Earnings Call: Q1 2020

May 14, 2020

Earnings release

Good day, ladies and gentlemen, and welcome to the UFA Measuring Instruments First Quarter 2020 Results Conference Call. For your information, today's conference is being recorded. I would now like to turn the conference over to your host, 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 Q1 2020 Financial Results Conference Call. With us on the line today are 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 and 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 the 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, Nova's President and CEO. Eitan, please go ahead. Thank you, Miriam, and thank you all for joining our Q1 financial results conference call. I sincerely hope that you and your families are safe and healthy in these extraordinary times. I would like also to extend my wishes to our partners, suppliers and customers. I will start the call today by speaking about our Q1 results and performance highlights, including our extensive plan to meet the company's strategic targets amid the global spread of COVID-nineteen. Following my commentary, Dror will review the quarter's financial results in detail and will conclude the guide conclude, sorry, with the guidance for the Q2 of 2020. Nova delivered strong results for the Q1 of 2020 with both revenue and profitability exceeding the high end of the previously announced guidance. These results demonstrate our solid execution capabilities as well as our agile operating model, which allow us to adapt quickly to volatile market conditions. Our sound achievements in diversifying our customers and products in recent quarters allow us to successfully mitigate cycles in the different market segments. Our sustainable operating model and long term strategic objectives will continue to provide us with a solid framework to meet our customers' demand even in this unprecedented time. Before I discuss our performance highlights for the quarter, I would like to share with you our main actions and priorities in addressing the challenges caused by the spread of COVID-nineteen. Our well organized comprehensive plan is aimed at confidently navigating the company through market uncertainties and constant changes. Our collective experience in managing frequent delivery challenges in Israel due to other reasons allowed us this time to respond effectively to the evolving situation by adopting our well practiced disaster recovery plan. Our plan is focused on 4 elements that have been implemented since the beginning of March. First and foremost, our top priority remains the health, safety and financial well-being of our employees, partners and their families. We are complying with all local and global directives in order to prevent infection and spread of the disease. As part of our fast response, we offered employees remote working arrangements, we restricted work related travel and limited customers' interaction. Beside the health measures we implemented, we are also proactively offering financial support to our employees and partners that may be affected from the pandemic's economical aftermath. 2nd, we took proactive measures to secure our supply chain and business continuity in order to meet customers' varied demands. Although the pandemic has a global impact, we have worked extensively to strengthen our supply chain, including qualifying new suppliers as part of a mitigation plan for unpredicted risks. As part of this plan, we are also securing inventories and spare parts throughout the year and aiming to maintain full production capacity to mitigate volatility and shortage once the situation recovers. This may be reflected in the company inventory levels in the coming quarters. Additionally, we have moved all our production teams to work in shift and split turns isolated from the rest of the company with a clear mindset to meet any customer needs within a reasonable lead time. 3rd, we are focused on strengthening the capabilities and expertise of our regional teams and offices to meet our customers' local requirements. Although we anticipate cross region travels to resume gradually only in the Q3, we are working closely with our customers to minimize delays in installing new products. Finally, as Nova plays a major part in the local communities around the globe, we are proud to have multiple volunteering initiatives in various places including medical equipment and fund contribution. This is part of our corporate social responsibility policy and I'm proud of all the projects we led in the last 3 months to support the fight against the corona spread. Turning now to our performance highlights during the Q1 of 2020. Our performance continued to be supported by a diversified customer portfolio, which drove a balanced revenue mix between memory and foundry logic. Our customer mix for this quarter comprises of 3 major customers, including the largest foundry in the world and 2 leading memory customers. During the quarter, we achieved a major milestone in our continued effort to strengthen our position with the top tier customers. Following our press release from May 5, we are proud to have selected by the world's leading logic manufacturer for its global manufacturing sites. The customer selected Nova's optical 3D solution due to its unique combination of advanced hardware and software, including advanced deep tech algorithms. We have already received multiple orders and recognized initial revenues this quarter. Following the strong customer traction we had during the Q1, we entered the 2nd quarter with significantly improved book to bill pace driven by record quarterly bookings. This achievement exemplifies the important role Nova plays in our customers' R and D phase in the most leading edge nodes. As a result, a decent portion of our revenue came from customer investments in strategic development, which are more resilient to the current market volatility. These encouraging milestones demonstrate soundly the contribution that our diversified product offering and balanced customer mix bring to the company resiliency. Moreover, we believe that once market fully recovers from the pandemic implications, our growing position will support our profitable growth plans in the future. Let me now turn to our product portfolio and development highlights. As we discussed in the last several earnings calls, we are in the process of introducing new dimensional and material solutions for the advanced front end semiconductors. The first Herbinger was the Prism optical platform that was introduced in the Q3 of 2019. Since then, we have conducted several evaluation simultaneously with leading customers and we are pleased to inform today that initial revenues were recognized already in the Q1. In addition to the Prism, we are extremely focused on introducing 2 new platforms that are aimed at converting laboratory techniques into semiconductor high volume production tools. By nature, these are very long evaluations as they change the way the customers are working and qualifying their devices. Although we see good progress with several field evaluations, we are experiencing some scheduled deviation due to the COVID-nineteen restrictions, including customer site installations and travel limitations. Another meaningful effort to mention in regard to our product roadmap is our software and advanced algorithm development. As part of our strategic approach to enter more into the deep tech capabilities, we are seeing increased adoption of our machine learning and modeling solutions in high volume manufacturing. Currently, our main investment is to bring together combined hardware and deep tech solutions like machine learning, big data and adaptive training into the heart of semiconductor manufacturing. In all of our last wins, we proved that this combination allows our customers to tighten their process control, improve yield faster and shorten time to market. Before I conclude my prepared remarks, I would like to briefly highlight some market dynamics and their relevance to Nova's performance. Though we are very encouraged by the business pace in the first half of twenty twenty, which is higher compared to the same period last year, the visibility for the second half is still low. Despite several announcements of COVID-nineteen exit plans in Asia and Europe, the recovery pace and demand behavior are still hard to predict. Nevertheless, we still believe that in the long term demand fundamentals remain solid and will continue fueling the market beyond the interim conditions. Amplified by the current environment, we believe that demand for enterprise and cloud applications will grow along with demand for advanced data infrastructure and 5 gs ecosystem. To summarize, we are dealing with a challenging period facing global uncertainties and frequent dynamic changes. But against the evolving backdrop of the pandemic, Nova has proven its ability to adopt quickly without compromising either the safety of our people or the aggressive execution plan to meet our strategic goals. While we should keep being prudent in our approach to the current dynamic environment, we strongly believe in the company's long term prospects. I would like to conclude my remarks with stating again our main focus today, which is to secure the safety and health of our employees and their families, while ensuring the business continuity of the company. 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 Q1 of 2020 were $61,000,000 exceeding the company guidance range for the quarter. Product revenues included revenue recognition of the first tool sold to a new Logic customer in connection with the selection win we announced several weeks ago. Product revenue distribution was approximately 55% from logic and foundry and approximately 45% from memory. Following an uptick in service revenues in the previous quarter, service revenues in the Q1 came in at a normalized level of $15,300,000 Blended gross margin increased in the Q1 of 2020 to 56% on a GAAP basis and 57% on a non GAAP basis. The increase in blended gross margins was attributed to improved product mix in the quarter and to higher service gross margins, which came in at 44%. Operating expenses in the Q1 of 2020 totaled 21,500,000 dollars on a GAAP basis and $19,800,000 on a non GAAP basis. Gross R and D expenses were stable during the quarter, while R and D income came in at a normalized level of 1,500,000 relative to $3,700,000 in the previous quarter. Sales and marketing expenses reduced significantly, mainly due to a different regional sales distribution and related lower sales commissions. Operating margin in the Q1 of 2020 was 21% on a GAAP basis and 24% on a non GAAP basis. Effective tax rate in the quarter came in at approximately 16%. Company profitability in the first quarter of 2020 was better than expected despite the COVID-nineteen impact. This result was driven by strong demand for the company products, leading to outperformance in revenues, improved product mix and related gross margins for products and services and lower international travel expenses, which more than mitigated increased costs related to COVID-nineteen. As a result, earnings per share in the quarter were $0.41 per diluted share on a GAAP basis and $0.47 per diluted share on a non GAAP basis, exceeding the high end of the company guidance. Moving to the company outlook for the Q2 of 2020, we expect the following: revenues between $58,000,000 to $66,000,000 GAAP earnings per diluted share between $0.29 $0.43 non GAAP earnings per diluted share between $0.37 $0.51 At the midpoint of the 2nd quarter guidance, we expect the following: blended gross margins are expected to be approximately 56%. Given the COVID-nineteen pandemic, the company is working diligently to create backup resources across its global workforce. In addition, the company is gradually increasing its supply chain commitments and related inventories in order to secure the ability to manufacture and deliver products and services as much as possible across different locations and territories and throughout the year. In that respect, operating expenses are expected to increase in the 2nd quarter to approximately $23,000,000 on a GAAP basis and approximately $21,500,000 on an non GAAP basis. The majority of the expense increases are expected in R and D sales and marketing, while G and A expenses are expected to reduce. 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. Our first question comes today from Patrick Ho of Stifel. Please go ahead. Thank you very much, and congrats on the nice quarter and outlook and glad to hear everyone well. Maybe for both you, Eitan and Dror, as it relates to COVID-nineteen, can you give a little more color of some of the, I guess, supply chain manufacturing and parts procurement challenges you faced? And you did mention in the prepared remarks some of the issues you're trying to do to mitigate it on a going forward basis. What are some of the restrictions that are still potentially hindering you as you go into the June quarter? Thanks, Patrick for the question. So there are few levels of in the questions and I'll answer each one of them. So first of all, regarding the production facilities, in all the production facilities, we are we move to work and split turns around the clock. So we don't see any damage to any supply chain capabilities as a result from the production capabilities on our clean rooms and production facilities. So that we are doing the utmost in order to isolate those places. So nobody can enter and make a damage or distribute something that we don't want. This is on the 1st level. 2nd level, the supply chain. So every place that we thought that we have a risk, we qualified already a second vendor, which is a very challenging in this pandemic because the pandemic is attacking globally. So at the beginning, we tried to find some sources to the Chinese supply chain and after that we came back to China. But nevertheless, we currently have secured the dual vendors to the whole critical parts. And therefore, we are pretty safe on that. We are of course having a risk management plan where we're tracing those suppliers and even offer them some financially help in order for them to supply the whole capacity. So this is the second one. The third one, as I said in my prepared remarks and Dror mentioned it as well, you probably see some dynamic changes in our inventory going forward because our belief is that the target right now is produce as many systems as we can in our production lines. In order for us to be preferred to the day when everything will be finished, so everybody will go to the same suppliers. So we are trying right now to secure as much inventory as we can until the end of the year. So we will not be dependent on any economy or any hit that will happen during this period. So I think that those three levels should secure the deliverables that we have for until the end of the year. Talking about that, we need to take it with a very prudent approach that the pandemic hit everybody everywhere. So at the end, there might be some suppliers that will have some hits and maybe will delay some of their parts. But currently, when we're looking at least for the next quarter, we don't see such a problem. Great. That's really helpful. And maybe as my follow-up question, it was great to see the recent announcement of the win by the Logic customer. Obviously, that's a great penetration on your end. How do you look at additional application opportunities given their strategy of using basically a CopyXact formula across the globe, What's your efforts now to get additional applications with this customer? So I want to Patrick, I want to be very careful with my answer because we are we don't want to reveal anything competitive wise with this specific customer. But I think that it's a great achievement for Nova entering into this customer. It was a real battle for the last couple of years. And the jewel in the crown was always getting in into the logic part because we are partners of these customers in the memory side. So when we when logic side, of course, we went in, in a very challenging application and we are now and we will be in the next couple of quarters working with these customers evaluating other applications as well. When I'm saying other application, it's not only optical. So this customer is very advanced in materials metrology as well. And there is a match between the demand of these customers and the requirement to our portfolio. So I'm pretty sure that we will see more application coming in on the OCD platform. And if I can look right now on the strategic partners with this customer, there's a lot of potential on the materials as well. Great. Thank you very much. Thank you. We take our next question from Quinn Bolton of Needham. Please go ahead. Hey, guys. Congratulations on the nice results and outlook in a challenging environment. Wanted to follow-up on Patrick's question about the new customer, sort of a couple of questions there. It sounds like the wins, the applications were critical applications, but just wanted to confirm these were sort of critical applications repeat orders from this customer. Just wondering, are those orders scheduled for delivery later this year? Are those potentially further out into calendar 2021? So Quinn, I will answer the first one and Dror will take the second one. So I can tell you very shortly that this win is on the most advanced production application for this customer in the logic advanced node, Okay? So it's not any R and D or a small win. It's a win in the center of the activity in this customer's production. Now, revenues throughout the year, additional deliveries and revenues from this customer. Great. And then just my follow-up, Eitan, you had mentioned the new materials and dimensional technologies were facing some perhaps qualification or eval delays as a result of COVID. Wondering if you might be able to update us on any expectations when you think those new technologies might be able to rev rec. Is that something now that might push into the second half of the year? Or is visibility just too low to try to time when those tools and new applications may rev rec? So we're not talking here on major delays. So I think that we can expect them to be recognized in the second half. Great. Thank you. Thanks. Thank you. We take our next question from Mark Miller of Benchmark Company. Please go ahead. Thank you for the question. Congrats on another good quarter and outlook. And I'm glad everyone has been safe at Nova. Just trying to get a little more color on revenues, in particular, in terms of software related and X ray characterization related revenues. Can you give us a little more color on that, those revenues, how they've been trending and what you expect? So, obviously, we don't we do not break down the revenues per product line. In general, the revenues in the Q1 were a little bit more lenient to the with more software revenues and with products which include a little bit more products on the high end with higher gross margins. We should remind that we have a target model for software revenues to become up to 10% of our product revenues. We hope that this year we will be able to see some growth in software revenues and it already started in the Q1. Thank you. There's been some talk more U. S. Restrictions, especially shipping into China. Do you see that as having any impact on your sales? So there are 2 things on that. So first of all is the old restrictions or the previous situation with the trade war between the U. S. And China, we as you know, we have facility both in the U. S. And in Israel, and we mostly restricted in the U. S. And we follow that. At that time, there was only one customer, JHICC, that was a big issue from the U. S. Administration to ship tools and we were banned from doing anything according to the federal rules with this customer as well. Nevertheless, there are less restrictions on the Israeli entity and therefore, we don't expect any kind of effect on the Israeli side shipping equipment to China. We're definitely looking and learning and analyzing all the time the new rules coming from the U. S. I just want to say that it might be an opportunity for us to enjoy for more awards because we have less restriction in Israel and therefore we can compete more. And as a result of this, those restrictions, we might see more semiconductor fab in the U. S. And then we enjoy again. So I think that this is not an healthy situation, but I don't see an impact on our strategic plans following those kind of restriction unless it will go into some kind of economical, global economical crisis that will affect the whole semiconductor. Thank you. Thank you. We move now to Chris Sankar of Cowen and Company. Please go ahead. Yes. Hi. Thanks for taking my question. I had 2 of them. First one, just to follow-up on your earlier comments. Is it fair that as things do get worse with the U. S.-China relations, it's only your XPS product line, which is being made in the U. S. Would be impacted not the optical three d line? And then I have a follow-up. So first of all, yes. So most of our X-ray way tools are going out from the U. S. And they will have those restrictions. We need to learn them carefully and they will have restriction like other U. S.-based company. Regarding the Israeli facility, so the Israeli facility is not producing only optical CDs, producing optical tools. Some of them are doing materials, some of them are doing CDs. But Israel, as I said before, the Israeli facility is not fully obliged to this to those rules coming from the trade war. Got it. That's very helpful. And then as a follow-up, is there a way to parse out your Q1 numbers growth year over year? How much of that was underlying industry growth? How much of it was share gains? Can you repeat the question? The March quarter revenue strength you saw on a year over year basis, it was up 8% year over year. How much of that was the industry growing? And how much of it was from your share gains? I think I would assume that most of it is related to either new products or a penetration into new customers rather than the industry growth. Chris, it's Eitan. So it's a strong quarter in a very cyclic environment. So you can imagine that both the market share and the position was strengthening a lot during this quarter. So you see right now the rest of the results and I assume that decent portion of the revenue came either from selection to strategic investment by our customers that are less influenced by the COVID as well as a great portion coming from market share. Got it. Thanks, Eitan and Doran. Congrats on the impressive results. Thank you very much. We'll now take a question from Jason Schmitt of Lake Street. Please go ahead. Hey guys, thanks for taking my questions. Just curious if you could quantify the amount or revenue that was impacted in Q1 due to supply constraints? So, Jason, we the impact that we see on the supply chains are the most of it, it's maybe delayed from 1 quarter to another. So we don't see any capability that was damaged so far by the supply chain. I think that starting from the crisis in China somewhere in January, suppliers. So there are suppliers that we by Nova kept alive and open during the crisis in order to supply our production capabilities and supply chain parts. Of course, there's some challenges in the way. But if I'm looking right now on the damages or some challenges that we had in the Q1, it's just delays that move to the Q2. We don't see any cancellation. We don't see any major delays right now from the customer demand that we have. Okay. That's helpful. And looking at the OpEx line, understanding sort of the moving parts in should we expect this elevated level to be consistent throughout the remainder of the year? Or is this sort of a near term bump and then going back to more normalized levels? No. So as I mentioned, we are increasing our, I would say, redundancies across the world to ensure delivery and customer presence. So I would say this is a new level and you should see across the second half maybe low single digit growth every quarter starting Q3 until the end of the year. Thanks a lot guys. Thank you. Thank you. I would now like to turn the call back over to Mr. Etijn Oppenhaim, President and CEO for his closing remarks. Thank you, operator, and thank you all for joining the call today. I really hope that you and your families remain safe and stay health in the next period. By that, we conclude our Q1 earnings call. Thank you very much. Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.