Good day, and welcome to Nova's fourth quarter 2020 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of MS-IR. Please go ahead.
Thank you, operator. Good day to everybody. I would like to welcome all of you to Nova's fourth quarter and full year 2020 financial results conference call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO, and Mr. Dror David, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements. The safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it in the investor relations section of the company's website. Eitan will begin the call with a business update, followed by Dror with an overview of the financials. We will open the call for the question- and- answer session. I'll now turn over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.
Thank you, Miri, and thank you all for joining us today. I will start the call by speaking briefly about our fourth quarter results and performance highlights. I will then spend some time summarizing 2020 and our main achievements for the year. Following my commentary, Dror will review the quarterly and annual financial results in detail, including the guidance for the first quarter of 2021. Nova reported remarkable results for the fourth quarter, with revenue exceeding the guidance and profitability reaching the high end of the guidance, demonstrating our growing agility and solid execution capabilities. The company resilience amid the pandemic, led by our global team, drove exceptional performance in the quarter and throughout the year. Our robust quarterly results concluded a record year, representing an annual growth rate of 20% in our revenue and 30% in our non-GAAP earnings.
This was a strong conclusion to a well-performed year, during which we continued to innovate and extend our differentiated technology to support our customers' growing demands. The positive market reception of our product offerings and our sound operational model support our momentum to continue our growth in 2021 as well. The accelerated demand for new complex semiconductors across the industry represents a significant compelling technology event affecting all semi-segments, including Logic, DRAM, and Flash NAND . These trends continue to expand our available markets and increase the attractiveness of our materials and dimensional portfolios in the coming years. Following our successful product introductions in 2020, we believe that Nova is well-positioned to increase its footprint and market share across multiple customers in 2021.
Our accomplishments this year highlight the agility and resiliency that the company developed along the year to support our growing activity, despite the challenging environment imposed by the COVID disruptions. Turning now to our quarterly highlights, our performance was driven by a mix of technology enhancement, product introduction, and business wins, reflecting our progress to meet Nova's long-term organic targets. The revenue for the quarter reached a record high, representing 10% sequential growth from the third quarter of 2020. Based on the recent market dynamics, our quarterly sales were driven primarily by strong demand in logic. The current demand for both advanced and mature logic devices concluded a very healthy year for our logic customers. In the current environment, the leading-edge customers are required to accelerate their advanced node transitions to meet the growing demand for high computing applications like 5G, AI, and HPCs.
On the other hand, the acceleration in digital evolution in many applications also drives demand for the more mature nodes across various markets such as consumer, automotive, and industrial. As a result, our quarterly mix was weighted towards logic, with around 72% of the revenue derived from this segment. Although we just started 2021, we expect the same healthy demand to continue across various logic generations this year as well. Although 2020 was more robust in logic demand, our memory customers also started to increase their investment in the fourth quarter, mainly in DRAM, which grew more than 25% sequentially in our quarterly revenue mix. We expect this moderate growth to continue in 2021 as well in other various memory segments. The evolving semi market during COVID is also fueling memory demand across broadening application space.
As a result of decreasing inventories and more balanced supply-demand levels, we expect a better investment cycle in memory, both in NAND and DRAM throughout 2021. Our progress along the year to balance our revenue mix is highlighted also this quarter by the customer mix, which yielded three major customers that contributed more than 10% each to our revenue. This includes a leading foundry manufacturer, a leading memory provider, and a growing foundry in China. One of the more notable achievements in the fourth quarter was the record revenue contribution from our materials metrology sales. During the quarter, we received multiple orders from multiple leading logic customers for our most advanced material metrology solutions. The bookings were for Nova's VeraFlex materials metrology platform, which provides breakthrough thin film thickness and composition process control capabilities for the current and emerging technology nodes.
The recent win marks Nova's growing penetration into all leading industry manufacturer and cements Nova's position as a material metrology leader. As part of a consistent approach to expand our exposure to more materials applications, we announced in December the launch of Nova ELIPSON, a revolutionary materials metrology solution. The new in-line standalone metrology platform is designed to measure materials properties such as stress, strain, and surface for both memory and logic applications. Following the announcement and outstanding progress we had with multiple customers, we recognized initial revenues from several accounts already in 2020. Let me now shine some light on our yearly benefits. Nova's quarterly performance signifies an optimistic end note to a challenging year in which COVID-19 threatened world stability. We concluded the year better than previously anticipated, growing our revenue to a record high, representing a compound annual growth rate of 13% for the past five years.
Our profitability continued to strengthen as well, with net income earnings growing significantly also year-over-year. During this disruptive period, multiple factors contributed to our strong performance in 2020, and I would like to mention four major ones. First is the advanced operational model that we built during this period to allow better agility and resilience, which allow Nova to function well and adapt faster to the changing conditions. This model is currently guiding our product development cycles, go-to-market strategies, flexible lead times, tighter supply chains, a safer environment for our employees, stronger territory support, and robust recovery plans. As a result, we continue our manufacturing plans according to customers' demand and increased capacity by around 25% without a single shutdown day.
Additionally, and in light of the continued travel restrictions, we invested significantly this year to strengthen our global team by increasing professional headcount and expanding the facilities around the globe to shorten customer response and time to service. Second is the enhanced product portfolio we introduced during the year. Our investment in research and development, which grew at around 20% year-over-year, was focused on two main pillars. Introducing new product generations, both in the optical and X-ray lines, and the development of entirely new products from the ground up. In light of the technology evolvement in the industry, we introduced a new generation platform to all our traditional product lines, including the integrated and standalone OCD, the advanced software package, and XPS. All of them are already installed, accepted, and generating revenue.
Regarding our new innovation, we continue to proliferate the newly introduced PRIZM platform in multiple accounts, gaining share and winning new positions in both memory and logic. On this front, we are also excited this year to introduce the ELIPSON, a new materials metrology platform based on Raman technology that aims to deliver additional materials information like stress and strain, unmatched by any other in-line materials metrology system. As a result of these product initiatives, in both our sustained and new innovative portfolio, we could reach record annual revenues in both the standalone and integrated optical CD metrology, growing significantly year-over-year. The third highlight I would like to mention is the continued diversification of our revenue mix that allows us to mitigate different demand cycles in the industry.
Although this year was weighted towards logic with roughly 68% of revenue contribution, we also had significant wins and penetration into other customers, including a large IDM, global memory manufacturer, and other accounts in China. This creates a healthy balance mix that will continue to support our long-term strategic targets and interim growth plan in 2021. The last highlight I would like to mention in regard to 2020 is the growing importance we have been giving to our Social Responsibility Plan. The reality of COVID-19 solidified our commitment to support communities across the globe. Over the past year, we've actively supported our partners and customers, as well as families, individuals, and health organizations in the communities. Our recently announced Corporate Social Responsibility Strategy is a natural evolution of our ongoing practice, aiming to continuously enhance our ethical, social, and environmental performance.
We are committed to incorporating social responsibility into our daily operations and business management while inviting all stakeholders into our socially responsible ecosystem. To wrap up, and before I hand over the call to Dror, let me briefly summarize our results and market position going into 2021. Despite continuous disruption and growing challenges associated with the pandemic spread, Nova's global team adapted quickly to the new dynamic environment, performing well and driving a solid growth year. While the industry is going through tremendous structural changes and adjusting to the different demand catalysts as a result of the accelerated transition to a more data-driven world, our offering is rapidly evolving to meet these changes and expand our available markets.
Given our agile operational model, innovative portfolio, new product rollouts, and growing exposure to a broader opportunity range, we believe that Nova is well-positioned to continue capitalizing on growth opportunities in 2021 as well. Now let me hand over the call to Dror to review our financial results in detail. Dror?
Thanks, Eitan. Good day, everyone. Total revenues in the fourth quarter of 2020 exceeded our previously announced guidance and reached an all-time record of ILS 76 million, 18% higher than the fourth quarter of 2019. Product revenue distribution was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan and Korea each contributed more than 20% to our product revenues, while China contributed slightly less than 20%. On a per customer basis, three major customers contributed 10% or more to our product revenues, including two foundry customers and one memory customer. Blended gross margin in the fourth quarter was 55% on a GAAP basis and 56% on a non-GAAP basis. Product gross margin increased to 63% on a GAAP basis and 64% on a non-GAAP basis due to favorable product mix.
Service gross margin reduced to 22% on a GAAP basis and 23% on a non-GAAP basis due to lower revenue levels, less favorable mix between contracts and time and materials, higher materials consumption for warranty and contracts, and end-of-year inventory-related adjustments. Operating expenses in the fourth quarter of 2020 on a GAAP basis increased to ILS 25 million and included a one-time income of ILS 2.9 million presented in general and administration related to cash recovery of an unauthorized transaction previously made by a financial institution. Operating expenses in the fourth quarter on a non-GAAP basis increased to ILS 26 million, reflecting increased headcount and end-year closing costs, as well as the impact of unfavorable Israel currency exchange rates.
In the fourth quarter of 2020, the company presented net financial expenses on a GAAP basis due to ILS 0.9 million of expenses related to amortization of debt discount and issuance costs from the October convertible notes issuance and ILS 1.4 million of expenses related to the revaluation of our operating lease liability as a result of the unfavorable Israel currency exchange rate. Both of these financial expense elements were adjusted for non-GAAP purposes. Earnings per share on a GAAP basis in the quarter were ILS 0.47 per diluted share, above our guidance of ILS 0.32- ILS 0.43 for the quarter, mainly as a result of the previously mentioned one-time income of ILS 2.9 million. Earnings per share on a non-GAAP basis in the quarter were ILS 0.55 per diluted share at the high end of our guidance of ILS 0.45- ILS 0.56.
On an annual basis, revenue grew 20% year-over-year to over ILS 269 million in 2020. Product revenue distribution on an annual basis was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan, Korea, and China each contributed between 20% and 30% to our product revenues. On a per customer basis, three major customers contributed 10% or more to product revenues, including two foundry customers and one memory customer. Annual blended gross margin was 57% within our target model range. Product gross margin grew to 62% on a GAAP basis and 63% on a non-GAAP basis as a result of significantly higher revenues utilizing similar infrastructure as well as favorable product mix. Service gross margin reduced to 37% on a GAAP basis and 38% on a non-GAAP basis, mainly due to higher personnel and material costs.
Operating expenses in 2020 grew approximately 15% year-over-year, mainly in research and development, reflecting the significant investment in developing, introducing, and proliferating new technologies and products. Operating margin in 2020 grew to 21% on a GAAP basis and 24% on a non-GAAP basis. Effective tax rate in 2020 was approximately 15%. In 2020, earnings per share on a GAAP basis grew to $1.65 per diluted share, while earnings per share on non-GAAP basis grew to $2.06, representing a 30% year-over-year growth, which significantly outpaced the revenue growth in the same year. In 2020, we generated free cash flow of ILS 54 million and in parallel, successfully concluded a 0% convertible bond offering in the amount of ILS 200 million. As a result, we enter 2021 with gross cash reserves in excess of ILS 420 million, which enables us to pursue business opportunities within the year.
Moving into our outlook for the first quarter of 2021, we expect the following. Revenues to be between ILS 76 million-ILS 83 million. GAAP earnings per diluted share between ILS 0.41 and ILS 0.53. Non-GAAP earnings per diluted share between ILS 0.55 and ILS 0.66. At the midpoint of the first quarter guidance, we expect the following. Blended gross margin to be approximately 57%, while service gross margin is expected to increase to between 35%-38%. Operating expenses to be approximately ILS 27.5 million on a GAAP basis and approximately ILS 25 million on a non-GAAP basis. Effective tax rate to be approximately 15% in the first quarter of 2021 and throughout the year. With that, I will turn the call back to Eitan. Eitan?
Thank you, Dror. With that, we will be pleased to take your questions. Operator?
Thank you. If you wish to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is tuned off to allow your signal to reach our equipment. Again, that's star one for questions. We'll now take our first question from Quinn Bolton from Needham & Company. Please go ahead. Your line is open.
Hey, guys. Congratulations on the strong finish to 2021 and the very strong first quarter guidance. I guess my first question for you, as you sit here today looking into 2021, you've guided us to a very strong first quarter. I'm wondering if you could make any comments about how sustainable you think that revenue level is. There's been a debate among some of your WFE peers about whether spending in 2021 would be sort of front half loaded, balanced or second half weighted. I just would love your perspective as you sit and you look at your order book and your backlog, whether you think your revenue profile this year is front half weighted or more balanced through the year. Thank you.
Thank you, Quinn. It's Eitan here. Regarding the market review and what we should expect in 2021. As I said in my prepared remark, entering in 2021, there are two main catalysts that fuel the growth, at least in the first half, which is the healthy demand in logic foundry that will continue at least in the first half. Second is the growing investment in DRAM. Regarding the second half, as you know, although we don't guide for the year, and the visibility right now for the Q4 is not so great, I can be cautious and say that I support the analysts and the prediction in the market that's saying that WFE in 2021 will grow at around 10%-15%. I think that if we're looking right now on the segments, I think that H1 probably will be fueled by logic and foundry.
If I'm looking on the second half, the foundry and logic will continue on the same healthy demand, basically on the 7, 5, 3 nm. I think that mainly VNAND will be added in the second half as well. Okay? I'm looking right now on a balanced year, at least from our prediction.
Great. Dror, you mentioned that the appreciation of the shekel was one of the things that added to costs in the fourth quarter. Wondering, as you look into 2021, you've given us OpEx guidance for the first quarter, how are you thinking about foreign currency exchange? Do you expect that those are going to remain elevated costs and lead to higher OpEx this year? How are you thinking about that foreign exchange effect on OpEx in 2021?
Obviously, it's hard to predict these economic elements of the market. What I can say is that during the first quarter, the foreign exchange rate did hit some kind of a low level and started recovering since then. Our guidance for the first quarter is already embedding an additional small impact as a result of that, and assuming the currency will remain stable at these levels. Again, it did hit some kind of a low in January. Expenses will not get another hit from that aspect in the coming quarters.
Okay, great. Thank you.
Thanks.
We will now move to our next question from Atif Malik from Citi. Please go ahead. Your line is open.
Hi, thank you for taking my questions. Good job on the results and guide, Eitan. In terms of the logic demand, very strong last year. If you can parse the metrology demand between mature technologies versus leading edge. Also, if you can comment on the intensity of your products as we move to 3D gate-all-around fab devices of 5 nm and 3 nm .
Thanks, Atif, for the question. If we're looking right now on the metrology intensity, there are two pillars. The first pillar is that always in logic foundry, the intensity is higher or the highest in the semi segment. After that is the DRAM, and at the end is the VNAND or the NAND. This is the way that the intensity is being allocated. The reason is that mainly that in foundry, there are many products, and there are changes also in the materials and the dimension. As you go along to the DRAM and the VNAND, the number of products is reduced, and it's more stable products. The intensity-wise is always higher in the logic foundry. This is one pillar. The second pillar is always when you're moving to a new generation of chip, and you're moving to a new complex device.
The current movement that we see that the logic is moving to three and two, and changing also the architectural structure to go to nanowires and changing the materials. Also, if you're looking right now on the memory as well, when you are scaling down the device, of course, every change on every move to a new generation is increasing the intensity itself for the segment. If you have both logic and the memory, as we see that in 2021, replacing generations and also changing and replacing materials and going to a very complex devices, of course, the intensity is going up. We need always, when we're talking about intensity, try to offset it by the capacity, right? If your intensity is going higher and capacity is not going on the same level. Then you have some offset.
If you are normalizing it to 100 wafers or 1,000 wafers, always logic and foundry is higher. When you're looking right now on the next one year, all the intensity and attach rates in all the new technology nodes are going to be higher as well.
Great. As my follow-up, if you can talk about what's driving the service gross margins higher in the March quarter. Is it just the volume? Thank you for breaking out the two margins.
Yeah, sure. Obviously, the phenomenon in Q4 was a one-time phenomenon related to the aspects that I mentioned before, more materials consumption in the specific quarter and end-of-year adjustment. Actually, what we see in the first quarter is that service gross margins are returning to the normalized level, and this is what you should expect along the year. If we will see pickup in service revenues along the year, margins can even further improve from these levels.
Thank you.
We will now move to our next question from Mark Miller from The Benchmark Company. Please go ahead. Your line is open.
Based on the mid-quarter guidance, it appears backlog went up significantly last quarter, and it looks like that trend is going to be continuing in 2021. Is that correct?
Yes.
Okay. Taiwan Semiconductor is putting up a major fab in Arizona. It's a key customer of you. Are orders starting to flow in from that, or is that going to be later this year?
The orders for the Arizona fab will probably start to arrive, and again, I don't know the orders, and I don't know when exactly they are going to come, but probably towards the end of the year.
Thank you.
We'll now move to our next question from Jaeson Schmidt from Lake Street. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions. I think at one time there was talk that the goal for the service revenue line would be sort of targeting 10% growth. Is that still a good ballpark growth rate to think about for that revenue stream?
I would say the following. Our current assumption for services growth is between 5% and 10%, depending on the install-based growth and also value-added services in the specific year. Obviously, this year it was around 5%. There could be years where it's going up to approximately 10%, it's between these levels, 5%-10% a year.
Okay, that's helpful. Just as a follow-up, just curious if you saw any constraints on the supply side in Q4 or if you're anticipating any going forward here in the near- term.
Jaeson , if you're talking about the supply chain for our production facilities, I think that we managed very well in 2020, trying to secure everything that we can in the supply chain. So it means that we increased inventories, and you see that in our financial report. Also we tried to qualify actually a second or third supplier in each one of our elements in the supply chain. The way that we are looking forward is trying to order and try to make sure that we have enough capacity for the next six to nine months, and this is secured. We need also to remember that we need to secure extra capacity because we see a growth in the production. Regarding the bottom line, we don't see any disruption currently.
If the worst is behind us through 2020, and we could succeed increasing the production, I think that 2021 can be the same and even higher.
Okay. Thanks a lot, guys.
We'll now take our next question from Patrick Ho from Stifel. Please go ahead. Your line is open.
Thank you very much. Congrats on the nice finish to the year. Eitan, maybe first off, on the materials metrology front, it's good to see the traction and the adoption very quickly for these new products. As you look at the memory side of things, and you mentioned DRAM has higher metrology intensity, can you maybe give a little more color on some of the applications and some of the potential wins on the memory side with the materials metrology offerings that you have today?
Yeah. Thanks, Patrick, for the question. The two main applications that are running specifically on the X-ray or the previously ReVera products is the materials composition and ultra-thin thickness measurement, okay? These are the two main applications, and we are running on these two applications in all the customers. Now because it's a unique metrology capabilities, the way that it started from taking it from 2015 from the lab to fab. We started with a couple of systems per phase or per fab. Some of them were in R&D, some of them were in production. In the last five years, we could move those tools to be real in-die, in-line production tools. Once you move them to in-line and in production, you also improve the attach rate and the intensity.
Once you start to get the customer's confidence, because it's non-destructive and it's becoming a very fast metrology capabilities, you start to get into the fab with more capacity, more attach rate, and more intensity. I can say that, without getting to the exact numbers, but the distribution between memory and foundry or logic, it's around 50%, 50%. We have applications coming from the memory, mainly the VNAND sides when they are changing materials, and they're starting to have a very ultra thickness applications. Also for the logic and foundry when they're moving to new structures. It's two different directions, but both of them are increasing the intensity of the usage once we move to the in-line and in-die systems that have the capability to measure really fast.
Great. That's really helpful. Maybe as my follow-up question, it's good to see the services business continue to grow, and you mentioned the margin improvements as we move forward into 1Q. Maybe, Dror, from that standpoint on the margin improvements. How much is the service business evolving where you're helping customers more not only with the traditional type of services, break-and-fix type of model, but with enhanced features, enhanced products, upgrade? How much of that is contributing to, quote, the services growth as well as the uptick in margins?
That's a good point, Patrick, because actually in 2020, at least for the first half of the year, because of the situation of the COVID-19, the ability to enter the fabs and do these mega projects of upgrade cycles was a little bit limited, and this probably had some impact on the growth of the services in 2020, which was at the low end of the 5%-10% that I mentioned. Looking forward when we move into 2021, obviously these limitations are less significant and hopefully this can contribute more to our revenues in 2021, and hence accelerate the growth of services in the.
Great. Thank you very much again.
Thank you, Patrick.
Just as a reminder, that is star one to ask a question. We'll now take our next question from Krish Sankar from Cowen & Company. Please go ahead. Your line is open.
Yeah, hi, thank you for taking my question and congrats on the really strong results. If I may throw one quick question. When I look at your calendar 2020 numbers, you guys definitely seem to have grown really nicely, both you outperformed the industry growth and also some of your peers. I'm kind of curious, is there a way you can quantify how much of your growth came from share gains, and which vertical were those share gains in? Was it in foundry, logic, or memory? And then I'll follow up.
Krish, thank you very much for the question. If you're looking right now on the average growth in the market, as you said, it was around 15%. If we're looking right now on our products, the growth rate in the year was above 25%. I think that there were two strong catalysts to our growth. One, of course, is capacity, because capacity demand is growing in all segments. The second is purely share gains, which I cannot mention exactly where, but once you're doing outperformance, it's either you open a new market or you're taking a market share. In this specific year, as I said in my prepared remark, we took a market share in one big IDM, as I discussed before, and I mentioned it in a couple of my calls.
As well as in a global memory customer that took our old portfolio, starting from integrated standalone as well as materials and software. It's also adding to that is couple of other customers in China that in some of them we are holding a high percentage of market share in light of the performance this year. Definitely there is increase in market share this year on top of the demand. I also would mention that if we're looking right now on 2021, the new product that we're bringing in will probably open new applications that were not answered in production for many years. We can increase besides the market share, also getting applications that were measured before in the lab and now is moving to inline production.
Well done. Very impressive. I just want to quick follow up. Thanks for the color on the service and product gross margin. At the op margin level, is it fair to assume service and products have similar op margins?
Can you repeat the question?
The service and product divisions from the op margin level, are these similar to corporate average? In other words, services has lower OpEx, lower R&D, so it's similar to, on at the op margin level, similar to products?
Yeah. Actually the situation is that the service business as a whole is heavy on personnel and headcount and field service engineers in the field, relative to maybe products which is more heavy on materials. Practically this is the main reason for the difference between gross margins of services and products. Service is around 40% and products around 60%. Again, the main reason is that the infrastructure of the service organization is heavy on headcount and personnel across the globe. It's 150 sites and so forth.
Well done. All right. Thank you very much. Appreciate the color.
Thank you.
There were no further questions, so I'd like to hand the call back to Eitan Oppenhaim, Nova's President and CEO, for any closing remarks.
Thank you, operator, and thank you all for joining our call today. Please stay safe and healthy, and we'll meet you in the next earning call. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.