Semiconductor quality control company Nova (NASDAQ: NVMI) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 24.5% year on year to $151.2 million. Guidance for next quarter's revenue was $130 million at the midpoint, 3.99% above the average of analyst estimates. Nova made a GAAP profit of $36.1 million, improving on its profit of $22.2 million, in the same quarter last year.
Nova (NVMI) Q4 FY2022 Highlights:
- Revenue: $151.2 million vs analyst estimates of $147.8 million (2.31% beat)
- EPS (non-GAAP): $1.28 vs analyst estimates of $1.25 (2.04% beat)
- Revenue guidance for Q1 2023 is $130 million at the midpoint, above analyst estimates of $125 million
- Free cash flow of $41.2 million, up 52.3% from previous quarter
- Inventory Days Outstanding: 157, down from 170 previous quarter
- Gross Margin (GAAP): 55.4%, down from 56.2% same quarter last year
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 very strong, averaging 37.7% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $121.5 million to $151.2 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).
This was a decent quarter for Nova as revenues grew 24.5%, topping analyst estimates by 2.31%. This was the third straight quarter of decelerating growth for Nova , potentially indicating a coming cycle downturn.
Nova 's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 2.95% year on year decline, while analysts are estimating a NTM revenue decline of 18.5%.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 157, 3 days below the five year average, showing no indication of an excessive inventory buildup at the moment.
Pricing Power
Nova 's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 55.4% in Q4, down 0.8 percentage points year on year.
Nova 's gross margins have been stable over the past year, averaging 57.1%, and remains well ahead of most of its semiconductor peers, indicative of a potent competitive offering, pricing power, and solid inventory management.
Profitability
Nova reported an operating margin of 27.8% in Q4, down 1.1 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 30.3%. However, Nova 's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 16.8% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Nova 's free cash flow came in at $41.2 million in Q4, up 129% year on year.
Nova has generated $98.2 million in free cash flow over the last twelve months, translating to 17.2% of revenues. This is a strong result; Nova 's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
Nova ’s average return on invested capital (ROIC) over the last 5 years of 38.4% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Nova 's Q4 Results
With a market capitalization of $2.62 billion Nova is among smaller companies, but its more than $373.5 million in cash and positive free cash flow over the last twelve months give us confidence that Nova has the resources it needs to pursue a high growth business strategy.
We were very impressed by the strong improvements in Nova ’s inventory levels. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $91.2 per share.
Is Now The Time?
When considering Nova , investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Nova is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last three years. On top of that, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.
Nova 's price to earnings ratio based on the next twelve months is 22.9x. There are definitely things to like about Nova and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.
The Wall St analysts covering the company had a one year price target of $110 per share right before these results, implying that they saw upside in buying Nova even in the short term.
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