Nova - Earnings Call - Q3 2025

Transcript

Operator (participant)

Good morning and welcome to Nova's third quarter 2025 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mary Siegel, CEO of MSIR. Please go ahead.

Mary Siegel (CEO)

Thank you, Operator, and good day, everyone. I would like to welcome all of you to Nova's third quarter 2025 financial results conference call. With us on the line today are Gabby Weissman, President and CEO, and Guy Kisner, 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. Gabby 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 Gabby Weissman, Nova's President and CEO. Gabby, please go ahead.

Gaby Waisman (President and CEO)

Thank you, Mary, and thank you all for joining us. I will start the call today by summarizing our third quarter performance highlights. Following my commentary, Guy will review the quarterly financial results in detail. Nova achieved record quarterly revenue of $224.6 million in the third quarter, marking a robust 25% year-over-year growth. This performance reflects the continued trust of our customers, driven by demand in advanced nodes and advanced packaging. This quarter, we delivered record revenue from memory devices, fueled by strong demand for advanced DRAM and high bandwidth memory. We also reached record revenue from advanced logic nodes, predominantly driven by gate all-around processes. Our materials metrology revenue benefited from adoption of our Ellipsan and Metrium platforms, and we also achieved record service revenue, underscoring the resilience and value of our portfolio and business model.

According to our fourth quarter guidance, 2025 will be a record year for Nova, reflecting growth of approximately 30% year-over-year at the midpoint. Looking ahead, we anticipate further growth in 2026, with advanced logic, advanced packaging, and DRAM continuing to fuel the momentum. Recent announcements of large-scale investments in artificial intelligence are creating a positive outlook for sustained industry growth and wafer fab equipment spending. Manufacturing integrated circuit devices for AI applications introduces unique process control challenges, such as complex architectures, tighter tolerances, new packaging technologies, and the integration of new materials. Our customers are constantly challenged to reduce ramp-up periods and then maximize yields in high-volume production. Nova's solutions are purpose-built to address these challenges, enabling our customers to deliver the performance and reliability required for next-generation AI devices.

With this in mind, in 2026, we expect WFE growth in the mid-single digits, with potential upside as AI-driven demand trickles down the value chain to increased utilization rates and wafer starts. Now, I'd like to review some of the highlights from the past quarter. First, our record sales in memory this quarter were driven by several key achievements. In materials metrology, we saw record Veriflex sales to memory fabs. We also secured new orders for our Prism platform supporting HBM manufacturing. In chemical metrology, we anticipate receiving orders for multiple tools from a new memory customer, following the successful adoption of the Nova Anchor front-end platform, which replaces a competing tool. These wins underscore Nova's expanding footprint and the important role our solutions play in enabling advanced memory production.

Second, Nova achieved record sales in advanced logic, driven primarily by strong demand for our solutions in gate all-around manufacturing processes. Notably, our Ellipsan materials metrology platform was selected as a tool of record by a leading global foundry, and we have already delivered several systems for use in high-volume production. Ellipsan leverages state-of-the-art Raman spectroscopy to provide precise, non-destructive material characterization. These capabilities are essential for advanced device nodes. In addition, we recognize revenue from the sales of the Metrium platform to a gate all-around manufacturer, further expanding the adoption of this tool. We expect to see orders from additional customers in the coming months. Third, in advanced packaging, the demand for Nova's optical metrology solutions continues to increase, particularly for critical dimension measurements in the most complex manufacturing environments. Our portfolio for advanced packaging includes Prism, WMC, Semdex integrated metrology, and the Anchor Laser.

These solutions address multiple stages in the production process, such as post-CMP applications, as well as measurements of through silicon via wafer warpage, total thickness variation, and electroplating analysis. This quarter, we introduced our latest optical metrology platform, the Nova WMC, a next-generation modular system designed from the ground up to address the evolving requirements of advanced packaging. The WMC has already been adopted by three customers for HBM and power device manufacturing, with additional customer evaluations and demonstrations underway. The WMC offers exceptional versatility, supporting a wide range of wafer sizes and forms and multiple metrology technologies. This positions WMC as a cornerstone tool for next-generation packaging, including 2.5D, 3D, and hybrid bonding applications. The strong demand for the WMC is a testament to its ability to address industry challenges such as high warpage, non-symmetric shapes, and diverse surface conditions, all with high throughput and nanometer-level fidelity.

Additionally, our Prism and integrated metrology platform were adopted by a leading global logic manufacturer for advanced packaging processes, and our chemical metrology platform, the Anchor Laser, was shipped to a gate all-around customer for back-end packaging processes. All of these embody Nova's commitment to deliver comprehensive integrated solutions that enable our customers to meet the stringent requirements of advanced packaging and maintain a competitive edge. Finally, we marked a significant milestone in our operational excellence and capacity expansion with the opening of our new state-of-the-art production facility in Mannheim, Germany. This advanced cleanroom, which extends our existing site, enables us to triple our production capacity for advanced packaging optical metrology solutions while further improving our manufacturing process and quality. To conclude my prepared remarks, this quarter reflects the strength of Nova's strategy and execution across all fronts, from technology leadership to operational scale. As our industry continues to evolve, driven by AI and increasingly complex architectures, Nova is well positioned to support our customers with differentiated, scalable, and innovative solutions. Looking ahead, we remain confident in our ability to deliver long-term growth and value. For more details on the financials, let me hand over the call to Guy.

Guy Kizner (CFO)

Thanks, Gabby. Good day, everyone, and thank you for joining our 2025 third quarter conference call. I will begin by reviewing our financial achievements for the third quarter of the year and then provide guidance on the fourth quarter. Total revenues in the third quarter of 2025 reached a record level of $224.6 million. Marking the sixth consecutive quarter of record-breaking results. This performance reflects a growth of 2% quarter over quarter and 25% year over year. Product revenue distribution was approximately 70% from logic and foundry and 30% from memory. Product revenues included four customers and three territories, which contributed each 10% or more to product revenues. In the third quarter, blended gross margins aligned with our guidance, achieving 57% on a GAAP basis and 59% on a non-GAAP basis, well within our target model range of 57%-60%.

Operating expenses increased to $63.5 million on a GAAP basis and $58.6 million on a non-GAAP basis, as we used top-line growth to invest in R&D for long-term opportunities and in ongoing strategic evaluations. Operating margin in the third quarter reached 28% on a GAAP basis and 32% on a non-GAAP basis, demonstrating the scalability of our model and the strong value proposition of our process control portfolio. The effective tax rate in the third quarter was approximately 16%. The earning per share in the third quarter on a GAAP basis was $1.90 per diluted share, and earning per share on a non-GAAP basis was $2.16 per diluted share. Turning to the balance sheet, during the third quarter, the company generated approximately $67 million in free cash flow, bringing the total positive free cash flow for the first three quarters of 2025 to approximately $170 million.

In September 2025, the company successfully completed a 0% convertible notes offering of $750 million, with a 35% conversion premium and a capped call structure that raised the effective premium to 75%. As a result, total cash, cash equivalents, bank deposits, and marketable securities increased to $1.6 billion at the end of the quarter. This strong financial position enabled us to continue investing in R&D and strategic growth initiatives, while maintaining the flexibility to pursue M&A opportunities and capitalize on market trends that support our long-term objectives. Next, I'd like to outline our guidance for the fourth quarter of 2025. We currently expect revenue for the quarter to be between $215 million and $225 million, GAAP earnings per diluted share to range from $1.77 to $1.95, and non-GAAP earnings per diluted share to range from $2.02 to $2.20. At the midpoint of our fourth quarter 2025 guidance, we anticipate the following.

Gross margins of approximately 57% on a GAAP basis and approximately 58% on a non-GAAP basis. Operating expenses on a GAAP basis to increase to approximately $65 million. Operating expenses on a non-GAAP basis to increase to approximately $59 million. Financial income on a non-GAAP basis is expected to increase to approximately $16.8 million in the fourth quarter, reflecting the higher cash balance on hand. Diluted share count for the fourth quarter is expected to be approximately 34 million, incorporating the full quarter effect of the recently issued convertible notes. The increase in share counts and higher financial income are expected to largely offset each other, resulting in a minimal impact on a non-GAAP earning per share. Effective tax rate is expected to be approximately 16%.

Before I conclude my remarks, I would like to highlight that based on the midpoint of our fourth quarter guidance, we expect to close 2025 with record high revenues, reflecting exceptional annual growth of approximately 30%. Our non-GAAP profitability outlook for 2025 remains robust, with blended gross margins around 59% and operating margins near 33%, positioning us at the high end of our target model and highlighting the strength and scalability of our business. With that, we will be pleased to take your questions. Operator.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ateef Melek with Citi. Please go ahead.

Aatif Malik (SVP of Trade Sales)

Hi, thank you for taking my questions and strong execution throughout the year. Gabby, with respect to your mid-single digit wafer fab equipment outlook for next year, if I recall, this was the same outlook that you were giving in early September, and a lot of things have changed in the memory land since then. Can you walk us through the upside case to this WFE? Is Nova still going to outperform the WFE? We have been hearing that the memory makers are somewhat constrained in their shell capacity. Is that the driver that is limiting the growth to mid-single digit? If you can just walk us through the puts and takes.

Gaby Waisman (President and CEO)

Definitely. Thank you for your question. First of all, I believe that there's been some improvement since the September discussions. In general, I think that for the Nova side, we do believe that we have the right growth engines and ability to outperform this growth. We estimate that 2026 will continue the trend and that, in general, we believe it will be more of a second-half weighted year.

Aatif Malik (SVP of Trade Sales)

Great. Guy, on the gross margins, a little bit light on the reported quarter and guiding to 58%. Can you walk us through the puts and takes on the gross margin? Are you seeing any impact from the incremental China restrictions to your gross margins?

Guy Kizner (CFO)

This quarter, we reported a gross margin of 59%, and it's aligned with our forecast. Looking ahead for the next quarter, we are guiding 58%, plus minus 1 percentage point. That range reflects continued discipline in pricing and cost structure, and importantly, our ability to deliver strong value to customers. The main fluctuation when they occur in the gross margins is mainly product mix during the quarter. The right way to look on our performance is on the annual basis, where in 2025, we expect to see 59%. It's well aligned within our target model of 57%-60% gross margin.

Aatif Malik (SVP of Trade Sales)

The impact on the China restrictions, any incremental impact?

Guy Kizner (CFO)

No. Currently, we don't see a significant impact from China.

Aatif Malik (SVP of Trade Sales)

Thank you.

Operator (participant)

The next question comes from Blaine Curtis with Jefferies. Please go ahead.

Ezra Weener (VP of Equity Research)

Hi. Thanks for taking my questions. It's Ezra Wiener on for Blaine. Just to start, in the quarter, Foundry and Logic was down like 6%, and Memory up a little over 20%. Can you talk about the moving pieces there, especially considering you said leading-edge foundry hit a record? How do you see that going into next quarter?

Gaby Waisman (President and CEO)

Sure. So first of all, we mentioned that. As you said, that this quarter has seen an increase in the memory sales, and we've reached a record revenue level. This quarter, memory was about 30% of our sales, where DRAM generated the majority of that business. And we see DRAM is recovering nicely, and we have a good exposure in this market. We do expect this trend to continue next year, and memory would be one of the growth drivers for WFE in 2026. Saying that, our long-term model suggests a ratio of 40% memory and 60% logic due to the higher metrology intensity in logic. Specifically to your question about the ingredients of that growth, we see adoption of our portfolio across the product divisions by leading memory customers. We mentioned the record Veriflex sales to memory. We have multiple orders for the latest and greatest Prism standalone OCD tool. We have a new win for the WMC for HBM, and we have a new memory customer in chemical metrology. We do see the fundamentals of the growth in the memory, and we do expect a continued growth next year in that sector.

Ezra Weener (VP of Equity Research)

Got it. In terms of what you're seeing from China, given. Clearly trailing edge, Foundry Logic is down?

Gaby Waisman (President and CEO)

Excuse me, you were cut at the end.

Ezra Weener (VP of Equity Research)

Yeah. Foundry and Logic is down in September. But leading edge was up. That does seem to likely be related to China. Can you talk a little bit about what you're seeing in China?

Gaby Waisman (President and CEO)

Sure. First of all, we expect the nominal value of our business in China this year to be slightly higher year over year compared to last year. We mentioned that the revenue is skewed towards the first half of the year. On an annual basis, we expect our revenue from China to be nominally higher all in all. Of course, the share of the overall business from China should be lower than last year. Last year, we had 39%, and this year will be lower, probably in the range of, let's say, the 30%-plus mark. We do believe that China has already normalized in terms of the business levels in the second half of this year, and we expect this trend to continue in the first half of 2026.

Ezra Weener (VP of Equity Research)

Got it. Thank you.

Operator (participant)

The next question comes from Liam Farr with Bank of America. Please go ahead.

Liam Pharr (Equity Research Analyst)

Hi, I'm from Michael. Thank you so much for taking my question. I was just wondering, in terms of gate all-around, what kind of trajectory are you seeing in 4Q and through 2026 as well? Thank you.

Gaby Waisman (President and CEO)

Gate all around has been driving our business, and the third quarter has ticked in that respect. We are exposed to all of the four gate all around players. We mentioned before that the aggregated business that we expect for 2024 to 2026 from that gate all around business is about $500 million. This is well in track. Our business from gate all around in 2025 significantly increased, and we expect this to continue next year. As I mentioned before, we are on track with our original plan, both in terms of scope and in terms of timelines. We are very fortunate and we are encouraged to see all the four players advancing towards manufacturing. We believe that this will continue where demand is certainly growing.

Liam Pharr (Equity Research Analyst)

All right. Thank you. Just to follow up, in terms of, you've mentioned M&A. Adds upside to your long-term model. Where would you like to expand or do a tuck-in deal if you could? And what kind of capabilities would you be looking to acquire?

Gaby Waisman (President and CEO)

After the convert that we successfully concluded early in September, we definitely have the right war chest to pursue inorganic growth opportunities. We are looking predominantly on the semiconductor area process control, but we are definitely open to some additional segments as long as there is a strong semi business. In that part, we have a dedicated team in the company that pursues such opportunities, and we are definitely looking forward in making sure that we can execute on our strategic plan in that respect.

Liam Pharr (Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from Zayd Bhatti Schroeder with Evercore ISI. Please go ahead.

Zayd Bhatti Schroeder (Analyst)

Hi. Thanks for taking my question. My first question was on the WFE outlook that you shared. You mentioned it's second-half weighted for 2026. Can you provide some color whether how this splits, like Foundry Logic versus Memory? Is that comment of second-half weighted for both the end markets?

Gaby Waisman (President and CEO)

Thank you for the question. First of all, I'd like to reiterate the fact that we have the right growth engines and the ability to outperform the growth of WFE next year. We see some upsides as well. In terms of the specifics, I believe that the advanced nodes, and in particular gate all-around, will accelerate further in the second half of next year, driving that weighted assumption. Of course, we are not giving any color beyond that, other than saying that we believe that we have both memory and advanced logic driving the business in next year in general and accelerating towards the second half in particular.

Zayd Bhatti Schroeder (Analyst)

Understood. My second question was more on the advanced packaging piece. You have the portfolio sort of increasing with your WFE product lines, and at the same time, you're kind of winning multiple applications across HBM and advanced Foundry Logic. What's your view on advanced packaging contribution for 2025? How much of your revenues would be coming from advanced packaging applications this year? Where does that go next year?

Gaby Waisman (President and CEO)

Sure. The current 2025 numbers show a high double-digit revenue growth for the company. We expect to see a higher share of revenue for advanced packaging compared to last year. Last year was about 15%. This year, it will be approximately 20%. The majority of the revenue from advanced packaging is coming from logic devices, whereas the main contributors, by the way, for that business are the dimensional and chemical metrology portfolios, which I alluded to in the script. We expect 2026 to further grow in that business, definitely given the latest AI announcements that we heard of.

Zayd Bhatti Schroeder (Analyst)

Understood. If I may squeeze one last one in. I understand your positioning on the DRAM side, and I think Foundry Logic, your positioning is very clear. Could you give us a sense of what your positioning in the NAND cycle is? What would you have to see for maybe the NAND revenues to start inflecting?

Gaby Waisman (President and CEO)

NAND is a bit muted still. I definitely hope that it will be growing, probably towards the second half of next year. We are well positioned in NAND as well. Our business, which is basically capacity-driven, requires more investments on the capacity side that, as I mentioned, I hope would start at the second half of next year.

Zayd Bhatti Schroeder (Analyst)

Understood. Thank you.

Operator (participant)

The next question comes from Charles Sheehan with Needham. Please go ahead.

Charles Shi (Managing Director and Senior Analyst)

Hey. Hi, Gabby and Guy. Congrats on the good results. Maybe I'll start with the commentary on next year. Mid-single digit WFE, you outperform that number, second half weighted. Can you provide a little bit of color relative to second half 2025? What's your best view on first half 2026 in terms of your top line, run rate, etc., and maybe some of the puts and takes between, let's say, Foundry Logic and Memory or China, non-China, as much as you can at this point. Thank you.

Gaby Waisman (President and CEO)

Sure. Thank you, Charles. First of all, we don't, as you know, provide guidance beyond the next quarter, so it would be difficult to drive into details. I would mention that 2026 is driven by both memory growth and investments in advanced logic and advanced packaging. Our position across these segments is strong, and that would drive our growth, relatively or related to that. We also invest a lot in market share gains in order to accelerate and fuel that momentum. In terms of China, I believe that the business that we see in the second half of the year, or the business that we already have in China, is already normalized in terms of business levels. We expect this trend to continue in the first half of next year. Beyond that, at this moment, in China, visibility is limited, and the market is very dynamic, so we'll need to see how things evolve.

Charles Shi (Managing Director and Senior Analyst)

Got it. Maybe I'll quickly follow up on China. Sounds like the first half 2025 was pretty strong for you. Second half, it's normalized. China sounds like it's a little bit first half weighted for 2025. If I extrapolate what you said, that normalization trend continues into first half 2026, sounds like China is probably a down year next year. Is that the right read? If that's the case, what would you—yeah, sorry.

Gaby Waisman (President and CEO)

I'm sorry for interrupting you, Charles. Not necessarily. I mentioned that we have lower visibility for the second half as it's a very dynamic market, but we do hope that nominally the business in China will remain solid. It does not allude to any changes in the overall levels in China next year.

Charles Shi (Managing Director and Senior Analyst)

Thank you. I appreciate the color.

Gaby Waisman (President and CEO)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Gabby Weissman, Nova's President and CEO, for any closing remarks.

Gaby Waisman (President and CEO)

Thank you, Operator, and thank you all for joining our call today.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.