Going while the going is good

After 15 years with Nova Measuring Instruments, seven of which as its CEO, Gabi Seligsohn is retiring from the company, but has a hard time saying goodbye.

On the last day of July, just after he retired from his position as CEO of Nova and released the company's second quarter results, Gabi Seligsohn (46) took a two-week family vacation in the Black Forest. After two weeks among trees and mountains, he will jump on a plane to catch waves in the Maldives, and when he returns he will..well., he still has no plans for his professional future, and he is really under no pressure to find his next job.

One can understand him. Seligsohn served as CEO of Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI) for the last seven years, having joined the company 15 years ago, two years before the beginning of the third millennium. In fact, he spent most of his adult life at Nova, located in the Rehovot Science Park, a few blocks walking distance from the Indigo plant and laboratories of some of the leading biomedical companies in the country. In the last decade and a half, especially during his tenure as CEO, Nova has been went through quite a bit - for better or worse - and Seligsohn led it through thick and thin, pretty successfully.

This is just one reason that Seligsohn, a rather modest person, is highly esteemed in both the Israeli and American capital markets, and, equally importantly, among customers of Nova, who are huge semiconductor manufacturers, mostly in Asia.

Nova is part of the production process of chips. It belongs to a sub-industry called metrology (the science of measurement). Novas tools are used to monitor the manufacturing process which is constantly challenged by the need to miniaturize features on the chips which in turn requires tighter process control and monitoring of the complex manufacturing process. Novas largest customer is the worlds leading foundry, TSMC.

Seligsohn, in a special interview with "Globes", relates how customers responded to his retirement, during his most recent tour of Asia. "It was so different, I called my mother and told her: 'Mom, when a person dies, people eulogize him and say good things about him. For me it is happening while I am still alive'.

How did she react?

(Laughs) "She asked me not to talk that way."

Seligsohn explains that the source of these reactions is the nature of the semiconductor industry. "This industry is pretty tightly knit. Those who work in it may move from company to company, but they usually stay within the industry, creating long lasting relationships. Generally speaking, Asian companies - especially in this industry dont find it acceptable for a CEO who took office before the age of 40 to leave before the age of 50. For them, it's a lifetime role, or at least until retirement age. Those were the reactions that came out during this trip, during which I got into quite personal conversations with the customers. They really tried to understand what was going through my head."

Did it embarrass you or did you go with the flow?

"Both. On the one hand, I have always relied on personal relationships in my professional life. Relationships between me and the employees, with our customers, and with our shareholders, have always been important to me. On the other hand, I'm fairly shy, so I was a bit embarrassed."

And now to the question of questions: Why are you retiring?

(Laughs) "I'll tell you a short anecdote. When I announced that I was retiring, a good friend called me and asked me the same question. After five minutes in which I explained my decision, he says to me, OK, enough, I am not a journalist just tell me why you are leaving, I responded that I have only one answer for my friends and for journalists

So let's hear it.

"My philosophy is that a CEO should serve for a period of 5-10 years, lead the company to success and leave it in a position from which it can make a further significant leap forward. In every company, throughout its life cycle, one should strive to create opportunities for new beginnings, that is, to appoint a new CEO. I have no doubt that I could continue to lead Nova, but when I realized that I did not want to be CEO of the same company all my life, I examined what would be the most appropriate moment for me to hand over its management, and that moment has come."

The examination was thorough, and it illustrates even more his commitment to the company and its future even in his absence."First, Nova reached annual revenue of $100 million. Secondly, it has more or less $100 million in cash. Thirdly, I built a strong management team. Fourth, I was fortunate to grow a successor from within the company (Eitan Oppenheim, T.T), and fifthly, Nova has a long-term vision, which the new CEO fully shares."

How does it feel are you sad or excited about the future?

"Look, I never got to the point of working without desire. I'm still full of energy as far as Nova is concerned, and this is a criterion that was important for me when choosing the moment to leave. I didn't want to reach the moment of retirement feeling content. Therefore, I believe this is a perfect time for me to retire. As they say, Dont overstay your welcome.

Where will you head next?

"I have no idea! Truthfully! As per the famous statement in 'Forrest Gump': Life is like a box of chocolates, you never know what you're gonna get, and how I want to open this chocolate box"

And no fear of the uncertainties?

"None at all! There is great satisfaction in handing over a company with so much wind in its sails. In 2006, when I was appointed CEO, Nova was not a place that people wanted to come work at, and my dream back then was that we would be flooded by resumes of applications from people dying to come on board. I feel that dream has now been fulfilled. For the past three years, every job we have advertised has attracted dozens of applicants.

At this point, Seligsohn reveals his patriotic side. "It was an enormous privilege for me to lead a company like Nova, and it gives me great pride," he says. "I am an eighth-generation Israeli. To me Nova represents a serious Zionist achievement. I leave with a great feeling, as though I was part of a relay race in which I did my absolute best in my portion of the race.

7 years of ups and downs

Nova, which only recently celebrated 20 years of activity, indeed went though quite a bit during the tenure of Seligsohn as CEO. In fact, you could say that under his leadership the company went through a real turnaround. In August 2006, when Seligsohn became CEO, the company had barely scratched the level of $50 million annual revenue annually, and posted operating and net losses. The share price was then $2, and the market cap of the company was only $32 million, while Wall Street didnt really pay any attention to this tiny company. Seven years have passed, some bad and some good, and the Nova of 2013 is significantly different from that of 2006. Its revenue is around $00 million, operating and net income are both in the black, and the share price is hovering around $9; which represents more than fourfold increase in market cap. The company's market cap is approaching a quarter billion dollars, and Wall Street no longer ignores it.

Nova provides two types of measuring tools: integrated metrology tools that are placed inside the process equipment to allow measurement and process control while the process takes place, and stand alone measurement tools which are placed between process steps to allow a more sparse measurement program for less variable process steps. The latter more expensive instruments have become one of the key growth engines of the company, but they are not the only one. As Seligsohn explains, the transition from selling tools through OEM agreements to direct sales (and consequently, with improved gross margins), and the development and marketing of additional software products in conjunction with the instruments also set the stage for further growth.

"In fact, part of our success has been driven by our ability to expand our target markets. Take TSMC, our biggest customer. TSMC constantly looks for ways to increase the use of our products, and Nova's ability to grow in a given semiconductor fab has significantly increased as a result. In 2009, for example, our target market on a single fab basis was about $30-40 million, while this year it is about $150-200 million, meaning that our market has more than tripled itself."

Seligsohn explains that the demand on the part of TSMC and its competitors for Novas solutions is growing as a result of the need to continue to shrink devices. The smaller the features, the greater the need to measure and control with metrology tools that is the greatest growth engine the company has. These requirements have helped Nova grow far beyond the growth rate of the semiconductor market as a whole - 10.1% CAGR between 2007-2012, versus an industry-wide negative 1.2% for that same period. "Our technology is enjoying a far steeper adoption rate than other types of technologies in the industry," says Seligsohn.

"I broke the glass ceiling"

In order to understand the demand drivers for Novas products, we will briefly explain the chip manufacturing process. A silicon wafer from which chips are derived goes through five manufacturing stages: Implant, Photolithography, Etch, CVD and finally, CMP. From its inception, Nova successfully established itself with its integrated metrology tools in the last of these stages (CMP), which means Chemical Mechanical Polishing, or, in simple terms, grinding wafer down in order to flatten it. Once the stand alone metrology tools were launched, Nova was able to penetrate the Photolithography and Etch steps as well. Later, the company also managed to start penetrating Etch with its integrated metrology tools. "Thus, our target market has grown to a billion dollars (!) compared with $80 million when I took up my post in 2006, and this is what gives me all the confidence that Nova will continue to grow far into the future," says Seligsohn. Recently, the company began marketing stand alone tools for the CVD step, while the first phase, Implant, offers less potential at this point.

"Looking ahead, Eitans goal (his replacement, T.T) is to increase the company's share of the same billion dollar pie. The companys glass ceiling has already been broken, says Seligsohn.

In order to take more of that pie, in 2011 the company started to introduce software solutions, such as fleet management software and the like, in parallel with its hardware tools. Seligsohn expects software products to add tens of millions of dollars to the companys top line in the next few years, while for now, the company only has a few million in annual software revenue. Even so, the contribution of software products is already felt in products gross margins. The margin was 38% in 2001, about 51% in 2006, and 59% last year. Overall gross profit margin improved from 22% in 2001 to 43% in 2006 and to 53% in 2012. "In fact, Nova does not have to sell a lot of software in order to significantly improve gross margins," says Seligsohn.

Nova isnt the only player in its field. Direct competitors include NanoMetrics and KLA Tencor, while indirect competitors include Applied Materials and Hitachi Hi-Tech. "Technologically, the competition is won on points and no single vendor has a significant advantage at this point. There is fierce competition, and hence the need to invest in R&D is also significant. Our customers' chip development cycles have shortened significantly, and Nova must keep pace with this trend.

The competition creates constant price pressure, but because Nova has focused on adding features and functionality to its products, the ASP has actually increased (and even doubled during his tenure as CEO T.T).

And indeed, Nova has been investing a great deal in R&D, and, according to Seligsohn, the shareholders understand why it must do so and therefore "forgive" Nova for the hit to the bottom line in the short term, as it creates expanded opportunities for the long term. In 2010, R&D expenditure accounted for 14.4% of total revenue; in 2011 it was 18.2%; in 2012 25.6%; while in the first half of 2013 it increased to 27.1%.

As a result, the net profit margin declined from 25.6% in 2010 to 12.3% in 2012 and to 9.4% in the first half of 2013. "I do not invest at the cost of moving to a net loss, Seligsohn clarifies, "I believe in growth while retaining profitability, albeit reduced profitability when investment needs to rise."

Nova can afford to invest much more in R&D. The company has $97.6 million in cash - 41% of its value. "First, in the semiconductor industry, liquidity of a supplier - such as Nova is very important to the customers," says Seligsohn, commenting on the companys cash position. "Secondly, the company also plans to use these funds in order to expand the Nova platform through acquisitions. Last year, we studied two acquisitions, but through the due diligence we realized they were not worthwhile moving forward with. Nova may examine those companies again in the future. And in general," Seligsohn adds in a patriotic tone," Israel has become a world leader in electro-optics. A company like Nova is therefore well positioned to lead consolidation of this area.

"I have no intention of running that company"

Last May Seligsohn was a director on the board of an Israeli company less successful than Nova DSPG. Seligsohn took the seat of Yair Shamir, who moved on to become Minister of Agriculture and a member of Knesset. At the time, the appointment of Seligsohn seemed a little odd. Firstly, Seligsohn stuck to his own rule of not serving on other boards during his tenure, a decision he himself says he is happy he made, and which allowed him to focus on Nova only. Secondly, a month and a half after his appointment, he announced his retirement from Nova, and word on the market was that this appointment as a director at DSPG which was embroiled in a proxy fight at the time with an American fund - was a step on the way to Seligsohn becoming DSPGs CEO.

"Absolutely not," responds Seligsohn to our direct question on the matter. "I have no intention of managing DSPG. I became a director in order to try to help the company focus on what is right for it in the long term. This company seems, at least to me, to be at a very interesting inflection point, and I want to help the board assess the real potential of its growth opportunities. I really feel I can contribute. "

DSP Group recently said goodbye to Eli Ayalon, its chairman who intermittently also acted as CEO in the last several years. The departure of Ayalon was part of a control bid made by Starboard an attempt which has yet to come to fruition and as things seem now, neither side has said the final word in this battle for control of the company. So it will be interesting to see how Seligsohn will fit into this endless struggle. DSPG, which develops chips for wireless phones, has a market cap of $156 million and $119.9 million cash.

Worth NIS 30 million

Despite his many years of tenure in the company, and despite turning it into a success as its CEO, Seligsohn has not accumulated a mind boggling fortune during his decade and a half with the company. "Globes" checks reveal that during his tenure (2006-2013) Seligsohn exercised options for $3.2 million (NIS 12 million gross before tax, and without accounting for the exercise price of those options). He currently holds shares and options worth about $1.7 million (about NIS 6 million).

Nova is incorporated in Israel, and is therefore not subject to the salary disclosure requirements of US law. At the same time, being a dual-listed company, it is relieved from statutory disclosure requirements of Israeli law, and therefore one cannot know what exactly Seligsohn's salary package was.

Assuming he received options in his previous positions in the company, and assuming his monthly base salary was in line with the average in the Israeli economy for his class of CEO, it can be estimated that Seligsohn gained NIS 30 million during his tenure (again, gross before tax).

Published by Globes [online], Israel business news - www.globes-online.com - on August 20, 2013

Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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