"An Israeli company should be traded in Tel Aviv. If we leave, eventually nothing will remain," Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI) president and CEO Eitan Oppenhaim said in a "Globes" interview. The Tel Aviv Stock Exchange (TASE) managers are surely happy to hear such a statement from the CEO of one of the important dual-listed companies - a statement that Check Point Software Technologies Ltd. (Nasdaq: CHKP) and Mellanox Technologies Ltd. (Nasdaq:MLNX) CEOs Gil Shwed and Eyal Waldman will take issue with. Both of these executives have spoken more than once against being listed for trading on the TASE.
Nova manufactures several types of machines. Its products include metrology (statistical measurement) systems for controlling semiconductor manufacturing processes, which are the basic unit in integrated circuits, such as chips, memory, etc. The company has 550 employees, 350 of whom work at its main site in the Ness Ziona Science Industrial Park, which is also where the machines are assembled.
In the production value chain, Nova manufactures chip-testing equipment, and takes part in the front-end stage of building silicon wafers. This stage is known to be very complicated, in view of the many processes involved and the great precision it requires.
High entry barriers
"There are thousands of processes in the semiconductor market before the chip reaches the smartphone, computer, or other device. One division is according to chip size. Some companies produce very large chips, around 90 nanometers, designed for the auto industry, stereo systems, and other sectors, for example. Nova doesn't do that, because they need less testing there. When they starting getting down to sizes of 40 nanometers or less, we're there. Now, incidentally, they have already reached three nanometers. The small and more complicated the process becomes, the more testing and measuring machines are needed," Oppenhaim observes.
Oppenhaim added, "Another division is of the companies making chips. There are companies that oversee the process. We're in the oversight. A third division is the front-end companies - those that make chips of raw material, and we're there, as opposed to back end, where there's less technology. Incidentally, Orbotech Ltd. (Nasdaq: ORBK) also oversees processes, but at more advanced stages and throughout the supply chain. Nova is in a much earlier stage, in which the technology is much more advanced."
"Globes": Why?
Oppenhaim: "In the beginning of the chip manufacturing process, every mistake is far more critical, and the measuring equipment there is therefore much more precise. If an error is made at the beginning of the process, we can issue an alert, and it can be corrected. Later in the process, it is far more difficult to correct errors, and they are more expensive.
"There can be dozens of floors of material within the chip, and they contain almost every metal found in nature. Today, we're able to do both optical and chemical measurements of the materials using advanced laser and x-ray technology, following our acquisition of ReVera in the US in 2015. Our two competitors, KLA and Nanometrics, are unable to offer this. The materials measurement field is growing. It's a relatively new technology."
What did they do before now when they wanted to check the chemical composition of the chip?
"They cut a sample of the wafer, the basic board on which the chips are built, and threw away the wafer. Even today, there are certain places where they cut the board. There are small companies around the world offering testing for the chemical components."
Does that shorten the process?
"Yes. When a customer asks for a measurement, he gets both the chemical composition and the dimensions from me through the optical measurements of our machines manufactured in Israel."
"Today, Moore's Law is partly true"
Nova's share price has risen 30% over the past year, pushing its market cap up to NIS 1.4 billion. Almost every investment institution in Israel and several in the US hold Nova shares.
Nova recently reported new orders from a number of leading Asian memory manufacturers in Japan, China, and South Korea. The new orders are projected to contribute more than $20 million to Nova's revenue in 2017. The company's measuring solutions, which are designed for installing at companies manufacturing memory using V-NAND technology on various sites, are applied in critical measurements, composition of materials, and thin layers in the production stages.
Your last report about orders from customers in Asia includes the supply of two types of machines.
"Yes. The machines for customers in Asia are sent from here and from the site in California. Chips manufactured by different companies and by the overall manufacturer, such as Apple, can be integrated within a smartphone. The smartphone manufacturer orders the chips it needs from the various companies after it designs them and specifies its requirements. It assembles all the components at a specific site or several sites. Our industry is very concentrated and limited. There are 6-7 large companies making advanced chips, because building a fab to manufacture chips costs at least several billion dollars, and you have to build the fab before you have any customers. The financial and technological entry barriers here are very high. These companies are very professionalized and specialized. There's a combination of hardware and software here. There are usually 2-3 players in every sub-segment."
Where does the software come in?
"There's a lot of brainpower in the machines in translating what the machine is testing into what we see in various dimensions. The investment is about half in hardware and half in software. The machine has to translate, interpret, and understand what it sees into 3D technology. There are thousands of wavelengths and thousands of colors that have to be translated and interpreted. The algorithmics is very complicated. We have entire rooms with servers operating the software. There is new technology every year taken from higher education institutions that has to be developed and adapted. This is very complex technology."
How many people in Nova are in software development?
"About half of our R&D staff. Incidentally, about 5% of the people here have doctorates - more than 50 people."
We see more and more processes are without human contact.
"True, but the automation processes were always a significant part of the semiconductor industry. There are entire plants, fabs, that are completely machine operated. The fab is networked with cameras and sensors, and the employees in the control room know exactly what is going on with every machine at any given time. There are fabs like this the size of football field and bigger.
"Every measurement of ours is correlated with the final performance of the smartphone. In addition to the developments in processors, the memory sector is also being revolutionized. The triangle of price, power, and size is constantly moving the industry."
The unending progress of this industry provides you with work. We're nowhere near the limit of the technology. Does Moore's Law still apply?
"Yes. Progress in the industry can only be to our benefit. We have work all the time, and we're investing a lot in R&D. We still don't see any limit to the technological development in the chip industry. Chips of one nanometer or less are already being made."
Gordon Moore already predicted in 1965 that the number of chips on an integrated circuit would double every 18-24 months, while the price would be halved. This law, which has been called Moore's Law ever since, has been fairly accurate up until recent years.
"Where Moore's Law is concerned," Oppenhaim says, "one part of it is already correct - the part involving performance. The other part, which concerns the length of time and the price at which the chip doubles its performance, is already not true. It takes more time to double the number of chips. In a low location, it takes more than two years, and the price isn't halved in two years. Today, they're manufacturing 16-nanometer processors for Apple's newest smartphones. In R&D, we're making both three-nanometer and one-nanometer processors. Next year, there will be 10-nanometer and seven-nanometer processors in the iPhone 8, for example, and three years from now, we'll see smartphones with five-nanometer technology, and maybe three-nanometer, too."
What will we gain from that?
"There will be flexible screens, for example. The new screens with OLED and EMOLED technology will accommodate that. And they'll be able to put a lot more sensors and additional apps into smartphones, such as things related to augmented reality, virtual reality, and more."
How much are the customers committed to you?
"There's renewed warfare over the customers at the end of each year. I have to show the customer technological progress and innovation; otherwise, he won't stay with me. So we invest a lot in technological innovation and R&D."
Is being in Israel an advantage?
"There are great masses of talent in physics and optics here, but our two US competitors can also find high-quality personnel. You have to bear that in mind."
Does your assembling take place here in Ness Ziona?
"The parts come from all over the world, but the integration and final testing takes place here, and the completed machines go out from here to customers everywhere in the world. Our revenue is constantly increasing, and we're also maintaining a relatively high gross profit margin. Our development expenses vary from 22% to 25%, which is very high; these expenses are usually 15-18% in high-tech companies. We still manage to wind up with a very nice net profit in terms of a percentage of sales. Over three years, Nova invests more than $100 million in R&D.
"As the industry progresses, chips become more sophisticated, and there are more technological transitions, more measuring and testing equipment is needed. In all these technological changes, we also have to develop and perfect our control processes. With the help of investments, we believe that we can create a competitive advantage against our competitors."
"The cash in the bank is for acquisitions"
Nova recently held a conference for investment managers and analysts in which it presented a plan for reaching $300 million in sales within a few years, compared with the $160-165 sales forecast for 2016.
How are you planning to achieve this target?
"There's an element of organic growth, of course, but there's also an element of mergers and acquisitions. We're always saying this. The money in the bank is earmarked for this. Even without this, however, we're planning to reach $250 million in sales within five years."
Published by Globes [online], Israel Business News - www.globes-online.com - on January 4, 2017
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