Hi there. Good afternoon, I'm Brian Chin, the Semiconductor Capital Equipment and Memory Analyst here at Stifel. Glad to have everyone here at the Stifel CSI Conference in Boston, and very happy to have Nova with us, one of the leading process control metrology and inspection companies in the semiconductor industry. I have Dror David here, the CFO of Nova, and I think he has just maybe a couple kind of brief comments on an overview of Nova for those unfamiliar, and then we'll kind of hop into maybe a fireside discussion.
Sure. So, first of all, one comment, we also have here Guy Kizner. Guy is actually the incoming CFO, who will be taking over from July 1st. So good luck. Just a few general words about Nova. Obviously, we are a company operating in the metrology segment, in the process control for semiconductors. I think the exciting news about Nova right now is that the performance of the company is really, really strong in terms of business and profitability in the recent quarters. And this is off of a baseline in the industry, where the vectors are not really all operating right now.
We expect in the next two, three years a cycle of investments in a very important sectors of advanced logic and foundry, and also return of the memory which should generate additional growth, again, off of a very strong basis that we have today and right now. Brian will discuss it in a minute.
Great. I appreciate that, and maybe before we kind of step into a broader look at the company and the business, any updates just in terms of the guidance that you provided in terms of the second quarter from the last conference call?
Yeah. So, our guidance for the second quarter illustrated the growth relative to the previous quarter, and almost record revenues for the company. I think if any, some clouds from that time in the last one or two months have actually cleared. There were some concerns around the investment in China. China just announced another fund of $50 billion to invest in semiconductors. And also, we saw good signs in terms of the initial investments in Gate-All-Around, which is the new advanced technology nodes since then. So I think generally things are shaping up to be good.
Great. And you kind of touched a little bit on it, but I'll ask every company, you know, their view of the cycle. But I think, you know, Nova, historically in the past, has had some, you know, some commentary to share about sort of WFE and the broader cycle. And so maybe can you fan out a little bit about sort of your views on 2024 WFE and, you know, you touched on it, but maybe how things might be evolving a little bit differently than maybe you expected a few months ago. And certainly, you know, this is related to it, but just what kind of your view into second half and even provisional view on 2025 in terms of advanced logic, foundry, DRAM, and NAND flash? And so easy question, but.
Yeah. So, first of all, it's important to know that Nova, given the fact that, we have presence at all semiconductor customers, there's no single fab today which is being built in our industry, be it memory, advanced logic, foundry, where Nova is not selling tools. So we have a very wide exposure across, the different elements of the industry, across customers, across territories. So we do believe that we have a good view of, where the industry is going and, what's going on in terms of, investments. Looking, specifically at 2024, off of a reduction year in 2023, we believe that, this year will be around, mid-single-digit growth in, wafer fab equipment investments.
Obviously, the expectations for Nova are much higher than that, so we do expect to continue and outperform the same as we did in recent years. I think this expectation of mid-single digits is based mainly on the fact that we see robust investments in China, trailing edge. We see some increase in advanced packaging, but still, the high expansion-high level of expansions that memory can reach, the same as in recent years, is not there yet, the evolution of memory and the recovery. And on the other side, the leading-edge investments are not there yet in terms of volume. So most of that is actually pushed to the following years. This is why we see moderate growth in 2024. Again, not for Nova.
Nova will outperform. Looking at 2025 and 2026, exactly, this is exactly the point that we do expect memory investments to recover. Gradually, we do expect the mega expansions for Gate-All-Around and leading-edge fab logic fabs to start happening by the end of 2024. Therefore, the expectation from our perspective for 2025 and 2026 is some kind of a cycle of investments which could lead to double-digit growth every year in 2025 and 2026 for wafer fab equipment.
That's, that's great. Now taking a step back, just on the company and sort of your addressable market. Clearly, the company has broadened through the years in terms of its product portfolio and footprint. That's clearly by design. And I would, yeah, I would give the company credit for identifying certain parts of the addressable market that had not yet been, you know, large in terms of like materials characterization, materials metrology, as an attractive market.
Mm-hmm.
Clearly, you know, that. We'll talk a little more about that later. Maybe even kind of a further step back from that, can you talk about maybe how, you know, the complexity and the roadmaps for semiconductor have sort of opened up these market opportunities, such as materials characterization and you know, higher intensity and process control? Kind of like what's really been taking place and maybe, you know, given this is your last month as a CFO, this is kind of a retrospect of your two decades of tenure there at the company, but kind of what you've seen evolve over that timeframe that really has, you know, teed up these opportunities, which you've certainly capitalized on.
Yeah, so that's a good point because, when you look at Nova in the last probably 20 years, two decades, you would see that the company was able to double its revenues every five years. Now, this is, of course, not the trajectory that was in the market in terms of wafer fab equipment and so forth, and we were able, the company was able to do that by identifying the relevant niches where we can outperform the market, either through acquisitions or internal development. What the company has been doing, in the last, more or less seven years, is focusing its R&D investments on a differentiated product portfolio, on developing this material metrology, which we will touch on, later on.
The situation right now is that approximately 40%-50% of the business of the company is coming from technologies which only Nova is offering into the market. And as such, first of all, we have differentiation. Second of all, we have good average selling prices for these technologies because they are unique. And third, which is the most important, there is a technology adoption cycle for these new technologies, which is happening as we speak and as we move to the new technology nodes. The result of that is that when there is a technology adoption cycle, you can clearly outperform the market, and this is what we expect looking forward.
One of the major elements which we were preparing for in terms of the technology developments and the product portfolio is the Gate-All-Around, and we are in the midst of qualification of many of these technologies for Gate-All-Around applications, and we hope to enjoy these qualifications in the coming years. On another note, I would add that Nova was historically mainly focused on the front-end markets, companies like Intel, TSMC, which you know. But in the last three years, we also made inroads with the front-end technologies and also acquisitions into the advanced packaging market. Actually, three, four years ago, the company had almost zero revenues coming from applications or sales to advanced packaging customers, or applications. And today, in 2024, we expect 15% of our revenues already coming from advanced packaging.
The ability of the company to identify growing markets, take the necessary actions to develop organically and make acquisition is evident in this process. For advanced packaging, we started with the acquisition of ancosys, which we did at the beginning of 2022, and also transforming some of our front-end products to the advanced packaging markets.
What, Dror, what was the percent? I think it was like 40%-50% of Nova revenue or product portfolio was technologies that only Nova offers.
Mm-hmm.
What was that again, that metric?
Yeah. So it was 40%-50%. This includes the capability of Nova Prism in the optical CD. It includes Metrion, Elipson, and VeraFlex, which are materials metrology. All these products that I mentioned are capabilities and technologies that only Nova is offering for in-line semiconductor monitoring, and again, as such, it creates opportunities in the market.
Yeah, and obviously, you know, pricing structure, you know.
Exactly.
More favorable versus.
Pricing, gross margin.
I'll get to that as well, obviously. But the, And just to deconstruct this a little bit more, Nova's comment that the served addressable market was around $2 billion last year. On your revenue base, that's about 25% market share of your addressable market. You've talked about it being a $3 billion addressable market in 2027. In terms of that incremental growth in the addressable market, what type of market share are you sort of targeting against that? And it probably feeds into sort of the desire to double the revenue from $5 billion, sorry, $500 million to $1 billion in five years. But what, what kind of, i t sounds like it's higher market share on the incremental growth in the addressable market.
Yeah. So first of all, we believe that the materials metrology market, which Nova is practically dominating with few products, will outgrow the industry, and in general, is growing faster than, let's say, the corporate average. And obviously, our market share there is quite strong because along with these products, we are just working hard with the customers to qualify these technologies into in-line semiconductor monitoring. And also, we have unique capabilities in the other areas of chemical and optical CD, where we believe we'll win market share in the coming years. I think the signs for this market share has already started.
Some of these products have been qualified for new applications in the recent two years, and most of the capacity expansions related to this qualification, again, are happening in the next two to three years. So definitely we expect to take more share of this addressable market looking forward, probably from 25% to the 30% level.
You know, if you look at the addressable market, I don't know the exacts, but optical would be the biggest part of that market. Certainly historically, right? When you think about sort of the incremental $1 billion in terms of the growth of the addressable market, how big of that ratio of that $1 billion could, you know, the combination of materials and chemicals represent within that addressable market growth?
So, today, approximately 60% of our revenues are coming from the traditional optical CD markets, and this should reduce to around 50%.
Mm.
Maybe even a little bit less, depending on the growth of the other factors.
With optical growing still, but still.
Optical will continue to grow, will continue to grow more than the industry, but still, the major growth factors in the is in these areas of technology adoption for us.
And when you think about, you know, some of the new products and the reference technologies that Nova has, and maybe other people have not brought out of the lab into the fab environment, as an example, how much of your revenue today is, or in 2024, have you said how much do you think, you know, like Metrion and Elipson, how much of your revenue could be comprised of those new products this year? And have you talked about sort of what that contribution will be?
Mm-hmm.
To the $1 billion-dollar model?
So we do not disclose specific product revenues. And we did not discuss exactly what the percentage in 2024. What I can say, and on one hand, we would have liked it to be higher, is that it's not high in 2023 and 2024. And again, most of the increase is expected in the coming years. The issue is that when you qualify a product in a customer, such as Samsung or Intel or another customer, you need to wait for the capacity expansions to happen in order to monetize this qualification, and this is exactly what's happening in 2023 and 2024.
We have been qualifying, qualifying these products for memory and high-end logic applications, but as you know, most of these expansions, be it, in, in DRAM or, advanced DRAM or even NAND and advanced logic, are happening in the, in the coming two years. So, that's the reason for this, for this process. When we look strategically, off of a very, relatively low base right now, it should grow to around 10% of our, business.
The newer products?
Yeah.
I think the conventional thinking is that when you think about process control, you tend to think of the intensity being higher for advanced foundry and logic kind of naturally. Maybe flash is typically at the other end of that spectrum. Everyone spends on process control, but, you know, as a percent of total WFE, it tends to be higher. So in that kind of thinking, and thinking about, you know, the additional addressable market that you're now touching, if we were trying to, 'cause other companies have done this, on a normalized, sort of a 100,000 capacity add, 100,000 capacity wafers added or Gate-All-Around capacity, which, you know, it's Samsung has some capacity today. TSMC and Intel are kind of just getting started.
But if you think of increments of 100,000, what is sort of maybe the parameters for what the revenue opportunity could be for Nova? Because other companies have talked, some of the bigger ones, you know, it could be $1 billion, it could be, you know, $1.5 billion, et cetera, right? Obviously, you're not that scale.
Yeah.
Company. But what, what kind of parameters might you throw around in terms of how that particular Gate-All-Around investment could have a nice effect on the company?
So I don't think the nominal dollar value, you know, says something, because at the end of the day, be it hundreds or, you know, a few hundreds, you just can't quantify it in terms of how much more is it relative to the previous nodes or FinFET. So I think the main important thing is, when you move from FinFET fab of 100,000 wafer starts to a Gate-All-Around 100,000 wafer start, how much the opportunity is, larger. And based on our analysis, this opportunity is 30% higher than a FinFET fab. Therefore, for a FinFET fab, for a Gate-All-Around fab in TSMC or others, we have actually 30% more opportunities, in terms of our revenue potential.
What I can say and add, in terms of Nova's position for Gate-All-Around, is that there are four customers who are expected to have Gate-All-Around capability in the next three years, including Rapidus in Japan, which we need to see how things will evolve, but this is their plan. In all these four customers, Nova has a better position than it had in the FinFET arena, more technologies, better, more products, and so forth. In some of these customers, we did not have any position in the FinFET. For example, Rapidus. Yeah. No, it's 30% more opportunity for us because there are 30% more measurement steps because the process is becoming more complex.
There are many things which have impact on this, you know, on how much of more opportunities we have, the level of adoption of the new technologies, the pricing of the tools, and all these elements, but based on our analysis, it's around 30% more business.
Like three back-to-back companies. So can we just give like a little bit of difference between these companies?
Actually, maybe it even be better to handle that offline, kind of after the meeting. That way, keep it focused, like, on it, but glad to do that for you.
For Nova? So approximately 50% of our business is competing with KLA and Onto on dimensional optical CD measurements. And again, the rest of the 50%, which is mainly materials, we are unique in the market, selling, differentiated, and, and unique products. But generally speaking, it's, for this portion of the 50%, it's KLA and Onto.
Sure. The stuff to talk about, advanced packaging, 10% of revenue last year, 15%, 15% on a growing number again this year, so more than 50% growth year-over-year. Maybe can you just outline the applications that and technologies that comprise the majority of that revenue thus far? Also kind of how you're bringing, you know, technologies that maybe are not in production, or even for the front end.
Mm-hmm.
And applying that to sort of the back end. KLA has sort of talked about that.
Mm-hmm.
In a recent call. And also just sort of as you further intersect this market, are you, are you vying for kind of some of these existing application steps that other companies, you know, inspection, metrology, height measurements, or are you sort of looking further out on the roadmap, to like hybrid bonding or other sorts of evolvement of the technology in terms of, you know, taking another bigger cut of the market?
Mm-hmm. So, in terms of our journey into advanced packaging, first of all, most of our revenues are not in advanced packaging. We are a front-end company which has some technologies and position in advanced packaging. We have two different main elements. One is an acquisition that we did in 2022. This company or division is doing chemical metrology. They are actually measuring the chemical properties of the liquid before it flows into the manufacturing process, and this is highly required for back end and the advanced packaging processes. The second element is what you mentioned regarding front-end technologies, which are suitable for advanced packaging applications.
In general, what is happening is that in order to manufacture chips, which can be used in advanced packaging in terms of chiplets, stacking of DRAM, such as HBM, in order to do that, you need to build special structures in the chips during either the end or the start of the advanced packaging process on a wafer level. What we are doing, we are using our front-end technologies, which are measuring the transistors themselves, to measure these structures on the wafer level. What is happening is with the evolution of advanced packaging, these structures are becoming complex enough, sensitive enough and so forth, that they require measurements such as the front end. Specific applications include the TSVs.
TSV is a very deep via, which is done in on the wafer, in all the chips, in order to be able to stack them and connect them to each other. It's called TSV. This is an application where our Nova Prism has a lot of advantages in terms of measurement, and we are already qualified in few customers to do these measurements. This is one example. The second example is that in order to take a whole wafer and do wafer-to-wafer bonding and these sort of things, you need the wafer to be totally flat in all areas of the wafers, and some of our tools are capable of supporting the customers in doing this flattening process. And obviously, there are other applications as well.
Generally speaking, I would say we are not focused on, you know, taking a widespread applications in the advanced packaging market. We are targeting specific applications where we have an advantage, and our technology is, let's say, unique in the approach of solving the application, TSV and others, as well. And, as such, we expect advanced packaging to grow as part of our business, and, but, but not, it will not become the majority portion of our business.
That's definitely helpful. Just a quick note on China. Yes, can you give us a sense of which of your products are maybe most in demand for China? Obviously, we know that it's mainly a mature or trailing edge sort of investment profile in China today based on export controls, et cetera. But maybe you give us a sense of what you're selling into China today, and also what that process control intensity looks like, because I would think typically you would kind of think it would be lower relative to dollars spent, although also, you know, maybe they're more immature in general in terms of manufacturing. So maybe there's puts and takes on that.
So, in China, we see a lot of greenfield fabs, and in greenfield fabs, generally, there is more opportunity for process control because the first phases of starting the fab, the fab is always buying more control equipment, and then it normalizes across the expansions which are being done on the same fab. So this is also happening in China. China main areas of sales for us is the technology nodes between 40 and 20 and 40 nm. We practically almost do not sell for lower than 20 nm because, as you know, there are restrictions which maybe we can sell from Israel, but they don't have access to other U.S. equipment, so they do not do the expansions. China is very strong recently.
We expect it to continue to be strong well into 2025. We do have a very strong position in China. They are actually buying all of our, let's say, technologies, be it X-ray or optical CD. Obviously, less exposure in terms of the new technologies.
Maybe let's shift gears a little bit to the financial targets, target model, financial model. You know, we've referenced this a couple of times, but the target is to be a billion-dollar company, you know, in the second half of the decade, roughly five years, right, from $500 million again to $1 billion. You know, we referenced this earlier, but your gross margins are in the low 60% range. Maybe there's a mix effect we can kind of touch on that sort of is fostering that, but a reason why that will not necessarily sustain.
But if I look at, you know, the business that's annualizing to $600 million per year, you know, almost $150 a quarter right now, and nearly $5.50 in EPS, and I think about, you know, another $400 million to go to the $1 billion target revenue model, your $7 EPS that you associate with that one, that looks really conservative, actually. I mean, I could just back of the envelope be like $8-$9, right? So I guess, are there other variables there that maybe we should consider, which we're not.
Mm-hmm.
That, I'm sure there's some conservatism, but what else should we be thinking?
So let's first of all clarify. This, target model does not include the M&A portion, so it does not include another $150 million-$200 million, which should come from M&A, and we do M&A, which is accretive. So you are right on the context that if it will be, when it will be $1 billion, it will definitely be higher than $7. Definitely. And, when we said, we discussed the model, we did say more than $7 per share, even for the organic portion, which is 800-850. So, I think we can expect a significantly higher, EPS with, with, the potential acquisitions that, we are alluding to. We know how to do acquisitions and bring them to the, let's say, model of Nova.
So in that context, they should bring in 27, where we expect to be $1 billion, a lot of value into the EPS as well, assuming they are done within the next year and a half. So in that context, this number of $7 is not alluding to $1 billion, it's alluding to $800 million. So that's one thing. In terms of gross margins, we do see a lot of upside recently. Last year, we had 59% gross margins, where our model is 57%-59%. This year, we started with 61% in gross margins because of favorable mix between the different products that we have. We see some potential incremental support for gross margins from the new technologies, which are very high ASPs.
Obviously, there are other factors which are dragging the gross margins lower, you know, increased costs. You all know about the inflation and so forth. But generally speaking, I think that now that we are starting to see the stabilization and the ability to forecast better what would be the mix between the products, also related to advanced packaging, which is becoming 15%-20% of the business. We will need to review exactly what is the right model for the company for the coming years, and we will share it with investors once we have the chance.
Well, sure. Thank you so much. I think that's all the time we've got. Thank you for your great career over at Nova, and appreciate you spending time with us today.
Thank you.