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spk01: and welcome to NOVA's fourth quarter 2020 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Mary Segal of MSIR. Please go ahead.
spk00: Thank you, Operator, and good day to everybody. I would like to welcome all of you to NOVA's fourth quarter and full year 2020 financial results conference call. With us on the line today are Mr. Eitan Oppenheim, President and CEO of 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 a business update, followed by a drawer with an overview of the financials. We will then open the call for the question and answer session. I'll now turn over the call to Mr. Eitan Oppenheim, NOVA's president and CEO. Eitan, please go ahead.
spk02: Thank you, Miri, and thank you all for joining us today. I will start the call by speaking briefly about our fourth quarter results and performance highlights. I will then spend some time summarizing 2020 and our main achievements for the year. Following my commentary, DRAW will review the quarterly and annual financial results in detail, including the guidance for the first quarter of 2021. NOVA reported remarkable results for the fourth quarter, with revenue exceeding the guidance and profitability reaching the high end of the guidance, demonstrating our growing agility and solid execution capabilities. The company resilience amid the pandemic led by our global teams drove exceptional performance in the quarter and throughout the year. Our robust quarterly results concluded a record year representing an annual growth rate of 20% in our revenue and 30% in our non-GAAP earnings. This was a strong conclusion to a well-performed year during which we continue to innovate and extend our differentiated technology to support our customers' growing demand. The positive market reception of our product offering and our sound operational model support our momentum to continue our growth in 2021 as well. The accelerated demand for new complex semiconductors across the industry represent a significant compelling technology event affecting all semi-segments, including Logic, DRAM, and Flash NAND. These trends continue to expand our available markets and increase the attractiveness of our materials and dimensional portfolios in the coming years. Following our successful product introductions in 2020, we believe that NOVA is well-positioned to increase its footprint and market share across multiple customers in 2021. Our accomplishments this year highlight the agility and resiliency that the company developed along the year to support our growing activity despite the challenging environment imposed by the COVID disruptions. Turning now to our quarterly highlights, our performance was driven by a mix of technology enhancement, product introduction, and business wins, reflecting our progress to meet NOVA's long-term organic targets. The revenue for the quarter reached a record high, representing 10% sequential growth from the third quarter of 2020. Based on the recent market dynamics, our quarterly sales were driven primarily by strong demand in logic. The current demand for both advanced and mature logic devices concluded a very healthy year for our logic customers. In the current environment, the leading-edge customers are required to accelerate their advanced node transitions to meet the growing demand for high computing applications like 5G, AI, and HPCs. On the other hand, the acceleration in digital evolution in many applications also drives demand for the more mature nodes across various markets, such as consumers, automotive, and industrial. As a result, our quarterly mix was weighted towards logic, with around 72% of the revenue derived from this segment. Although we just started 2021, we expect the same healthy demand to continue across various logic generations this year as well. Although 2020 was more robust in logic demand, our memory customers also started to increase their investment in the fourth quarter, mainly in DRAM, which grew more than 25% sequentially in our quarterly revenue mix. We expect this moderate growth to continue in 2021 as well in other various memory segments. The evolving semi-market during COVID is also fueling memory demand across broadening application space. As a result of decreasing inventories and more balanced supply-demand levels, we expect a better investment cycle in memory both in NAND and DRAM throughout 2021. Our progress along the year to balance our revenue mix is highlighted also this quarter by the customer mix, which yielded three major customers that contributed more than 10% each to our revenue. This includes a leading foundry manufacturer, a leading memory provider, and a growing foundry in China. One of the more notable achievements in the fourth quarter was the record revenue contribution from our materials metrology sales. During the quarter, we received multiple orders from multiple leading logic customers for our most advanced material metrology solutions. The bookings were for NOVA's VeraFlex materials metrology platform, which provides breakthrough thin-thin thickness and composition process control capabilities for the current and emerging technology nodes. The recent wins marks NOVA's growing penetration into all leading industry manufacturers and cement NOVA's position as a material metrology leader. As part of a consistent approach to expand our exposure to more materials applications, we announced in December the launch of NOVA ELIPSON, a revolutionary materials metrology solution. The new inline stand-alone metrology platform is designed to measure materials properties such as stress, strain, and surface for both memory and logic applications. Following the announcement and the outstanding progress we had with multiple customers, we recognized initial revenues from several accounts already in 2020. Let me now shine some lights on our yearly benefits. Nova's quarterly performance signifies an optimistic end note to a challenging year in which COVID-19 threatened world stability. We concluded the year better than previously anticipated, growing our revenue to a record high, representing a compound annual growth rate of 13% for the past five years. Our profitability continued to strengthen as well, with net income earnings growing significantly also year over year. During this disruptive period, multiple factors contributed to our strong performance in 2020, and I would like to mention four major ones. First is the advanced operational model that we built during this period to allow better agility and resilience, which allow Nova to function well and adopt faster to the changing conditions. This model is currently guiding our product development cycles, go-to-market strategies, flexible lead times, tighter supply chains, a safer environment for our employees, stronger territory support, and robust recovery plans. As a result, we continue our manufacturing plans according to customers' demand and increased capacity by around 25% without a single shutdown date. Additionally, and in light of the continued travel restrictions, we invested significantly this year to strengthen our global teams by increasing professional headcount and expanding the facilities around the globe to shorten customer response and time to service. Second is the enhanced product portfolio we introduced during the year. Our investment in research and development, which grew at around 20% year-over-year, was focused on two main pillars, introducing new product generations, both in the optical and X-ray lines, and the development of entirely new products from the ground up. In light of the technology involvement in the industry, we introduced a new generation platform to all our traditional product lines, including the integrated and standalone OCD, the advanced software package, and XPS. All of them are already installed, accepted, and generating revenues. Regarding our new innovations, we continue to proliferate the newly introduced Prism platform in multiple accounts, gaining share and winning new positions in both memory and logic. On this front, we are also excited this year to introduce the Ellipson, a new materials metrology platform based on Raman technology that aims to deliver additional materials information, like stress and strain, unmatched by any other inline materials metrology system. As a result of these product initiatives, in both our sustained and new innovative portfolio, we could reach record annual revenues in both the standalone and integrated optical CD metrology, growing significantly year over year. The third highlight I would like to mention is the continued diversification of our revenue mix that allows us to mitigate different demand cycles in the industry. Although this year was weighted towards logic with roughly 68% of revenue contribution, we also had significant win and penetration into other customers, including a large IDM, global memory manufacturer, and other accounts in China. This creates a healthy balance mix that will continue to support our long-term strategic targets and interim growth plan in 2021. The last highlight I would like to mention in regard to 2020 is the growing importance we have been given to our social responsibility plans. The reality of COVID-19 solidified our commitment to support communities across the globe. Over the past year, we proactively supported our partners and customers, as well as families, individuals, and health organizations in the communities. Our recently announced corporate social responsibility strategy is a natural evolution of our ongoing practice, aiming to continuously enhance our ethical, social, and environmental performance. We are committed to incorporating social responsibility into our daily operations and business management while inviting all stakeholders into our socially responsible ecosystem. To wrap up and before I hand over the call to draw, let me briefly summarize our results and market position going into 2021. Despite continuous disruptions and growing challenges associated with the pandemic spread, Nova's global teams 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 catalysts as a result of the accelerated transition to a more data-driven world, our offering is rapidly evolving to meet these changes and expand our available markets. Even our agile operational model, innovative portfolio, new product rollouts, and growing exposure to a broader opportunity range, we believe that NOVA is well positioned to continue capitalizing on growth opportunities in 2021 as well. Now let me hand over the call to Dror to review our financial results in detail. Dror?
spk04: Thanks, Eitan. Good day, everyone. Total revenues in the fourth quarter of 2020 exceeded our previously announced guidance and reached an all-time record of 76 million, 18% higher than the fourth quarter of 2019. Product revenue distribution was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan and Korea each contributed more than 20% to our product revenues, while China contributed slightly less than 20%. On a per-customer basis, three major customers contributed 10% or more to our product revenues, including two foundry customers and one memory customer. Blended gross margin in the fourth quarter was 55% on a gap basis and 56% on a non-gap basis. Product gross margin increased to 63% on a gap basis and 64% on a non-gap basis due to favorable product mix. Service gross margin reduced to 22% on a gap basis and 23% on a non-gap basis due to lower revenue levels, less favorable mix between contracts and time and materials, higher materials consumption for warranty and contracts, and end-of-year inventory-related adjustments. Operating expenses in the fourth quarter of 2020 on a GED basis increased to $25 million and included a one-time income of $2.9 million presented in general and administration related to cash recovery of an unauthorized transaction previously made by a financial institution. Operating expenses in the fourth quarter on a non-GAE basis increased to $26 million, reflecting increased headcount and end-year closing costs, as well as the impact of unfavorable Israel currency exchange rates. In the fourth quarter of 2020, the company presented net financial expenses on a GAE basis due to $0.9 million of expenses related to amortization of debt discount and issuance costs from the October convertible note issuance and $1.4 million of expenses related to the revaluation of our operating lease liabilities as a result of the unavailable Israel currency exchange rate. Both of these financial expense elements were adjusted for non-GAAP purposes. Earnings per share on a GAAP basis in the quarter were 47 cents per diluted share above our guidance of 32 cents to 43 cents for the quarter, mainly as a result of the previously mentioned one-time income of 2.9 million. Earnings per share on a non-GAAP basis in the quarter were 55 cents per diluted share at the high end of our guidance of 45 cents to 56 cents. On an annual basis, revenue grew 20% year over year to over $269 million in 2020. Product revenue distribution on an annual basis was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan, Korea, and China each contributed between 20% and 30% to our product revenues. On a per customer basis, three major customers contributed 10% or more to product revenues, including two foundry customers and one memory customer. Annual blended gross margin was 57% within our target model range. Product gross margin grew to 62% on a gap basis and 63% on a non-gap 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 GED basis and 38% on a non-GED basis, mainly due to higher personnel and material costs. Operating expenses in 2020 grew approximately 15% year-over-year, mainly in research and development, reflecting the significant investment in developing introducing and proliferating new technologies and products. Operating margin in 2020 grew to 21% on a GAAP basis and 24% on a non-GAAP basis. Effective tax rate in 2020 was approximately 15%. In 2020, earnings per share on a GAAP basis grew to $1.65 per diluted share, while earnings per share on a non-GAAP basis grew to $2.06, representing a 30% year-over-year growth, which significantly outpaced the revenue growth in the same year. In 2020, we generated free cash flow of $54 million, and in parallel, successfully concluded a 0% convertible bond offering in the amount of $200 million. As a result, we entered 2021 with gross cash reserves in excess of 420 million, which enables us to pursue business opportunities within the year. Moving into our outlook for the first quarter of 2021, we expect the following. Revenues to be between 76 million to 83 million. Gap earnings per diluted share between 41 cents and 53 cents. Non-GAAP earnings per diluted share between $0.55 and $0.66. At the midpoint of the first quarter guidance, we expect the following. Blended gross margin to be approximately 57%, while service gross margin is expected to increase to between 35% to 38%. Operating expenses to be approximately $27.5 million on a GAAP basis and approximately 25 million on a non-GAAP basis. Effective tax rate to be approximately 15% in the first quarter of 2021 and throughout the year. With that, I will turn the call back to Eitan. Eitan?
spk02: Thank you, Dror. With that, we will be pleased to take your questions. Operator?
spk01: Thank you. If you wish to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one for questions. We'll now take our first question from Quinn Bolton from Needham and Company. Please go ahead. Your line is open.
spk07: Hey, guys. Congratulations on the strong finish to 21 and the very strong first quarter guidance. I guess my first question for you is you sit here today looking into 2021. You've guided us to a very strong first quarter. I'm wondering if you could make any comments about how sustainable you think that revenue level is. There's been a debate among some of your WFD peers about whether spending in 2021 would be sort of front half loaded, balanced, or second half weighted. I'm just Would love your perspective as you sit and you look at your order book and your backlog, whether you think your revenue profile this year is front half weighted or more balanced through the year. Thank you.
spk02: Thank you, Quinn. It's Seitan here. So regarding the market review and what we should expect in 2021, so as I said in my prepared remark, entering in 2021, there are two There are two main catalysts that fuel the growth, at least in the first half, which is the healthy demand in logic foundry that will continue, at least in the first half. And secondly, the growing investment in DRAM. 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 I support the analysts and the prediction in the market that's saying that the WFC in 2021 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 7, 5, 3 nanometer. And I think that mainly VNANT will be added in the second half as well. So I'm looking right now on a balanced year, at least from our prediction.
spk07: Great. And then for Tor, you mentioned the appreciation of of the shekel was one of the things that added to costs in the fourth quarter. Just wondering, as you're looking at 2021, you've given us OPEX guidance for the first quarter. How are you thinking about foreign currency exchange? Do you expect that those are going to remain elevated costs and lead to sort of higher OPEX this year? Or how are you thinking about sort of that foreign exchange effect on OPEX in 2021?
spk04: Yes, so obviously it's hard to predict these economic elements of the market. What I can say is that during the first quarter, the foreign exchange rate did hit some kind of a low level and started recovering since then. Our guidance for the first quarter is already embedding an additional small impact as a result of that. And assuming the currency will remain stable at these levels, again, it did hit some kind of a low in January. So expenses, you know, would not get another hit from that aspect in the coming quarters. Okay, great.
spk07: Thank you. Thanks.
spk01: We will now move to our next question from Atif Malik from Citi. Please go ahead. Your line is open.
spk05: Hi, thank you for taking my questions, and good job on the results and guide. Eitan, on the logic demand, very strong last year. If you can parse the metrology demand between mature technologies versus leading edge, and also if you can comment on the intensity of your products as you move to 3D gate all-around type devices, the 5 nanometre and 3 nanometres.
spk02: Thanks, Sati, for the question. So if we're looking right now on the metrology intensity, there are two pillars. The first pillar is that always in logic foundry, the intensity is higher or the highest in the semi-segment. After that is the DRAM, and at the end is the VNAT, okay, or the NAND. This is the way that the intensity is being allocated. The reason is that mainly that in foundry there are many Many products, and there are changes also in the materials and the dimension. And as you go along to the DRAM and the VNAN, the number of products is reduced, and it's a more stable product. So the intensity-wise is always higher in the logic boundary. So this is one pillar. The second pillar is always when you're moving to a new generation of chips, and you're moving to a new complex device and the current movement that we see that the logic is moving to 3 and 2 and changing also the architectural structure to go to nanowires 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 itself for the segment. So if you have both logic and the memory, as we see that in 2021, replacing generations and also changing and replacing materials and going to a very complex devices, of course, the intensity is going up. We need always, when we're talking about intensity, try to offset it by the capacity, right? 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, always logic and foundry is higher. And when you're looking right now on the next one here, all the intensity and the touch rate in all the new technology nodes are going to be higher as well.
spk05: 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 two margins.
spk04: Yes, sure. So obviously the phenomena in Q4 was a one-time phenomena related to the aspect that I mentioned before, more materials consumption in the specific quarter and end-year adjustments. So actually what we see in the first quarter is is that service gross margins are returning to the normalized level, and this is what you should expect along the year. If we will see pickup in service revenues along the year, margins can even further improve from these levels. Thank you.
spk01: We will now move to our next question from Mark Miller from the Benchmark Company. Please go ahead. Your line is open.
spk03: Based on the midpoint of your guidance, it appears R&D went up significantly last quarter, and it looks like that trend is going to be continuing in 2021. Is that correct?
spk04: Yes.
spk03: Okay. Time on semiconductors 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?
spk02: So the orders for the Arizona sub 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.
spk03: Thank you.
spk01: And we'll now move to our next question from Jason Schmidt from Lake Street. Please go ahead, your line is open.
spk07: Yes, thanks for taking my questions. I think at one time there was talk that the goal for the service revenue line would be targeting 10% growth. Is that still a good ballpark growth rate to think about for that revenue stream?
spk04: Well, I would say the following. Our current assumption for services growth is between 5% and 10% depending on the install-based growth and also value-added services in the specific year. 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% a year.
spk07: Okay, that's helpful. And then just as a follow-up, I'm 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?
spk02: So, Jason, if you're talking about the supply chain for our production facilities, I think that we managed very well in 2020 trying to secure everything that we can in the supply chain. So it means that we increased inventories, and you see that in our financial reports. And also we tried to qualify actually a second or third supplier in each one of our elements in the supply chain. And the way that we are looking forward is trying to try to order and try to make sure that we have enough capacity for the next six to nine 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 that 2021 can be the same and even higher.
spk07: Okay. Thanks a lot, guys.
spk06: we'll now take our next question from patrick ho from stifle please go ahead your line is open thank you very much and congrats on a nice finish to the year hey tom maybe first off on the materials metrology front uh it's good to see the the traction and the adoption very quickly uh for these new products as you look at the memory side of things and you mentioned dram has higher metrology intensity Can you maybe give a little more color on some of the applications and some of the potential wins on the memory side with the materials metrology offerings that you have today?
spk02: Yeah. Thanks, Patrick, for the question. So the two main applications that are running specifically on the X-ray or the previously Rivera products is the composition, materials composition, and ultra-thin thickness measurement. This is the two main applications, and we are running on these two applications in all the customers. Now, because it's a unique metrology capability, the way that it started, it started from taking it from 2015 from the lab to fab, which started with a couple of systems per phase or per fab, Some of them were in R&D, some of them were in production. And in the last five 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, you start to get into the fab with more capacity, more touch rate, and more intensity. I can say that without getting to the exact numbers, but the distribution between memory and foundry or logic is around 50%, 50%. So we have applications coming from the memory, mainly the Venom sites when they are changing materials, and they're starting to have a very ultra-thickness application, and also for the logic and foundry when they're moving to new structures. So it's two different directions, but both of them are increasing the intensity of the usage once we move to be in-line and in-die systems that have the capability to measure really fast.
spk06: 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 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 more, not only with the traditional type of, you know, services, you know, break and fix type of model, but with enhanced features, enhanced products, upgrades? How much of that is contributing to, quote, the services growth as well as the uptick in margins?
spk04: 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-19, the ability to enter the fabs and do these mega projects of upgrade cycles was a little bit limited. And this probably had some impact on the growth of the services in 2020, which was at the low end of the 5% 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 accelerate the growth of services.
spk06: Great.
spk04: Thank you very much again.
spk06: Thank you, Patrick.
spk01: And just as a reminder, that is star one to ask a question. We'll now take our next question from Krish Sankar from Cowan & Co. Please go ahead. Your line is open.
spk05: Hi. Thanks for taking my question, and congrats on the really strong results. I'm going to draw one quick question. When I look at your calendar 20 numbers, you guys definitely seem to have grown really nicely, both your output from 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 were those share gains, and was it in foundry, logic, or memory? I'm going to add a follow-up.
spk02: So, Chris, thank you very much for the question. So, you know, 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 two strong catalysts to our growth. One, of course, is capacity because capacity demand is growing in all segments. And the second is purely share gains. that I cannot mention exactly where, but once you're doing outperformance, it's either you open a new market or you're taking a market share in this specific year. As I said in my prepared remark, we took a market share in one big IDM, as I discussed before, and I mentioned it in a couple of my calls. as well as in a global memory customer that took our old portfolio, starting from integrated standalone as well as materials and software. And it's also adding to that is a couple of other customers in China that in some of them we are holding a high percentage of market share in light of the performance this year. So definitely there is increase in market share this year. 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 in production for many years. So we can increase beside the market share, also getting applications that were measured before in the lab and now is moving to inline production.
spk05: 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 it fair to assume service and products have similar off-margins?
spk04: Can you repeat the question?
spk05: The service and product divisions from an off-margin level are they similar to corporate average? In other words, You know, services has lower RPEX, lower R&D, so it's similar to that of modular, similar to products.
spk04: Yeah, 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, you know, 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 is heavy on headcount and personnel across the globe. You know, it's 150 sites and so forth.
spk05: All right. Thank you very much. Appreciate the call. Thank you.
spk01: And there were no further questions, so I'd like to hand the call back to Eitan Oppenheim, NOVA's President and CEO, for any closing remarks.
spk02: Thank you, Operator, and thank you all for joining our call today. Please stay safe and healthy, and we'll meet you in the next turning call. Thank you.
spk01: Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.
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