Nova Ltd. (NVMI) Earnings Call Transcript & Summary

Good day, and welcome to the Nova Ltd. Second Quarter 2026 Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Ms. Miri Segal, CEO of MS-IR. Please go ahead.

Thank you, operator, and good day, everyone. I would like to welcome all of you to Nova's Second Quarter 2026 Financial Results Conference Call. With us on the line today are Gaby Waisman, President and CEO; and Guy Kizner, CFO. Before we begin, I would like to 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. Gaby will begin the call with a business update, followed by Guy with an overview of the financials. We will then open the call for the question-and-answer session. I will now turn the call over to Gaby Waisman, Nova’s President and CEO. Gaby, please go ahead.

Thank you, Miri, and thank you all for joining us today. I will start the call by summarizing our second quarter performance highlights. Following my commentary, Guy will review the quarterly financial results in detail. We delivered an exceptional quarter, achieving record revenue of $255 million at the top end of our guidance and record profitability. This performance marks a significant milestone for Nova with quarterly revenue surpassing $250 million and non-GAAP earnings per share exceeding $2.50, demonstrating the scale and earning power envisioned in our long-term strategic plan. Looking ahead, we expect to deliver another year of double-digit growth, supported by sustained customer investment, broader adoption of our solution and continued market share gains. We are now working on the next phase of our long-term growth strategic planning, and we will share more about this in our upcoming Investor Day during the first quarter of 2027. Our results reflect strong execution amid a favorable industry backdrop, characterized by accelerating technology transitions and capacity investments. Demand was broad-based across our portfolio, driving record sales in multiple product lines and services, led by advanced logic and advanced packaging applications. With enhanced visibility and a robust pipeline of opportunities, we are well positioned to extend this momentum and deliver another year of profitable growth. We continue to see strong AI-driven demand across the semiconductor industry, supported by ongoing investments in infrastructure and the emergence of agentic AI. The need for related leading -edge silicon, including CPUs, memory and storage is robust, supporting continued investments in manufacturing capacity and the process control solutions required to enable it. Sustained investment in innovation remains central to our strategy. We invest approximately 15% of revenue in research and development to ensure that our technology road map remains aligned with the industry's most advanced manufacturing challenges. As device architecture becomes more complex and customers pursue new approaches in advanced logic, memory and packaging, the need for new metrology capabilities, higher levels of automation and greater software intelligence continue to increase. Recent product introductions demonstrate the breadth of our innovation. These include a new generation of Prism targeted for advanced memory structures, a new generation of VeraFlex for materials metrology and a new configuration of Nova WMC that extends our dimensional metrology capabilities to panel-level packaging. In software, we introduced Nova Hub, a scalable platform for fleet and AI-driven analytics that enable advanced applications and supports the efficient operation of large metrology fleets. Together, these solutions and additional technological innovations still in the pipeline expand our serviceable market while enabling customers to achieve higher performance, greater productivity and address critical applications across future technology generations. Now let me turn to some business highlights for this quarter. Revenue associated with advanced logic more than doubled sequentially as customers expanded production capacity. Demand stretched across product lines and divisions reflecting the range of process control solutions required in leading-edge logic manufacturing. This quarter, 2 areas in particular, benefited from advanced logic. In materials metrology, the VeraFlex XPS platform continued to gain traction, driven by proliferation in gate-all-around manufacturers as customers continue to increase the number of VeraFlex tools per fab. This traction was one of the factors driving our recent clean room expansion in California, which doubles our manufacturing capacity in the U.S. Another highlight was the increasing need for more powerful capabilities in our dimensional metrology platforms to further increase performance while reducing time to solution. Our AI-enabling modeling solution, which combines physics-based and machine learning algorithms help customers address multiple challenges associated with complex 3D device structures. These capabilities play an increasingly important role in managing the expanding Nova's installed base in gate-all-around manufacturing. Another highlight was the record sales of our front-end chemical metrology solution, Nova ancosys, supported by both advanced memory and mature logic applications, reflecting increasing adoption, deeper engagement with existing customers and continued market share gains at the front end of the line. Ancosys strong performance demonstrates its growing role as an important revenue driver and further reinforces our leadership in chemical metrology. Advanced packaging was another area of strength during this quarter with record sales contributing nearly 1/4 of our overall product revenue, driven by our dimensional metrology portfolio. This performance was fueled by our customers' continued investment in advanced packaging and high-bandwidth memory capacity to support growing demand for AI-related devices. An important growth driver was the Nova WMC platform, which continued to gain traction across advanced packaging applications, including a recent tool of record selection by a leading foundry customer for multiple layers measurement in advanced packaging production flows. We also saw accelerating adoption of the Nova WMC across memory and foundry customers, positioning us to benefit from further investments in advanced packaging and high-bandwidth memory manufacturing. Service revenue reached another record level in the quarter, augmented by value-added services. This included customer investments in upgrading existing tools to address new process requirements such as tool upgrades, coupled with enhancements to our chemical metrology fleet. These enable customers to address new applications, materials and chemistry. The strength and breadth of demand we see across our end markets provide us with increased visibility into the remainder of the year and into 2027. Customer road maps and planned capacity investments continue to support a favorable outlook. Importantly, the drivers behind this demand appear increasingly durable in nature. Given these trends, we believe we are on a path to reaching our organic growth objectives sooner than originally planned, reinforcing our confidence in Nova's long-term growth. Now for some more details on our financials, let me hand over the call to Guy.

Thanks, Gaby. Good day, everyone. I will begin by reviewing our quarter financial achievements and then provide guidance for the third quarter. Total revenues in the second quarter of 2026 reached a record level of $255 million, at the high end of our guidance. This performance reflects growth of 8% quarter-over-quarter and 16% year-over-year, driven by continued strength across our customer base and solid demand for our differentiated process control solutions. Product revenue distribution was approximately 73% from logic and foundry and 27% from memory and others. Product revenues included two customers and four territories, which contributed each 10% or more to product revenues. In the second quarter, blended gross margins were 57% on a GAAP basis and 58% on a non-GAAP basis. Gross margins remained healthy and supported our record revenue and strong profitability performance. As expected, operating expenses increased to $68 million on a GAAP basis and $62.9 million on a non-GAAP basis. This increase reflects our disciplined approach to reinvesting growth into product development and road map expansion, positioning the company for continued long-term success. Operating margins in the second quarter reached 30% on a GAAP basis and 33% on a non-GAAP basis, on the upper range of our target model of 28% to 33%. This excellent result was driven by the revenue growth and the company robust operational model. The effective tax rate in the second quarter was approximately 16%. Earnings per share in the second quarter on a GAAP basis were $2.20 per diluted share, and earnings per share on a non-GAAP basis were $2.51 per diluted share, exceeding the high end of our second quarter guidance. Next, I would like to outline our guidance for the third quarter of 2026. We currently expect revenues for the quarter to be between $277 million and $287 million. GAAP earnings per diluted share to range from $2.46 to $2.61. Non-GAAP earnings per diluted share to range from $2.70 to $2.85. At the midpoint of our third quarter 2026 estimates, we anticipate the following: gross margins of approximately 57% on a GAAP basis and approximately 59% on a non-GAAP basis. Operating expenses on a GAAP basis to increase to approximately $74 million. Operating expenses on a non-GAAP basis to increase to approximately $68 million; financial income on a non-GAAP basis to remain similar to that of the second quarter. Effective tax rate is expected to be approximately 17%, looking back at the first half of 2026, we are pleased with the strong momentum across the business. We achieved record revenues, delivered operating margins at the upper end of our target model and generated earnings above the high end of our guidance. These results highlight both the demand of our solutions and the leverage inherent in our operating model. Our financial position remains strong with more than $1.7 billion in cash and investments, providing substantial flexibility to continue investing in R&D, support strategic growth initiatives and pursue selective M&A opportunities that align with our long-term objectives. Combined with our positive third quarter outlook, we believe we are well positioned to continue driving profitable growth throughout 2026. With that, we will be pleased to take your questions. Operator?

[Operator Instructions] First question is from Tom O'Malley, Barclays

This is Trip Smith on for Tom O'Malley. Nice results today. I was just a little curious about what's going on in the split between logic/foundry and memory. Just based on the numbers you guys gave, the 73-27 split, it implies nice sequential growth for logic/foundry, but a step down in memory, down 14% quarter-over-quarter. I was just wondering what the puts and takes were there.

Thank you, Trip, for the question, and thank you for the kind comments. We are projecting memory to be about 30% for us this year. Obviously, the intensity in logic is higher, and our long-term model calls for about 60-40 in favor of logic. But we do see strong demand from DRAM, somehow muted demand from 3D NAND still this year, which may change. But we see growth in both logic and memory, whereas the intensity and growth on the advanced nodes in logic is obviously higher.

And then just as a quick follow-up. We've heard buy side, sell side talking about potentially 40% growth next year for WFE. That implies something closer to like $210 billion, $215 billion. I was just wondering if you could support those levels today or what you might need to do to support those levels.

Sure. So we do have visibility into 2027 where our customers are planning further ahead. And obviously, we're working closely with them to plot capacity and inventory levels. In some cases, we're already receiving orders and planning the 2027 deliveries. We did see some pull-ins by the way, that drove both the first half and are obviously driving the second half of the year. But obviously, in overall customers are planning further ahead, and we do work closely with them on their capacity planning. It's too early to say whether 2027 will grow 40%. We do anticipate it to be a growth year for us. And therefore, we are working to ensure that our supply chain can provide us with the needed capacity. They are stretched, but we are managing production as well as the supply chain to ensure that we are meeting the lead times and the increased demand from our customers.

Next question is from Atif Malik, Citi.

Gaby, you used the word enhanced visibility in your prepared remarks. And I was curious if you can compare or contrast this cycle, particularly on the DRAM side to any prior memory cycles, maybe perhaps the NAND cycle in 2001 to 2007, which was a fairly long investment cycle. But any kind of qualitative commentary you can provide around your customers' behavior? Are they giving -- putting more down payments or any backlog and RPO that can help us understand how far is your visibility extending?

Yes. Thank you for the question, Atif. I think that it's not really comparable to the previous cycles because we are seeing demand from both logic and memory and customers understand that in order to provide the product in the lead times that suppliers, including Nova are committed to, they should work closely or closer with us on giving us long-term or longer-term visibility into next year. That didn't happen in previous cycles, long or short ones. And we are encouraged by that because it does give us the ability to work with our supply chain and making sure that we have the right planning in terms of capacity in order to address the needs of next year. So I would say that comparably, it's an unprecedented cycle in terms of the visibility and also customer intimacy that allows us to have better planning for both the second half of this year as well as into next one.

Great. And a follow-up for Guy. Guy, can you talk about any impact from higher component costs, particularly memory to your gross margins? And if you can share your philosophy or strategy around pricing? Are there any knobs for you to take your target gross margin model higher in this environment of supply constraints?

Yes. So thank you, Atif. I would say that we do see some impact on the -- on our BOM costs related to memory. Our proportion of memory portion of our BOM is not significant. So we don't see any major change to our gross margin profile due to that. So I would say the margin profile and the margin range, the gross margin range that we have in our target model of 57% to 60% is well intact.

Yes. I would add to that, if I understood correctly, also from the ASP side. Obviously, there is a balance and, let's say, an effort on all sides to ensure that pricing continues to support both the down side and COGS that Guy mentioned as well as customer expectations -- we are looking at the long term in that respect and the customers are long-term partners of ours. So we continue to support in the best possible way while considering the different changes on the BOM and COGS. But overall, as Guy said, we are maintaining our gross margin model, and we are confident that we will continue to do so through this year and the next one.

Next question is from Shane Brett, Morgan Stanley.

So my first question is, if I take your guidance, you're growing products in the low to mid-20s, which is a bit below WFE this year, but I think that's more so due to process control intensity being quite a bit lower this year and nothing idiosyncratic. So a bit of a 2-part question. Firstly, what is Nova's view on process control intensity recovering into 2027? And my second question is just do we have levers to outgrow process control growth next year?

Thank you very much, Shane. I would say that in terms of process control intensity, we need to break down the process control into end markets because they behave differently. Logic process control intensity is higher than memory, while advanced packaging is, of course, rapidly growing. Process is also tapping on other growth engines such as 3D NAND, which is investing in upgrades, but it's currently muted in process control. And that, of course, may change in the future. More importantly, the structural drivers that propel our business are still in place. We have increasing complexity in architectures and materials that are driving the need for process control. And from our perspective, the most important indicators are customer adoption, market share gains and technology wins. And we see continuous strength across these areas and remain confident that those long-term drivers of Nova's growth and outperformance remain firmly intact.

Got it. And for my follow-up, you previously published a tech blog focusing on your talks at VLSI 2025 on hybrid bonding and Nova solutions for it. Just can you talk about hybrid bonding is impacting your SAM? And if there's just an update you can give on your advanced packaging growth for this year as well, that would be very helpful.