Nova Ltd.

Good day and welcome to the NOVA Limited Q1 24 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal, CEO of MSIR. Please go ahead.

Thank you, operator, and good day, everybody. I would like to welcome all of you to NOVA's first quarter 2024 financial results conference call. With us on the line today are Gabi Weissman, President and CEO, Dror David, CFO, and Guy Kisner, Corporate VP of Finance and incoming 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. Gabi will begin the call with the 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 turn the call over to Gabi Weissman, NOVA's President and CEO. Gabi, please go ahead.

Thank you, Miri, and thank you all for joining us today. I will start the call today by summarizing our first quarter performance highlights. Following my commentary, Dror will review the quarterly financial results in detail. NOVA delivered another strong quarter, exceeding the high end of guidance in both revenue and profits, with record non-GAAP EPS, operating and free cash flow. Our performance was supported by a favorable product mix, backed by a diverse exposure to opportunities across market segments, territories, customers and technologies. The increased demand for our advanced portfolio, combined with NOVA's robust operational model, continues to drive us forward. With our guidance for the second quarter in mind, we are back on track for a growth trajectory, and we remain confident in our ability to execute our strategic plan. Our solid execution resulted in a sequential and -over-year revenue growth, with our cash reserves totaling approximately $700 million. Positive indicators of a memory recovery cycle, driven primarily by advanced DRM devices such as DDR5 and HBM, have increased the memory share of our product revenue to 40% this quarter, with Korea playing a major role. At the same time, our diverse portfolio and exposure to multiple markets enabled us to leverage the demand for mature nodes from China. Looking at the year ahead, we see encouraging indicators in the semiconductors industry perpetuating long-term secular growth and the rising need for process control across segments. Utilization rates and need for capacity are on the rise again for two reasons. On the one hand, inventory levels are stabilizing while end-market demand recovers, with a positive note of anticipation for replacement cycles in both consumer and enterprise products. On the other, the continuous increase in chip sizes, driven by a need for faster, more power-efficient processing and memory, drive up the volume of wafer production. According to some of our customers and other third parties, HBM-free e-chips consume two to three times more wafers than leading-edge DRAM chips, and data center processor chip sizes today are five times larger than those produced just a few years ago. Beyond capacity as a driver of our business, the new chips also drive design and materials complexity to address the insatiable need for computing power by running AI models and inferences on both client and server side. The emergence of new technologies such as hybrid bonding and TSV, the increase in number of process steps, and the consistently smaller tolerance for errors all serve to support substantial growth of process control. Hybrid bonding technology is a good example of a highly complex process that requires rigorous process control, such as bonding layer flatness. Other positive notes we see are the healthy demand for mature devices, the broad investments across nodes, and the vast recognition of the need for local supply chain resiliency that drive a manufacturing footprint build-out across the US, Europe, and Asia. Naturally, all these have a positive impact on our business. As I've said, we had a strong quarter, and we are very pleased with the results. Our performance was built on the continued adoption of Nova's advanced portfolio by leading customers for advanced applications, which include the transition to Gale All-Around and rising demand for advanced packaging solutions, including high bandwidth memory. Towards the anticipated transition to the most advanced technology nodes, we see a significant increase in market traction for existing and new technologies such as Raman and inline SIMs with multiple evaluations and selections taking place at numerous customers. I'd like to share several examples. Let's start with our Ellipson platform, which secured repeat purchases, new selections, and evaluations by multiple leading memory and logic customers. At the same time, Metreon is gaining traction and is starting new evaluation processes at two leading global memory manufacturers. And the Veriflex 4 platform was selected by a leading global foundry, landed several new customers, and reached a new record of eight systems in a single memory phase. On the hybrid bonding, packaging, and HBM fronts, we have multiple orders in place and strategic evaluations kicking off for the Prism 2 standalone OCD and our integrated metrology solutions. The Nova Prism 2 platform with its spectral interferometry technology and unique algorithmic capability brings clear benefits to process control of TSV and hybrid bonding challenges, which our customers recognize. There is a clear use case of front-end tools at the back end of advanced nodes production, which we were able to identify early and address by creating a dedicated portfolio. We expect revenues from packaging related processes to grow by more than 50% in 2024, driven by our optical and chemical metrology portfolios. Speaking of our chemical metrology division, it is in peak performance with multiple new customer penetrations at the front end, back end, and HBM. Overall, we expect our chemical metrology business to capitalize on the rapid growth of its addressable markets and hit another record year in 2024. Finally, our service business continues to deliver this quarter, growing by 13% year over year. While during 2023, many of our customers prefer the more prudent approach, this year the rising utilization rates and demand to extend tool life spans to maximize investments are driving our performance. We expect our service business to maintain its growth path in 2024 and capture customer spending across the board. Before I conclude, I'd like to thank Drow David, our formidable CFO, who has decided to step down after 20 years at NOVA. Drow has been my colleague and friend since I joined NOVA, and over the past year his support and advice have been indispensable. I am grateful for his contribution over the years, and I am confident that the handover to his successor, Guy Kisner, will be seamless. Guy and I plan to be in San Francisco for Semicon West, and we look forward to meeting many of you in person. I also want to express my gratitude to our employees worldwide, who work as a tight-knit unit to maximize every opportunity and support our customers. And to our employees in Israel, who continue to deliver regardless of circumstances. We have a truly gifted group of people who chose to work at NOVA, and we are fortunate to build on the breadth and wealth of talent and the incredible resilience of our team. To summarize my prepared remarks, NOVA had a robust quarter, and our forecast for the second quarter indicates additional growth. We see a healthy demand for our portfolio across nodes, market segments, and territories, driven by multiple positive trends and the clear value our tools and services bring to customers. Looking forward, 2024 is shaping up to be a growth year and an encouraging milestone on our path to executing our long-term strategic plan. Now, for some more details on the financials, let me hand over the call to Dwar.

Thanks, Gabi. Good day, everyone, and thank you for joining our 2024 First Quarter Conference Call. Total revenues in the first quarter of 2024 reached 142 million, exceeding the company's guidance and demonstrating a 6% -over-quarter increase and 7% -over-year growth. Product revenue distribution was approximately 60% from logic and foundry, with the remaining 40% from memory. Blended gross margin in the first quarter increased to 59% on a gap basis and 61% on a non-gap basis, topping the company target model of 57% to 59%. The high gross margin in the quarter was attributed to a favorable product mix, coupled by gradual adoption of newer product configurations for advanced nodes. These newer products present improved performance and embed higher customer value with higher gross margins. We expect gross margins to gradually normalize in the coming quarters and align with the higher end of the company target model on an annual basis in 2024. As expected, operating expenses increased in the first quarter, reaching 46 million on a gap basis and 41 million on a non-gap basis. Operating margins in the first quarter were 26% on a gap basis and 32% on a non-gap basis, exceeding the high end of the company target model of 27% to 31%. This excellent result was driven by the healthy quarterly gross margins and the company robust operational model. Financial income in the quarter remained elevated, reaching 6 million, reflecting high yields on cash reserves. The effective tax rate in the first quarter was approximately 15%. Earnings per share in the first quarter on a gap basis were $1.15 per diluted share. Earnings per share on a non-gap basis were $1.39 per diluted share, surpassing the high end of our first quarter guidance and reaching a record high for the second consecutive quarter. Finally, I would like to share the details of our guidance for the second quarter of 2024. Currently, we expect revenues for the quarter to be between 144 million and 152 million, gap earnings per diluted share to range from $1.07 to $1.21, non-gap earnings per share to range from $1.27 to $1.42. At the midpoint of our second quarter 2024 guidance, we anticipate the following. Gross margins of approximately 57% on a gap basis and approximately 59% on a non-gap basis at the high end of the company target model, operating expenses on a gap basis to increase to approximately $48 million, operating expenses on a non-gap basis to increase to approximately $43 million, financial income and tax rate to remain similar to the first quarter. I want to mention that during the first quarter, the company generated a record fleet free cash flow of 57 million, which increased the company's cash reserves to approximately 700 million at the end of the first quarter of 2024. This robust cash position enables us to continue and pursue and execute growth strategies and infrastructure investments. With that, we will be pleased to take your questions.

Operator. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 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 2. At this time, we will pause momentarily to assemble our roster. We'll take a first question from the line of Vivek Arya with Bank of America Securities. Please go ahead.

Thank you for the question and good luck to both Dror and Guy. Gabby, you mentioned about 50% growth for advanced packaging, I believe you said, for this year. I was hoping you could give us a sense for what proportion of your sales, you know, is it contributing this year versus last year, and how is it kind of split across memory and boundary logic?

Thank you for the question. So last year we indicated the fact that packaging related business was about 10% of our overall revenue. And we expect that there's more than 50% growth this year overall. We are looking at the growth coming essentially from the dimensional division product lines and portfolio as well as the chemical ones. Whereas the chemical is making headways in high bandwidth memory, and the dimensional is focused on the hybrid bonding and TSV with a strong potential looking forward at technologies such as the HBM4. For the dimensional metrology portfolio, we look at the dedicated integrated metrology tools and the platforms we have, as well as for the prism, which together with the spectral interferometry and algorithmic suite is capable of addressing through silicon via applications as part of the overall heterogeneous integration for which both hybrid bonding and TSV serve. And we look at those specific capabilities for the depth, for the CD, and additional parameters related to the TSV both after etching and after fill. So it gives us a strong position and definitely a strong outlook for the growth this year and onwards.

As a follow-up, so you definitely outlined the strong growth in HBM. What about Gate All Around? Have you started to see the benefit of that yet? Is it still to come? And conceptually, how much does your content or opportunity increase in Gate All Around versus FinPET?

So as we've announced in the press release earlier this year, we do see a strong position in the Gate All Around business that we currently have. And this is involving basically all of our product lines. We see the increased precision and higher sampling rate and size, the high K metal gate control, gate and material characterization, and we have a unique offering from both hardware and software perspective that gives us a strong position with most of the Gate All Around players. And as we've recently announced, this is very encouraging, whereas we see initial orders for the coming 12 months already in place and expect the ramp to happen during that time and onwards into next year and beyond.

And for the last one on gross margins, so they continue to surprise on the upside every quarter, and then you always conservatively guide them lower, although still at the high end of your long-term outlook. And it just kind of happens to coincide with your increasing mix of memory. So what about whether it's a product mix or customer mix do you think is helping you to consistently outperform your gross margin expectations? And then what do you think will tone them down in the back half? Is it a change in the product or customer mix that you are expecting? Thank you.

Yes, so obviously the main aspect which has impact on gross margins is the product mix. If you look, for example, last year, NOVA was at the high end of the model 59% currently and also in that year in the first quarter we were a little bit higher than that. And this is exactly what happened also in 2024 where, as I mentioned in my prepared remarks, the products which are of newer version and more content were adopted by several customers which were intaking equipment specifically in Q1. Therefore, the product mix in Q1 was favorable and the gross margin was high. Our expectation for the next quarter is around 59% and obviously for the rest of the year within and maybe the higher portion of the model. But on an annual basis, we do expect it to be around 59%.

Thank you. Thank you. We'll take our next question from Vedwati Shrotri with Evercore. Please go ahead. Yes. Hi, thanks for taking my question.

I wanted to double down on the gate order and unfortunately you talked about several semi-cap companies have started talking about pilot lines. You had a press release with orders starting to come in. Can you provide us any color on the size of orders you're seeing, how those split out between dimensional versus metrology, and what do you expect for the trajectory of orders through the remainder of the year?

Sure. So, the orders, as I mentioned before, are across our product lines, but I'd like to give some color and a few examples. So, we're looking at the integrated metrology tool. We're looking at the standalone OCD essentially for focusing on the prism. We see materials, of course, with the VeroFlex 4 being adopted for gate all around. And we also see the introduction of the new technologies that we have, both on the Raman, the Elpson tool, as well as the inline SINs, the Metreon one. We've mentioned the fact that for gate all around and in general, we see strong traction for both the Elpson and Metreon. So, by the end of this year, the Elpson will be in advanced evaluation by two top three customers for gate all around applications and already in production by the third. And we expect proliferation potential, of course, once it reaches the high volume manufacturing. And we've mentioned additional traction for the Metreon. So, I do see the strong potential. We see the initial orders already coming for the next, for deliveries in the next 12 months. And the ramp is expected to happen during this time and beyond.

Sorry, that's helpful. And then switching gears on the packaging side, you mentioned these are growing 50% year on year. How does this split between chemical versus your dimensional metrology solutions?

So, we see both optical and chemical portfolios gaining strong traction with advanced packaging. And if we want to dive in more specifically, the dimensional is focused on the hybrid bonding and TSV as well as HBM. I'd say that chemical is very strong in HBM, but definitely has applications for the other advanced packaging technologies. We see the demand coming from a suite of applications that include the measuring of that size, dimensions on the on the through silicon via as well as the flatness. We see the criticality of the edge of the wafer becoming more and more important, again, as part of the requirements on flatness. And that all drives both the chemical and the dimensional optical tool adoption for that segment.

And if I may ask, what is the competitive positioning? If we look at some of your bigger competitors like KLA, they have been talking about their front end tools being converted into back end. Is that your competitive? I mean, are you seeing that happen for the applications you're being used in?

Definitely. I believe that the use case of front end tools converting into back end is exactly what we're seeing. And we did identify early the need, and so we customized the tools in order to support the specific requirements of the back end, both back end, far back end and hybrid bonding. So it all boils down to the adoption from the customers in that respect.

Thank you. Thank you.

We'll take the next question from the line of Charles. She's on need them and company. Please go ahead.

Hey, thanks. Hey, good afternoon, Gabby, Joel and Guy. I want to come back to the question about the two nanometer ramp, the shape of the ramp a little bit. So you are expecting some initial orders, looks like, and more of the ramp into next year. But I kind of wonder whether you think 2025 will be a big ramp year across all three customers, the leading edge customers on two nanometer node, or maybe we should expect maybe 2026 to be a bigger year. The reason why I asked this was that at least the TSMC, they announced that the revenue will, two nanometer will be more like a 2026 event rather than 2025. Of course, they're going to pull the tools a little bit earlier, but just try to understand based on your current visibility, what's the shape of the ramp for the overall two nanometer? And of course, I want to add that the leading logic IDM customer, they adopted several of your new technologies, but that sounds like we still haven't seen a good amount of revenue contribution yet. Do you think that will happen in 25 or maybe a little bit earlier in 24, maybe a little bit later in 26? Thanks.

Thank you. So I did mention that we already received orders for Gate All Around, which are expected to be delivered in the coming 12 months. And we are talking in fact on four Gate All Around customers. In terms of the shape, it's definitely going to grow and gain momentum as we finish this year, enter into 25 and onwards towards 26 as our customers ramp gain traction. I cannot address to a specific customer, but I'll definitely say that we are working very closely with all of them.

Thanks, Gabby. I want to ask a little bit more on the memory side. It looks like the memory revenue is probably in a Q1, is probably a record if my numbers for your past quarters are accurate. It sounds like Korea is the main driver for the strong memory results. I wonder how much of that memory numbers is from China in the last quarter? And do you expect that the memory revenue round rate to maintain or even grow from here for the rest of the year?

So our long-term model calls for 60-40, 60 for logic foundry and 40 for memory simply because of the metrology intensity that is higher in logic and foundry. We already had in the past an even split of 50-50 between logic and memory, so 40% is not the record, but it's definitely an improvement if we compare it to the previous quarter. The memory is obviously split between different territories, other territories to the ones that you've mentioned and quite a few customers. So we are definitely very much focused on making sure that we can capture any opportunity first and foremost on DRAM, as this is the segment that grows this year. But most definitely Friedenand wants when it gets traction probably towards the second half and onwards.

Thanks. If I may, one last question. One of the examples you gave about XPS tools for memory application, six tools for one memory fab, I think that's probably the highest number I've heard. Because what I remember is probably more like two tools per fab, but correct me if I'm wrong there. Can you talk a little bit more in details, whether this is DRAM or NAND or what's driving the increase in the intensity of the XPS in the memory fabs? Thanks.

I mentioned that we reached a record of eight VeroFlex tools per fab in memory. And this is attributed to both the span of applications as well as capacity. And we're very encouraged by the fact that we see that growth. We also discussed in the past in terms of our effort and focus on increasing the appeal, the number of applications, the value that the platform provides. And with the VeroFlex 4, with the additional throughput sampling rate and performance criteria, we're definitely able to execute on that and increase the number of tools per fab.

Thanks,

Gabby. Thank you. We'll take our next question from the line of Mark Miller from the Benchmark Company. Please go ahead.

Congratulations on your record results. As we discussed previously, memory was up to 40%. I'm just wondering in terms of that memory sales, can you attribute a percentage to high bandwidth memory?

Well, high bandwidth memory is counted as part of memory as well as advanced packaging. So in that respect, the HBM is part of that. And we are seeing the focus of growth in the first quarter on both DRAM and high bandwidth memory that consists of making sure that the high bandwidth memory is being used. So we're seeing the total of that 40%.

In terms of tools for high bandwidth memory, are there any typically tools that have higher margins?

So our tools for high bandwidth memory are both optical as well as chemical. On the optical side, it's the front end tools that were customized for the use in high bandwidth memory. For the chemical, it's those tools that are serving both, I would say, the back end packaging customers such as the Ankylizer. And for the front end side, we have the copper dual damascene tool that is being used for those front end fabs. So for the HBM specifically, it's mostly the Ankylizer tool.

Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Gabby Weissman, President and CEO, for any closing remarks.

Thank you, operator, and thank you all for joining our call today.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now...