Good day, and thank you for waiting. Welcome to the Nova Ltd Third Quarter 2024 Results Conference Call. Today, all participants will be in listen-only mode. [Operator Instructions] Please note, that today’s event is being recorded. I would like now to turn the conference over to Miri Segal of MS-IR. Please go ahead..

Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's third quarter 2024 financial results conference call. With us on the line today are Gaby Waisman, President and CEO; and Guy Kizner, 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. Gaby will begin the call with the 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 Gaby Waisman, Nova's President and CEO. Gaby, please go ahead..

Thank you, Miri, and thank you all for joining us. I will start the call by summarizing our third quarter performance highlights. Following my commentary, Guy will review the quarterly financial results in detail.

Nova delivered another record quarter, exceeding the high end of the guidance in revenue and profitability with robust performance across our product lines and in multiple territories.

Our revenue result represents approximately 39% growth year-over-year and our recurring high profitability outcome reflects the efficiency embedded in our operational model.

Our performance is driven by the record sales of our materials, metrology solutions, record sales to advanced packaging processes and the increased demand for our advanced dimensional portfolio.

Given our guidance for the fourth quarter, we expect our annual revenues to grow approximately 28% year-over-year at the midpoint, outperforming the anticipated wafer fab equipment growth in 2024. As we now have more clarity on our performance in 2024, I want to share some thoughts on next year.

We see robust demand from leading edge manufacturing including advanced packaging and expected to manifest in our 2025 performance. Nova benefits from long-term trends driving the need for semiconductors and the substantial investment in wafer fabrication equipment. We persist with our long-term strategy and are confident in executing our plans.

We expect WFE growth in 2025 to be higher than this year and we also anticipate it will be another growth year for Nova. Our positive outlook stems from the distinct growth in leading edge demand to support capacity and the gate-all-around processes which drive an increasing share of advanced nodes processes out of our total product sales.

We are also encouraged by the fact that robust broad scale demand for AI seems to reflect actual workloads and increased CapEx spending by end customers.

This demand and the growing use of AI in multiple industries drive investments in advanced logic and memory nodes and advanced packaging which are the critical enablers of both large language model training and inferences.

The rapid growth of artificial intelligence increases the intricacy of chip architectures and brings forth complex and challenging process steps. These steps are derived from the transition to gate-all-around and advanced packaging and include hybrid bonding with wafer edge, metrology, Through-Silicon Vias and redistribution layers.

These techniques help achieve higher bandwidth, lower latency, lower power and higher yield. They also require much tighter process control on smaller, denser interconnects and tall, highly complex multilayered structures. They fuel a growing need for innovative metrology capable of solving numerous new structures and material applications.

Multiple evaluations and selections manifest the demand for our advanced portfolio by leading customers across territories and we continue to invest significant resources in developing our advanced metrology portfolio to introduce new platforms and technologies and capitalize on the various emerging opportunities driven by these trends.

I want to highlight some additional components that contributed to our performance in the third quarter. First, our materials metrology portfolio delivered record revenue with geographically diverse revenues from Korea, the U.S. and Taiwan as the most significant contributors.

We qualified our latest XPS model, the VeraFlex IV platform, with another leading memory customer and received multiple orders directly tied to building memory capacity for AI related devices.

We also shipped multiple high volume manufacturing tools for advanced nodes production as a leading logic manufacturer and expect additional order from this customer to support gate-all-around manufacturing.

The VeraFlex IV offers a unique value in its capacity to solve specific highly complex applications in advanced nodes in logic and memory production. Nova's unique experience in this domain generates high demand and rapid adoption.

Second, our revenues from sales of advanced packaging applications have reached new heights fueled by demand for our dimensional and chemical metrology solutions in foundry and memory. We have several ongoing evaluations with a leading logic customer which we expect will mature into adoption in 2025.

We also expect a record year for our chemical metrology division, which continues to deliver outstanding performance with a revenue growth rate of high double digits and third, we're encouraged by the strong performance of standalone optical CD solutions driven by demand for advanced nodes processes coming from multiple territories.

As shared in our press release during the quarter, one of the world's leading logic manufacturers recently qualified the PRISM 2 to solve backside power delivery applications in front end processes.

The selection has already yielded an order for multiple tools and sets another milestone in Nova's rapid market share growth in standalone optical CD solutions. This follows another selection by a leading memory customer and recurring orders by other major foundry and memory customers, all for the most advanced process nodes.

The Nova PRISM platform, using its unique spectral interferometry technology and applying proprietary machine learning algorithms, has a proven advantage in addressing these new challenges and providing manufacturers with the relevant insights to support successful production.

This is also an excellent example of how AI is an integral part of our unique offering to our customers. Our consistent performance, driven by our unique portfolio, expanding market presence and ability to identify and address evolving opportunities supports our confidence in remaining on track with our long-term strategic goals.

For more details on the financials, let me hand over the call to Guy..

Thanks Gabby. Good day everyone and thank you for joining our 2024 third quarter conference call. I will begin by reviewing our financial achievements for the third quarter of 2024 and then provide guidance on the fourth quarter.

Total revenues in the third quarter of 2024 reached a record level of $179 million, marking the second consecutive quarter of record breaking results. This performance exceeded the company's guidance for the quarter, reflecting a growth of 14% quarter-over-quarter and 39% year-over-year.

This achievement is a testament to the strength of our core offerings as well as our ability to capture and respond to the continued demand in in the market. Product revenue distribution was approximately 75% from logic and foundry and approximately 25% from memory.

Product revenue includes four customers and four territories which contributed each 10% or more to product revenues, underscoring the company's well balanced and diversified reach across markets and customers.

In the third quarter, blended gross aligned with our guidance achieving 57% on a GAAP basis and 68% on a non-GAAP basis, well within our target model of 57% to 59%. Operating expenses increases to $52 million on a GAAP basis and $47.5 million on a non-GAAP basis.

As we use top line growth to invest in R&D for long-term opportunities and in ongoing strategic evaluations to capture market potential, qualifying our unique technologies and positioning our solution as the tools of choice for strategic customers.

Operating margin in the third quarter reached 28% on a GAAP basis and 32% on a non-GAAP basis, surpassing the upper range of our target model of 27% to 31%. The effective tax rate in the third quarter was approximately 15%.

Earnings per share in the third quarter on a GAAP basis were $1.60 per diluted share and earning per share on a non-GAAP basis were $1.74 per diluted share, exceeding the high end of our third quarter guidance reflecting a fourth consecutive quarter of record results.

This achievement highlights the strength of our business strategy and the growing impact of our solutions in driving value for our customers and stakeholders alike. Turning to the balance sheet, we ended the third quarter with $810 million in cash, cash equivalent bank deposits and marketable securities.

Our free cash flow for third quarter reached $43 million, highlighting our strong cash generating capability. This solid cash position allows us to confidently invest in R&D and strategic growth while providing the flexibility to pursue M&A and capitalize on market opportunities that align with our growth objectives.

Next, I would like to outline our guidance for the fourth quarter of 2024. We currently expect revenues for the quarter to be between $181 million and $191 million. GAAP earning per diluted share to range from $1.51 to $1.70. Non-GAAP earning per diluted share to range from $1.72 to $1.91.

At the midpoint of our fourth quarter 2024 estimates, we anticipate the following; gross margin of approximately 57% on a GAAP basis and approximately 58% on a non-GAAP basis. Operating expenses on GAAP basis to increase to approximately $55 million. Operating expenses on a non-GAAP basis to increase to approximately $50 million.

Financial income to remain similar to that of the third quarter. Effective tax rate is expected to be approximately 14%. Before I conclude my remarks, I would like to note that based on the midpoint of our fourth quarter guidance, we expect to close 2024 with record high revenues, achieving an impressive annual growth of 28%.

Our non-GAAP profitability outlook for 2024 remains strong with blended non-GAAP gross margin around 60% and non-GAAP operating margin near 32% positioned 1% above our target model. With that, we will please to take your questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Atif Malik with Citi. Please proceed..

Hi, thank you for taking my questions and great results. Gabby, I have a question on gate-all-around. If you can provide a little bit more color. I believe in the past you guys have talked about accumulated sales of about 500 million by the end of 2026 for gate-all-around.

If you can just talk about how do you see the difference between 3 nanometer versus 2 nanometer demand into next year and then just the diversification of that gate-all-around pipeline..

Sure. Thank you very much for the question and comment. So with regards to those advanced nodes, at the moment the majority of the revenue is not yet driven by gates-all-around and we definitely expect this to ramp next year.

While saying that, you also relate to the fact that we gave last quarter an estimation of about $500 million in aggregated revenue from gate-all-around by the end of 2026 and this estimated has not materially changed for us at this moment. I can also share that we definitely see our portfolio very strongly present from gate-all-around.

It's already been selected or is being evaluated by all of those gate-all-around manufacturer. And as we mentioned last time, it adds about 30% to the number of process steps required to produce a wafer with growing complexity of processes and we see that as a significant opportunity for Nova.

We can also address the fact that we see additional new opportunities and increasing demand all across our advanced technology portfolio and definitely in gate-all-around which we expect to ramp next year..

Thanks. And then a question on China. If you can talk about what you're seeing for domestic China demand September, December quarter into next year, your peers have talked about China sales coming down as a percentage of total sales as well as on an absolute basis. So if you can just help us out what you're seeing in China..

So we see continued demand on robust business in China also entering 2025. And generally speaking, the share of China out of our product sales is similar to our peers..

Thank you..

And our next question comes from Charles Shi with Needham. Please proceed..

Hi, thanks for taking my question. Gabby, Guy. Maybe the first question a little bit. Looking into next year. I think you previously talked about the high confidence to outperform WFE into next year. One of the things we do observe over the course of the last 90 days was that the WFE consensus estimate has actually come down quite a bit.

Probably a quarter ago most of the people probably were expecting mid-teens kind of WFE growth for next year, but now probably getting into like a high single digit.

Assuming that you're still going to have some outperformance in terms of overall revenue growth, were you still expecting somewhere in the range of high teens, maybe 20% growth for next year or maybe that number also comes down a bit given the overall WFE? Maybe not that the consensus growth number seems to have come down quite a bit. Thanks..

So all I can say in that respect is that historically we modeled Nova outperformance in WFE at the ratio of 1.5 and we definitely see it going forward. It's a bit difficult to see right now or to anticipate the actual WFE growth of next year, but we can definitely say at this point of time that it's going to be higher than the WFE growth in 2024..

Got it. Maybe the other question, do want to touch upon China a little bit? You mentioned that your overall China contribution is similar to your peers, but your peers do have a slightly wider range right now where depending on what they do.

Like for example in process control here the large capacity process control peers still going to see more than 40% of the revenue coming from China. But the process peers like Lam [ph] possibly Applied Materials, the numbers actually for this year is probably more like in the 30s.

So with respect to your peers, where do you land? Where's your China exposure going to land for 2024? Thanks..

So we still have the fourth quarter to end and give us the final number for the year. What I can say is that we are within the range of those peers and that the growing share of advanced nodes revenue in our portfolio is going to increase next year..

Thanks Gabby. If I may maybe one last question. I think previously you did talk about product penetration at the U.S. IDM making very good progress, but the significant revenue probably more tied to their gate-all-around nodes which may be coming up next year.

So wonder if you have any thoughts on that particular customer because there has been a good amount of pretty negative headlines associated with the leading U.S. Logic IDM customer. Any qualitative thoughts would be very helpful. Thank you..

So I can't address to a specific customer. What I can say is that we're working very closely with all gate-all-around customers globally. As I mentioned, we don't see a major change in orders, evaluations and plans going forward.

And I doubt that there will be in terms of the focus of advanced nodes as being strategically important for the success of all these manufacturers.

Another thing that I can also mention in that respect because you mentioned the technologies and this is obviously the most important thing is that I'll give you an example of the Metrion platform, the inline synth and by the end of this year this platform which enables dopamine concentration, contamination and thickness measurements will be evaluated with the leading memory with three leading memory and logic manufacturers.

And we believe that this is really going to revolutionize the fab ability to perform statistical process control for such measurements in line. And we are seeing recurring revenue for our Raman tool as well from major customers.

So this also gives us very strong confidence of our ability to continue and support those gate-all-around manufacturers in future..

Thanks Gabby for the color. I will hop back to the queue..

[Operator Instructions] And the next question comes from Vedvati Shrotre with Evercore ISI. Please proceed..

Hi, thanks for taking my question. So the first one I had was so on the foundry logic side we understand the inflection with gate-all-around.

Can you highlight the inflections or the investments that are going on in the memory space which benefit you?.

So in the memory space right now we see demand from DRAM and within this DRAM growth we see also strong demand from high bandwidth memory which is about 30% of our advanced packaging business. We see regarding memory some moderate growth mainly fueled by DRAM capacity building related to AI devices.

A few of our VeraFlex IV platforms have been dedicated to that these kinds of processes and we believe that DRAM demand should grow more in the first half of next year and NAND will probably see some growth and recovery around the second half of next year..

Is there any activity on the flash side or the NAND side that you….

There's obviously activity and we expect it to grow even more in in the second half of next year. But definitely we see activity and momentum in that area as well..

Got it.

So the other question I wanted to ask was, on your pipeline to getting your revenue potential to 500 million by 2026 for gate-all-round nodes, we're seeing that your foundry logic customers who are facing issues with gate-all-around have, has there been any change in the conversations you have been having with the customers in terms of just how that trajectory looks going into next year and then maybe the following year..

Could you repeat the last thought of the question?.

The trajectory of how you get to that aggregate 500 million, does that change? Given that you're seeing some issues on the gate-all-around front by the customers?.

No change and opposition remains strong and we're confident in reaching that number by the end of 2026..

Understood. And on China, the last question I had was on China. So all the large cap, semi cap equipment’s have been kind of lowering their China exposure going into 2025. ASMR got it down to 20%. Lam and KLA are roughly around 30% for next year.

How are you thinking of that exposure to China into 2025? And do you see any moderation in the demand on the trailing node foundry logic side?.

So at this moment we see continued demand and very robust business in China also entering 2025. Obviously, as a result of the faster growth in advanced nodes, we'll see some moderation in the overall share of China out of our overall business, out of the overall product sales, but we still see the continued demand..

Understood. Thank you..

And this does conclude our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Gabby Waisman for any 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. And you may now disconnect..