Nova Ltd. (NVMI) September 8, 2026 Conference Transcript

Good morning, everyone. Welcome to day one of Citi Global PMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Guy Kisner, 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. I think you guys have talked about 2026, VFF have equipment growth, an outlook of 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?

Yeah, so I think, as you mentioned, we usually are relatively a small player in this industry of giants. So we don't have really the ability to look on the WFE or have, you know, internal focus. So when we're talking about WFE, we're usually referring to the, you know, the consensus in the market. We're relying on external sources. And I think what is unique in 2026 is that every two 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're already just four 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, tech insight in the high 20s. You have, you know, other analysts talking about 30, 35, 38, even though it's four months left, right? When you have the big players, the backlog is out there, the shipment plans are 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 if you can just talk about where is the incremental demand coming from in terms of leading-edge logic in DRAM and around HPM? Anything you see on the NAND side in terms of green shoots?

When we're looking at 26, so definitely there are many drivers that are working. First is the advanced node, as you mentioned, both on the gate all-round, but also a lot of spending happening on the 3nm as well. DRAM, definitely we see 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. Unfortunately, Nova is not going to benefit from the upgrades, and we need greenfield capacity additions. And it's not happening yet. Hopefully, we will see some of it happening in 2027, because I would say the longest down cycle on NAND side. So, except NAND, I would say all the engines other than working very strongly. Great.

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

So I think historically, if you look on OVA performance, you see that we are capable of upperforming WFE significantly. Just, you know, recent years, 24, we grew by 30 percent. WFE didn't grow so much. 25, we grew by 31 percent. 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 a definitely strong year, and Nova is growing nicely this year as well, but we don't see the same art performance 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, suggest 60-40 due 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, usually the investment pattern is happening when the customer is moving to new 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're seeing this year, given the fact that the AI customers didn't transition to the gate all around to the newer tech node, and they are still using the N-1, 3 nanometer and 5 nanometer, and obviously the huge demand that we're 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 are looking on 2026 in terms of spending weight, you see that the metrology intensity went down because of the spending, I would say, mix. 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 that. I think hopefully we will see NAND increasing the capacity. So practically for us, it's coming from zero 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 increase. It will happen when the industry will move to the 4S square, but it will happen in 28 and going forward. But I would say on the logic side, we do expect much more mixed skew towards the 2 nanometer and the gate all around, and less on the 3 nanometer. So I would say when we are looking on 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 to continue to outperform the industry going forward.

Yeah, 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?

We talked about the visibility in our latest earning 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're talking about visibility, it's mainly, first of all, on the backlog side, we do see a significant backlog in its higher versus, you know, 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 times in four 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 forecasts. 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, one year ahead, sometimes even longer than that, in order to make sure that all the vendors are ready, capable to supply all the demand. So definitely the visibility and the confidence we're having.

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 in the past?

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

Let's talk about some of the newer products with Metreon and Lipson entering high-volume manufacturing. How much are these parts contributing to your growth this year and next year?

So we have three main drivers, three main products, as you mentioned, Ellipson, Metreon, 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 a metrology solution that's increasing our addressable market. It's not necessarily always looking on the WFE increase. I would say Ellipson and Metreon 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. You know, our 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 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 Veriflex. It was very successful. And this is what we are doing right now, both with Ellipson and Metrian, where we are looking for more application, more use cases. And in some cases, we are very successful at that front, and we see repeat buys from leading customers with this platform. But 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 the main focus is to address the most complex advanced packaging application. This tool was structured as a tool that can... The uniqueness of this tool is that you can deploy different sensors in one tool. So in one measurement, you can really solve different applications. But in the past, 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 bold wafer, frame wafer, the standard 300 millimeter, 150, 200, no matter what kind of size and shape wafer, future 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 one year ago, we just recently we announced another win with this platform and we see a very rapid adoption. solution. Super exciting.

Guy, advanced packaging is now like 25% of your sales. It's growing fast for the market. We currently get asked by clients on kind of share shifts in this market. 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 we had zero exposure to packaging. And we did a couple of things. First, we acquired two companies, both ANCOSIS, the today chemical metrology division, and the Centronics company that we acquired in the beginning of 2025. It has very strong positioning on the advanced packaging. And second, we took our front-end tools, which is both integrated metrology and the optical signal, mainly Prism, and we deployed it into the advanced packaging applications. And this strategy paid off because, as you said, 2025, it was about 20%. The second quarter, we said we reached a level of 25% of contribution of advanced packaging. 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 want to see how we can solve a specific application with our material metrology. So this is definitely another gold agent for us. So I would say these are the key areas of advanced banking. Great.

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

Yeah, so, you know, as you said, in the first half of the year, we saw the 59% gross margins. In the third quarter guidance, we also guided a 59%. So 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 an economic of scale. So this is 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. It means what kind of productivity you are bringing, what kind of capabilities. So with every capability that you're 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're doing in your product that we're introducing, usually driving higher ASPs. And third, I would say the size of the customer. Usually, the bigger customer, the higher discounts that he is getting compared to a smaller customer that's getting a lower discount. So this is the economic of sales. So those are the key factors that are 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 the gross margin, depending on factors that I described, factors going forward.

Mark, some of your peers have talked about, like, value-based pricing and things like that. Do you guys have opportunities to kind of raise pricing on your newer products that could structurally take the margins higher over time?

Yeah, so mainly the, I would say, the pricing strategy, Semi, and specifically process control from our side, is really based on value. So your opportunity to extend the ASPs and the margins is true value that you bring to the customers. I think if you look on Nova's gross margin profile, we're definitely the top performance, and this reflects the high value that we are bringing to our customers. So I would say it's really reflecting that. So every capability that we bring, really the ability for us to produce margins.

Kai, can you help us understand the difference between the gross margins between products and services?

Yeah, so the gross margin on the product side is higher because the service is very, you need to have a very broad infrastructure. You know, it's very labor intense. You want to make sure that you're investing enough in the infrastructure that you have in a very good support to the customers because eventually his next decision about who is going to cooperate with and who will be the tool of record, part of it is also the serviceability, so we're investing a lot on that. So the gross margins on the service side are lower. Obviously, as you scale, also on the service side, you can benefit from that as well because, for example, if you have a new site, you still need to put infrastructure. You need to put the office, you need to put FSCs. And as the customers scale and increase in the soil base, it doesn't resist to translate to linear investments. So even there, we see operational leverage and gross margin leverage as the gross margin of the service is also .

And the target model, you're reaching the quarterly run rate. underlying the $1 billion revenue target ahead of 2027. How should you think about your aspirations for your next target model?

Yeah, so I think second quarter was a very significant milestone for us, right, when we achieved the milestone of run rate of our target model that we announced back in 2022. We said that we are going to continue our path of doubling our revenues, and we achieved it practically one year ahead of the timeline. even the market share growth and more technology adoptions and obviously the environment of the WFE. And now we are working on the next target model. We are planning to do an investor day in the beginning of 2027 where we're going to outline our view over the next five years over the market, what kind of technology we should expect to see, what kind of technology we're going to introduce in order to capture those opportunities, and definitely, you know, how the growth trajectory for Nova will be accordingly. And together with that, also the financial model, because it's part of the strategy. I think if you look on our previous target model, you saw that we had a range of operating margins and these kind of attractions. So even though we reached the model, We also reached the top line. We also reached the high end of our estimate. And with this growth, we saw an operational leverage. And as we look on the next growth, we should expect operational leverage to keep increasing.

I have multiple questions on the cash allocation. We just announced a 200 million share buyback program. Can you talk about your expectations of over what period of time you'll be implementing that?

Yeah, so our capital allocation strategy has not really changed. As you know, today we have more than $1.7 billion cash available, where the key top priority for us is in organic growth. And it doesn't change. We are spending a lot of time and a lot of focus from the management in order to make sure that it's happening. so even though we do have in our budget $1.7 billion it's allowed us to look for bigger scale companies and bigger opportunities but it doesn't really change our risk appetite for what kind of M&As we want to have we still want to be disciplined in the way we're deploying this capital meaning it needs to be acquittative it needs to fit our financial model we need to identify very clear synergies between the business either on the top line or technological level. And we believe that these criteria is really what driving our previous M&As that essentially were very successful. In terms of buybacks, buyback was always part of our capital allocation strategy. And previously we announced the $100 million buyback that we concluded. And now we deployed an additional authorization up to $200 million that we are going to use based on the market condition, based on the market valuation.

Yeah, indeed, a very good track record trading value through M&A and Consist and Tronics. What are the areas that, you know, we could expect you to add, you know, kind of more products, new products, newer markets? Is photonics an area of interest or advanced packaging will remain the near-term focus?

We're definitely looking on those areas, but not only those other areas as well. Our key focus, given the fact that in our space, you don't have an endless list of companies that are doing what we are doing, not in process control, not in semi. So we are looking at all opportunities and we are looking mainly on what kind of synergies we bring to the table. If we are not identified synergies, this is not area where we want to look. So our view is not necessary what kind of technology we want to bring in. Mainly is what kind of synergies these two businesses.

And then on the manufacturing side, I had the chance to visit your factory in Premont and you're adding more clean room. How should we think about the capex as a percentage of sales, particularly into next year? Some of your peers are talking about doubling their manufacturing capacity.

So we were very successfully able to manage the, let's say, our capacity ahead of the demand, right? And the fact that Nova were growing very fast in those years and we're able to be, able to catch those opportunities without any significant bottleneck, it just shows how much attention we're standing on the agility on the operational side. And we're continuing to do so even this year, right? As you said, we're doubling our production floor in the U.S. We opened a new clean room in Germany. We are going to open a new clean room by the end of this year for the first time in Asia. And this is part of our ongoing plan in order to capture all those opportunities and all the demand that we expect to see going forward. So it's part of our strategy. We're already investing a lot of our capexes focused on the infrastructure. And we will continue to do so in 2027 and forward ahead. I think our focus is not only on our capacity and clean room space. It's also about the whole supply chain. Because you need to make sure that your vendors are up to speed together with you. Because you can have a lot of clean room space. But eventually, if there is a bottleneck in a specific vendor that's crucial for your tools, it's practically not allowing you to meet the demand. So we're spending a lot of time to making sure that, and the visibility that we are giving to our vendors in order for them to ramp their capacity, in order to make sure that if we identify a specific problem with a specific vendor, to qualify another vendor that can supply for us. So a lot of our attention is to make sure that we have enough focus and we eventually have this demand flexibility. And this is part of our focus going forward.

Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand.

I'm just curious on the advanced packaging part.

Some of your peers are talking about very rapid growth this year. and i'm just curious for you guys um is it are what are the like sharing opportunities ahead like is it more on memory size and more only you know coals like kind of boundary logic side or is it more on the emerging opportunities like hybrid bonding i think the the main opportunity is towards the hybrid bonding i'd say hybrid bonding is definitely a big opportunity for nova uh hybrid bonding is really bringing the front end to the back end capabilities so when you're looking on and the metrology intensity is definitely going up when you are having an application of, you know, copper-to-copper bonding, and then you need to see much more controls if it's wafer-to-and-die warpage control or CMP uniformity or flatness control. So those challenges definitely drive much more metrology capability that those capabilities usually today is being used on the front end, especially with our dimensional metrology portfolio but also with our material metrology portfolio. Now the time, I would say, in terms of the hyperbonding is mainly about qualifications that are happening right now. I think the high volume manufacturing and capacity is not a big story in 2027. It's something that we will see in the future ahead.

But right now the main point and the significant importance is mainly towards qualifications. and this is where our attention is and i i would say this is the biggest opportunity for us right now in the packaging side um china um you have discussed china sales normalizing towards the 25 30 percent of uh sales um please talk about uh competition in china from domestic metrology makers um what what are the areas where you're seeing more domestic competition and where and NOVA the strongest?

So China is a very important market. I would say not only for NOVA, for the old WFE. I would say today they are investing 25% to 30% over all WFE spending. And NOVA is today, I would say it's around 30% of our revenues. And this year, even though we said in the beginning of the year that China will go slightly down to flat, Now, given the visibility that we're having in China, it will be another growth year for China for us on a nominal basis. Obviously, percentage-wise, it will continue to go down, given the fact that the other areas are growing faster. You're right saying that now the main focus is from China. It's the local ecosystem, the fact that there are a lot of export control being introduced. And from China's perspective, there are a lot of local vendors that are going after different areas in the fab. on the semi-cap size, including in the area that we are operating. Still, there is a gap in terms of capabilities, but we are looking on this as a risk, right? We are not dismissing any competition with going our way. We believe that they have the talent, the funds, the government support in order to succeed. And our strategy is to continue to invest a significant portion of our revenues into the R&D in order to drive more capabilities and continue to open the gap versus their capability versus us in order to be able to compete in this market going forward. So even today, today, there is a gap. We do expect them to continue to invest and try to close the gap. Our goal is to run faster.

Awesome. We're almost out of time. Guy, thank you for coming to the Citi Conference. Thank you.