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Nova (NASDAQ:NVMI) Delivers Impressive Q4, Provides Encouraging Quarterly Guidance


Full Report / February 15, 2024

Semiconductor quality control company Nova (NASDAQ: NVMI) reported Q4 FY2023 results beating Wall Street analysts' expectations, with revenue down 11.3% year on year to $134.2 million. Guidance for next quarter's revenue was also optimistic at $137 million at the midpoint, 2.2% above analysts' estimates. It made a non-GAAP profit of $1.36 per share, improving from its profit of $1.28 per share in the same quarter last year.

Nova (NVMI) Q4 FY2023 Highlights:

  • Revenue: $134.2 million vs analyst estimates of $128 million (4.8% beat)
  • EPS (non-GAAP): $1.36 vs analyst estimates of $1.24 (10.1% beat)
  • Revenue Guidance for Q1 2024 is $137 million at the midpoint, above analyst estimates of $134 million
  • Free Cash Flow of $22 million, down 49% from the previous quarter
  • Inventory Days Outstanding: 209, down from 227 in the previous quarter
  • Gross Margin (GAAP): 55.1%, up from 51.5% in the same quarter last year
  • Market Capitalization: $4.51 billion

Headquartered in Israel, Nova (NASDAQ: NVMI) is a provider of quality control systems used in semiconductor manufacturing.

Nova was founded in May 1993 by Giora Dishon and Moshe Finarov. Dishon held a Phd in materials science and Finarov a Phd in semiconductor physics. The company went public in April of 2000 with a NASDAQ listing.

Semiconductor manufacturing begins with a silicon wafer upon which chips are constructed through the application of thin layers of film that act as conductors, semiconductors, or insulators. Precision is key, as deviations in materials, measurements, or temperatures could result in defects. Strong quality and process control therefore involves constant monitoring and measurement of the silicon wafers and manufacturing environment through each step of the process. Trends in the semiconductor market such as smaller form factors and increases in 3D technology increase the need for improved quality and process control.

Nova’s product portfolio includes a range of metrology (measurement) technologies applied to dimensional, film, material, and chemical measurements across the semiconductor manufacturing process. Nova goes to market with two product divisions. The ‘Dimensional Metrology Division’ (DMD) uses optical measurement technologies while the ‘Materials Metrology Division’ (MMD) employs x-ray based solutions. Accompanying these products is a suite of software that enables customers to model and design elements needed in the semiconductor manufacturing process.

Competitors offering semiconductor process control systems include KLA Corporation (NASDAQ:KLAC), ASML Holdings (NASDAQ:ASML), Lam Research (NASDAQ:LRCX), and Thermo Fisher Scientific (NYSE:TMO).

Sales Growth

Nova's revenue growth over the last three years has been strong, averaging 27.9% annually. But as you can see below, its revenue declined from $151.2 million in the same quarter last year to $134.2 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Nova Total Revenue

Even though Nova surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 11.3% year on year. This could mean that the current downcycle is deepening.

Nova looks like it's on the cusp of a rebound, as it's guiding to 3.6% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 12.3% growth over the next 12 months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Nova Inventory Days Outstanding

This quarter, Nova's DIO came in at 209, which is 32 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Pricing Power

In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Nova's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 55.1% in Q4, up 3.6 percentage points year on year.

Nova Gross Margin (GAAP)

Over the last 12 months, Nova has seen its already high gross margins rise, averaging 56.6%. These margins are indicative of its solid competitive offering, disciplined cost controls, and relatively low pricing pressure.

Profitability

Nova reported an operating margin of 30.4% in Q4, up 2.6 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.

Nova Adjusted Operating Margin

Nova's operating margins have been trending down over the last year, averaging 30.2%. However, the company's profitability is still above average for semiconductor companies, driven by an efficient cost structure.

Earnings, Cash & Competitive Moat

Analysts covering Nova expect earnings per share to grow 9.3% over the next 12 months, although estimates will likely change after earnings.

Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Nova's free cash flow came in at $22 million in Q4, down 46.5% year on year.

Nova Free Cash Flow

As you can see above, Nova produced $106.3 million in free cash flow over the last 12 months, an impressive 20.5% of revenue. This is a strong result; Nova's free cash flow conversion was higher than most semiconductor companies, and if it can maintain this level of cash generation, it can invest in plenty of new and existing products to ride out cyclical downturns more easily.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Nova's five-year average ROIC was 30.4%, beating other semiconductor companies by a wide margin. Just as you’d like your investment dollars to generate returns, Nova's invested capital has produced robust profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Uneventfully, Nova's ROIC stayed the same over the last two years. A rising ROIC would be ideal, but this is still a noteworthy feat when considering its returns are already high.

Key Takeaways from Nova's Q4 Results

We were impressed by how significantly Nova blew past analysts' revenue and EPS expectations this quarter, driven by outperformance in both its segments (Products and Services). We were also glad its inventory levels shrunk. Looking ahead, Nova's revenue and EPS guidance for Q1 2024 beat expectations. We think this was a fantastic quarter that should have shareholders cheering. The stock is up 2% after reporting and currently trades at $160.71 per share.

Is Now The Time?

When considering an investment in Nova, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Nova is a great business. While we'd expect growth rates to moderate from here, its impressive revenue growth over the last three years suggests it's increasing its market share. Additionally, its market-beating ROIC suggests it has been a well-managed company historically, and its strong free cash generation allows it to sustainably invest in growth initiatives.

Nova's price-to-earnings ratio based on the next 12 months is 29.6x. Looking at the semiconductors landscape today, Nova's qualities stand out, and we like the stock at this price.

Wall Street analysts covering the company had a one-year price target of $147.50 per share right before these results (compared to the current share price of $160.71).

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