Nova Ltd.

and welcome to NOVA's second quarter 2023 results conference call and webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of MSIR. Please, go ahead.

Thank you, operator, and good day to everybody. I would like to welcome all of you to NOVA's second quarter 2023 financial results conference call. With us on the line today are Mr. Gabby Weissman, President and CEO, and Mr. Dror David, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it in the investor relations section of the company's website. Gabby will begin the call with the 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 the call over to Mr. Gabby Weissman, NOVA's president and CEO. Gabby, please go ahead.

Thank you all for joining our second quarter financial results conference call. I will start the call by speaking about our quarterly results and performance highlights. Following my commentary, Doro will review the quarter's financial results in detail and then conclude with the guidance for the first quarter of 2023. NOVA's results for the quarter met our expectations, highlighting the resilience of our portfolio our wide exposure to new advanced applications, and a well-maintained operational model which effectively combines customers' focus and our roadmap for continuous investment in every division. The value of our broad materials and dimensional portfolio helps us drive increased traction with several notable achievements this quarter, including new penetrations and additional orders following successful evaluations of our new products. These opportunities will allow us to broaden our position and capitalize on larger opportunities once the industry fully recovers. We are taking necessary steps to ensure NOVA's near-term healthy business performance and profitability for the remainder of 2023. Just as we performed in the first half, we are also confident about our long-term strategy and ability to deliver going forward. We are committed to executing our strategic plan towards $1 billion in revenue, and we aim to resume our accelerated growth path. We are building our business, our infrastructure, and technology offerings to be ready for the industry when it resumes growth. This quarter, we diversified revenue streams in each of our product divisions with a continued proliferation of advanced materials and dimensional products adopted by existing and new customers. First, our newest integrated metrology platform just completed a successful evaluation with the world's leading foundry in the most advanced node, presenting significant performance enhancements and addressing the customer's need for cutting edge productivity and accuracy towards a faster time to market and high yield. Second, our Nova Prism standalone OCD platform is transferring to high-volume manufacturing in a leading foundry and recently penetrated a new memory manufacturer. The value of Prism for advanced nodes, front-end processes, in both logic and memory is becoming increasingly clear, buoyed further by significant interest in the platform's unique technology in advanced packaging, and more specifically, in what we can do in hybrid bonding process steps. Third, we just delivered another Ellipson tool to a leading IBM and we have additional evaluations in progress as our ability to bring Raman technology to the fab garners a lot of interest and not just in the leading edge. In addition, the Veriflex platform secured several new customers and continued proliferation within our existing customer base. Finally, our chemical metrology division is already inherently embedded in packaging and advanced packaging processes and benefits from a recent increase in demand for high-bandwidth memory. Additionally, the division is breaking ground with several new customers this quarter, a strategic new evaluation at the leading IDM, and our front-end ankylosis solution gaining traction across nodes. We are successfully leveraging Nova's exposure to front-end processes to open the door for our chemical metrology portfolio, while also leveraging our strong customer relationships to ramp up sales and explore opportunities in the back end of line. Our revenues are derived from multiple territories, with China generating approximately a third of our sales, driven by greenfield customers and significant capacity expansions in mature and trailing nodes. Other regions where we see great potential are the European and US territories propelled by government incentives and global players building capacity outside their homelands. Beyond regionalization, Nova benefits from its broad exposure to the foundry logic sector and to the majority of semiconductor CapEx. Nearly 80% of our revenue this quarter was generated by Foundry Logic customers, and approximately half of that stemmed from mature and trailing nodes. This is the result of our ability to leverage the shift from a market predominantly ruled by the leading edge towards the growing investment in more mature nodes. At the same time, driven by our unique technology-enabling value, we achieved significant traction with the leading memory customer this quarter, making Korea our second largest territory. The increasing interest in Nova's unique technology offerings for front-end, back-end, and advanced packaging applications at the potential new addressable markets are more building blocks for our future growth. Nova's rich and differentiated portfolio is built to meet the challenges of next-generation device fabrication. Our complementary offering for 3D architecture devices allow customers to gain a better insight into the most complicated semiconductor structures through a wider view of geometrical dimensions, physical material properties, and chemical analytics. One example of that is our Veriflex platform that has become a technology enabler, and it therefore exerts higher resilience to demand fluctuations. If you want to successfully run high-key metal gate processes Veriflex is a requirement in the fab from first silicon to correctly characterize composition and measure ultra-film-film thickness. It is true for FinFET processors and even more so for gate-all-around and 3D memory. Another example is the Nova Ellipson, with a field-proven crucial ability to successfully characterize nanosheets. And of course, Prism, which I mentioned earlier, brings unique abilities to the table, adding new information inaccessible by current optical CD methods. I want to take a minute to also highlight the opportunity we see in 3D stacking and heterogeneous integration in advanced packaging. It is essentially a way to maintain Moore's law and to achieve higher bandwidth, lower latency and power, along with higher yield. Integration cases abound from CMOS sensors to 3D NAND and 3D DRAM. Furthermore, advanced packaging allows mid-range and mature mode node manufacturers an alternative scaling route to EUV, expanding the opportunity beyond gate all around. These new advanced packaging schemes necessitate process steps such as through silicon via backside power delivery, hybrid bonding, and wafer edge CMP. They demand tighter process control and smaller, denser interconnects, as well as tall, highly complex, multilayered structures requiring more measurements to ensure package integrity. The Nova Prism has a proven advantage over our competitors in some of the applications I mentioned, and our market-leading portfolio allows manufacturers to utilize optical CD technology for advanced packaging in completely new ways. So you can see why we are encouraged by the interest from existing and new customers in previously untapped processes and market segments across multiple territories. To conclude my prepared comments, we are working on multiple fronts to ensure that Nova is ready for the turn of the tide. We're expanding the range of applications our solutions address, broadening our customer base, increasing our market share, and enhancing our relationships with the world's leading manufacturers. We're investing in infrastructure, technology, and in building long-term capacity. We are confident in our ability to deliver constant performance in the coming quarters and to leverage new opportunities when the market rebounds. Now, let me hand over the call to Dror to review our financial results in detail. Dror?

Thanks, Gabi. Good day, everyone. And thank you for joining our 2023 second quarter conference call. Total revenues in the second quarter of 2023 were $122.7 million above the midpoint of our guidance and down 13% year-over-year, reflecting the current lower investment levels in memory and in leading logic and foundry. Product revenue distribution was approximately 80% from logic and foundry and approximately 20% from memory. Product revenues included three customers and four main territories, contributing each more than 10% to product revenues. The wider territory distribution reflects an improved territorial diversification relative to previous periods, driven by the increase in investments in the western territories of the US and Europe. Blended gross margin in the second quarter was 57% on a GAAP basis and 59% on a non-GAAP basis at the high end of the company non-GAAP target model of 57% to 59%. Operating expenses remained stable in the second quarter and came in at 41 million on a GAAP basis and 38 million on a non-GAAP basis, reflecting management focus on restraining costs in the current business environment. Operating margins in the second quarter were 23% on a GAAP basis and 28% on a non-GAAP basis within the company non-GAAP target model of 27% to 31%. This excellent result was driven by the healthy gross margins and the prudent cost control initiatives implemented by the management. Financial income for the quarter increased to approximately $5.6 million, driven by higher yields on cash reserves. The effective tax rate in the second quarter was approximately 13%, slightly lower than our target model of 14% to 15%. Earnings per share in the second quarter on a GAAP basis were $0.94 per diluted share and earnings per share on a non-GAAP basis were $1.06 per diluted share at the high end of our second quarter guidance. This result coincides with management commitment to generate quarterly earnings per share of $1 or more or the equivalent $4 or more in annual earnings per share on annual revenues of approximately 500 million a year. Finally, I would like to share the details of our guidance for the third quarter of 23. Currently, we expect revenues to be between 119 million and 126 million. Gap earnings per diluted share are expected to range from 83 cents to 94 cents. Non-GAAP earnings per diluted share are expected to range from $1.02 to $1.13. At the midpoint of the third quarter 23 estimate, we anticipate the following. Gross margins to be approximately 56% on a GAAP basis and approximately 58% on a non-GAAP basis within the company non-GAAP target model. Operating expenses on a GAAP basis are expected to decrease to approximately 40 million. Operating expenses on a non-GAAP basis are expected to decrease to approximately 36 million. This reduction reflects management determination to restrain expenses in the current environment. However, looking forward, we do expect operating expenses to gradually increase towards the end of the year and into 2024. Financial income and tax rate are expected to be similar to the second quarter. To conclude my remarks, I want to mention the company's cash and working capital management. In the first half of 23, the company generated operating cash flow of approximately 50 million or 19% of revenues. In parallel, we continue to aggressively invest in manufacturing capacity expansions, in IT infrastructure, and in additional offices to support sales and services at new sites. As a result, we expect elevated capital investments throughout the remainder of 23 and throughout 2024. In addition, as Gabi mentioned, we continue to expand our investment in product evaluations at customer sites to meet the heightened customer interest and the growing application space of our most advanced product portfolio. Finally, I would like to highlight the cash reserves of the company, which increased to approximately $570 million, and provide the required flexibility to pursue organic and non-organic business development activities towards executing the One Billion Strategic Plan. With that, I will turn the call back over to Gabi. Gabi?

Yes, I would like to open the session for Q&A.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And again, it's star one to ask a question. Our first question comes from Vivek Arya from Bank of America. Vivek, please go ahead.

This is Duk San on behalf of Vivek. I just want to touch on the trailing edge portion that you talked about. So it's about 50% of Foundry and Logic. A lot of your peers are seeing strengths here, and they see this to continue into next year. So I'm curious if you're seeing similar things, and if so, what kind of visibility do you have to support that view? Thank you.

So we share this notion, and we do expect it to continue towards 2024, but I do expect some of the advanced nodes to kick in at some point of time, elevating the share of advanced relative to the trailing and mid-range during 2024.

Got it, got it. And then in terms of just trailing edge specifically, is it the new products that you're ramping where you see the strengths from? Or is it any other kind of views that you have?

It's a combination of investing in areas such as in automotive, analog, power, IoT, And, of course, some expansions into advanced packaging and other areas. So it's actually the mix between different customers, geographies, and focused areas of investment that drive those specific nodes. Got it.

And then just one on memory. I think you said you had a significant traction at your memory customers and Korea was the second largest geography. How much is this related to the HBM kind of ramp that we're seeing in the industry versus non-HBM? Thank you.

So it's still not related to it, but as I mentioned during the call, we do expect high bandwidth memory to increase even further towards the second half of the year. Thank you. It currently relates to other capabilities that we have presented in offering us a unique advantage of our portfolio, both dimensional and materials, for these kinds of memory customers.

Understood. Thanks.

And our next question comes from Quinn Bolton from Needham and Company. Quinn, please go ahead.

Hey, Gabby and Gerard, this is Darren Lin on for Quinn Bolton. Thanks for letting me ask the question today. So I have a couple of questions. The first being in the press release, you mentioned an increasing number of tool evaluations for advanced packaging applications. Can you sort of discuss where Nova plays in advanced packaging markets, specifically what tools are under evaluation? And also, could you discuss Nova's opportunity in hybrid bonding and how large the TAM could be in hybrid bonding for Nova? Thank you.

So we're currently focusing on our dimensional metrology portfolio in positioning in both advanced packaging as well as hybrid bonding. This is related to capabilities on the wafer edge as well as the through silicon via, where we are seeing our technology capable of delivering better cost of ownership and, of course, better performance. In terms of the TAM, we expect the TAM for these particular products to reach about $200 million in 2027.

Great.

Thank you for the call, and if I could just squeeze one more in. You mentioned the additional placements for the Veriflex tool. How do you see the TAM for Veriflex, and do you see it continuing to expand going forward?

So the Veriflex platform is gaining traction in both existing and new customers. We see that accelerating with the new generation of our tools that are offering an even better cost of ownership and definitely addressing the most challenging requirements from these customers. And we expect the TAM of these tools to reach about $400 million in 2027.

Great, I understand. Thank you very much.

And I would like to remind everyone that if you would like to pose a question, please press star 1. And now we follow with a question from Vivadi Chaudhry from Jefferies. But Radhi, please, go ahead.

Yeah, thanks for taking my question. The first one I had is, could you talk about the timelines you're seeing for gate all around ramps? Have they shifted or come in in the recent quarters?

They have not shifted in a significant way. I think that our customers are definitely driving forward were the plans for GATE all around. We expect the timeline to remain as anticipated previously throughout the coming two years.

Got it. And then if I think about the penetration with your materials portfolio, right, the Viraflex, the Ellipson, and your positioning with GATE all around, is Do you think there's kind of more room for adoption that you're still in that evaluation process? And how do you gauge what percentage adoption is there and what would go in as you start ramping these technologies?

So we, as I mentioned, already delivered the second Ellipson tool to a leading IBM in the second quarter of the year, and we have delivered additional tools for evaluations. We definitely see the great potential that this tool has for both strain, stress, and crystallinity, and not only in advanced nodes, by the way, which is becoming very interesting, But definitely the take-up rate is going to be determined after the evaluation, or after some of those evaluations, considering the specific layers and applications that this tool is going to become a product tool of record for. And we definitely believe in the potential of this tool to cover a myriad of such layers and applications. We've started with a few. We see that growing, and I believe it will continue to grow as customers become more acquainted with the capabilities of this tool.

Got it. And then I guess a last one. So have you characterized recently your contribution from the chemical metrology products? And you mentioned that that's benefiting from the growth in HPM. Can you give us a sense of what percentage of your revenue that lines up to it?

You mean how much is the chemical metrology from our business?

Yes.

So when we acquired this new technology, we said that it's more or less around 5%, and we hope to grow the annual contribution from this product line in the coming quarters to around 10%. So this product line is actually growing its portion of the revenues. and we want to reach around 10% in the coming quarters.

And is that mostly HBM driven?

It's not only HBM driven, but HBM definitely propels the business, specifically in the second half of this year. And we see a lot of potential growth in the adoption of those tools in HBM, which is becoming a crucial component in driving some of the AI new business that is coming.

All right. That's helpful. Thank you.

And this concludes our question and answer session. I would like to turn the conference back over to Gabi Wiseman. Novus President and CEO, for some closing remarks.

Thank you all for taking the time to join our call today. We look forward to meeting many of you in person in the upcoming investor conferences. Thank you very much.

And this concludes the conference.

Thank you for attending today's presentation. You may now disconnect.