Q4 2022 Nova Ltd Earnings Call
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Good day, and welcome to Nova's fourth quarter 2022 results conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Mary Seagal of M. S. I R. Please go ahead.
Thank you operator, and good day, everyone I would like to welcome all of you to our conference call with US on the line today are Mr. Aten, Oppenheim, President and CEO and Mr. Dror, David CFO before we begin may I remind our listeners that certain information provided on this call.
<unk> may contain forward looking statements and the safe Harbor statement outlined in todays earnings release.
Still 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.
<unk> 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.
Now ill turn the call over to Mr. Aten Oppenheim President.
President and CEO Etan. Please go ahead.
Thank you Mary and thank you all for joining our call today.
I will start the call by.
Summarizing our fourth quarter and full year performance highlights following my commentary.
I'll review, the quarterly and annual financial results and vehicles.
Nobody strong performance in the fourth quarter concluded another record year highlighted by a notable increase in revenue and profitability.
Despite market volatility and dynamic industry behavior, although was able to perform well during the fourth quarter and the full year.
So I think the Grenfell followed diversified.
<unk> business model.
Most customers markets and technologies.
Why do we remain focused on addressing banking firm.
The challenge that we continue to implement our long term strategic plan.
And solidify our position and seize various opportunities, particularly in this period.
We believe that in the current environment, our unique position in process control can help us strengthen the company's strong demand fundamentals throughput.
For the duration of our newest product portfolio additional market share gains and new penetration.
As for the financial highlights the fourth quarter revenue came in at the high end of our quarterly guidance setting new quarterly and yearly records.
Quarterly revenues grew 24% year over year.
Revenue grew 37%.
Performing the industry indexes well this year.
So stability for the year remains strong with new record high results.
The company to exceed EPS.
$6 per share.
Annual data for the first time.
Along with a record annual product sales across all different region as I mentioned on.
Excuse me.
Materials.
Our services business also grew significantly in 2022 games.
Again, 35% year over year.
And surpassing 100 million in revenue.
This milestone demonstrates the attractiveness of our customized packages.
Who extend the lifetime of the tool increased productivity and improved mythology results.
The previous product generation.
Following three years of significant industry growth.
2023 to be more volatile.
As customers adjust their capacity.
To me the software demand in some segments like mobile and possibly others.
They need these uncertainties nobody ended the fourth quarter with record backlog, which we anticipate will enable us.
Well I think we outperformed in 'twenty two 'twenty three.
During this period the market undergoes capacity adjustment we.
We believe that all will establish the fundamentals.
Help us navigate the risks.
Enable us to increase exposure to additional opportunity either in adjusting to market.
New customers really.
Trailing edge nodes or additional unexploited application.
To meet these short term potential opportunities as.
As well as the continued industry growth in the future.
Our strategic priorities remain intact with continuous investment in our long term R&D roadmap.
And building a tighter partnership called runs across all men named territories.
The growing diversification in our activities and its contribution to our agility and future growth where it demonstrated once again in 2022 with the following notable highlights.
First.
I would like to highlight our revenue mix across various chip generation.
Our revenue is well diversified across different technology nodes.
Approximately 50% of our revenue generated from advanced nodes.
While the remaining came from a variety of trailing edge nodes in.
In different technologies and pellicle.
While in the past these nodes required basic cost control, we saw during the year of significant growth and demand for cutting edge technology solution in.
Similarly, you, let's see I note the stability.
As requested in the phones.
This is the result of continuous investment.
Good performance utilization and he is in this legacy technology.
Additionally, it seems the bus today to improve your chip performance impulse technology enhancements.
So you've got bumps packaging and fewer back then.
We were encouraged to see growing demand for advanced metrology solution like customers that used to have very basic cost control in the bus.
We believe that this win will expire in the next few years, where the need for accurate stocks mythology will grow of course other nodes beyond Swanson.
So again I would like to highlight the progress we've made in increasing the contribution of all materials metrology portfolio.
Our goal as outlined during the recent Investor day is to extend our leadership in this area.
And reach 30% to 40% of our revenue mix as possible Snowball 1 billion plan.
In 2022, we succeeded in adding more customers and more applications in both the Bakken and the form 10 segment, resulting in record revenue for both the clinical methodology.
Coffee and the materials metrology diffusion.
The range of materials application, we serve today it's.
It's great to the extent that some simple thickness measurements.
So include competition, whereas your E com.
Complex for filing and more.
We anticipate that.
A bunch of men in materials engineering will continue and extend the application mix as customers aimed to improve performance.
In line material modification.
Instead the highlight.
Its all growth.
Technology diversification.
In addition to introducing new solutions.
Product line we.
We continue to expand the adult channel called Prism technology.
Among high volume manufacturing customers.
Starting in record sales.
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The significant increase in free themselves.
Furthermore, we are encouraged by that.
This performance of our latest addition, the Alexander and met your own which were adopted by Nomura logic and memory customers during the year.
Both solutions are currently undergoing further evaluation by additional customers.
<unk> decision expected to be made in 2023.
Yeah confidence the dermatology offering we have demonstrated in advanced logic.
Noting nano wire.
We will broaden our market opportunities across different segments.
Another growth engine that was amplified this year once the software portion of our portfolio.
Our strategic plan.
To generate at least 10% of our product revenue.
So in fleet management and machine learning for adaptive Modelings based software.
By the end of 'twenty to 'twenty two.
Reached a new record high in this segment.
Within the target model for the sick and here in the road.
Finally, considering the current year.
The political environment.
The geographical distribution of our revenues in 2022.
We highlight that as well.
While Taiwan and China were the largest contributor.
The U S and Europe .
One.
Ultimately doubling the revenue contribution year over year.
The rest of the thing our revenue across different territories.
That does.
Counter act the impact of weak memory demand in some regions and we will continue to support us in managing potential risks in the future.
It's otherwise my part I would like to refer to 'twenty to 'twenty, three and its impact on our planning.
We know by now that this year will be a year of capacity adjustment as customers struggle with slower demand and high inventories in various segments.
Although we strongly believe in the long term industry growth space.
We win by multiple engines and technologies, we are focused on navigating the risk in the current environment.
Our focus is on balancing spending.
While maintaining R&D investment to drive competitive edge and meet customer requirement.
It's been in recent years, we expect relatively outperform.
Page 23, as well by increasing market share winning new applications.
Adding new names.
Extending the opportunity mix because industry.
Segments.
In conclusion, while it increased projected to be a softer year.
Following three years of robust growth.
We remain confident in our 1 billion strategic plan outlined in our Investor day.
Our solid operational structure.
Strong cash position.
So the lever.
Outperformance and outgrowth over the next few years.
Now, let me handover the call to Dror to review our financial results Indeed, the law.
Good day, everyone and thank you for joining our 2022 full year and fourth quarter conference call.
Total revenues in the fourth quarter of 2022 reached a record level of 161 million up.
24% year over year.
Product revenue distribution was approximately 85% for logic and foundry and approximately 15% for memory.
Product revenues included three customers and four territories contributed more than 10% each to the filter with the contribution of the U S territory growing to slightly above 15%.
Gross margin in the fourth quarter was 55% on a GAAP basis, and 56% on an aggregate basis lower than the company target model, mainly due to specific unstable unfavorable product mix in the quarter.
We expect gross margins to return to normalized levels.
In the current first quarter of 2023.
Operating expenses increased in the quarter and came in at 47 million on a GAAP basis, a 43 million on a non-GAAP basis.
The increase was mainly attributed to higher research and development expenses.
We expect operating expenses to decrease already in the first quarter of 2023 to the 40 million level as a result of cost saving measures implemented by the company management.
Operating margins in the fourth quarter were 24% on a good basis and 28% on a non-GAAP basis within the company's target financial model.
The effective tax rate in the fourth quarter was lower than 10%, mainly as a result of higher than expected tax credit values in the U S.
Earnings per diluted share in the fourth quarter increased to $1.14 on a debt basis and $1 28 on a non-GAAP basis.
Moving onto the annual results for calendar year, 2022 revenues grew 37% to a record level of 571 million.
This growth is substantially higher than wafer fab equipment in 2022.
It was fueled by three main factors.
The revenue contribution from the acquisition of adequacy.
Higher revenue growth rate than the industry average for each of our dimensional and materials metrology product line.
And a strong growth rate of the service business utilizing mobile active installed base of approximately 4800 system installed across the industry.
Annual product revenue distribution in 2022 was approximately 70% for logic and foundry and approximately 30% for memory.
And the company had two customers and four territories.
Hunting for more than 10% of product for them.
It is important to note that in the past two years the company doubled its number of active customers.
Pension into new front end customers in China and through expansion into new back end customers as a result of the acquisition of bankruptcies.
Gross margins for the year came in at 56% on a GAAP basis, and 58% on a non-GAAP basis within the company target model of 57% to 15, 9%.
Year over year, the company was able to present stable gross margins in a challenging environment of significant inflation and rising supply chain costs.
This was achieved by increased operational efficiency through growth.
And by the continued proliferation of new capabilities and features.
Provide higher value to customers on the same product platforms.
Operating expenses in 2022 increased significantly and came in at 173 million on a GAAP basis, and 151 million on a non-GAAP basis.
This reflects a 32% increase year over year on a non-GAAP basis. The company made strides in aligning its infrastructure development projects and sales teams to meet the current and expected business levels and opportunities.
Operating margins for the year came in at 26% on a GAAP basis and at a record level of 31% on a non-GAAP basis and the high end of the company's non-GAAP target financial model.
27% to 31%.
Earnings per diluted share on an annual basis grew significantly.
Came in at a record level of $4.40 on a GAAP basis.
$5.07 on a non-GAAP basis.
During 2022, the company generated 98 million in free cash flow and presented healthy parameters related to working capital management.
Day sales outstanding.
Outstanding of approximately 60 days and inventory turnovers of approximately two five times a year.
In addition, during 2022 the company deployed approximately $185 million in cash as follows.
Approximately $90 million for the acquisition of emphasis.
Approximately 55 million for working capital during growth, mainly for inventories and accounts receivables.
Approximately $20 million in capital investments and facility expansions in all main sites.
And approximately 20 million for share repurchases.
Moving onto our guidance for the first quarter of 2023, we expect the following.
Revenues between $125 million, and 135 million, reflecting the adjustments in customer spending levels.
GAAP earnings per diluted share between <unk> 77 to 98 cents.
non-GAAP earnings per diluted share between 93 cents.
And the one dollar and 14 cents.
At the midpoint of our first quarter 2023 estimates we anticipate the following.
Gross margins to improve relative to the previous quarter.
Come in at approximately 57%.
Operating expenses on a GAAP basis to decrease relative to the previous quarter and come in at approximately $45 million.
Operating expenses on a non-GAAP basis to decrease relative to the previous quarter and come in at approximately $40 million.
Financial income to increase to approximately 4 million due to higher yields on cash reserves.
And effective tax rate to return to a normalized level of approximately 14%.
In conclusion to my prepared remarks, I would like to note that the company management continues to closely monitor the different scenarios of market demand and customer investment plans for 2023.
To mitigate different scenarios the company is already activated several mechanisms.
So we screened expense leverage.
These measures are expected to improve and reduce operating expenses already in the first quarter of 2023.
In addition, the company's cash reserves grew to over 500 million at the end of 'twenty two.
And are expected to further grow in 2023.
This healthy cash level allows us to continue and execute.
Rashid growth strategies and infrastructure investments as part of the North of 1 billion strategic plan is.
As well as to continue and execute the $100 million share repurchase program, which was announced and initiated in 2022.
With that we will be pleased to take your questions operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Victoria from Bank of America. Please go ahead.
Hi, This is stuck Sunshine speaking on behalf of Vivek. Thanks for taking my question.
I know you are.
Outperforming the broader industry.
Some of your peers are mentioning cancellations in order push outs is that something you're seeing as well and how do you view the near term demand just broadly overall thank you.
Thanks for the question, so I would say it on here so long.
So first of all we are not we're.
We're not giving a guideline died on guidance beyond the current quarter that we gave.
And in this particular dynamic environment people will not be responsible to.
Talking about the rest of the year.
We do see it being a dynamic behavior with our customers, we do see push outs call in and we do see that things are changing on a daily basis.
We didn't see a major cancellations.
And currently when we're looking on the on the rest of the quarter as I said before our target.
As to all perform outperform the market.
Even in the current situation.
In my prepared remark.
March no one knows.
Very difficult situations to identify opportunities for growth either market share to them.
Graphical development, new product, new technology and IP.
I'll live with that and Twenty-twenty agreed to would be the same.
Understood.
And then how much is services contributing to that outperformance.
I know you guys don't guide, but services has generally been more resilient over the last downturn.
Should we assume similar dynamics this time around.
So obviously in the current situation. We also see some impact on our on the service business as well maybe in specific areas are which are a little bit less strong right now, but generally we do expect service revenues to grow in 2023, obviously it.
A lower pace than it was in 2022.
Got it thank you so much.
Our next question comes from Quinn Bolton from Needham and company. Please go ahead.
Hi, eight and then career a congratulations on the nice results and the strong relative outlook I guess I wanted to start with that relative outperformance.
Expect in 2023, some some peers.
Well sort of say they expect to outgrow wf fee. Other of your process control peers would sort of say theyre going to grow faster than non litho WFAN. So when you're talking about outperformance can you just sort of.
Gave us what's what's the base you expect to outperform is it just overall Wi Fi, which I think people think are down twentyish percent. This year or is it the non litho portion, which might be more down 20% to 25% to 30% this year.
So yeah. Thanks screen Salt so of course that are looking like now on.
Oh, the litho, which would provide a result, all of us need to deduct some of the the litho equipment and look on the rest of the industry, but when I'm looking right now on nonperforming I'm looking on too.
We'll measure as long as the double you'll see that the consensus light towers would be around 20%.
And second are outperforming the you know my peers that reported okay. So.
Most of them are both at the 20% I think one of them reported even 23% and we.
We want to be.
Better than that.
Understood.
And I know you don't really want to guide beyond the current quarter, but just wondering you know as you sit today.
Do you have any sense, where you think revenues might trough is is that a first half of 'twenty. Two 'twenty. Three event do you think that their revenue could be weak into the second half just trying to think through it you know relative weightings of of you know what you're seeing from customers kind of first half versus second half of 2023.
So I you know I can't say from the current position.
H dual lens, because I mean everything depends on the memory.
Myself recovery okay.
So again, it will not be responsible to try even predict what will happen in the fourth quarter.
And I think that if you look right now on at least on the.
Quarters ahead of US we would like to be approximately in the numbers we reported the guidance.
Good.
Got it Okay, and then lastly.
Last quarter, I think you've called out only a 10 million dollar impact too.
Two the materials metrology from China export controls.
Wondering you know as we've had another quarter of data are you seeing any impact on the OCD business from some of those China restrictions.
So I'll I'll divide this stay on substitutes. So first of all we are still are remaining the same version, saying that the impact is minimal and as I said the wrong 10 million on the material side. This is coming from the U S.
Second level is that a.
The question is the amount of fresh ore.
That is going on from a you know from Japan, Netherlands U S.
Chinese semiconductor industry can lead to.
Something else then.
The overall industry, Okay, we don't see it right now, but we need to.
You'll be aware of that our current planning is that the China will stay stable in the 20th Wednesday.
Understood. Okay. Thank you very much.
So next question comes from Mark Miller from the Benchmark Company. Please go ahead.
You mentioned some emails falling one I'm just wondering if you could provide some more color on emails in terms of numbers and what areas. These emails are going on.
Yeah. So we will we will not discuss about the numbers and the customer profile, but we can discuss the basis of what we did so far in 2022 and when we look right now on the on the results. We had in 2022, we had.
We had the privilege and it was good that we started with the eval.
And then the Mexican with the leading customers.
So some of them already accepted the tool and therefore their restaurant in the industry.
Much better.
Should we started with different customers. So we have an opening page, which is which is good now going through the rest of the customer.
Looking right now on both that it's on and they met young as I said before it was.
The solution is changing the whole mythology scheme.
So therefore every customer that youre coming do you need to go through that change.
Changing of dermatologist screaming, the Saab and then going into high volume on a fluctuating so therefore.
In 'twenty two 'twenty three we have a couple of them.
And we think that by Dan.
It was we will be able to say that we called road.
All the the whole front end segments.
Would you expect to gain new customers from this evolves.
They're successful.
Yes, we are.
Okay. Thank you.
Okay.
Our next question comes from <unk> Malik. Please go ahead.
Hi, Thank you for taking my questions and good job on the execution and at times can you talk about.
The areas of outperformance that you're expecting this year.
The logic side is it coming from gate all around applications in the on the memory side, where do you expect the outperformance of your problems to come from.
Yeah, So all along you're talking about the difference of the different goldstar engine, if I look at them this year.
Would you have disconnected from the from the capacity. So first of all the new products right. So we think that the pace of recognition this year with the new product that we introduced will be higher than last year. This is one second.
When you're looking like now on the customers and even if we're looking right now on the logic that we are very strong there was a lot of place to grow in the logic with all of the prism solution on the stand alone is overall okay.
Because a we have a lot to do over there and there's a lot of the available market for us to grow in the logic, we those are standalone tools.
Third one should be everything that is related to materials. Okay. The combination of smoothing Mafia wars mythology inline.
And the fact that customers are starting to change materials.
During the process opening a lot of unexploited application that before they measured in the in.
In the laboratory and now they started to measure in line. So this is the third one and the fourth one is everything that is related to chemical chemical mythology, the ankle space that we bought last year.
Already reached a record revenue switching that's parts when we bought uncle since we said that Uncorking. If it was not so strong in the content, we're very strong in the backend.
And we do see we do see now that our with our airports.
<unk> is becoming.
A strong parts and we expect to grow over there as well.
And thank God it didn't know element.
Great and one for drawing a door.
When I look at the commentary from your peers on the services.
This year, they still expecting services sales to grow some of them are saying it's flat.
Is it now.
I want to put words in your mouth, but is there any reason to believe that your services business behave differently from your peers.
Oh, no I don't think so I think we also expect our services business to grow in 2023, obviously, they grew significantly more than 30% in 2022 because of several reasons. So the growth in 2023 would be more oh.
We would be less than that but we do expect the business of services to grow in parallel to our installed base grows switch, which practically in 2023 is expected to gross 5000 systems in our in all territories.
And then the software component does that behave similar to services or is it more attached to your system too.
It's more of a desk attached to system sales and most of the software business is presented within product revenues.
So I definitely can lead to death.
I just want to add to that the certain here that when we are talking about software sales.
We're not talking about the part that is.
Touch to the system. So we're not talking about version cells or the war software upgrades, you're just talking about the advanced software, which is along the.
The machine learning stuff the model based Aldo.
Things that are sold.
<unk> as a standalone solution to enhance the slips.
This is on top of the service.
Got it thank you guys.
This concludes our question and answer session I would like to turn the conference back over to Aten Oppenheim.
President and CEO for closing remarks.
Thank you all and thank you operator.
So do you want in the next call. Thank you for joining the call today.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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