Nova Ltd. (NVMI) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Nova Measuring Instruments Ltd First Quarter 2015 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of Hayden MS-IR. Please go ahead.

Thank you, Operator. Good afternoon to everybody. I would like to welcome all of you to Nova Measuring Instruments 2015 first quarter financial results conference call and presentation. With us on the line today are Mr. Eitan Oppenhaim, President and CEO, and Mr. Dror David, CFO. I'd like to draw your attention to the presentation that accompanies today's call. The presentation can be accessed and downloaded from the link on Nova's Web site at www.novameasuring.com in the Investor Relations section. 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 pertain to this call. If you have not received a copy of the release, please view it in the Investor Relations or News 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 then open the call for the question-and-answer session. I will now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead.

Thank you, Miri. Let me add my welcome to everyone and thank you for joining our 2016 first quarter financial result conference call. This was a strong start in 2016 highlighted by solid business and financial performance. We’re very pleased with our results where both the revenue and possibility exceeded the top end of our quarterly guidance. This quarter was very unique quarter for Nova, a quarter in which we moved forward with another milestone in our long term strategy with acquisition of ReVera. We believe this acquisition will significantly change our trajectory and the positive at that point that far including accelerated bookings and progress in the memory sector have reinforced our belief. As we shared previously and as reflected also in our aggressive guidance for the second quarter, the new addition to our portfolio will add meaningful revenue stream in the following quarters in 2016. Today I will start the call by reviewing our first results I will then provide some highlights in regard to the recent acquisition of ReVera and it's relevance to our long term strategy following that I will provide some commentary on the industry trends as it relates to our opportunities in the market. I will conclude my part with the guidance for the second quarter of 2016. Following my comment read, Dror will review the quarterly financial results in details. For those of who are following the presentation please proceed to slide number four. The March quarter concluded with results both the top and bottom line exceeding the high end of our guidance. We posted revenue of 27.5 million well above our guidance of 24.5 million to 26.5 million this generated 4 million or $0.15 per diluted share in non-GAAP net income with significantly exceeded the high end of our possibility guidance of $0.08. This result reflects solid execution against our strategic objective and the efficiency embedded into our business model. With this result we have delivered by now 23 quarters of continuous possibility. We’re encouraged from the combination of strong quarterly results and even stronger guidance for the second quarter. We set the stage for another growth here for Nova. Booking for the quarter were also strong supporting our second quarter guidance which reflects above one book to bill ratio. During the quarter we focused of the Asian of the positive trend we started in the third quarter of 2013 experiencing a growing order stream from our memory customers for multiple price expansion, this progress will further broaden our customer base and mitigate the softness previous in the foundry spending, during the quarter we continued expanding our provision in the memory space with multiple design wins in all the latest DRAM expansion, with all the three DRAM players as a result memory revenues during the quarter increased significantly and accounted for 54% from our product sales versus 27% in the fourth quarter of 2014 and only 19% in the third quarter of 2014. This is clearly demonstrating the inwards we’re making into the memory space. Beside our organic growth within the memory segment the additional ReVera further increased our customer diversification towards this space with recent orders received for all major memory players. On the customer front we continued diversifying our customer mix over both the foundries and memory segment with three customers contributing more than 20% each to our business. We’re very proud in the fact that during this quarter two of these customers are leading memory customers. We’re increasingly encouraged by the growing adoption of our metrology solution across multiple customers which has placed us in stronger position in the advanced technology node. Notably advance node accounted for the majority of our deliveries with 80% of our first quarter revenue generated from 20 nanometer technology node and below. We are steadily gaining structure [ph] and increasing our presence with this advance nodes and this will continue to reinforce our position and support our growth as a technology leader in the most challenging nodes in the years to come. Let me now spend few moments discussing the recent ReVera acquisition. As most of you know in early April we closed the $46.5 million acquisition of ReVera [indiscernible] held by a profitable company based in California. I can report today the integration of ReVera has done exceptionally well where it became a fully functioned division in Nova. One of the key strategy consideration with this acquisition or [indiscernible] little bit would help us diversify our customer base by providing access to customers in the memory sector and by providing us additional cross-selling opportunities. This belief has been quickly confirmed as a business reality and we’re now entering the second quarter with backlog orders from several of our memory customers. Following the last few months of integration we’re confident that the combination of the two companies complimentary and logistics technologies the optical CD creates a portfolio of offering that we believe will better supply from our competitors in the advanced process control space and would set the stage for accelerated growth and the expansion of our markets. This acquisition is also providing us with space and we believe that next year's revenues for the next four quarters will reach at least $25 million and will allow Nova to keep growing beyond this organic OCD growth. We are looking into the challenges our customers are facing when transitioning to the most advanced node, we believe that complex systems and materials are becoming a key enabled for process control in the most advanced node. As in complimentary metrology technology like XPS will allow us to provide our customers with a complete solution for geometry materials and [indiscernible] measurement. Furthermore with both product we cover now a variety of applications in both the front end and back end appliance and we can increase our footprint with leading customers. The widening of our offering creates a facility for greater customer pull through as well as strengthening our overall market position. We’re very encouraged by the customer's reaction to this combination where new opportunities were already created for both companies in the short term closing. The acquisition of ReVera is yet another example for our ability to meet our strategic objectives. In order to sustain our profitable growth while strengthening our position and broadening our offerings we keep executing well our long term plans although we have a good earnings start for 2016 we should also be pleased from the company's progress and it's long term plans to transcend into leading provider in the process control segment. Our plan includes four pillars which we believe are the fundamental for our growth, the first one is our ability to diversify our portfolio. We have also been an integrated metrology provider to multi-product companies with both integrated metrology and standalone tools including hardware and software products providing holistic approach to all sorts of steps [indiscernible] orders in it from R&D space to high volume manufacturing including institute as well as the [indiscernible]. We cleared the advantage in our elevated R&D spending in creating leading advantage portfolio. This investment are clearly paying off with tangible revenues in order related diversified product directions we took. The second one is to emphasize our culture and behavior where the customer is always in the center. Nova has transformed into a customer centric company, this emphasize partnership with customers and this partnership are leading our future roadmap. During the last few months we signed joint development programs with all the leading research institutions in the market. Those in situation partner with our customers as well for leading process controls. Our goal going forward is to strengthen our position even further with a foundry customer while broadening the customer base with growing position in the memory state. The last few quarters demonstrates exactly that. The third element is our M&A strategy, our defined acquisition strategy is to diversify our core technology and to strengthen our position while broadening exposure to several end market segments. Our recent acquisition missed this [indiscernible] and deliver complimentary technology as well as revenue stream that extends also our customer reach. We will continue looking to further expand and diversify our reach with future M&A activities as well. The last pillar is our proven operational efficiency. As in previous quarter our first quarter results demonstrate the operational leverage that we have worked very hard to create. We will continue refining the model where we continue to balance consistent possibility with elevated investment in R&D to continue our sustainable growth and innovative our way to lead them in the metrology market. As part of our financial model we also initiated a share repurchase program which continued along 2014. I will turn now briefly to the industry trends and the market environment as they relate to our opportunities in the market. Following the results of the first quarter the same above our expectations and the visibility we have to the second quarter we maintain our general view that wafer fab equipment spending will moderately grow in 2016. The market indicate that indicators show continued demand for mobile enterprise products which along with the demand for leading edge devices still supports long term growth trajectories for our leading customer. Nevertheless our customer controls investments while tracking carefully their end user market is well adopted now and leads to spending fluctuations over the years which is not something new in our industry by now. Consolidated market with technology complexities drive higher volatility and lower visibility. Our goal as a company is to be able to digest fluctuation in short cycle while presenting long term growth with solid fundamental. Following that of our technology transition we experienced the industry, we believe that the geometrical complexity and material stability which are associated with developing and is being explored to expand our opportunity and develop the market going forward. Our goal in the market like that is to invest in our long term growth while strengthening our business model, technology innovation and operational efficiencies which can also digest short term cycle. The future launch of new mobile products have generated immediate demand for advanced FinFET devices. These new products have actually triggered to some degrees a struggle between the largest foundry customers as to who will share a preferred vendor for the different public company. We believe that besides near term uncertainties as for timing and capacity magnitude the overall foundry segment will continue it's long term growth based on the transitions of advanced FinFET devices. The focus in 2015 will continue to be at the realm of the 16 and 14 nanometer new node along with growing investment in the new 10 nanometer node to process first take out product towards the end of the year. In memory segment we expect that DRAM will continue its momentum into the first half of 2016 driven mainly by the demand for mobile and enterprise DRAM. Investment in new devices will continue mainly in transitioning into 20 nanometer. NAND investment in the first half of the year will continue mainly in panel devices. The projected investment in vertical NAND at the second half can balance this year investment between planar and vertical NAND. As we mentioned in previous calls we believe that investment in 3D NAND will continue at a steady pace over the year rather than a growth spike. With that I would like to share our guidance for the second quarter of 2015. Revenues will be in the range of 33 million to 35 million. Non-GAAP basis, EPS will be at the range of $0.07 to $0.11 per share. Now let me hand over the call to Dror who will review our financial results in details, Dror?

Thanks, Eitan. Good day everyone. In my prepared remarks I will start with overviewing the financial results for the first quarter of 2015 I will then give additional financial details regarding the acquisition of ReVera as well as the second quarter guidance. Total revenues in the first quarter of 2015 were 27.5 million up 6% over the fourth quarter of 2014. During the first quarter of 2015 we have seen a significant shift of revenues towards memory. As Eitan mentioned this shift is related to the overall spending pattern in the industry as well as the in-roads the company made into additional and existing memory customers. Revenue from the memory segment accounted for 64% of product revenues relative to approximately 20% in 2014. Revenues from the foundry segment accounted for 46% of product revenues. During the quarter the company had 3% customer, off the company's overall product revenues PSMC accounted for 27%, [indiscernible] accounted for 23% and Samsung accounted for 20%. I would like to emphasize again that these results did not include any of ReVera revenues and reflect a continued impression of the company into additional areas in the memory market. Blended gross margin came in at 52.5% within the company target model, product gross margin came in more than the previous quarter due to a different product mix. We accept the product mix to normalize in the second quarter. Service gross margins came in at record level of 46%, the level is good to high margins software upgrade on existing install base and to effective cross management of the service organization. R&D expenses in the quarter came in lower than expected mainly due to the timing of prototype in-take. We expect R&D expenses to pick up in the second quarter as the company continues the execution of it's product involvement. First quarter operating expenses included 1.1 million of expenses related to the acquisition of ReVera. These expenses were adjusted for non-GAAP purposes and are not reflected in the company's non-GAAP EPS. Excluding these acquisition related expenses operating income in the quarter more than doubled and came in at 3.4 million or 12% of revenue in the first quarter of 2016 relative to 1.6 million or 6% of revenues in the previous quarters. Net income in the quarter was 0.5 million reflecting continued accumulation for future R&D credit Israel. GAAP net income in the quarter was 3 million or $0.11 per diluted share and non-GAAP net income in the quarter was 4 million or $0.15 per diluted share. These result significantly exceeds the high end of the purpose order guidance reflecting the strong leverage built into novel operating model. Moving into key benefit metric, cash reserves increased in the quarter to a record level of 125 million. During the quarter given the acquisition process we did not continue to execute the share repurchase program. We have approximately 5 million worth of purchases before we conclude the previously announced 12 million share repurchase program and we plan to resume the share repurchases shortly after this quarterly conferences. DSOs in the quarter decreased to 55 days lower than our target of 70 days and inventory returns were 3.3 times a year higher than the company target of three inventory returns per year. I will now move to discuss the acquisition of ReVera and it's accounting and financial implications looking forward. Nova has paid 46.5 million in cash for 100% ownership of ReVera. The purchase price allocation of this acquisition as well as the opening balance sheet o ReVera and the date of the acquisition are still subject to all these and accounting reviews and therefore may change in the future. The current purchase price allocation is described in the presentation and includes purchase of 16 million of tangible assets, 2.5 million payment of cash which was included in ReVera financials on the date of the closing and 28 million of intangible assets. The 28 million acquired in tangible assets include different elements such as technology, IT, R&D, customer relations and goodwill. In addition the intangible assets is good approximately 5 million of intangible assets related to backlog. On the date of the closing ReVera had customer orders in excess of 10 million and this intangible assets reflect the economic value of the backlog as of the date of the closing. Each of the acquired intangible assets has a different amortization schedule which will impact the company GAAP financial results in the coming quarters. Following the conclusion of a transition period involving backlog amortization which will take several quarters, we expect the net annual normalized amortization of intangibles to be between 1.5 million and 2 million. As scheduled of the amortization period and items is detailed in the quarterly presentation which is also available for review and download from the company website. This amortization will be adjusted for non-GAAP purposes and therefore will not impact the company's non-GAAP results. As Eitan mentioned ReVera business results will be evident in the consolidated financials of Nova starting the second quarter of 2015. In the recent weeks we have been focused on combining the financial reporting schemes and processes between the two companies in order to reach a high level of predictability of results looking forward based on the outcome of this process I will now provide additional granularity as to the second quarter guidance. We expect acquisition related expenses in the second quarter will be 1.6 million, these expenses are adjusted for non-GAAP purposes and do not impact the company's non-GAAP results. We do not expect any material acquisition related expenses in the second half of the year. Stock based compensation expenses are expected to increase 0.7 million in the second quarter of the year, we expect the quarterly stock based compensation expenses to gradually increase to 0.5 million by the end of 2015 and remain in that quarterly level looking forward. Given the acquisition impact on GAAP results the following P&L numbers are provided on a non-GAAP basis which includes amortization of intangibles, acquisition related expenses, stock based compensation and adjustments related to the transact assets and obligations. Blended gross margin in the second quarter of 2015 on a non-GAAP basis is expected to be approximately 53%. Product gross margin on a non-GAAP basis is expected to be approximately 57%. Service gross margin on a non-GAAP basis is expected to be approximately 40%. Operating expenses on a non-GAAP basis are expected to be between 15.5 million and 16 million in the second quarter of 2015. Detailed P&L items are available in the quarterly presentation. And finally tax expenses on a non-GAAP basis which excludes adjustments of deferred tax assets and obligations is expected to come in at 0.2 million. I would like to emphasize that the acquisition closing took place on April 2nd 2015 hence the financial performance of ReVera is expected to be included for the full three months of the second quarter. And as Eitan mentioned the company revenue guidance is 33 million to 35 million in the second quarter reflecting revenue growth in a set of 20% quarter-over-quarter. In addition in the second quarter of the year we expect to have three 10% customers two of which are in the memory segment with memory revenues accounting for more than 30% of the quarterly revenue. Before concluding my prepared remarks it is important note that the combined company is expected to have fresh reserve in excess of 75 million and is expected to continue to generate free cash flow in the second half of 2015. This level of cash provides management with the required flexibility to execute it's business plans looking forward. With that I will move the call back to Eithan. Eithan?

Thank you, Dror. With that we will be pleased to take your questions. Operator?

[Operator Instructions]. Our first question will come from Edwin Mok with Needham & Company. Please go ahead.

So first question I’ve on the memory as you said of gaining share and growth in the memory side very impressive, can you give some color regarding if that is mostly leveraged to CMT or is it edge or also any color on if this is interim charge versus [indiscernible] some combo?

We don’t give details on any specific deals or equipment. I would like to maybe elaborate a bit situation in the memory and our position over there. Firstly I would like to make sure that we’re in a consistent position in the memory space before we refer to the increasing markets. Actually we’re selling to all memory manufacturers and none of the NANDs and the memory is a customer penetration for us. We use to sell integrated metrology for CMT for all the memory customer and this one continued, nevertheless we invest in the last few quarters tremendous to broaden the position, broader steps and with multiple solutions and you can see the result in the last few quarters. In this one I can say that there are three pillars to our share gaining into the memory space. First of all it's a traditional, I would say the integrated and the standalone, this is traditional optical CD systems at Nova. Second one is all the new growth engines as we brought to the market and I can name also the --- there are few [ph] Institution that was aimed into the memory and the third pillar is ReVera, as we said before the closing and after the closing and right now for the guidance for the next quarter one of the things that we have in the combination and the complimentary solution of ReVera is broadening the base of memory customers and as I said in my prepared remarks, actually all the leading memory customers, all the ReVera tools in the last few months. So this is actually summarize the picture in the memory space.

I want to dive in a little bit more than ReVera. So you mentioned on the prepared remark that you’ve foreseen new opportunity created from announcing and closing the deal, I was wondering if you can give some color maybe how ReVera or OCD leverage or [indiscernible] leverage of each other and that -- are you guys selling combined solution already and at some point we should expect a product that actually have combined technology or how do you not think about it long term?

So I was talking about the synergy and I will not get into the details of the roadmap and exactly how we do that but if you’re looking right now on the future of the process controls we looked on the ways to enhance the optical metrology capabilities in the advanced node and our belief that optical CD can give the geometrical element or the shape element of the safe measurement of the structure. Nevertheless we started to shape, we start to see that customers are requiring more process control or [indiscernible] and also on composition which actually is the materials and we look right now on the way to measure complicated structure either FinFET or we need those 2 to 3 complimenting each other in order to give a full solution to the customer. Now for the actual solution we don’t need to put the hardware together in order to leverage the synergy between the product in order to give a combined solution, but I can tell you that there is a click [ph] to customers as we already we started to have this stabilization between XPS to OCD and with thing -- together we go to solution it will generate actually a better process control in that functional majorly in the FinFET.

Dror, two financial questions, first on the service margin coming back down to 40%, is that just normalization there or is that ReVera has lower service margin or how do you think about long term service margin should be?

So first of all you’re correct, one of this is normalization, our target for service gross margin is higher than 35%. So definitely we’re seeing some kind of normalization in the second quarter. In general regarding the ReVera I would say that because of their current scale for the acquisition their service business is lower margins than the Nova model. However we do believe that once we combine and this will take a couple of quarters the sales channels and so forth, we will be able to bring them to our level and again our model is gross margin beyond 35%.

And then on the balance sheet, I’ve to be really clear, on the decline on your short term deposits is just because you already allocate some cash for the ReVera deal before the end of the quarter?

Yes because the acquisition, the closing that took place [indiscernible] and we actually allocated the money around a week before, within the quarter therefore the portion of 46.5 million is presented as other receivables and then was used for the acquisition at the beginning of the second quarter.

[Operator Instructions]. We go next to Patrick Ho with Stifel Nicolaus.

Dror, can you give a little bit of color of the activities and steps that you will need to take to bring the ReVera deal or the acquisition to accretion from the company? I know you mentioned a couple of quarters but what are some of the steps that are necessary to get at the cost line and structure and the agreeing the accretion into the model?

Well first of all we want to make something clear, ReVera acquisition is accretive within the first 12 months of following the acquisition. This means that starting the second quarter from the acquisition it will be accretive on a non-GAAP basis. It's not that we hope that the acquisition will be accretive only with second year or so. ReVera acquisition will already be accretive within 2015. In terms of the synergy there are several elements of cost synergy, one is on the side of operating expenses which probably will take place only in 2016 and the second is in the combination of the sales channel of both companies relating to field expenses, services and so forth and we believe that in that aspect we have leverage here to increase the service revenues after the acquisition including [Technical Difficulty] of ReVera, marginal cost because we do have these infrastructures already in place.

And maybe Eitan, in terms of the market environment, there is obviously has been a lot of moving pieces in terms of both foundry and logic spending as well as memory spending being at pretty robust level. Can you give a little bit of the color on the foundry side how you see 10 nanometer investment and whether you see that activity picking up particularly as we go into the second half of the year?

So Patrick, as we’re looking right now on the foundry space I think that there is a clear demand for capacity of FinFET devices and if I look right now on the next 2 or 3 quarters the Q1 foundries or the big foundries will be focused more on ramping up the 14 and 16 nanometer, all of us know that [indiscernible] goes on between preleasing foundries who will serve the leading projects [ph] and I think that this project will continue in the next two quarters. We definitely see that our leading customer starting to gradually ramp up the 60 nanometer and we started to see all they are coming from 60 nanometer, so definitely at least in the next 2 to 3 quarters we will see the foundries focusing on the 40 and 60 nanometer, nevertheless we do see in all those three accelerated activity in the last few weeks which will continue in the next few months bringing up the [indiscernible] of the 10 nanometer up in order to start phasing out products somewhere by the end of this year or next year. Part of our guidance looking forward to second quarter including already 10 nanometer order from the foundries. So we definitely see that somewhere in the second half it will be probably a mix between '14 - '16 ramp or maybe some expansion over there and also some acceleration on the 10 nanometer.

And there are no further questions at this time. I would like to turn the conference back over to Mr. Eitan Oppenhaima for closing remarks.

Thank you, Operator. I would like to thank everyone for joining our 2015 first quarter financial results call today. Before we conclude I want to mention that we will be hosting an Analyst Day from 9 AM to noon on Tuesday June 9. The event will be at the Le Parker Meridien on New York. The senior leadership team will address Nova's strategic direction, the recent acquisition of ReVera and discuss our unique product offerings and significant market opportunities in the short term and the long term. I sincerely hope you can attend and we will be happy to meet all of you. Thank you and have a nice day.

Ladies and gentlemen this does conclude today's conference. Thank you for your participation.