Nova Ltd.

Please stand by. We're about to begin. Good day and welcome to NOVA's first quarter 2022 results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mary Siegel of MSIR. Please go ahead.

Thank you, operator, and good day to everybody. I would like to welcome all of you to NOVA's first quarter 2022 financial results conference call. With us on the line today are Mr. Eitan Oppenheim, President and CEO, and Mr. Dror David, CFO. Before we begin, I'd like to 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, sold by drawer, with an overview of the financials. We will then open the call for the question and answer session. Now I'll hand over the call to Mr. Eitan Oppenheim, NOVA's president and CEO. Eitan, please go ahead.

Thank you, Miri, and thank you all for joining our call today. Let me begin by speaking briefly about our first quarter performance highlights. Following my commentary, DRAW will review the quarter's financial results in detail. NOVA delivered a strong opening for the year, exceeding the high end of the revenue and profitability guidance, and by that delivered another record quarter. This robust outcome marks eight consecutive quarters of revenue growth. Our financial results for the March quarter reflect our upward business momentum, driven by our burgeoning position across technology nodes, our expanding customer base, and the proliferation of our increasingly diverse portfolio. As a result of our employees' solid execution, revenue grew 59%, and non-GAAP profitability leaped 86% year-over-year. The outstanding quarter was also distinguished by record bookings, an elevated yearly backlog, improving visibility for the rest of 2022, and cementing our confidence in our continuous profitable growth. The momentum of the first quarter will continue also in the second quarter, even as we navigate through a dynamic macro environment and a persistent supply chain challenge. These stout earnings demonstrate once again our consistent approach to meet customers' demand and delivery schedules without missing a bit. While we are focusing on solving ongoing supply chain disruptions, we continue increasing production capacity for all our product lines across our facilities in Israel, Germany, and in the u.s as a matter of fact our preparations for the coming years demand along with the growing market adoption of our new growth engines propelled more than 60 percent growth in nova's production output in 2021 and led us to invest in two new production facilities opening later this year based on the revenue forecast for the first half of 2022 which is approximately 50% higher than the same period last year, we are proud to outperform the market growth of our peer groups, growing twice as high as the group average. Furthermore, we now expect to realize our NOVA 500 plan ahead of schedule and by the end of 2022. In doing so, we have fulfilled our vision of doubling the company revenue every five years. Encouraged by the expected results for 2022, the company is now working on a new strategic plan to be initiated in 2023. This plan will be built on both our growing organic engines, like the Ellipson, Prism, and Matreon, as well as the newly acquired Ancosys portfolio and new M&A activities. The initial stage supporting our growth is already taking shape this year with major investment in doubling production capacity. We will share more on this later this year when the plan is in progress. Following the recent ANCOSIS acquisition, this is the first quarter that we are consolidating chemical metrology sales results as part of our reporting. During the quarter, we continued to integrate ANCOSIS as a division in NOVA developing a thriving new pipeline of products and opportunities in both the front-end and back-end industry segments. Most of ANCOSYS sales channels have already been incorporating into NOVA to keep utilizing this year momentum and strong demand from various customers. Chemical metrology is becoming a standard process control step in front-end interconnect layer deposition and we expect demand to further increase as the dynamic nature of plating chemistry calls for inline metrology, closer to the manufacturing process. The introduction of increasingly complex materials in both memory and logic devices drives the need for higher sensitivity to purity, particles, and contaminations. As more liquid-based process steps are introduced, it will drive the demand for higher inline chemical metrology intensity. A similar trend exists in advanced packaging where smaller pitches at higher density are used to increase connectivity, which enhance device sensitivity to materials purity. As a result, we see a growing number of applications requiring inline metrology across all advanced packaging segments. Under NOVA's umbrella, ANCOSYS is well positioned to capitalize on the growing demand in the market and take leadership position in liquid chemistry process control. Now let me shine some light on the major business highlights of the quarter. The first highlight is our balanced customer base. Diversification in our customer mix generated five major customers contributing over 10% each. It is especially notable that one of our top customers for the quarter is the world's leading logic IDM, which adopted our standalone OCD and material solutions for its advanced node globally. The balanced mix is a result of close cooperation with our customers at every stage of the production cycle, from early development to high volume manufacturing. These partnership programs with our customers drive unique solutions that later proliferate to other industry leaders as well. One example is our recent award at the SPIE Advanced Lithography Conference for the best metrology paper for our work with IBM. The award was given for demonstrating the value of inline Raman spectroscopy for nanosheet devices using our Nova Ellipson platform. A new device like the nanosheet structure pushes metrology requirement to the limit and requires innovative, out-of-the-box solutions for both materials and dimensions characterizations, which can't be fulfilled today with traditional methods. We are confident, following several demos and evaluations, that our new portfolio can meet these high-end demands and support our customers' manufacturing challenges. Another highlight is NOVA's evolving geographical mix. The revenue distribution from various regions is further evident of our diversified strategy, our products appeal to different methodology steps and nodes, and our actual market share gains. All of this is reflected in the revenue breakdown for this quarter, with China being the biggest contributor, signifying our growing leadership in the region, driven by a combination of market share gains, portfolio adoption, and a vibrant base of more than 13 active customers. While the three big semiconductor territories, China, Taiwan, and Korea, continue to be the majority source for our revenues, Europe and the U.S. are gaining momentum in light of government programs to establish a growing dependency. The most recent example is the EU CHIP Act, whereby 2030 member states will invest more than 43 billion euros in the chip industry in Europe. We strongly believe that our current investment in global R&D and production facilities in different regions will support our growth in the years to come, preparing Nova to various geographical investment scenarios and optional geopolitical developments. Though we continue to see a growing adoption of our hardware products, this quarter's performance also reflects our success in software sales, which rose to a new record high. As customers transition to advanced nodes, their process control requirements expand to new applications, higher sampling, and in-die capabilities at the highest speed possible to maximize productivity and yield. In this environment, where the limits are close to the physical hardware limitations, our software and advanced algorithm solutions, including top-notch machine learning and data training capabilities, provide an additional edge to the productivity and yield improvements that are so crucial to today's markets. Finally, we made another step function with our service revenue, hitting a record high. Revenues in this segment grew by approximately 13% in the first quarter, bolstering our confidence to set another annual record and surpass our expectations. This growth is driven mainly by our customers' urgent need to increase capacity and utilization of the install base to meet market demand. We focus our efforts not only on productivity upgrades, but also on offering other value-added software and hardware solutions to utilize the fleet in better, more accurate, and effective ways. Before I hand over the call to draw, I want to touch on our commitment and progress on the environmental, social, and government fronts. We have been making significant strides in implementing our vision, aiming to create an advanced ethical and sustainable ecosystem that improves communities and the environment. Our program, which was divided into five pillars, diversity, inclusion, ethics community relations and environment is progressing well towards specific targets and elevate investments while we are improving on all fronts i'm really encouraged by the way we opened 2022 with our commitment to a diversity model but by the end of the first quarter 25 percent of our employees and over 40 percent of our board members were females We've been setting clear goals and investing in raising awareness of Nova as a preferred employer for females, a workplace where women are rightfully assuming their place in technical and leadership roles. Later this year, we plan to release our first ESG report, where we'll be able to share more on our progress in this area that is becoming part of our culture. Lastly, I want to recap our Q1 results, and forecast. Despite the market dynamics, political uncertainty, and constant supply chain challenges, we believe that the structural increase in long-term semiconductor demand remains firm. The strength of our various fundamental growth drivers continue to fuel demand for growing computing power, while data centers and intelligent edge applications requiring increasingly more memory and storage to support data incentive workloads. The strong demand for semiconductors is pushing our customers to increase their capacity and technology investment globally for the long term. Engaged in this dynamic environment, Nova remains focused on improving efficiency, solving delivery issues, and meeting all our customers' demands. As we consider our accomplishment in the first quarter and given our guidance, we are striving to outperform the market once again and achieve another record year for NOVA. Now let me hand over the call to Dror to review our financial results in detail. Dror.

Thanks, Eitan. Good day, everyone. And thank you for joining our 2022 first quarter conference. Total revenues in the first quarter reached a record level of 134 million, exceeding guidance and representing 59% growth year-over-year. Product revenue distribution was approximately 65% from Logic and Foundry and approximately 35% from Memory. Product revenue included five customers that contributed 10% or more each to product revenues, one of which was the world's global leading IDM. Blended gross margin in the first quarter increased to 57% on a GAAP basis and 59% on a non-GAAP basis, mainly due to a favorable product mix, which included newer product configurations embedding high metrology and throughput performance adopted by several customers. Operating expenses for the quarter came in at 39 million on a GAAP basis and included 1 million in fluent amortization of intangible assets related to the ANCOSIS acquisition. Operating expenses on a non-GAAP basis came in at 33 million for the quarter. Operating margins in the first quarter were at a record level, increasing to 28% on a GAAP basis and 35% on a non-GAE basis as a combined result of higher revenues, improved gross margins, and stable operating expenses. The effective tax rate in the first quarter decreased to 11%, lower than our model of 15%, mainly due to tax incentives related to employee stock grants, which fluctuate across quarters based on when those grants are exercised. Earnings per share came in at a record level of $1.07 per diluted share on a GAAP basis and $1.30 per diluted share on a non-GAAP basis. In terms of share count, as expected, the company implemented the accounting standard for debt instruments which include conversion options. As a result, the share count for diluted earnings per share increased to 32 million shares. In parallel, the company announced in the first quarter a $100 million share repurchase program, which we expect to start executing in the coming quarters. Since the acquisition of ANCOSYS closed at the end of January 2022, the P&L results cited for the first quarter include ANCOSYS results only for the month of February and March. Including an earn-out payment of 10 million anticipated in the third quarter of 2022, NOVA expects to pay approximately 90 million for the acquisition of ANCOSYS. The purchase price allocation of this amount, which remains subject to final auditing, was reflected in the consolidated company balance sheet as of March 31st, 2022. The main elements of the purchase price allocation at the closing date were as follows. ANCOSY's net acquired tangible assets were approximately $20 million. ANCOSY's intangible technology assets were approximately $45 million and are expected to be amortized over a useful life period of nine years. ANCOSY's intangible customer relation assets were approximately 5 million and are expected to be amortized over a useful life period of 13 years. ANCOSY's inventory step-up related to backlog at the time of the acquisition was approximately 3 million and was substantially amortized in the first quarter of 2022. Finally, I would like to share the details of our guidance for the second quarter of 2022. Currently, we expect revenues to be between $133 million to $141 million, gap earnings per diluted share to range from $0.82 to $0.96, and non-gap earnings per diluted share to range from $1.09 to $1.23. These results include ANCOSY's expected first full quarter contribution. At the midpoint of our second quarter guidance, we anticipate the following. Gross margins to be approximately 57% on a GAE basis and approximately 58% on a non-GAE basis. Operating expenses on a GAE basis to come in at approximately 43 million. This amount includes approximately $2 million in quarterly amortization of intangibles, as well as an expected one-time contingent liability step-up expense of $2 million related to the ANCOSIS acquisition earn-out payment. Operating expenses on a non-GAAP basis are expected to be approximately $36 million. The expected increase in non-GAAP operating expenses from 33 million in the first quarter to 36 million in the second quarter is related to a combination of accelerated recruitment in all departments, as well as acceleration of several research and development roadmap programs. The effective tax rate during the second quarter is expected to be approximately 15%. With that, I will turn the call back to Eitan.

Eitan?

thank you draw following our prepared remark we would be happy to take your questions now operator of course thank you and if you'd like to ask a question please press the star 1 on your telephone keypad if you're on a speakerphone please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment again it is star 1 if you'd like to ask a question we'll go ahead and take our first question from Jamie with Bank of America. Please go ahead.

Hey, guys. Thanks for the question. Really nice start to the year, so congrats there. I know you guys aren't going to guide full year, but if I look at the start of the year, you guys obviously are outperforming the industry, and some of your peers are run rating at like an $80 billion WFE level right now, and They're guiding for $100 billion for the full year, so that suggests a very strong ramp in the back half. But for you guys, you're already run rating at over $100 billion, even excluding ANCOSIS. So do you think there's still room for sequential growth in the back half at these levels?

Amy, thanks for the question. As you said, we are not guiding the rest of the year, but as I did in my prepared remark, based on the growing backlog and the record bookings, as well as the fact that the visibility has improved a bit for the year, we certainly expect to have a record year and outperform the market, okay? Besides that, we cannot guide beyond the quarter ahead. Now, if we're looking on the capacity expansion on the second half, we do see a potential room to grow even further.

Got it. Appreciate that. And then also in your prepared remarks, you talked about how China was the... largest contributor to your revenue this quarter. There was a headline last week that got a bit of attention about U.S. adding restrictions on equipment to China. So I wanted to get, could you quantify the China exposure? And then also, is there any way to quantify what portion of your tools that are produced in the U.S. are shipped to China?

So in terms of China distribution, generally China is around 25% of the company revenues, and this quarter it was a little bit higher. In terms of the equipment going out from the U.S. to China, the X-ray product line is shipped out of the U.S., However, it's important to note that these restrictions on the Chinese customers are quite limited, right? It's only a couple of customers and not necessarily the main customers in China.

Right, but I guess my question is if those sort of restrictions are broadened, what is the, you know, potential risk of those, let's say, X-ray product lines What is the exposure there to China?

So according to our product portfolio, the three product lines, so we have the dimensional and the OCD that are manufactured in Israel. We have the chemical now that is manufactured in Germany. Those ones are not related or not affected by the restriction currently. Now, regarding the U.S.-based manufacturing, we're talking about the XPS and the Metreon. and they are exposed only on the currently on the SMIC and even to SMIC while it's SMIC while it's advanced logic customers you get license to export to non-advanced nodes so all in all if I'm looking right now on my exposure to SMIC on the advanced nodes for XPS which is it's not large Okay, we're talking about several percentage.

Got it. Appreciate it. Thank you.

And we'll go ahead and move on to our next question from Quinn Bolton with Needham & Company. Please go ahead.

Hey, guys. Just wanted to say congratulations on the nice results and outlook, and especially on the 35% operating margin. Just, I guess, wanted to follow up on the last question about China. I just want to clarify, your only exposure with XPS and Metreon is to SMIC, or are you shipping those tools to other customers in China as well?

No, we are shipping all over. The regulations that are related specifically to the front-end customers that we are affected with is SMIC with the advanced nodes.

Right. Right. But I think that there is, you know, again, in the U.S., there's speculation that the Commerce Department will broaden the restrictions on shipments to China to include all Chinese manufacturers. And so I guess we're trying to get a sense, you know, of the 25 percent of revenue that typically goes to China. Can you give us some split between the XPS or the U.S. based products versus products from Germany or Israel? in the event that the US changes its current policies?

Actually, the answer is not different from what we answered before to Amy. Usually, XPS and Matreon are sold to advanced nodes, usually on the more advanced sites. And basically, there are only few customers in China that are going to the most advanced node. So even though the U.S. will broaden at the end the restriction on U.S. companies or U.S. manufacturers to a broader number of customers, again, the effect on OVA will be several percent.

Got it. Thank you for that, and sorry to be that persistent. Aiden, the second question, just around the gross margin, obviously up at 59.5% on a non-GAAP basis in the second quarter towards the higher end of the range. I guess as you guide to 58%, is it just you see a more normal mix in the second quarter, or are there any other pressures, whether it's input costs or other inflationary pressures on gross margin that bring you back to the 58% level in Q2?

Well, I would say it's a combination. It's a normalized level of gross margins combined also, obviously, with pressure on the supply chain. But the larger portion, I would say, is the normalizing of the gross margins.

Got it. And just lastly, With about 25% of sales typically from China, obviously the COVID lockdowns are disrupting logistics, the ability for companies to receive equipment at ports. Have you seen any impact on logistics or delivery times within China, or have things been running pretty smoothly for you?

No, no. So we see those disruptions happening, okay? So as you said, it's the ongoing work in the ports, as well as transportation between cities, as well as even the simple logistics of signing papers where people are locked down. So we do see those restrictions having an effect on us as well as part of the hard things that are going in China in regard to the logistics. But currently looking on the second quarter, those are factored in. already. And we need to see what will happen in the second half, if it will be easier or it will be harder. But definitely when we're looking right now on the guidance for the second quarter, we are taking into consideration that the lockdown will continue, at least in the largest city of Beijing and Shanghai. Now, I just want to say that, yeah, just the last sentence is that The Chinese customers are trying to work normally as possible under this lockdown. So employees are staying in the factories. All right. So they are trying to increase yield as much as possible. And our employees is in that matter in the fabs as well. So we see the logistics issues, but once the equipment is in the fab, we do see them investing in yielding up and ramping.

Perfect. Thank you.

And as a reminder, it is star one if you would like to ask a question. And we'll go ahead and move on to our next question from Mark Miller with the Benchmark Company. Please go ahead.

Let me add my congratulations for another record quarter. You mentioned you're facing supply constraints. A lot of people are. Can you kind of quantify in terms of an increasing component cost did you have to push out any shipments of tools because you didn't have enough components and just a little more color on what you're facing in terms of supply constraints so mark definitely there there are price increasing in many of the many of the components okay

And we do see in some elements a shortage from some of our suppliers, and also we do see some difficulties in reaching to a certain component. So all that we see on a daily basis, the supply chain issues, is pretty much a consistent issue every day. Nevertheless, as I said before, the preparation that we took... I think one and a half years ago, two years ago, that raising the inventory in such level that we can enjoy from that until now, including the preparation that we took for the next two years in increasing inventories and capacity. And secondly, we have special teams in Nova that all day, what they are doing is qualifying second vendors and trying to find those parts everywhere in the world. I can tell you that up to now, as I said in my prepared remark, we didn't miss any delivery. So I hope that it will continue like that in the rest of the year. But in this consistently challenged environment, we can manage lead times and delivery almost in the original schedules.

You mentioned that there's two more facilities you're expanding capacity. What do you estimate will be your CapEx spending for this year?

So the main investments this year are divided to three. One is a clean room in Israel, a new clean room. The second is a new facility in Germany, which we will start investing in in the third quarter practically, and also a facility in the U.S. The combination of all these investments is expected to be around between $17 to $20 million in 2022.

Thank you.

And we'll go ahead and move on to our next question from Patrick Ho with Steeple.

Please go ahead.

Thank you very much, and congrats on a really nice start to the year. Eitan, maybe first off in terms of the business environment, You know, given the demand that's out there, the issues with the supply chain and lead times extending, can you at least qualitatively discuss, you know, how you're looking at 2023? And from what I mean by that is some of your equipment peers are already working on 2023 business, you know, given that 2022 appears to be full. How is that working for you guys in terms of next year?

So Patrick, I would like to divide it to two. So first of all, the positive side is that we do see orders for next year as well. Some of the leading edge customers, they know the problems with the supply chains and some equipment issue, and therefore they're starting to show their intentions for 2023 already. mainly the new FABs that you probably know in the U.S. and also in Germany and Japan. So we're starting to see those capacity requirements and system requirements, and we start to see the distribution over the years. And we also start to see real purchase orders that are coming from now to secure Q1. So we're starting to see as well the 23% capacity Increasement and I think that from Investment point of view at least from the largest customers. I think that 2023 will be Will be a growth here as well from the other side there are you know? There are different elements that nobody will know how they will develop their uncertainty regarding the geopolitical situation uncertainty regarding the other elements in the supply chain and and the overall economical issues with inflation, interest rate, and exchange rates, which we cannot predict. But if you eliminate this one aside, and you're looking right now on the overall demand for the IE and user applications, I do see them firm. So I don't think that the demand will be fulfilled in 2022, and the overall demand will continue in 2023 as well.

Great, that's helpful. And maybe as my follow-up question for Draw, based on your results and the outlook, you guys are managing through a lot of these supply chain issues very well, given what a lot of your equipment peers are experiencing. I guess from, again, a qualitative perspective, what's the biggest issue that you're facing in the June quarter? Is it procurement? Is it freight and logistics? Is it higher inflationary costs? What's the biggest issue? And is there any impact on the gross margin lines by, you know, let's just say a few hundred basis points of that matter? What's the impact of gross margins?

So, as I mentioned before, I think the larger portion in terms of the change in gross margins in the second quarter is a more normalized level of You know, 59% and more are not the normalized level of gross margins that we aim for in general. So most of this reduction is related to normalizing product mix. In terms of the shortage and challenges in the supply chain, including increasing costs, I would say the main challenge is around semiconductor content within our product. which are hard to find and sometimes are requiring extreme measures in order to reach the suppliers and actually acquire the inventory.

Great. Thank you very much. Thank you, Patrick.

And with that, I would like to turn the call back over to Ethan for any closing or additional remarks.

Thank you, operator, and thank you all for joining us today. With that, we conclude our call for today. Bye.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.