Q1 2022 Nova Ltd Earnings Call
[music].
Please standby we're about to begin.
Good day and welcome to <unk> first quarter 2022 results conference call.
Based companies is being recorded.
At this time I'd like to turn the conference over to Gary Siegel.
S. I R. Please go ahead.
Thank you operator, and good day to everybody I would like to welcome all of Houston, Nobody first quarter 2022 financial results conference call with US on the line today are Mr. Aten, Oppenheim, President and CEO and Mr. Dror, David CFO before we begin.
I'd like to remind our listeners that certain information provided on this call may contain forward looking statements and the safe Harbor statement outlined in todays earnings release also pertain to this call if you've not received a copy of the release. Please view it in the Investor Relations section of the company's website.
Ethan will begin the call with a business update sold by Dror with an overview of the financials. We will then open the call for the question and answer session now I'll hand over the call to Mr. Aiken Oppenheim Nova's, President and CEO Etan. Please go ahead.
Thank you Mary and thank you all for joining our call today.
Let me begin by speaking briefly about our first quarter performance highlights.
Following my commentary Dror will review the quarter's financial results in detail.
Nova delivered a strong opening for the year exceeding the high end of the revenue and profitability guidance and by that delivered another record quarter.
This robust outcome marks the eighth consecutive quarters of revenue growth.
Our financial results for the March quarter reflect our airport business momentum driven by our bargaining position across technology nodes are expanding customer base and the proliferation of our increasingly diverse portfolio.
As a result of our employees is a solid execution.
Revenue grew 59% and non-GAAP profitability leaped, 86% year over year.
The outstanding quarter was also distinguished by record bookings and elevated yearly backlog.
The improving visibility for the rest of 2022.
And cementing our confidence in our continuous profitable growth.
The momentum of the first quarter will continue also in the second quarter.
Even as we navigate through a dynamic macro environment and a persistent supply chain challenge.
This this stout earnings demonstrate once again, our consistent consistent approach to meet customers' demand and delivery schedules.
Without missing a bit.
While we are focusing on solving ongoing supply chain disruptions, we continue increasing production capacity for all our product lines across all facilities in Israel, Germany and.
In the U S.
As a matter of fact, our preparations for the coming years demand along with a growing market adoption of our new growth engines.
Propels more than 60% growth in Nava production output in 2021, and led us to invest in two new production facilities opening later this year.
Based on the revenue forecast for the first half of 2022, which is approximately 50% higher than the same period last year. We are proud to outperform the market growth of our peer groups.
Growing twice as high as the group average.
Furthermore, we now expect to realize our novel 500 plan ahead of schedule.
And by the end of 2022.
In doing so we have fulfilled our vision of doubling the company revenue every five years.
Encouraged by the expected results for 2022. The company is now working on a new strategic plan to be initiated in 2023.
This plan will be built on both our growing organic engines like the ellipse on prism and met to your own.
As well as the newly acquired <unk> portfolio and new M&A activities.
The initial stage supporting our growth is already taking shape this year.
With major investment in doubling production capacity.
We will share more on this later this year when the plan is progress.
Following the recent Ankylosis acquisition. This is the first quarter that we are consolidating chemical metrology sales result, as part of our reporting.
During the quarter, we continued to integrate <unk> as a division in Nova developing it's driving new pipeline of products and opportunities in both the front end and backend industry segments.
Most of <unk> sales channels have already been incorporating it into nova to keep utilizing this year momentum and strong demand from various customers.
Chemical metrology is becoming a standard process control step in front end interconnect layer the position and we expect demand to further increase as the dynamic nature of plating chemistry call calls for in line metrology.
Closer to the manufacturing process.
Production of increasingly complex materials.
In both memory and logic devices.
Drives the need for higher sensitivity to purity particles and contamination.
As more liquid based process steps are introduced it will drive the demand for higher inland chemical metrology intensity.
A similar trend exist in advance packaging, where smaller features.
Higher density are used to increase connectivity, which enhanced device sensitivity to materials purity.
As a result, we see a growing number of applications requiring inline metrology across all advanced packaging segments.
Under <unk> umbrella and Kosice is well positioned to capitalize on the growing demand in the market and take leadership position in liquid chemistry process control.
Now, let me shine some light.
The major business highlights of the quarter.
The first highlight is our balanced customer base.
Diversification in our customer mix generated five major customers contributing over 10 percentage.
This is especially notable that one of our top customers for the quarter is the world's leading logic, IDM, which adopted our standalone OCD and material solutions for its advanced node globally.
The balance mix is a result of close cooperation with our customers at every stage of the production cycle from early development to high volume manufacturing.
This partnership programs with our customers drive unique solution that later proliferate to other industry leaders as well.
One example is our recent recent award at the SBA E Advanced Lithography conference for the best Metrology paper work with IBM.
The award was given for demonstrating the value of inline Raman spectroscopy for nano sheets devices, using our novel Epsilon platform.
The new device like the nano sheets structure.
<unk> metrology requirement to the limit.
And requires innovative out of the box solutions for both materials and dimension characterization.
Which can't be fulfill today with traditional methods.
We are confident following several demos and evaluations.
Our new portfolio can meet this demand and support our customers' manufacturing challenges.
Another highlight is evolving.
Evolving geographical mix.
The revenue distribution from various regions is further evidence of our diversified strategy, our products appeal to different mythology steps and nodes and our actual market share gains.
All of this is reflected in the revenue breakdown for this quarter with China being the biggest contributor.
Signifying our growing leadership in the region.
Given by a combination of market share gains portfolio adoption and a vibrant base of more than 30 active customers.
While the three big semiconductor territories, China, Taiwan, and Korea continued to be the majority source for our revenues.
Europe and the U S are gaining momentum in light of government programs to establish a growing dependency.
The most recent example is the EOG box, whereby 2030 member states will invest more than 43 billion euros in the chip industry in Europe .
We strongly believe that our current investment in global R&D and production facilities in different regions will support our growth in these two come preparing nova to various geographical investment scenarios and.
And optional geopolitical developments.
So we continue to see a growing adoption of our hardware product. This quarter's performance also reflects our success in software sales, which rose to a new record high.
As customers transition to advanced node their process control requirements expand to new application higher sampling and indycar abilities at the highest speeds possible to maximize productivity and yield.
In this environment, where the limits are close to the physical hardware limitation, our software and advanced algorithms solutions, including top notch machine learning and data training capabilities.
Provide an additional edge to the productivity and yield improvement that are so crucial to today's market.
Finally, we made another step function with our service revenue hitting a record high.
Revenues in this segment grew by approximately 13% in the first quarter bolstering our confidence to set another annual record.
And surpass our expectations.
This growth is driven mainly by our customers' urgent need to increase capacity and utilization of the installed base to meet market demand.
We focus our efforts not only on productivity upgrades, but also an offering other value added software and hardware solutions to utilize the fleet in better more accurate and effective ways.
Before I handover the call to Dror I wanted to touch on our commitment and progress on the environmental social and governments fronts.
We have been making significant strides in implementing in implementing our vision aiming to create an advanced ethical and sustainable ecosystem.
This improves communities and the environment.
Our program, which was divided into five pillars diversity inclusion ethics community relations and environment is progressing well towards the specific targets and elevate.
Investment.
While we are improving on all fronts I'm really encouraged by the way we opened 2022 with our commitment to a diversity model.
But by the end of the first quarter, 25% of our employees and over 40% of our board members were female.
We've been setting clear goals and investing in raising awareness of Nova as a preferred employer for females, a workplace, where a woman's are rightfully assuming their place in technical and leadership roles.
Later this year, we plan to release, our first ESG report.
Where we will be able to share more on our progress in this area that is becoming part of our culture.
Lastly, I want to recap, our Q1 results and forecast despite the market dynamics political uncertainty and.
In constant supply chain challenges, we believe that the structural increase in long term semiconductor demand remains firm.
Strength of our various fundamental growth drivers continue to fuel demand for growing computing power.
While data centers and intelligent edge applications.
Requiring increasingly more memory and storage to support data incentive workloads.
The strong demand for semiconductors is pushing our customers to increase their capacity and technology investment globally for the long term.
Engaged in this dynamic environment novel remain focused on improving efficiency solving delivery issues and meeting all our customers demand.
As we consider our accomplishments in the first quarter and given in our guidance.
We are striving to outperform the market once again and achieve another record year for Nova.
Now, let me handover the call to draw to review our financial results in detail.
Thanks, Nathan and good day, everyone and thank you for joining our 2022 first quarter conference.
Total revenues in the first quarter reached a record level of 134 million exceeding guidance and representing 59% growth year over year.
Product revenue distribution was approximately 65% from logic and foundry and approximately 35% for memory.
Product revenue included five customers that contributed 10% or more each to product revenues, one of which was the world's global leading idea.
Blended gross margin in the first quarter increased to 57% on a GAAP basis.
59% on a non-GAAP basis, mainly.
Mainly due to a favorable product mix, which included Europe product considerable configurations embedding higher metrology in throughput performance adopted by several customers.
Operating expenses for the quarter.
I mean at $39 million on a GAAP basis, and included 1 million influenced amortization of intangible assets related to the <unk> acquisition.
Operating expenses on a non-GAAP basis came in at $33 million for the quarter.
Operating margins in the first quarter were at a record level, increasing to 28% on a GAAP basis.
And 35% on a non-GAAP basis as a combined result of higher revenues improved gross margins and stable operating expenses.
The effective tax rate in the first quarter decreased to 11%.
Lower than our model of 15%.
Mainly due to tax incentives related to employee stock grants, which fluctuate across quarters.
Just on when those grants are exercise.
Earnings per share came in at a record level of $1 <unk> per diluted share on a GAAP basis and $1.30 per diluted share on a non-GAAP basis.
In terms of share count as expected the company implemented the accounting standard for depth instruments, which include conversion options.
As a result, the share count for diluted earnings per share increased to 32 million shares.
In parallel the company announced in the first quarter and $100 million share repurchase program, which we expect to start executing in the coming quarters.
Since the acquisition of <unk> closed at the end of January 2022.
P&L results cited for the first quarter include <unk> results only for the month of February and March.
Including in the earn out payment of $10 million anticipated in the third quarter of 2022.
Nobody expects to pay approximately $90 million for the acquisition of enquiries.
The purchase price allocation of this amount, which remains subject to final auditing was reflected in the consolidated company balance sheet as of March 31 2022.
The main elements of the purchase price allocation at the closing date were as follows.
<unk> net acquired tangible assets were approximately $20 million.
And Kosice intangible technology assets were approximately $45 million and are expected to be amortized over a useful life period of nine years.
<unk> intangible customer relation assets were approximately $5 million and are expected to be amortized over a useful life period of 13 years.
<unk> inventory step up related to backlog at the time of the acquisition was approximately $3 million and was substantially amortize in the first quarter of 2022.
Finally, I would like to share the details of our guidance for the second quarter of 2022.
Currently we expect revenues to be between 133 million to $141 million.
GAAP earnings per diluted share to range from 82.
To 96.
And non-GAAP earnings per diluted share to range from $1 nine.
To $1 23.
These results include Ankylosis expected first full quarter contribution.
At the midpoint of our second quarter guidance.
We anticipate the following.
Gross margins to be approximately 57% on a GAAP basis, and approximately 58% on a non-GAAP basis.
Operating expenses on a GAAP basis to come in at approximately $43 million.
This amount includes approximately $2 million in quarterly amortization of intangibles as.
As well as unexpected one time contingent liability step up expense of $2 million related to the <unk> acquisition earn out payment.
Operating expenses on a non-GAAP basis are expected to be approximately $36 million.
The expected increase in non-GAAP operating expenses.
From $33 million in the first quarter to $36 million in the second quarter is related to a combination of accelerated recruitment in all departments.
As well as acceleration of several research and development roadmap programs.
The effective tax rate during the second quarter is expected to be approximately 15%.
With that I will turn the call back to Eitan Nathan.
Thank you Dror following our prepared remark, we would be happy to take your questions now operator.
Of course, thank you and if you'd like to ask a question. Please.
One on your telephone keypad, if you're on a speakerphone. Please pick up a handset and make sure your mute function and turned up for you.
Our equipment.
It is star one if you'd like to ask a question.
We will go ahead and take our first question.
From Jamie <unk>.
With Bank of America. Please go ahead.
Hey, guys. Thanks for the question.
Really nice start to the year so congrats there.
I know you guys arent going to guide full year, but if I look at the start of the year you guys. Obviously are outperforming the industry and some of your peers are run rating at like an $80 billion nwfp level right now and they are guiding for a 100 billion for the full year. So that suggests a very strong ramp in the back half.
But for you guys.
Already run rating at over 100 billion, even excluding anchors. There. So yes, I think there's still room for sequential growth in the back half at these levels.
Thanks for the question.
Said, we are not we're not guiding the rest of the year about.
Later in my prepared remark.
Based on the growing backlog and.
On the record bookings.
As well as the fact that the visibility has improved a bit for the year.
We certainly.
We expect to have a record year and outperform the market. Okay. Besides that we cannot guide beyond the quarter ahead.
Now if we're looking on.
Capacity expansion on the on the second half.
We do see potential room.
To grow even further.
Got it I appreciate that.
And then also in your prepared remarks, you talked about how China was.
Okay.
Largest contributor to your revenue this quarter there was a headline last week and I got a bit of attention about U S. Adding restrictions on equipment to China. So I wanted to go back could you quantify the China exposure and then also.
Is there any way to quantify what portion of your tools that are produced in the U S are shipped to China.
So.
In terms of China distribution.
Generally China has.
The 25% of the company revenues and this quarter it was a little bit higher.
In terms of the equipment going out from the U S to China.
The X Ray product line is that you've shipped out of the U S.
However, it's important to note that these restrictions on.
The Chinese customers are quite limited right it's only.
A couple of customers and not.
Not necessarily the main customers in China.
Right, but I guess my question is if those sort of restrictions are brought in what is the potential risk of those let's say X ray product line.
What is the exposure there to China.
So according to our product portfolio. The three product lines. So we have the dimension arlindo seeded a dominant factor in Israel. We have the chemical analysis is one factor the and Germany, those ones are not related or not.
Not affected by the restriction currently now.
Now regarding the U S based manufacturing, we're talking about the xps and Dimitri on.
And they are exposed only on.
Currently on the snake.
And even to snake wildly SMIC wireless.
Advanced logic customers, you get license to export to.
Non advanced nodes.
All in all we filmed looking right now in my exposure.
To SMIC on the advanced nodes for Xps, we choose.
It's not large.
Okay, we're talking about several percentage.
Got it I appreciate it thank you.
And we will go ahead and move on to our next question from Quinn Bolton.
<unk> company. Please go ahead.
Hey, guys just wanted to say congratulations on the nice results and outlook and especially on the 35% operating margin just I just wanted to follow up on the last question about China I just wanted to clarify your only exposure with xps.
And Medtronic is to smack are you shipping those tools to other customers in China as well.
No. We are shipping all over the regulation that are related specifically to the front end customers that were affected with this SMIC with advanced nodes.
Right right, but I think that there is.
Again in the U S. There's speculation that the Commerce Department will brought in the restrictions on shipments to China to include all Chinese manufacturers and so I guess, we're trying to get a sense of the 25% of revenue that typically goes to China can you give us some split between the xps.
The U S based products versus Prada.
Products from Germany, or Israel in the event that the U S changes its current policies.
So.
The answer was actually the answer is not different from what we answered before to Amy So usually xps and material and are sold to advanced nodes usually on the on the more advanced sites.
And basically they are only a few customers in China that are going to the most advanced nodes. So even though the U S will broaden the end.
The restriction on U S companies or U S manufacturers to a broader number of customers again.
<unk> will be several percent.
Got it thank you for that and sorry.
See that persisting.
Second question just around the gross margin, obviously up at 59, 5% on a non-GAAP basis in the second quarter.
And towards the higher end of the range I guess as you guide to 58% is it just you see a more normal normal mix than in the second quarter are there any other.
Pressures, whether it's input costs are.
Other inflationary pressures on on gross margin that would bring you back to the 58% level in Q2.
Well I would say, it's a combination.
Normalized level of gross margins combined also obviously with the pressure on the supply chain.
But the larger portion I would say is the normalizing of the gross margins.
Got it and then just lastly.
It's about 25% of sales typically from China.
You see the Covid lockdowns are disrupting logistics the ability for companies to receive equipment at ports.
Have you seen any impact on logistics or delivery times within China or have things been running pretty smoothly for you.
So we see those disruptions happening okay. So as you said it's.
The the ongoing work in the ports as well as transportation.
When cities as well as even dilute the simple logistical finding papers, where our people are locked down okay. So we do see those.
Restriction on having effect on us as well as part of the part of the.
They're hard things that are going in China in regard to the logistics so.
But currently looking on the second quarter those are factored in.
Already and we need to see what will happen in the second half if it will be.
Zero or it will be harder, but definitely when we're looking right now on the guidance for the second quarter, we are taking into consideration that the lockdown will continue at least in.
The largest city of Beijing and Shanghai.
Got it thank you I want to say that.
Yes, just under just the last sentence is that.
The Chinese customers are trying to work.
Normally as possible under the slowdown so employees are staying in the factories.
Alright, so they are trying to increase yield as much as possible.
And our employees is in that in that matter in the in the Fabs as well. So we we see the logistics issues, but we once the equipment is in the fab, we do see them investing in building up and ramping.
Perfect. Thank you.
Thanks.
As a reminder, it is star one if you would like.
Good question.
And we will go ahead and move on to our next question from Mark Miller with Benchmark Company. Please go ahead.
Let me add my congratulations for another record quarter.
You mentioned you are facing.
Apply constraints a lot of people working can you kind of quantify in terms of is it increasing component cost did you have to.
Push out any shipments of tools because you didn't have enough.
Components.
Just a little more color on.
What you are facing in terms of supply constraints.
So mark definitely there are.
Price increasing.
And many of the many of the components okay.
And we do see in some elements shortage from some of our suppliers and also we do see some.
Some difficulties and reached two two a certain a certain.
Component, Okay. So all that we see on a daily basis.
The supply chain issues.
Pretty much a consistent issue every day.
Nevertheless, as I said before the preparation that we took.
I think one and a half years ago, two years ago that raising the inventory and such level that we can enjoy from that until now including.
The preparation that we took for the next two years and increasing inventories in capacity and secondly, we have special teams in all of our debt all day, what Theyre doing is qualifying second vendors and trying to figure out trying to find those.
Those parts.
Everywhere in the world.
I can tell you that up to now as I said in my prepared remarks, we didn't miss any delivery.
So.
And I hope that it will continue like that in the rest of their.
But in this consistently challenged environment, we can manage lead times and delivery almost in the in the original schedules.
You mentioned, there's two more facilities you are expanding capacity what do you estimate you'll be your capex spending for this year.
So the main investments this year are divided to three one is a clean room in Israel, the new clean room. The second is a new facility in Germany, which we will start investing in in the third quarter practically.
And also a facility in the U S. The combination of all of these investments is expected to be.
Iran.
$17 million to $20 million in 2022.
Thank you.
Yeah.
And we will go ahead and move on to our next question from Patrick Ho with Stifel. Please go ahead.
Thank you very much and congrats on a really nice start to the year, maybe first off in terms of the business environment.
The demand that's out there.
Issues with the supply chain and lead times extending.
Just qualitatively discuss.
How youre looking at 2023 and from what I mean by that is some of your equipment alright.
Already working on 2023 business, given that 2022 tiers to before.
How is that working for you guys in terms of next year.
So Patrick.
I'd like to divide into two so first of all the.
The positive side is that we do see orders for next year as well some of the leading edge customers. They know their problems with the supply chain and then some.
Equipment issue and therefore, they're starting to.
To show there.
<unk> for 2023 already mainly <unk>.
Mainly the new Fabs that you are.
If you would probably know in the U S and also in Germany, and Japan. So we are starting to see those capacity <unk> capacity.
Requirement and system requirement and we start to see the the distribution over the year and we also start to see real B will purchase orders that are coming from now to secure Q1, So we're starting to see as well the 23.
Capacity in Christmas.
And I think that from invest.
Investment point of view at least from the largest customers I think that 2023 it will be.
We will be a growth here as well from the other side there are they are.
Different elements that nobody will know how they will develop their uncertainty regarding the geopolitical situation and uncertainty regarding the other elements in the supply chain.
And.
The overall economical issues with inflation and interest rates.
Exchange rates.
Which we cannot predict but if you eliminate this one's a side and youre looking right now on the overall demand for the <unk>.
For the end user applications I do see them firm. So I don't think that the demand will be fulfilled in 2022.
The overall demand will continue in 2023 as well.
Great that's helpful and maybe as my follow up question for Dror based on your results and the outlook you guys are managing new a lot of the supply chain issues very well.
A lot of your equipment tiers.
I guess from me again, a qualitative perspective, what's the biggest issue that you're facing in the June quarter is the procurement is it freight and logistics.
Is it higher inflationary costs, what's the biggest issue and is there any impact on the gross margin wise by.
Let's just say, you're 100 basis points that matter, what's the impact to gross margins.
So as I mentioned before I think the larger.
Larger portion in terms of.
The change in gross margins in the second quarter is a more normalized level.
59 <unk>.
<unk> and more you are not the normalized level of gross margins.
That we that we aim for in general So most of this reduction is related to normalizing.
Product mix.
In terms of the shortage and challenges in the supply chain, including increasing costs I would say the main challenge is around semiconductor content within our products, which are hard to find and sometimes are requiring requiring.
Extreme measures in order to.
Reached the suppliers.
And actually.
Acquired the inventory.
Great. Thank you very much.
Thank you Patrick.
And with that I would like to turn the call back over to Ethan for any closing or additional remarks.
Thank you operator, and thank you all for joining us today with that we conclude our call for today.
And with that that does conclude today's call. Thank you for your participation.
Nick.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
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Yeah.
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