Nova Ltd. (NVMI) Q3 2026 Earnings Call Transcript

Where we will present our future strategy and provide greater insight into the market and technology transitions ahead, the opportunities they create, and how we are aligning our portfolio and investments to drive Nova's next phase of growth. Now, for some more details on our financials, let me hand over the call to Guy.

Thanks, Gabi. Good day, everyone. I will begin by reviewing our third quarter financial achievements, and then provide guidance for the fourth quarter. We delivered another quarter of record results, generating $287.8 million in revenue, our third consecutive quarter of all-time highs. Revenue exceeded our guidance and increased 13% quarter over quarter and 28% year over year. This achievement is a testament to the strength of our core offerings, as well as our ability to capture and respond to the continued demand in the market. Product revenue distribution was approximately 61% from Logic and Foundry, and 39% for Memory and others. Product revenues included four customers and four territories, which contributed each 10% or more to product revenues. In the third quarter, gross margin was 57.7% on a gap basis and 59.1% on a non-gap basis. These strong margin levels reflect the high value of our product delivered to customers. Combined with record revenue, they enable us to generate another quarter of strong profitability. As expected, operating expense increased to $73.3 million on a gap basis. And $68 million on an on-gap basis, as we continue to invest in innovation and future growth opportunities. The increase was driven primarily by higher R&D spending to support our product roadmap and technology leadership, as well as cost-related ongoing strategic evaluations. Operating margins in the third quarter reached 32% on a gap basis and 35.5% on a non-gap basis, surpassing the upper range of our target model of 28% to 33%. These results highlight our ability to translate revenue growth into profitable expansion. The effective tax rate in the third quarter was approximately 18%. Earning per diluted share in the third quarter on a gap basis were $2.64 per diluted share, and earning per share on a non-gap basis were $2.86 per diluted share, exceeding the high end of our third quarter guidance. Turning to the balance sheet, we ended the third quarter with $1.8 billion in cash, cash equivalent, bank deposits, and marketable securities. Our free cash flow for a third quarter reached $132 million, bringing total positive free cash flow for the first three quarters of 2026 to approximately $206 million. This performance highlights the strong cash-generating capability of the business and the quality of earnings. In addition, consisting with our balanced capital allocation strategy, we repurchased approximately $38.5 million of shares during the quarter, following the $200 million share repurchase authorization announced in September. Next, I'd like to outline our guidance for the fourth quarter of 2026. We currently expect revenues for the quarter to be between $305 million and $315 million. Gap earning per diluted share to range from $2.78 to $2.94. Non-gap earnings per diluted share to range from $3.03 to $3.18. At the midpoint of our fourth quarter 2026 estimates, we anticipate the following. Gross margins of approximately 57% on a gap basis and approximately 59% on a non-gap basis. Operating expense on a gap basis to increase to approximately $78 million. Operating expense on a non-gap basis to increase to approximately $72 million. Financial income on a non-gap basis is expected to increase to approximately $18.7 million in the fourth quarter, reflecting the higher cash balance on hand. Effective tax rate is expected to be approximately 17%. Before I conclude my remarks, I would like to highlight that based on the midpoint of our fourth quarter guidance, we expect to finish 2026 with another year of record revenues. Moreover, in the third quarter, we surpassed our long-term milestone of $1 billion in revenue on the last 12 months basis and delivered profitability at the high end of our target range. Both achieved a full year ahead of our original plan. Reaching these milestones ahead of schedule is a testament to the strength of our business model, the discipline execution of our strategy, and the significant value our process control portfolio creates for customers. Most importantly, it reflects our ability to consistently generate attractive returns and long-term value for our shareholders. With that, we will be pleased to take your questions.

Operator? We will now begin the question and answer session. To ask a question, you may press star, then 1 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 and then 2. Our first question comes from Atif Malik with Citi. Please go ahead.

Hi, thank you for taking my questions. Gabby, you talked about objective to outperform WSE, which is a function of spending mix. So when you look at DRAM versus Foundry logic mix next year with higher gate all around mix, a new logic project, do you think that spending mix closes the gap from this year and helps Nova outperform?

Thank you, Ates, for the question. So let me perhaps give some color to... What makes the 2027 investment mix more favorable for us, for NOVA? So I'll start with Gator around. First, we see some shift towards incremental investments in Gator around, where intensity of metrology increases by about 30 percent compared to FinFAT. And our NOVA share in Gator around across all players is higher as well. So that also supports the increase. In memory, we do expect continued strong double-digit growth in DRAM investments and moving to some more advanced DRAM nodes, moving to such as 1C, 1D, whereas we will see some additional intensity, including in materials metrology, where we see increased sampling, new implications, and higher tool utilization, which drives an increase in numbers of tools per fab, which reach up to nine. Obviously, process control and saying that in memory is lower than logic as a whole, but we do see some positive trend in that vector. And the advanced packaging, and specifically in HBM, we continue to see the capacity expansion, The process complexity driving our business, and we see some, as I mentioned during the transcript, I do see some adoption in OSATs of some of our tools as a result of those players capitalizing on leading manufacturers' advanced packaging tool selections that were already made. And last but not least, we do see some new customers and entrances into the market, and those participants create additional opportunities for us to broaden our customer base and footprint. So overall, what I see is that 2027 combines both the WFE growth with an investment mix favorable for Nova and some opportunities for increased application penetration and expansion of our market share. So I do anticipate this momentum to drive into next year. I would also say that we do see some linearity in the business in the quota-over-qu quota growth next year in that respect.

Very helpful. And, Guy, on the topic of the supply chain, there are some concerns in the market that shortages of components like gas delivery and optical could limit the ability to ship more. Are you seeing any issues with NOVA or your ability to ship more products or the bottlenecks elsewhere?

So... We are seeing, we're definitely seeing this rapid industry ramp stretching our supply chain, and we're taking steps to ensure that we keep delivering and maintaining our commitments to customers in spite of it. Supply chain resilience remains an area that requires active management, attention, and mitigation. We're working very closely with both existing suppliers on long-term capacity initiatives, while also striving to broaden our supply chain and investing in NOVA's own manufacturing infrastructure. I did mention our new cleanroom in Asia, and that supports our operational agility, provides us more capacity as part of our long-term plan. It's closer to customers, by the way, and definitely broadens the local supply chain ecosystem for us.

Thank you. And the next question comes from Shane Brett with Morgan Stanley. Please go ahead.

Thank you for letting me ask the question. My first question is on memory. Even if I assume your memory revenue is flat quarter over quarter into December, it would imply your memory revenue is up north of 60%, which is seriously impressive, especially given we've not necessarily had a huge technology inflection in the front end this year. Just what is driving this really impressive memory growth for Nova, and how do you think about just kind of inflections into next year for memory that could drive even more outperformance? Thank you.

Thank you. Thank you, Shane. So, We did indicate the fact that this quarter, we had about 39% of our business coming from memory and others, and we do forecast that our memory revenue this year... to have a strong double-digit growth. And we do see some similar trends into next year as well. It's coming mostly from capacity expansions. You mentioned some transitions, and there are definitely some transitions that are providing some gradual increase in intensity as a result of architectural changes. And we definitely see some initial pilots next year with the transition to 4F2 that will further increase the process control intensity for those customers. So the opportunity in general is diverse and comes from our entire product portfolio. For the dimensional metrology, it's both the capacity expansion and an increasing intensity in HBM. In the materials metrology, we see increased sampling rates, new applications, and all of that is driving additional tools per fab. I mentioned reaching the bar of nine with leading customers, and chemical metrology is definitely the growing adoption of our front-end solutions.

Got it. That's great to hear. And for my follow-up, I'd love to hear about the competitive environment and material metrology. You pioneered this market, have driven adoption with customers. If we do see competition emerges, how do you think this market will change for you? Thank you.

We anticipated the competition in material metrology. I indicated that a few times in the past, and it's a testament to the fact that this is becoming a meaningful process control area for both customers and obviously for peers and competitors. We see new entrants that will come and compete probably towards the second half of next year, and we are investing considerably in order to maintain a very significant competitive gap to make it very challenging for new entrants. But we do welcome the competition, and again, it indicates the importance of this market and the fact that it will continue to grow and be very attractive in terms of the importance it possesses with our customers. Thank you.

And the next question comes from Michael Manny with Bank of America. Please go ahead.

Hi, thanks so much for taking my question. To start, could you give us a sense of where foundry and logic and memory end up for Q4? And the basis for that question is, when I look at where your foundry and logic growth is tracking overall for this year, it seems to be maybe a little bit more muted, especially relative to memory, trailing behind overall foundry and logic WP as we see it. How should we interpret that? Is that more of a digestion sort of period after multiple years of very strong growth in that segment? Is it more of a mixed factor or timing factor? And is it really just gain all around coming back next year that could help return that part of your business to grow? Thank you.

Thank you, Michael. So I wouldn't say it's muted. We do see meaningful growth for us in logic, logic and foundry, in both advanced and mature nodes, by the way, and I'll speak to it a bit later. In the advanced logic nodes, the transition to Gator around is definitely increasing intensity overall, and I believe that it will also help our growth in that respect, both the intensity as well as our share with the customers. And talking about logic, I would indicate the mature nodes, especially China, whereas in the third quarter, we did see an increase in both revenue and in share of sales. But overall, this year, we expect China's shares to be lower than 2025, but still nominally grow.

Got it. Thank you. And for my follow-up, I think on what's on Metron, you've mentioned before that after I get to be present at all, five major customers by end of next year, I think qualifications are still progressing. So how many of the five are in high-moley manufacture today versus still in qualification? What do you see as the timeline and the gating factors for the remaining ones to get to that milestone? Thank you.

So we currently, it's a great question. Thank you, Michael. We do see right now four out of the five already adopting the Metreon, either in high volume manufacturing proliferation or valuations. I do hope to conclude the fifth next year. And we see strong demand for the Metreon. There are longer lead times for this tool, but we're very encouraged by the market demand.

Thank you. And the next question comes from Charles Shee with Needham. Please go ahead.

Hi, thanks for taking my question. Maybe first I want to clarify and maybe help us unpack the Q3 results and Q4 guidance a little bit. I think roughly 90 days ago, we were under the impression that a half-over-half growth for this year is probably in the high teens range, and obviously I think it's going beat and raise our quarter to quarter. That's what NOVA does. But now, based on your guidance, it seems like it's going to be half of a half, 22 percent. I wonder if, relative to the expectation, what has changed and what's driving the upside? That's the first question. Thank you. Thank you.

So thank you, Charles. I believe that it's more or less in line with our initial expectations. So I don't think that we deviate from the previous forecasts and expectation of having a stronger second half to the first one. It might be a bit higher in terms of the strength, but it's still in line with the expectation. But we are encouraged, as I mentioned before, by the momentum, and we expect it to continue next year as well.

Thanks, Gabby. Maybe a follow-up question on material about the competition new entrants you mentioned about. We know you have X-ray, you have You have Raman, you have SINs, and these are all material technologies, but we're exactly which technology you're seeing new entrants, especially if it's x-ray, can you be a little bit more specific because, you know, there are all kinds of x-ray technology, XRF, XPS is where you play, but there's x-ray CT, there's x-ray CD, so kind of unpack a little bit for Thank you for the new entrants you are seeing and how you intend to maintain your competitive lead. Thank you.

Thank you, Joe. So definitely, thank you for the question. The competition we are seeing, or we will see, it's not here yet, and we need to be a bit more cautious about it. We'll probably see something initial. I'm not sure that it will be meaningful, but towards the second half of next year, but it's centered around XPS only. So we don't see this across the board in our material metrology portfolio, but XPS only. Nova does have a very extensive XPS plus XRF portfolio. We are not selling, by the way, XRF as a standalone tool. It's a part or an addition to the XPS capabilities, augmenting the overall application space and value of the tool. The investment, as always, is on the two-pronged approach on both technology and cost of ownership. So we are investing significantly, and we're releasing new products, new XPS products, that are providing... Higher performance and better cost of ownership, and we've doubled down on investments in order to make sure that future generations of tools will have a very significant gap in offering value to customers.

Thank you. I appreciate the insights, Gabby. And the next question comes from Tom O'Malley with Barclays. Please go ahead.

Hey team, this is Trip Smith on for Tom O'Malley. Thank you for the question. I was just curious if you could expand on the qualification and completed acceptance of the Ancocene product. I was just curious if there was like a timing on that for the high volume manufacturing by the leading foundry, and then any kind of color on the competitive space in the front end chemicals metrology area versus like the larger incumbent and how you're getting share there. Thank you.

Definitely. So first of all, I'll start with saying that front-end chemical metrology extends our chemical metrology presence beyond our historical strength in back-end application, and the third quarter was a record quarter for chemical metrology in general, whereas specifically the ANSC-Anchocene completed acceptance and was released into HVM at the leading foundry. And we're currently at additional customer penetration stages, and we gain market share, which is occurring across several geographies. We have one competitor in the chemical metrology front-end space, which is KLA, and we're offering very unique value to our customers with that tool.

Thank you. And then maybe just as a follow-up, I think we've heard a little bit about this in the industry, but based on your guide, it kind of implies a flattish to down gross margin. I was just curious if that's coming from continued memory headwinds or broader supply constraints and how you guys are managing those. Thank you very much.

Yes, so our gross margin this quarter was 59%, and we guided the next quarter also 59%, so we don't see a reduction. Obviously, the gross margin for the next quarter can fluctuate, plus-minus 1%, but we don't see currently any headwinds on the gross margin side.

And the next question comes from Venvati Shrotri with Evercore ISI. Please go ahead.

Thanks for taking my question. So you've previously outlined a $500 million revenue opportunity with accumulated revenue opportunity through 26, right? Where do we stand against that today? And with TSMC expecting into capacity almost doubling in 2027, how should we think about your annual get-all-round revenues next year? Could they scale similarly? Could you see them double?

So thank you, Vedvatik, for the question. We are on track with the accumulated revenue from 24 to 26 of a total of $500 million. And we are very encouraged by the shift towards increasing investment in GED all around. I definitely believe that this is providing a tailwind for the company. I think it's a bit early to assess or provide some color on the number, but we do see growth year over year in our gate all around the process control revenue. I understand. Thank you.

And for my follow-up question on gross margins, I understand that we flagged in December quarter, but as we go through the year, could you talk about the headwinds you're seeing or the tailwinds you're seeing? Like one aspect is, you know, you're also expanding your manufacturing facilities in Asia. So what would be the impact of that to the gross margins?

Yeah, so when we're looking beyond fourth quarter, we do see cost increase, but the cost increase is being offset by better operational efficiency and higher volumes. We also typically adjust pricing when we introduce new capabilities that add value for our customers. Whatever through unique metrology capabilities or productivity improvements, and as we mentioned on the last turning call, we do have several initiatives already in the pipeline that we expect to announce in the future, which should further support this trend.

All right. Thank you.

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.

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

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