Earnings Call: Q4 2020

Feb 18, 2021

Good day, and welcome to Nova's 4th Quarter 2020 Results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mary Segal of NSIR. Please go ahead. Thank you, operator, and good day to everybody. To welcome all of you to Nova's 4th Quarter and Full Year 2020 Financial Results Conference Call. To begin with the question and answer session. With us on the line today are Mr. Ethan Oppenhaim, President and CEO and Mr. Dror David, CFO. To begin, may I remind our listeners that certain information provided on this call may contain forward looking statements to discuss the Safe Harbor statement outlined in today's earnings release also pertains to this call. To 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. To open the call for the question and answer session. I will now turn over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. To welcome Nathan, please go ahead. Thank you, Mary, and thank you all for joining us today. I will start the call by speaking briefly about our 4th quarter results and performance highlights. I will then spend some time summarizing 2020 to review our main achievements for the year. Following my commentary, Dror will review the quarterly and annual financial results in detail, to conclude, including the guidance for the Q1 of 2021. Nova reported remarkable results for the 4th quarter to start with revenue exceeding the guidance and profitability reaching the high end of the guidance, demonstrating our growing agility to conclude the presentation and solid execution capabilities. The company resilience amid the pandemic led by our global team to introduce our financial results. Our robust quarterly results to conclude the record year, representing an annual growth rate of 20% in our revenue and 30% to conclude our non GAAP earnings. This was a strong conclusion to a well performed year during which we continued to innovate and expand to introduce our differentiated technology to support our customers' growing demand. The positive market reception of our product offering to and our sound operational model support our momentum to continue our growth in 2021 as well. To The accelerated demand for new complex semiconductors across the industry represents a significant compelling technology event to discuss our segments, including logic, DRAM and flash NAND. These trends continue to expand our available markets to introduce the attractiveness of our materials and dimensional portfolios in the coming years. To 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 to highlight the agility and resiliency that the company developed along the year to support our growing activity to turn the call over to Mr. President. Thank you. Turning now to our quarterly highlights. To our performance was driven by a mix of technology enhancement, product introduction and business wins, to reflect our progress to meet Nova's long term organic targets. Revenue for the quarter reached a record high, to represent 10% sequential growth from the Q3 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 to conclude with the SEC and Mature Logic Devices concluded a very healthy year for our Logic customers. In the current environment, to The leading edge customers are required to accelerate their advanced node transitions to meet the growing demand to provide a brief overview of the financial results for high computing applications like 5 gs, AI and HPCs. On the other hand, to The acceleration in digital evolution in many applications also drives demand for the more mature nodes to discuss various markets such as consumers, automotive and industrial. As a result, our quarterly mix to reiterate that the company 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 generation to This year as well. Although 2020 was more robust in logic demand, Our memory customers also started to increase their investment in the 4th 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 selling market during COVID to It's 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, to note that both Pinnant and Biram throughout 2021. Our progress along the year to balance our revenue mix is highlighted also this quarter by the customer mix, which yielded 3 major customers to that contributed more than 10% each to our revenue. This includes a leading foundry manufacturer, a leading memory provider to introduce a new company and a growing foundry in China. One of the more notable achievements in the Q4 was the record revenue contribution to turn the call over to Mr. President. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. To review our most advanced material metrology solutions. The bookings were for Nova's Veraflex material metrology platform, The recent wins marks Nova's growing penetration into all leading industry manufacturer to comment Novak's position as a material metrology leader. As part of a consistent approach to extend our exposure to more materials applications, we announced in December the launch of Nova Epsilon, to introduce a revolutionary materials metrology solution. The new in line standalone metrology platform is designed to measure materials properties to discuss such as stress, strain and surface for both memory and logic applications. Following the announcement to note that the outstanding progress we had with multiple customers, we recognized initial revenues from several accounts to start with the Q1 of 2019. Let me now shine some light on our yearly benefits. Nova's quarterly performance signifies an optimistic endnote to a challenging year to introduce our financial results in the quarter. We concluded the year better than previously anticipated, to growing our revenue to a record high, representing a compound annual growth rate of 13% for the past 5 years. Our profitability continued to strengthen as well with net income earnings growing significantly also year over year. To during this disruptive period, multiple factors contributed to a strong performance in 2020, and I would like to mention to take a look at the 4 major ones. First is the advanced operational model that we built during this period to allow better agility and resilience, to be guiding our product development cycles, go to market strategies, flexible lead times, tighter supply chains, to provide a safer environment for our employees, stronger territory support and robust recovery plans. As a result, to continue our manufacturing plan according to customers' demand and increased capacity by around 25% to without a single shutdown day. Additionally, and in light of the continued travel restrictions, to we invested significantly this year to strengthen our global teams by increasing professional headcount and expanding the facilities to around the globe to shorten customer response and time to service. 2nd is the enhanced product portfolio we introduced during the year. To our investment in research and development, which grew at around 20% year over year, was focused on 2 main pillars, Introducing new product generation, both in the optical and x-ray lines and the development of entirely new products from the ground up. In light of the technology involvement in the industry, we introduced a new generation platform to all our traditional product lines, to introduce the integrated and standalone OCD, the advanced software package and XDF. All of them are already installed, accepted and generating revenue. Regarding our new innovation, We continue to proliferate the newly introduced Prism platform in multiple accounts, gaining share to announce that we are also excited this year to introduce the elixthon, a new materials metrology platform based on Raman technology that aims to deliver additional materials information to As a result of these product initiatives in both our sustained and new innovative portfolio, we could reach record annual revenues to in both the standalone and integrated optical CV methodology growing significantly year over year. To mention is the continued diversification of our revenue mix that allows us to mitigate different demand cycles to introduce our speakers to our shareholders. Although this year was weighted on Logic with roughly 68% of revenue contribution, We also had significant wins and penetration into other customers, including a large IBM, to Global Memory Manufacturers and Other Accounts in China. This creates a healthy balance mix to continue to support our long term strategic targets and interim growth plan in 2021. To mention in regard to 2020 is the growing importance we have been given to our social responsibility plans. The reality of COVID-nineteen solidified our commitment to support communities across the globe. Over the past year, we proactively supported our partners to thank our employees and customers as well as families, individuals and health organizations in the communities. To our recently announced corporate social responsibility strategy is a natural evolution of our ongoing practice to continue to enhance our ethical, social and environmental performance. We are committed to incorporating to social responsibility into our daily operations and business management, while inviting all stakeholders into our socially responsible ecosystem. To To wrap up and before I hand over the call to Dror, let me briefly summarize our results and market position going into 2021. To discuss the progress we made in the past. Despite continuous disruptions and growing challenges associated with the pandemic spread, to Noval's global team adapted quickly to the new dynamic environment, performing well and driving a solid growth here. While the industry is going through tremendous structural changes and adjusting to the different demand catalyst to turn the call over to Mr. President. 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, to introduce new product rollouts and growing exposure to a broader opportunity range, we believe that Nova is well positioned to continue to capitalize on growth opportunities in 2021 as well. Now let me hand over the call to Dror to review our financial results to speak to George. Thanks, Eitan. Good day, everyone. Total revenues in the Q4 of 2020 to exceeded our previously announced guidance and reached an all time record of $76,000,000 18% higher than the Q4 to 2019. Product revenue distribution was approximately 70% from Logic and Foundry to and approximately 30% for memory. Geographically, Taiwan and Korea each contributed more than 20% to our product revenues, to While China contributed slightly less than 20%. On a per customer basis, 3 major customers contributed 10% or more to our product revenues, including 2 foundry customers to and one memory customer. Blended gross margin in the 4th quarter was 55% on a GAAP basis to review the financial results and the financial results and the financial results. Product gross margin increased to 63% on a GAAP basis to turn the call over to the operator and the operator to to turn the call over to the operator. 22% on a GAAP basis and 23% on a non GAAP basis due to lower revenue levels, to discuss the financial results. Less favorable mix between contracts and time and materials, higher materials consumption for warranty and contracts to review the financial results and end of year inventory related adjustments. Operating expenses in the Q4 of 2020 on a GAAP basis to increase to $25,000,000 and included a onetime income of $2,900,000 presented in general and administration to discuss the financial institution. Operating expenses in the 4th quarter on a non GAAP basis increased to $26,000,000 reflecting increased headcount to discuss the financial results and the impact of unfavorable Israel currency exchange rate. To In the Q4 of 2020, the company presented net financial expenses on a GAAP basis due to $900,000 of expenses to discuss the financial results related to amortization of debt discount and insurance costs from the October convertible notes issuance to review the financial results and the financial results and the financial results related to the revaluation of our operating lease liability to as a result of the unfavorable Israel currency exchange rate. Both of these financial expense elements to were adjusted for non GAAP purposes. Earnings per share on a GAAP basis in the quarter to review our financial results for the quarter, to discuss the financial results mainly as a result of the previously mentioned one time income of $2,900,000 to discuss our financial results. Earnings per share on a non GAAP basis in the quarter were $0.55 per diluted share at the high end of our guidance of $0.45 to turn the call over to $0.56 On an annual basis, revenue grew 20% year over year to turn the call over to over $269,000,000 in 2020. Product revenue distribution on an annual basis to was approximately 70% from Logic and Foundry and approximately 30% from Memory. Geographically, Taiwan, to Korea and China each contributed between 20% 30% to our product revenues. On a per customer basis, 3 major customers contributed 10% or more to product revenues, including 2 foundry customers to 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, to mainly due to higher personnel and material costs. Operating expenses in 2020 to grow approximately 15% year over year, mainly in research and development, reflecting the significant investment in developing, to introduce and proliferating new technologies and products. Operating margin in 2020 grew to turn the call over to the operator to discuss our financial results. Effective tax rate in 2020 was approximately 15%. In 2020, earnings per share on a GAAP basis grew to $1.65 per diluted share, to discuss our financial results. While earnings per share on a non GAAP basis grew to $2.06 representing a 30% year over year growth, to which significantly outpaced the revenue growth in the same year. In 2020, we generated free cash flow of 54,000,000 to and in parallel successfully concluded a 0% convertible bond offering in the amount of $200,000,000 As a result, to enter 2021 with gross cash reserves in excess of $420,000,000 which enables us to pursue business opportunities to begin the year. Moving into our outlook for the Q1 of 2021, we expect the following: to review our financial results. Revenues to be between $76,000,000 to $83,000,000 GAAP earnings per diluted share between $0.41 to At the midpoint of the Q1 guidance, we expect the following: blended gross margin to be approximately 57%, to provide service gross margin is expected to increase to between 35% to 38%, to Operating expenses to be approximately $27,500,000 on a GAAP basis and approximately $25,000,000 to take a look at the financial results on a non GAAP basis. Effective tax rate to be approximately 15% in the Q1 of 2021 and throughout the year. To 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? To thank We will now take our first question from Quinn Bolton from Needham and Company. Please go ahead. Your line is open. To Hey, guys. Congratulations on the strong pace to 'twenty one and the very strong Q1 guidance. I guess my first question for you as you to sit here today looking into 2021. You've guided us to a very strong Q1. I'm wondering if you can make any comments about how to see how sustainable you think that revenue level is. There's been a debate among some of your WFE peers about whether to spend in 2021 would be the sort of front half loaded, balanced or second half weighted. I'm just would love your to take your order book and your backlog, whether you think your revenue profile this year is front half weighted or more balanced through the year? To Thank you, Quinn. It's Eitan here. So regarding the market to review and what we should expect in 2021. So as I said in my prepared remarks, Entering in 2021, there are 2 main catalysts that fuel the growth at least in the first half, Which is the healthy demand in logicfoundry that will continue at least in the first half. And secondly, the growing investment in to Now 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 to I support the analysts and the prediction in the market that's saying that the WFE in 2021 I will grow at around 10% to 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 753 nanometer. And I think that none, mainly VINANT will be added in the second half as well, okay? So I'm looking right now on a balanced year, at least from our prediction. Great. And then, Futur, to You mentioned that the appreciation of the shekel is one of the things that added to costs in to the Q4. Just wondering as you look into 2021, you've given us OpEx guidance for the Q1. How are you thinking about to take a question from the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of the line of And you need sort of higher OpEx this year? Or how are you thinking about sort of that foreign exchange effect on OpEx in 'twenty one? Yes. So obviously, it's hard to predict these to Economic elements of the market. What I can say is that during the Q1, the foreign exchange rate did hit to discuss some kind of a low level and started recovering since then. Our guidance for the Q1 is already to discuss the question and answer session. Yes, I would like to discuss the question and answer session. And assuming the currency will remain to take a look at these levels. Again, it did hit some kind of a low in January. So expenses would 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 and good job on the results. And to Guy, Ethan, on first of the largest demand, very strong last year, if you can parse the metrology demand to discuss the 3 d Mature Technologies, which is leading edge. And also if you can comment on the intensity of your products as we move to 3 d Thanks, Atif, for the question. So if we're looking right now on the metrology intensity, there to There are 2 pillars. The first pillar is that always in logicfoundry, the intensity is higher Or the highest in the semi segment, after that is the DRAM and at the end is the VINAT, okay, or the NAND. This is the way that the incentive has been allocated. The reason is that mainly that in foundry, there are many products and there are changes also in the materials and to And as you go along to the DRAM and the VINAM, the number of products is reduced It's more stable products. So the intensity wise is always higher in the logic foundry. So So 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 and the current movement that we see that to keep actual structure to go to manual and changing the materials. And 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 to So if you have both logic and the memory, as we see that in 2021, to 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? So if your intensity is going higher and capacity is not going on the same level. So then you have some offset. But if you are normalizing it to 100 wafers or 1,000 wafers, to Always logic and foundry is higher. And when you're looking right now on the next 1 year, all the intensity and attach rate in all the new technology nodes Great. And 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? And thank you for breaking out the key margins. Yes, sure. So obviously, the phenomena in Q4 was a onetime phenomena related to speak to the aspects that I mentioned before, more materials consumption in the specific quarter and end year adjustment. So actually, what we see in the Q1 The 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. To turn the call over to Mark Miners from The Benchmark Company. Please go ahead. Your line is open. Based on the midpoint of your guidance, it appears R and D went up to significantly last quarter and it looks like that trend is going to be continuing in 2021. Is that correct? Yes. Okay. Plant 1 Semiconductor is putting up a major fab in Arizona. It's a key customer view. Are orders starting to flow in from that or is that going to be later this year? So the orders for the Arizona fab will probably start to arrive. And then 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. To and we'll now move to our next question from Jason Schnick from Lake Street. Please go ahead. Your line is open. To 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 to start targeting 10% growth. Is that still a good ballpark growth rate to think about for that revenue stream? Well, I would say the following. Our current assumption for services growth is between 5% 10%, depending on the installed based growth and also value added services in this specific year. So obviously, this year, it was around 5%. There could be years where it's going up to approximately 10%, but It's between these levels, 5% to 10%. Okay. That's helpful. And then 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? So, Jason, if you're talking about the supply chain for our production facilities, I think that we managed very well in 2020, to 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. And also, we tried to qualify actually a second or third supplier in each one of our to take a look at the supply chain. And the way that we are looking forward is trying to order to make sure that we have enough capacity for the next 6 to 9 months, and this is secured. And we need also to remember that we need to secure extra capacity because we see a growth in the production. But regarding the bottom line, we don't see any disruption currently. So if the worst is behind us through 2020 and we could succeed Increasing the production, I think the 2021 can be the same and even higher. Okay. Thanks a lot, guys. To take your questions. And we'll now take our next question from Patrick Ho from Stifel. Please go ahead. Your line is open. To Thank you very much and congrats on a 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 to ask 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. Yes. Thanks Patrick for the question. So the 2 main applications that are running on the specifically on the X-ray For the previously, Rivera products is the composition, material composition and ultrathin Thickness measurement. Okay. This is the 2 main applications, and we are running on these 2 applications in all the customers. Now, because it's a unique metrology capabilities, the way that it started, it started from taking it from to turn the call over to John. We started with a couple of systems per phase or per fab. Some of them were in R and D, some of them were in production. And in the last 5 years, we could move those tools to be real in line production tools. So once you move them to in line and in production, you also improve the attach rate and the intensity. So once you start to get the customer's confidence because it's non destructive and it's becoming a very fast metrology capability, to 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 to and foundry or logic, it's around 50%, 50%. So we have applications coming from the memory, to discuss mainly the VINAM side when they are changing their materials and they're starting to have a very ultra thickness applications And also for the logic and foundry when they are moving to new structures. So it's 2 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. Right. That's really helpful. And maybe as my follow-up question, it's good to see the services business continue to grow. And you mentioned the margin improvements to as we move forward into 1Q, maybe draw from that standpoint on the margin improvements. How much is the service business evolving where You're helping customers not only with the traditional type of services, break and fix type of model, but with enhanced features, enhanced products, to upgrade. How much of that is contributing to quota services growth as well as the uptick in margins? To That's a good point, Patrick, because actually in 2020, at least in the first half of the year, because of the situation of the COVID-nineteen, The ability to enter the fabs and do these mega projects of upgrade cycles was a little bit limited, and this probably had to confirm the impact on the growth of the services in 2020, which was at the low end of the 5% to 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 to accelerate the growth of services in the industry. Great. Thank you very much again. To Thank you, Patu. We'll to now take our next question from Krish Sankar from Cowen and Co. Please go ahead. Your line is open. Hi. Thanks for taking my questions and to Congrats on the really strong results. It kind of draws one quick question. When I look at your calendar 2020 numbers, you guys definitely seem to have grown really nicely, to both you outperformed the industry growth and also some of your peers. So I'm kind of curious, is there a way you can quantify How much of your growth came from share gains? And which vertical will grow share gains? And was it in foundry, logic or manual? And then I have a follow-up. So, Chris, thank you very much for the question. So, if you're looking right now on the average Growth in the market, as you said, it was around 15%. And if we're looking right now on our product, The growth rate in the year was above 25%. So I think that there were 2 strong catalysts to our growth. 1, of course, is capacity, because capacity demand is growing in all segments. And the second is purely share gain, which I cannot mention exactly where, but once you are doing Once you're doing outperformance, it's either you open a new market or you're taking market share in this specific year. As I said in my prepared remarks, we took market share in 1 big IBM, as I to discuss before and I mentioned it in a couple of my calls, as well as in a global memory customer to take our all portfolio, starting from integrated standalone as well as materials and software. And 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 to share in light of the performance this year. So definitely, there is increase in market share this year to On top of the demand, and I also would mention that if we're looking right now on 2021, The new product that we are bringing in will probably open new applications that were not answered to be in production for many years, so we can increase besides the market share also getting applications that were measured before in the lab And now he's moving to in line production. Very impressive. And then I just have a quick follow-up. Thanks for the color on the service and product gross margin. At the off margin level, is this Hercules deal service and products have similar off margins? Can you repeat the question? The service and product division to From an off margin level, are these similar to corporate average? In other words, services have lower ARPES, lower R and D sales similar to Yes. So 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. So practically, this is the main reason for the difference between gross margins of services and products. Services around 40% and products around 60%. Again, the main reason is that the infrastructure of the service organization to is heavy on headcount and personnel across the globe. It's 150 sites to Got it. Got it. All right. Thank you very much. Appreciate the color. To Thank you. And there are 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 meet you in the next to turn the call. Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.