Earnings Call: Q1 2021

May 6, 2021

Earnings release

Good day, and welcome to Nova's First Quarter 2021 Results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mary Sigal of MS IR. Please go ahead. Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's First Quarter 2021 Financial Results Conference Call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO and Mr. Dror David, CFO. Sigat. Before we begin, may I 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. Stigata. If you have not received a copy of the release, please view it in the Investor Relations section of the company's website. Stigata. Eitan 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 hand over the call to Mr. Eitan Oppenhaim, Sigat, Novo's President and CEO. Eitan, please go ahead. Thank you, Mimi, and thank you all for joining our Q1 Sigal's financial results conference call. I will start the call today by speaking about our Q1 results and performance highlights. Following my commentary, Dror will review the quarter's financial results in detail and will conclude with the guidance for the Q2 of 2021. Sigat. Nova continues to perform well in the Q1 of the year, delivering outstanding results Sigal. And exceeding both our revenue and profitability guidance. The growth in our business momentum, as reflected in our financial results, to gather 38% year over year to a record high, while our non GAAP net profit grew at 52% year over year to a record level as well. During this remarkable quarter, we also achieved record bookings and operating cash flow. Sigal. The solid growth momentum this quarter and the outstanding performance we demonstrated along the last year Could be accomplished only by consistently executing our strategic roadmap, while creating greater agility to guide. The flexibility we have built into our operating model combined with the investments we have made to secure our supply chain during COVID-nineteen enabled us to ramp up our production capacity to gather the full year of the year. Fikau. Our differentiated portfolio honed by our commitment to innovation continues to amplify our position with leading customers as we address their challenging technical transition to new generations of semiconductors, which combine innovative complex architectures with new novel materials. Our achievement this quarter marked another successful milestone to gather. In our healthy growth trajectory for this year as we expand our market presence and deploy our new leading edge technologies. Sigat. Nova's diverse revenue across multiple device segments is a result of the growing demand At the end markets for the electronics, which continues shaping the growing demand at the semiconductor fabrication supply chain. Stigatti. The main catalysts are driven by the growing digitization of multiple industries and include improvements in data management, network infrastructure and broader usage of AI in different markets. In addition to pure demand for silicon and in order to support these dynamic changes, the complexity embedded Sigal. In building next generation technology nodes requires a bridge of innovative products, specifically in process control to support the development and fabrication of new advanced memory and logic devices. Sigal. Furthermore, in addition to these current demand factors, customers are more focused on growing their investments Sigal. By optimizing productivity and diversifying their investment across multiple regions. When combined, these elements of accelerated technology transitions, increasing complexity in new advanced nodes And new investments in geographical distribution drive strong healthy WSE spending in 2021 and beyond. In this favorable environment, Nova is well positioned to capture more opportunities with its dimensional Fikau and Materials' unique process control solution. Zooming into our quarterly achievements, I would like to highlight several business and technology milestones, which will also impact the rest of the year. Sigal. This quarter's revenue was driven by record contribution from both our products and service sales, which included a mix of technology, functionality and productivity enhancements to the installed base. The growth in our traditional OCD and XPS business along with several new technology and business wins And the increasing volume in our service business reflects our progress and the momentum to meet our long term organic targets. The broad diversity in our revenue stream across segments, territories and customers was maintained in this Q1, Sigal, reflecting ongoing robust demand for both trailing edge and advanced 5, 3 and 2 nanometer to gather the company's data. In addition, memory grew significantly to compare to the previous quarter as we leverage our strategic exposure and new technology wins in both DRAM and Vinant. The wide exposure we have built to both logic and memory is reflected also in our customer mix With 4 major customers that contributed more than 10% each to our revenue mix. This includes to gather 2 of the world's leading memory customers, the world's largest foundry and a leading Chinese customer. This mix of different customers in different geographies is reflective of our wins in different markets And we'll accompany the company throughout the year. During the current investment cycle, The leading customers are going through fundamental technology changes in the way they process new devices. In the 3 d NAND roadmap, we have started to see evolvement to multi stack scaling to contain more memory layers. The new design creates new challenges in both high aspect ratio application, tilting to gather with new materials. The prism with its unique channels and advanced data interpretation was created in order to provide the right sensitivity to these dimensional challenges. Following the introduction of the platform, We are expanding our penetration to more memory customers globally, which benefits from faster time to solution to gather an advanced process control that can't be achieved with any of the traditional optic methods. In the Q1, Sigal. We continued our penetration efforts and established multiple new evaluations with leading memory customers Fica, that will decide on their capacity expansion later this year. On the material side, these new devices to go. Require a better approach to the way composition and ultra thin films are controlled. And following our introduction Fikau. Of the Veraflex 4 XPS platform, we see more traction with memory customers as demand for high throughput Sigal. I would like to mention again and refer to some competitive comments Sigal. The DC's non destructive in line high productivity tool, which measures tens of wafers every hour. As a result of this growing demand, XPS sales contribution maintained its record sales level in this quarter as well. In the logicfoundry, new device architectures are introduced as well to meet the required performance of the high end market. Beyond continued scaling to 3 nanometer, the leading manufacturers are adopting 3 d structures like GATE all around and NanoShifts. The combination of scaling and new dimensional structures Creates new process challenges, which drive higher metrology intensity and new measurement schemes to guide. The surge in demand for logic chips along with the technology transition Sigal. To enhance architecture, drove high demand for all our platforms with integrated metrology Sigal. Reaching another sharp increase to a record high. In this manner, we are very encouraged with the market adoption Fikau of our newly introduced I570 integrated metrology platform that was designed to measure complex 3 d structures, Sigal. Improving precision, productivity and sensitivity. Multiple tools have already been installed in the field And our forecast to grow during the year. Another highlight I would like to mention In the progress we are making in introducing new products, which is the software solutions. Handling high end application In advanced nodes, calls for more innovative solutions, a tighter process certification to go. Require more complicated metrology measurements while maintaining fast time to solution. Our product strategy is built on combining advanced hardware platforms and state of the art machine learning Fikau. Our software strategy brings a holistic approach that is built on 4 elements: Sigal. Physical modeling, enhanced with mathematical modeling for accurate and fast measurements and fleet management with automatic preventive maintenance, which focuses on tool performance control and enhancements. By adopting more software elements, we opened the metrology ecosystem to other references of other process control technologies and by that to guide. Our long term software revenue goal Sigal. Beyond the system traditional sequencing software remains intact with the efforts to reach at least 10% to gather our products revenues. Finally, all these successful business and technology milestones The fundamentals in the current market, along with our achievements in the Q1, support our ambition to outperform this year as well. Before I hand over the call to Dror to explain our financial highlights in more detail, I would like to recap our position post Q1 results. We are in an environment where industry fundamentals are strong, Sigal. Demand is healthy and complex technical transitions are taking place. Moreover, semiconductor manufacturers Sigal. A standing in large breeze of technology nodes, geographical presence and new process methods, Sigal, combining new materials with dimensional scaling. Based on our newly introduced products and technologies, Sigal. Nova is well positioned at the forefront of technology innovations to meet customers' requirements and roadmap. Stigata. Based on our diversified portfolio and exposure, solid operational leverage that has proven itself during COVID-nineteen pandemic and our strong local teams, we expect to continue our organic growth in the current cycle to meet our long term strategic goals. Alongside with the guidance we provided for the Q2 of 2021, we expect roughly 40% growth Now let me hand over the call to Dror to review our financial results in detail. Dror? Thanks, Eitan. Good day, everyone, and thank you for joining our Q1 2021 conference call. Total revenues in the Q1 of this year Sigal. Exceeded our guidance and reached an all time record of $84,000,000 representing a 38% growth Fikar, compared to the Q1 of 2020. Looking at product revenue distribution, approximately 65% attributed to Logic and Foundry and approximately 35% to Memory. Geographically, Taiwan and Korea each contributed more than 25% to our product revenues, while China was slightly under 20%. On a per customer basis, 4 major customers accounted each for over 10% to our product revenues, including 2 foundry customers and 2 memory customers. Blended gross margin in the Q1 increased to 57%. Stigata. Product gross margin came in at 62%, while service gross margin increased to a normalized level of 39%. Operating expenses for the quarter increased to $28,200,000 on a GAAP basis Stigata and $25,800,000 on a non GAAP basis. Sales and marketing expenses increased in the quarter, Sigal, mainly due to higher sales commission expenses and other costs of sales personnel. Stigata. On a non GAAP basis, we expect sales and marketing expenses to normalize between 8,000,000 to get a cash flow and $8,500,000 in the upcoming quarters. Effective tax rate in the Q1 of 2021 was approximately 13%, slightly lower than our effective tax rate model of 15%. Earnings per share on a GAAP basis was $0.60 per diluted share and earnings per share on a non GAAP basis Sigal. $0.70 per diluted share, both exceeding the company guidance for the quarter and representing a new record for quarterly earnings per share. Moving on to cash flow, the company generated $33,000,000 in free cash flow, Stigatti, an all time record for the company. This significant increase in free cash flow was also driven by efficient management of Sigal. Working capital keeping sales outstanding at 66 days and inventory turnover ratio Sigat. Finally, I'd like to share our guidance. We expect the following for the Q2 of 2021. Revenues to be between $84,000,000 92,000,000 GAAP earnings per diluted share to range from $0.51 to 0 $0.64 Sigal. Non GAAP earnings per diluted share to range from $0.64 to $0.77 At the midpoint of our Q2 estimates, we expect gross margins to remain at similar levels as the Q1 of this year, Operating expenses to reach approximately $29,000,000 on a GAAP basis and approximately $26,000,000 on a non GAAP basis Sigal. Thank you, Dror. Before we take your questions, I would like to use this opportunity to thank once again Nova's employees for their dedication to gather an outstanding effort leading to these record results during this dynamic and uncertain periods. Sigal. The past year has been a fruit test of 3 of grit and resilience of the company and our local team across the globe. Sigal. They didn't miss a bit along the year. Our local offices were strengthened tremendously to maintain top quality service for our global customers and to capitalize on various emerging opportunities. Our production teams never stopped working, sometimes around the clock to ensure we deliver on our promises and meet market demand. Sigal. Every single one of Nova's employees stepped up to the challenge and did their part. Sigal. As we groanly and cautiously resume our familiar working with teams, starting from Israel, Sigal. Where 97% of the employees are vaccinated, I would like to take to thank each and every one of them for their contribution to our performance and ongoing success. With that final note, we will be pleased to take your questions. Operator? Sigal. Sigal. We will now take our first question from Quinn Bolton from Needham. Please go ahead. Hey, Ethan and Dror. Sigal. Good afternoon and congratulations on the great results. I wanted to start first with maybe a clarification drawer. Sigal. It looks like deferred revenue on the balance sheet jumped up pretty meaningfully and maybe to a record level. Wondering if you could discuss what led to that increase. Is it reflecting greater software sales that are recognized over time? Is there a Sigal. Yes. So the deferred revenues did increase significantly in the Q1, and most of the increase Fica. It's related to the new product that we are introducing into the market. We have few of these in several product lines. And In some cases, we installed the tool. The customer is already paying and the acceptance is actually being delayed to a later period. So most of this increase is related to these new product introductions. Great. Thank you. The second question I have is many of your peers are citing sort of growing capacity constraints that may be starting to limit upside in the second quarter or perhaps even in the second half. Wondering if you're having or seeing any to gather the supply chain constraints that might be limiting your near term outlook either again in the second quarter or the second half, whether it be Semiconductors, whether it be passive devices, anything else that go into your systems? Sigal. So the answer is no. We took a lot of actions during Sigal. 2020 in order to expand both our production capacity as well as securing the supply chain Sigal. From the understanding that once everybody will go out from the corona, we'll have here an over demand issue with the supply chain. Sigal. We secured both our inventory as well as the production capabilities, both in Israel and the U. S. And in Taiwan. And currently looking in 2021, we don't see any issue coming from either productivity perspective Our supply chain and everything is based on the current situation. If something will change economically or From the COVID perspective, then we need to evaluate again. But as it looks right now, we don't have constraint to increase capacity. Sigal. Great. And Eitan, for you, my last question is, it sounds like you've got an increasing number of Prism and Stigal. I was just wondering if you could give us any sense on other new technologies you're developing, whether Technologies would be more in the dimensional space or the material space. Sigu. So obviously, once we release those technologies to the market, we will announce it. I think that on the current growth path that we have and the surge in demand for the current products that we have, Sigal. It will take a few quarters more in order to introduce more new technologies, but Definitely, the 2 areas that we are focusing right now or the 3 areas we are focusing right now, one is finding new information for the dimensional part and one of them you saw is the prism. The second pillar will be More products on the material side because it's becoming a real issue to measure the profile, composition, to gather. And the third element is more and more Software and machine element and machine learning elements as they are compensating part of the hardware It will be very tough to reach in this tight windows and tight specification that the customers are asking. Sigal. So most of the development right now or most of the investments right now goes into these three directions. Sigag. Thank you, Mirek. Thank you, Dror. I'll get back in the queue. Thank you. Thank you very much. Sigal. We will now take our next question from Jamie Vazaloreck from Bank of America. Please go ahead. Stigata. Hi, guys. Thanks for taking my question and congrats on the great results. I had a question on China. So How are you guys seeing demand from the domestic China region? I think some of your peers have mentioned they expect domestic China WFE this year to be around $10,000,000,000 maybe slightly higher. So what's been your visibility into demand? And Sigal. So, thanks for the questions. So let's start Sigal. Let's start on the second question. Regarding the geographical distribution of the revenue, we definitely in the Q1 see more demand coming from Korea actually, it was a record revenue for us coming from Korea this quarter. So we see growth both in DRAM, Sikka. Logic and Vinant coming from Korea during the Q1. Taiwan is already elevated With a larger foundry over there that is spending both on 5 nanometer and 3 nanometer. And regarding to China, We do see the increase of investment in the local domestic in China. The fact that we Well, parts of our product can ship from Israel, allow us to gain market share as well as to get into those investments, Kim, much easier than part of our peers, and we are enjoying from that. And Sigal. If we are looking right now on distribution over the year, China is very stable to us Sigal. Across the 4 quarters with some options for upside Got it. That's very helpful. And then, you guys talked about a number of impressive product offerings. I kind of wanted to ask a little bit more about the new Ellipton tool. Can you discuss what's driving the need for this specific tool? How it's really different from what else is in the industry? And any color on gather customer momentum so far. So if I'm looking right now on the total portfolio Sigal. For material measurement, it's very unique and it's one of a kind in the market. Actually, both for the XPS Sika. Those are products that used to be measuring Materials characterization in the laboratories. And what we did actually, we took them into the production And we took them to applications that are in line in guide. And besides Nova, I there isn't any Other competitors in the market that is doing either composition or stress With any other technology in the market. So for that uniqueness that you're taking some technologies that will not exist today to gather. In the production and taking it from a very slow laboratory tool and bring it to guide. To high volume productivity in the fab itself, it's creating a lot of demand. Now regarding the application itself, we need to understand right now that In order to improve today's performance on a chip, if previously everybody talked about the Moore law And scaling, today it's a combination of scaling, which is dimensions and a lot of investment in materials. So we do see in the future, As we've seen in the last few quarters with our materials portfolio, a lot of demand for materials measurement. It's always running around composition, stress, strain, crystallineality of the silicon and many other to gather materials measurements that are really needed today in process control and we are very unique in that. Got it. And if I could to squeeze one more in. Some of your peers have mentioned that they now expect WFE to be back half loaded this year. Are you seeing the same? And what does that mean for your get revenue profile throughout the year. So usually, we don't give guidance beyond the quarter, and I'm saying it always in the first Cica. It will be a bit nice to look on the Q4 and assume that we know exactly what is the result in the Q4. Stigata. And we see this upside in the second half, But I think that the second half will be better than the first half, but we don't see it The major increase in the second half, everything is under the assumption that we don't yet see the full visibility on the 4th quarter. Get our next question from Patrick Ho from Stifel. Please go ahead. Thank you very much and congrats on the nice quarter and outlook. Etan, maybe first off, you've talked about a lot of your development work that's now coming to fruition with new products As you look forward into the foundry logic, you did bring up in your prepared remarks Comments about the heat blowing around nanowires and the future transistor structures on the foundry logic side of things. How much capital intensity do you think it increases for both your dimensional and materials tools Sigal. So I think that if we're looking right now, by the way, Not only on the logic, if we're looking also on the memory, there's 2 inflection points that is requiring a lot Sigal. In the Vinant, it's majorly increasing the count layers of the memories, Which don't allow you to do 1 shot hedge or 1 shot deposition and therefore You need to do have a multi stock structure. And this multi stock structure in the vein on creating a lot of difficulties Sigal. This can be controlled only with more intensity on the metrology side, mainly to gather the next question. And if you're looking right now on the logic, the gate all around or the nanosheet structure with the to gather. 3 and maybe 5 sheets later on create a whole new story, okay? So the Transistors are not anymore Traditionally, they are standing and currently they are becoming horizontal. And in order to make it as an accurate and precise structure, you need to add a lot of materials and it's a very to guide. And every time that something is tough to control, you need more methodology and you need more intensity Sigal. On those process control tools. So definitely, when we are looking right now on the advanced node, both on to gather. The north of the 170 layers in the mass in Xenon as well as the nanosheets, 2 nanowires with 3 sheets in logic, We definitely see increase in tens of percentage of intensity in those technology nodes. Sigal. Great. That's helpful. And maybe as my follow-up question, in terms of the services business, you mentioned you had a record quarter this year. I know over the last couple of years, you've increased your capacity, particularly in Israel. That's obviously helped with The manufacturing side of things and getting tools out, can you discuss your services infrastructure and whether you need to invest more to keep pace with that growing business and the number of tools that are starting to hit the field. Sigal. So obviously, once you increase the install base, you need more services and you will need more resources to support But I think that if we're looking on the larger picture, the service revenues are distributed over 3 elements. One is the contract or the service based licenses for services for those tools installed based in the trailing edge. And the target, of course, is to have as much as many tools As you can in those service contracts or license based contracts, this is one part. The second part, of course, is time and materials, Which means those customers that don't like this, the contract part, you need to support them by call, which is a part of the service revenue. And the last one is everything that we call the value added services, which this is the growing part And this is where we invest both on road map. We have a specific service road map, which means Productivity upgrades, hardware and software of tools and installed base, which are installed for a couple of years. We have in this part also unique to guide the software elements to control the tools in large volumes only for the service part. So and of course, many more. So part of the development that we have in the R and D is to develop those value added services that actually you can earn money to the current installed base. And I'm not talking just about the release upgrades or Just to put upgrades, I'm talking about real functionality changes that we can squeeze money and revenue In order to give more functionality and productivity to the customers. So definitely there is investment in that And definitely, we are growing in investment in services. Great. Thank you very much. Sigal. Thank you, Patrick. We will now take our next question from Sikaatif Malik from Citi. Please go ahead. Fikal. Ethan, you talked about the 10% goal for the software to be as a percentage of the products. Can you help us understand where you guys Yes. So in the Q1 of 2021, we were at approximately 7% to 8% of product revenues. Sigal. Okay. And then as my follow-up, I just want to understand what the percentage of your product Our integrated metrology and how much of that is exposed to kind of Fikau. The decision making and at the OEMs, the processing tool companies in the U. S. And how much of it is influenced by Fikas. The reason I asked that question is because some of these OEMs are increasingly talking about Sigal. Kind of a holistic kind of inspection and metrology and they talked about some in house capabilities Fikar in terms of putting metrology capabilities on the processing tool. So I just want to understand how much of your card Sika. And if there should be any concern in terms of in sourcing risk at these OEMs? Thank you. Sigal. So, Atif, thank you for the question. In regard to the first part, we don't break down the Fikau. Revenue is coming from integrated and stand alone. And we would like to say in this policy, Sigal. Because it has a lot of competitive information once we start breaking it down following the market demand. Stigal. In regard to the second question, I would like to shine a bit light about the metrology and the way that it's been decided. So in the gutter metrology, although it's connected to an OEM tool, it's a totally different market, decided by the customers And the OEM, besides the fact that they need to be ready to connect to the integrated and of course that we have Very good relationship with all of them. Decisions are made by customers and the OEM don't have a say in that, okay? Sigal. Now looking right now on the way that metrology has been divided, it has 3 parts. The first part is a standalone. It's tools that are standing as a standalone station, not related to the OEM And the wafers are traveling to this standalone system. If you go one level down, it's the integrated metrology, Which are connected to the OEM and give metrology as wafer to wafer control, okay? So we know how to Sigal. Control the metrology between the wafers. And if you go and this is where Nova exists. And if you go one level down, you go to the institute. This is what the OEM are doing. And institute usually is For the polishing or the etching process itself, it can't even compete with the integrated. So Sigal. It's 3 different markets that exist by itself and Nova is not competing with the Institute and the Institute is not competing with the Integrom. Sigal. Therefore, the OEM discussion about having internal metrology through the institute of very smart sensors I'm not cannibalizing any of our markets. Thank you. Your time is very clear. Sigal. As there are no further questions at this time, I would like turn the conference back to Iten Oppenhaim, President and CEO, for any additional or closing remarks. Sigal. Thank you, operator, and thank you all for joining our call today. Please stay safe and healthy. Bye. Sigat. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.