Nova Ltd. ($NVMI)

My name is Michael Mani. I'm an analyst here one the semiconductors and semi-cap equipment research team here at Bank of America. Very pleased to have with me today the team from Nova Measuring Instruments. We have Gaby Waisman, Chief Executive Officer; and Guy Kizner, Chief Financial Officer. Gaby and Guy, thanks so much for being with us.

Thank you. Thanks for having us, Mike. Really Appreciate it.

So to start before we kind of get into the more near-term dynamics and the kind of opportunity ahead. I was just hoping you could give a quick reflection on the -- where the company is in its strategic journey. Over the last couple of years, you've had a number of years where you strongly outperformed WFE. That's due to the unique kind of exposures you have in your portfolio. If you could spend a little bit of time talking about those specific exposures, dimensional materials and chemical metrology. what makes Nova so special? How does that recipe work in your favor to outperform WFE time and time again?

So Nova strategy is very clear. We're focusing on organic growth, and coupling that with inorganic acquisitions in order to drive and add more firepower into either the product lines that we already have or to expand to additional segments and add more synergies as we do so. In terms of organic growth, we have currently 3 divisions, each one with 2 or 3 product lines, covering basically the entire market span and from front end, of course, Logic and DRAM as well as 3D NAND to advanced packaging, packaging and compact. Now in terms of the unique capabilities and the reasons for our growth, it has to do with differentiation and innovation. It's all about giving the right performance with a superior cost of ownership, and that's how we win market share. And our strategy is based on continuing to do so while we invest about 15% of our revenue in R&D and innovation in order to make sure that we stay ahead of the curve. In terms of the unique attributes to each of the divisions. On the dimensional metrology line, we have 2 product lines that are targeting either the CMP market with integrated metrology or process control with stand-alone optical critical dimension measurements. In terms of our material metrology, we have basically 4 products. We have the -- sorry, 3 products, we have the XPS, which is coupled also with XRF. We have the in-line SIMS, the Meterion and we have in line Raman, which is ELIPSON. These are unique products that are targeting material characterization and ultra film thickness as well as in-depth profiling of the deposited layers during the production process. And we have the chemical metrology in which we have both the back-end side as well as the front-end copper dual damascene tools. And that's all coupled with fleet management and a unique capability of having both mathematical as well as physical modeling to drive better performance and throughput and cost of ownership using unique generative AI capabilities. On top of that, of course, we have an offering, a dimensional metrology offering specifically to the back end, that was added as part of the recent acquisition that we did and demonstrating phenomenal growth over the last year after the acquisition. And this is targeting especially the advanced packaging, but not only the compound, the power and other 150 and 200-millimeters market, with unique handling capabilities that are going to also serve the latest advanced packaging architectures that are emerging now into the market.

Great. Great introduction. Now moving on to your outlook for this year. Obviously, very -- it's a very strong year for WFE. You guys talked about some of the strength you're seeing, particularly in the second half. If you could just give us a segmentation of like where you're seeing that strength in Foundry and Logic and DRAM, high-bandwidth Memory versus advanced packaging and NAND. And just like to the extent you have visibility, like what does 2027 look like from where you stand today?

Sure. So there's definitely a momentum in advanced Logic investments, especially in gate-all-around, but not only -- and we tap on this growth. We have demonstrated our ability to have an established position across all 4 gate-all-around players. And we obviously have a good position across both advanced and mature logic markets, which gives us an ability to tap on the growth in each and every one. We've also expanded our footprint into the DRAM market. We've grown from about 25% exposure and ratio in 2025 into more than 30% in the first quarter of the year, and that's driven essentially by both material and chemical metrology positions over there. And right now, 3D NAND is a bit muted, but we do see it as a growth opportunity once greenfield investments come online, which gives us some additional firepower in our growth trajectory for -- hopefully, for the next year. In addition, advanced packaging is a very interesting story for us. 5 years ago, we had no business in advanced packaging. Today, we have more than 20% coming out of that part. About 2/3 of that from Logic, 1/3 from high-bandwidth Memory. But we see both the inflection points in advanced packaging, such as the coming hybrid bonding and additional advanced architecture driving more and more needs in metrology. We see the adoption of both dimensional metrology as well as chemical and now coming on board, material metrology is demonstrating signs of initial adoption and definitely encouraging signals for years to come since what we are witnessing is the porting of front-end tools into advanced packaging architectures and using similar type of applications there. So material metrology is definitely the next wave of adoption as we see it for Nova.

Great. And I think it would be helpful to have like a quick clarification on your view for WFE and your opportunity this year versus some of your peers. I think there might be a little bit of confusion over what those different baselines are, right? Obviously, everybody defines WFE in a different way. You define it specific to the opportunities Nova has. Maybe just give us a sense of like when you talk about WFE and your opportunity, like what does that mean maybe relative to what peers are saying when people make that comparison?

Definitely. So we've seen WFE numbers dramatically change over the last quarter or 2, and we rely on external sources. We get our data about WFE there. The important factor for Nova is to have the right drivers to outperform WFE. And this is what we're investing in. It comes from both differentiation and unique offering as well as our ability to have a relationship and be able to tap in on opportunities as they present itself. And we are definitely planning to outperform WFE, whatever number it is.

So earlier this week, we had the opportunity to visit your manufacturing facility on Fremont, where your materials metrology production tools is primarily based out of there. [ Then ] I have a chance to meet Adrian Wilson, your General Manager of materials metrology business, really fascinating experience. And we got to see our capacity expansions in progress, right? So a lot of exciting momentum there. Talk about the state of supply where you're adding it, right? Do you feel like you have enough for the years of WFE and process control tool growth ahead? And once you're fully done with these expansions, how much -- how large of a business can it support from a revenue footprint perspective?

So within our strategy and our strategic plan, we're investing capital in order to make sure that we have the right capacity to support our customers. That's what we've done in the recent years. We've doubled our capacity in '24 and '25, we're able to double the capacity of our divisions and our production centers across the world to make sure that we are ready for the current ramp. And we are constantly investing and making sure that we can maintain those lead times in years to come. This is part of our strategic plan going forward as well. And we recently announced the opening of a production center in Asia, which is going to have a significant portion of our ability to deliver product into the market in 2027 and onwards. But we are all -- we're constantly looking at our capacity and making sure that we can stay ahead of the curve. Just as an indication, we've doubled our capacity in Germany after the acquisition, and we're making sure that we can supply from that part of the world as well. The production center in Asia is also giving us more flexibilities in terms of the ability -- the proximity to customers and the agility it gives us in supply chain, there's a natural need to make sure that our supply chain is geared towards the capacity requirements that we need as well. And we've demonstrated this capability over the last years, having the right operational agility to address the demand. And we continue to monitor that and invest in broadening our supply chain and making sure that they have the visibility to support us in years to come.

Perfect. Let's move on to leading edge Logic. So for gate-all-around, you've reiterated this cumulative $500 million new opportunity, 2024 through 2026, right? So we're getting towards the end of that period. When you first set out that target, I'm sure there was an assumption on starting with the number of 2-nanometer wafer starts and get-all-around wafer starts. The attach rate you would have for certain tools and then of course, Nova's share opportunity. As we stand here today, I mean, how has that trended relative to your expectations, which was set 2 years ago because so much has changed? And where have you seen like the biggest differences if at all or any surprises?

Sure. So you said it right. We were looking at the cumulative demand for gate-all-around between '24 and '26, and we based our projections on both the demand as well as our position across the 4 players. Now obviously, there were a lot of ups and downs in terms of who is the player that can supply, and there were question mark about some of the players, but I'm very happy to say that what we are seeing now is that all 4 players have potential to take part of those demand fulfillment for gate-all-around, both now and going forward. And we are well on track in terms of having this $500 million of cumulative business. There's always a potential for upside, but very encouraging to see that our projections were well on track. And it's a demonstration of our ability to have a strong position across market segments with the leading players and definitely to meet the demands, the most stringent demands of gate-all-around providers into the market.

Right. And like to your point, the 2-nanometer get-all-around expansion story doesn't really end this year. A lot of people expect it to be a very large node, relatively speaking, one of the largest in a couple of generations. And of course, like this year, most of it is being driven by one customer, but to your point, it's broadening a lot of those customers, Nova had no exposure to in the FinFET era. So maybe talk about when you think about like the next leg of expansion for gate-all-around, the next build out over the next 2 years. Does your share potential look different there? And does the process control intensity of some of these newer customers favor you in a way since they're newer and they're trying to maximize yields and are a little bit behind maybe the leader in the market?

Every inflection point in the industry and definitely the move from FinFET to gate-all-around presents an opportunity for Nova. And what happened with gate-all-around is that we both improved our position across those players as well as so metrology intensity grow by about 30%. That gives a strong basis for the growth in years to come. As you say, we expect this node to be a very significant one with all players and what we also see are additional inflection in technology that could drive additional opportunities for Nova. It has to do with hybrid bonding on the advanced packaging side. It has to do with moving to 4 and 6F square on the DRAM and later on to 3D DRAM, has to do with the multi-deck opportunities in 3D NAND. And we are looking at all of those as opportunities for market share gains. Obviously, there's CFET later on. That, coupled with the capacity and volume growth that we see in the market are giving us the right tailwind and confidence to see the growth of our business in years to come.

Perfect. So let's move on to advanced packaging. So that's become a meaningful part of your business relatively quickly, right? From here, like where do you see like the next leg of growth coming from? You have some interesting potential applications, things like WMC. Could you talk about how large that market could be for you over the next couple of years? And what do these next generation of challenges from a metrology perspective look like that Nova is uniquely able to solve?

So this is a very interesting story for us. As I mentioned, we had no business 5 years ago in advanced packaging, and now we have more than 20%. The story is about having a two-pronged approach to advanced packaging. We're coming from both the front-end side, customizing front-end tools to have a unique position on the back end and having products stemming from advanced packaging, gaining more and more share as a result of the synergies, and of course, investment in R&D. You talk about WMC, WMC is a great story about having an advanced packaging tool with a much better engineering and I would say, a Swiss army knife of sensor capabilities to address multiple applications from warpage to topography from TSVs to RDL. And this gives us an ability to expand our footprint with more and more customers tackling the most high-value problems that customers have for metrology in the advanced packaging. On the front-end side, we've customized our integrated metrology, and we have established a very dominant position in advanced packaging. Now there is a strong runway ahead for those kind of products because if we look at advanced and integrated metrology specifically, the attach rate on the front end is close to 100%. On the back-end side, it's much, much lower. So we have both the opportunity to increase attach rate while specs are becoming tighter as well as tap into the growth of high volume and adoption of that integrated metrology tool. On the PRISM side, this is stand-alone OCD, the unique ability that we have to combine spectral interferometry as part of the optical channel gives us unique capabilities on displacing other types of tools and introducing optical tools that have better cost of ownership. And this is only at the beginning. So here as well, we have a runway to grow, and we're in the beginning of the journey. And last but not least, as I mentioned, the material metrology, which is going to tap into to applications that are also porting from the front end into the advanced packaging space as well as unique challenges that they have that require XPS, the XRF tools and more.

And today is more of your business in advanced packaging. Is it in Memory and Logic? I think I believe it's in HBM. And how -- but how does that shift in the next couple of years, right? Does it shift more towards Logic? Like, what's the opportunity there?

So right now, it's actually about 2/3 Logic and the third on high-bandwidth Memory. I expect that it could balance out. What we look at in terms of our long-term model in general in metrology is about 60-40 between Logic and Memory, simply because Logic is more intense in metrology compared to Memory. So long term, you may get to that ratio, It, of course, depends on the cyclical nature of investments in Memory or Logic, but that's more or less where we're driving at. And in terms of our growth, we have seen strong double-digit growth for advanced packaging in Nova in the last couple of years. We see continued momentum in investments in advanced packaging. So we definitely see the opportunity to increase the ratio of that business as part of the overall business that we have. And we have a very a very focused approach into front end, whereas most of our business is there, but definitely a strong lag and interest to grow our advanced packaging part while combine that approach from both the front end and the back end.

Great. And roughly 1.5 years ago, you acquired a business called Sentronics, right. Could you just give us an update on how that integration is going? Have you started to see that going to translate into wins? Or is that -- is it still a little early to make a comment on that?

That integration was phenomenal. As I mentioned, we've acquired the Sentronics at the end of January last year. We opened up a new cleanroom, doubling the capacity of total last year, and we see this business growing at a strong double-digit pace, whereas the introduction of the WMC is an example of how the synergies work -- worked us -- worked out in the sense that we see both adoption of this tool across Logic and Memory customers as well as additional potential, expanding the footprint geographically with more and more territories and more and more customers. And we see a great future for that business as part of Nova.

Great. And could you spend a little bit talking about hybrid bonding. When will we start to see that part of the business really begin to reflect for Nova? What applications do you think it will happen first? And why are you well positioned to kind of capitalize on that?

So we are already at the stage of qualification to become tool of record for hybrid bonding. We're either selected or we're in advanced stages of evaluations. And this is the critical moment for us to gain the share in hybrid bonding and make sure that we can tap on the growth. The growth of the business depends on the pace of building upon this unique capability and the architectures of advanced packagings in years to come. I expect some pull-in compared to the original outlook for adopting this technology. But we definitely see the critical time now in establishing our position at that space. Now when we look at the specific characteristics with the combined, the planarity and the need to have unique applications in the TSV or RDL. Topography and warpage, we are well positioned to address all of it with the product portfolio that we have. And we are building upon more and more applications that could serve that market. What we also see is that every such step tightens or every such step tightens the spec that is required, and this complexity is what we thrive upon. So this complexity drives more and more needs for metrology across the board. Our tools are well geared to address those -- these complexities, and that gives us more opportunities in this space.

And on those qualifications, when do you think you'll know like how long before they go on volume, what your share is, like whether it'd be one [ process of record ], like roughly how long before does that typically happen?

So I believe that we have a fair view of the share in the beginning of next year, whereas this is a continuous fight after you have those share, of course, you need to continue and fight for it in volume manufacturing, but I think that we'll have a good understanding at the beginning of next year.

Great. Let's talk about your broader strategy with lab-to-fab, right? So very key framework for the company in terms of how it's driven growth over many years. Number one, just if you could give us a reminder of like what exactly the strategy entails, how it worked for you maybe, especially in the VeraFlex product? And where are we in that sort of plan? Every quarter, we hear of a number of wins across your various products like Meterion, ELIPSON and all. But let me put that into context in terms of where we are in terms of initial adoption versus broader proliferation across key end markets and all these various applications that you can serve?

Definitely. So first of all, moving in line is the holy grail in metrology. There are technologies in the lab that are crucially important for the semiconductor industry. But having those technologies in an automated way in line is providing great efficiencies to our customers, and this is the foundation of our lab-to-fab strategy. We've started with XPS and XRF. We've seen the adoption of that over the last years from a tool per customer moving to a tool per fab, of course, expanding on the number of customers. And we've announced a few quarters ago on milestone of reaching 8 tools per fab in one of the leading customers globally. We are continuing to expand the footprint in the way that we're addressing more applications, increasing the utilization, which drives the adoption of the tools in the fabs. And we've seen this momentum building out -- building up over the last years. Now with the Raman tool, the ELIPSON as well as the Meterion, the in-line SIMS, we are mimicking the same kind of approach. We are offering distinct opportunities, unique opportunities for customers to [ port ] their lab tools into the fab, in those spaces. And for the in-line SIMS. we've had a record quarter in the first quarter of the year, whereas what we have done is to first start -- of course, with the advanced nodes customers, both in Logic and Memory, introducing this tool in the penetration stage, having initial adoption. Then moving into proliferations with those customers, expanding, of course, the number of customers. And the next thing to watch is obviously the move to more than 1 tool per fab. Right now, we are at the stage of introducing it to all of the customers. Of course, that has to do with the advanced nodes and making sure that we have the first tool per fab with these customers moving on the next stages of proliferation and adoption. And of course, we're expecting this cycle of adoption compared to the XPS to be much faster.

Great. And very quickly, one of our product offerings is an X-ray metrology, right? That's been the kind of one of the bread and butter products of the business for many years, and we've been very successful there. We started to see a little bit more competition in that particular area. A lot of unique strengths in Nova's favor in terms of why you might be able to keep your edge. But if you could just articulate what those strengths are, if you're seeing any kind of competitive pressure at all in this particular segment in the market, and just general thoughts there?

So we definitely expect competition. We're currently a sole source, but we expect competition to come. And what we are doing, we're adamant about is making sure that we maintain a competitive gap and we continue to invest in innovation and technology to make sure that once technology is there or once -- sorry, competition is there, we will be able to offer better value to our customers and making sure that we can convince them that our solution provides better performance or superior performance with the cost of ownership. So we continue to heavily invest in XPS and XRF. And we have more and more capabilities to ensure that this gap is going to be maintained, while anticipating competition to come, broadening, of course, our presence across market segments. And again, the key is to continue to invest. I believe that the competition will come probably next year sometime, but remains to be seen.

Sure. Let's bring guidance to the conversation for a discussion on some of the financials. So gross margins stayed kind of near the upper end of the target model here, like kind of closer to the end of 60%. As you look ahead, what are the kind of key factors supporting this level of gross margins? Is it just mix? Is it just -- is it volumes? And is there a chance for the company to maybe take more value as you introduce new products over the next couple of years?

So first of all, what's driving the gross margin, it's usually reflecting the value that we're bringing to the customers, right? And all the innovation that Gaby mentioned, so it's eventually reflected in the gross margins that you are making as a business. As you mentioned, we are at the high end of our model that was introduced back in 2022. And there are -- when you're looking ahead, I think there are a couple of headwinds and tailwinds with the gross margins. So there are definitely pressure from the cost that associate with product, the labor costs going up, the material cost, the shipment costs with all the energy is going up and so forth. On the other hand, definitely, the scale is contributing to the gross margin tailwinds. Technology, once you are introducing a new product with new capabilities, usually, you are sharing this benefit with the customer. And part of it, you are increasing the ASPs. So this is definitely expanding that. So I would say in the short term, we are -- we will remain at the gross margin level as we saw before. But looking ahead, we -- once we are going to introduce the next growth pace of the next 5-year horizon, we're going to also share the new financial target model, and then we're going to outline exactly how it's going to look like.

Great. And yes, that's a good segue as well because you gave your target model just over a year ago, last March was your Investor Day. $1 billion in sales by 2027. We're already at that run rate with this last quarter. And that's entirely through organic growth. You talked about additional synergies potentially from M&A. So obviously, if you'd like to give an updated target model today, that would be fantastic, but probably not. But so much has changed in the past year based on the assumptions on that model. So if you were to sort of think about creating a new one today for the next 5 years, right, when you think about growth through 2030 because that's the kind of time scale we're thinking about for semi caps. Like what would you bear in mind? Like what would you have us consider? And then just very quickly, like any kind of updates on what you'd be looking to acquire from -- with your very strong cash position that you've developed?

So you're Right saying that we introduced our original model and the growth of the $1 billion model back in 2022 when we said that we are going to continue our path of doubling our revenues every 5 years. And as you said, it seems like we're going to achieve. We are on our track to achieve that. Definitely, we had a very good successful run with that, with all the new technology that we introduced, the market share gains and so forth. Once we reach the $1 billion target, and this is a significant milestone for the company, we're definitely going to step back and outline the next growth trajectory, where the focus will be the inflection point that are about to happen in the industry, hybrid bonding, CFET, 3D DRAM [indiscernible], all those inflection points usually driving for much more metrology intensity. And for us to really deploy the unique technology that we're investing and -- in order to capture more share and improve the positioning of the company. So definitely something to look forward to. In terms of inorganic growth, we have today more than $1.7 billion in cash and where the majority is allocated towards inorganic growth. We have a strict criteria is what kind of acquisition we want to make. So it needs to be accretive, need to be similar to our financial model, and we need to identify clear synergies between the business, mainly on the top line or technological synergies. Once the company meets those criteria. This is a company that we believe that we can go and acquire and to drive the business. We did previously 3 very successful acquisitions that drove a lot of value to our shareholders. And we believe that we can execute on that front as well.

And is there like a particular technology or end market you would be looking to ideally acquire something in? Or are you just very open-minded?

So these are the criteria. And the reason why is because we -- there are not so many targets out there. So we cannot cherry-pick a specific submarket or technology, really focus on this criteria. Once the company meeting those criteria. This is something that we want to go ahead and acquire, right.

One final question, and it's just on share gains. So if you look at like the latest third-party data that came out, Nova picked up several points of share. Again, it's a very -- process control market is very -- there's some very tough competitors, but every year, you've been able to kind of pick up shares and find your own niche in the market. If you were to look at where you have the potential to expand share this year and into next year. Does that look very similar to where it was last year, like what key applications should investors focus on in terms of tracking your share gain progress?

So based on the latest Gartner report for CD and Thin Film metrology, we grew from about 20.3% in 2023 to about almost 28.8%, almost 29% share in 2025. This is an impressive growth, which is attributed to the differentiation we offer in the market. And we definitely see additional market share growth potentials across our portfolio. I'm not sure it's going to be in the same pace, but we definitely have a strong focus on gaining market share, and the opportunities are across the board. I think that the unique offering that we have is giving us the opportunity to expand on practically every product line, and it's about execution and our ability to introduce more value.

Perfect. Well, on that optimistic note, thank you very much for being with us here today. And yes, it's been a great conversation. So thanks so much for your presence.

Thank you. Thank you very much for having us.

Great. Thank you.