Q2 2022 Nova Ltd Earnings Call
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Thank you for standing by this is the conference operator, good day and welcome to Nova's second quarter 2022 results Conference call. Today's conference is being recorded at.
At this time I would like to turn the conference over to Mary Seagal C. O M. S. IR. Please go ahead.
Thank you operator, and good day to everybody I would like to welcome all of you to Nova's second 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 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.
A company's website.
John will begin the call with a business update followed by Dror with an overview of the financials. We will then open the call for the question and answer session. I'll now turn the call to Mr. Aten Oppenheim Novas, President and CEO Etan. Please go ahead.
Thank you all for joining our second quarter financial results Conference call.
I will start the call today by speaking about our quarterly results and performance highlights.
Following my commentary Dror will review the quarter's financial results in detail and then conclude with guidance for the third quarter was 2022.
Nova reported solid results for the second quarter, demonstrating strength in all our product lines across dimension, all materials and chemical metrology portfolio.
Why do we keep gaining momentum from multiple industry growth driver in.
In various semiconductor segment, we continued to expand our portfolio diversification and its market adoption to secure long term growth and outperformance.
This quarter results demonstrate once again the resiliency, we are embedding into our operating model, which continues to be strained by multiple elements, including supply chain issues and various other macroeconomics and geopolitical concerns.
We believe that the.
The fundamental changes implemented in the company over the last two years.
To meet our strategic goal of reaching 500 million in revenue.
We will significantly strengthen the company position in multiple verticals and markets in the next few years.
For the quarter, our earning results came in well ahead of expectation and at the top end of our guidance, including another sequential quarterly revenue record, which represents around 45% growth year over year.
Reviewing the first half of 2022 shows a significant year over year growth space in all financial elements compared with H, one 'twenty, 'twenty, one, including revenues and profitability growth or 52% and 70% respectively.
Our solid performance over the last few quarters demonstrates our operational agility and ability to meet customers' demand in a constantly changing environment without missing a bit.
Against the backdrop of the current global economic uncertainties, we still see strong demand for our product is a combination of mono fracturing capacity demand growth.
Dust control intensity growth they can.
<unk> development in both memory and logic.
Growing adoption in other markets vertical.
And continuous proliferation of our new organic growth engine.
As a result, our backlog while exiting the second quarter reached a record high enabling further visibility for the second half of 2022 and the first quarter of 2023.
Our diversification airports across market segments and products.
Continues to bear fruit this quarter is approximately 80% of our revenues were generated by 10 different customers compared to just five in the same period last year.
Furthermore, these customers are spread throughout four main territories, which contributes more than 15 percentage.
As discussed previously and after the chips at approval, we expect significant growth in the U S in the coming years.
With the multinational and national companies investment in the territory.
We are already seeing progress this year with a growing contribution.
From the U S. This led to our record revenue this quarter.
Even more diversification is generated by our newest additional technology the chemical metrology portfolio.
The second quarter is the first in which we report <unk> results in full.
We are encouraged by the integration process.
Led to a record revenue quarter and will drive a significant annual growth this year.
In this short period since the acquisition, we have already grown customers interest in our chemical analysis products setting in motion intercompany synergies to increase market share stays this year.
Hmm.
Furthermore, the efforts to diversify our revenue mix with other market segments were validated by the recent selection of our X P. S via our flex solution by our leading analog device manufacturer.
Adopting these multiple tools enables the customer to measure vital parameters and supported by traditional optical tool.
We expect more cases like that as the fast evolving backend market will start adopting more metrology steps as part of its developing technology to meet the cheap the performance requirement.
Finally, and as another example of our continuous efforts to differentiate our solution as part of a more diversified portfolio.
We saw this quarter record sales from our software and optical CD standalone platforms.
The Standalone platform.
And performance were driven by the growing adoption of Nova PRIZM in high end memory is the whole segment is preparing for a larger cheap structure with hundreds of memory layers in multiple stocks.
Prism is prevailing in this complex high aspect ratio devices, where physical limitation prevent traditional optical tools from providing extensive extensive deep measurements.
The software portion was driven mainly by growing adoption of our novel fit machine learning offering.
Which can now provides real process insight and foresight by connecting split different tools and different steps to learn the inefficiency.
And train dermatology platform to detect changes in materials and dimensional NOLA anomalies faster and more accurately.
Highlighting the financial results for the second quarter, and given and given our guidance for the third quarter.
Currently aim to grow meaningfully this year as well.
Over achieving our previous expectation and.
And setting another record outperformance here.
With a company revenues exceeding $500 million over the last four quarters.
And profitability rates hitting the higher mark established by our planned business model.
We can delineate this quarter the realization of our novel 500 strategic plan.
With cemented the fundamentals to support our future organic and inorganic growth.
The strong momentum we have demonstrated is a result of our ability to execute a clear long term strategic plan, which was introduced in 2018.
The plan was built on pillars of technology differentiation increased revenue diversification and inorganic growth.
Our performance in each pillar, including the progress in developing both organic and inorganic engine.
Our strides in materials and chemical metrology areas.
Increased capacity in all manufacturing sites and growing exposure to more customers and segments.
It is paving the path to our next strategic milestone, which will be presenting in our upcoming virtual analyst day on September 21st.
Before summarizing the second quarter highlights I would like to refer to the market environment and semiconductor demand as it relates to nova's performance.
Overall, we believe that the long term semiconductor demand will persist driven by several elements.
Including end market Mega trends applications complex technology transformations, and semiconductors self sustain geographical buildups.
While we are monitoring the latest issues with some of the consumer market.
And ICEE prices, we continue our delivery plans to accommodate the strong demand for the rest of the year.
Although capacity growth is a major factor in our planning.
We still anticipate various other catalysts in the next few quarters.
The other main contributors are the new fabs and greenfield customers in various territories.
A major technology developments in both memory and logic.
Increased mythology attach rates in advanced nodes.
Pension of inline materials metrology requirements.
All information of Pneumatology methods.
Growing demand for backend mythology, and finally market share expansion.
Yeah.
Those supply chain disruptions, we remain one of our main concerns we began to see incremental improvement in lead times by our suppliers this quarter and.
And therefore expect to meet all our customers' request during the remainder of the year.
Nevertheless, we are closely monitoring the optional delay of other essential process tool suppliers.
Which may impact overall ramp up of our customers.
Okay.
With that I would like to recap our second quarter results.
<unk> had a remarkable first half of 2022.
Setting multiple records against the backdrop of dynamic market and an increasingly complex environment.
As we consider our accomplishments in the second quarter and given our guidance for the third.
We are striving to outperform the market once again and achieved another record year for Nova.
As we aspire to continue our strong momentum in the market, we will announce a new strategic plan during our Investor day in September .
<unk> of course towards the $1 billion company in annual revenues.
Now, let me handover the call to Dror to review our financial results in detail.
Thanks, Nathan Good day, everyone and thank you for joining our 2022 second quarter conference call.
Total revenues in the second quarter of 2022 reached a record level of $142 million at the high end of the guidance and representing 45% growth year over year.
Product revenue distribution was approximately 75% from logic and foundry.
Increasing mainly due to adoption of novel technologies in additional logic segments, such as analog and IBM and.
And approximately 25% from memory.
Product revenues included three customers.
Contributed 10% or more each to product revenues.
Product revenues also included four main territories.
<unk> more than 15% each to product revenues, reflecting an expansion of semiconductor capital investments into additional territories and the company diversified position across regions and customers.
Blended gross margin in the second quarter was 57, 7% on a GAAP basis, and 58% on a non-GAAP basis within the company target model of 56% to 59%.
Operating expenses for the quarter increased to $43 million on a GAAP basis, including $2 4 million for a one time revaluation of contingent consideration presented in G&A and one 5 million influenced amortization of intangible assets.
These.
Spencers are mainly related to the <unk> acquisition and are adjusted for non-GAAP purposes.
Operating expenses on a non-GAAP basis increased to $37 million for the quarter, reflecting the company efforts to align its global workforce and infrastructure with the current business levels.
Operating margins in the second quarter were 26% on a GAAP basis, and 32% on a non-GAAP basis higher than the company target model of 26% to 29%.
The effective tax rate in the second quarter was 14%.
Yes.
Earnings per share in the second quarter on a GAAP basis were $1 <unk> per diluted share significantly higher than our guidance for the second quarter.
The main reasons for this outperformance was the positive impact of a reevaluation of operating lease liabilities in the amount of $3 4 million related mainly to favorable exchange rates of the U S dollar versus the Israeli local currency.
This revaluation is adjusted for non-GAAP purposes, and therefore does not impact the company non-GAAP results.
Earnings per share on a non-GAAP basis came in at $1 24 per diluted share slightly higher than the high end of the quarterly guidance.
Moving into our guidance for the third quarter of 2022 currently we expect the following.
Revenues to be between 137 million to $147 million.
GAAP earnings per diluted share to range from 89.
To $1 <unk>.
And non-GAAP earnings per diluted share to range from $1 <unk>.
The $1 25.
At the midpoint at the midpoint of our third quarter estimates, we anticipate the following.
Gross margins of approximately 57%.
Operating expenses on a GAAP basis of approximately $44 million.
Operating expenses on a non-GAAP basis of approximately $39 million.
Effective tax rate of approximately 13%.
Okay.
Before I conclude my remarks, I would like to note the following.
<unk> first half 2022 revenues increased more than 50% over the comparable half year of 2021.
Outperforming the capital equipment market in the peer group growth rates.
The company's solid guidance for the third quarter of the year.
Coupled with elevated backlog levels.
<unk> the company to continue to perform well throughout 2022.
During the quarter <unk> 12 months trailing revenues reached $510 million.
Marking the fulfillment of Nova 500 strategic plan.
As part of this plan, we target we targeted gross margins of 56% to 59% and operating margins of 26% to 29% on a non-GAAP basis.
Our results in the last four quarter.
Where gross margins of 58% within the target model and operating margins of 33% exceeding the target model and reflecting the leverage built into the company operations.
We have concluded the execution of de Novo 500 strategic plan with approximately $500 million in total cash reserves, which allows us to continue to build an aggressive growth strategy for the future.
And simultaneously to execute the share repurchase program, which was recently announced and initiated.
With that I will turn the call back to Eitan.
Thank you Dror following our prepared remarks.
He would be happy to take your questions now operator.
Thank you.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
And we'll pause for a moment as Colorado's China Q.
The first question is from Vivek Arya from Bank of America Securities. Please go ahead.
Thank you for taking my questions I had a few actually.
So first one could you give us a sense for what the Anglicist contribution as this year. So we can appreciate the organic.
Growth rate, but the more important part of the question is what is helping you outgrow.
<unk>. This year do you think it's more share gains or is it that the metrology aspect of intensity is higher than what you thought it would be at the start of the year.
So regarding <unk> contribution obviously, we're not disclosing specific numbers, but we expect on an annual basis the contribution to be.
Slightly higher than the $30 million.
Okay.
Okay, Okay, Yeah, I'll answer it and I talked about it in the.
Also in the prepared remarks thing.
The couple of elements that we feel gives us the tailwind in order to outperform because everybody is talking about capacity and demand, but we need to remember some other issues in regard to Nova one is the new product proliferation, which are very unique and a.
Starting to.
Propel well this this year.
The second area. The second thing is the material growth, we feel that the materials metrology growth is.
It's starting to be a significant one.
The third one is as you said the intensity and the intensity is growing if we can see the process control growth. This year versus process schools. We continue the process control is growing in a higher pace.
Because of the complex transition in the technology nodes in the advanced technology nodes and as I said couple of times.
Logic intensity grows that they're wrong.
80% to 100% from node to node than memory, it's around 50%. So definitely when customers are moving to new and or do we see.
Our growth in intensity.
And the last item is.
The development of new node, which require new steps that the customer didnt require those steps before for example, if we move now to either.
Gate, all around structure or you move to a memory structure, which is that three stock.
Profile with 500 players.
Of course, you need to start doing process control a bit different and its adding some steps to the to the measurement and the last thing is of course market share and market data again in my prepared remarks said that specifically this year.
As we see it by the end of the year. According to the orders we have.
Following the market share that we took last year, we definitely see a growth in the market share.
Got it and my second question on gross margin. So it's clearly within the target model as you outlined but what's creating this decline on a sequential and year on year basis why isn't.
The strong demand environment and your pricing power able to overcome is just a mix issue is as an input cost inflation issue, what why are gross margins down sequentially and year on year.
So.
On a quarterly basis, I would say that the <unk>.
Fluctuations are mainly.
Because of.
The mix of products in the portfolio.
So thats on a quarterly basis on an annual basis. Obviously this year, we are experiencing a lot of pressure on costs in all elements.
It includes.
The bill of materials supply chain, and also obviously infrastructure and head count costs.
<unk>.
I think we are in a good position, where the combination of introduction, introducing new technologies and new features and new products.
Together with the growth of the business of the company is able to significantly offset.
This this cost trends.
Thank you.
Yeah.
The next question is from Atkins and Alec from Citi. Please go ahead.
Thank you for taking my questions and good job in achieving the Novo 500 plan and look forward to the next plan in September .
I have a question on your.
Your comment about <unk> better.
Being adopted at a meeting analog chip makers can you talk more about what is an application that is the power management is an empty use what type of.
Devices are these and.
Who is the competition.
The incumbent technology, because it sounds the incremental thank you.
Yeah. So let me let me just say that I would like to stay in the border of the competition and I'll talk about our competitors.
And I can talk about the segment itself.
I think that when are we going to those devices.
Customers are starting to use some of the methods in the front end for example, the usage of <unk>.
Either a very thin film a very thick films, okay, and the structures are becoming similar to the front end and therefore, you will start to have.
Some kind of vacuum with the traditional optical tools that have problems either in the ultra 10 firms or the very thick films.
The X ray specifically define to solve this issue and therefore in every analog devices. The advance one that we start to see in the market as potential.
To be measured by the X ray capabilities, because otherwise it would be very difficult to measure regarding competition is everybody that's doing thickness in thin films.
And if the customer would like very much to compete with that with any kind of destructive way you can actually cut the wafer.
But if youre looking on a real methods like the front end guys are measuring the X Ray and specific index business is the way to measure it.
It's non destructive and I'll give you the right measurement inline.
Got it and as my follow up can you guys talk about the impact from expanding our U S.
Restriction.
On China.
It's up 40 nanometer and below if that has an impact on you and I know it's early days.
He can comment on have you seen any impact from.
Kind of the political situation in Taiwan, where the ships and flights have been without it.
That could impact you.
Your shipments to that region. Thank you.
Yes, so I'll start with the first part and all will take the vote will take the second part regarding the U S deliveries and the Chief Ark programs I think that we started to see the development development lines for those.
<unk> already this year.
And we expect that our next year, we will probably see it.
More of those deliveries happening in both Arizona, and Austin and maybe later on in.
And the east as well.
And definitely we see also.
The other chip programs that were established in other places like Europe .
Mainly for the automotive in Germany, with some of our new joint venture Thats, starting to invest in chip manufacturing.
Also in Japan, and Korea, Taiwan, and definitely in China regarding the regarding the political issue with the trade War as I said before.
Yeah.
Yeah.
<unk> is an Israeli company. So therefore, we are.
We are continuing to ship regularly to China. The only effect that we have is by the by the xps tool that is being shipped from the U S. Over there we are working to get the export license for a new product. We've got the licenses for services and if we want to talk about impacting adjusted.
Limited to SMIC.
In Shanghai.
Which in any case is not large volume of business for the next year.
Okay.
Yes, I would say that.
Generally the financial impact of these limitations because of the reasons eight unmentioned is really.
Really marginal.
In terms of Taiwan, we did not see any impact to date.
Because of the recent.
Announcement, and I would just add that the way we look at it is that the company needs to continue and expand its presence across the globe in all territories and I think that the results in the in the second quarter.
Which.
Evidently we had.
Four territories for the first time accounting for 15% or more adding one one new territory is a significant one relative to the.
Korea, Taiwan and China in historically.
It is very important in terms of.
I would say.
Managing and operating in these in these situations.
Thank you.
Yeah.
As a reminder, it is star one to ask a question.
Okay.
The next question is from Trevor Gentileschi of Needham. Please go ahead.
Yes, Hi, this is Trevor on for Quinn Bolton and thanks for taking my question I'm wondering based on your conversations with customers do you have any preliminary thoughts on 2023, WMC and given your new product ramps do you expect to outgrow WMC next year as well.
Thanks.
Hello, everyone. Thanks for the question, obviously, we are not guiding beyond the quarter and definitely now in this environment.
It's a bit we.
We want to be a bit cautious about predicting what exactly will happen next year, but definitely when we look we're talking with customers and looking on the demand for our products.
And based on our.
Outperformance in the last few years we.
We believe and expect to outperform next year as well.
And when we plan our <unk>.
Our $1 billion.
Our revenue strategic plan, we are planning on growth in all those years until we get to 1 billion. So definitely we're looking on growth next year.
Okay.
And as my follow up how many metric on tools do you expect her advanced fab and can you quantify how much revenue metric on may contribute next year.
So if.
If we go and look on all dermatology technologies not only the metro on because those are very complex tools always it starts.
With the <unk>.
Moment in the laboratory.
After that when the requirements are going higher it moves to be.
One or two per fob after that it would become one or two per phase and after that it becomes in line.
So when we're talking right now on the Matthew on in on the latest successful penetration that we have we are talking currently on one or two per fob, okay and the next step after those customers will get the confidence in that will move it to our in line to.
To inline tool I want to to.
To emphasize again that the dose every tool that we are bringing to the to the fab or do the customer is planned to be in line. The target is to be measured on attach rates and grow together with our customers and the number of tools.
So the battery only entered into in the second February it was.
Move to their fab will start to see one or two.
Out of them in every new fab.
The high price high value tools. So we expect to see couple of them on a yearly basis.
Very helpful. Thank you.
This.
The question and answer session I would like to turn the conference back over to Aten Oppenheim.
President and CEO for any closing remarks.
Thank you all for joining US today, we look forward to seeing you all at our virtual Investor Day on September 21.
The press release on the exact timing will be published soon.
So very much and have a nice day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Okay.
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Yeah.