Good day, and welcome to Nova's Fourth Quarter 2021 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 everybody. I would like to welcome all of you to Nova's Fourth Quarter and Full Year 2021 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. I'll now hand over the call to Mr. Eitan Oppenhaim, Nova's President and CEO. Eitan, please go ahead..

Thank you, Miri, and welcome, everyone, to our quarterly financial results conference call. I will start the call today by speaking about our fourth quarter and full year performance highlights. Following my commentary, Dror will review the quarterly and annual financial results in detail.

The agility we have developed during the COVID period drove Nova to another robust quarter concluding the best performing year in our history. Our success in adapting to the dynamic environment and evolving demand resulted in record growth across product lines, financials and business achievements in 2021.

During the year, we successfully continued to modify our working model to navigate through unprecedented supply chain disruptions, while we continued to rapidly expand our production capacity to fulfill record demand across all our technologies and markets.

Company performance at the end of the year drove our fourth quarter revenues to a new record high with results at the high end of the guidance making it the seventh consecutive growth quarter.

As a result, our annual revenues grew at 64% year-over-year reflecting our continuous innovation, our resiliency in the phase of constant challenges, and the strength of our global teams.

Our record annual performance is also plainly apparent in our financial results pushing our non-GAAP earnings per share to a record high with 87% growth year-over-year.

Combined with our positive guidance for the first quarter of 2022, it is evident that we are successfully realizing our Nova 500 strategy and continue our trajectory to double the company revenue every five years.

As we continue to grow and diversify our technologies and markets, we recently announced the acquisition of ancosys, a leading provider of chemical analysis and metrology solutions for advanced semiconductor manufacturing, mainly utilized for deposition and CMP. The transaction is valued approximately at $90 million U.S.

all cash and includes a performance-based earn out of approximately $10 million.

The deal was signed during the fourth quarter of 2021 and was closed in the first quarter of 2022 solidifying our strategy to keep investing in the growing materials engineering markets where new materials and compositions are introduced frequently to improve chip performance in all semiconductor segments.

In today’s complicated production environment, the number of interconnects requiring plating and different organic alloys and compounds has tripled over the last few years. This directly translate into growing demand for a tight inline chemical process control with increasing intensity.

ancosys enables manufacturers to increase yield by controlling the organic and inorganic materials at the front-end process, as well as in packaging and back-ends. Nova’s goal during 2022 is to expand ancosys served markets by utilizing our position and growing leadership in the materials metrology segment.

ancosys progress was evident by our recent press release that detailed a new front-end customer that adopted ancosys solution. To-date, ancosys ancolyzer has been selected by five leading front-end wafer manufacturers including the world-leading foundries.

Following the ancosys acquisition, our product strategy for the next coming years will continue to be build around expanding our product offering in three main categories, materials metrology, dimensional metrology and advanced process control software.

One of the more notable achievements of this strategy is the record revenue contribution from our materials metrology portfolio in 2021. We are striving to lead this market segment with a highly differentiated and unique set of solutions.

2021 has been a record year for our VeraFlex XPS platform which provides ultra thin film thickness and composition capabilities. VeraFlex is now being adopted by every leading manufacturer in the world including a recently announced global logic customer.

To that segment, we can add also the recent rollout of the ELIPSON products that utilize Raman’s spectroscopy to extract unique materials property information. The platform has already gained repeated orders and it is evaluated by additional customers.

On top of that, and in order to provide a wide range of inline materials capabilities, we have also launched the METRION our secondary ion mass spectrometry platform. METRION has already been purchased by a couple of customers and is evaluated by others.

To complete our holistic materials metrology portfolio, we now have the ancosys ancolyzer product to provide better process insights to the materials flowing into the process.

With this advanced offering, we now cover a wide range of materials production challenges from ultra thin film to composition, to material stack profile, stress, strain and chemical analytics. In 2022, our goal is that revenue contribution from this part alone will reach 40% of our products revenue.

The second element in our strategy is the dimensional portfolio along with the company record growth, the optical CD product line reached a new record high outperforming the markets and industry by growing at 63% year-over-year.

This outstanding result is driven by a new-generation optical offering, which was introduced in both standalone and integrated OCD platforms, market share gains and extensive growth in China, and U.S.

Our synergistic portfolio is currently adopted by all leading customers for the current technology nodes, as well as for the next-generation device in both logic and memory.

The third element in our strategy is the software offering, our distinguished hardware portfolio is complemented by our market-leading machine-learning, modeling and fleet management solutions.

During 2021, we were able to prove clear benefits of our software and algorithms advantages enabling our customers to reduce time to solution and increase yields.

The complete innovative software ecosystem for metrology, which includes an internal cloud-based environment to handle big data and mass communication between hundreds of tools, combined with advanced physical and mathematical models, provides the customers with cutting-edge metrology performance for yield ramping efforts.

As a result, this year, we have hit our strategic goal of roughly 10% coming from software sales out of our overall product revenue. Another notable achievement this year is the company’s diversification over different geographical regions. This part of our revenue growth, all three major territories grew significantly.

Taiwan’s revenue contribution grew due to elevated investment by the leading foundry, but also by the investment of other customers in trailing nodes for common applications. In Korea, our memory revenue grew significantly due to our increasing position in this segment across all our products.

Our China revenue grew tremendously where local manufacturers has been working around the clock to meet the exploding demand for mid-range and legacy logic and memory devices. Our growing reputation and customer base drove our sales in China to a record high with more than 15 active customers.

Nova’s strategic focus in China led us to establish a new Chinese branch and open a new facility in Shanghai to support our growing activity and further improve the service we provide directly to our customers.

Finally, on this front, we are also excited by the growing revenues from North America this year, a trend we believe will continue also in 2022. Finally, to summarize the year, I would like also to refer to another strong milestone, the service sales growth.

Revenues from the service business increased more than 30% this year to a record high with contracts, upgrades and value-added services contributing to the continuous utilization of the growing installed base. Let me turn now to our industry current fundamentals and their relevancy to Nova.

The demand environment continued to demonstrate accelerated adoption of a broad range of applications and devices. The ongoing digital transformation is propagating blistering demand drivers such as 5G communication, high-performance computing, artificial intelligence, gaming datacenter and other end-market applications.

These trends driving investment in both memory and logic semiconductors, as well as new complex advanced packaging technologies. Additionally, across the industry, we see multiple investments in building new fabs globally, which requires massive CapEx.

And on top of that, we see additional investments as a result of the geographical environment, geopolitical situation, the drive for semiconductor independency. We believe that these trends will keep pushing the industry forward in 2022, as well. Before I hand over the call to Dror, let me briefly summarize.

We have had an incredible record year and I am immensely proud of our team for rising to the challenge and maximizing the business and technology potential.

Although we are not immune to the growing challenges in the supply chain, and the chain reactions they have on the industry, Nova succeeded in outperforming the markets demonstrating the agility and efficiency of its operational model.

Given our innovative portfolio, new product rollouts and growing exposure to a broader opportunity range, we believe that Nova is well-positioned to continue its solid growth in 2022 as well. Now, let me hand over the call to Dror to review our financial results in details.

Dror?.

gross margins to be approximately 57%, operating expenses on a GAAP basis to come in at approximately $39 million including an assumption-based amount of approximately $1 million for amortization of intangibles related to ancosys acquisition; operating expenses on a non-GAAP basis are expected to be approximately $34 million.

It is important to note again that the mentioned operating expenses include ancosys contributions for two months only as the acquisition closed at the end of January.

Looking forward into the rest of 2022, we expect operating expenses to grow in the second quarter by an additional $1 million to absorb ancosys consolidation for a full quarter and gradually grow from there quarter-over-quarter. The effective tax rate in the first quarter of 2022 is expected to be approximately 15%.

With that, I will turn the call back to Eitan.

Eitan?.

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

Operator?.

[Operator Instructions] The first question is from Jamie Zakalik of Bank of America. Please go ahead. .

Hi guys. Thanks for letting me ask a question. My first one is on supply.

So, quite a few of your peers saw pretty meaningful supply constraints at the end of Q4 and into Q1 and you clearly have handled the supply challenges very well, but was there any sort of supply headwinds baked into the Q1 outlook? And I guess the second part of that question is, because so many of your peers saw shortages in Q1, they are expecting 2022 to be back half weighted using – given your revenue trajectory to be somewhat different since you were less impacted in the start of the year.

.

Thanks, Jamie for the question. So, first of all regarding the supply chain, we are of course facing the same problems as everyone. I think that the basic strategy that we took one year and a half ago to take inventory to cover at least 18 months of delivery is paying off today.

But as the time goes by, some suppliers are getting to some problems, either it’s a shortage of materials or problems with manpower due to the omicron.

But nevertheless, when we are looking right now in Q1, we could commit to our customer to supply every demand that they ask and we don’t see a problem in Q1 and actually we don’t see also a problem in Q2, unless something unforeseen will happen.

So this is regarding the supply chain, but definitely the issue with supply chains are becoming tougher and tougher. The second issue regarding the question of the revenue and how it’s distributed over the quarter, so we don’t give yearly – yearly guidance on a yearly estimation.

But definitely when we are looking on the first and the second quarter, we are expecting it to be flat quarter-over-quarter and looking on the yearly revenues, we are definitely looking on a growth year. Estimation in the market right now is talking between 10% to 20% and we are supporting that. .

Great. Thanks. That’s helpful. And then, my second question, if you look historically you guys have always kept OpEx close below sales growth and just based on your guidance for Q1, Q2 and the rest of the year in terms of OpEx you are looking at 24%, 25% OpEx growth.

Should we read into anything about expectations for sales growth this year in terms of your ability to outperform the broader WFE industry? Thanks. .

So, in terms of the OpEx, obviously, the level of OpEx have grown a lot in recent quarters and with the combination, with ancosys, we are starting the year with the level I mentioned and this will gradually grow across the year.

I think that the fact that OpEx has grown so much in 2021 given more than 50% increase in revenues is starting the year at relatively high level and this will remain with us across the year.

In terms of the annual performance, obviously during 2021 and also in recent years, Nova was able to outperform the market and given the acquisition with ancosys, the new product and our new products which were announced in existing platforms, we hope to continue and outperform the market also in 2022. .

Great. Thanks..

The next question is from Quinn Bolton from Needham & Company. Please go ahead. .

Hey guys. Let me offer my congratulations. I just wanted to follow-up on that last question just about the 2022 outlook. I know you are not giving formal guidance, but you even announced ELIPSON, PRIZM and most recently METRION. So, lots going on, on the new product front. WFE is looking to grow by a high-teens percentage.

I am just kind of wondering if I exclude the ancosys acquisition, do you think the core business driven by new products keeps pace or outperforms WFE, because I would think ancosys obviously will be added to the core organic business. .

Yeah, okay. Quinn, thank you very much for the question. So I want to start on a very general answer saying that and what I said in my prepared remarks that two things, one is that, we – our prediction is that in 2022, we are going to fulfill the Nova 500 plan. This is the first thing that I said in my remarks.

The second one was that we are starting actually the strategic planning for the next few years and our target as usual is in five years to double the revenue. So, if the revenue in 2022 will be somewhere around 500, we can calculate what it will be in five years.

So this is the two general comments about the strategic growth and how we see the next few years now. If we dive into the specific year 2022, we do see as god appears that the market is still positive exiting 2021 going into 2022, mainly driven by continuous demand in logic, accelerated demand in V-NAND and then also continuous demand in DRAM.

So, all fronts and we do see that trailing nodes for common applications as well as advanced nodes for advanced applications continue in this pace. I am not so sure that it will be in the same pace as 2021, but definitely higher than a normalize level of 5% to 10%.

Coming from that, as I said in one of my answers is that, when we are looking right now if the market is predicting something like 10% to 20% in 2022, we definitely want to outperform that. .

And again that’s organically, or does that comment include ancosys?.

So, we need to be careful when we count ancosys, because we didn’t closed yet one quarter with them. We need to understand also that Q1 would be marginal, because there is a lot of financial elements been considered when you are moving a private company to a public company. Also it’s only two months.

So, therefore when we talked about the acquisition of revenue of around $25 million to $30 million, the contribution for the first quarter is marginal. So if we are looking right now on the organic growth only, the company continues to grow and it will continue to grow in the next few quarters as well. As you said, there is a fraction in the market.

There is a reception of the new product and definitely when we are looking right now on the next few quarters, we want to keep the organic growth outperforming the market without adding ancosys. .

Thank you, Eitan. Wanted to ask just a follow-up question on the SIMS tool, you mentioned a couple of customers have now adopted that platform.

Wondering if you can give us any idea of the applications? Is this mostly advanced logic data or around architectures? Are you seeing memory either V-NAND or DRAM manufacturers also starting to use that tool for those applications?.

Well, actually the tools that were recognized are coming for both applications, both the memory and logic and definitely it’s not – the architecture is not relevant to the potential market for the METRION. The METRION actually is very good in detecting stack profile of materials in V-NAND and it’s also very good in profiling metal layers in logic.

So, when you are looking right now on the range of application that the METRION can address is definitely in both. Okay? The reason by the way that the METRION is so appealing in the markets right now because customers now understand they cannot anymore control such a complicated stack of materials by sending wafers to the lab.

That takes them hours and days to characterize. So they need it in the fab. And definitely this is a tool for advanced nodes, okay? So advanced in V-NAND, advanced nodes in logic, this is where we are targeting currently. .

Thank you, Eitan..

Thanks. .

The next question is from Atif Malik from Citi. Please go ahead. .

Hi, thank you for taking my questions. First, Eitan, you spoke about China be an area of strength for you last year in the mid-range in legacy logic devices. I am curious to know what are your expectations for domestic China demand this year.

We heard from some suppliers that there may be some sort of deceleration happening in that area after this last year. So just talk on China domestic demand this year..

So, when I am looking right now on China, actually this is the most extended territory that we handle right now with 15 active customers that kept on buying in 2021. And as we do see 2022, it will be the same, okay? So we see the same customers keep on buying.

We do see that the process to go from development and R&D to production was shorter because of their stride to be independent and not count on other supply of chips from other continent.

So therefore they are starting to be fast and moving from development to production and therefore we do see more equipment coming into China next year to those fabs that started development. Addition into that when we are looking right now on China, there are at least four to five customers that are in heavy investment for ramp.

We do see two to three logic customers that are expanding and we do see a big memory customer that is expanding as well. So the overall momentum in China as we see that and our expectation is to continue in 2022 and keep growing. .

Great. And as my follow-up for Dror, I look you talked the break out of the sales expectations for two months for ancosys in the first quarter, if you can provide that.

And are there any revenue synergies in V-NAND and ancosys and your other rheumatology or optical products? And then lastly, I also didn’t catch what’s offsetting the gross margin dilution from ancosys this year? Are those the new products that are going to offset the gross margin dilution? Thanks. .

So, obviously, on the gross margin front, it’s several elements, but I think that the same has been in 2021, the fact that the company is growing including with the new product and software products is offsetting this impact of ancosys which is not huge in its essence and it’s anyway at 50% in higher blended gross margins.

In terms of the revenue contribution in Q1, the deal just closed in the end of January and obviously this is a private company working based on German GAAP. So the revenue recognition aspects are still under review. In a way, our assumption for Q1 was really marginal contribution of ancosys to the revenues of the overall company. .

Let me just – it’s Eitan, let me just also complement the questions with synergies with ancosys. So, when you are looking right now on ancosys and then we said it in the last, in the previous earnings call. There is a lot of logic in buying such a company to Nova.

One, is an entry point for the advanced packaging back end TCV and everything that we were not strongly present before. And we – by this window we can also enter with our optical and X-ray to other places that we were not present before, this is one.

Second, as I said in my prepared remarks, we are investing heavily to diversify our products to be a leader in the materials metrology and combination of having both XPS X-ray, as well as the ELLIPSON, as well as the METRION and now the ancosys product allow us to actually almost give the full range of measurements for our customers.

And I think that the last – this last item in this synergies is the fact that if you will pay attention – specific attention to the application that ancosys is doing is CMP. So, Nova is very strong in CMP by the integrated and the standalone. And in front end, the ancosys product the ancolyzer, it is going into the CMP.

So, if we are looking right on the overall metrology in the ecosystem of the CMP alone, Nova is actually having materials metrology there. We have analytics for chemical and we have also the hardware for measuring the dimension.

And the last thing is the – or the final thing in this synergy, if you are looking right now what we do, so up to now we had only metrologies for wafer-based structures.

But the fabrication of chip starting before with the materials that they are coming from the materials company and flowing into the profit over there, it’s a total green land and together with ancosys now, we control both the fluids as well as the wafer structures.

And all of us know that we had with our largest customer or the market had with the largest customer some incidents in the last few months were materials quality were only pure they’ll flood into the deposition process and damaged a lot of wafers.

Our target together with ancosys and our materials product is to use those failures in order to provide the market a better control in the fab not where the materials are been produced and they create a large market over there and I think that the incidents like we had just in the last two months can actually increase the need for that. .

Very helpful. Thank you. .

Thanks. .

The next question is from Mark Miller from The Benchmark Company. Please go ahead. .

Let me add my congratulations on another record quarter. Memory as a percent of sales grew last quarter.

Do you expect in 2022 that memory will continue to grow as a percent of sales?.

Yes, we do, Mark. .

And any feelings could it gear up to 40%, 45% of sales?.

So, the answer is, yes. So, currently when we are looking right now on a strong year for foundry and logic in 2021, it was around 30% to 35% and definitely if we are going to face a strong V-NAND year or NAND year in 2022, it definitely can go higher as 40%. .

Any indication from your major customers that supply constraints with your major customers might be impacting business for you or they just need equipment as soon as possible?.

So, all the customers that we are talking about currently which are the leading ones and trailing nodes customers. All of them would like to have equipment as soon as possible. We have control trailers from a year from now for the next couple of months and some of them even give us more.

Of course, that this is a very dynamic and dangerous environment if something happens to the supply chain. But nevertheless if we not have problems with the big ones that’s supplying equipment like SML or others in this year we definitely see a strong demand and we don’t see any start currently. .

Thank you. .

The next question is from Patrick Ho from Stifel. Please go ahead. .

Thank you very much. Eitan, you’ve kind of briefly touched on about and you are looking for little more color, you talked about some of the advanced packaging opportunities with ancosys.

It’s early obviously in your integration phase, but do you see the potential of revenue synergies are bringing some of your – and metrology solutions over into the back-end advanced packaging side of things?.

Patrick, you are correct and this is what I said when I answered to Atif is that one of the synergies as we look that is that once we are present in the advanced packaging like ancosys, which is the market leader in advanced packaging, for chemical metrology.

Once we have this reach into the advanced packaging, also by the way to the back-end and the PCB, we could start bringing also optical and ex metrology to this ground.

Obviously, when we are looking right now on high value, high price tools, the place to be after the front end is to be in advanced packaging and definitely we see only from just the last few months integration with ancosys, we definitely see more opportunities in the advanced packaging with our current tools. .

Great. That’s helpful and maybe as my follow-up question, in terms of the capital intensive plan, that we are seeing metrology grow as we go down these advanced foundry logic nodes.

Just from a big picture perspective, from an industry perspective, I should say, how do you see capital intensive trends from materials versus your traditional dimensional OCD metrology platform? Is one from an industry basis outgrowing the other or are they both growing at pretty accelerated rates?.

So, when we are looking right now on the material side versus the dimensional side, we are talking about two different phases in the lifecycle of the product, okay? When we are looking right now on dimension and OCD products, it’s pretty easy to calculate, because the intensity is driven by capacity.

And as you said, once you are going to advanced nodes, the intensity is then going higher. But there is no questions that every time that there is investment of capacity, the customer will buy more tools in the dimension. So it’s in mature parts.

When you are looking right now on the materials, when you are looking right now on the ELLIPSON and the METRION and ancosys, it’s pretty much in the phase where it’s growing from being lab tool to an inline metrology tool.

And therefore, the intensity over there is lower because the stage of where the products came into the production is actually later. But definitely when we are looking on the future, both the ELLIPSON and the METRION and the ancosys should be decided by the capacity and by attach rate exactly like the OCD products.

It’s just a matter of a cycle and time. Regarding the XPS that is with Nova for the last six year, the XPS for the last two years moved to be a capacity tool. And every time that a customer is extending their capacity and moving to a larger facility or expanding the wafer per hour, so therefore, the XPS attach rate is increasing.

So if two to three years ago, every time that, for example, a customer had a phase, they used to buy two to three tools, now it’s their capacity, it’s not per stage. So the XPS is definitely in the right way as the OCD. So this is the three levels. We have the dimensional tools and the OCD. This is running by capacity and attach rates.

We have the XPS this is starting to be exactly that and the materials tools which is a new market is in the phase where you are in the fab. But you are not yet per attach rate as the others. .

Great. Thank you very much. .

The next question is from Krish Sankar from Cowen & Company. Please go ahead. .

Yes. Hi, thanks for taking my question and congrats on a good results. Eitan or Dror, I have two questions.

First one, till you guys are doing a good job navigating supply chain issues, but I am just wondering, would your customers moderate metrology tool intake if they are having issues getting definite equipment, because the – seems to have lot more supply issues with vacuum components versus you folks.

So I am just wondering have you seen that or you don’t think that’s ever going to happen not at least this year?.

So, I need to say that looking right now on the next two quarters, I don’t see a slip from the demand for metrology to slowdown. Now, again, we need to understand that those supply chains are dangerous and it can happen tomorrow morning.

We also don’t know what a supply chain issues in other suppliers will cause to the overall demand or to the overall chain. But definitely when you are looking right now on the markets, where this is a heavy investment in advanced nodes like, 5 nanometers, 3 nanometers, the 200 layers, in V-NAND and the demand for metrology is not slowing down. .

Got it. Got it. Very helpful. And then, just as a follow-up, three months ago you folks said that obviously, foundry logic is going to be strong this year, but at the margin V-NAND is going to grow especially in the first half of 2022.

But relative to DRAM and I think you kind of reiterated that, A, is that still the case, the reason I am asking is some of your peers who were more optimistic on V-NAND three months ago, seem to be think actually DRAM might grow this year? So I am kind of curious, especially on the memory side between V-NAND and DRAM, what do you expect this year in terms of relative growth? And has that thought changed in the last three months? Thank you.

.

So, let me just answer that.

I want to bring it back into context, okay? So, what I said was that in 2021 DRAM grew more than DNAND and in 2022, the phenomena will be the opposite, okay? So, V-NAND over 2022 will be higher than DRAM, but two of them are going to grow this year, okay? Just one of them will grow more than the others and we still believe that in 2022, V-NAND will grow higher than or stronger than DRAM.

.

Got it. That is super helpful. Thanks for the color. Thank you very much. .

This concludes the question-and-answer session. I would like to turn the conference back over to Eitan Oppenhaim, President and CEO for any closing remarks. .

Thank you, operator, and thank you all for joining our call today. Good morning. Good evening..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..