Nova Ltd.

Good day and welcome to the NOVA Limited fourth quarter and full year 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 telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mary Siegel, 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 fourth quarter and full year 2024 financial results conference call. With us on the line today are Gabby Weissman, President and CEO, and Guy Kisner, CFO. Before we begin, I would 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. Gabby will begin the call with a 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 Gabby Weissman, NOVA's President and CEO. Gabby, please go ahead.

Thank you, Miri, and thank you all for joining us today. I will start the call by summarizing our fourth quarter and full year performance highlights. Following my commentary, Guy will review the quarterly and annual financial results in detail. Inova ended the fiscal year on a high note with record revenue and profitability, outperforming industry indices. Our revenues grew 30% year-over-year and reached $672.4 million while non-GAAP net income grew 38%. We have cemented our position across multiple device segments and achieved numerous milestones across our product lines, including strategic penetrations into leading manufacturers, an evolving position in new segments, and a growing market share. Our agile operational model and strategic focus continue to generate value to our shareholders, enabling us to drive higher profitability while relentlessly growing our business. Our performance this year was driven by our materials metrology solutions record sales, coupled with a growing adoption across market segments. Additionally, the growing revenue from advanced packaging processes underscores the importance of our dimensional and chemical metrology solutions. This broad-based growth highlights the strength of our diversified portfolio and our ability to capitalize on multiple market opportunities. Turning to the fourth quarter record results and our sixth consecutive quarter of growth, we exceeded the top end of our guidance in revenue and non-GAAP profitability. Our record quarterly revenue was driven by the robust sales of the Veriflex, Ellipson, and Metreon platforms. This success was augmented by record sales of our dimensional standalone OCD solutions that saw heightened demand due to their unique capabilities in gate-all-around and advanced packaging applications. These results underline our ability to meet the evolving needs of our customers and maintain our competitive edge in the market. Looking forward, Nova is poised to leverage the transition into advanced manufacturing processes and architectures. We expect our growing exposure to new market segments and our differentiated portfolio to drive sustained growth into 2025, continuing the momentum we've built. The surge in AI-related demand has been a significant driver of our market, as it necessitates energy-efficient computing power and accelerates the demand for advanced processing nodes and memory solutions. Our customers are leading the transition to 3D architectures, which translate into multiple catalysts for our business, including larger and more complex dyes that require a growing number of wafers, a higher number of layers, and a leap in the number of process steps at a much smaller tolerance for error. Increasing complexity drives the need for high-quality metrology solutions, which Nova is well positioned to provide. Let me share some highlights from 2024 and the recent quarter. First, we are encouraged by the broad adoption of Nova's comprehensive portfolios across gate-all-around and high-bandwidth memory processors. Leading foundries, logic, and memory manufacturers are increasingly integrating multiple Nova solutions from our optical dimensions, materials, and chemical metrology portfolio. This widespread adoption underscores our ability to address the complex metrology challenges associated when manufacturing the most advanced semiconductor nodes. Our unique solutions for two and a half and 3D structure applications are pivotal in enabling our customers to achieve the precision and efficiency required for current and next generation technologies. Our advanced packaging revenue more than doubled this year, reaching 15% of product revenue and signifying its growing importance to NOVA. Our integrated metrology solutions have been adopted by four of the top five advanced packaging manufacturers, while our standalone OCD market share in the segment grew significantly. With the recent addition of Centronics, we expect our revenues of advanced packaging to grow further. Centronix modular dimensional metrology technology will enable us to diversify our offering into the rapidly growing field of advanced wafer-level packaging and specialty devices and into additional wafer sizes and types beyond 300 millimeter silicon wafers. Along with NOVA's optical CD standalone and integrated metrology, we can offer customers a rich portfolio for critical applications in both back-end and front-end fabrication processes. Centronics builds highly modular multi-sensor platforms with proprietary sensors and software that extend the range of applications we can solve. Some key examples that are critical to advanced packaging include total thickness variation, topographies for roughness measurements, and wafer bow and warpage. Following the deal closing announced last month, the post-merger integration teams are working diligently to tighten collaboration and align activities while maintaining focus on execution, meeting delivery timelines, and business goals. Now let me review some of the highlights from our product division. In the dimensional metrology division, our integrated metrology earned new market share in multiple segments, including advanced packaging and HBM, expanding our TAM and securing our market leadership. Our standalone OCD solutions had a record year and increased our market share, driven by high demand from numerous customers due to their high productivity, precision, and unique offering. The Nova Prism platform sales grew at high double digits this year-over-year, with multiple engagements with both front end and advanced packaging customers. To meet market demands, we recently launched the Nova Velocity, the next generation of the successful high productivity platform MMSR. Driven by increasing demand for productivity and yield improvements, Velocity features a unique dual chamber configuration that enables the highest productivity in standalone tools in the market. The platform's speed and robustness have been a deciding factor for a leading logic manufacturer who adopted the platform and is expected to purchase multiple tools. These achievements highlight our ability to deliver innovative solutions that cater to the needs of our customers. Next, our materials metrology portfolio delivered record quarterly and annual results. As we shared in early January, the Metreon platform was adopted by a leading global memory customer for its most advanced DRAM R&D as well as DRAM and NAND high volume manufacturing lines. Metreon was selected based on its ability to perform full wafer measurements of epitaxial layers with high sensitivity and precision. We expect to receive additional orders from this customer. In addition, The platform is currently being evaluated by two of the top five customers in memory and logic, and we anticipate receiving orders from them later this year. The Veriflex platform saw a market transition and broad adoption of its fourth generation, becoming the tool of record for several leading foundry and memory customers. The Nova Ellipson platform performed well this year, with repeat orders from a leading memory customer and penetrating to two new major customers. Looking ahead, we have strategic foundries already planning to use the platform for strain and material concentration measurements. The performance of our materials metrology portfolio attests to the value of our solutions and their critical role in advanced semiconductor manufacturing. Our chemical metrology division had a record growth year at a high double-digit rate. Significant highlights include the Anchocene market share growth in front-end customers and the Ancholizer proliferation with memory customers for HBM. Additionally, we have ongoing evaluations with memory and foundry customers, which we expect to materialize later this year. Finally, Our service division delivered another record quarter and year, with 2024 revenues growing 19% year over year, driven by increasing demand for capacity and yield improvements. In terms of market outlook, our industry continues at an upward momentum, driven by end market demand for mobile and AI, and the investments in building a matching capacity in advanced logic nodes, DRAM, and advanced packaging. We expect WFE to grow at mid-single digits this year, driven by leading-edge demand. In summary, our well-established fundamentals will help us increase exposure to additional opportunities in adjacent markets and processes, new customers, and new critical applications. Our strategic priorities remain intact with continuous investment in our long-term roadmap and by partnering with our customers across all territories. In 2025, we expect to capitalize on the opportunities created by our enhanced market position, continue our growth trajectory, and outperform WSE. We will elaborate on our strategy and vision at our upcoming Virtual Investor Day on March 17th, and we look forward to seeing you all there. Now, for some more details on our financials, let me hand over the call to Guy.

Thanks, Gabi. Good day, everyone, and thank you for joining our 2024 fourth quarter conference call. I will begin by reviewing our financial achievements for the fourth quarter of 2024, then summarize our performance for the full year, and finally provide guidance for the first quarter of 2025. In the fourth quarter of 2024, total revenue reached a record high of $194.8 million, making it the third consecutive quarter of record-breaking results. This performance exceeded the company's guidance, reflecting a 9% quarter-over-quarter increase and 45% growth year-over-year. These achievements demonstrate our strong ability to anticipate, capture, and respond to evolving market demand. Product revenue distribution was approximately 72% from logic and foundry and approximately 28% from memory. Product revenues included three customers and four territories, which contributed each 10% or more to product revenues. In the fourth quarter, blended gross margin aligned with our guidance, achieving 56% on a gap basis and 58 percent on a non-GAAP basis, well within our target model range of 57 percent to 59 percent. Operating expenses increased to 54.5 million dollars on a GAAP basis and 48.9 on a non-GAAP basis. A significant portion of the increase was directed towards expanding our R&D efforts, ensuring we stay ahead in innovation and technology leadership. Operating margin in the fourth quarter reached 28% on a GAAP basis and 33% on a non-GAAP basis, surpassing the upper range of our target model of 27% to 31%. The effective tax rate in the fourth quarter was approximately 15%. Earning per share in the fourth quarter on a GAAP basis were $1.58 per diluted share. and earning per share on a non-GAAP basis were $1.94 per diluted share, exceeding the high end of our fourth quarter guidance. Moving on the annual results for the calendar year 2024, revenue increased 30% year over year. In a year where the industry experienced moderate growth, our ability to scale at this pace, demonstrate the strength of our business model. The value we bring to customers and the effectiveness of our long-term strategy. The geographic revenue split in 2024 was as follows. China was 39%, Taiwan was 20%, Korea was 18%, U.S. was 14%, and other territories contributed the remaining 9%. Gross margin for the year came in at 58% on a gap basis and 59% on a non-gap basis, at the high end of the company target model of 57% to 59%. Despite cost pressures and the industry-wide supply chain dynamics, we maintain robust profitability through operational efficiencies, pricing discipline, and continued focus on higher value solutions. Operating margin for the year came in at 28% on a gap basis and 33% on a non-gap basis. Earning per diluted share on an annual basis came in at $5.75 on a gap basis and $6.69 on a non-gap basis. Achieving a record high EPS this year underscores our ability to drive profitable growth by effectively converting top-line expansion into bottom-line value. Our disciplined approach to execution, operational efficiencies, and strategic investments has allowed us to scale while maintaining strong financial performance. This milestone reflects the strength of our business model and our commitment to deliver sustained value to our shareholders. Turning to the balance sheet, we ended 2024 with $820 million in cash, cash equivalent, bank deposits, and marketable securities. During 2024, the company generated $218 million in free cash flow and presented healthy parameters related to working capital management. In addition, the company deployed approximately $48.5 million in cash as follows. Approximately $30 million was deployed for share buybacks and approximately $18.5 million was deployed to facilitate the early conversion of 9% of our outstanding convertible notes with the paramount paid in cash and the remaining balance settled in shares. At the end of January 2025, we completed the acquisition of Centronic Metrology, deploying approximately $60 million in cash for the transaction. As a result, Centronics financial results will be consolidated into NOVA starting in February 2025. The acquisition aligns with our strategic growth priorities, and we expect it to be accretive on a non-GAAP basis within 12 months. Our guidance reflects the impact of this combination. Now, let's move to our guidance, which factors in the acquisition. We currently expect Revenue for the quarter to be between $205 million and $215 million. Gap earnings per diluted share to range from $1.75 to $1.91. Non-gap earnings per diluted share to range from $2 to $2.16. At the midpoint of our first quarter 2025 estimates, we anticipate the following. Gross margins of approximately 57% on a GAAP basis and approximately 59% on a non-GAAP basis. Operating expenses on a GAAP basis to increase to approximately $60 million. Operating expenses on a non-GAAP basis to increase to approximately $54 million. Financial income on a non-GAAP basis to remain similar to that of the fourth quarter. Effective tax rate is expected to be approximately 15%. 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 one on your telephone keypad. If you are using a speakerphone, please press star then one on your telephone keypad. If you were using a speakerphone, please pick up your hands up 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. We will pause momentarily while we assemble our roster. The first question comes from Atif Malik with Citi. Please go ahead.

Hi, thank you for taking my questions and nice results. Gabby, the first question on advanced packaging. So you doubled your sales last year, 15% of product sales. I assume the majority of the sales were driven by your OncoSales or chemical metrology products. Can you talk about your aspirations for advanced packaging sales for the current year?

Definitely. Thank you so much for the question. So first, the advanced packaging had contribution from both our chemical metrology division as well as the dimensional metrology division. We have our integrated metrology in all of the top five advanced packaging manufacturers, and we have a significant adoption of our PRISM standalone OCD platform. So it's both divisions that contributed to this this growth and we do expect this year to expect to continue and grow by double-digit growth Excuse me one more thing that with your permission I'd like to add is that with the addition of centronics we do expect to fuel our growth as we As we move in with this platform to additional customers and grow their adoption over there as well.

Great. And one for Guy on the services growth last year, a very strong 19% growth. Some of your peers have talked about a more muted services growth this year, primarily because of 200 millimeter equipment slowdown in China. So if you can talk about the services growth outlook for this year, as well as any impact from the restrictions that came on late last year to either services or system sales this year?

Yes, of course. So this year, as you mentioned, service businesses grow by 19%. This growth was fueled also by increasing utilization of the tools in 2024 compared to 2023. When we're looking ahead, our model assumed for the service to grow between 10% to 15%, and this is what we expect for 2025 as well.

And the impact from restrictions?

We don't see a significant impact on the services from the restriction part.

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

Hi, this is Duxen Zhang on behalf of Vivek. Thanks for taking our question. On memory versus foundry logic, I'm curious how you're thinking about the demand into 2025 and which segment do you expect to grow faster? Thank you.

Thank you. So we do expect advanced logic and advanced packaging to lead the pack in 2025 with the growth. We definitely see the HBM segment as part of the advanced packaging growing with the metrology intensity as well. But the bottom line is it's definitely advanced logic and advanced packaging.

Got it. And then one on gross margins, obviously, a recovery into Q1, but that's also at the high end of your long-term range. So could you talk about the drivers that are driving the expansion in Q1, and then what would it take for you to reach above that 60% point again? Thank you so much.

Our gross margin, we remain committed to our target model and believe that given the business dynamics we anticipate heading into 2025, we will continue to demonstrate strong gross margins. Our ability to sustain healthy gross margin reflect the value we bring to our customers through differentiated technology, strong execution, and operational efficiencies. While there may be some quarter-to-quarter fluctuation due to product mix, and market dynamics, and market conditions, we are confident that our long-term margin profile remain intact. So, as we mentioned before, the quarter-over-quarter changes can fluctuate, mainly due to product mix, but on the annual basis, we will be on our target model. Reaching above 60% is challenging, but it's the main unknown is basically how successful we will be with the new product and so forth. So our model dictates and reflects the current business dynamics that we have.

The next question comes from Ezra with Jefferies. Please go ahead.

Thanks for taking my questions. Two quick ones. One, we're seeing HBM, two different kind of stories out of your peers. How do you see the competitive market and capacity builds there? And then the second is China. Obviously, you guys have a pretty high amount of revenue coming from China. What do you see there kind of long-term as a lot of your peers are seeing that come down? Thank you.

So in terms of HBM, so first of all, we see advanced packaging growing very significantly for us. We're at the infant stages with regards to our dimensional metrology portfolio, and the majority of our business with advanced packaging at the moment is with the logic side with the two and a half, the architectures. But there's definitely buildup on HBM, and as I mentioned, The process control intensity is growing over there as well, which means that we have a higher appeal to both our chemical and dimensional portfolio. So we do see growth in high bandwidth manufacturing as well. Could you repeat the question about China?

Yeah, just. You guys have pretty high China exposure, and a lot of your peers are seeing their China exposure come down as some of these hold-in sales come up. Just wanted to know what you're seeing in China, and that's all of 25.

Sure. So in 2024, the China share of our overall sales was 39%. Our strength there is in line with industry peers. And due to the fact that growth this year will come from advanced nodes, we see the share of China declining.

Thank you. The next question comes from Vinvati Shroche with Evercore ISI. Please go ahead.

Hi, thanks for taking my question. So I have two questions. One is about your contributions from the Centronics acquisition, what you expect for this year, and what your target growth rates are longer term. And then what's the margin profile of this portfolio versus the materials metrology or chemical metrology portfolio?

So the line is a bit broken, so I hope I understood the questions correctly. But overall, Centronics last year had about 10% of the $200 million TAM market. Our first quarter forecast already includes the revenue from the relative period Centronics will report on the NOVA. We closed the deal on January 30th. And we do expect an upside. to materialize as we progress with the post-measure integration. And we are very enthusiastic by the level of engineering we see in the solutions and the fast growth of Centronix's main markets.

And regarding the question about the financial model, so Centronix aligned well with our financial model, which is one of our criteria in our due diligence process for any acquisition. And as we previously stated, the deal is accretive, and we expect it to contribute positively to our financial results. So I would say it's more or less fit to our financial model in terms of gross margins and operating margins as well.

Understood. And then on the chemical metrology, you're increasing the footprint, the manufacturing footprint there. How... What would have you kind of quantified the revenue potential you could get from those facilities?

So we've just opened up a completely new facility in Bad Urach in Germany. This facility, which is also environmentally friendly, hosts all the different units of the chemical metrology division under one roof and is a state-of-the-art facility. We do expect the capacity to be able to drive the business forward. Obviously, as the business continues on its upward momentum, we will adjust the capacities accordingly.

Thank you.

The next question comes from Matthew Prisco with Cantor. Please go ahead.

Hey, guys. Thanks for taking the question. I guess first, can you walk us through the drivers of the strong sequential growth into one queue across maybe end market products and including what the Centronic acquisition contribution is? And then over the past few quarters, you've been increasing revenues roughly 15, 20 million per quarter. Are those types of sequential increases sustainable as we move to 25?

Thanks. So we don't give forecasts for the entire year. what we do expect to outperform WFC. I think that we have very strong end markets driving the industry, whether it's AI or HPC and mobile. We are all acquainted with the fundamentals over there that translate both to investments in advanced nodes, especially advanced logic, as well as the advanced packaging. and we definitely see our position across those markets as fundamental in order to support our continued growth into the year.

And anything on the 1Q color, where you're seeing that strength and what the centronic contribution is?

So as I mentioned, the first quarter forecast includes the revenues from the relative period centronics increase will report on the NOVA, and you can deduct from the fact that Centronics had about 10% of a $200 million market last year as to the level of business that we expect, especially at least in the first quarter.

Perfect. And then as a follow-up, can you help walk us through the translation of these material metrology design went to revenue? For instance, Metreon's recent selection by a leading memory manufacturer, does that mean shipping one tool to a fab for high volume production? And then how quickly does that tool proliferate across fabs? And then what's the process and typical timing of customers expanding the number of tools per fab? Just any color into how we can think about better modeling the opportunity going forward.

So first of all, we're very excited about this recent adoption focusing on the R&D for DRAM as well as 3D NAND. We do expect proliferation into high-volume manufacturing with this customer, and we believe that this market, which is for measuring the profile of multiple layers in these kinds of areas to continue and drive the adoption. We mentioned the fact that we have at the moment to additional evaluations with key logic and memory manufacturers that we expect to materialize later this year. And this is the first introduction of such an inline SIMS tool. We expect the adoption to start with about one tool per fab as we experienced when XPS was adopted 15 to 20 years ago. And then, of course, increase the number of tools per fab as more applications and higher utilization of the tool will happen. So eventually, we believe and we hope that the kind of adoption rate that happened with the XPS will repeat itself with the Metreon. We can't anticipate the exact timing of such an adoption of more than one or two tools per fab, but we have a lot of room to grow with the Metreon both with a number of customers as well as with a number of fabs as capacity grows. And we're very excited about the opportunity as it unveils with the Metreon. Helpful. Thanks, guys.

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

Let me just express my congratulations on another record quarter. This is becoming routine for you guys. I was just wondering if you could discuss where you're seeing significant share gains and what markets?

Thank you so much, Mark, for the comment. So we see a few areas in which we saw share gains. So first of all, in terms of the PRISM standalone OCD, we saw share gains in both advanced manufacturing as well as advanced packaging. We saw increase in market share on the front-end side of the chemical metrology portfolio. We saw obviously higher utilization and additional adoption of the XPS tools in material metrology. And we also gained some share on the integrated metrology, especially as we entered into the advanced packaging space, both in the 2.5Ds architectures and logic, as well as in high-bandwidth manufacturing.

In terms of your memory sales, could you give a little more color in terms of what percent of the memory sales were high bandwidth memory and what, if any, you're seeing from NAND?

So I think that we need to address it as more as DRAM versus NAND or HBM versus other architectures with your permission. So obviously DRAM was stronger than NAND, and if we put HBM as part of the DRAM, then that was the majority in terms of our memory business. HBM growth, of course, is higher in that respect compared to the DRAM one. Thank you.

The next question comes from Charles G. with Needham. Please go ahead.

Hi. Congratulations on the truly exceptional results. Really congrats to the Nova team here. I have a question, maybe two questions. Let me ask the first one. The Q1 guidance, if I flatline that numbers, that would imply a roughly speaking 25% young year growth in 2025. And I think you guided that WFE probably may single digit. And I thought historically you were expecting our performance roughly 1.5x, but any reason for us to have a little bit more confidence that you're going to fight back at the rate of WFE this year? Of course, you guys did well outperform in 24, but what are the reasons for us to believe that that best outperformance will continue in 25?

Thank you for the comments, Charles. I think that the I think it has to do with three major issues. One is the position that we have, especially with the unique value driven by the technologies that we offer. The second one is expanding our position into advanced packaging and seeing higher adoption. And the third one, of course, which drives that as well, is the Centronics acquisition that gives us an opportunity to expand to additional customers than the ones that we are exposed to today. I would top it all, of course, by the fact that we have a strong position in advanced logic, and that gives us grounds to believe that we have the fundamentals, the infrastructure, in order to drive the growth into 2025.

Thanks. Maybe another question on Gate All Around. I believe you mentioned that Gate All Around revenue in 2024 was roughly high single digit of the product revenue based on your latest reporting. Sounds like it's $40 million-ish. I think most of your peers are guiding Gate All Around revenue doubling, but your guidance seems to suggest there's a little bit more than doubling for you guys. Mind if you provide a little bit more color as well in terms of where you're tracking to that $500 million in cumulative GATE all-around revenue from 2024 to 2026. Any additional quantitative color would be very helpful. Thank you.

I'm not sure I can add more to the fact that we are committed to the $500 million from GATE all-around until 2026. We haven't changed our position in that respect. We will try to give more color during the investor day on March 17th, but I think that tracking that number gives a lot in terms of our confidence in making it this year as well. Thanks, Gabby. Sure.

This concludes our question and answer session. I would like to turn the conference back over to Gabby Wiseman, NOVA's President and CEO, for 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.