Good day and welcome to Nova’s Fourth Quarter 2020 Results. Today’s conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of MS-IR. Please go ahead..

Thank you, operator and good day to everybody. I would like to welcome all of you to Nova’s fourth quarter and full year 2020 financial results conference call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO and Mr. Dror David, CFO.

Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements and the Safe Harbor statement outlined in today’s earnings release also pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations section of the company’s website.

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..

Thank you, Miri and thank you all for joining us today. I will start the call by speaking briefly about our fourth quarter results and performance highlights. I will then spend some time summarizing 2020 and our main achievements for the year.

Following my commentary, Dror will review the quarterly and annual financial results in detail, including the guidance for the first quarter of 2021.

Nova reported remarkable results for the fourth quarter, with revenue exceeding the guidance and profitability reaching the high end of the guidance, demonstrating our growing agility and solid execution capabilities.

The company resilience amid the pandemic, led by our global team, drove exceptional performance in the quarter and throughout the year. Our robust quarterly results concluded a record year, representing an annual growth rate of 20% in our revenue and 30% in our non-GAAP earnings.

This was a strong conclusion to a well-performed year during which we continued to innovate and expand our differentiated technology to support our customers’ growing demands. The positive market reception of our product offering and our sound operational model supports our momentum to continue our growth in 2021 as well.

The accelerated demand for new complex semiconductors across the industry represents a significant compelling technology event, affecting all semi segments, including logic, DRAM and Flash NAND. These trends continue to expand our available markets and increase the attractiveness of our materials and dimensional portfolios in the coming years.

Following our successful product introductions in 2020, we believe that Nova is well positioned to increase its footprint and market share across multiple customers in 2021.

Our accomplishments this year highlight the agility and resiliency that the company developed along the year to support our growing activity despite the challenging environment imposed by the COVID disruptions.

Turning now to our quarterly highlights, our performance was driven by a mix of technology enhancement, product introduction and business wins, reflecting our progress to meet Nova’s long-term organic target. The revenue for the quarter reached a record high, representing 10% sequential growth from the third quarter of 2020.

Based on the recent market dynamics, our quarterly sales were driven primarily by strong demand in logic. The current demand for both advanced and mature logic devices concluded a very healthy year for our logic customers.

In the current environment, the leading-edge customers are required to accelerate their advanced node transitions to meet the growing demand for high computing applications like 5G, AI and HPC..

Thanks, Eitan. Good day, everyone. Total revenues in the fourth quarter of 2020 exceeded our previously announced guidance and reached an all-time record of $76 million, 18% higher than the fourth quarter of 2019. Product revenue distribution was approximately 70% from logic and foundry and approximately 30% for memory.

Geographically, Taiwan and Korea each contributed more than 20% to our product revenues, while China contributed slightly less than 20%. On a per customer basis, three major customers contributed 10% or more to our product revenues, including two foundry customers and one memory customer.

Blended gross margin in the fourth quarter was 55% on a GAAP basis and 56% on a non-GAAP basis. Product gross margin increased to 63% on a GAAP basis and 64% on a non-GAAP basis due to favorable product mix.

Service gross margin reduced to 22% on a GAAP basis and 23% on a non-GAAP basis due to lower revenue levels, less favorable mix between contracts and time and materials, higher materials consumption for warranty and contracts and end-of-year inventory related adjustments..

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

Operator?.

Thank you. We will now take our first question from Quinn Bolton from Needham & Company. Please go ahead. Your line is open..

Hey, guys. Congratulations on the strong finish to ‘21 and the very strong first quarter guidance. I guess my first question for you as you sit here today looking into 2021, you have guided us to a very strong first quarter. I am wondering if you could make any comments about how sustainable you think that revenue level is.

There has been a debate among some of your WFE peers about whether spending in 2021 would be sort of front half loaded, balanced or second half weighted.

I just would love your perspective as you sit and you look at your order book and your backlog whether you think your revenue profile this year is front half weighted or more balanced through the year? Thank you..

Thank you, Quinn and it’s Eitan here.

So regarding the market review and what we should expect in 2021, so as I said in my prepared remarks, entering in 2021, there are two main catalysts that fueled the growth at least in the first half, which is the healthy demand in logic foundry that will continue at least in the first half and secondly, the growing investment in DRAM.

Now regarding the second half as you know, although we don’t guide for the year and the visibility right now for the Q4 is not so great. I can be cautious and say that I support the analysts and the prediction in the market that’s saying that the WFE in 2021 will grow at around 10% to 15%.

I think that if we are looking right now on the segments, I think that H1 probably will be fueled by logic and foundry. If I am looking on the second half, the foundry and logic will continue on the same healthy demand, basically on the 7, 5, 3-nanometer and I think that NAND, mainly VNAND, will be added in the second half as well, okay.

So I am looking right now on a balanced year, at least from our prediction..

Great. And then to Dror, you mentioned that the appreciation of the shekel was one of the things that added to costs in the fourth quarter. Just wondering, as you are looking to 2021, you have given us OpEx guidance for the first quarter.

How are you thinking about foreign currency exchange? Do you expect that those are going to remain elevated costs and with sort of higher OpEx this year or how are you thinking about sort of that foreign exchange if that’s on OpEx in ‘21?.

Yes. So obviously, it’s hard to predict these economic elements of the market. What I can say is that during the first quarter, the foreign exchange rate did hit some kind of a low level and started recovering since then. Our guidance for the first quarter is already embedding an additional small impact as a result of debt.

And assuming the currency will remain stable at these levels – again, it did hit some kind of a low in January, so expenses would not get another hit from that aspect in the coming quarters..

Okay, great. Thank you..

Thanks..

We will now move to our next question from Atif Malik from Citi. Please go ahead. Your line is open..

Hi, thank you for taking my questions.

And good job on results and guide, Eitan, on first in the largest demand, very strong last year, if you can parse the metrology demand between mature technologies versus leading edge? Also, if you can comment on the intensity of your products as we move to 3D, be it all DRAM-type devices, the 5-nanometer and 3-nanometers?.

Thanks, Atif, for the question. So if we’re looking right now on the metrology intensity, there are two pillars. The first pillar is that always in logic foundry, the intensity is higher or the highest in the semi segment, after that is the DRAM and at the end is the VNAND, okay, all the NAND. This is the way that the intensity has been allocated.

The reason is that mainly that in foundry, there are many products and there are changes also in the materials and the dimension. And as we go along to the DRAM and the VNAND, the number of products is reduced and it’s more stable products. So the intensity wise is always higher in the logic foundry. So this is one pillar.

The second pillar is always when you’re moving to a new generation of chip and you’re moving to a new complex device. And the current movement that we see that the logic is moving to 3 and 2 in – and changing also the architectural structure to go to nanowires and changing the materials.

And also, if you are looking right now on the memory as well, when you are scaling down the device, of course, every change on every move to a new generation is increasing the intensity itself for the segment.

So if you have both logic and the memory, we see that in 2021, replacing generations and also changing and replacing materials and going to very complex devices, of course, the intensity is going up.

We need always, when we’re talking about intensity, try to offset it by the capacity, right? So if your intensity is going higher and capacity is not going on the same level, so then you have some offset. But if you are normalizing it to 100 wafers or 1,000 wafers, always logic and foundry is higher.

And when you’re looking right now in the next 1-year, all the intensity and attach rate in all the new technology nodes are going to be higher as well..

Great. And as my follow-up, if you can talk about what’s driving the service gross margins higher in the March quarter? Is it just the volume? And thank you for breaking out the two margins..

Yes, sure. So obviously, the phenomena in Q4, was a one-time phenomena related to the aspect that I mentioned before, more material consumption in the specific quarter and end-year adjustment.

So actually, what we see in the first quarter is that service gross margins are returning to the normalized level, and this is what you should expect along the year. If we will see a pickup in service revenues along the year, margins can even further improve from these levels..

Thank you..

We will now move to our next question from Mark Miller from The Benchmark Company. Please go ahead. Your line is open..

Based on the midpoint of your guidance, it appears R&D went up significantly last quarter, and it looks like that trend is going to be continuing in 2021.

Is that correct?.

Yes..

Okay. Taiwan Semiconductor is putting up a major fab in Arizona. It’s a key customer of you.

Are orders starting to flow in from that? Or is that going to be later this year?.

So the orders for the Arizona fab will probably start to arrive. And again, I don’t know the orders and I don’t know when exactly they are going to come, but probably towards the end of the year..

Thank you..

And we will now move to our next question from Jaeson Schmidt from Lake Street. Please go ahead. Your line is open..

Hey, guys. Thanks for taking my questions.

I think at one time, there was talk that the goal for the service revenue line would be sort of targeting 10% growth, is that still a good ballpark growth rate to think about for that revenue stream?.

Well, I would say the following. Our current assumption for services growth is between 5% and 10%, depending on the installed base growth and also value-added services in the specific year. So obviously, this year, it was around 5%. There could be years way, it’s going up to approximately 10%, but it’s between this level, 5% to 10% a year..

Okay. That’s helpful.

And then just as a follow-up, just curious if you saw any constraints on the supply side in Q4 or if you’re anticipating any going forward here in the near-term?.

Jaeson, if you are talking about the supply chain for our production facilities, I think that we managed very well in 2020, trying to secure everything that we can in the supply chain. So it means that we increased the inventories, and you see that in our financial report.

And also, we tried to qualify actually a second or a third supplier in each one of our elements in the supply chain. And the way that we are looking forward is trying to try to order and try to make sure that we have enough capacity for the next 6 to 9 months, and this is secured.

And we need also to remember that we need to secure extra capacity because we see a growth in the production. But regarding the bottom line, we don’t see any disruption currently. So if the worst is behind us through 2020 and we could succeed increasing the production, I think that 2021 can be the same and even higher..

Okay. Thanks a lot, guys..

And we will now take our next question from Patrick Ho from Stifel. Please go ahead. Your line is open..

Thank you very much and congrats on a nice finish to the year. Eitan, maybe first off on the materials metrology front, it’s good to see the traction and the adoption very quickly for these new products.

As you look at the memory side of things, and you mentioned DRAM has higher metrology intensity, can you maybe give a little more color on some of the applications and some of the potential wins on the memory side with the materials metrology offerings that you have today?.

Yes. Thanks, Patrick, for the question. So the two main applications that are running on the – specifically on the X-ray or the previously ReVera products is the composition, material composition, and ultra-thin thickness measurement, okay. This is the two main applications and we are running on these two applications in all the customers.

Now because it’s a unique metrology capability, the way that it started, it started from taking it from 2015 from the lab-to-fab. We started with a couple of systems per phase or per fab. Some of them were in R&D some of them were in production. And in the last 5 years, we could move those tools to be real inline production tools.

So once you move them to inline and in production, you also improve the attach rate and the intensity. So once you start to get the customers’ confidence, because it’s nondestructive and it’s becoming a very fast metrology capability, you’ll start to get into the fab with more capacity, more attach rate and more intensity.

I can say that without getting to the exact numbers, but the distribution between memory and foundry or logic, it’s around 50%, 50%. So we have applications coming from the memory, mainly the VNAND side, when they are changing materials.

And they are starting to have very ultra-thickness applications and also for the logic and foundry, when they are moving to new structures. So it’s two different direction but both of them are increasing the intensity of the usage once we move to the in-line and in-die systems that have the capability to measure really fast..

Right. That’s really helpful. And maybe as my follow-up question, it’s good to see the services business continue to grow, and you mentioned the margin improvements as we move forward into 1Q.

Maybe draw from that standpoint on the margin improvements, how much is the performance business evolving where you are helping customers more not only with the traditional type of services, break-and-fix type of model, but with enhanced features, enhanced products upgrade? How much of that is contributing to core services growth as well as the uptick in margins?.

That’s a good point, Patrick, because actually, in 2020, at least in the first half of the year because of the situation of the COVID-19, the ability to enter the fab and do these megaprojects of upgrade cycles was a little bit limited.

And this probably had some impact on the growth of the services in 2020, which was at the low end of the 5% to 10% that I mentioned. Looking forward, when we move into 2021, obviously, these limitations are less significant. And hopefully, this can contribute more to our revenues in 2021, and hence, accelerate the growth of services in the business..

Great. Thank you very much, again..

Thank you, Patrick..

We will now take our next question from Krish Sankar from Cowen & Co. Please go ahead. Your line is open..

Yes, hi, thanks for taking my question and congrats on the really strong results. Eitan or Dror, one quick question, when I look at your calendar ‘20 numbers, you guys definitely seem to have grown really nicely, both you outperformed the industry growth and also some of your peers.

So I’m kind of curious, is there a way you can quantify how much of your growth came from share gains and which vertical were those share gains? And was it foundry, logic or memory? And then I had a follow-up..

So, Krish thank you very much for the question. So if you’re looking right now on the average growth in the market, as you said, it was around 15%. And if we’re looking right now on our products, the growth rate in the year was about 25%. So I think that there were two strong catalysts to our growth.

One, of course, is capacity because capacity demand is growing in all segments. And the second is purely share gain. But I cannot mention exactly where, but once you’re doing outperformance, it’s either you open a new market or you’re taking market share.

In this specific year, as I said in my prepared remarks, we took market share in one big IBM, as I discussed before, and I mentioned it in a couple of my calls; as well as in a global memory customer that took our old portfolio, starting from integrated stand-alone as well as materials and software.

And it’s – also adding to that is a couple of other customers in China that, in some of them, we are holding a high percentage of market share in light of the performance this year. So definitely, there is increase in market share this year on top of the demand.

And I also would mention that if we’re looking right now on 2021, it’s – the new product that we are bringing in will probably open new applications that were not answered in production for many years.

So we can increase, besides the market share, also getting applications that were measured before in the lab and now it’s moving to in-line production..

Got it. Very impressive. And then I just had a quick follow-up. Thanks for the color on the service and product gross margins.

At the op margin level, is it fair to assume service and products have similar op margins?.

Can you repeat the question?.

The service and product divisions from an op margin level, are they similar to corporate average? In other words, services have low OpEx, low R&D sales similar to that op margin level similar to product..

Yes. So actually, the situation is that the service business as a whole is heavy on personnel and headcount and field service engineers in the field relative to maybe products, which is more heavy on materials.

So practically, this is the main reason for the difference between gross margins of services and products, services around 40% and products around 60%. Again, the main reason is that the infrastructure of the service organization is heavy on headcount and personnel across the globe, it’s 150 sites and so forth..

Got it. Got it. Alright. Thank you very much. Appreciate the color..

Thank you..

And there are no further questions. So I’d like to hand the call back to Eitan Oppenhaim, Nova’s President and CEO, for any closing remarks..

Thank you, operator and thank you all for joining our call today. Please stay safe and healthy and we meet you in the next earning call. Thank you..

Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect..