Nova Ltd.

Good day, and welcome to the NOVA Limited First Quarter 2025 Results Conference Call. All participants will be in lesson-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 touchtone phone. To withdraw your question, please press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mary Segal, CEO of MSIR. Please go ahead.

Thanks, Operator, and good day, everyone. I would like to welcome all of you to NOVA's first quarter 2025 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, Novus 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 first quarter performance highlights. Following my commentary, Guy will review the quarterly financial results in detail. NOVA achieved another exceptional quarter with record results in both revenue and profitability. Our revenues grew 50% year-over-year, exceeded our EPS guidance, and increased non-GAAP EPS by 56% year-over-year. Our business performance is tightly linked to our executional and operational excellence, as well as our inherent ability to adapt to evolving market dynamics. Our performance was driven by NOVA's strong standing across market segments, regions, key customers, and technologies. This position was validated by the recent release of the annual Gartner Market Share Report. highlighting our growing presence the report indicates that nova's market share increased significantly in the thin film and os and cd metrology segment solidifying our position as the second largest vendor in this market semiconductor manufacturing capacity is in robust growth mode driven by demand for ai applications this surge has translated into significant revenues for NOVA as manufacturers across the globe build their production capacity and adopt the unique value proposition our portfolio offers. Our customers estimate the newly introduced AI models will enhance efficiency and lower the barriers to future AI development, resulting in broader usage and increased adoption of AI, all of which depend on advanced technology nodes. In parallel, the demand we see for mature nodes remains stable, with many new customers joining the ranks. As our second quarter guidance suggests, we expect these positive trends to continue. On a global level, macroeconomic uncertainty impacts various sectors, and the potential indirect implications of the current international trade climate are still unclear. Despite this, we have not observed significant shifts in demand or planned customers' investments, and our business remains solid. Now let me turn to some business highlights for the quotas. The accelerating adoption of gate-all-around and advanced packaging solutions lead customers to build capacity and increasingly embrace our portfolio. As a result, we saw a significant increase in revenues from gate-all-around and advanced packaging processes, which manifested in several areas of our business. First, we achieved record sales in our standalone solutions, led by record revenues from the Prism platform. PRISM has successfully completed two more evaluations for advanced packaging and leading edge nodes by a leading logic manufacturer, and it is shaping out to be a best seller for us. The PRISM spectral interferometry technology and unique algorithmic capability bring clear benefits to process control of through silicon via and critical hybrid bonding applications, which our customers appreciate. Second, we also saw record sales of our integrated metrology solutions. This quarter's highlights include a new penetration into two GatorAround manufacturers, one of which also adopted the solution for its advanced packaging processes. I'm proud to say that these latest adoptions have been driven by NOVA's superior technology, but just as much it is a testament to the power of collaborating with our customers. Third, our software business achieved record performance, driven by strong sales of our software suite, targeting high-value applications and improving performance and efficiencies. More specifically, our advanced packaging customers have noted the advantage of using our machine learning capabilities to solve critical challenges and reduce costs in their increasingly complex processes. Fourth, our materials metrology solutions also benefit from this demand. Denova Ellipson was recently adopted for gate-all-around processes by a leading IDM that already employs multiple Ellipson tools in other areas. In addition, we shipped another Metreon platform for qualification with a new gate-all-around customer. We also saw the continued adoption of the Nova Veriflex 4 platform by additional customers towards gate-all-around manufacturing lines. We recently introduced some new capabilities on the Veriflex platform, which opened a whole new range of layers for advanced 3D NAND manufacturing. We will be able to share more details in the future. On the memory side, the majority of demand is coming from DRAM, and it is driven by the need to increase capacity in high bandwidth memory production. Notably, we are seeing heightened demand for our chemical metrology solutions. Finally, all this growth is also driving our services business forward. This quarter ended with another record in service revenues, which grew more than 30% year over year. Now, I want to share some updates on our operations in Germany. During the first quarter, we completed the acquisition of Centronics, and we are progressing well in post-merger integration. While the contribution to the first quarter is relatively small, we expect to see our business from this acquisition grow significantly in Q2 as we transition to direct sales in key markets. Also, during the first quarter, we moved into our new facility in Bad Urach, Germany, The new facility combines state-of-the-art manufacturing with a research and development center focused on chemical metrology. The new site doubles the capacity of NOVA's chemical metrology division and fosters collaboration by bringing all the division teams together in one location. The transition to the new facility has been seamless, and the next quarter looks very promising for the division. Before I complete my prepared remarks, I wanted to note that we recently published NOVA's 2025 Sustainability Insights Report. The report highlights significant milestones in various areas, including renewable energy use and reduction in greenhouse gas emissions. The report includes updated KPIs that have been incorporated into our operating model along with a revised set of goals that place greater emphasis on key environmental and social impacts. To summarize my part, NOVA had a robust quarter characterized by healthy demand across various nodes, segments, and territories. These positive trends continue to underscore the value of our tools and services. As we look ahead to the second quarter, we anticipate similar strong demand patterns. The current markets are making visibility more challenging. In the coming months, we expect to gain clearer insights and will diligently monitor potential impacts on market demand, managing our business with prudence. Considering our current business momentum, market share opportunities, and the anticipated increase in process control intensity at the leading edge, we are confident in our ability to outperform WFC growth in 2025. 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 first quarter 2025 conference call. I will begin by reviewing our financial achievements for the first quarter of this year and then provide guidance on the second quarter. As a reminder, since the acquisition of Centronix was finalized at the end of January 2025, the financial results reported for the first quarter include only a partial contribution from Centronix, covering the two months following the close of the transaction. Total revenues in the first quarter of 2025 reached a record level of $213 million, representing our fourth consecutive quarter of all-time high revenues. This performance reflects a growth of 10% quarter-over-quarter and 50% year-over-year. Product revenue breakdown was approximately 75% from logic and foundry and approximately 25% from memory. Product revenues for the quarter included contribution from three customers and three geographic territories, each accounting for 10% or more of total product revenues. In the first quarter, blended gross margins were 57% on a GAAP basis and 59.6% on a non-GAAP basis. in the upper end of our updated target model range of 57% to 60%. The high gross margin in the quarter was attributed to a favorable product mix coupled with a higher revenue volume growth. Operating expenses increased in the first quarter and came in at $59 million on a gap basis and $53.5 million on a non-gap basis. as we continue to ramp up R&D and sales and marketing spending in a targeted manner to advance our product roadmap and unlock future growth opportunities. Operating margins in the first quarter reached 30% on a GAAP basis and 34.5% on a non-GAAP basis, surpassing the upper range of our updated target model of 28% to 33%. The effective tax rate in the first quarter was approximately 15%. Earning per share in the first quarter on a GAAP basis were $2.03 per diluted share. And earning per share on a non-GAAP basis were $2.18 per diluted share. With first quarter results exceeding the top end of our guidance, We've now delivered six consecutive quarters of record performance, a milestone that highlights our consistent execution and the value we are delivering to customers and stakeholders alike. Turning to the balance sheet, we ended the first quarter with $812 million in cash, cash equivalent, bank deposit, and marketable securities. This quarter, we deployed $20 million in share buybacks and paid a preliminary amount of $51.7 million for the acquisition of Centronics, net of cash acquired. An additional $4.7 million will be paid in the second quarter as part of the final purchase price adjustment, bringing the total net consideration for the deal to approximately $56.4 million net of cash acquired. The purchase price allocation of this amount, which remained subject to final audit, was reflected in the company's consolidated balance sheet as of the end of the first quarter. The main elements of the purchase price allocation at the closing date were as follows. CentronicsNet acquired tangible assets were approximately $9 million, Centronics intangible technology assets were approximately $15 million and are expected to be amortized over a useful life period of five years. Centronics intangible customer relations assets were approximately $2.5 million and are expected to be amortized over a useful life period of seven years. Inventory step-up, approximately $2.3 million was recorded to reflect fair value adjustments. Roughly half of this amount was amortized through a cost of sales in the first quarter, with the remaining portion expected to be recognized in the second quarter. Finally, I would like to share the details of our guidance for the second quarter of 2025. We currently expect revenues for the quarter to be between $210 million and $220 million. Gap earning per diluted share to range from $1.70 to $1.88. Non-gap earning per diluted share to range from $1.96 to $2.14. At the midpoint of our second quarter 2025 estimates, we anticipate the following. Gross margins of approximately 56% on a gap basis. and approximately 58% on a non-GAAP basis. Operating expenses on a GAAP basis to increase to approximately $61 million. Operating expenses on a non-GAAP basis to increase to approximately $56 million. Financial income on a non-GAAP basis to remain similar to that of the first quarter. Effective tax rate is expected to be approximately 16%. Despite a more complex global trade environment, our second quarter outlook indicates that business conditions are maintaining positive momentum. While recent tariff developments have introduced new variables, we have not seen a significant shift in customer demand. We are staying closely aligned with our customers as they adapt and we are confident in our ability to support them through ongoing collaboration and responsiveness. one of our structural advantages in our global production footprint, with manufacturing facilities located across three key geographies, the US, Germany, and Israel. This diversification provides us with the flexibility to help mitigate the operational impact of evolving trade dynamics. Based on our current assessment, We estimate that the new tariffs could reduce gross margins by approximately 30 to 50 basis points. That said, the situation remains fluid, and we are actively evaluating mitigation opportunities, including operational adjustments and selective pricing strategies. As always, we are committed to executing with discipline, staying agile, and partnering closely with our customers. positioning us well to navigate changes and capture opportunities. With that, we will be pleased to take your questions. Operator,

Thank you, sir. 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 the 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 and then two. Again, to ask a question, please press star and then one. Now, the first question that we have today comes from Blaine Curtis of Jefferies. Please go ahead.

Hi, Ezra Wiener on for Blaine. Thanks for taking my question. Just to start, can you talk about where you are in the Gate All Around ramp in terms of that $500 million cumulatively and how we should expect that from a shape perspective over the course of the year?

Sure. So in terms of Gate All Around, we definitely see a ramp. In the first half of the year, we see strong demand. from Gator around and looking ahead, we expect to meet the growth plans. Of course, there could be some changes in the second half outlook as a result of market conditions. But overall, we are on course for the Gator around.

Got it. And then can you talk about kind of the size of that opportunity between the R&D phase and the ramp of high volume manufacturing?

So obviously the beginnings that are happening this year are reflecting the pilot lines and initial investments and the business is growing so that once it moves from this stage to high volume manufacturing, we expect business to grow. So when we spoke of 24, 25, 26, it was obvious that 25 is going to be higher than 24 and definitely 26 is going to be higher than 25. We're also looking at additional players coming into play. So overall, we see this growth as such that the business next year from Gator Rounds is planned to be or expected to be higher than this year.

Thank you very much. And then one more. In terms of your gross margin, you obviously had a great result in March, comes down a bit in June, and you were talking about tariffs. Can you talk about the moving pieces for the gross margin? Sure.

Yes, so on the gross margin side, the way to think about our gross margin is really on the annual basis, not the quarter over quarter. In any given quarter, mix can shift things slightly up or down. In the second quarter, specifically the low gross margin, we select two main things, the impact of tariffs, as I mentioned, 30 to 50 basis points, and some product mix effects. That said, we remain fully committed to our gross margin model of 57% to 60%, and we expect to be within this range for the full year.

Thank you.

Thank you. The next question we have comes from Asif Malik of Citi. Please go ahead.

Thank you for taking my questions. The first one for Gabby. Gabby, interesting to see some cross-selling in advanced packaging with some of the same customers who are also using your gate all-around equipment. Can you talk about what's driving these dynamics? Or maybe I'm reading too much into it.

So we are definitely well-positioned in terms of our, as you mentioned or defined it as cross-sales, between those front end players that have either logical memory, advanced packaging processes. So we're looking at both high bandwidth memory as well as advanced packaging and logic. And we have positioned both our dimensional metrology as well as the chemical metrology solutions into those markets. What we can see is a very strong double digit growth in our advanced packaging revenue for 2025. and definitely a higher share of the revenue from this segment compared to 2024. We are seeing also, in addition to the chemical and traditional dimensional metrology solutions, whether it's the standalone OCD or the integrated we now see in Centronics, well positioned in order to help us drive this business. Again, leveraging our strong position in front end with those who have either high bandwidth memory or other logic advanced packaging processes in the midst.

Great. And follow up for Guy. And Guy, on the tariffs, some of your equipment peers have talked about the revenue impact in China from the reciprocal tariffs. And just want to clarify that you did not see any revenue impact in China in your guidance. Also, if you can remind us, for the full year, services growth this year?

Yes. So, as I mentioned during my script, the main impact of the tariffs is on the gross margin, 30 to 50 basis points, and we don't see currently impact on the top line. On the service, our model suggests 10 to 15 percent growth year over year, and we are we'll meet this target for 2025 as well. Thank you.

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have comes from Mark Lepatius of Evercore.

Great. Thanks for taking my questions. On the A question on the tariff. What is the framework that we should think about for this? Is this simply components shipped into the U.S.? Is that the main part of the tariff impact to gross margins, or is there something else that we should think about here?

So, the main tariff-related impact on gross margin come from the BOM of our machines, but it's relatively modest. Most of our supply chain is localized, so the volume of imports is quite low. The second piece is service per parts, which do involve more imports. Altogether, we estimate, as I mentioned, the impact on the gross margin, 30 to 50 basis points. That said, the environment remains dynamic, and we are actively monitoring it. And our diversified operational footprint across regions give us the flexibility and helps us caution the impact.

And I guess I was curious is, and I don't know if you can answer this, but is most of that tariff impact from a geographic location on shipping components to your manufacturing facilities in the U.S.? ? Is that where the most of the impact is, or is it something else? Should we think about it differently?

Partially is that, and partially of that is the shipment of spare parts between different territories that have tariff impacts.

Okay, gotcha. And then you are coming in at the high end or above the high end of the target model. What is the process for re-evaluating your target model range and You know, in timing, is this something that you consider doing when you're hitting this kind of levels of profitability?

So we did introduce during our investor day lately an updated model on the operating margin of 28% to 33%. It's important to know that in quarters where we're growing in such a quick pace As we did in the first quarter, it takes time for the OPEX to catch up. We see the increase in the OPEX this quarter, and as I mentioned as part of the guidance, the second quarter we'll see an additional increase. And this increase, we are building, you know, the main focus is investing more in R&D and sales to support both our roadmap and strategic evaluation. So I think these are the main components for that.

Great. Thank you very much.

Thank you. The next question we have comes from Vivek Arya of Bank of America. Please go ahead.

Hi. Thank you for taking the question. This is Daksan on behalf of Vivek. Just to follow up on the tariff question, I know you said you don't see much top line impact, but have you seen any signs of potential pull-in or push-outs by customers? Just given, obviously, you have a very diverse geographical mix. Thank you.

So there are obviously concerns, but we haven't seen any major push-outs or pull-ins in that respect, no.

Got it. Thank you for that. And then one follow-up on HPM. Obviously, you're doing very well in advanced packaging overall, but your memory revenue, despite the underlying market growing very significantly, I think memory has been flat as year over year for you guys, whereas Foundry Logic almost doubled. So I'm just curious about your ramp and progress in HVM. Thank you so much.

So we definitely see a double-digit growth in advanced packaging, and HVM is part of it. I can say that HVM represents about a third of our advanced packaging product revenues, and we do see major growth in that as well. So it's progressing across the board, both logic and memory. Got it.

Thank you.

Thank you. The next question we have comes from Mark Miller of the Benchmark Company.

Congratulations. Another record quarter. In terms of memory, after several years of slowness, NAND manufacturers are increasing their CapEx. Do you expect increasing sales related to NAND?

We definitely hope so, and we are planting the seeds in terms of our portfolio in order to capture the ramp, we definitely see that momentum gearing, but still not translating into immediate revenue. So we hope that that would happen towards the end of this year, as we have indicated before. And our effort now is really to build the footprint in terms of technology, valuations, in order to have a strong position in memory in general and 3D NAND specifically.

Looking at your backlog, what is the margin profile of your backlog? Is that similar to what you've been seeing recently in terms of reported margins?

Yes, it represents more or less the same mix.

Thank you. Thank you. The final question we have comes from Charles Shi of Needham and Company. Please go ahead.

Good evening, Gabby and Guy. Thanks for taking my questions. The first one, I know that in the prepared remarks, you did express some cautiousness about the second half, given all the uncertainties. But your largest appear in process control seems to have soft-guided the flattish second half, at least over the first half. Wonder what's your thought there based on your order backlog and the pipeline? At the point, I mean, absent of any potential impact from the tariffs. That's the first question, thank you.

So we are not giving any guidance for the full year, but we're not necessarily sharing the same the same views of our peers in the industry. And I think that our position is different. But overall, we definitely see the concerns on one hand, but also see the robust business ahead. So we can definitely expect different trends.

Thank you, Gabby. Maybe let me drill down a little bit. I think, let's say, go back to one quarter-ish. I think you also expressed a little bit of a conservatism on the China outlook going into the second half of the year. in terms of the visibility, now where you may, and what's the sense right now? Because I did catch what you said on the preparing marks, mature node seems to be still pretty steady, but I kind of inferred that as a China commentary, but what's the China outlook going into second half? Any thoughts there? Thank you.

Sure. So overall, we expect the the nominal value from our China business to stay flat or slightly decline year over year. As I indicated before, share-wise, we expect to see a relatively lower share of the revenue as advanced nodes are becoming more prominent. We do see good backlog for the coming quarters, but we still lack full visibility of the year. And in any case, we see this trend offset by the strong performance in the other territories and other regions. So overall, as I mentioned before, and that hasn't changed, nominally flat or slightly decline, share-wise lower, but we do see the good backlog.

Thanks, Gabi.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the conference back over to Gabby Wiseman for any closing remarks. Please go ahead, Sal.

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

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.