Nova Ltd.

Good day and welcome to the NOVA LTD fourth quarter and full year 2025 financial 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 1 on a 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 Mary Sagal, CEO of MSIR. Please go ahead.

Thanks, Operator, and good day, everyone. I would like to welcome all of you to NOVA's 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 forelooking 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 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 will 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. 2025 was an exceptional year for Nova, delivering record performance across our business and strong execution in a rapidly expanding semiconductor landscape. We delivered record annual revenue of $880.6 million, up 31% year-over-year, along with record gap and non-gap profitability, with earnings per share growing 29% year-over-year. Fourth quarter revenue exceeded the midpoint of our guidance, reaching $222.6 million up 14% year over year. This performance highlights the depth of our portfolio, solid customer demand, our leading market position, and our disciplined operational focus. It underscores NOVA's strategic alignment with key vectors in the industry and strengthens our foundation as we move into another year of growth. We entered 2026 with a robust investment cycle translating into accelerating demand for leading-edge nodes and steady investments in mature ones. It has manifested in capacity additions, higher yield pressures, and a need to maximize device performance. Rising design complexity is increasing the number of process steps and accelerating adoption of new integration methods such as backside power delivery and hybrid bonding. Coupled with faster time to market and yield requirements, it is broadening the need for precise metrology. Some manufacturers have already announced an increase in CAPEX plans, contributing to the positive outlook. We are confident that our operational agility, flexibility, and grit enable us to address our customer needs. An emerging segment fueled by the AI area is silicon photonics, a technology that uses light photons instead of electrons to transfer data, enabling ultra-fast data transmission at lower power consumption. It requires very high accuracy measurements of optical structures, such as waveguides and modulators, necessitating precise alignment and 3D characterization, which opens new opportunities for NOVA. These market and technology dynamics are reinforcing our strategic alignment with the fastest growing and most technically demanding segments of our industry. We are engaged with our customers to address their high value challenges and are well positioned to capitalize on the opportunities they pose. We expect positive momentum to propel our performance in the coming quarters. One of the highlights of the fourth quarter was when a global leading logic customer selected Nova's integrated metrology portfolio for CMP applications across gate-all-around processes. Following a comprehensive evaluation, the customer adopted our full CMP product suite, extending their earlier backend deployment into front-end high-volume manufacturing. Multiple orders have already been placed for 2026, with additional orders expected as capacity ramps. This win reflects our close collaboration with customers to accelerate time to market, support the technology roadmaps, and enhance yields. Another highlight is our services organization delivering record quarterly and annual revenues. This performance was driven by capacity installation, adoption of our value-added services to support yield improvement, and a focus on shifting from time and materials towards annual service contracts. We are especially proud that our teams earned multiple service excellence awards from leading customers in Asia, underscoring our deep commitment to customer success. Nova's growth this year was broad-based. In gate all around processes, we are now firmly established as a foundational partner in the industry's transition to next-generation architectures and expect to see demand increase further in 2026. In advanced packaging, revenue rose more than 60% year-over-year, representing approximately 20% of product revenue. We saw strong traction across both dimensional and chemical metrology platforms and broad adoption of our dedicated products. And in memory, we saw record results driven primarily by DRAM applications where manufacturers expanded adoption of the materials and chemical metrology offering. NOVA's advanced metrology solutions secured multiple strategic qualifications across leading global manufacturers, reinforcing our position as a trusted partner for next-generation technology inflections. A few examples include the Ellipson Materials Metrology Solution, which was selected as tool of record by a leading foundry for advanced gate-all-around production and recent adoption of the Matrion platform for gate-all-around as well as advanced Friedenand and DRAM device manufacturing. At the same time, ANOVA WMC optical metrology system gained traction in advanced packaging and high bandwidth memory. On the technology front, We continue to invest in R&D, including a novel metrology solution that leverages our optical and materials metrology core competencies, amplified by NOVA's unique strengths in modeling and signal analysis. This new solution is designed to address emerging challenges associated with technology inflections such as gate-all-around, CFET, and advanced memory. NOVA's unique strengths in physical and AI-driven modeling will come together in this new solution, enabling precise measurement of individual nanoscale structures, improved parameter de-correlation for complex architectures, and coverage of critical gaps left by existing metrology technologies. Looking ahead to 2026, we are entering the year with increasing confidence in the market environment. we see favorable trends across logic, advanced packaging, and memory applications. Current order patterns point to another growth year for Nova, with momentum expected to build through the first half and accelerate in the second half of the year. Our priorities for 2026 remain clear. Continue to expand our leadership in advanced nodes, proliferate our materials metrology platform, deepen our share in advanced packaging ecosystem, and scale our operations to support increasing customer requirements. To that end, we are strengthening our operational foundation for the next phase of expansion, including the launch of a new state of the art ERP system to manage growing volume of business with greater efficiency and scalability. We are also expanding our global manufacturing footprint by building new production capacity in Asia, enhancing cost efficiency, while positioning us closer to key customers and supply chain partners. We remain focused on executing with discipline, capturing opportunities, and outperforming WFC. I'm thankful to our employees for their dedication and commitment, and to our customers and partners for their trust in NOVA. For more details on the financial Let me hand over the call to Guy.

Thanks, Gabi. Good day, everyone. I will begin by reviewing our financial achievements for the fourth quarter of 2025, then summarizing our performance for the full year, and finally provide guidance for the first quarter of 2026. In the fourth quarter of 2025, total revenues reached $222.6 million, above the guidance midpoint of $220 million. This performance reflects a growth of 14% year-over-year. Product revenue distribution was approximately 75% from logic and foundry and 25% from memory. Product revenue included three customers and four territories, which contributed each 10% or more to product revenues. In the fourth quarter, blended gross margins were 57.6% on a GAAP basis and 59.6% on a non-GAAP basis. In the upper end of our target model range of 57% to 60%. The high gross margin in the quarter was attributed to a favorable product mix. Operating expenses increase in the fourth quarter and came in at $67.5 million. on a GAAP basis and $62 million on a non-GAAP basis. We continue to ramp up R&D and sales and marketing spending in targeted manner to advance our product roadmap and unlock future growth opportunities. Operating margins in the fourth quarter reached 27% on a GAAP basis and 32% on a non-GAAP basis. The effective tax rate in the fourth quarter was approximately 11% on a GAAP basis, primarily reflecting the release of uncertain tax positions following the completion of a tax assessment audit. The effective tax rate on a non-GAAP basis was approximately 16%. Earnings per share in the fourth quarter on a GAAP basis were $1.94 per diluted share. and earning per share on a non-GAAP basis were $2.14 per diluted share, exceeding the midpoint of our fourth quarter guidance of $2.11. Moving on to the annual results of 2025. Revenues increased 31% year over year, reflecting our continual performance of the industry to discipline execution of our strategy. We are also building the foundations to sustain this outperformance by gaining market share, qualifying our differentiated portfolio with strategic customers, and advancing innovation through a continued investment in R&D of more than 15% of revenues. The geographic revenue split in 2025 was as follows. China was 33%, Taiwan was 29%, Korea was 16%, US was 9%, and other territories contributed the remaining 13%. Gross margins for the year were 57.4% on a GAAP basis and 59% on a non-GAAP basis. Operating margins for the year came in at 29% on a GAAP basis and 33% on a non-GAAP basis. in the upper end of our target model range of 28% to 33%. These operating margins demonstrate the strong value proposition of our process control solutions and our consistent operational execution. Earning per diluted share on an annual basis came in at $7.96 on a GAAP basis and $8.62 on a non-GAAP basis. Turning to the balance sheet, we ended 2025 with more than $1.6 billion in cash, cash equivalent, bank deposit, and marketable securities. During 2025, the company generated $218 million in free cash flow and presented healthy parameters related to working capital management. I would like to share the details of our guidance for the first quarter of 2026. We currently expect revenues for the quarter to be between $222 million and $232 million. Gap earning per diluted share to range from $1.90 to $2.02. Non-gap earning per diluted share to range from $2.13 to $2.25. At the midpoint of our first quarter 2026 estimate, we anticipate the following. Gross margins of approximately 56% on a GAAP basis and approximately 58% on a non-GAAP basis. Operating expenses on a GAAP basis to decrease to approximately $65 million. Operating expenses on a non-GAAP basis to decrease to approximately $60 million. Financial income on an on-gap basis is expected to be approximately $16 million. Effective tax rate is expected to be approximately 16%. To conclude, our 2025 results reflect strong execution and continued progress against our strategy. As we look to 2026, we see positive momentum in the business and remain focused on investing in innovation. strategic customer relationship and capacity to support long-term performance. 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 pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Blaine Curtis with Jefferies. Please go ahead.

Hi, Ezra Wiener on for Blaine. Thanks for taking our question. Just wanted to start by looking at your guidance. You've talked about the first quarter, but can you talk a little bit about the year, what you're seeing? We've heard a lot of different WFE outlooks and what you're seeing for your WFE outlook that you plan to outperform.

So I believe that the most important, and thank you for the question, Ezra, factors in outperforming the WFEs, having the right growth engine, and we're well positioned in that respect. With regards to WFC, we anticipated to be in the low double digits based on, I assume, the same data that you are seeing. So we definitely see a momentum gathering where we expect the second half of the year to accelerate, and we do see the first half of 26 higher than 25. So it's definitely progressing in the right direction.

Got it. And then just a follow-up would be, if WFE does accelerate, do you have any bottlenecks in terms of your own production and being able to meet demand?

So it's a great question. First of all, we have made significant investments over the last year to expand our manufacturing capacity And we have the sufficient one to support our growth outlook, including, of course, cleaning capacity for advanced packaging in particular. And this year, we continue to invest in infrastructure, including new production capacity in Asia, and also the investment in IT infrastructure, such as the ERP, to improve the efficiency and scalability. And we believe that these actions give us the ability to manage higher volumes with better cost and time efficiency, being closer to the customers, and providing greater transparency.

Got it. Thank you.

The next question is from Matthew Pristo with Cantor. Please go ahead.

Hey, guys. Thanks for taking the question. Maybe just to start, do you offer any additional color on maybe how customer conversations have evolved over the past three months across each end market? And then those customer conversations, are those translating into actual orders at this point to support that second half inflection? Thanks.

So thank you, Matthew. So let me start with perhaps taking it to the growth engines, the primary growth engines and drivers for us this year. and take it to the customers specifically. So we see 26 as another growth year with several key drivers. First, it's the advanced logic and gate all around. We see proliferation of gate all around across all leading manufacturers with increasing process control intensity. On DRAM and high bandwidth memory, we see a healthy recovery in DRAM and continued build out of HBM capacity. In advanced packaging, we see growing contribution from hybrid bonding And, of course, we support it with our both dimensional and chemical portfolio that we see significant growth over there. Overall, we see the increased capital investments as has been published by several of our customers. Of course, it takes time until this is turned out into WC orders and, of course, revenue for the company. But we've seen those latest announcements as very encouraging and building the momentum getting to 2026.

That's helpful. And then maybe the follow-up, can you walk us through share dynamics in your dimensional metrology business, both from the overall portfolio and that integrated CD opportunity you talked about, and maybe a specific focus on PRISM as well and Nova's positioning there and kind of adoption trends of those systems? Thank you.

So I hope I understand the question correctly, but if you're talking about the overall market share, so as per the Gartner latest report for 2024, we grew to become second in market share with an overall market share in CD and SimSim at about 25%. That represented an overall increase of about 25%, and we're seeing continued market share gains across our portfolio. In terms of the integrated metrology, I've mentioned the fact that we have a leading global logic customer adopting our integrated metrology portfolio and product suite for its GatorRound CMP processes. We've also mentioned the fact that both Ellipson and Matreon had had an excellent year in 25 and are becoming important growth engines for the company. Ellipson is a tool of record at the top foundry for advanced Gator Round production with additional tools with another leading logic and memory customers. We also see repeat orders and proliferation from R&D into high volume manufacturing. And on the Matreon side, we have recently qualified at both scale around logic customer and a leading memory manufacturing manufacturer as we have planned to and discussed, and this is a very significant milestone for the company in both cases. Of course, we're at the early phase of proliferation, and our goal is to evolve to become a multiple tool per fab, similar to how we scaled XDS historically. And just as a side note, we've just shipped 300th XPS tool, and it's definitely a reason to be optimistic. We also see share gain traction with our standalone OCD solutions for packaging and advanced packaging, and also on the front-end copper dual damascene for our chemical portfolio. So definitely quite optimistic in terms of the share gain momentum as we enter 2026. Very helpful. Thank you.

The next question is from Michael Manny with Bank of America Securities. Please go ahead.

Hi, thanks for taking my questions. Could you just clarify your view for the business this year between DRAM and Foundry and Logic? Which one do you expect to grow faster? And thanks for your WP view for 2020 or 2026 of low double digits. I guess as you look out to this year, You said you'd be able to outperform, and that makes sense because you have the right product suite, getting share. It's going to be a very leading edge heavy year, but does the degree of outperformance you expect this year look very different from the past couple years? It feels like it should be stronger given all those dynamics, but would love to hear your view on that.

Thank you for the question. We do see several vectors in growth this year. stemming especially from advanced logic and DRAM. We see significant growth coming from advanced packaging as well. I think that I mentioned the fact that we have about 60% growth in 25 in advanced packaging, bringing the total share out of the company's revenue to about 20%. And we believe that advanced packaging will still have a double-digit growth this year. So the major vectors for growth are both leading-edge advanced logic and DRAM as well as advanced packaging. In terms of NAND, we do see some signs of improvement, but we are awaiting an inflection point similar to what we've seen on DRAM and HBM. And in terms of outperformance, of course, we are aiming to outperform WC, but it's still early on this year to indicate any specific number.

Got it. Thank you. And then on China, so you mentioned it came in at 33% of sales for 2025. I think that was a little higher than expected. So heading into this year, I mean, what's your view for the market? Is it flat? Is it slightly down? and any sort of color on what exactly you're seeing that might be driving that lack of growth. Thank you.

So we've had 39% of our business from China in 2024, and as you indicated, it normalized to about 33% last year. China is a large and very... very important territory for us, and we expect it to continue and represent around 30% of our sales. We do see shorter lead times in China, which reduce visibility, but we are seeing trends that make us believe that China will continue to have steady investments this year to maintain this proportion that I've just indicated as part of our overall sales. Naturally, as advanced nodes and DRM invest more and China is focused on mature nodes, we'll see the relative portion of China go down even if the nominal sales remain flat. But we are seeing signs of improvement in the business in China as well.

Thank you.

The next question is from Shane Brett with Morgan Stanley. Please go ahead.

Thank you for letting me ask a question. So my first question is on leading-edge logic. So how should I think about your share position in the context of your largest customer adding more three nanometer wafers this year? I'm asking this because your Taiwan revenue is up nearly 90% year-over-year in 2025, which is very reflective of your strong position. I'm just curious just how much better this can be for you in 2026. Thank you.

So I'm not sure I can discuss specific shares with a specific customer, but I can say that in terms of Gatoral Round specifically, and we'll talk a bit more about the advanced nodes in Gatoral Round, we're well positioned across all four players. And we see the growth this year and the momentum increasing compared to last one. In terms of free nanometer, of course, the intensity is not as high as it is in gate or around in the two nanometer, but it's still very significant. So any investment in advanced nodes is very beneficial for us.

Got it. Thank you. And then for my follow-up, so for advanced packaging revenue, you kind of talked about low double digits, but I guess relative to some of the etch-in-depth players, that feels a little bit light, but it's kind of in line with your kind of metrology inspection peers. Just what's the dynamic that's going on in advanced packaging this year that's, I guess, leading to a bit of a moderation from 60% growth to kind of low double digits this year. Thank you.

So advanced packaging for us is relatively new, and we see the penetration of more and more products and gaining share in advanced packaging. So out of the 20% of product revenue that I indicated, about a quarter to a third, depending on the quarter, is high bandwidth memory, and the rest is logic. We do see strong double-digit growth this year as well. And since we are engaged with all players and introducing more and more solutions and capabilities, we believe that this is a great opportunity for us and we'll see the growth continuing into this year as well. Thank you.

The next question is from Elizabeth Sun with Citi. Please go ahead.

Hi, thanks for taking my question. This is Elizabeth Sun for ADHIS. First question is for GAIG. It's for gross margin guidance for Q1. 58% is down sequentially, so I'm just wondering what the percent takes in the gross margin guide for Q1.

Sure, so this quarter we reported gross margin of 59.6. Looking ahead for the next quarter, we are guiding gross margin of 58% plus minus 1% point. And this reflects the current specific product mix as we see it right now for the quarter. But as we always said, margins can fluctuate on a quarterly basis. And the right way to look on our margin profile is on the annual basis. So nothing really changed structurally. It's based on specific product mix and specific water.

Got it. And then on the get all around accumulated revenue of $500 million to 26. So we are already in 26. I'm just wondering, like, you have a lot of announcement recently. So I'm wondering for get all around in total, are you... seeing the accumulated revenue to be maybe above the 500 million level?

So we do see the momentum. And as I mentioned, we're well positioned across all players. And we are on track with getting to the 500 million mark as an accumulated revenue for 24 to 26. Obviously, 26 is expected to be higher than 25. So, we'll see how it goes. Right now, I can say that we're on track to getting to this target.

Thank you. The next question is from Charles Shi with Needham and Company. Please go ahead.

Thanks for taking my question. Maybe two. First one is regarding China, how it looks like you talked about a little bit reduced visibility, but overall looking strong. Sounds like probably second half should see some pickup in China revenue relative to second half as well, in line with the overall trend for what you're guided for your overall revenue. Is that still the case? And how do you feel about sustaining maybe last year's China growth somewhere around 11% based on your the geographical breakdown I just provided. Any comment would be great. Thank you.

Thank you, Charles. So overall, if we look at process control in China, according to the data that we have from external sources, process control in China actually went down. But as I mentioned before, for us, it nominally went up. And we're very encouraged about the position that we have there. Obviously, as I mentioned before, Proportionally, it went down from 39% to 33%. And the more investment there is in advanced nodes, it's expected to continue to go down, whereas I believe that it will normalize around the 30%. So it will continue to be a dominant and key territory for us moving forward. In terms of the trends, we currently see some increased visibility, even though in general visibility went down in China as well. But what we see now gives us more confidence about at least the nominal level of business in China in 26.

Got it. The other question I know, this is actually a question I got asked a lot. One of your peers talked about rising memory prices having some impact on gross margin I'm wondering if you are seeing any of that. I know it's kind of hard to compare what you see versus what your peer sees. And I just want to get some clarification. Is memory price creating any pressure on your gross margin? Thank you.

Not sure I fully understood the question. But overall, we don't see a correlation between memory pricing to our gross margin, no.

OK. Okay, that's good enough.

Thank you. The next question is from Vedvati Shrotra with Evercore ISI. Please go ahead.

Hi. Thanks for taking my question. I think most of my questions have been answered. So the one I had was, can you talk about how your lead times have changed maybe, you know, three months versus now? And within that, your peers talked about the optical components being constrained. Does that impact you as well as you go through the year?

Yeah, so thank you for the question, Advati. I agree with the fact that there is more pressure on the lead times, which of course impacts visibility as well. But that pressure on lead times calls for our operational agility to improve, which we're doing, as I previously mentioned. We're working with our suppliers and with our supply chain to make sure that we have both the material and to have the capacity to support the business and the anticipated growth this year. So there is additional pressure on the lead times. But we are making ourselves more agile in order to accommodate for that.

And is the optical component a driver of that lead time pressure?

No, I think that the lead time pressure is coming from the customers as they have to turn CapEx into WFE and to actual delivery into the FAB. It's across the board, meaning that it impacts both the material, chemical, and dimensional metrology portfolio that we have. There is no difference in the requests that we have from different components of our portfolio.

Understood. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Gabby Wiseman, NOVA's president and CFO, CEO, excuse me, for closing remarks.

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

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