Nova Ltd. (NASDAQ:NVMI) Q2 2023 Earnings Call Transcript
Nova Ltd. (NASDAQ:NVMI) Q2 2023 Earnings Call Transcript August 5, 2023
Operator: Good day, and welcome to Nova's Second Quarter 2023 Results Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of MS-IR. Please go ahead.
Miri Segal: Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's second quarter 2023 financial results conference call. With us on the line today are Mr. Gaby Waisman, President and CEO, Mr. Dror David, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations section of the company's website. Gaby will begin the call with a business update, followed by Dror with an overview of the financials. We will then open the call for the question-and-answer session. I'll now turn the call over to Mr. Gaby Waisman, Nova's President and CEO. Gaby, please go ahead.
Gaby Waisman: Thank you all for joining our second quarter financial results conference call. I will start the call by speaking about our quarterly results and performance highlights. Following my commentary, Dror will review the quarter's financial results in detail, and then conclude with the guidance for the first quarter of 2023. Nova's results for the quarter met our expectations, highlighting the resilience of our portfolio, our wide exposure to new advanced applications and a well-maintained operational model, which effectively combines customers' focus and our roadmap for continuous investment in every division. The value of our broad materials and dimensional portfolio helps us drive increased traction with several notable achievements this quarter, including new penetrations and additional orders following successful evaluations of our new products.
These opportunities will allow us to broaden our position and capitalize on larger opportunities once the industry fully recovers. We are taking necessary steps to ensure Nova's near-term healthy business performance and profitability for the remainder of 2023. Just as we performed in the first half, we are also confident about our long-term strategy and ability to deliver going forward. We are committed to executing our strategic plan towards $1 billion in revenue, and we aim to resume our accelerated growth path. We are building our business, our infrastructure and technology offerings to be ready for the industry when it resumes growth. This quarter, we diversified revenue streams in each of our product divisions with a continued proliferation of advanced materials and dimensional products adopted by existing and new customers.
First, our newest integrated metrology platform just completed the successful evaluation with the world's leading foundry in their most advanced node, presenting significant performance enhancements and addressing the customers' need for cutting-edge productivity and accuracy towards a faster time to market and high yield. Second, our Nova PRISM stand-alone OCD platform is transferring to high-volume manufacturing in a leading foundry and recently penetrated a new memory manufacturer. The value of PRISM for advanced nodes’ front-end processes in both logic and memory is becoming increasingly clear, buoyed further by significant interest in the platform's unique technology in advanced packaging and more specifically, in what we can do in hybrid bonding process steps.
Third, we just delivered another Elipson tool to a leading IBM, and we have additional evaluations in progress as our ability to bring Raman technology to the fab garners a lot of interest and not just in the leading edge. In addition, the Veraflex platform secured several new customers and continued proliferation within our existing customer base. Finally, our chemical metrology division is already inherently embedded in packaging and advanced packaging processes and benefits from a recent increase in demand for high bandwidth memory. Additionally, the division is breaking ground with several new customers this quarter, a strategic new evaluation at the leading IBM and our front-end ancosys solution gaining traction across nodes. We are successfully leveraging Nova's exposure to front-end processes to open the door for our chemical metrology portfolio while also leveraging our strong customer relationships to ramp up sales and explore opportunities in the back end of line.
Our revenues are derived from multiple territories with China generating approximately a third of our sales, driven by greenfield customers and significant capacity expansions in mature and trailing nodes. Other regions where we see great potential are the European and US territories propelled by government incentives and global players building capacity outside their homelands. Beyond regionalization, Nova benefits from its broad exposure to the foundry logic sector and to the majority of semiconductor CapEx. Nearly 80% of our revenue this quarter was generated by foundry logic customers and approximately half of that stemmed from mature and trailing nodes. This is the result of our ability to leverage the shift from a market predominantly ruled by the leading edge towards the growing investment in more mature nodes.
At the same time, driven by our unique technology enabling value, we achieved significant traction with a leading memory customer this quarter, making Korea our second largest territory. The increasing interest in Nova's unique technology offerings for front-end, back-end and advanced packaging applications at a potential new addressable markets are more building blocks for our future growth. Nova's rich and differentiated portfolio is built to meet the challenges of next-generation device fabrication, a complementary offering for 3D architecture devices allow customers to gain a better insight into the most complicated semiconductor structures through a wider view of geometrical dimensions, physical material properties and chemical analytics.
One example of that is our Veraflex platform that has become a technology enabler and it therefore exerts higher resilience to demand fluctuations. If you want to successfully run high-K metal gate processes, Veraflex is a requirement in the fab from first silicon to correctly characterized composition and measure ultra-thin film thickness. It is true for FinFET processes and even more so for gate-all-around and 3D memory. Another example is the Nova Elipson, with a field-proven crucial ability to successfully characterize nanosheets. And of course, PRISM, which I mentioned earlier, brings unique abilities to the table, adding new information inaccessible by current optical CD methods. I want to take a minute to also highlight the opportunity we see in 3D stacking and heterogeneous integration in advanced packaging.
Photo by Jonas Svidras Unsplash
It is essentially a way to maintain Moore's law and to achieve higher bandwidth, lower latency and power along with higher yield. Integration cases abound from CMOS sensors to 3D NAND and 3D DRAM. Furthermore, advanced packaging allows midrange and mature node manufacturers an alternative scaling route to EUV, expanding the opportunity beyond gate-all-around. These new advanced packaging schemes necessitate process steps such as through-silicon via, backside power delivery, hybrid bonding and wafer edge CMP. They demand tighter process control on smaller, denser interconnects as well as tall highly complex, multilayered structures requiring more measurements to ensure package integrity. The Nova PRISM has the proven advantage over our competitors in some of the applications I mentioned and our market-leading portfolio allows manufacturers to utilize optical CD technology for advanced packaging in completely new ways.
So you can see why we are encouraged by the interest from existing and new customers in previously untapped processes and market segments across multiple territories. To conclude my prepared comments, we are working on multiple fronts to ensure that Nova is ready for the turn of the tide. We're expanding the range of applications, our solutions address, broadening our customer base, increasing our market share and enhancing our relationships with the world's leading manufacturers. We are investing in infrastructure, technology and in building long-term capacity. We are confident in our ability to deliver constant performance in the coming quarters and to leverage new opportunities when the market rebounds. Now let me hand over the call to Dror to review our financial results in detail.
Dror?
Dror David: Thanks, Gaby. Good day, everyone, and thank you for joining our 2023 second quarter conference call. Total revenues in the second quarter of 2023 were $122.7 million, above the midpoint of our guidance and down 13% year-over-year, reflecting the current lower investment levels in memory and in leading logic and foundry. Product revenue distribution was approximately 80% from logic and foundry and approximately 20% from memory. Product revenues included three customers in four main territories contributing each more than 10% to product revenues. The wider territory distribution reflects an improved territorial diversification relative to previous periods, driven by the increase in investments in the Western territories of the US and Europe.
Blended gross margin in the second quarter was 57% on a GAAP basis and 59% on a non-GAAP basis, at the high end of the company non-GAAP target model of 57% to 59%. Operating expenses remained stable in the second quarter and came in at $41 million on a GAAP basis and $38 million on a non-GAAP basis, reflecting management focus on restraining costs in the current business environment. Operating margins in the second quarter were 23% on a GAAP basis and 28% on a non-GAAP basis, within the company non-GAAP target model of 27% to 31%. This excellent result was driven by the healthy gross margins and the prudent cost control initiatives implemented by the management. Financial income for the quarter increased to approximately $5.6 million, driven by higher yields on cash reserves.
The effective tax rate in the second quarter was approximately 13%, slightly lower than our target model of 14% to 15%. Earnings per share in the second quarter on a GAAP basis were $0.94 per diluted share, and earnings per share on a non-GAAP basis were $1.06 per diluted share, at the high end of our second quarter guidance. This result coincides with management commitment to generate quarterly earnings per share of $1 or more or the equivalent $4 or more in annual earnings per share on annual revenues of approximately $500 million a year. Finally, I would like to share the details of our guidance for the third quarter of '23. Currently, we expect revenues to be between $119 million and $126 million. GAAP earnings per diluted share are expected to range from $0.83 to $0.94.
Non-GAAP earnings per diluted share are expected to range from $1.02 to $1.13. At the midpoint of the third quarter '23 estimate, we anticipate the following. Gross margins to be approximately 56% on a GAAP basis and approximately 58% on a non-GAAP basis, within the company non-GAAP target model. Operating expenses on a GAAP basis are expected to decrease to approximately $40 million. Operating expenses on a non-GAAP basis are expected to decrease to approximately $36 million. This reduction reflects management determination to restrain expenses in the current environment. However, looking forward, we do expect operating expenses to gradually increase towards the end of the year and into 2024. Financial income and tax rate are expected to be similar to the second quarter.
To conclude my remarks, I want to mention the company's cash and working capital management. In the first half of '23, the company generated operating cash flow of approximately $50 million or 19% of revenues. In parallel, we continue to aggressively invest in manufacturing capacity expansions in IT infrastructure and in additional offices to support sales and services at new sites. As a result, we expect elevated capital investments throughout the remainder of '23 and throughout 2024. In addition, as Gaby mentioned, we continue to expand our investment in product evaluations at customer sites to meet the heightened customer interest and the growing application space of our most advanced product portfolio. Finally, I would like to highlight the cash reserves of the company, which increased to approximately $570 million and provide the required flexibility to pursue organic and non-organic business development activities towards executing the $1 billion strategic plan.
With that, I will turn the call back over to Gaby. Gaby?
Gaby Waisman: Yes. I would like to open the session for Q&A.
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