quarter financial results going from school [laughter] wouldn't be office all foreseen overall, we hope both you and your family's I'll say Sanofi.
It's a bit of all the time period.
I extend this which is also to our employees fourth nerves suppliers and customers.
I will start the call today by speaking about our second quarter results, including the latest update there both our continuous exports to meet the company's targets.
I mean, there's various global uncertainties.
Following my Coleman three role is you will just financial results in details and will conclude with the guidance for the third quarter.
Despite several challenges, including the spread of corporate 19, and other geopolitical and macroeconomic disruptions nobody delivered strong financial results in the second quarter of 2020.
Both revenue and profitability.
Our guidance and significantly outperforming the same period last year.
Although the environment to students Louise we currently expect the strong demand for products combined with several meaningful share wins, we've had during the first half of the year.
Good position 2020, as a growth year for Nova we sold its momentum expected to continue also into 2021.
This is a clear demonstration of our execution capabilities and agility to adopt quickly to fast changing markets.
Despite these actions during the last few years to diversify all products customers and geography has continued to support all going to resiliency. During this period and fell below plans to a marriage, it's a stronger partner once the environment to stabilize.
We're very proud of our ability to compete and I'd once that's wrong strategic opportunities, especially through this period when our teams are aggressively investing in gaining market share and securing soda girls.
In spite of the continues to struggle with the spread of corporate 19, and as a result before employees in education and outstanding airports, we managed to quickly ramp up our production lines and development capabilities to respond to be mindful ability and fostering just seem to semiconductor market.
Since we expected the virus is here to stay for longer periods in the field visits needs. We have changed all working procedures to ensure employee safety at all times high production capacity supply chain resiliency and customer support continually.
We have adopted protocols to continue to work from home hybrids methods for as long as needed without a disruptive sorry without disrupting any will fall business, so what mob development targets.
Our aim as demonstrated in the last two quarters used to continue executing goes to future goals. Despite the drop it changes.
Beyond the Coleman measures, we have taken to fundamentally change out working that towards we're also focusing on strengthening our local entities in order to continue servicing to all global customers and capitalized on various emerging opportunities.
Oh plan to increase production capacity specific it in this period you start good that to accommodate the supply chain disruptions as well as customers demand for shorter lead times.
As a result, we may experience some inventory volatility during the next few months, yet without changing our longstanding operational model.
Our confidence in our new product portfolio and our ability to transform short term pipelines into long term growth engine dictate our operational goals currently independent of the current in Threem disruptions.
Turning now to all business highlights in the second quarter of 2020, all performance continue to rely on breadth and depth.
Well for customer mix, which was driven by five major customers, including three foundry logic customers and two large memory providers.
That's reflected in our customer mix, we're very proud to achieve two new share wins with both on a stand alone and integrate the doors in China.
This mix of customers highlights the growing demand for solution in both memory and logic, which is affected by going to be mindful not to devices as well as for a wide range well for logic devices.
Starting from Foltene, sorry, 14 nanometer all the way down to three nanometer.
This outcome represent the overall positive momentum in the semiconductor industry that is dictated by the coffee 19 implication on the way we work communicate their rocks stream data and rely on remote applications.
You know service business you expected, we are expecting meaningful gross you see here as we continue to offer blocks if service packages to our customers to improve their installed base for the activity and mythology couple abilities as well.
Beyond revenue contribution contribution from service contracts and time and material services, Oh God used to significantly increase the overall contribution from value added services without developed specifically for our customers, enabling them to better utilize the aging in.
Told base and to extend their lifecycle.
Finally for this part I would like to mention again, our strong operation on the margin, which is the basis for continuous growth and ability to invest in our development roadmap, even when facing uncertainties.
The volume fall products, along with no what's unique offering and efficient manufacturing capabilities support all profitability more dead and all reflected the no strong cash flow generation during the first six months of 2021.
Which was much higher compared with the same period last year.
Embedded in our strategy. This guess <unk> cash position should accelerate our organic and non organic blends specifically in this period.
That's I mean I'll provide some highlights as for all products portfolio and roll them up development progress. The first highlights to mention is our announcement from July 27, it both new additions to our optical CD integrated solutions.
The need for better in die and in waste dermatology performance in the most advanced logic and memory nodes is converging, we double digits needle sheep into integrated metrology market and supporting our aggressive future roadmap.
Thanks partnership with customers and our leadership position, where boss well both reflected strongly in the second quarter with record high revenues for integrated metrology across all the front end segments.
Then you announced platforms the ice fiveseventy enough Sarah extends nobody leadership and integrated metrology process control and targets the development and manufacturing of next generation I see architectures.
Then over sterile platform. He was the first of its kind in the industry providing stands at one level performance in a kolpak phone Sox door or integrated metrology.
The new platform utilizes multi channel measurements, providing the best solution in the market intermodal accuracy decision close to two matching and extend of entity.
The flat told me is targeted to support the development of next generation device technologies beyond three nanometer logic.
And to 56 layers will do decks, we do not nodes and as such is expected to enter the market over the course of the company in years.
Through R&D line first.
The second new solution is no value Fiveseventy single channel and so you seem to China. That's all that's all.
Which is in the center of Snowbirds mission.
The integrated metrology market leader to provide the most reliable and highest performance integrated metrology platform solution for high volume manufacturing subs.
The New addition offers the highest throughput in the market supporting the new Foster CMP polishes, and new ventures, allowing better we didn't away server creation controlled by measuring by measuring more sites is what is reinforced waste or measurements, but did you.
Do seem to this got phones nobody expense its leadership position by offering a wide range of integrated solutions from single John that didn't seem spot solutions.
Thank you John is Oh, C.D. complex solution for CMP deposition and etch.
With this announcement for new integrated metrology platforms, and along with the new President stand alone All city markets Rollouts and the new technologies that are evaluated currently indices the by most people customers.
We are planning to enter 2021.
With a completely differentiated and unique portfolio that was supports the expenditure for a total served and event a bit of markets going forward.
As part of all the strategy.
At the heart of the technology roadmap would continue to invest in enabling software technologies that supports innovative hardware development.
The main airports in this part.
Our to embed more deep steps capabilities in our solutions, including machine learning.
Big data and adaptive training.
Although latest product announcement includes an element of advanced software engines to enhance hardware couple abilities and overall mythology performance.
As a result of this airports, we received a significant order for my logic customers.
This quarter to enhance their entire new installed base with a complete machine learning solution that allows them to tighten process control schemes improved yields foster and shorten time to markets.
Before I conclude my prepared remarks, I would like to briefly highlight some market dynamics and their relevance to another performance.
No. We are very encouraged by the business space in the first half and they improved momentum towards the second half of 2020, which is significantly higher compared to the same period last year.
We remain watchful for possible changes seemed to market and their effect so novel.
As for the current demand characteristics, we believed that the global pandemic ended changing in social behavior. It does create it is dictating.
It will accelerate key long long term technology inflections.
These changes are driving investment mostly in cloud based services.
That's communication ecosystems to allow better streaming in video calls.
Going to need for automation and in <unk> and they are.
So on good compute power and memory capabilities in every device.
These Isaac.
Application Rice technology enhancement in both logic and memory and create a solid demand for more mythology control.
Although coffee 19 will continue to present, some challenges and fluctuations we still believe that all.
These three years.
Creates a compelling event for solid wses spending in 2020 and 2021.
To conclude we delivered strong results for the first half of 2020.
We are guiding this third quarter two continue performing at the same elevated levels.
Well see positive momentum you know exports to gain market share expand our available markets and roll out new technologies.
These soundly demonstrates the contribution that dollar diversified product offerings.
And strong customer Grace bring to the company resiliency, which in turn drives our ability to adapt quickly and perform well even in challenging periods.
Although we've yet to know the full impact of copied 19 on global economies will still be leaving the long term semiconductor technology innovation and the significant opportunity present to Nova in the long ones.
Now, let me hand over the cold to draw to review our financial results in detail girl.
Thanks, eight on good day everyone.
In the second quarter of 2020, the company continues to perform well.
The financial results met expectations and company guidance, despite the turbulent global carbon economy environment caused by the topic 19 condemning.
Total revenues into second quarter of 2020 were 62.6 million, 3% higher than the previous quarter and 22% higher than the second quarter of 29 Kim.
Product revenue distribution was approximately 70% from logic and foundry and approximately 30% from memory.
Service revenues grew sequentially and came in at 15.5 million.
Geographically product revenues were well distributed between the major semiconductor manufacturing territories with approximately 30% of product revenues generated from each of the Taiwan Korea and China.
On a per customer bases, five major customers contributed 10% or more to the company product revenues, including two local Chinese manufacturers.
Blended gross margins significantly increased sequentially by more than 220 basis points on both GAAP and non get bases in came in at 58% on the get bases and 59% on and on good basis.
The increasing blended gross margins was attributable to improved product mix in the quarter, which led product gross margins to increased to 64%.
Why services gross margins remained at higher than use your level of 44%.
Operating expenses into second quarter of 2020 totaled 26.3 million on a good bases in 21.5 million on a non-GAAP basis.
Gionee expenses into second quarter on a good bases included a onetime expense related to an incident in which a financial institution use by the company for certain financial transactions.
Doubts company funds without company authorization.
These wire transfers were executed based on instruction given by fraudster directly to the financial institution.
Based on U.S. GAAP accounting rules. The company was required to provide a onetime expense for their relate to the mountains in the second quarter financial reasons.
The company's taking appropriate measures with the relevant parties to fully recover the fraudulently transferred the amount.
The related amounts were adjusted for the presentation of non-GAAP financial results into second quarter of 2020.
Operating margins into second quarter of 2020 came in at 19% on the get bases and increased to 25% on a non-GAAP basis.
Second the tax rate into quarter came in at approximately 19% on a good basis.
Earnings per share in the quarter, where cert worth 30 cents per diluted share on a good bases and 48 cents per diluted share on a non-GAAP basis.
Moving to the main balance sheet items trade accounts receivables reduced by approximately 11 million as a result affective collection during the second quarter.
Days sales out to came in at 72 days.
As expected the company recognized higher than usual inventory levels due to business continuity measures taken as a result of the copied 19 fund them.
We expect to continue to gradually increase the company's supply chain commitments and relate to the inventories in order to secure the production and delivery of products and services as much as possible across different locations in territories throughout the year.
Inventories at the end of the second quarter accumulated to 56.6 million with inventory turns of two times a year.
During the second quarter, the company generated 19.1 million of operating cash flow.
Accumulating to 32.5 million positive operating cash flow into first half of 2020.
Free cash flow into same period. The first tonsils 2020 was approximately 30 million representing a healthy free cash flow generation of 24% of total revenues.
As a result overall cash reserves at the end of the second quarter accumulated to 218 million dollar.
11, which will enable the company to explore different business opportunities during the coffee 19 global pandemic crisis.
Regarding the company outlook for the third quarter of 2020, we expect the following.
Revenues between 58 million to 66 million.
GAAP earnings per share between 25 cents and 39 cents.
Non-GAAP earnings per diluted share between 34 cents and 47 cents.
At the midpoint of the third quarter guidance, we expect the following.
Blended gross margins are expected to be approximately 58%.
Given the copied 19 situation the company continues to build a backup resources across its global workforce.
In parallel we continue to focus on introducing and proliferating new products globally.
In death respect operating expenses are expected to be approximately 25 million on the get bases into increased to approximately 23 million on a non-GAAP basis.
Most of this expense increase is expected in R&D expenses.
The effective tax rates are expected to be similar to the second quarter of 2020.
With that I will turn to cold back to eight then you done. Thank you are there or would that we will be pleased to take your questions. Operator. Please.
Thank you.
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Just a moment hello, everyone and opportunity to signal for questions.
Well take our first question from Charles She from Needham. Please go ahead. Your line is open.
Hi.
Anytime youre congratulations.
Next week.
Two questions first stop.
Oh, how <unk> recently.
And then.
<unk>.
Well.
View.
Impact.
Yes.
Absolutely.
Right.
No reason.
Thanks for the question so regarding regarding to.
The the big logic or customers that we.
But we announced I think that in our business small, though the revenue proliferation coming from this they've gone too far these here.
And what to grow gradually next year and we took into account the seven nanometer will start.
The investment the Reinvestment Act you will talk next year.
So it's embedded in our plans, where we thought and we plan that will have fuel systems going and it's a this year and then more system going in next year when they start ramping up the seven nanometer.
All Dole.
Dale one off the customers for this technology, we have other customer that they're using it to the present, we always said that there are multiple installations with this tool for standalone in both memory and logic. Therefore, we still expect a multimillion revenues from this still this year.
Oh, yes.
Thank you. Thank you very much any impact I mean on the same logic customer to push out.
Any impact on the new technology.
I know you got new technologies not being evaluated.
Uh huh.
One coffee cost impact.
Are you still expecting.
[laughter] this year.
Well so as we said the last the last quarter and we continue talking about the new technology is the.
We said that there are three things right. We said that there's a prison, which we just talked about and we settle down there are two more technologies that are being evaluated with leading customers.
And they are evaluated in customers, which is different than this specific logic customer. So we don't see any disruptions into the acceptance process because of this delays.
Actually if.
It's just the fact wouldnt be proven tools that the capacity of this logic customer going to another leading foundry then we'll enjoy for that formed that even more with the new technology next year.
Great Great Great and then one last question from me.
No we saw.
Revenues.
I haven't percentages company.
Going into the third quarter do you what is the general trend line here do you continue to see.
Hi.
<unk> percent miners.
Just the reason why.
Is it came out a yesterday ardently Oh I've guided.
Got it.
Well go up sequentially, I wonder, whether you're seeing things that trend here.
Okay.
So it's a as we've talked to many time the bulk of the diversified portfolio, we have and the customer mix, which is bonds between memory and logic foundry.
Thing that what we saw in the last two quarter was starting with the we then even portfolio then because of the leading foundry that went into five nanometer. We started to see growing good revenue for them at some foundry and in the third quarter, we expect to see that we will have some fee.
Laundry gross mainly from China.
Which will which will.
Moved their portfolio to being much more or more weight that into the foundry. Nevertheless, when are we looking on on the fourth quarter. We thought we starting to see that a the mix is starting to be even to distribute that because of the non recovery in the market and more orders coming from that from memory customers.
And as you.
So we see that as a your nicely we look at the end of the are probably will say that it will I would probably be at around 60% foundry 44 cents memory and 2020.
Thank you very much.
Thanks.
Well take our next question from Jason Schmidt from Lake Street. Please go ahead. Your line is open.
Hey, guys. Thanks.
Questions just make sure.
Correctly I mean, you guys are still anticipating some supply chain disruptions in Q3, and if that's the case just curious.
Good.
Apart or quantify what sort of headwinds you think that is impacting this quarter.
Oh, sorry, I want to clarify Jay Tsongas, we said that Ah, we said that on the on the second quarter, where are we had to secure our supply chain disruption and therefore, we continue to ramp up our production lines, but we don't see and me a any disruption or beyond what we also will already saw.
In the last few months, saying to coming quarters. So we don't see it is an issue.
Okay. That's helpful.
Yes.
Service gross margin.
Elevated here.
The level, we should be thinking about going forward.
So as you know our models for service gross margins is a 40% and ER and above a I do believe that into third quarter.
Margins for services trending a little bit down to the 40% level.
And again in order to balance between the need to have a very good ER.
Service level to our customers in terms of Ah availability of free services and headcount at customer sites and for stability. Our model. It remains 40% and this is what you should expect I'm looking forward.
Okay. Thanks.
Thank you.
I will now take our next question from Patrick Ho from Stifel. Please go ahead.
Well, thank you very much and congrats on nice quarter, maybe following up on the Sharon's question you got posted strong results in that business given to cope with 19 environment.
What changes how are you, suggesting or are you doing more with most type of quote services to help your cluster news out.
Given some of the restrictions there still out there.
Given the strong revenues and the margin profile what efforts have you taken here to continue to growth in that business segment.
Perfect. Thank you for the question and now I'm not thinking that there are two levels to this on so the first level is that a navarre during the last few years.
Thanks, and a lot to then dependency on for the local entities. So we are very much in dependent on their capabilities to Ah to sell service market our equipment sold in their regular mainstream products. We don't see a neutral we discovered 19 as we don't need to fly anyway people to support.
This a this products.
And the main a centers in Korea, Taiwan, China, Japan or are very strong entities on top of that when we started the coffee do we think then even more the technical capabilities of this over this groups with ER with extra spare parts extra people and things like that because we understood. It will.
Next time when people would come back to a regular flights.
So in that respect we didn't a we're not worried then maybe it's going according to a two up to our strategic plans and everything is okay.
We did see at the beginning this is the second level, we did see at the beginning some disruptions to the new products and the new technology that we are the two of providing to our customers because we have multiple evaluations with a new technologies and we'll give others relation with the prison and a new integrated which required some support from their headquarters Ida U.S. or or as well.
And that's matter, we adopted everything that is needed in order to do remotes. So.
Even the customers are open up a bit more the the IP restrictions in order to have remote access. So every everything that can be done were mostly it's been done remotely and they send it to death, we adopted a some standoff Oh, Oh commences reality couple abilities, so where we have people into headquarters.
Good thing and I have all this event at the reality to activate the system from remote and it's it's been proven as a good.
Interface, we don't systems. So we are going to adopt it into future as well so beside the fact that we had to ramp up a bit the different approach to their remote DOCSIS will see like now that in the in going into the third quarter, we don't see almost any disruptions because of service capabilities not to the not too big.
This thing installed base, and then existing tools installations as well as the new technology evaluation.
Great. That's really helpful. Maybe as my follow up question you had a business in China also continues to increase and diversify and expand you have both memory and foundry logic customers, maybe on the foundry logic and there's a higher mix in China.
I know right now trailing edge type of capabilities versus the leading edge, where you've made a lot against <unk> in other regions can you maybe give a little bit a qualitative color in terms of you know the opportunities on the trailing edge side.
Given that in China itself. The advanced technologies are somewhat limited you have said so one player today.
Well we are we are.
We didn't break down the foundry logic or logic segments into a trailing edge and that's one small to what I talked about it in my prepared remark where.
It can be understood that a there is a major portion of their foundry capacity and the contribution of revenue this coming from trailing nodes and by the way, it's China would a with a two to three Nigel customers over there it's got to boosted the because of the of the trade war with or would the U.S.
And it's coming also from the leading foundry that you'd that investors also in a in this trailing nodes mainly in 28. So overall when we look like now on the capacity or fundraising into in the second quarter and will it will go.
Through the third quarter as well, we see a wide range of expansions coming from 28 Tonami, There's all the way to fixed in 14, and even seven and five so it's it's a mix range of capacity coming from from foundry of course that the major or.
That's a team led by a but by Taiwan with advanced nodes, but in the rest of the of the region. We see a mixed notes coming from the threatening trending now I can say that in the last few met few months.
Because of the political situation in the U.S. coming into November and also the tradeoff between the between the nations are we starting to see more investment in a in the Chinese low cost or domestic foundry customers to start ramping even advance nodes like then answer.
I don't know meter.
So this is overall that makes the foundry.
Great. That's very helpful. Thank you very much.
Thank you for us.
And just as a reminder to ask a question Eddie's Star bond.
We'll now take our next question from Mark Miller from the Benchmark Company. Please go ahead. Your line is open.
Well I want semiconductor announced that they were increasing their capital.
Capex budget by about a billion dollars.
We're also planning a new fab in Arizona or you're starting to see increased traction there I know that's what we spent a major customer or some of these.
Plan starting to show up in your waters.
Yeah. It's also a we do see if we if its right to anticipate the end of the year 2020, we do see a stronger year in disgusting mare from what we previously expected, it's composed phone or from investment into trailing nodes as I said like 28 and six.
Then, but also from a elevated spending in the seven in five nanometer. So we definitely see a stronger a capex a investments bye bye.
By this customer it's it's too early to look and understand what will happen.
In both the Arizona case, as well as the Intel comment about capacity, but yet if we're looking on 2020 and 2021, we expect elevated his phone from this customer.
Okay. Thank you.
One of firms are starting to see some traction from the ramp of Fiveg.
Do you see any evidence that perjury starting to impact your business in terms of opportunities.
We definitely say that okay. So we see we saw some hiccups in the into first a into first half when ER all investment in the in the handsets that are driven for fiveg as well as the eco systems are delayed a bit but when are we looking right now on the mix of the results that we have.
Laura.
For the second quarter as one of the prediction for all the forecast for the third quarter or the second second half, we do see more spending and a into fiveg, both the eco system as well as Dan said, we've been fiveg.
Thank you.
[noise] try next question from Quinn Bolton from Needham <unk> Co. Please go ahead, Sir your line is open.
[laughter] Oh, just some of your prepared comments for just wanted to ask.
Fronts onto innovation announce.
Oh, Standalone and integrated.
Just wondering.
Really.
<unk> was five.
Person tool and then any any comments on.
Yeah.
<unk>.
Charles.
Great. Thank you.
And pick your brain, so I'll try to want to talk about it without getting into the the complicated the competition struggled but as I said in my remarks, and I keep on saying it in every summary that I have that we step aside from a the this.
A rush competition on the on every no make their off a of measurement and came with a full portfolio, which is the innovative and differentiated from our firm but competition.
Actually is different from both competitors before looking right now when all portfolio.
The freedom is totally different form a their line of products is bringing a bringing S. R class a interferometer into the into the game, which they don't have in the integrate their do we are bringing get moved to China, which they have only single Johnno and if we're looking right now on the material was we are looking.
And on their material metrology coming out from X Ray, which I think only OS and care. They have for them I told you. So I think that looking specifically on this a tool announcement.
I don't see it's a competing with us at all.
Thank you.
This concludes today's question and answer session I would now like to hand, the call back to each channel time for any additional closing remarks.
Thank you very much operator, and thank you all for joining our call. Today are we wish you all good health and let's be safe by did we conclude our earning conference call for the second quarter. Thank you.
Ladies and gentlemen, this concludes today's cool. Thank you for your participation you may now disconnect.
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Yeah.
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