Q3 2021 Nova Ltd Earnings Call
Good day and welcome to <unk> third quarter 2021 results today's conference is being recorded.
Go ahead.
Thank you operator, and good day to everybody I would like to welcome all of you to Nova's third quarter 2021 financial results conference call.
With us on the line today are Mr. Athens, Oppenheim, President and CEO and Mr. Dror David CFO.
Before we begin Mag remind our listeners that certain information provided on this call may contain forward looking statements and the safe Harbor statement outlined kind of 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.
Nathan will begin the call with a business update followed by Dror with an overview of the financials we.
We will then open the call for the question and answer session I'll now hand over the call to Mr. Aten, Oppenheim, President and CEO.
Please go ahead.
Thank you Mary and welcome everyone to our quarterly conference call I will start the call today by speaking about our quarterly results and performance highlights.
Following my commentary there all will review the financial results in detail, including the guidance for the fourth quarter of 2021.
Nobody track record of consistent outperformance and strong execution was evident in the third quarter results with both revenue and profit exceeding our guidance and reaching another record high.
Although we are not immune to the various challenges in the supply chain. These outstanding results demonstrate the strong momentum in our coal markets and our ability to navigate efficiently in this environment to satisfy our customers' demands.
Our record performance over the last five quarters also signifies the strength and agility of our financial model, which allows us to keep expanding production output and investing in new technologies, while still meeting our long term strategy of profitable growth.
The impact of multiple technology transitions in chip design continues to drive growth across the broad range of applications.
The impact of Covid on consumer behavior.
With the industry secular drivers like data storage mobile infrastructure.
And digital transformation.
Now augmented by strategic decisions.
To redistribute capacity over different geographies in order to ensure supply independence.
These elements are creating pressure simultaneously on multiple semiconductor technology nodes across different chip manufacturing lines.
While we continue to deliver a solution to their most high end technology nodes. We also continued to deliver systems to the trailing edge nodes that supports the growth of traditional applications.
In the <unk> environment.
We are well positioned to keep fortifying our market advantages as we continue rolling out new metrology solutions delay.
Delivery of a combination of new and traditional platforms to a wide range of fabrication nodes drove record bookings this quarter, which increased our backlog significantly for the following quarters.
With our current guidance in place for the fourth quarter and following my comments during the previous earnings call about the potential upside for the year and we now forecast the company revenue for the year to surpass $412 million.
In revenues this forecast indicates growth of more than 50% year over year.
Turning now to our business highlights for the quarter.
Revenue contributions was weighted towards logic across different technologies.
While we continue delivering our solutions to their most advanced nodes below seven nanometers. We also increased our delivery to the more trailing nodes across various traditional applications.
The strong demand for our logic solutions is reflected in our geographical distributions with growing activity in Taiwan, China Korea and U S.
We expect this demand.
Along with.
New site construction to continue in 2022 as well.
On the memory side, we continued to experience solid DRAM demand, we had expectations for additional NAND spending as we enter 2022.
The growing demand for our portfolio drove several several notable achievements this quarter.
The first one to mention is the record contribution of our materials metrology portfolio.
Against the backdrop of broad demand for advanced semiconductors, the growing complexity of materials engineering has struck a high note in our offering.
The next generation devices require a better approach to control different materials properties.
And along with the ambitious.
Textural design.
As complexity increases inline materials process control in etch lithography and the position.
Crucial to ease the improvement and drive growing metrology attach rates.
<unk> strategy to lead this market.
<unk> well in our results as both our xps very flex and Roma and <unk> products were adopted by multiple customers.
Beyond the immediate effect on our business growth the initiative to move more laboratories capabilities to inline manufacturing capabilities.
Resonates well with our strategy as we continue to develop new technologies to allow production fabs to better control of each step of their process.
Following this encouraging progress we announced this quarter two major wins for the <unk> flex and <unk> platforms, with leading memory and logic customers.
These wins represent a solid business potential for 2022 as well.
The second achievement to notice is the record income from our software products are.
Software Standalone portfolio is now implemented by our leading customers and allow them to utilize more effectively the hardware platforms.
Combining our physical modeling and advanced mathematical training engines.
Over a connected fleet of tools in various stages.
It allows nova to achieve better results using a smaller data sets with much greater accuracy and repeatability.
We continue increasing investment in these areas.
Which we view as our most encouraging competitive advantage.
The third milestone to highlight is our new service revenue record.
In the current environment customers are investing simultaneously in both extending their existing nodes and expanding into new ones.
Revenue this year from services is expected to hit a record high with a wide range of drivers, including upgrades improved productivity software enhancement and advanced service contract.
The growing demand for Nova.
Innovative portfolio in both memory and logic for materials and dimensional metrology.
Who shares our development cadence forward with new products and offering.
Our focus this year continues to be the prism standalone rollout the expansion of the materials offering and the investment in advanced software prediction prediction capabilities.
During the third quarter, we made exceptional progress in all of these directions.
This direction, putting us in a very strong proliferation position towards 2022.
A notable achievement in this regard was the continued adoption by several customers of our Standalone OCD prism platform for advanced memory.
In response to the surge demand during 2021, we are working intensively to expand our production capacity, which grew more than 60% this year.
With growth in all our product lines, we continue to optimize our output around the globe.
And plan to open two new clean room facilities next year in Fremont U S and Israel.
And there's other companies companies mentioned, we are not immune to the supply chain disruptions in this dynamic market.
As materials and chip.
Keep being short transportation and increasing prices are constantly changing.
Yet as reflected in our outstanding results, we continue to navigate well these challenges in order to extend our growth into 2022.
Okay.
Before I hand over the call to draw let me recap my notes for this quarter.
It has been yet another outstanding quarter.
And a milestone for Nova where for the first time, we crossed the 100 million dollar.
Rotary revenue Mark is a direct result of a well executed plan towards the Nova 500 strategy.
Against the backdrop of global Chief shortage, the growing demand for innovative portfolio continues to pave the way to another outperformance ear in 2021 and build a positive and encouraging momentum towards 2022.
With that let me handover the call to Dror to review our financial results in detail.
Thanks, a ton and good day, everyone and thank you for joining our third quarter 2021 contract.
Total revenues in the third quarter of this year exceeded our guidance and reached a record of 113 million.
This represents a 62% growth compared to the third quarter of 2020 and.
And a 15% sequential growth compared to the second quarter of 2021.
Products revenue included the record software revenue in the third quarter of the year.
Hitting our target level of 10% of the overall company's product revenues.
Product revenue distribution was approximately 70% from logic and foundry and approximately 30% from memory.
Blended gross margin in the third quarter was 58% on both GAAP and non-GAAP basis.
Within the company's target model of 56% to 59%.
Operating expenses for the quarter increased by approximately 3% to $30 million on a GAAP basis and to $27 million on a non-GAAP basis as the company continues to increase its global head count to support the steep growth in business activities.
Operating margins in the third quarter significantly increased to record levels, reflecting the financial leverage built into the company's operational model.
On a GAAP basis operating margins increased from 28% in the second quarter to 32% in the third quarter.
On a non-GAAP basis operating margins increased from 31% in the second quarter to.
To 34% in the third quarter.
The effective tax rate in the third quarter was approximately 12%.
Earnings per share came in at all time record and cross for the first time the level of $1 per share.
On a GAAP basis earnings per share were $1.02 per diluted share on <unk> and on a non-GAAP basis earnings per share were $1.16 per diluted share.
Finally, I'd like to share our guidance.
We expect the following for the fourth quarter of the year.
Revenues to be between 113 million to $123 million.
GAAP earnings per diluted share to range from 78 to <unk> 96.
And non-GAAP earnings per diluted share to range from 94.
To one dollar and 12.
At the midpoint of our fourth quarter 2021 estimates, we expect gross margins to come in at approximately 57%.
Operating expenses are expected to significantly rise in the fourth quarter as a result of year end activities and provisions and continued head count increase and reach approximately $34 5 million on a GAAP basis, and approximately $31 5 million on a non <unk>.
<unk> basis.
Looking forward into the beginning of 2022, we expect operating expenses on a non-GAAP basis to start from a level of approximately $30 million and to gradually grow as we continue accelerating investments in recruitment in all areas and departments, including.
<unk> and establishment of new and existing offices and clear rooms globally.
The effective tax rate in the fourth quarter of 2021, excluding adjustments related to a potential change in tax rate in the U S is expected to be approximately 13%.
Looking at 2021 as a whole as Eitan mentioned, we are on our way to a record year with more than $400 million in annual revenues, reflecting more than 50% growth year over year.
Also we expect to conclude 2021 with operating margins of around 30% slightly higher than the company target model of 26% to 29%.
I will conclude by noting that cash reserves increased to more than $500 million at the end of the third quarter of 2021.
Following a positive free cash flow of more than $50 million in the same quarter.
With that I will turn the call back to <unk>.
Thank you Dror.
We will we will be pleased to take your question now operator.
We will now begin the question and answer session.
During our question queue. You May Press Star then one on your telephone keypad, you'll hear at Kona acknowledging your request.
Speakerphone, please pick up your handset before pressing any keys to.
Toy story a question. Please press Star then two.
Pause for a moment as callers join the queue.
First question comes from Jamie is that correct from Bank of America. Please go ahead.
Hey, guys. Thanks for letting me ask a question.
For my first question why don't they are large peers talked about strong momentum into the first half of 2020 tail. Even suggested their process control system sales could grow somewhere in that 10% range half on half in the first half.
So I'm not asking for a specific guide, but are you guys seeing a similar momentum into the March and June quarter, and how strong is your visibility given I think your lead times are somewhat more normal range.
Yeah, Alright, so first of all the regarding the lead times, so lead times for novel systems too.
Today is around three to three to five months that surround the lead time.
This is a somewhat our visibility for next year. So.
Definitely when we're looking on next year and following my comments on the backlog.
Although we don't give a guidance for more than one quarter, we do see continuous momentum in the first half as well.
Say right now and we don't have the visibility to safe HD will be higher than H, one, but definitely is going to be a growth year for us.
Got it.
And then on gross margin very strong in this quarter.
<unk> suggest they're down quite a bit despite record revenues. So what are what are the puts and takes there.
So as I mentioned in my prepared remarks, we are investing a lot in our opening.
Opening new sites globally also because of the penetration to new.
Customers are in several areas, including including in Europe, China and other areas.
So as a result of that some of the.
Expenses are related.
Related to the service organization and Oh, the spread of our field service engineers globally on top of that obviously there are pressure from the supply chain in terms of cost of material deliveries and this is obviously building building up quarter over quarter on <unk>.
Of that we had in the third quarter as I mentioned record revenues from software. This is probably going to normalize a little bit in the fourth quarter and all of these elements together.
Have some impact on the gross margins.
Got it and if I could squeeze one last one in on the balance sheet it looks like deferred revenue.
A large step up in the quarter anything to read in there.
Sure Yes.
Just by mentioned deferred revenues are.
Customer payments, which were done before the company recognized the revenues. The reason for this increase is a combination of several elements.
It's across our.
A significant portion of our product portfolio and also relates to the fact that the company is proliferating new technologies at existing and new customers and in some cases.
Payments are coming in before the final acceptance of the system.
Got it thanks guys.
Yeah.
Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Chris <unk> from Cowen and company. Please go ahead.
Yeah, Hi, Thanks for taking my question and congrats on crossing the 100 million quarterly revenue Mark.
Ethan I suppose first question I had is you spoke about not growing in 2022 I'm kind of curious.
Is that a no specific comment or is it more what youre seeing in the industry can you just help us give some color on it.
We think our Y 90 as growing in 2022 relative to this year.
Yeah. So I don't I don't think so thanks for the question, but I don't think that this is a novel comment. This is the industry comments and I think thats my peers talked about it as well so if youre looking right now in 2021, it was a very strong logic here.
Mentored by our strong DRAM demand because of the low.
Because of the of the of the pressure in the in the deal market as well and the increased increase prices if youre looking right now on NAND, we're starting to see in Q4.
Increase in our non demand then.
I think that it will go into the first half of 'twenty to 'twenty two.
This coming from a combination of shortage.
In supply.
And this market together with the new.
<unk> technologies or new layer layer memory that needs to come to the market. So the combination of the new technology.
Together with some kind of.
Demand to this.
To the to the non memory.
Sure thing.
A growing opportunity of growing demand for NAND in the next couple of months.
Got it so it's coming more would you say, it's more technology, driven rather than capacity driven.
So I think that it's a combination if youre looking right now on the leaders in the industry, it's coming from both technology and capacity. So we don't see that.
So again, but if youre looking right now 2021, it was a DRAM and logic, a year, where our non was a bit lower than DRAM and I think that if we're looking at the first half of 2022, it will be more NAND and DRAM, we see it everywhere.
Got it got it that's very helpful gentlemen.
Just a quick follow up you know, obviously, you're easily outgrowing W. E. C. O just kind of curious as little bit as to figure out how much of the outperformance this year.
It's actually driven by process.
Troll intensity, increasing or how much is driven by your own share gains and how much is driven by the new products that we introduce can you help us quantify the outperformance in those three buckets as possible.
Yeah. So so we will not get into the numbers, but if youre looking right now on Wi Fi.
In 2021, the prediction of.
The prediction is talking about a 35% to 40% growth.
In process control, probably will be from the forecast perspective from the analyst probably will be the same.
So if we are going to do more than 50 actually it means that it should come from something else. It cannot confirm attach rate. So it's coming from a couple of areas first of course is coming from the new technologies that expand our total available market and create more application for us to come to come in it's coming of course for market share as we discuss.
About the prism and other tools.
And also it's coming from opening a.
New places, where our materials metrology was measured in the in the lab and now it's measured into in the fab.
So if youre looking on the combination of all that you can see that actually we outperformed we outperformed the W. A fear now we outperformed most of the predictions for process control.
Which usually process control, including also metrology and inspection Nevertheless.
We are more we are growing more than that significantly.
Got it Super helpful Tangle out Aten and congrats on the good results.
Thank you very much thanks.
Our next question comes from Mark Miller with Benchmark company.
Please go ahead.
Let me add my congratulations.
Quarter after a record quarter is very impressive.
Your largest cluster with Taiwan semiconductor, they're there, they're just starting with building a plant in Arizona and they also announced I think a new fab coming in Japan.
Do you think orders will start to flow into you from these opportunities.
Yeah.
Okay. So when we're looking right now.
On on this customer so we're talking about a new fab in and U S. A new fab in Japan, I think that the order is first Arizona Fab and then the Japanese one.
And I did.
Our forecast right now that the orders will start to flow to fly in and around the end of next at the end of Q3 Q4 2022.
You have a question is yeah.
There are several ramps of new technology, <unk> really starting to heat up I think asml's doubling the number of what those tools are going to be shipping.
And also next generation DRAM. This is expand the use of your equipment.
These trends.
Sure. So every.
So I'm using to saying to every investor presentation that I'm doing that for us the best environment is when complexity is getting.
Much more difficult to produce so everyone everywhere that are the technology transition is complex and it involves both the architectural and materials changes.
Usually at the beginning of attach rate is the growing up and the need for process control and in dermatology is getting higher and I'm not sure. It is of course getting they're.
It's getting stronger.
So if youre looking right now on the combination of transitions that we see in the market.
Starting from logic moving from five nanometer three nanometer and two nanometer.
It involves not only the scaling but also moving from one <unk>.
Thanks, Mark Thank you.
Yeah.
The next question comes from Patrick Ho with Stifel. Please go ahead.
Alright, Thank you very much and congrats on the nice quarter on the outlook actually maybe one.
First I'll start off with in terms of the supply chain you manage through it very well based on your results.
<unk> outlook can you just specifically give a little bit of color of some of the challenges.
<unk> faced in the third quarter, specifically, because it seems like situation actually worsened in three Q what were some of the specific challenges and how did you mitigate those problems are especially looking forward going into Q4.
Yes, so Patrick several things first of all if I'm looking right now on the supply chain challenges and disruption that's coming I think from a couple of areas first of all the.
Football is the obvious thing of transportation insurance delivery cost of delivery.
I mean, it's becoming a bit challenging as the world is very expensive.
And it's it's creating some issues second is the issue of our raw materials that is in shortage.
And we're starting to see some of the materials that you can actually.
If I mind never mind the prices you cannot you'll start to see that are in shortage.
And if you can reach them at a with a very high prices.
And the third element is that when we look on our suppliers. They start they start to be challenged by the by the capacity. Okay. So not all of them are big.
Some of them starting to see capacity capacity issue and on top of it we need to to understand that we are suffering from.
The shortage of shortage of chips exactly like the the rest if we needed for our computer than other controllers into systems.
So this is where we see the challenges in the supply chain I don't think that is a surprise and I don't think that is different from other <unk>.
The vendors, we have the benefits as part of our suppliers are all.
Spread around the world and some of them in Israel, we have dual source for almost everything and basically we will increase our inventory of lots and we usually buy equipment or materials for a four to six quarters ahead.
So we can mitigate mitigate that nevertheless, there are things that money cannot buy and we see some shortage I don't think that it will damage any of our plans for the next few quarters, but it is becoming challenging.
No I appreciate the color and again like I said the results and outlook. Obviously show that you guys are managing it very well maybe as my follow up question you briefly touched upon it but wanted to get your take on some of the broader implications for Nova gate all around it's something that's around the corner.
For the industry, how do you see that both from what you talked about the complexity in our materials opportunity.
No specifically do you see that transition as being big for both of those are market applications.
So definitely the move for a gate all around or the nano sheets.
The movement itself is extremely challenged.
Okay. It looks like you are taking a vertical gate and you make it oriental and actually from only from the simple fact that its becoming.
Or is that you'll start to see a lot of challenges in the structure the structure itself and you'll start to see some physical our physical challenges as well as material challenges and basically the the the whole structure. The building of the of the structure needs are.
Different control schemes that you don't see in a different.
A different gaiter technology, so for the logic providers. This transition is a huge complex a complex issue.
And then of course, you need to create a when you're talking about gate all around you need to do it with multiple gates. So the separation of the gates is an issue that the strain is an issue.
And definitely when we came out with our portfolio of starting from the pre them the new integrated.
The ellipsoid zone to measure the stress everything is built.
In order to measure those challenges so when you're looking right now in gate all around.
It will not be like Finfet, a dimension I'll challenge it will be dimension, a challenge a material challenge.
And also when you're looking on the material judge it start to be acumen culture Island, and definitely stress strain composition on how you build the gate will become a huge issue. So it's playing to our strategy.
So we want to be the leader in this in this market, where it's a combination of materials and dimension.
Great. Thank you very much and again correct.
Thanks, Patrick.
This concludes.
Our Q3 call I would now like to turn the conference back over to Mr. Eitan Oppenheim.
Nancy or for any closing remarks.
Thank you operator, and thank you all for joining our call today. Thanks.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
Yeah.
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