Nova Ltd. (NASDAQ:NVMI) Q4 2023 Earnings Call Transcript
Nova Ltd. (NASDAQ:NVMI) Q4 2023 Earnings Call Transcript February 15, 2024
Nova Ltd. beats earnings expectations. Reported EPS is $1.36, expectations were $1.24. Nova Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. And welcome to the Nova Limited Fourth Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, the event is being recorded. And now, I would like to turn the conference over to Miri Segal. Please, go ahead.
Miri Segal: Thank you, Operator, and good day to everybody. I would like to welcome all of you to Nova’s fourth quarter and full year 2023 financial results conference call. With us on the line today are Gaby Waisman, President and CEO; and 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 the 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 Gaby Waisman, Nova’s President and CEO. Gaby, please go ahead.
Gaby Waisman: Thank you, Miri, and thank you all for joining us today. I will start the call today by summarizing our fourth quarter and full year performance highlights. Following my commentary, Dror will review the quarterly and annual financial results in detail. Nova delivered a robust quarter, exceeding the top end of our guidance for revenue and profit, with GAAP and non-GAAP EPS reaching an all-time high, concluding the fiscal year on a higher note than initially expected. Nova’s performance remains steadfast, showcasing the strengths of our diversified and agile business model. We persist with our long-term strategic plans to solidify our position and seize new opportunities across customers, markets and technologies.
Nova is uniquely positioned to accelerate its market adoption in hybrid bonding, as well as high-bandwidth memory and to capitalize on the transition to gate-all-around through our strong stance in advanced logic manufacturing. Looking forward, we witness encouraging trends across our key growth drivers that we expect to steer us to a path of growth and outperformance in 2024. Our performance this quarter was driven by the continued proliferation of materials metrology and chemical metrology solutions across both front-end and back-end markets, and the expanding adoption of optical metrology solutions among multiple DRAM customers. The encouraging results of the fourth quarter and fiscal year are indicative of our aptitude in addressing the myriad needs of process control in IC manufacturing.
This proficiency plays a key role in leveraging opportunities, as evidenced by the significant expansion of our customer base. Our PRISM standalone optical metrology platform secured several wins with memory, logic and hybrid bonding customers. Furthermore, we exit 2023 with a growing adoption of Nova’s VERAFLEX, XPS and XRF, ELIPSON inline Raman, and ANCOLYZER and ANCOSCENE chemical metrology solutions. Finally, our service business demonstrated consistent growth, reaching another annual revenue record. I want to take a minute and highlight some of the technology inflection points and industry growth drivers that we identify as the propellers of Nova’s growth. The surge in AI-related demand also drives the need for energy-efficient computing power and accelerates demand for advanced processing nodes and memory solutions from the network to the client side.
Our customers are spearheading the transition to 3D architectures that enable high-bandwidth memory and highly advanced logic integrated circuits, as well as advanced packaging solutions. These evolutions, in turn, translate into larger and more complex dies 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. Manufacturers now need high-quality metrology across the entire wafer, from the center to the very edge. They must control highly complex 3D design with high aspect ratios and underlie -- under layer structures. They need to monitor new materials, measuring ultra-thin films, composition and structures on the wafer and in-die, and they must solve manufacturing challenges that arise from gate-all-around transistors, 3D memory architectures, backside power delivery, hybrid bonding and often other methods aimed at generating faster, more efficient and more powerful devices.
All of which translate to a growing need for process controls. Nova’s achievements over the past quarter, coupled with our growth guidance for the first quarter of 2024, reflect our ability to cash in on the opportunities through a strategy of diversified growth. We built a variety of opportunities in 2023 that we expect to capitalize on in 2024. Our chemical metrology division delivered on the promise, growing to a record annual revenues in 2023, fueled by the increasing demand for metrology in packaging production lines. Notably, in Q4, we secured several new packaging customers and received a large order from a leading global memory manufacturer. Our optical metrology expanded into hybrid bonding, high-bandwidth memory and related applications through a dedicated optical metrology portfolio.
As a result, we increased our revenues from the advanced packaging domain by approximately 30% year-over-year. Our portfolio addresses critical applications, such as through-silicon via, essential for the successful manufacturing of AI-related devices. We have been collaborating with our customers for several years to develop these dedicated solutions. We are proud to be the first to market with the industry’s top five customers having either purchased or engaged in evaluations with Nova. For example, the Nova PRISM has already been selected by a leading global foundry and is in evaluation process with additional leading manufacturers. Therefore, we expect our revenues from advanced packaging to grow significantly in 2024. I mentioned earlier the transition to advanced nodes and here we see our technology growth engine coming into play.
The advent of gate-all-around and advanced memory drives the need for our unique materials metrology portfolio, resulting in increased customer traction for ELIPSON and METRION, and wider adoption of our VERAFLEX platform. Nova ELIPSON has been chosen as a process tool of record for advanced DRAM production by a leading global memory manufacturer who has already placed repeat orders for the tool. We also expect additional evaluations with the other customers later this year. Nova METRION is also making strides. We recently announced the availability of the platform’s second generation, and in Q4, we received evaluation purchase orders from two of the world’s leading memory manufacturers. Platform has already been adopted by three other customers and we expect to expand our footprint by the end of this year.
The Nova VERAFLEX platform proved that it is indeed an industry staple, landing new logic and memory customers in Q4. The newest generation, VERAFLEX 4, grew approximately 170% year-over-year and is quickly taking over from previous versions, proliferating in high volume manufacturing. VERAFLEX 4 offers higher productivity and improved metrology performance that brings true measurable value and expanded application space to our customers. Finally, our service division delivered record performance and increased the share of revenue from contracts by 24%, leveraging the expansion of our install base, which surpassed 5,400 tools and cementing its importance as one of our growth engines. Beyond our focus on expanding our presence in new market segments and penetration of new technologies, we also dedicated many of our resources this year to building the infrastructure that will support our growth in 2024 and beyond.
We opened a new cleanroom in Israel, we expanded our offices in Korea to provide better support closer to our customers and we opened an innovation center in the U.S. In 2024, we plan to invest in building our presence and capacity, and in increasing the efficiency and agility of information systems and processes. We also plan to accelerate our investments in research and development in close collaboration with our customers and partners. In summary of my prepared remarks, I believe that our well-established fundamentals will help us increase exposure to additional opportunities in adjacent markets and processes, new customers and additional 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 2024, we expect to capitalize on the opportunities created by our enhanced market position, resume our growth trajectory and outperform the market. Now, for some more detail on our financials, let me hand over the call to Dror.
Dror David: Thanks, Gaby. Good day, everyone, and thank you for joining our 2023 fourth quarter and annual conference call. Total revenues in the fourth quarter of 2023 were $134 million, exceeding the company guidance for the fourth quarter and growing 4% quarter-over-quarter. Product revenue distribution was approximately 65% from logic and foundry and approximately 35% from memory, similar to the previous quarter. Blended gross margin reduced in the fourth quarter and came in at 55% on a GAAP basis and 57% on a non-GAAP basis. This result is at the lower end of the company non-GAAP target model of 57% to 59% and is related to quarterly record revenues from chemical metrology, which gross margins are lower than the company average.
We expect gross margins to rebound already in the first quarter of 2024. As expected, operating expenses increased in the fourth quarter, reaching $40 million on a GAAP basis and $36 million on a non-GAAP basis. Operating margins in the fourth quarter were 25% on a GAAP basis and 30% on a non-GAAP basis at the higher end of the company’s non-GAAP target model of 27% to 31%. Financial income in the quarter continued to increase due to higher yields on cash reserves, totaling $7 million. As expected, the effective tax rate in the fourth quarter reduced to approximately 7% below the company’s 14% to 15% model due to year-end tax adjustments and statute of limitations. Earnings per share in the fourth quarter exceeded the company guidance, reaching an all-time record high.
This outcome reflects the effective and agile business model of the company, combining a unique and differentiated product portfolio embedding high customer value proposition with effective and prudent operational and financial management. GAAP earnings per share were record $1.20 per diluted share and non-GAAP earnings per share were record $1.36. Moving on to the annual results for calendar year 2023, revenues decreased by 9% year-over-year, reflecting the generally lower industry investment and capacity expansions in 2023. Annual product revenue distribution was -- in 2023 was approximately 70% from logic and foundry and approximately 30% from memory, similar to 2022. Gross margins for the year came in at 57% on a GAAP basis and 59% on a non-GAAP basis at the high end of the company target model of 57% to 59%.
Year-over-year, the company was able to increase gross margins by approximately 1% in a declining industry environment. We believe this result is a testimony to the company’s ability to deliver high customer value through a combination of technology leadership and superior cost of ownership. Operating expenses in 2023 slightly decreased year-over-year, reflecting the management cost containment initiatives implemented as early as the industry cycle was identified at the beginning of 2023. Operating margins for the year came in at 26% on a GAAP basis and 30% on a non-GAAP basis at the high end of the company’s non-GAAP target financial model of 27% to 31%. Earnings per diluted share on an annual basis came in at $4.28 on a GAAP basis and $4.86 on a non-GAAP basis.
During 2023, the company generated $106 million in free cash flow and presented healthy parameters related to working capital management with days sales outstanding of approximately 80 days and inventory turnovers of approximately 2 times a year. In addition, during 2023, the company continued its infrastructure and capital investments, including a new cleanroom in Israel, which commenced manufacturing in mid-2023 and a new facility for the chemical division in Germany, which is expected to open by the end of 2024. We anticipate capital investments to remain elevated throughout 2024. Finally, I would like to share the details of our guidance for the first quarter of 2024. Currently, we expect revenues to be between $134 million and $140 million.
GAAP earnings per diluted share to range from $1 to $1.12. Non-GAAP earnings per diluted share to range from $1.21 to $1.33. At the midpoint of the first quarter 2024 estimate, we anticipate the following. Gross margins to increase to approximately 57% on a GAAP basis and approximately 59% on a non-GAAP basis at the higher end of the company’s non-GAAP target model. Operating expenses to increase to approximately $45 million on a GAAP basis and $40 million on a non-GAAP basis. Financial income to be similar to that of the fourth quarter and the tax rate to be approximately 15%. With that, I will turn the call back to Gaby. Gaby?
Gaby Waisman: Thank you, Dror. Our prepared remarks are now concluded. We would be happy to take your questions. Operator?
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