Miri Segal - Hayden MS-IR Eitan Oppenhaim - President and CEO Dror David - CFO.

Edwin Mok - Needham & Company Patrick Ho - Stifel Nicolaus Keith Maher - Singular Research.

Good day and welcome to the Nova Measuring Instruments Limited Fourth Quarter 2014 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of Hayden MS-IR. Please go ahead..

Thank you, Operator. I would like to welcome all of you to Nova Measuring Instruments 2014 financial results conference call and presentation. With us on the line today are Mr. Eitan Oppenhaim, President and CEO, and Mr. Dror David, CFO. I'd like to draw your attention to the presentation that accompanies today's call.

The presentation can be accessed and downloaded from the link on Nova's Web site at www.novameasuring.com in the Investor Relations section.

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 pertain to this call.

If you have not received a copy of the release, please view it in the Investor Relations or News section of the Company's Web site. Eitan 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 will now hand over the call to Mr.

Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead..

Thank you, Miri. Let me add my welcome to everyone and thank you for joining our 2014 financial results conference call. Today I am excited to discuss the record year Nova fostered in 2014 and to share with you outlook for first part of 2015.

I would like to start today’s call by speaking briefly to our December quarter results and to performance for the year. I will then provide some commentary on the industry trends as they relate to our opportunities in the market and conclude my part with the guidance for the third quarter of 2015.

Following my commentary, Dror will review the financial results in detail. For those who are following the presentation, please proceed to Slide Number 4. The December quarter is highlighted with revenue results in line with our expectation and net income exceeding our guidance.

As in previous quarters, our fourth quarter results as well our annual performance continue to demonstrate the operational leverage as we have built into our business model given during industry cycles for produce visibility and increased volatility.

We maintain our successful business model while keeping elevated R&D investment to continue our sustainable growth and innovate our way to lead the optical metrology market. During the quarter, we experienced a growing order stream from our memory customers for multiple price expansion which helped us further broaden our customer base.

In fact this quarter customer mix included also a memory customer that contributed more than 20% to our quarterly product revenue.

During the quarter, spending of our largest customers was the slowest quarterly levels in 2014 but this quarterly softness in the foundry space was offset by increased activity in memory that including design wins with our advanced integrated metrology tools mainly for DRAM and new emerging markets which extended our overall addressable market.

We’re proud in the fact that the all latest DRAM expansions were done using Nova integrated tools, as the result of all of this memory revenue during the quarter increased significantly and accounted for 27% of our product sales versus 19% in Q3 clearly demonstrating the inroad we’re making into the memory space.

In the fourth quarter, we posted revenue of 25.8 million in line with our guidance. This generated 2.3 million or $0.08 per diluted share in non-GAAP net income which exceed the high-end of our profitability guidance by $0.02.

Turning to 2014 achievements, I am proud with our second consecutive record breaking year with the Company with total revenue of 120.6 million and 19.2 million or $0.69 per diluted share in non-GAAP income up from 111.5 million in revenue and 14.2 million or $0.52 per diluted in non-GAAP income in 2014.

On yearly basis, our profit growth outpaced the revenue growth creating a very solid basis for continue sustainable growth in the next years to come to various strategic directions that would further strengthen the Company position in the market.

We are increasingly encouraged by the growing adoption of our optical metrology solutions across multiple customers leading to a stronger position in the advanced technology node. Notably advanced nodes accounted for the majority of our activities receiving 76% of our 2014 annual revenues generated from 20 nanometer technology node and below.

We believe that our ability to gain traction in this advanced node will pave us the way to evolve as a technology leader in the years to come in the most challenging technology junction.

On the customer front, we substantially diversified our customer base in 2014 over both the foundries and memory segment with three customers contributing more than 10% each to our business, combined these three customers which include one memory customer generated more than 70% of the our sales in 2014 compared to just two customers in 2013.

One particular customer of node is a leading memory manufacturer that accumulated order in the excess of US$10 million in 2014. This broader customer base allowed us to mitigate a soft year with our leading customer and allowed us to still grow and show second consecutive year of record revenue.

During the year we made a significant progress against our strategic initiatives which laid the foundation for our future growth. We believe that with the progress we had in our product offerings we have increased both our total sense of the available market in multiple segments.

Our goal is diversify our offering to include the software share paid off with 4% of our total annual product revenue generated from multiple solutions where all them are currently installed in customer site. With this solid progress, our software revenue stream clearly surpassed our internal expectation with steady growth each quarter.

Our initiative to business offering closer to the wafer fabrication process paid off as well with the first order for our Real-time Profile Measurement system NovaRPM which is used for real-time monitoring of the most advanced Etch processes.

This order is a result of tight cooperation between Nova, a leading process vendor and a leading memory customer. We believe that going upstream into the challenging process environment the In-Situ is the way to best leverage Nova’s methodic abilities in the high-end and complex application.

We believe that this cooperation will expand our strategy that the growing technology complexity and process control can be best addressed through cooperation between customers and vendors in early stages of the process. Beyond our RPM solution, we continue to see increasing demand for our fleet management and hybrid software product mix.

We can now see tangible market demand for all three of our software solutions. This success will enforce our confidence out that our software offerings will represent growth driver for Nova in 2015 and beyond.

Beside software we continue expanding to new markets with our integrated metrology tools with penetration to additional process step as well as to new return step added at the post CMP. Our standalone tools are well adopted in all major foundries while advanced node down to 7-nanometer for multiple step in both second and front-end applications.

During the year beyond several selections to deliver our standalone solution for multiple processes steps in the most advanced node. With this progress in our product portfolio our tools are currently installed in all the major R&D and risk production lines for foundry FinFET devices leading to even stronger position in the foundry segment.

Finally following our solid financial performance, we also initiated this year for the first time in our history a $12 million share repurchase program which will continue in 2015. Overall 2014 was a very significant year for Nova with record sales that along with our efficient business model led to increased profitability and EPS growth.

Beyond our financial results we also a made significant progress in all of our business initiatives including product offerings, customer adoption and partnership and market expansion. We believe that with this year progress we have solidified our presence in the market and positioned Nova to continue its growth in 2015 as well.

In spite of some volatility and near-term uncertainty from a timing and capacity perspective especially with our leading customer, we are confident that Nova is well positioned to benefit from the industry major transition in 2015 and beyond.

With the combination of our continuing technological innovation and operational efficiency we see growth and market expansion opportunities for Nova in the coming years. In order to continue our successful story in 2015 we have identified the following major areas of growth that we will pursue during the year.

Continue strengthening our position in foundry along with market share gains in memory, execute a diversified product portfolio that includes software and hardware, expand our sales markets for both integrated and standalone tools complement our organic growth with inorganic additions and tighten the cooperation with leading vendors and customers.

I would like to provide now some commentary on this current market environment and our view for 2015. The market indicator that we address show continued solid demand for mobile and enterprise devices leading to another growth year in semiconductor in 2015.

The launch of new mobile products such as smartphone, watches and tablets have generated immediate demand for advanced FinFET devices. This new product has actually triggered to some degree the slot between the largest foundry customers, as who will serve the preferred vendor for different fabric companies.

We believe that despite fight near-term uncertainty as for timing the overall foundry segment will continue its long-term growth based on the condition to advanced FinFET nodes.

The focus in 2015 will continue to be the ramp-up of the 16 and 14 nanometer new nodes along with growing investment in the new 10-nanometer nodes, to process to first take out product before the end of the year.

In memory we expect that DRAM will continue its momentum into 2015 as well while demand for mobile and enterprise DRAM continues to be strong from the support of stable prices. NAND investment will continue mainly in panel device streams with some investment in vertical NAND towards the end of the year.

As we mentioned in previous calls we believe that investment in 3D NAND will continue at a steady pace over the year rather than a growth spike. 2015 trends represent a growing opportunity for Nova to continue expanding its market position.

In this environment optical metrology is taking a major role as enabler for the most complex, technically transitioned, in FinFET vertical NAND DRAM streams in tier three. The process control continues to grow Nova is well positioned to caster the market opportunity. With that I would like to share our guidance for the first quarter of 2015.

Revenues will be in the range of 24.5 million to 26.5 million. Diluted EPS on a GAAP basis will be at the range of $0.02 to $0.06. On a non-GAAP basis, EPS will be at the range of $0.04 to $0.08 per share.

While we don't have to provide annual guidance we believe we're well positioned to capture new additional growth opportunities in 2015 and we look further for another year of growth.

Now let me hand over the call to Dror who will review our financial results in details, Dror?.

Thanks, Eitan. Good day everyone. Please move to Slide 9. Total revenues in the fourth quarter of 2014 were 25.8 million and included all time record revenues from services. Software revenues continued to be at a pace higher than 1 million a quarter. On the bookings side we have seen a significant shift towards memory.

Bookings from the memory segment in the fourth quarter accounted for 45% of total bookings relative to approximately 20% in the previous quarter. During the quarter all four memory manufacturers have placed orders to Nova and in addition one of them became a higher than 10% customer.

Geographically in the fourth quarter 70% of the bookings came from Asia-Pacific, 25% of the bookings came from the U.S. and the rest from Europe and Japan. Product gross margin came in at 57% but lower than the previous quarter mainly due to the quarterly reduction in product revenues.

Service gross margin continued to be high and came in at 42% following the increase in service revenues to record level while utilizing the same existing infrastructure. Blended gross margin came in at 52% within the Company's target model.

Net income for the quarter exceeded the high-end of the quarterly guidance, this resulted in asset bases to the better than expected gross margin level and prudent control over operating expenses. GAAP net income in the quarter was 3.3 million or $0.12 per diluted share based on the share count of 27.5 million shares.

Non-GAAP net income in the quarter was 2.3 million or $0.08 per diluted share. Moving into the annual results, 2014 total revenues were 121 million, an increase of 8% over 2015. In 2014 for the second consecutive year, the Company presented record level of revenues which is unique among its peer groups.

Software revenues accounted for 4% of annual revenues relative to only 1% in 2013. Services revenues increased 29% in 2014 to a record level of 28 million. In 2014, we continue to present healthy blended gross margins of 53%.

Looking forward into 2016, we expect to continue and present this healthy level of gross margin which is within our target model of 52% to 55%. As communicated early in the beginning of year, 2014 was an inflection point in our financial performance.

During the three years prior to 2014, the Company continuously increased its R&D investment in order to align its product portfolio with an emerging market need. In 2013 and 2014, this investment has materialized enabling the Company to present record revenue level.

In 2014 specifically the Company was able to increase its revenues by 8% while keeping operating expenses stable year-over-year. This has resulted in an inflection point of profitability with operating margins increasing to 14% of revenues and with operating profit increasing 37% year-over-year to a level of 17 million.

This result clearly demonstrates the leverage built into the Company operations and business model. During 2014 the Company started utilizing tax incentives in Israel, these incentives provide for zero tax rate on taxable income generated in Israel during 2014 and 2015.

As a result, the global tax expenses of the Company amounted to only 0.5 million in 2014 and we expect similar tax levels in 2015. In addition during the fourth quarter of 2014, we created a 1.6 million tax asset related to an expected future tax credit which will be utilized starting 2016.

Our expected consolidated tax rate starting 2016 is approximately 20%. Moving into network stability, GAAP net income in 2014 increased 77% to 19 million or $0.67 per share and non-GAAP net income in 2014 increased 35% to 90 million or $0.69 per share.

In parallel during 2014, the Company generated record cash flow of 33 million from operating activity. Moving into annual balance sheet key metric, cash reserves increased to 124 million after executing approximately of the announced share repurchase program.

DSOs decreased to 66 days lower than our target of 70 days and inventory turns were 3.3 times a year higher than our target of three inventory turns per year. Capital investments increased to 5.2 million as we continue aligning our facilities to the increasing business activity level.

Before concluding my prepared remarks, I would like to refer to Eitan’s comment regarding Nova’s revenue growth which outperformed the peer groups.

Those of you are following the presentation please move to Slide 13, the chart in this slide presents the accumulated revenue growth of Nova since the previous industry peak of 2011 relative to its peer group and relative to the wafer fab equipment.

As the chart demonstrates, Nova will able to increase its revenues by more than 15% during this year at the same time peer group revenues and wafer fab equipment investments decreased by approximately 15% on average. This is clearly demonstrating the significant market share gain of the Company during this three year period.

With that, I will move the call back to Eitan, Eitan?.

Thank you, Dror. With that, we will be pleased to take your questions..

Thank you. [Operator Instructions] We will take our fist question from Edwin Mok with Needham & Company..

So first question on the memory mix, good color, thanks for providing the color in the revenue side, so it sounds like your booking of memory was even stronger than your revenue for the fourth quarter because you’ve mentioned 45% of booking coming from memory, so should we expect a still high memory mix than at least in the first half of ’15 before some of these foundries spending come back and actually how you all think about that trend?.

Yes, definitely, in the first quarter we should expect higher portion of memory revenues we will see how the second quarter evolves as the foundry picks up..

It sounds like you guys have may be a little bit some visibility into foundry spending beyond this quarter and any kind of color you can provide in terms of timing of when do you expect those to start to really material benefit you guys beyond this quarter would be helpful?.

So if we're looking right now in 2015 I think that as Dror mentioned the first quarter probably the second one will be would be more DRAM oriented as the DRAM is continuing to grow. And we have alluded somewhere in the end of the second quarter we will start to see pick up of foundry mainly coming from the 16 nanometer ramp up in [indiscernible]..

So later part of second quarter, great that's helpful, I think the service revenue actually was really strong this quarter is this a one quarter thing or is it a new level of service revenue that we should model?.

Well in general I think we can say that service revenues have increased to the level of around 8 million this quarter was a bit stronger than what we would have expected but the level of between around 8 million is the level that we expect looking forward..

Anyway and then on the software side Eitan maybe you can give us some color around the new win that you announced yesterday. Specifically is the one specific application or are you guys are talking on both applications there.

And then in terms of contribution are we expecting to see revenue from that or is still call it a pilot and therefore we may not see revenue until later on this year?.

So I will now start first with the first question and then I will talk about the revenue in 2015 from this particular RPM direction.

So as we have discussed in the last year or so we believe that Nova's strength in the core competence started from the integrated methodology and along the years we actually went into the direction of the standalone which we are looking ongoing downstream into the standalone.

Our strength in the integrated is coming from our ability to actually measure FinFET and OCD in a very complicated environment which actually is implemented by the budget process tool and we believe that we're doing it the best. So we started first to roll the standalone.

We think that right now it's a good timing to go upstream into the chambers itself because going into the environment of the process itself and monitor wafers during the process actually presents some difficulties into the OCD measurement because it's not -- it's a noisy environment it's not optimized but still we believe that if we can do this it's really the holy grail of measurement.

So you move actually from wafer-to-wafer to start measuring in the process itself. So, we started this one a year ago, we had two evaluations going on and we have this first order coming in right now.

The orders that came right now for the S processes in multiple applications mainly for the memory and looking right now on the other things that we're doing in this range we're targeting this one and other processes.

Actually the ability to grow in the process itself and to provide a software solution to same-store and in situ same-store in the chambers itself for the back end can go CVD as well in BNH and later on can be on CMT as well. But those are the applications. Looking on revenues we anticipate that the first revenue will come in 2015 along the year..

And lastly on TSVs any updates for the quarter, do you guys have any incremental tool that was booked in, in that quarter?.

So looking right now on TSV we don't have a specific add on this quarter.

So looking right now on the multiple customers that we have we are still doing some evaluation with other customers and looking right now in 2015 we think that right now towards the second half of the year we will start to see multiple orders coming from the same wins that we had during 2014.

But in the fourth quarter itself we don’t see additional [indiscernible]..

And we will take our next question Patrick Ho with Stifel Nicolaus..

Eitan on the memory side I think in the past you have mentioned that on the NAND flash side that the capital intensity of between 10% to 15% as you move to 3D NAND.

Looking at the DRAM side as we go to the 20 nanometer conversion how do you see capital intensity increasing for OCD methodology on that transition and what processes do you see I guess increasing into OCD methodology on this new business side?.

I think that looking on the DRAM numbers and the DRAM attach rate for optical methodology I think it’s very similar to the memory so as we said before that memory will be around above 10%, 10% to 15%, I think this is the same number that we’ve seen during itself.

In 10-15 that we see right now in 2014 probably continue in 2015 coming from two major applications one is of course the shrink to the 2x and the secondly is the way the DRAM is doing the gate which is somehow some kind barrier gate, it actually creates some challenges on the process that will need some more optical methodology coming in.

That’s roughly the two applications that we see for the optical methodology for the OCD..

May be looking forward a bit on the timing size obviously there is a lot of uncertainly in terms of the timing of the initial 16 nanometer to 14 nanometer FinFET ramp, there you guys did sign on with a customer last year for 10 nanometer and 7 nanometer development, can you just give a little bit of color how the industry is pushing forward specifically that 10 nanometer second generation FinFET and how you capitalize in terms of maybe additional probably next year at that node?.

Looking right now in our foundry position and what we did in during 2014, so as I said in my commentary and prepared remark, we actually strengthened the position in foundry. I think that position in integrated with the best as I recall in the last few years.

If I am looking right now on the standalone, I can talk about few things with this process of course the position that we took in PSMC where we used to be doing most of the PMC and right now we’re doing Etch as well and we’re beginning for 2016 and going forward 10 as well.

If I am looking right now on the other foundries, so GlobalFoundries is becoming to one of our largest customers.

Looking on 2014 and the softness with the PMC along the year, actually GlobalFoundries become very strong for us which actually is the second customer on the revenue base and our position in GlobalFoundries across the Broad doing integrated in multiple process steps, we’re doing standalone and front end and back end and we’re actually selling to them part of the software solution that we have.

So the position that we have in PMC single foundry going forward is actually strong. Looking right on the market, the market characterization looking forward to 2016 I think that the focus will be the ramp up of ’14 in GlobalFoundries and Samsung.

I think it will be the 16 and PMC along the year as I said by the end of the second quarter and I think that beside those massive ramp, I think that we will see also some strength in this lineated it’s being a strong node and we will see some capacity coming from the other customers that I didn’t mention for 28.

And I think that the most investment will come on those preferred devices in 14 and 16. Looking on 10, I think that PSMC is really aggressive in yet being step out by the end of the year in order to compete of course with Intel.

And I think that the rest of the foundries will follow them on the second half with 10 nanometer, but if looking right on the leading foundries going to 10 nanometer of course it’s PSMC..

Final question for me and maybe for Dror in terms of the ongoing investments obviously there you’ve got more support with some of the tailwinds you’ve garnered over the last few years and projects next generation technology, what are some of the I guess levers of the pulls and pushes on the R&D line that we can expect in 2015 as a whole? I know things are always on a quarterly basis depending on projects and everything, but how should we look at R&D investment for the year?.

So first of all as you mentioned in general the fluctuations in R&D are denominated mainly by the timing of brining prototypes for the new projects and we had these fluctuations within 2014.

We do expect some fluctuations also in 2015, but in general the level of increase that we should see in 2015 is R&D and we will see some increase is I would say on the single-digit growth year-over-year and for the first quarter the level of operating expenses including R&D is expected to be somewhat north of $12 million a quarter..

[Operator Instructions] We will take our next question from Keith Maher with Singular Research..

Bookings and obviously the mix with surface board memory I am just trying to understand was that because memory bookings growth was maybe better than we have seen in the last few quarters or it was just due to just weaker bookings on the foundry side.

I don't if you could talk in terms of bookings growth or book to bill whichever is your point but just any more color on those bookings and then on the impact it’d be helpful?.

Well what we can say our few optics.

First of all it's a combination of both the items that you mentioned but in general bookings in the fourth quarter did increase relatively to the third quarter as I mentioned before all four memory manufacturers actually placed bookings to Nova in the fourth quarter including one which became more than 10% customer.

So evidently the combination of bookings in general increasing and memory becoming more significant created a situation where memory bookings increased to around 45% of total bookings. But in general I would say that it's a combination of both elements that you mentioned..

One just say manufacturing capacity do you have any -- a couple of questions there just in terms of if you have any CapEx guidance for this year and also if the year shapes up to see that you have hit more [indiscernible] the certain orders we have had in the foundry space.

Are we in a position to meet any demand that you had anticipate [indiscernible]?.

So we don't have right now any indication on capacity going in stores 2015 if the foundry is pick it up in a much larger scale than we anticipated or even if we are anticipating share in the memory currently looking on our capacity manufacturing it will not become an issue if we have an increased capacity and we don't expect any issue with that one..

And on the share repurchase $12 million expected to [indiscernible] end of the year and I think that the near programs could we think that to maybe expand to be maybe 5 million plus this quarter or on share purchases?.

Well as you mentioned from the 12 million we already performed 7 million executed 7 million we do that on a regular basis it depends on the available volume in the market and so forth. But our expectation is that we will conclude this purchase program within the first half of 2015..

And just one follow-up question on the tax rate, Dror I think you said 2014 you have delivered 20% tax rate so for 2015 is it going to be pretty low I mean should we expect kind of single-digits?.

Yes..

And there are no other questions. At this time I would like to turn the conference back to our speakers for any additional or closing remarks..

Thank you, Operator. I would like to thank everyone for joining our 2014 financial results call today. We appreciate your interest and your questions and we hope to see you on the next quarterly call.

In the meantime for those of you in the New York area we will be attending the Susquehanna Fourth Annual Semi, Storage & Technology Summit on February 24th. Thank you everybody and have a good day..

Thank you everyone. That does conclude today’s conference. We thank you for your participation..