Q3 2020 Nova Measuring Instruments Ltd Earnings Call
Yeah.
No.
Sure.
Third quarter.
<unk> results conference call.
Finally, today's audience in place shortly.
We appreciate your patience and please.
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Good day and welcome to <unk>.
Instruments limited third quarter.
Results Conference call today's conference is being recorded.
This time I would like to turn the conference over to Mary and.
And that's IR. Please go ahead.
Thank you operator, and good day to everybody I would like to welcome all of you to know both third quarter 2020 financial results Conference call.
Just on the line today are Mr., Dan Oppenheim, President and CEO and Mr. drawer, David CFO.
Before we begin may I remind our list.
Listeners certain 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. If you have not received a copy of the release. Please view it in the Investor Relations section of the company's website.
And we will begin the call with a business update followed by drawer with an overview of the financials.
We will then open the call for the question and answer session I'll now hand over the call to Mr. eight an open hot Nova's President and CEO Aken. Please go ahead.
Thank you Mary.
And welcome everyone to our third quarter financial results Conference call.
I will start the call today by speaking about our quarterly results and performance highlights although.
During my commentary, nor will review the quarterly financial results in detail, including the guidance for the fourth quarter fiscal year wasn't one.
Oh outstanding results for the third quarter exceeded the company's previous expectations and guidance.
Despite the market dynamics, we continued to demonstrate strong financial performance.
Cash flow generation and sound execution against our long term strategic targets.
[noise] along with our guidance for the fourth quarter. We are currently forecasting 2020 to be a growth beautiful novo.
Why do we outperformed the industry growth rate projections year to date.
We remain confident in our strategy and the long term value, we bring to our customers.
As they progress through their next generation devices across all technologies and segments.
Although the industry is experiencing various the munchies during this disruptive year, Oh technical value continues to resonate with the market.
Demonstrated by several customers.
In the third quarter, including selections for traditional and newly introduced technologies.
Oh, well executed plan you strongly reflected in our financial results for the third quarter.
Where both our revenue EPS exceeded our previously announced guy.
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More over most all products rather than you hoped because to the extent the lawn and software sales reached a record high.
This is the result of continued demand for our products by our customers outstanding execution by our global and local team.
And there was.
You can see off our operating model.
Turning now to the business performance highlights for the quarter.
Our quarterly revenue included a diversified customer and territory mix, which was primarily made up of four large customers.
Two global memory providers.
Words into logic foundry manufacturer.
As expected demand from foundry for both advanced and trailing nodes.
Remained strong this quarter.
Exiting 2020, we expect the healthy revenue stream from foundry customers to continue in 2021 is.
Well as they prepare for growing demand in several key applications and manage structural changes in manufacturing dynamics across customers and territories.
Although this quarter was weighted towards logic, we continue to see high utilization in.
The memory sites in.
And expect recovery in 2021.
The relative softness in memory during 2020 allowed us to further penetrate this segment and enabled us to continue the proliferation of our new and existing products in this segment.
One indication of our growing market share is our recent announcement that the top memory customer selected nova's president for its most advanced memory fabrication sites.
Following the selection the company expect to deliver multiple tools to multiple sites throughout two.
2021.
Based on our long term trajectory, which combines both organic and inorganic growth drivers. We have decided also to raise capital to support our next level of expansion.
In October we completed a successful private convertible note offering.
Earnings of 200 million us dollars.
We initially announced an offering of $150 million, but upsized it due to a strong demand.
The offer was closed at attractive conditions of zero percent interest on a conversion premium of approximately 20.
Any 7.5%.
The fact that over 100 institutions applied to participate in the offering was a very positive indicator to us.
With interest extending beyond us borders, including Europe and Israel.
Beyond the fact that this is.
Recent move create a favorable position for us to leverage our company assets for inorganic expansion.
It is a broad vote of confidence INNOVALT business trajectory.
Following the transaction, we will continue to seek investment in disruptive new technology.
Relative risk.
With few attractive merger and acquisition opportunities.
And enhance shareholder value.
During the last quarter, we remained focused on realizing our strategy to build novice growth engine by constructing a disruptive portfolio.
In both dimensions and materials metrology solutions.
Our goal is to continuously develop and introduce disruptive solutions to the market that set us apart from the competition.
And allow our customers to overcome newer emerging challenges.
As part of the strategy, we announced all.
All our traditional product lines with new generation platforms to continue supporting our customers' future complex challenges across all semiconductor segments.
The new set of platforms that were introduced in the last.
12 months, including the prism optical CD stand alone.
Aeroflex three X Ray platform.
570, and Sarah integrated metrology tools.
And our new deep stack software and machine learning engines.
Are all generating strong customer traction with multiple all.
Orders and installations.
Additionally, a fundamental part of our 2020 strategy was to develop a pipeline of new technologies.
That will expand our total available market.
And gain our share in nontraditional metrology steps.
This disruptive technologies aim to create new application space in the in line in day production environment in order to shorten time to market in the most advanced nodes.
By introducing these new platforms, we are working with customers to fundamentally change there.
Process control schemes.
To overcome new challenges.
That are not met today by traditional all study or IR systems that have existed in the market for decades.
Although our plans met some challenges due to the COVID-19 spread we are.
Back on track with multiple installations in leading customer sites.
We still expect initial acceptance has to happen in 2020.
It is worth mentioning that according to our procedures and cautious approach, we only announced new products after they reach.
The certain level of maturity typically following multiple installations and receiving octreotide purchase order.
Following the quarterly highlights I would like to spend few minutes.
Okay and explain our long term hardware technology in more details.
Since the semiconductor market is very aggressive in moving to the next generation chip technology, our product portfolio is always built to meet the future technology trends of our industry.
In our view the industry is undergoing a major revolution, where critical dimension.
Insurance, driven scaling can no longer be the sole process used to deliver improvements in performance.
Along with two additional scaling.
One of the main avenues of advancement into.
Is the introduction of new materials costs.
Compounds.
And alloys in the most advanced process steps in.
Including little etch and deposition.
As a result, the surge in complexity also raised the bar for material metrology platform, creating a strong need for novel solution capable of measuring and controlling.
Curios properties.
Such as all talked in sales composition stress strain.
Surface properties and more.
Customer requirements already span multiple performance factor for such advanced tools.
Including high productivity and extremely accurate.
Non destructive material property analysis.
Nova non destructive Aeroflex X Ray solution is the industry standard for inline compositional and ultra thin films analyses with dozens of distinct use cases in each major segment.
It has been.
Nick ability to measure in die.
In production on patent wafer.
With sensitivity for films below 100, Onstream, where most of the critical composition control happens.
While Nova continuously evolve its X rate performance.
We are also developing new materials analysis technologies.
Including optical and other spectrometry methods.
Capable of expanding to new application space and addressing critical units.
In a dimensional metrology space led by the optical CD solution.
The growth in complexity, driven by continued three d. scaling and aspect ratio devices.
Produces new metrology challenges.
While in the past there was a clear distinction between optical metrology use to measure critical dimensions and.
Three used to measure materials.
Our portfolio of vision aims to converge the technologies.
X Ray metrology will address in died dimensional application as well.
The new directions of X Ray metrology, our non destructive metals.
And we'll solve applications that optical networks cannot sold physically today in in the future.
We definitely expect our CD portfolio to be driven in the future by a combination of optical CD and X ray capabilities, which will complement each other with.
With extra sensitivity.
Let me turn now to the company operational status.
In terms of our growing efforts to overcome the COVID-19 pandemic we're.
We are very pleased with the comprehensive actions, we take to strengthen our global operational infrastructure in the last three quarters.
We proactively amended supply chain disruption and successfully executed high volume manufacturing, while maintaining the health and safety of our global workforce.
As a result of our employees the dedication and outstanding airports, we quickly ramped up our production lines and development.
Capabilities to peak levels.
Since we expect the virus to remain a global concern.
During 2021 as well.
We have fundamentally change our working procedures and implemented them as the new normal environments for at least the next 12 months.
As we continue to assure our business continuity.
Our go forward portfolio growth.
He is on strengthening our local entities in order to maintain top quality service for our global customers.
And engaged in various emerging opportunities.
With the reliance on remote capabilities.
And a minimal headquarter support.
The confidence we have in our new product portfolio and our ability to transform short term pipelines into long term growth engine.
Dictates our operational goals currently despite the threem disruption.
The significant step towards our long term goal is the recently announced construction of the new large clean room in Israel.
Glenn for manufacturing, Nova most advanced platform.
By utilizing state of the art production an industry four point all metals.
The new facility will allow our flip will it sorry allow for flexible capacity changes.
Facilitate shift work for better better social distancing and Swift adjustment of production line focus.
And will ensure our long term agility and business continuously in.
Various recoveries in ours.
Looking forward and despite the several disruptions we had this year, Nova is well positioned for a strong finish to the year.
Also outperforming the industry the latest growth projections of wafer fab equipment spending.
To conclude we delivered strong results in the first three quarter of the year and our guidance for the fourth quarter assumes similar level of performance.
Exiting 2020, our outlook is positive in terms of overall market growth.
And no.
Expansion.
Coupled with our diverse customer base and product offerings, we are well positioned to deliver on our long term strategic goals.
Now, let me hand over the call to draw to review the financial results in detail Dror.
Thanks Eitan.
Good day everyone.
In the third quarter of 2020, the company continued to perform well in the financial results exceeded the initial expectations and guidance.
Total revenues in the third quarter of 2020 were 69.5 million all time record quarterly revenues 30.
Over 2% higher than the third quarter of 2019.
Product revenue distribution was approximately 65% from logic and foundry and approximately 35% from memory.
Geographically, China, Taiwan, and the U.S. each contributed more.
30, 20% to our product revenues.
The higher than usual contribution from the U.S. was related to a recent penetration to a new customer in that region.
To the adoption of the Nova prism by another U.S. based customer.
On a per customer basis.
For.
And your customers contributed 10% or more to the company product revenues, including two foundry customers and to memory customers.
Blended gross margin came in at 57% on a GAAP basis, and 58% on a non-GAAP basis.
Within the company target model.
A 56% to 59% on a non-GAAP basis.
Operating expenses in the third quarter of 2020 increased to $24 million on a GAAP basis and $22 million on a non-GAAP basis.
These incremental increases are across all company operation.
Connectivities and are aimed at aligning the company resources and redundancies to the growing business levels and the COVID-19 environment.
Operating margins in the third quarter of 2020 increased to 22% on a GAAP basis and to 26% on a non-GAAP basis.
In L. effective tax rate in the quarter came in at approximately 15% on a GAAP basis.
Earnings per share in the quarter increased to 48 cents per diluted share on a GAAP basis, and 57 cents per diluted share on a non-GAAP basis.
Moving to the main balance sheet.
Items trade accounts receivables further decreased by approximately $3 million as a result of effective collection during the third quarter and days sales out came in at 55 days.
As expected the company inventory levels continue to increase due.
Due to the higher business volumes and due to business continuity measures taken as a result of the COVID-19 pandemic.
We expect to continue to gradually increase the company's supply chain commitments and related inventories in order to secure the production and delivery of products and services.
As much as possible across the different locations and territories.
Inventories at the end of the third quarter accumulated to $62 million with inventory turns of two times a year.
During the third quarter, the company generated approximately $22 million of operating cash flow.
So.
Accumulating to approximately $54 million of positive operating cash flow in the first three quarters of 2020.
As a result overall cash reserves at the end of the third quarter increased to 238 million.
In parallel in October.
Talbot 2020, the company successfully concluded and zero percent interest convertible bond offering in the amount of 200 million.
The company used 10 million of these proceeds to buy back shares during the offering process.
The company guidance for the fourth quarter.
Is already taking into consideration the accounting impact of the convertible debt issuance on the company GAAP results.
We expect to charge approximately $1 million in amortization of debt discount and issuance costs for GAAP purposes on a quarterly basis.
Lisa amortization is expected to be presented as financial expense in the company's consolidated statements of operations on a GAAP basis, starting the fourth quarter of 2020.
The company intends to adjust these amortization costs for non-GAAP purposes, and investors can view.
The specific breakdown and reconciliation of GAAP to non-GAAP results as it relates to the fourth quarter guidance at the end of the quarterly press release.
The convertible debt is due in five years and the company has the intention and is expected to have the ability to redeem the department.
Our value of the convertible debt in cash at the maturity date.
As a result for purposes of diluted earnings per share the underlying shares related to the convertible debt are not expected to impact the share count of the company in the near future.
Such impact may occur partially.
Partially or fully if nova share price is higher than the conversion price or when the company adopt new accounting standards, which relate to the convertible debt.
Moving into the details of the company outlook for the fourth quarter of 2020, we expect the following.
Right.
And use are expected to be between 66 million to 73 million.
GAAP earnings per diluted share between 32 cents and 43 cents.
Non-GAAP earnings per diluted share between 56 cents between 45 cents and 56 cents.
At the midpoint of the fourth quarter guidance, we expect the following.
Blended gross margins are expected to be approximately 57%.
Given the COVID-19 situation the company continues to build backup resources across its global workforce.
In parallel we continue to focus on.
To focus on introducing and proliferating new products globally.
In that respect operating expenses are expected to increase to approximately 26 million on a GAAP basis and to increase to approximately $23 million on a non-GAAP basis.
Most of this increase.
As expected in R&D expenses.
Effective tax rates are expected to slightly increase in the fourth quarter as a result of annual provisions and tax closing processes.
As we conclude 2020, which is expected to be a year of record revenues for the company grow.
Overall cash reserves are expected to accumulate to more than $400 million.
We believe this level will enable the company to explore different business opportunities during and after the coven COVID-19 global pandemic crisis.
With that I will turn the call back to eight times EBITDA.
Hey, Dan.
Thank you Pedro with that we will be ready to take your questions operator.
Thank you if you would like.
Ask a question please press star.
Keith.
We are using a speakerphone please make sure your mute function.
That is true.
Hi.
So again.
Good question.
And we will take our first question from.
Quinn Bolton with Needham and company.
Hey, guys. Thanks, good job on the third quarter results in the fourth quarter outlook I wanted to start.
First with what's your outlook for the specialty foundry.
Segment of the market, obviously, the U.S. Commerce Department actions on SMIC.
That will result in us companies needing to export licenses wondering if that's having any impact on your shipments to SMIC I don't believe your RCD business.
Requires an export license, but just wondering if you've seen any change.
Demand from that customer as a result of export control and then I've got a couple of follow up questions.
So most of the month.
Alright, great. Thank you for the question later on here so most of the demand in mic for those games.
For the Ole study tools that are coming from Europe.
Therefore, we don't see any shifts in demand reduce the pooling of fourth of the dual there's an overall phenomenal or make flying to balloon tools.
The rest of the vendor, but we see it as well we don't see a reduction in capacity nor the demand.
Okay, Great and then for the comments, you've made or the U.S. a was more than 20% of revenue in the third quarter I believe you said that.
That reflected the prism win at a large logic manufacturer, but then I think you may have said that you also shipped prism to a second.
Customer in the U.S. wanted to make sure I heard that right and if I could you provide any more color, whether that's prism for logic or memory or.
Any any more detail would be would be helpful.
Yes, so what I said in the prepared remarks is that the.
The increase in U.S., a <unk> product revenues in the third quarter was related.
To the win that we announced earlier this year for a us based customer into a.
Another U.S. based customer, which was in the logic area, which adopted the Nova prism as well.
Great.
Thanks.
And then just draw a couple of quick clarifications from on the revenue guidance.
Of 66 to 73 million.
You mentioned in the script that you still expect Rev. Rec on a new tool wondering if the 66 to 73 million includes Rev Rec.
Fortyg step to the extent you do Rev Rec, new tool, whether that would be additional to that 66 to 73 million.
So as I mentioned, we do expect initial acceptances form the new technologies in the fourth quarter already.
In 2020 the Ray.
Range of the guidance reflects.
All elements related to our projections for that quarter.
Including the new technologies.
Got it great and then just lastly on that on inventory I know you said that you.
Increased the inventory one for business continuity reasons, but also to support higher level demand wondering.
Also if there are any is there any increase in sort of how.
Units included in that inventory figure either for presume at new customers or for some of the new technologies. Thank you.
Yes, the increase in inventory not necessarily in the third quarter, but the cross 2020.
He also relates to new evaluations of the new product.
Great. Thank you.
We will take our next question from Jason Smith with Lake Street.
Hey, guys. Thanks for taking my questions I think you previously.
Expectation for Q4 was for logic and memory to be a bit more even here is that still the assumption.
If we're looking right now on the fourth quarter.
Do you expect that.
The foundry will be the mid stronger.
Although we do expect that memory will come off so it will not be the same location as we see right now around 70 30.
But definitely.
In a more equal way now.
Nevertheless, the foundry will still be stronger in Q4.
Okay. That's helpful and then.
Just curious.
If you're seeing any supply constraints at all across the channel.
No in general we.
We do not see any.
Significant disruption obviously some of the suppliers have some difficulties during this.
These times, but nothing which is our second.
The current and as mentioned before we are secure securing the supply chain with both orders inventory a tan and also inventory add supplier facilities. So we've done that.
Have disruptions.
Today.
Okay, and then just the last one for.
If you and I will jump back into queue.
Obviously, the service revenues a bit more macro sensitive how should we think of followed.
Rebounding going forward do you think Q3, what's the bottom or I mean, I I think at one point the goal was to grow that line about 10% on an annual basis.
I mean is that still the target even with all the uncertainty out there.
Yes, so as we've discussed before the growth of the service business is highly correlated to the increase in the installed base.
Generally these increases between five and 10% a year.
Maybe 5% to 8%.
And we still expect such such growth rates in the future.
Okay. Thanks, a lot guys.
Thank you.
We'll take our next question from Patrick Ho with Stifel.
Thank you very much.
Thats on the nice quarter and outlook eight Tom maybe first off aside from the snick situation can you give a little bit of color of the traction you're seeing on the trailing edge found.
Foundry logic and at this time.
Looks like with that business segments.
Coming up.
LCD metrology fits in well with some of the.
The product in markets that are at the trailing edge can you give a little bit of color on what you're seeing out there broadly speaking.
Yeah. So when we're looking right now on the demand.
And the foundry driver across the advanced nodes and trailing known we.
We refer you see a a soda distribution over the year will for on the.
70% coming from advanced nodes that I won 30% coming from drilling known.
The 30% that that's going to start coming from trailing nodes are divided.
Pick when between Taiwan and China.
Where we see a growing demands.
Demands coming from China, along the quarter.
Well, we definitely see the next at least the next two quarters growing from a this phone we'd be month running or renting edge.
In a in China.
Good.
You know there are two major.
Foundry provider in China, and both of them actually to grow significantly this year.
And unless something is changing in the U.S., China Trade War next year.
We expect the definitely one of them will continue growing so.
If I need to expect what will come in at 2021 is the same distribution of around 70% 30%.
Where we have this leading foundry this will increase capacity and also the trailing edge nodes that.
We'll keep modestly growing next year as well.
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Great that's really helpful and maybe as my follow up question obviously.
Obviously, all CD metrology in a beneficiary of the industry shift to Threed NAND and the growth of wafer starts capacity in that marketplace.
Can you give me your thoughts on the DRAM.
Space.
Both from a market perspective on what you think may occur and secondly, the capital intensity trends, particularly as they go to one Z and one out but the need for more on CD metrology, and possibly x-ray as well for those.
Since most advanced nodes.
Alright, so were not when I need to divided between the X. wake up abilities and the materials shipments.
Versus the old TV and the traditional dimensional the dimension of the month.
So if we're looking right.
Now on all CV.
Currently the most.
Advanced.
Sites or the foundry logic one.
And every new node that is coming in the intensity and the demand is growing for us.
There are thousands wafer.
After that it's the it's the Vietnam.
That once you increase the sales or the number of cells you increase the layers, but you also increase the stocks from one start to two stocks, which increased the number of layers that.
Require all city and the third one is the DRAM, even scaling DRAM form one X one why one v.
Some further.
Actually increase a bit the intensity, but its not large because the V NAND and the V NAND.
And sorry, non to end the foundry and logic.
I'm going into the memory I think that.
In the first place is the is the memory, including.
Even under in DRAM and the second place is foundry. So this is the way it goes and the and the scale is the same which means every new node. This is coming in that.
The attach rate for X ray tools the expenses are.
Actually increasing.
So every new knows that introduced in memory, having more.
Attach rate than foundry.
Great. Thank you very much.
Thanks, Patrick.
As a reminder, if he would like to ask a question. Please press star one.
We'll take our next question from Mark Miller with Benchmark company.
The rexall in the quarter and your outlook Chris.
I was wondering you initiated two new customers in China were you shipping in the third quarter. These customers.
Yes.
And you anticipate shipping in the fourth quarter also.
Yes, yes.
You mentioned, a higher attach rate for exploration.
Im wondering next year do you see X ray and software being a greater percent.
Our sales are similar but you had this year.
Yes, so I refer to the to participate in my in my script, when I said that we will.
I would like to converge X ray to via dimensional tool as well so if I'm looking right now on next year.
Im looking right now on the X Ray tools.
To be driven by the month of those dimensional and materials.
We definitely see the X ray tools demands growing next year okay.
It's growing from a statutory perspective is growing from new customers is growing from the fact that its going in line and it's worth mentioning that.
Our X Ray Youve nondestructive very fast the inline tool.
So it's growing with capacity and therefore, we definitely looking.
Looking on X Ray growing next week.
Regarding software.
Our long term model is talking about staying at around 10% of our product revenue. So if the product revenue will grow next year. The software revenue will grow as well we are not taking it the outside of the of dermatology space. So as we look.
Welcome that he would like to stick to that 10% number.
And with the extra growing next year, what is the impact on margins will that be a slight improvement.
Or or stay the same.
More or less the same.
Thank you.
Thanks Mark.
Okay.
It appears there are no further questions at this time I would like to.
To turn the conference back to Mr. for any additional closing remarks.
Thank you operator, and thank you all for joining our call today. Thank you.
That concludes today's presentation. Thank you for your participation you may now disconnect.
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