Q4 2022 Nova Ltd Earnings Call
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.
So 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'll then open the call for the question and answer session.
Now ill turn the call over to Mr. Aten, Oppenheim Novas, President and CEO Etan. Please go ahead.
Thank you Mary and thank you all for joining our call today.
We'll start the call by summarizing our fourth quarter and full year performance highlights. Following my commentary nor will review the quarterly and annual financial results in detail.
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.
He was able to perform well during the fourth quarter and the full year, demonstrating the strength of our diversified.
<unk> business model.
Core customer market and technology.
Why do we remain focused on addressing button.
The increased challenges, we continue to implement our long term strategic plan.
So let me probably all position and see.
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.
Fourth quarter revenue came in at the high end of our quarterly guidance setting new quarterly and yearly records.
While quarterly revenues grew 24% year over year.
Revenue grew 37% outperforming the industry index for the year.
Both the ability for the year remains strong with new record high results, allowing the company to exceed EPS.
<unk> dollar per share.
Fuel data for the first time.
Along with our record annual product sales across all the vision as I mentioned.
<unk>.
Yes.
Our services business also grew significantly in 2020 to gaming.
Gaming, 35% year over year.
And surpassing $100 million in revenue.
This milestone demonstrates the attractiveness of our customized packages.
To extend the lifetime of the tool.
Greece was activity and improved Macdonald your results.
Our previous product generations.
Following three years of significant industry growth.
We expect 2023 to be more volatile.
As customers adjust their capacity.
To meet those demands.
<unk> segment.
T mobile and possibly others.
I mean this uncertainty nobody ended the fourth quarter with record backlog, which we anticipate will enable us to.
Relatively outperformed in 2023.
During this period as the market undergoes capacity adjustment we.
We believe with our well established fundamentals.
Help us navigate the risks.
Enable us to increase exposure to additional opportunity either in adjustments markets new customers.
Railing edge nodes or additional unexploited application.
To meet these short term potential opportunities.
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 programs 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.
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 different technologies and pellicle.
While in the past these nodes required basic process control.
We saw during the year with significant growth in demand for cutting edge technology solution.
Similarly, <unk> stability.
As requested in the content.
This is the result of continuous investment to improve performance utilization and he is in this legacy technology.
Additionally, since the past today to improve.
Performance in both the technology enhancements.
Also in the advanced packaging and fewer backend.
We're encouraged.
The growing demand for advanced metrology solution like customers that used to have very basic process control in the past.
We believe that this trend will expand in the next few years, where the need for accurate metrology will grow across other node beyond front end.
Second I would like to highlight the progress we've made in increasing the contribution of all the materials metrology portfolio.
Our goal as outlined during the recent Investor day is to extend our leadership in this area.
Reach 30% to 40% of our revenue mix is part of know about 1 billion plan.
In 2022, we succeeded in adding more customers and more applications in both the backend and the content segment.
Resulting in record revenue.
The clinical metrology uncoated.
And the materials Metrology Division.
The range of materials application, we serve today.
This greatly extended from simple thickness measurements.
We'll include composition stress your comps.
Complex for filing and more.
We anticipate.
This advancement in materials engineering will continue and expand the application mix as customers aimed to improve performance in.
Inline materials modification.
The third highlight is.
Our growth through technology diversification.
In addition to introducing new solutions in our main product lines.
Continued to expand the adoption of our prism technology.
Among high volume manufacturing customers.
<unk> and record sales of Standalone OCD solutions.
With the significant increase in prison cells.
Furthermore, we are encouraged by the business performance of our latest addition to Alexandre <unk>.
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.
We are confident the dermatology offering we have demonstrated in advanced NAND and logic, including nano wire.
We will broaden our market opportunities across different segments.
Another growth engine.
Was amplified this year was the software portion of our portfolio.
Our strategic plan aims to generate at least 10% of our product revenue.
On fleet management and machine learning for adaptive Modelings based software.
By the end of 2022, we reached a new record high in this segment.
Also within the target model for the second year in their roles.
Finally, considering the current geopolitical environment.
The geographical distribution of our revenues in 2022.
Should be highlighted as well.
While Taiwan and China were the largest contributor the U S and Europe .
Approximately doubling the revenue contribution year over year.
Diversifying our revenue across different territories.
It helps us.
Counter the impact of weak memory demand in some regions.
And we will continue to support us in managing potential risks in the future.
To summarize my part I would like to refer to 2023 and its impact on our planet.
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.
Given by multiple engines and technologies, we are focused on navigating the risk in the current environment.
Our focus is on balancing spending.
Maintaining R&D investments to drive competitive edge and meet customers' requirements.
As in recent years.
Six two relatively outperform in 2023 as well by increasing market share winning new applications.
Adding new names.
And expanding our opportunity mix across industry segments.
In conclusion while.
While 2023 is 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 and.
And competitive portfolio.
Set us up.
To deliver.
Outperformance in our growth over the next few years.
Now, let me handover the call to Dror to review our financial results in detail.
Thanks, Nathan Good day, everyone.
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 800 potential medical problems.
Yes.
And approximately 15% for memory.
Product revenues included three customers and four territories contributing 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 a non-GAAP basis lower than the company target model, mainly due to specific unfavorable unfavorable product mix in the quarter.
We expect gross margins to return to normalized levels.
<unk> in the current first quarter of 2023.
Operating expenses increased in the quarter.
Came in at $47 million on a GAAP basis, and $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 'twenty three.
So 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 GAAP 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 GAAP 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 and was fueled by three main factors.
The revenue contribution from the acquisition of <unk>.
A 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 logos active installed base of approximately 4800 systems in.
Stalled 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 before territories, each accounting for more than 10% of product revenues.
It is important to note that in the past two years the company doubled its number of active customers through expansion into new front end customers in China.
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 59%.
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 as 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.
High end of the company's non-GAAP target financial model of 27% to 31%.
Earnings per diluted share on an annual basis grew significantly.
<unk> a record level of $4 40 on a GAAP basis and $5 seven 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.
Days sales out 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.
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.
98.
non-GAAP earnings per diluted share between <unk> 93.
And $1 14.
At the midpoint of our first quarter 2023 estimates we anticipate the following.
Gross margins to improve relative to the previous quarter and 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.
Seniors 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.
The restrained expense levels.
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 2022.
And are expected to further grow in 2023.
This healthy cash level allows us to continue and execute our aggressive growth strategies and infrastructure investments as part of the north of 1 billion strategic plan.
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.
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 Vivek Arya from Bank of America. Please go ahead.
Hi, This is <unk> Feng Zhang speaking on behalf of Vivek.
Thanks for taking my question.
I know you're.
Outperforming the broader industry.
Some of your peers are mentioning cancellations in order push outs is that something youre 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.
Uh huh.
Well first of all we are not.
We're not giving that.
<unk> died on guidance beyond the current quarter that we gave.
And then in this particular dynamic environment people will not be responsible to do.
You talked about the rest of the year.
We do see it.
Now make the behavior of our customers, we do see push outs call in.
And we do see that things are changing on a daily basis.
Fortunately enough we didn't see.
No major cancellations.
And currently when we're looking on the on the rest of the quarter as I said before our target is to outperform and outperform the market.
Even in the current situation and as I said in my prepared remarks.
Northern nodes in very difficult situations to identify opportunities for growth either market share.
Vertical development, new product, new technology, and I believe that in 2023, it will be the same.
Understood.
And then how much is services contributing to that outperformance.
I know you guys don't guide for it.
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 the service business as.
As well maybe in specific areas.
Or a little bit less strong right now, but generally we do expect service revenues to grow in 2023, obviously.
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.
And then for 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.
We will sort of say they expect to outgrow wf fee. Other of your process control peers will sort of say theyre going to grow faster than non litho Wi Fi and so when you were talking about outperformance can you just sort of.
Give us what's what's the base you expect outperformance or just overall Wi Fi, which I think people think are down 20 ish percent. This year or is it the non litho portion, which might be more down 20%, 25% to 30% this year.
So yeah. Thanks, <unk> so of course that looking right now on the.
On the litho and also provide our results 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 for nonperforming I'm looking onto.
Hello measure as long as the double you'll see that the consensus life policies will be along have you said, 20%.
And second are outperforming the my peers that have reported okay. So.
Both of them reported the 20% I think one of them reported even 23%.
And 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.
As you sit today.
Do you have any sense, where you think revenues might trough is that a first half of 2023 event do you think that revenue could be weak into the second half just just trying to think through.
Relative weightings of of what Youre seeing from customers kind of first half versus second half of 2023.
So I.
Hum.
<unk> from the current position.
All H score will land because everything is.
Gains on the memory.
Resource 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 the guidance.
Got it okay.
And then lastly.
Last quarter, I think you called out only a $10 million impact.
Two the materials metrology from China export controls wondering.
<unk> 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 answer institutes. So first of all we are still remaining the same version, saying that the impact is minimal and as I said around $10 million on the material side of it is coming from the U S.
The second level is that.
The question is the amount of fresh ore.
That is going on from an all from Japan, Netherlands U S.
When the Chinese semiconductor industry can lead to.
Something else then.
Influence 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.
China will stay stable in 2020.
Understood. Okay. Thank you very much.
The next question comes from Mark Miller from the Benchmark Company. Please go ahead.
You mentioned some <unk> 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 you 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 evils of their lives on the nexium with the leading customers.
So some of them already accepted the tool and therefore, the restaurants in the industry.
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 customers.
Looking right now on both <unk> and <unk> as I said before.
The solution is changing the whole mythology scheme.
So therefore every customers that youre coming do you need to go through the evolve changing of dermatologist screaming the Saab.
And then going into high volume manufacturing so therefore.
In 2023, we have couple of them.
And we think that by the end of those.
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.
If they're successful.
Yes, we are.
Okay. Thank you.
Okay.
Our next question comes from our Chief Malik. Please go ahead.
Hi, Thank you for taking my questions and good job on the execution and <unk> can you talk about.
The areas of outperformance.
Are you expecting this year.
On the logic side is it coming from.
It all around applications.
The memory side, where do you expect the outperformance of your products to come from.
Yeah, So I'll.
Talking about the difference the <unk>.
The growth engine of 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.
New product that we introduced will be higher than last year. This is one second.
When you are looking like now on the customers and even if we're looking right now on the logic that we are very strong.
A lot of place to grow in the logic with our present solution on the stand alone is overall okay.
We have a lot to do over there and there's lots of available market for us to grow into the logic. We those are standalone tools.
Third one should be everything that is related to materials. Okay. The combination of smoothing materials metrology inline.
And the fact that customers are starting to change materially.
During the process.
Turning 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 armed forces.
As we bought the.
Last year and already reached a record revenue, which is that's part when we bought <unk>. We said that <unk> was not so strong in the front end, we're very strong in the backend.
And we do see we do see now.
Yes.
With our efforts the front end is becoming.
A strong parts and we expect to grow over there as well.
And seeing that element.
Great and one for Dror.
When I look at the commentary from your peers on the services for this year, they still expecting services sales to grow some of them are saying it's flat.
No I don't.
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.
Services business to grow in 2023, obviously the grew significantly more than 30% in 2022 because of several reasons.
The growth in 2023 will be more.
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 cross 5000 systems in all territories.
And then the software component.
That behave similar to services or is it more attached to your system sales.
It's more attached attached to system sales and most of the software business is presented within product revenues.
So I just wanted to add to that too.
I just want to add to that is right on 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 sales though.
<unk> software upgrades, we were just talking about the advanced software, which is the wrong.
The machine learning stuff the model based although the things that are sold.
As a standalone solution to enhance the fleets.
This is on top of the services.
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.
See you 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.
[music].