Nova Ltd.

Good day and welcome to the NOVA Limited second quarter 2024 results 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 one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Miri Segal, CEO 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 2024 financial results conference call. With us on the line today are Gabby Weissman, President and CEO, and Guy Kisner, 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 the 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 Guy 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 Gaby Weissman, NOVA's President and CEO. Gaby, please go ahead.

Thank you, Miri, and thank you all for joining us today. I will start the call by summarizing our second quarter performance highlights. Following my commentary, Guy Kisner, NOVA's Chief Financial Officer will review the quarterly financial results in detail. Nova delivered an exceptionally strong quarter, exceeding the high end of the guidance in revenue and profit, with record results across the board. Our performance was propelled by our exposure across geographies, customers, and technology nodes, and manifested throughout Nova's dimensional, materials, and chemical metrology portfolios. Our revenue grew 11% sequentially and 28% year over year, and profitability set another unprecedented record. Furthermore, our overall cash reserves reached record levels at approximately $760 million. The strong momentum and the outstanding performance result from our consistent execution. These results also attests to our ability to leverage market opportunities while relying on our flexible operational model to maximize the benefits. Looking at the broader picture, the first half of 2024 revenue came just under $300 million, 17% higher than the same period last year, a significantly higher rate than current forecasts for wafer fab equipment. Given our third quarter guidance, we remain confident in our ability to outperform the market. Going forward, we see a steady increase in demand for leading-edge nodes, including gate-all-around and advanced packaging-related processes, led by customers in Taiwan, Korea, and the US. The upside to our performance this quarter is free-fold. First, the Nova Prism 2 platform's strong performance resulted from a faster-than-expected adoption rate in advanced packaging and gate all-around processes. Second, our chemical metrology division delivered record results driven by increasing demand for our solutions in high bandwidth memory, packaging, and front-end-of-line logic processes. Finally, Our service business grew 19% year-over-year by leveraging the increasing utilization rates to secure contract-based and value-added services sales, rounding up the contribution for this stellar quarter. While these revenue streams stand out, our performance relies on the broad diversity of our portfolio and market presence. with multiple new customers in all product divisions. A company's inherent ability to succeed in our industry's dynamic nature stems from having a myriad of revenue streams that complement and compensate through ebb and flow. NOVA has built this solid foundation through deep partnerships with our customers, flexible operations, and the unwavering dedication of our teams. It makes us confident that we can leverage every opportunity and address any challenge to thrive on our journey and realize our long-term strategic plans. Artificial intelligence is reshaping our digital world and expediting the implementation of scaling agents in integrated circuits to boost performance and power efficiency, which are at the core of enabling large language models through training and inference stages. Scaling is manifested in more complex designs through three avenues, dimensions, materials, and advanced packaging. It is also manifested in the size of manufactured dies and in the number of dies required in solutions such as high bandwidth memory. These developments profoundly impact our industry. in the number of the wafers needed to supply demand and in the yield ratio you must obtain to secure profitability with a lower number of dyes per wafer. Couple that with a growing complexity of architecture and materials and you have the growth drivers of process control in the coming years. We can already see these trends echoed in NOVA's portfolio and performance. There are multiple indications that our differentiated portfolio is well-structured to meet our customer needs of our most advanced critical dimensions and materials solutions. I mentioned Prism 2 earlier as a great example of the rapid adoption of our solutions by the manufacturers already engaged in gate-all-around production. This quarter, we recognize revenue from multiple present two tools. Demand is also consistently high for our advanced integrated metrology and XPS material metrology platforms. We're engaged with all customers developing Gable around production lines, and we estimate the transition will add 20 to 30% to the number of metrology steps. By the end of 2026, we see an opportunity of $500 million in gate-all-around, including adoption of our new technologies. The demand for metrology is not limited to gate-all-around processes, and we also see equipment deliveries driven by the demand for process control in FinFET advanced nodes. Nova had a record booking of Veriflex XPS platforms this quarter, of which over 40% resulted from capacity growth in such nodes. Advanced packaging is a revenue accelerant with significant revenue and booking in chemical and dimensional metrology. Approximately half of PRISM II record bookings stem from advanced packaging processes such as through SiliconVIA, where PRISM has a unique advantage in filtering information from specific underlayers. The platform is also under evaluation in one of the world's leading foundries, alongside our integrated and chemical metrology platform. There is a clear use case of front-end tools at the back-end of advanced nodes, and we were early to respond by creating a dedicated portfolio to address this need. I want to summarize my prepared notes by saying that looking into the second half of 2024, we see robust and diversified booking and a potential upside across all three divisions. we see encouraging indicators that our industry is moving into a growth cycle with strength coming primarily from logic across nodes. We remain vigilant for changes in the market conditions and confident in our ability to deliver on our promise to outperform the market. Now, for more details on the financials, let me hand over the call to Guy.

Thanks, Gabi. Good day everyone and thank you for joining our 2024 second quarter conference call. I am excited to address you today as newly appointed Chief Financial Officer of NOVA. It has been a privilege to be part of this incredible organization and I look forward to continuing to contribute to our success in this role. Now let's review the financial and business highlights for the quarter. Total revenues in the second quarter of 2024 reached a record level of $156.9 million, exceeding the company guidance for the second quarter, reflecting growth of 11% quarter over quarter and 28% year over year. This strong performance was driven by high demand for our products and faster than anticipated acceptance processes by our customers. Product revenue distribution was approximately 75% from logic and foundry and approximately 25% from memory. Product revenue includes four customers and four territories that contributed each 10% or more to product revenues, reflecting the company's diversified position across regions and customers. Blended gross margin in the second quarter were 59% on a gap basis and 61% on a non-GAAP 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 with higher revenue volume growth. We expect gross margin to gradually normalize in the coming quarter, aligning with the high end of the company target model on an annual basis. As expected, operating expense increased in the second quarter and came in at $47 million on a gap basis and $42.3 million on a non-gap basis. Operating margins in the second quarter were 29% on gap basis and 34% on a non-gap basis, exceeding the high end of the company target model of 27% to 31%. This excellent result was driven by a healthy quarter gross margins and the company's robust operational model. Financial income in the quarter remained elevated following higher yields on cash reserves and came in at $8.4 million. The effective tax rate in the second quarter was approximately 16%. Earnings per share in the second quarter on a gap basis were $1.41 per diluted share. and earning per share on a non-GAAP basis were $1.61 per diluted share, exceeding the high end of our second quarter guidance, reflecting a record for the third consecutive quarter. Finally, I would like to share the details of our guidance for the third quarter of 2024. Currently, we expect revenue for the quarter to be between $168 million and $176 million. Gap earning per diluted share to range from $1.39 to $1.52. Non-gap earning per diluted share to range from $1.60 to $1.73. At the midpoint of our third quarter 2024 estimate, we anticipate the following. Gross margin of approximately 56% on gap basis and approximately 58% on a non-gap basis. operating expense on GAAP basis to increase to approximately $50 million and on non-GAAP basis to increase to approximately $45 million. Financial income to remain similar to the second quarter and effective tax rate is expected to be approximately 14%. Before I conclude my remarks, I would like to note the following. During the first half of 2024, the company generated a record free cash flow of $115 million or 38% of revenue that grew company cash reserve to approximately $759 million at the end of the second quarter of 2024. This healthy cash level provides the required flexibility to pursue organic and non-organic business development activities towards executing the company's $1 billion strategic plan. With that, we will be pleased to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone 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 it, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Blaine Curtis of Jefferies.

Take my questions and great results. Maybe you can just walk through. A few people have seen some lumpiness in memory. It was down a bit. Can maybe just talk through that? And then in your outlook, the commentary on booking sound pretty balanced. So I'm just kind of curious the outlook for the memory segment to recover in the second half.

Yes, so thank you for the comment and question, Blaine. So this quarter, logic was up. We see a significant ramp in that request, and that's reducing, of course, the overall share of memory. Last quarter, we also had some too large DRM orders that shifted it out a bit. But in H2, we expect... at least in the third quarter. And overall, we expect memory to maintain a level of approximately 25%. And that's mostly because of the fact that we see high demand coming from logic and advanced packaging, which is obviously increasing the ratio of that part.

Thanks so much. And then I wanted to ask on the gross margin, you've been above the range for a couple quarters. It drops back in. Can you just remind me the drivers in terms of the mix? And is this more about new products or is it end market mix? What's the driver for the margin to go back into the range?

Yeah, so Regarding the gross margin, there are a couple of factors to that. Given the fact that we have a diverse product portfolio with different gross margin profiles, such as software and new products, and the fact that our product ASP ratio to quarterly revenues is relatively high, we have a high sensitivity for product mix within the quarter. And in environments such as we saw in this quarter, of higher revenues and faster acceptances from customers than anticipated, we have in such fluctuation. For the third quarter, as revenue increasing, we are less sensitive for specific deals. And we believe at this point that our gross margin will be 58% plus minus 1% in the third quarter. And as we mentioned, on the annual basis, to be within the high end of our target model of 59.

Thanks a lot.

The next question comes from Vivek Arya from Bank of America. Please go ahead.

Hi, thank you for taking our question. This is Dakshan on behalf of Vivek. Congrats on the nice results and guide. My question is, do you think this level of strong guide in Q3 is sustainable? And I'm curious if you saw any type of pull-in from any customers from any geographies in both quarters. Thank you.

Obviously, thank you for the question, Doxan. We don't provide the outlook for the fourth quarter yet, but we do expect it to be as strong as the third quarter. In terms of geographies, as we indicated, we saw strong business coming from Korea, Taiwan, and the U.S. Got it.

And then Just based on your current manufacturing footprint, is it sustainable and enough to get your $1 billion model, or do you have to constantly feed into the capex?

Yes, so as part of the strategic plan that we introduced in 2022, we have invested in the facilities in order to support our $1 billion plan. So we invested in our facilities, production facilities, in Israel, in Germany, and in the US. And by the end of this year, practically, we will have enough capacity to support the 1 billion plan.

Got it. If I may just have one more. Recently, there was a large US-based, I guess, IDM slash foundry that cut capex significantly. I assume most of that is tied to leading edge and packaging, sort of your bread and butter. So I'm curious if that impacted your outlook in any way, and do you see this as more idiosyncratic, or is it a sign of kind of pressure across the industry? Thank you so much.

So we expect the focus to, according at least to their statements, to continue to be on the five nodes in four years plan that they have. And they also spoke about accelerating production of AI-related chip. And in both cases, this works in favor of Nova. All in all, I think that this is not reflecting a cross-industry phenomenon. Got it. Thank you.

Our next question comes from Charles Shi of Needham & Company. Please go ahead.

Hey, good afternoon, Gabby, Guy. I want to ask a question about China. Last year, China was 36% of the total revenue. What's the outlook for 2024? Do you think China is going to maintain at a similar level or actually a little bit higher this year, given that the China WFE seems to be running a little bit stronger than many of us thought?

Yeah, so we still see robust demand throughout this year and some projects already scheduled for the next one. And this year is expected to be a bit higher than last year in terms of the overall share.

Got it. Do you, because some, I mean, some of your peers were seeing China contribution to, may have peaked in Q1 and slightly trending down. throughout the year, but some of your other peers see the opposite. They actually see second half being higher than first half. What's the view from NOVA?

So we see the ratio declining in the second half as the leading edge nodes pick up the pace. Got it.

Maybe another question about events packaging. I think you previously mentioned events packaging could grow 50% year-on-year from last year. And maybe the contribution back then, you thought it's going to be 15%, but your top line actually goes up a lot. And I wonder if any of these two numbers have changed.

So the current booking forecasts indicate that packaging product revenue will be at least 15% of the company product revenue this year, as we've discussed last time as well. So this is in line with our projections last quarter.

Thanks, Gabi.

Sure. The next question comes from Vedvati Shratra of Evercore ISI. Please go ahead.

Hi, thanks for taking my question. One thing I wanted to, and I know you don't provide these details on a kind of annual basis, but given the strong bookings you're seeing, could you give us a sense of how the product revenues are splitting out dimensional versus materials versus chemicals?

So overall, I would split it, with your permission, a bit different. I would say that our revenue coming from unique solutions will be around 40% this year. So if we're looking at the new tools, the material metrology, et cetera, we'll see about 40% of revenue coming out of that space.

Got it. And on the packaging side, How does the packaging revenue sort of split, you know, logic versus HPM or even chemical metrology versus the dimensional piece?

Sure. So chemical metrology is about half of our packaging or advanced packaging and advanced packaging revenue. And interestingly enough, on the Prism side, which is a DMT standalone OCD product, about half of the booking is for advanced packaging and high bandwidth memory.

Oh, okay. That's a big increase. I think last time it was 90% was kind of chemicals, and now you're seeing a lot more Prism bookings.

I'm not sure last time. Yeah, sorry, go ahead.

Sorry, go ahead. You were saying.

Yeah, I'm not sure we indicated 9% last time, but we definitely see, as you mentioned, an increase in the portion of DMD in that mix.

Got it. As a follow-up, so you characterized revenue opportunity of $500 million for Gate all around in 2026. Could you give us a sense of the puts and takes? Like, is this the revenue opportunity for NOVA? Like, what share do you expect to capture here? What's the target you've set? Anything here would be helpful.

Yeah, so we definitely see Gatel around as a major opportunity for us. We see 20% to 30% increase in metrology steps, including backside power delivery compared to advanced SINFET. We are engaged with all the Gatel and Round manufacturers and we already have multiple orders across our portfolio for delivery later this year and the next one including multiple evaluations for additional tools including our new technologies. We see obviously that increasing in terms of opportunities and business in 25 and 26 that it evolves and overall We see it as a $500 million aggregate sales opportunity by the end of 26 from that transition to get all around, which is coming, of course, from all of our divisions.

All right. Thank you.

The next question comes from Mark Miller of the Benchmark Company. Please go ahead.

I just want to congratulate you on another strong quarter. In terms of the memory sales, you seem to be doing better than a number of semi-firms. I'm just wondering what percent of the memory sales, is it over 50% of memory sales are being driven by high bandwidth memory?

Thank you for the kind comment, Mark. We saw overall about 30%. If we look at Q1 and Q2 and look at H1, we see a share of about 30% coming out of memory. And in the second half, we expected to maintain a level of about 25%. And that's, of course, because of the ratio and the fact that we see higher demand coming from logic and advanced packaging. In terms of the high bandwidth memory that's part of the advanced packaging, 15% product revenue ratio that I indicated before. But yeah, we do see a relative stronger, I would say, demand for memory.

Okay. You talked about Prism, record results for Prism and also Veriflex. How did Ellipson go during the quarter in terms of Ellipson sales?

Sure. So in the second quarter, we saw revenue from both leading memory and foundry customers. We do have evaluations with leading foundries, and we were selected by Tier 1 manufacturers already from two of those and from leading foundries as well. We have repeat buys, and it also became the PDOR for DRM manufacturing by the world's leading memory customers. So overall, we do see good traction for the Ellipson.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Gabby Wiseman for any closing remarks.

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

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