Nova Ltd. (NVMI) Q1 2016 Earnings Report, Transcript and Summary

Please standby, we’re about to begin. Good day everyone and welcome to the Nova Measuring Instruments Limited First Quarter 2016 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 and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments 2016 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 website 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 pertains to this call. If you have not received the copy of the release, please view it in the Investor Relations or News section of the company’s website. In addition, the company has prepared a presentation for today's call. It is available in the Investor Relations section of Nova's website and now would be a good time to download this presentation. Eitan will begin the call with a business update followed by Dror with an overview of the financials. We will then open the call for the question-and-answer session. I’ll now hand over the call to Mr. Eitan Oppenhaim, Nova’s President and CEO. Eitan, please go ahead.

Thank you, Miri, and thank you all for joining us today for our quarterly earning conference call. During the call today, I will start with a highlight of our first quarter results and provide some perspective on our performance relative to our 2016 objectives. Prior to turning the call over to Dror, I will conclude my prepared remarks with our guidance for the second quarter. The first quarter results were in line with our expectations with $34.1 million in revenues and non-GAAP net income of $4.5 million, or $0.16 per diluted share, which is at the high end of our profitability guidance. This results reflect the market dynamics and our customers investment patterns as we experienced during the quarter and our ability to adjust accordingly and meet the targets. With these results, we have delivered by now 27 consecutive quarters of profitability indicating the solid operational efficiency and agility we have reaching to our model. Our sustained financial performance is an outcome of our continuous progress to diversify both our product offering as well as our customer mix and shift our highly concentrated business to a much diverse one with a spread of customers and a unique portfolio that is beyond typical of 3D dimensional measurements and represents a great opportunity for us to grow and outpace the competition. As announced this morning in the recent five weeks, we have experienced a notable uptick in bookings and this of course our expectation for a stronger second half. Accordingly, we continue to believe that 2016 will shape up to be another solid year for Nova as our customers ramping up their production capacity to support the next generation device. The growth in bookings is already evidenced with this recent announcement of more than $20 million in bookings that we received from several Asian foundry customers for the 10, 7 and 5 nanometer technology nodes as well as for capacity expansion for mature devices required by the IOP emerging markets. The orders we received are for our optical CD and X-ray solutions for both CD measurements as well as for film thickness and material composition application. The delivery, we should mainly weighted towards the third quarter of the year includes integrated and standalone optical metrology tools combined with our advanced software solutions as well as our newest X-ray metrology tool, which combined XPS and XRF for film thickness and composition. This achievement is a direct result of our previous announcement about the selection by the world’s leading foundry to deliver optical and X-ray metrology solutions for multiple process steps for the customers’ most advanced technology nodes. These orders along with others we have not announced to support a better visibility into the remainder of the year and our expectations for a stronger second half. Let me now extend on my opening remarks in regard to our customer diversification progress. It was a key achievement for us in 2016. For the full year, we had five customers including two memory customers, contributing 10% or more in revenue each compared to two only in 2014. The substantial changes we have gone through to diversify our customer base are also evident in the first quarter results where we met our targets despite some customers standing softness and different investment cycles over the different semiconductor segments. Two of our customers, which historically contributed a large portion of our quarterly revenues contributed only 14% in the first quarter and still we mitigate a dispose by other customer spending including one large memory customer. In addition to the more diversified and evolving customer mix we also experienced geographical shifts over the course of last few months with increased revenue from China following multiple competitive selection. Our Chinese customer and more than tripled their ordered with Nova in the last six months reflecting our translation efforts in market share gains in the territory. All in all our strong position in the foundry space is allowing us to extend our revenue mix to include not only equipment to the most advanced node progressing through 7 and 5 nanometer device structure but also to materialize opportunities in the mature knowledge of ramping up capacity for the IOP related market. This quarter we are also celebrating the first anniversary of the ReVera acquisition, acquiring ReVera was the first sensible milestone in our long term strategy to diversify our goals with M&A activities, which should widen our semi-customers exposure as well as our technology reach and competitive edge. Coming out from a year of a smooth integration, we are definitely encouraged from this acquisition we performed exactly as we expected from both revenue and P&L contributions as well as technology synergy perspective. The combined entity can compete today on the larger available market in both the OCD space as well as the thin film and material metrology segment offering a unique solution this can’t be matched by our main competitors. With a wider offering, which is comprised of OCD and X-Ray we now cover a variety of applications and we are increasing our foot-print with in the customers in memory, foundry and logic. Due to the emerging requirements to perform in-line metrology on structure, the synergy between the technology allow us to combine XPS and XRF data with information derived from our OCD symptoms. This hybrid combination, which enables process control on structure if any momentum with living customers and allows us to better meet the demand in the most advanced node. On the customer front we also see good progress where the synergy between the companies creates a better entry point due to customers who are less exposed through in the path and create a solid base for market share gains. Following the successful integration with the ReVera we are confidently looking into our next step in expanding our M&A activities to strengthen our financial and technology position in the semi markets. Besides integrating ReVera complimentary technology we are presenting in 2016 a much wider and richer product portfolio, aiming at offering an holistic metrology solution that would set us aside from the competition. Our current road map meets more customized market requirements across multiple technologies and segments. Our portfolio includes several and new integrated tools that can measure full complex Optical CD applications. Our standalone models can meet more highly our customer requirements and in our X-Ray family of tool is extending as well with new road maps to address thickness and composition metrology. Our unique approach is in combining all of this to one solution across the Fab. Using our modeling engine and software management tools to allow customers utilizing metrology and process control scheme more efficiently. This unique approach is bearing fruit already with market win in both the advanced node as well as the mature one. As evidenced by the growing metrology intensity in the recent technology transition we are confident that the demand for advanced metrology will increase in the next few years in order to enable key technology infliction and first time to market. In addition our knowledge is from the latest transition is that better offering should combine different metrology methods that need to converge to one solution in order to meet the growing complexities. These two elements are translated in to a large opportunity for Nova as we keep investing in our core technology as well as in bringing holistic solutions and unique software elements to the market. Turning now to the market dynamics and its effect on the reminder of the year while the first quarter was mainly weighted towards memory including DRAM we expect to see foundry pick up in the second quarter with continuous investment in the second half driven mainly by investment in 10 nanometer production and 7 and 5 development. During the second half we also expect incremental investment in mature foundry nodes in order to meet the market demand for this devices. Since DRAM is facing some complex technology transition during 2016 we believe that we will see also some incremental spending by our DRAM customers towards the end of the year. Finally, our progress is embraced by our customers as evidenced by the growing number of partnerships and joint development program we established with leading customers. One of our main initiatives in 2016 will be to continue tightening the technology corporation with our partners in order to overcome obstacles rising from the complex transitions the market is experiencing. With that I would like to share with you our guidance for the second quarter of 2016. We expect revenues to be in the range of $34 million to $38 million, diluted non-GAAP EPS is expected to be $0.08 to $0.15. And diluted GAAP EPS is expected to be $0.04 to $0.10. Now let me hand over the call to door sorry to Dror to review our financial result in detail. Dror?

Thanks Eitan. Good day everyone. In my following preferred remarks I will refer mainly to non-GAAP results, unless otherwise specifically mentioned. You can find a detailed reconciliation between GAAP and non-GAAP results per item at the end of the quarterly press release. Total revenues in the first quarter of 2016 were $34.1 million up 24% year-over-year. Product revenue distribution in the quarter was 65% from the foundry segment; and 34% from the memory segment. During the quarter the company had four 10% customers. Of the company’s overall product revenues, UMC accounted for 33%, Hynix accounted for 24%, SMIC accounted for 22% and TSMC accounted for 11%. Blended gross margin in the quarter was 55% at the high end of the company's target model of 53% to 55% and similar to the previous quarter. For the second quarter of 2016, the company guidance assumes non-GAAP gross margins of approximately 53.5%. Operating expenses in the quarter we as expected lower than the average run rate and came in at $14.5 million mainly due to lower net R&D expenditures. For the remaining of 2016, we expect the normalized non-GAAP operating expenses to be between $15.5 million and $16 million with R&D net expenditures at the $9 million to $9.5 million range. Operating margins in the quarter on a non-GAAP basis was 12%. Tax expenses in the first quarter on a non-GAAP basis were $0.2 million and we expect similar levels in the second quarter of 2016. Non-GAAP net income in the quarter was $4.5 million or $0.16 per diluted share at the high end of the company’s quarterly guidance. The company presented $4.2 million negative cash flow from operating in the quarter as a result of working capital adjustments related to connections and payment timing. Moving into key balance sheet metrics, DSOs remain healthy at 54 days in the quarter. Inventories remain stable, while inventory turns are reduced to 2.2 times a year as the company prepares for a business ramp which is expected to start at the end of the second quarter of 2016. With that I will move the call back to Eitan.

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

Thank you. [Operator Instructions] We will go first to Edwin Mok with Needham & Company.

Good morning guys thanks for taking my questions. So first question I had just quickly on the second quarter guidance, in terms of the foundry/memory mix, is there any change from your first quarter or what is baked into your guidance for the second quarter? It looks like you guys have little growth in the quarter, so I want to see where the growth come from.

So Edwin as we said in the prepared remarks and I said about the remainder of the market we start to see pick up in – larger pick up in foundry in the second quarter. So the mix will be weighted towards the foundry segment. We see two foundry contributions, one coming from the foundries in China and the other one is from the biggest foundry in Taiwan.

I see, okay, that’s helpful. And then for the second half congrats for the $20 million order that you announced. Just want to understand, and you mentioned on the prepared remarks as more way to resources for the quarter. Is it just a order you have to choose so far you do you see that trend continuing and do you expect to see more follow-on order beyond that that could potentially see even greater portfolio I’m just trying to understand the timing of that – kind of with the leading edge foundry ramp up that you expect in the second half of the year?

So Edwin so regarding the remainder of the year we don’t guide beyond the first quarter ahead, but during the prepared remarks that we have we actually gave a better guidance or growing guidance for the second quarter and we also hinted for our performance in the third quarter which strengthen our confidence that it’s going to be another solid year for us. From the visibility that we have right now we don’t see the full year, so we don’t see Q4 but definitely we’ll do see that the major fund we will continue investment – investing in Q4 and therefore we believe that the second half in total will be better than the first one. And therefore the year will be ended as a solid year for us.

Okay, okay. That’s helpful actually. Talk a little bit about your XPS product, mentioning historically a great exposure in both leading hedge funds as well as the NAND space. I was wondering how is that progressing this year, since like there is some pick up in the 3D NAND investment this year, because you have exposure there a little bit on you – what you just reported, it doesn’t seems like you does much revenue come out this past quarter. So try to kind of understand where that stands and do you expect that business to grow this year?

So we’re looking right now on the XPS product, on the ReVera’s product. Actually it’s been installed [indiscernible] clear I mean both the DRAM, V-NAND and foundry segments. When we looking specifically on the memory segment which is installed in the majority of those customers and when we looking right now in 2016 we expect repeat it all there from all those customers. So definitely we see those systems installed in more of the memory customers during 2016 as well.

Okay, all right. Lastly draw just on the quarter you mentioned lower profiting expense because you reduce in R&D, is it just a timing thing and we should expect R&D to bounce bank and probably it remain at this $9 million to $9.5 million level for the rest of the year?

Yes, exactly this is a timing issue of intake of product types related to do R&D programs we didn’t expect a decrease in Q1 but for the remainder of the year we do expect the level of $9 million to $9.5 million.

Okay, great. That’s all I have. Thank you.

I will go next to Patrick Ho with Stifel Nicolaus.

Very much, Eitan, first in terms of the industry outlook given that there has been a pick up in 3D NAND spending across a broader number of players can you just comment, I guess on your exposure how you see those trends playing out for you over the next couple of quarters?

Yes. So thanks Patrick, it’s a really good question. If I can answer that actually I can answer to emphasize once again the process we went through during the last three years in the memory segments. They also mentioned in my prepared remarks our efforts to change our concentrated business to a more diversified one, bearing fruits starting from last year, with contribution from a greater number of customers were part of them are memory. And if you looking right now in 2015 actually with lot of the amount of revenue coming from the memory segments from 15% to 30% and if you’re looking right now on the first quarter its actually the same, the same percentage. Our customer base which is now much more diversified with that allow us to have a larger opportunities on the rest of the year. So if you looking right now on the pick up in part of the memories we are part of it – either with OCD tool, or with XPS tool. So we definitely looking if the – V-NAND will continue to perform in the next few months, then we definitely are going to enjoy some of the expansions over there.

Great, that’s helpful. In your comments on the prepared remarks you talked about some of the hybrid metrology solutions, you’re starting to get traction with on the OCD as well as on the x-ray side of thing. Can you specifically talk about the applications that they are being either supplied to, like what are some of wins coming in, in terms of specific process applications?

I will avoid talking about specific application because of the competitive scenario but I will elaborate more on the – on what I said on the prepared remark that actually the ability to have true methodology to measure an application on structure and not on a test Pat and it allow us to measure more than just they mention, they mention our structure. So the OCD simply measure so they mention our structures in critical dimension, but once you add to that the ability of the reserve system to measure also thickness on the structure and also composition of the material. Then once you combine all of that to one solution you have a much more accurate metrology performance on this specific application and all of its done under one solution that is done through Nova. So you don’t need to go to a different metrology tools and get those numbers from different metrology elements and then combined it under the FAB roof. And now when we have that, can you imagine that before we could do OCD measurement, but we didn't do anything about the thickness and the material composition. And right now, when we have all of that, both the measurement in XPS side and the measurement in the OCD can be much more accurate. And as I said in my prepared remark, our solution when we bring to the market right now is much more holistic combining few elements larger than spending everything on an OCD point solution, and this is the news that we bring to the market with the synergy.

Right. Maybe just as a quick follow-up to that, it sounds like this provides a cost of ownership advantage for your customers. Can I assume also with these higher – with these “integrated type of solutions” that you're getting both with good ASPs as well as good margins on your end.

So, yes, it's correct. So both of them – once you combine solution to one hybrid solution, you are actually enabling faster time for solution to the customer. So it's obviously a win. And then the ASP, once you have this combination, you actually can bundle a deal that help you to extract a better growth margin, so both of them are correct.

Great, thank you very much.

[Operator Instructions]. We will go next to David Wu with Indaba Global Research.

Good evening. I have a question about 10 nanometer as a foundry business. Although TSMC, your largest custom appears to be talking about a major ramp towards the end of this calendar year, what do you see about the competitive move to 10 nanometer by Samsung, and if that represents a opportunity for incremental bookings for you in the second half.

Well, we're looking right now on that state of – moving to 10 nanometer actually we have few customers that are talking about it. For the obvious reason, TSMC is the leading one, any structure of the first one to go to 10 nanometer which will happen in the summer and we’ll continue through 2017 as well. Besides TSMC, I think that they are few other customers are debating if either they will – they should go to 10 nanometer immediately now as a result of the competition with TSMC or should they wait and spend the money in order to build the 7 nanometer sub. The notion in the market and the technology approach is that 10 and 7 nanometers exactly like what happened in 20 and 16 nanometers. And the question, if you spend in 20 nanometer and move to 16 nanometer or you have a strategy to go directly to 16 nanometer, this what happened before. The same thing here with the 10 and 7 nanometers. If either you are spending 10 nanometer and move or do the transition to 7 nanometer or you will start immediately with 7 nanometer. Now we have traction with other customers as well, beside one big competitor, TSMC, we don’t see others happen this year, at least from our visibility currently.

Okay. Thank you.

And we will go next to [indiscernible].

Thank you for the call. I want to ask what is your – the Nova company’s plan to lower the loans that company has in the balance sheet? Thank you.

Can you repeat the question please?

I want to ask – I’m sorry, how the Nova company planning to lower the loans in the balance sheet? If you can in the IPO…

So first of all the company in general does not have long-term liabilities in the balance sheet in the aspect of long-term debt. All the obligations that we have in the balance sheets are mainly are short-term related, and the company does not have any debt on its balance sheet right now.

Thank you.

And with no further questions in the queue, I’d like to turn the call back over to Eitan Oppenhaim for any additional or closing remarks.

Thank you, operator. I would like to thank you everyone for joining our 2016 first quarter financial results call today. Thank you and have a nice day.

Again, that does conclude today's presentation. We thank you for your participation.