Good day, and welcome to the Nova Measuring Instruments Ltd.’s Fourth Quarter and Full Year Results Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Miri Segal, Investor Relations. Please go ahead..

Thank you, operator and good day to everybody. I would like to welcome all of you to Nova Measuring Instruments’ Fourth Quarter and Full Year 2016 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 website 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 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.

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’ll 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 2016 fourth quarter and full year financial results conference call.

I’m excited today to discuss the record year Nova posted in 2016 and the strong momentum we established entering 2017, which demonstrates once again our ability to execute well against our strategic initiatives.

I will start the call today by speaking briefly through our December quarter results and then spend sometime on our 2016 performance highlights and their relevance to our growth trajectory in the years to come. I will conclude my part with the guidance for the first quarter of 2017.

Following my commentary, Dror will review the quarterly and full year financial results in detail. We continue to demonstrate consistent growth during the year resulting in an outstanding fourth quarter that was a strong conclusion to another record year.

These results demonstrate our ability to execute well our growth plan while improving our customer diversification and operational model. For the December quarter and as was reported in our announcement, we reported record quarterly revenue of $50.2 million, exceeding the high-end of our guidance of $46 million.

During the quarter, we demonstrated once again the operational leverage that we have built into our business model with record non-GAAP net income of $11.7 million, or $0.42 per diluted share, exceeding the high end of our guidance.

The growing profitability we demonstrated throughout the year is evidence of our ability to support the required investment in the Company’s growth while maintaining a solid business model, which has been constantly improved.

Our evolving leadership in advanced metrology for process control is resonating with customers as we continue to win major selections and new positions in various front-end semiconductor segments.

As recently announced, during the quarter, we were able to leverage our advanced differentiated portfolio combining optical and x-ray technologies to gain a new position with both foundry and memory customers for their most advanced technology nodes.

The growing attractiveness of our synergistic portfolio, combining materials and dimensions measurement, is evident with all time record quarterly bookings of over 68 million, including 30% generated from memory customers.

These new bookings are contributing to an elevated book-to-bill ratio significantly above one and increases our visibility into Q1 2017, which is reflected in our even stronger revenue guidance for the – sorry for the third quarter of 2017.

During the quarter, we continue to diversify our customer base which was a major achievement for us during 2016 as well. Quarterly revenues from both memory and foundry customers grew sequentially to record high with memory revenues accounting for approximately 40% of our Q4 product revenues.

Our continued efforts to increase share in the most advanced memory nodes are also bearing fruits with growing contribution from the 3D NAND revenues to the mix, which includes record high revenues and bookings from our largest memory customer.

Our significant achievements this quarter are also reflected in the sequential growth in the foundry segment, which is a combination of delivery to a variety of customers ranging from the most advanced stand in 7 nanometer, to 28 nanometer and 40 nanometer trailing nodes.

Our solid position in the foundry space became even stronger this quarter with selection wins and initial revenues for the new 7 nanometer and 5 nanometer R&D lines built by several customers.

Complementing the business momentum, which we achieved through successful customer partnership, is our ability to expand our supply chain and production even further. Our manufacturing facilities delivered record factory production and are prepared for another acceleration in the first quarter of 2017.

Following the solid quarterly achievement and recent customer wins, we believe we are on course for sequential growth in the first quarter of 2017, which will be a strong start for another growth year for Nova.

Turning now to the full-year of 2016, we are proud to achieve full year of sequential growth with new annual record high of $163.9 million, representing 10% growth year-over-year and 14% compound annual growth for the period, outperforming the wafer fabrication industry growth rate in this period.

The strong results we reported today is a result of focused effort to partner with our customers to deliver the most innovative process control solutions that enable better device performance and shorter time to market in the most advanced technology nodes.

Over the past year, notably through the integration of ReVera and several newly introduced optical solutions we have significantly widened the scope of our offering and increased our available markets.

Our comprehensive offerings referring to both x-ray and optical solutions increasingly supported by robust software and modeling solutions enables Nova to partner with broader range of customers in open and wider array of opportunities in traditional and emerging process control steps.

Our technical position exiting 2016 is much more competitive than the start of the year. Our portfolio today in adverse challenges uniquely in both 3D, materials and thickness, it can be delivered too much wider range of application in etch, lithography, deposition and CMP.

And it is being used in both the gate formation steps with on structure measurement, as well the back end stacking. As a result, we see increase in the usage of both our XPS and OCD tools inline and in production in the most advanced memory, emerging memory and logic nodes.

The result we have demonstrated during the last four years are an outcome of a well-executed plan with a clear strategic initiative based on three major pillars, organic and inorganic growth, expanded customer base, growing partnership programs and solid financial models that can support our healthy growth.

Our plans to exceed $200 million in revenues and non-GAAP EPS of $1, are bearing fruits. We already met the profitability target this year with revenues from our last four trailing quarters to just revenue pace of around annual of $200 million in revenue already.

As for the key part of our plan to extend our customer base and strengthen our position in the memory market, we aggressively made progress throughout the year in gaining share with both optical and x-ray solutions. This remarkable progress is reflected in the yearly revenue mix with more than 30% of our product revenue generated by memory customers.

Moreover, we are able to strengthen our position during the year with significant key nodes to all five major memory providers. The results are strongly evident with sequential growth in memory revenues to record levels, embedded multiple extended positions in extended customers, as well as having new customers including the largest IBMs.

Specifically I would like to mention the progress we made in the 3D NAND space with record booking and revenues which will extend even more with the ramp up of several non-volatile, next-generation memory nodes in 2017. While we made significant progress in memory, we also continue to strengthen our momentum in the broader foundry markets.

Beside the growing delivery to leading edge nodes of 10 nanometer and 7 nanometer, we also extended our deliveries to 28 nanometer and above the top fueled [ph] by growing demand for the IoT connected devices.

Our foundry revenues grew at 10% sequentially, higher than the foundry wafer fab equipment growth and amplify our share gain achievement in multiple customers, including a growing position in China.

Specifically this year we are proud of our ability to strengthen our position in the XPS market with leading foundries acquiring solutions to enhance the materials and built-in controls mainly in the gate formation applications.

As to our product portfolio, our growth in the high-end technology company is fueled by the successful execution of the differentiated and innovated product strategy that in our opinion is becoming more attractive as challenges are growing in the most complex next-generation memory and foundry nodes.

The elevated investment in technology innovation is bearing fruits with the holistic approach that couples hardware tools in advanced software modeling capabilities which intersect customer needs in both dimensions and materials meteorology.

All optical product lines, including our stand-alone and integrated metrology grew sequentially this year to record level while the XPS VeraFlex model reached also record high booking level of more than $32 million.

The growing presence of XPS tools in production in the most complex win in [ph] V-NAND formation will continue in 2017 as well with customers proliferating current solution as they grow. Finally, I would like also to address last pillar in our plan, which is the leverage we have built in our operational model.

Our ability as shown in 2016 results, to maintain an efficient model that can support elevated investment in product development and innovation along with increasing profitability is the key to support both our organic and inorganic accelerated growth in the years to come.

This year’s performance is at 45% growth in non-GAAP profits per diluted share bolsters our confident in our ability to continue our sustainable growth in 2017, as well.

And to underscore the strength of our business model I point out that while we grew revenues at 10%, we increased our non-GAAP net income by 44%, more than four times faster than we grow revenue.

Encouraged by our financial and business results in 2016 we introduced at the beginning of 2017 a new strategic plan introducing a new target of $300 million in revenues and further growth in operating margins. Exiting 2016 we believe the market dynamics present growing opportunities for Nova.

In these conditions involving growing market catalyst and very demanding solution our offerings become even more attractive to enable the next phase of challenging technology transition.

Our growing focus on executing our strategic plan combined with several tangible opportunities to strengthen our market position even further continue to create a multi-year opportunity for us to continue our growth through the $300 million in revenue.

In closing, we believe the strong end to 2016 sets us on a course for another growth year in 2017 due to growing demand for our entire product portfolio, combining dimensions and material metrology solutions.

The momentum as evidence but our strong guidance for the first quarter will continue into 2017 as we widen our opportunity reach and customers win. With that I would like to share with you our guidance for the first quarter of 2017. We expect revenues in the range $50 million to $54 million.

Diluted EPS on a GAAP basis in the range of $0.31 to $0.39 per share and on a non-GAAP basis diluted EPS in the range of $0.37 to $0.45 per share. Now let me hand over the call to Dror to revenue our financial results detail.

Dror?.

Thanks Eitan. Good day everyone. In my following prepared remarks I would refer to both GAAP and non-GAAP results. You can find a detailed reconciliation between GAAP and non-GAAP results per item at the end of the quarterly press release.

Total revenues in the fourth quarter of 2016 were $15.2 million up 14% quarter-over-quarter and up 25% year-over-year. Product revenues distribution in the quarter was approximately 60% from the foundry segment and approximately 40% from the memory segment, reflecting record revenue from the memory segment.

During the quarter, the company had three customers which accounted for 10% or more of the product revenues. TSMC accounted for 39%, Samsung accounted for 20% and UMC accounted for 17%. Blended gross margin in the quarter was 56% on both the GAAP and non-GAAP basis.

Operating expenses increased by 4% quarter-over-quarter on both GAAP and non non-GAAP basis mainly as a result of higher sales and marketing expenses, which include revenue base commission expenses. Operating margins in the quarter were 21% on a GAAP basis and 24% on a non-GAAP basis.

The effective tax rate in the fourth quarter was 24% on a GAAP basis and 5% on a non-GAAP basis. GAAP-based net income in the quarter was $8.4 million or $0.30 per diluted share. Non-GAAP net income in the quarter was $11.7 million or $0.42 per diluted share, up 24% quarter-over-quarter and up 121% year-over-year on a per share basis.

I will now give some more additional insights regarding the Company’s financial results for the full-year of 2016. The revenues in twenty sixteen were $1644 million, up 10% year-over-year. Product revenue distribution in the year was approximately 65% from the foundry segment and approximately 35% from the memory segment.

In 20116 the company had four customers which accounted for 10% or more of the product revenues. TSMC accounted for 37%, UMC and SMIC accounted for 13% each and Samsung accounted for 12%. Back in 2013 we communicated a target financial model on a non-GAAP basis as part of our Nova200 strategic plan.

We achieved each of the metrics in this financial model in 2016 ahead of our original plans, demonstrating our ability to execute and grow our business with increasing profitability across multiple, healthy financial metrics. Gross margins for the year came in at 55% at the midpoint of the Nova200 target model of 54% to 56%.

With product gross margins at 61% and services gross margins at 40%. Operating expenses for the year came in at 37% of revenues and the high-end of the Nova200 target model with R&D accounting for 21% of revenues and the SG&A accounting for 16% of revenues. Operating margins for the year came in at 18% also within our target range.

We have previously communicated that we expected to achieve this model at revenues of $175 million annually which will enable the company to generate $1 in non-GAAP EPS for the year. The Company has achieved this target earlier than planned.

In addition, the 45% year-over-year increase in non-GAAP EPS for 2016 outpaced the 10% increase in revenues in 2016, reflecting the significant earnings leverage within our financial model and our strong performance for the year.

Before concluding my prepared remarks, I would like to give some more details regarding the Company’s guidance for the first quarter of 2017 and the expected cost and margin structures for the remainder of the year. As Eitan mentioned, revenues in the first quarter are expected to be between $50 million and $54 million.

The midpoint of this guidance reflects another record revenue quarter for the Company and the revenue run rate that is more than $100 million for the combined two consecutive quarters.

Blended gross margin is expected to be approximately 57% in the first quarter of 2017 with product gross margins at approximately 62% and services gross margin at approximately 35%. We expect product gross margin to be at or greater than 60% for the year.

Operating expenses in the first quarter of 2017 are expected to be between $17.5 million and $18 million on a GAAP basis and between $16 million and $16.5 million on a non-GAAP basis.

At the midpoint of the revenue guidance for the first quarter, we expect our operating margin to be approximately 22% on a GAAP basis and approximately 25% on a non-GAAP basis. On the tax front, the Company has utilized most of the main tax incentives in Israel in 2014, 2015 and 2016.

As a result, we expect this effective tax rate of the Company to increase in 2017 to approximately 20% on a GAAP basis and 15% on a non-GAAP basis. Free cash flow in the first quarter of 2017 is expected to be very strong at a record level of between $15 million and $20 million. With that, I will move the call back to Eitan..

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

Operator?.

Thank you. [Operator Instructions] And we will take our first question from Edwin Mok with Needham..

Good morning, guys. Congrats for the great quarter and guidance. First question I have is some of your peers just talk about second half potentially you are seeing some softness mostly driven by NAND. I know historically you guys have smaller exposure when you talked about that NAND being bigger part of your business.

Now just curious how do you guys see that? Do you see same comp business trend or is there anything that you think can offset the decline in NAND?.

Well, thank you very much, Edwin. So I will talk about just – we don’t guided the full year and therefore I’ll be referring to the industry catalyst is actually fueling this year.

As I said in my prepared remarks and the results are talking not the evidence in the results by itself we expect a good year in the industry in 2017, we expect that most of the semi front-end segments will continue their investment along the year.

Although, currently we don't have yet the full visibility towards the second half, I assume the strong momentum of investment in technical transition in all segments, including some recovery in DRAM and also by some new customers or customer that will participate again, again in the topics in 2017 we expect that all of this will fuel 2017 which will shape up to be a good year.

What we see currently is mega-fabs and big investment underway which include huge ramp up phases that in our mind can’t be concluded in a short period. Therefore we expect the full year that will be growth year both in the V-NAND, or the flash memory, as well as in DRAM and foundry logic..

Okay that’s very helpful. Second question I have is on the gross margin I think Dror you talk about now you expect the product gross margin to be at 61% this year obviously much higher than what you guys have previously guided on your financial model.

I was wondering what price improve – product gross margin and are we seeing a greater mix in software sales or are those things you guys are doing to drive back product gross margin increase?.

So first of all, yes in the fourth and the first quarter we do see elevated levels of software revenues which obviously contribute to the high level of product gross margins.

I would say that for the year it’s a combination of two factors, one is the software revenues and the second is the fact that our cost structure in 2017 is expected to utilize more or less the same infrastructure on a much higher revenue level. Therefore gross margins are being impacted positively..

I see, so you get some leverage infrastructure [ph]. And just scaffold on the software you said that you are seeing an elevated level, can you put a number on that are you at 10% revenue of your total of your product revenue or approaching just can you give a rough range here or a number if you can..

So what I can say it’s not yet at the level of our target which is 10% but I can say that in the fourth quarter and the first quarter, the level of revenues is at the run rate which is higher than $10 million a year..

Okay, that’s actually helpful. Last question I have is one of your competitors talk about call it opportunity around in some metrology, right. And I understand that historically it’s a space where your largest competitors, largest process Control Company is at a pretty solid position there.

Just curious do you think that’s a good opportunity for you guys to go after? And have you – and I also think that – I understand that your – in your integrate metrology you have some business that compounds into metrology? Are you seeing competition on that end as a result those competitors being more aggressive in thin film?.

So Edwin, we didn’t understand exactly the question. So do you ask about thin film or you ask about the integrated..

Sorry, being question around thin film metrology do you see that as opportunity or do you see – how do you think about that market evolving in terms of competition?.

So when we are looking right now on 2016 it’s a good example of the evolvement of the composition market.

When we look right now in all the segments both the DRAM, the evolvement of the vertical NAND, as well as the foundry shrinks and scale to either 5 nanometer or new structures then it’s beyond FinFET, we’ll see that materials is becoming one of the main issues to control.

If we look previously on historical technology nodes material was not tough to control as it is today.

Now if we are looking right now on the composition that we measure on the front end applications both in the thin formation, as well as in the V-NAND stock formation for the next phases we see a growing attach rates in production and in line capabilities to control the process both in materials and in dimension.

Definitely, when I talked about the bookings that we announced, both in the press release in the fourth quarter, as well as the booking record for XPS for the next year, definitely it’s coming from both memory and foundry, and there is an accelerated usage of the XPS for composition..

Okay, you actually kind of answered my last question actually on XPS. The bookings that you’re seeing is more driven by customer, cared more about the material composition, and therefore driving that demand.

Just, I guess a quick follow-up on that is, if that’s the case should we see potentially more pull down the road as OCD – as always there’s material composition become more critical of your OCD process. And is that still the [indiscernible] an opportunity longer-term for that to drive additional XPS demand..

So, it is a very good question to explain exactly what we do in our product portfolio. So as you know and we preached about it a lot in the last one year, we’re investing a lot in differentiating our portfolio from our competitors in few levels. One is the hardware level and technology.

The technology, the way that we measure today both composition, thickness and CD are different from the way that our competitors are measuring. And obviously when you're looking on our results when the structures are becoming more complicated to manufacture, then we prevail in accelerated growth from our product.

Additionally to that, when we're looking right now on the way that we are exposed from customer base for XPS and OCD, definitely there is cross-selling opportunities between the XPS part and the OCD part.

We could along with the combination of optical and material measurement because of the strong position of ReVera, to penetrate more into the memory segment, specifically to the V-NAND.

And in on the foundry it was actually the opposite, so the strong position of the OCD that requires more material control, okay, could elevate the position in order to get more XPS tools inside.

So both the combination of the product itself, the uniqueness of the product portfolio itself, plus the cross-selling opportunities between memory and foundry actually increased both product lines.

So we’re definitely looking right now; when we're looking on 2017 that when customers starting to proliferate their ramp up both in foundry and in memory, we’ll start to see growing position on both the XPS and the OCD..

Great, that’s all I have. Thank you. Appreciate it..

And we will go to our next question from Mark Miller with The Benchmark Company..

Let me add my congratulations to your record results. And just was wondering if you could give me some sort of feeling in terms of your growth opportunities and share gain opportunities in couple of areas such as China 200 millimeter, advanced node, V-NAND, and also foundry.

What do you think is your best growth opportunity and best share gain opportunity? And if I missed one you can add that..

All right. So I think I will start the answer by looking on our expectation on the markets and the different catalysts in the market. The thing is I’ll start first on the weakest part in 2016 which was the DRAM.

In our view the tight supply demand chain that we start to see today and also the technical transition in DRAM to 2x or 2z, including 1x, both of those catalysts will start to increase the DRAM spending.

So if you're looking right now on the first half of the year, probably we’ll start to see some DRAM spending, which in our mind will grow in the second half as well. And this will definitely present an opportunity for us to grow as we are starting to get a very strong position in DRAM.

If we're looking right now on V-NAND, looking on the demand for the solid state drive for both mobile, and data centers and other applications, we assume that this drive will continue with continuous investment in Vertical NAND, 64 layers and beyond by all players during the year.

And definitely according to this new position that we took during 2016, it presents a very big opportunity for us in 2017, as well. And if we're looking right now on a foundry basis then it's also connected to your question about China.

If we’re looking on the foundry right now, we deliver a variety of tools starting from initial orders for 5 nanometer, 7 nanometer to various customers, not only the living one. 10 nanometer of course, which is the ramp up of TSMC.

And if we're going beyond of that on the bigger nodes, we deliver also equipment for 28 nanometer and 40 nanometer which the last two parts are coming from China, which we think we’ll continue to invest next year.

So if you’re looking right now on all these three segments, looking from the market perspective, you're looking on a good year where all of the catalysts from all those segments will increase the number of opportunities we will have to increase our market share..

Okay. And would you expect x-ray to grow significantly from – you had a good year in x-ray and that seems to be growing nicely.

Are you expecting continued growth in x-ray for this year?.

Well we expect x-ray to continue to grow in 2017 as well. I think that we – we took major achievement and major position during 2016. And we assume that once those customer will start to proliferate the BKM or start to ramp up aggressively, we’ll start to see more XPS tools coming into the field..

And finally, Micron said in its Analyst Day about a week and a half ago, there is some people who are concerned about the capacity coming online in China and Samsung. But Micron basically said in terms of NAND flash they think the supply will be tight, not just through this year but through 2018.

What’s your visibility about that?.

I think that Mark looking right now on the semiconductor cycles in the last few years, I think that it’s a much more solid, stable industry. And we moved from, I think, from big cycles to yearly cycles. And all of us accustomed to cycles in the year, I assume that in 2017 it will not be different.

I assume that we'll have some cycles in the year as well. Nevertheless, looking right now on the first half, I don't expect it to happen somewhere near the first quarter or the second quarter. And I assume that looking over the full year it’s going to be another solid growth for Nova.

So I assume that the market catalyst will be strong and healthy this year as well. In regard to 2018, I think it's too far for us to see the visibility into 2018.

But looking on the main application or high-end applications as we acquire advanced semiconductor devices, all of us are aware about the solid demand for both data centers, connected IoT devices, as well as solid state drives or solid state memory that are more than 64 layers.

And basically the demand for logic devices and DRAM devices are increasing as well. But I think it's an healthy environment looking on the current situation..

Thank you..

And we will go to our next – [Operator Instructions] And we will go to our next question from Patrick Ho with Stifel..

Thank you very much and congratulations as well. First the housekeeping question, I got back on late on the call.

What was your gross margin outlook from 1Q?.

It's expected to be approximately 57% in the first quarter..

Great. Eitan, may be on a big picture basis, one of the areas where Nova has historically been very strong in is in the CMP process.

As you see some of the dynamics changing and the ramp of 3D NAND in the industry, how do you see that overall marketplace potentially growing and the trickle-down effect for Nova?.

So I think that Patrick we were historically very strong in the CMP, we're talking about few years back. I think that in the last two, three years we're becoming very strong in OCD in three major areas which is the position CMP and etch where we're starting to see more incremental markets coming in 2015 and 2016.

And obviously as we’re talking right now on market segments and where can we elaborate more and increase more market share, is definitely in the memory and specifically in V-NAND.

We think that the combination or the coupling of solution that we have that combined tightly hardware and software give a lot of benefits to the customers, and therefore they go to those advanced nodes, the portfolio is becoming very, very attractive.

In our mind, when those customers will go to their next step in V-NAND, or next step of 1x DRAM, or the next step in stacking the verticals, then we'll see actually more markets or more opportunity for us to grow.

I think that definitely the combination of XPS and OCD is actually widening the market even more which bring us the capability to measure both materials and the dimensions almost on the same time..

Great, that’s helpful. And maybe as a follow-up question, given a lot of the volatility in the overall space, you kind of gave a little bit of an outlook of each of the major market segments of NAND, DRAM and foundry.

If there was to be some upside in overall spending, where do you see that potential upside coming from right now?.

So I'm looking on few elements. First, I think that we'll have in 2017 few other logic or foundry customers that will go into the 10 nanometer and 7 nanometer a year. I think this is one potential. I think that there are foundries that didn't spend so much in 2015 and 2016 that have to spend in order to stay in the race.

And I think that we will see some spending over there. By the way, I think that also the other players will start to invest in 7 nanometer and 10 nanometers. So definitely in the foundry, in the advanced node, there is an upside and I think that it will materialize during 2017.

I think also that the spending in China will continue in 2017 majorly in foundry. I think that the memory story in China, probably the magnitude of that will come in 2018, but definitely China is another potential for us to grow. And I think that the third element is the overall DRAM spending. I think that DRAM cycles are becoming shorter.

I think that there is the gap between supply and demand this year started to tighten up towards the end of the year, so definitely we'll see some investment in 2017. I think that also the competition between the large players will force them to invest in some technical transition as well in DRAM.

So definitely when I'm looking on all these three growth drivers, I think that we can look on that as some kind of upside in the year..

Great, thank you very much..

As it appears there are no further questions at this time. I'd like to turn the conference back to Mr. Eitan Oppenhaim for any additional or closing remarks..

Thank you, operator, and thank you all for joining the call today. We are very sorry for the inconvenience in the call connection and the quality of the call today. With that we conclude our quarterly conference call. Thank you..

This concludes today’s conference. We appreciate your participation. You may now disconnect..