Semiconductor quality control company Nova (NASDAQ: NVMI) beat analysts' expectations in Q1 CY2024, with revenue up 7.3% year on year to $141.8 million. On top of that, next quarter's revenue guidance ($148 million at the midpoint) was surprisingly good and 5.3% above what analysts were expecting. It made a non-GAAP profit of $1.39 per share, improving from its profit of $1.23 per share in the same quarter last year.
Nova (NVMI) Q1 CY2024 Highlights:
- Revenue: $141.8 million vs analyst estimates of $136.8 million (3.7% beat)
- EPS (non-GAAP): $1.39 vs analyst estimates of $1.28 (9% beat)
- Revenue Guidance for Q2 CY2024 is $148 million at the midpoint, above analyst estimates of $140.6 million
- Gross Margin (GAAP): 58.7%, in line with the same quarter last year
- Inventory Days Outstanding: 231, up from 209 in the previous quarter
- Free Cash Flow of $56.67 million, up 158% from the previous quarter
- Market Capitalization: $5.26 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 25.4% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $132.2 million in the same quarter last year to $141.8 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).
While Nova beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 7.3% year on year. Nova's growth, however, flipped from negative to positive this quarter. This encouraging sign will likely be welcomed by shareholders.
Nova returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 20.6% year-on-year growth next quarter, and analysts seem to agree, forecasting 14.1% 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.
This quarter, Nova's DIO came in at 231, which is 50 days above its five-year average, suggesting that the company's inventory has grown to higher levels than 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 58.7% in Q1, up 0.3 percentage points year on year.
Over the last 12 months, Nova has seen its already high gross margins rise, averaging 56.7%. These margins are indicative of its solid competitive offering, disciplined cost controls, and relatively low pricing pressure.
Profitability
Nova reported an operating margin of 31.8% in Q1, up 0.3 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's operating margins have been stable over the last year, averaging 30.3%. Furthermore, the company's margins are better than peers, implying that the business is efficiently managed.
Earnings, Cash & Competitive Moat
Analysts covering Nova expect earnings per share to grow 12.1% 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 $56.67 million in Q1, up 179% year on year.
As you can see above, Nova produced $142.7 million in free cash flow over the last 12 months, an eye-popping 27.1% of revenue. This is a great result; Nova's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
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 30.3%, 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. Unfortunately, Nova's ROIC averaged 3.7 percentage point decreases over the last few years. The company has historically shown the ability to generate good returns, but they have gone the wrong way recently, making us a bit conscious.
Key Takeaways from Nova's Q1 Results
We were impressed by how significantly Nova blew past analysts' EPS expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates. On the other hand, its inventory levels materially increased. Overall, we think this was still a really good quarter that should please shareholders. The stock is up 2.4% after reporting and currently trades at $185.78 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 revenue growth has been strong over the last three years. Additionally, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its market-beating ROIC suggests it has been a well-managed company historically.
Nova's price-to-earnings ratio based on the next 12 months is 32.2x. Looking at the semiconductors landscape today, Nova's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one-year price target of $195.75 per share right before these results (compared to the current share price of $185.78), implying they saw upside in buying Nova in the short term.
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