Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova's third quarter 2020 financial results conference call.

With us on the line today are Mr. Eitan Oppenhaim, President and CEO and Mr.

Dror David, CFO. Before we begin, may I 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 the copy of the release, please view it in the Investor Relations section of the company's website.

Thank you, Miri, and welcome everyone to our third quarter financial results conference call. I will start the call today by speaking about our quarterly results and performance highlights.

Following my commentary, Dror will review the quarterly financial results in detail, including the guidance for the fourth quarter of fiscal year 2020. Our outstanding results for the third quarter exceeded the company's previous expectations and guidance.

Despite the market dynamics, we continued to demonstrate strong financial performance, solid cash flow generation, and sound execution against our long-term strategic targets. Along with our guidance for the fourth quarter, we are currently forecasting 2020 to be a growth year for Nova while we outperform the industry growth rate projection year-to-date.

We remain confident in our strategy and the long-term value we bring to our customers as they progress to their next generation devices across all technologies and segments. Although the industry is experiencing various demand shifts during this disruptive year, our technical value continues to resonate with the market, demonstrated by our customer wins in the third quarter, including selections for our traditional and new technologies.

Our well-executed plan is strongly reflected in our financial results for the third quarter where both our revenue and EPS exceeded our previously announced guidance. Moreover, both our product revenue, optical CD standalone and software sales reached record highs.

This is a result of continued demand for our products by our customers, outstanding execution by our global and local team, and the resiliency of our operating model. Turning now to the business performance highlights for the quarter, our quarterly revenue included a diversified customer and territory mix, which was primarily made up of four large customers, two global memory providers and two logic foundry manufacturers.

As expected, demand from foundry for both advanced and trailing nodes remained strong this quarter. Exiting 2020, we expect the healthy revenue stream from foundry customers to continue in 2021 as well as they prepare for growing demand in several key applications and manage structural changes in manufacturing dynamics across customers and territories.

Thanks Eitan. Good day, everyone.

In the third quarter of 2020, the company continued to perform well, so the financial results exceeded the initial expectations and guidance. Total revenues in the third quarter of 2020 were $69.5 million, all-time record quarterly revenues, 32% higher than the third quarter of 2019.

Product revenue distribution was approximately 65% from logic and foundry and approximately 35% for memory. Geographically, China, Taiwan and the U.S.

each contributed more than 20% to our product revenues. The higher than usual contribution from the U.S.

was related to a recent penetration to a new customer in that region and to the adoption of the Nova PRISM by another U.S.-based customer. On a per customer basis, four major customers contributed 10% or more to the company product revenues, including two foundry customers and two memory customers.

Blended gross margin came in at 57% on a GAAP basis and 58% on a non-GAAP basis within the company target model of 56% to 59% on a non-GAAP basis. Operating expenses in the third quarter of 2020 increased to $24 million on a GAAP basis and $22 million on a non-GAAP basis.

These incremental increases are across all company operational activities and are aimed at aligning the company resources and redundancies to the growing business levels and the COVID-19 environment. Operating margins in the third quarter of 2020 increased 22% on a GAAP basis and to 26% on a non-GAAP basis.

Effective tax rate in the quarter came in at approximately 15% on a GAAP basis. Earnings per share in the quarter increased to $0.48 per diluted share on a GAAP basis and $0.57 per diluted share on a non-GAAP basis.

Moving to the main balance sheet items, trade accounts receivables further decreased by approximately $3 million as a result of effective collection during the third quarter and days sales out came in at 55 days. As expected, the company inventory levels continue to increase due to the higher business volumes and due to business continuity measures taken as a result of the COVID-19 pandemic.

Thank you, Dror. With that, we will be pleased to take your questions.

Operator?

Nice job on the third quarter results and the fourth quarter outlook. Wanted to start first with your outlook for the specialty foundry segment of the market.

Obviously, the U.S. Commerce Department actions on SMIC will result in U.S.

companies needing export licenses. Wondering if that's having any impact on your shipments?

I don't believe your OCD business requires an export license, but just wondering if you've seen any change in demand from that customer as a result of export control. And then I've got a couple of follow up questions.

So, most of the demand - sorry, Quinn, thank you for the question. It's Eitan here.

So most of the demand in SMIC for our tools came for the OCD tools that are coming from Israel. Therefore, we don't see any shift in demand.

We do see pool-in of part of the tools as an overall of phenomena of SMIC trying to pool-in tools from the rest of the vendors. So we see it as well.

We don't see a reduction in capacity nor the demand.

And then for the comments you made, the U.S. was more than 20% of revenue in the third quarter, I believe you said that reflected the PRISM win at a large logic manufacturer, but then I think you may have said that you also shipped PRISM to a second customer in the U.S.

Wanted to make sure I heard that right. And if I did, could you provide any more color whether that's PRSIM for logic or memory or any more detail would be helpful?

So what I said in the prepared remarks is that the increase in U.S. product revenues in the third quarter was related to the win that we announced earlier this year for our U.S.-based customer and to another U.S.-based customer, which was in the logic area which adopted the Nova PRISM as well.

And then just, Dror, a couple of quick clarifications. On the revenue guidance of $66 million to $73 million, you had mentioned in the script that you still expect rev rec on a new tool.

Wondering if the $66 million to $73 million includes rev rec or to the extent you do rev rec in new tool whether that would be additional to that $66 million to $73 million?

So as Eitan mentioned, we do expect initial acceptances from the new technologies in the fourth quarter already in 2020. The range of the guidance reflects all elements related to our projections for that quarter, including the new technologies.

And then just lastly on the inventory. I know you said that you increased the inventory, one, for business continuity reasons, but also support higher level of demand.

Wondering also if there are any - is there an increase into your eval units included in that inventory figure either for PRISM at new customers or for some of the new technologies? Thank you.

Yes, the increase in inventory, not necessarily in the third quarter, but across 2020 also relates to new evaluations of the new product.

I think your previous expectation for Q4 was for logic and memory to be a bit more even here. Is that still the assumption?

If we're looking right now on the fourth quarter, we still expect that foundry will be a bit stronger, although we do expect that memory will come up. So it will not be the same allocation as we see right now around 70-30, but definitely in a more equal way.

Nevertheless, the foundry will still be stronger in Q4.

And then just curious if you're seeing any supply constraints at all across the channel?

No, in general, we do not see any significant disruption. Obviously some of the suppliers have some difficulties during these times, but nothing which is of significant and as mentioned before, we are securing the supply chain with both orders, inventory at hand and also inventory at supplier facilities.

So we do not have disruptions to-date.

And then just the last one for me and I'll jump back into queue. Obviously, the service revenue is a bit more macro sensitive.

How should we think about that rebounding going forward? Do you think Q3 was the bottom or I mean I think at one point the goal was to grow that line above 10% on an annual basis.

I mean, is that still the target, even with all the uncertainty out there?

Yes. So as we've discussed before, the growth of the service business is highly correlated with the increase in the installed base.

Generally, this increase is between 5% and 10% a year, maybe 5% to 8% and we still expect such growth rates in the future.

Thank you very much and congrats on the nice quarter and outlook. Eitan, maybe first off, aside from the SMIC situation, can you give a little bit of color of the traction you're seeing on the trailing edge foundry logic and at this time, it looks like that that business segment is picking up OCD metrology, fits in well with some of the product in markets that are at the trailing edge?

Can you give a little bit of color on what you're seeing out there broadly speaking?

Yeah. So when we're looking right now on the demand and the foundry drivers across advanced nodes and trailing nodes, we roughly see a solid distribution over the year of around 70% coming from advanced nodes and around 30% coming from trailing nodes.

The 30% that is coming from trailing nodes are divided between Taiwan and China where we see a growing demand coming from China along the quarter, where we definitely see the next - at least the next two quarter is growing from this foundry demand from trailing edge in China. There are two major foundry providers in China, and both of them actually grew significantly this year.

And unless something is changing in the U.S.-China trade war next year, we expect the definitely one of them will continue growing. So if I need to expect what will come in 2021, it's the same distribution of around 70%-30% where we have this leading foundry that will increase capacity and also the trailing edge nodes that will keep modestly growing next year as well.

Great, that's really helpful, Eitan. And maybe as my follow-up question, obviously OCD metrology been a beneficiary of the industry shift to 3D NAND and the growth of wafer starts capacity in that marketplace.

Can you give me your thoughts on the DRAM space, both from a market perspective and what you think may occur? And secondly, the capital intensity trends, particularly as they go to 1z and 1 alpha that the need for more OCD metrology and possibly X-ray as well for those most advanced nodes.

All right. So we are - I need to divide it between the X-ray capabilities and materials shipments versus the OCD and the traditional dimensional demand.

So if we're looking right now on OCD, currently the most advanced sites are the foundry logic ones and every new node that is coming in, the intensity and the demand is growing per 1,000 wafers. After that, it's the VNANDs, that once you increase the sales or the number of sales, you increase the layers.

But you also increase the stacks, from one stack to two stacks, which increase the number of layers that require OCD. And the third one is the DRAM.

Even scaling DRAM from 1x, 1y, 1z and even further actually increase a bit the intensity. But it's not large as VNAND and VNAND - sorry, NAND and the foundry and logic.

If I'm going into the memory, I think that in the first place is the memory, including VNAND and DRAM and the second place is Foundry. So this is the way it goes.

And the scale is the same which means every new node that is coming in, the attach rate for X-ray tools, the XPS' are actually increasing. So every new node that's introduced in memory is having more attach rate than foundry.

Congrats on the quarter and your outlook. Just I was wondering, you indicated two new customers in China, were you shipping in the third quarter to these customers?

Yes.

And you anticipate shipping in the fourth quarter also?

Yes.

You mentioned a higher attach rate for X-ray, just was wondering, next year, do you see X-ray and then software being a greater percent of your sales or similar to what you had this year?

So I referred to that - to part of it in my script, when I said that we would like to converge X-ray to be a dimensional tool as well. So if I'm looking right now on next year, I'm looking right now on the X-ray tools to be driven by demands of both dimensional and materials and we definitely see the X-ray tools demands growing and next year, okay.

It's growing from attach rate perspective, it's growing from new customers, it's going from the fact that it's growing in line and it's worth mentioning that our X-ray is non-destructive, very fast in-line tool. So it's growing with capacity and therefore we are definitely looking on X-ray, growing in X-ray.

Regarding software, our long-term model is talking about staying at around 10% of our product revenue. So if the product revenue will grow next year, the software revenue will grow as well.

We are not taking it outside of the metrology space. So as we look on that, we would like to stick to the 10% number.

With the X-ray growing next year, what is the impact on margins? Will that be a slight improvement or stay the same?

More or less the same.

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