Nova Ltd. (NVMI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 1 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Guy Kizner, Chief Financial Officer for Nova Measuring Instruments. I'll kick it off with my questions first. If you have a question, we'll open it towards the end of the fireside chat, please raise your hand and the mic will come to you and you can ask your question.

Welcome, Guy.

Thank you.

Let's talk about the market outlook. It's been a super exciting year. No, I think you guys have talked about 2026 wafer fab equipment growth, an outlook of like mid-teens kind of framework. I know you guys don't spend a lot of time forecasting WFE relative to your large-cap peers. But we're just curious in terms of the framework you put out in May of mid-teens. How has that evolved? How are you looking at the market size this year and next year?

Yes. So I think as you mentioned, we usually are -- we're relatively a small player in this industry of giants. So we don't have really the ability to look on the WFE or have internal forecast. So when we are talking about WFE, we are usually referring to the consensus in the market. We're relying on external sources. And I think what is unique in 2026 is that every 2 months, we saw revisions of these numbers, and it's up as we go. And it's driven mainly by AI, right? And even today that we are already just 4 months until the end of this year, there's still a wide range of estimates for 2026, right? You have Gartner talking about 20% growth, Techinsights in the high 20s. You have other analysts talking about 30%, 35%, 38% even though with 4 months left, right, when you have the big players, the backlog is out there, the shipment plans out there, and there is still a wide range of WFE estimates. So for us, definitely, the numbers moved up when we're looking on the WFE, it will be above 20%. The exact number, it's very tough for us to call for a specific one.

Got it. Let's talk about what you do see, which is the type of spending for your tools and products -- and can -- just talk about where the incremental demand coming from in terms of leading-edge logic in DRAM around HBM. Anything you see on the NAND side in terms of the green shoots?

When we're looking at 26, so definitely, the -- there are many drivers that are working. First is the advanced node as you mentioned, both on the gate-all-around, but also a lot of spending happening on the 3-nanometer as well. DRAM, definitely, we see a significant additional capacity expansions that are happening there and advanced packaging. I think for us, the main driver that is not working yet is NAND. As you know, even though NAND is spending, it's mainly skewed towards upgrades. Firstly, Nova is not going -- benefit from the upgrades, and we need greenfield capacity additions. And it doesn't -- happening yet. Hopefully, we will see some of it happening in 2027. This is, I would say, the longest down cycle on NAND side. So except NAND, I would say, all the engines other than NAND are working very strongly.

Great. Something that you guys have alluded to in the past is your outperformance. But I think you guys have said 2x WFE. Now you've had very strong share gains in the last few years, which sets up tougher comps moving forward. But can you talk about your ability to outperform WFE? Are you still feeling confident about that 2x number and -- just like what would be the drivers to continue to drive outperformance relative to the market rate?

So I think historically, if you look on our performance, you see that we are capable of outperforming WFE significantly just recent years, '24, we grew by 30%. WFE didn't grow so much. '25, we grew with 31%, WFE didn't grow so much. But we are looking at 2026, and we talked about how significant this year is in terms of WFE spending, and we see a different, let's say, dynamic and we see something change. And the question is why, right? I would say, the uniqueness of 2026 is not only -- is definitely a strong year and Nova is growing nicely this year as well, but we don't see the same outperformance that we usually used to see from Nova. And the question is why. So I would say it's mainly driven by the investment mix. First, NAND, as I said before, right, even though NAND contributing to the WFE spending, Nova is not contributing for that because there is no capacity expansion. Second, a lot of investment happening in DRAM and even though we are selling to the major players in the DRAM, the metrology intensity in DRAM is lower compared to the logic side, right? And we talked about the fact that we are having our long-term model suggests 60-40 towards logic. It's mainly because on the logic side, the metrology intensity is higher. And third, and this is mainly the most important one on the advanced nodes on the logic side, given the fact -- usually, the investment pattern is happening when the customer is moving to tech node. And after that, you have a high-volume manufacturing, the customer transition to the newer tech node and then there are a lot of capacity expansions there. But -- what we are seeing this year given the fact that the AI customers didn't transition to the gate-all-around to newer tech node, and they are still using the N minus 1, 3-nanometer and 5-nanometer and obviously, the huge demand that we are seeing there, the customers spending a lot of capacity expansions in the 3-nanometer, right, both in U.S. and in Taiwan. So in a way, when you're looking on 2026 in terms of spending weight, you see that the metrology intensity went down because of the spending, I would say, maintenance. Now the question is what's happening going forward, right? How 2027 is going to look like -- and I think, first, let's look on NAND. I think, hopefully, we will see NAND increasing the capacity. So practically for us, it's coming from 0 to business because we are positioned with all the key customers there. Second, I would say on the DRAM side, we are not expecting significant change. DRAM will be a significant driver and we're going to enjoy from capacity expansions. But we are not expecting any significant metrology intensity to increase. It will happen when the industry will move to the 4F square, but it will happen in '28 and going forward. But I would say on the logic side, we do expect much more mix skewed towards the 2-nanometer and the gate-all-around and less on the 3-nanometer. So I would say when we are looking at '27 we will see much more metrology intensity going up in terms of the mix. And given the fact that Nova has its significant growth drivers to continue to outperform, I think we are well positioned. We have the right drivers continue to outperform the industry going forward.

Yes, that's super helpful. So it's basically the mix of the spend as well as the timing of the technology that can change numbers from year-to-year, but you see a stronger year next year. On 2027, can you just talk about the quality of your bookings or backlog that's giving you the confidence that these customers are going to move forward with the 2-nanometer or 1.4 nanometer early R&D work.

Yes. We talked about the visibility in our latest earnings call and the fact that we have better visibility now than we saw in the previous up cycles. And we need to distinguish between when we're talking about visibility versus the backlog, right? I think when we are talking about visibility, it's mainly -- first of all, on the backlog side, we do see a significant backlog and it's higher versus the previous up cycles. This is one. Second, we see much more that the customers are much more adhering to our lead times. As you know, our lead time is 4 months to 12 months, depending on the product line. And we're seeing that the customers are much more adhering to those lead times. And the second is the engagement that we are having with customers, meaning they are giving us -- we are engaging much earlier. They are giving us forecast. They are -- and given the fact that all the supply chain is stretched, they want to make sure that all the vendors are capable to keep up with that. So they are giving you a forecast, say, 1 year ahead, sometimes even longer than that in order to make sure that all the vendors are already capable to supply all the demand. So definitely, the visibility and the confidence we're having is...

Guy, any change to -- like are they putting deposits down? Any change versus prior cycles that are pointing to this cycle being a lot more durable than the past?

So I would say we are not changing not the lead times to our customers and not the terms of condition. Maybe -- so if the customer had deposits as part of the terms and conditions and payment terms, it still remains intact. If the customer didn't have it, it still remained the same. So we are not changing the terms and conditions to the customer.

Okay. So let's talk about some of the newer products with METRION and ELIPSON entering high-volume manufacturing. How much of these products contributed to your growth this year next year?

So we have 3 main drivers, 3 main products, as you mentioned, ELIPSON, METRION and the newest platform that we released a year ago, WMC. And I think this is a very good example how Nova with the right innovation that we are doing, how we are introducing new technology-driven metrology solution that increase in our addressable market. It's not necessarily always looking on the WFE increase. I would say ELIPSON and METRION has a very significant year last year when we had a very significant qualification with many of the Tier 1 customers where they adopted this solution, Nova's strategy there is to take existing technologies that are being used in lab and bring into in-line capability. And a lot of key customers already adopted this technology. Now for us, the focus right now is to continue to work with these customers and to add more and more applications and more solutions that could be solved with these tools that are already -- the customer already is using in order to increase the utilization and in order to increase the attach rate. So this is the path that we are doing right now, and this was our strategy, as we did previously with the VeraFlex, it's very successful. And this is what we are doing right now, both with ELIPSON and METRION where we are looking for more application more use cases. And in some cases, we are very successful in that front, and we see repeat buys from leading customers with this platform, but it's -- let's say, it's a process to have with those customers. WMC is a different story because WMC platform we introduced a year ago, and it's -- the main focus is to address the most complex advanced packaging applications. This tool was structured as a tool that can -- the uniqueness of this tool is that you can deploy different sensors in 1 tool. So in 1 measurement, you can really solve different applications that in the past, you need maybe to have a couple of different tools in order to do so. And second, this platform is very flexible in terms of handling different size and shapes of wafer. So if we're talking about bowed wafer, fine wafer, the standard 300 millimeter, 150, 200, no matter what kind of size or shape, wafer due to the panel packaging and so forth. So the uniqueness of this platform is very unique and we see a very strong adoption of this platform. Even though it was introduced just 1 year ago, we -- just recently, we announced another win with this platform, and we see a very rapid adoption solution.

It's very exciting. Guy advanced packaging is now, like 25% of your sales. It's growing faster than the market. We currently get asked by clients on kind of share shifts in this market. And without naming any competitor, can you kind of address your share gain opportunities in this important market?

So advanced packaging is a significant growth engine for Nova because if you recall a few years ago, we had 0 exposure to packaging, right? And we did a couple of things. First, we acquired 2 companies, both Ancosys that today are our chemical Metrology division and the Sentronics company that we acquired in the beginning of 2025 that has very strong positioning on the advanced packaging. And second, we took our front-end tools, consist both integrated metrology and the optical [indiscernible] Prism, and we deployed it into the advanced packaging applications. And this strategy paid off because, as you said, in 2025, it was about 20%. The second quarter, we said we reached a level of 25% of contribution of advanced packaging. So -- and these are the key areas that we are exposed today. And I would say the potential for us to continue to expand that is through material metrology. So today, the material metrology solutions that we are having are not exposed to the advanced packaging. What we are seeing, given the fact that the advanced packaging challenges keep increasing and the front-end applications becoming much more relevant for the back end. So we see early discussions with the customers where they are -- want to see how we can solve a specific application with our material metrology. So this is definitely another growth engine for us. So I would say these are the key areas of advanced packaging.

Right. Let's talk about the financial model, and we'll come back to the products. Gross margin has been a big topic with investors. Q2 gross margins is 58%. Your target model is 57% to 60%. What is the path to reach the high end of your target model?

Yes. So in -- as we said, in the first half of the year, we show the 59% gross margins. In the third quarter guidance, we also guided at 59%. I would say even today, we're operating in the high end of our target model. In terms of the gross margins, I would say that there are a few factors that play into that. First of all, definitely, as we scale the business and the capacity is increasing, there is economic of scale. So this definitely contributing to the gross margin increase. Second, the technological advance that we are doing. So usually, the way that the pricing is working with the customer is that you are increasing your pricing and definitely the gross margin through more value to the customer. I mean what kind of productivity you are bringing, what kind of capability. So with every capability that you are bringing, you're extending your ASPs accordingly. Definitely, you are sharing this benefit with the customer as well but this is helping us to progress. So with every new technological advancement that we are doing in your product that we're introducing usually driving higher ASPs. And third, I would say the size of the customer usually is the bigger customer, the higher discounts that he is getting compared to a smaller customer that's getting a lower discount. This is the economics of sales. So those are the key factors that changing our gross margin mix. And so I would say this is the mix. On the other hand, we have the material cost increase, labor cost increase and so forth. So currently, we believe that we can operate in a higher range of taxes margin depending on factors that describe the chain factors going forward.