Nova Measuring Instruments Q1 2009 Call Transcript

May. 6.09 | About: Nova Measuring (NVMI)

Nova Measuring Instruments Ltd. (NASDAQ:NVMI)

Q1 2009 Earnings Call

May 06, 2009 10:30 AM ET


Gabi Seligsohn - President and Chief Executive Officer

Dror David - Chief Financial Officer


Robert Katz - Senvest Capital, Inc.


Welcome to the Nova Measuring Instruments First Quarter 2009 Result Conference Call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded May 6th, 2009.

I would like to remind everyone that forward-looking statements for the respected company's business, financial condition and results of its operation are subject to risks and uncertainties that could cause actual result to differ materially from those contemplated. Such forward-looking statements include, but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology development and the effect of the company's accounting policy as well as certain other risk factors, which are detailed from time to time in the company's filings with the various securities authorities.

If you have not received a copy of today's press release and would like to do so, please call GK Investor Relations at 1866-704-6710.

With us online today are Mr. Gabi Seligsohn, President and CEO of Nova; and Mr. Dror David, CFO.

I would now like to hand over the call to Mr. Gabi Seligsohn. Mr. Seligsohn, would you like to begin please?

Gabi Seligsohn

Yes, thank you operator. Hello everyone and welcome to our first quarter of 2009 earnings conference call.

The first quarter of 2009 was yet another challenging quarter for the company and for the industry. But towards the end of the quarter, we began to see some encouraging signs of a possible rebound. While the industry as a whole is still on a state of overcapacity, perhaps have a growing need to selectively upgrade existing equipment and increase process control measures to support the transition to smaller design rules. It is our belief that we are well positioned to take advantage of this transition.

Now to give you some additional insight, let me review what happened during the quarter. Following the unprecedented lower electronic sales during the end of the year holiday season and with anticipation of significant economic measures by the U.S. administration, much of the industry continued to be cautious on wafer fab equipment spending.

Closely monitoring fab utilization rates at our key customer site, we continue to see a decline to very low levels in the first couple of months of the quarter. Interestingly, things changed in March and utilization levels climbed at a very steep rate in both the foundry and memory segments some of the results of government stimulus supporting large scale cellular projects such as the one in China, some to replenish significantly lowered inventory levels as well as manufacturers taking advantage of a slight improvement in NAND flash prices.

At the same time, we have seen advanced technology announcements by most foundries, each declaring major advances in their designed rules with the IBM alliance even mentioning availability of 28 nanometer high-K devices. Recent announcements by TSMC mentioned doubling of 45 nanometer output in coming months to support high end customers in a demonstration of an SRAM cell based on its upcoming 28 nanometer process.

UMC announced successful demonstration of 40 nanometer manufacturing capabilities and the global foundries company, which used to be AMD announced a 32 nanometer process. But we still saw an 8% decline in revenues during the quarter. Integrated metrology orders for Copper CMP process control at the world's leading foundry received just before the end of the quarter and multiple standalone metrology orders received right after the end of the quarter from the same customer are encouraging signs of a rebound.

These orders, which were recently announced in press releases mark a significant event for the company, and we'd like to use this opportunity to thank our field operations team for meeting the customers' requirements and instilling trust in our technology.

The combination of both integrated metrology and standalone metrology with our leading edge modeling software to support an aggressive technology advancements as this customers have clearly demonstrate that we provide highly competitive enabling technology.

The increased interest in our technology to support process control needs in Copper CMP is something we have been working on for several years. The need has today been more obvious in the foundries and logic fab, the recent customer interaction show that memory is finally transitioning to a copper-based process, and this represents an interesting opportunity as well.

As previously stated, these signs show a clear change in customer sentiments to replace existing measurement technology with suffers from lower throughput and it's challenged by the shrinking design rules.

We believe this trend will continue and provide us with growth opportunities. Also during the quarter, we installed another standalone evaluation system at a leading memory manufacturer site in the Asia Pacific region. This is inline with our plan for this year to grow our market reach and increase the number of standalone customers.

On the financial front, as mentioned in the previous quarter's conference call, we saw an increased consumption of cash, about half of which was related to delayed supplier payments, which came due. Further measures to reduce expenses without reducing headcount, which were implemented towards the end of the quarter will come into effect in the second quarter and help further reduce expenses.

On a product gross margin side, we have seen a notable improvement over the fourth quarter of 2008 as a result of a more favorable product mix and our continued cost control measures, and Dror will provide some more detail on that.

As previously communicated, we have also experienced a significant decline in service revenues as a result of our customer's initiative to reduce ongoing operational costs to a minimum until things improve.

While we believe this trend is temporary, it is still tough to estimate how long it will continue, and we will focus on finding means to mitigate its influence.

Now let me turn to the industry outlook as we see it. Recent conference calls held by most leading equivalent manufacturers show clear signs of improvement. No scope of significant order increases in the second quarter. Based on older traffic, of the first two weeks of the second quarter, we too are seeing a significant increase.

With so much latent capacity still available in many of the fabs, our expectation is that orders this year will continue to be focused on technology advances. In cases where customers want to extend their performance of process equipment to support their next technology node requirement, our tools provide a useful and cost effective solution.

Moreover, the introduction of double patterning techniques as either more lithography or etch steps, those requiring much tighter process control and thus increasing the opportunity for optical CD technology, which we provide. We are encouraged by recent improvements in order levels and by the fact that the standalone product represents the larger part of these orders.

Since these products have longer lead times, revenue recognition made still over into the next quarter. Though these are all encouraging signs, we are still assuming that in 2009 we'll see wafer fab equipment as a whole reaching a trough and we will therefore continue with our cautious and selective spending strategy while pushing forward on technology advancement opportunities and existing at new customer sites.

And with that, I would like to turn it over to Dror for a closer look at the numbers. Dror?

Dror David

Thanks, Gabi, and hi everybody and welcome to our quarterly conference call. As Gaby mentioned, we continued to experience a slow industry environment in the third quarter of '09. This environment resulted in an 8% reduction in revenues relative to the previous quarter to 5.7 million in quarterly revenues.

The reduction in revenues in the first quarter was a result of an expected decrease of 1.2 million in services revenues, which was partially offset by higher revenues from our integrated metrology products.

Looking at sales by territories, product revenues in the quarter continued to come from the east, while Asia Pacific accounted for 65% of product revenues and the rest of the revenues came from Japan.

On the product revenue side, we have witnessed a significant increase in the average selling prices of our integrated metrology products. This increase is mostly related to the adoption of our new marked software features, which allow our customers to extend the use of our integrated metrology product to advance technology nodes. Evidently, this increase also helped us to maintain our overall gross margin performance in the quarter.

On the service revenue side, we have witnessed a major reduction related to the closure of 200 millimeter fab and low utilization rates at most of the 300 millimeter fab, which drove customers to reduce operating costs by lowering service levels.

The reduction in revenues came from both cancellation of service contract and a reduction in time and material activities. In parallel to this reduction, we have taken necessary actions to align service costs and reduce service cost by 0.4 million or 15% within the quarter.

In parallel to our aggressive cost reductions, it is clear to us that we need to maintain continuous on-time presence at strategic customer site in order to facilitate successful penetration.

Looking into our gross margin performance, excluding inventory write-off in Q4 '08, blended gross margins in Q1'09 was 33% similar to the previous quarter. Product gross margin had significantly increased from 46% in Q4 to 57% in Q1. This increase is related to the higher average selling prices and to our effective ongoing cost controls.

During the first quarter, we reduced operating expenses to 3.5 million, an additional 21% decline relative to the previous quarter and a 34% decline relative to the first quarter of '08.

In terms of bottom line, the company reported a GAAP net loss of $1.7 million in the first quarter. Excluding non-GAAP items as detailed in the end of the press release, we reported $1.6 million non-GAAP net loss in the quarter relative to a $2.3 million non-GAAP loss in the previous quarter. The decrease in the non-GAAP net loss despite the 8% reduction in revenues is further evidenced of our effective fiscal discipline.

Cash flow wise, we reported negative cash flow of 3.6 million in the quarter. Approximately 1.5 million of this reduction is related to payments of previous obligations mainly to suppliers, which is not yet concluded and the rest is related to our ongoing operations. Overall cash reserves at the end of the first quarter was $16.4 million.

As Gabi mentioned, looking beyond the first quarter of '09 and to date, we see improved booking patterns and fab utilization rates. In parallel to these encouraging signs, we might see a longer than before revenue recognition cycle related to the standalone business, which will hopefully become a more significant portion of our revenues.

Evidently, we plan to continue our strict fiscal discipline, which is focused on giving us proper financial flexibility to support our operations and our continued technological advancements. Gabi?

Gabi Seligsohn

Thank you, Dror. And with that operator, we'd be happy to take some questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). The first question is from Robert Katz of Senvest International. Mr. Katz, please go ahead.

Robert Katz - Senvest Capital, Inc.

Hi Gabi and Dror. How are you guys doing?

Gabi Seligsohn

Pretty good, thanks Robert.

Dror David

Hi, Robert.

Robert Katz - Senvest Capital, Inc.

I have a few questions. One, do you think the gross margins mix will stay at these levels for product and service or do you see services is improving and products reverting back to lower gross margin. How should we model that going forward?

Gabi Seligsohn

Well, on the gross margin side, I think generally we've done a pretty good job on gross margins in the product area, around 50% this quarter they are up which is a good indication and obviously we'd like to see that continuing as much as possible. I think the burden, which creates the blended gross margin is obviously the size... the overall size of the business right now in this particular quarter and the fact that as you saw there has been a significant decrease of service revenues.

What we're hoping to see is of course an increase again in service revenues. I think the resulting or the decrease in service revenues is a direct result of the fabs trying to lower than ongoing fixed cost as much as possible. Throughout the industry, we're seeing a lot of cancellations of service contract because though there are fixed cost and customers are moving more to a time and material type contract with the suppliers, with utilizations being low for the first couple of months of the quarter, you didn't see a lot of time and material business, because the use of the equipment was lower than it usually is.

It's indeed this trend of increased utilization will continue, I think two things will happen. One is the requirement for time and material usage may increase; and number two, service contracts might come back although I have a feeling that usually these kind of decisions are decisions that are made in a wider decision base, and therefore they usually take about a quarter to reverse. So, I think it's going to take a little while until the service revenues come back.

We're obviously staying in contact with these customers, the installed base is quite significant. So we're not losing touch with the customers and the install base. So again, I think product gross margins, I think, will hold quite well. Service gross margins for a while will stay low until we see business volumes increasing.

Robert Katz - Senvest Capital, Inc.

And in terms of numbers standalone units we have in the field right now, where is that, and how much... how many of those have been recognized or how many are I guess on trial?

Gabi Seligsohn

Well, I don't want to actually refer to the exact number of tools in the call itself for obvious reasons. So, I'll say there are several tools out there, of course. There is a few tools out still on evaluation. I think the most important thing that we're focused on right now obviously is the night bookings that we've got for several tools from TSMC. And I think that's really where a lot of our focus is.

We're also excited about the new evaluation, which has started with major, major manufacturer in the Asia Pacific region. So, hopefully that will also yield some positive results. So, there's still a few evaluations out there from the revenue recognition standpoint. If you remember when we started speaking about standalone when we were at very early penetration stages, the revenue recognition was over a four quarter period or one year period. Situation is better now that we've already penetrated and most of these accounts in the repeat orders allow us to recognize much faster. Though as Dror had mentioned, some of the revenue may spillover, the revenue recognition may spillover to the next quarter simply because of the lead times associated with these products.

Robert Katz - Senvest Capital, Inc.

All right. And these up on (ph) 800,000 ASP; is that sort of ballpark?

Gabi Seligsohn

That and above.

Robert Katz - Senvest Capital, Inc.

That and above, about 2 million plus or minus?

Gabi Seligsohn

Yeah, I don't want to go too much into that level of granular detail for competitive reasons obviously. But as I mentioned, it's higher than the number that you had originally mentioned, so...

Robert Katz - Senvest Capital, Inc.

Okay. And what areas of processes are being used for the standalone?

Gabi Seligsohn

Yeah, it's a very good question. One of the things that I had mentioned in my prepared note was with reference to the Copper CMP area. And we've worked for years on penetrating that market and we've had some success. One of the things that's helping the success is the fact that the incumbent technology, which was based on measuring the copper itself directly, with outputs of acoustic measurement techniques is falling short of the technological requirement. An optical CD we found quite a while ago creates a very useful alternative, and it provides a very fast measurement capability, it deals very well with the design rule strength, both in the integrated and the standalone arena.

The nice thing about the announced deals are that they are combination of our overall product offering, integrated standalone and obviously the modeling software capability. So, first of all the copper side is definitely something that we were very happy to see the progress. It's happening both in logic and in foundry primarily. But I think that there are early signs that it might start also in the memory sector. And everyone has spoken about memory moving to a few layers of copper; it's finally starting to happen both in the DRAM and NAND, so I think there is more growth potential over there.

In the other areas of the fab, another thing that we are seeing OCD application in both the edge and the lithography. And as I mentioned in the prepared notes, the advent of double patterning and there's a few ways to do that. But in general, you could do it either by adding litho steps or by adding etch steps. Both of those are providing very interesting opportunities for us.

And we're seeing more applications being qualified in that direction, because customers are finding it again a very fab non-destructive measurement technique. It helps very much with double patterning, because the tolerances of the litho and etch process has become much, much tighter. And the repeatability and precision, which is offered by optical CD in many cases, is either half or a whole load of magnitude better things such as CD sound. So, those three areas are key areas for focus for optical CD. And we're seeing customers going that direction also in high-end DVD applications as well. Hopefully that answers it.

Robert Katz - Senvest Capital, Inc.

Excellent. And do you have any ideas of what you think demand will be this year for a number of units or base problem?

Gabi Seligsohn

Well, I want to make sure that it's clear that again 2009 is still a trough year for the industry. Wafer fab equipment going from pretty much to around a $10 billion level from X3, maybe two years ago. So first of all, important to remember is that the industry is still quite small this year because of the degree of the economic crisis.

Having said that to try in general to answer your question, I think that these kinds of wins like the ones that we just recently announced help us further position ourselves. For us, it's a huge vote of confidence, it's very competitive out there. And I think that the foundation that we've laid by the successful penetrations over the last 18 months, allow us to be there when the customer decides to incrementally increase things.

And as I mentioned, there is a ton of latent 300 millimeter capacity out there, but just like we saw recently, when they want to move to disks and technology generations, for instance from 65 to 45 nanometer, this kind of technology be it integrated or standalone, allows them to take the same process equipments, and do a process with higher tolerances and move to the next technology nodes.

So I think, key question on how many systems you should model, we're targeting a few more accounts, I'll say that. And again, the level of repeat orders or penetrations very much depends on their specific plans within those fabs. But I think we've laid the foundation from an application standpoint that we are qualified to support that kind of decisions when they make it.

Robert Katz - Senvest Capital, Inc.

Right. What is your break even right now? And how much cash do you anticipate burning at... you continue at these levels... revenue levels?

Dror David

Our revenue cash break even point is around 7.5. We expect to reduce perhaps a bit more in the next quarter. Regarding cash level and cash consumption, it's pretty much also depends on our within quarter collection and some obligation payment. So it's very hard right now to predict the second quarter. We expect it to be large than the first one.

Robert Katz - Senvest Capital, Inc.

Lower cash burn?

Gabi Seligsohn


Robert Katz - Senvest Capital, Inc.

Burns by cash to be lower off so...

Dror David

Lower cash burn. Cash levels at the end of the second quarter would be lower, but we expect the cash burn in the second quarter to be lower than the first one.

Robert Katz - Senvest Capital, Inc.

All right. And do you anticipate at near the... extreme near being cash flow positive? Or it's actually too hard to say right now?

Gabi Seligsohn

I think that the operational break even level and cash break even levels that Dror described of about $7.5 million. If order trends continue as they have in the last few weeks, we're not that far a distant from being able to do that. So I think the next couple of quarters will be critical obviously to monitor and see if we're able to turn that quarter. I'm happy to say that it's not that long a distance away because we've been so aggressive on cutting cost in the last couple of quarters.

Robert Katz - Senvest Capital, Inc.

You've done a great of doing that.

Gabi Seligsohn

Thank you.

Robert Katz - Senvest Capital, Inc.

Thank you very much guys.

Gabi Seligsohn

Thank you. Thanks Robert.


(Operator Instructions). There are no further questions at this time.

Before I ask Mr. Seligsohn to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on three hours on the company's website,

Mr. Seligsohn, would you like to make your concluding statement?

Gabi Seligsohn

Yes, operator; thank you. I'd like to thank everyone for joining today's call.

As I said, the first quarter was a quite a tough quarter as far as the business volumes are concerned. There are some positive signs of the last several weeks, and we'll obviously staying very close with our year aided (ph) ground and keep working very closely and collaboratively with the customers to be there as hopefully things continue to change. Thanks again and we hope to see you on the next conference call.


Thank you. This concludes the Nova Measuring Instruments first quarter 2009 result conference call. Thank you for your participation. You may go ahead and disconnect.

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