Nova (NASDAQ:NVMI) Q2 Sales Beat Estimates But Inventory Levels Increase

Full Report / August 03, 2023

Semiconductor quality control company Nova (NASDAQ: NVMI) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 13.4% year on year to $122.7 million. The company also expects next quarter's revenue to be around $122.5 million, roughly in line with analysts' estimates. Nova made a GAAP profit of $29.9 million, down from its profit of $34.9 million in the same quarter last year.

Nova (NVMI) Q2 FY2023 Highlights:

  • Revenue: $122.7 million vs analyst estimates of $121.7 million (0.83% beat)
  • EPS (non-GAAP): $1.06 vs analyst estimates of $1 (5.52% beat)
  • Revenue Guidance for Q3 2023 is $122.5 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $20.9 million, similar to the previous quarter
  • Inventory Days Outstanding: 256, up from 227 in the previous quarter
  • Gross Margin (GAAP): 56.8%, in line with the 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 34% annually. But as you can see below, its revenue declined from $141.6 million in the same quarter last year to $122.7 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 13.4% year on year. This could mean that the current downcycle is deepening.

Nova's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 14.9% year-on-year revenue decline while analysts are expecting a 3.41% drop 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 256, which is 86 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 56.8% in Q2, down 0.2 percentage points year on year.

Nova Gross Margin (GAAP)

Despite declining over the last 12 months, Nova still retains reasonably high gross margins, averaging 56%. These margins point to its solid competitive offering, disciplined cost controls, and lack of significant pricing pressure.


Nova reported an operating margin of 27.6% in Q2, down 4.4 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 29.5%. The company's profitability is in line with the broader semiconductor industry and it's working to appropriately manage its operating expenses.

Earnings, Cash & Competitive Moat

Wall Street expects earnings per share to decline 9.75% 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 $20.9 million in Q2, roughly the same as last year.

Nova Free Cash Flow

As you can see above, Nova produced $109.4 million in free cash flow over the last 12 months, a solid 19.6% of revenue. This FCF margin is above average for semiconductor companies and should put Nova in a relatively strong position to invest in future growth initiatives.

Over the last five years, Nova has averaged a 30.6% return on invested capital (ROIC), implying that it has a durable competitive position and track record of investing in profitable growth.

Key Takeaways from Nova's Q2 Results

With a market capitalization of $3.48 billion, Nova is among smaller companies, but its $129.2 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We enjoyed seeing Nova exceed analysts' earnings expectations this quarter. We were also happy that its revenue growth outperformed Wall Street's expectations, even if just narrowly. On the other hand, its inventory levels materially increased and its operating margin declined. Overall, this was a mediocre quarter for Nova. The stock is up 1.21% after reporting and currently trades at $122.97 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. We think Nova is a solid business. We'd expect growth rates to moderate from here, but its superb revenue growth implys that it's winning market share over the last three years. On top of that, its high ROIC suggests it can grow very profitably and has been well managed and its solid free cash flow generation gives it re-investment options.

Nova's price-to-earnings ratio based on the next 12 months is 28.3x. 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.

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