Nova Measuring Instruments Ltd (NASDAQ: NVMI) Q4 2020 earnings call dated Feb. 18, 2021.
Corporate participants:
Miri Segal — MS-IR LLC, Investor Relations
Eitan Oppenhaim — President & Chief Executive Officer
Dror David — Chief Financial Officer
Analysts:
N. Quinn Bolton — Needham & Company, LLC — Analyst
Atif Malik — Citigroup — Analyst
Mark Miller — The Benchmark Company — Analyst
Jaeson Schmidt — Lake Street Capital Markets, LLC — Analyst
Patrick J. Ho — Stifel — Analyst
Krish Sankar — Cowen and Company — Analyst
Presentation:
Operator
Good day, and welcome to Nova’s Fourth Quarter 2020 Results. Today’s conference is being recorded. At this time, I would like to turn the conference over to Miri Segal of MS-IR. Please go ahead.
Miri Segal — MS-IR LLC, Investor Relations
Thank you, operator, and good day to everybody. I would like to welcome all of you to Nova’s fourth quarter and full year 2020 financial results conference call. With us on the line today are Mr. Eitan Oppenhaim, President and CEO; and Mr. Dror David, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the Safe Harbor statement outlined in today’s earnings release also pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations section of the company’s website. Eitan will begin the call with a business update, followed by Dror with an overview of the financials. We will then open the call for the question-and-answer session.
I’ll now turn over the call to Mr. Eitan Oppenhaim, Nova’s President and CEO. Eitan, please go ahead.
Eitan Oppenhaim — President & Chief Executive Officer
Thank you, Miri and thank you all for joining us today. I will start the call by speaking briefly about our fourth quarter results and performance highlights. I will then spend some time summarizing 2020 and our main achievements for the year. Following my commentary, Dror will review the quarterly and annual financial results in detail including the guidance for the first quarter of 2021. Nova reported remarkable results for the fourth quarter with revenue exceeding the guidance and profitability reaching the high-end of the guidance demonstrating our growing agility and solid execution capabilities The company resilience amid the pandemic led by our global teams drove exceptional performance in the quarter and throughout the year.
Our robust quarterly results concluded a record year representing an annual growth rate of 20% in our revenue and 30% in our non-GAAP earnings. This was a strong conclusion to a well-performed year during which we continued to innovate and expand our differentiated technology to support our customers’ growing demand. The positive market reception of our product offering and our sound operational model support our momentum to continue our growth in 2021 as well. The accelerated demand for new complex semiconductors across the industry represent a significant compelling technology event affecting all semi segment including logic DRAM and flash NAND.
These trends continued to expand our available markets and increased the attractiveness of our materials and dimensional portfolios in the coming years. Following our successful product introductions in 2020 we believe that Nova is well-positioned to increase its footprint and market share across multiple customers in 2021. Our accomplishments this year highlight the agility and resiliency that the company developed along the year to support our growing activity despite the challenging environment imposed by the COVID disruptions. Turning now to our quarterly highlights, our performance was driven by a mix of technology enhancement, product introductions and business wins reflecting our progress to meet Nova’s long-term organic targets. The revenue for the quarter reached a record high representing 10% sequential growth from the third quarter of 2020.
Based on the recent market dynamics, our quarterly sales were driven primarily by strong demand in logic. The current demand for both advanced and mature logic devices concluded a very healthy year for our logic customers. In the current environment, the leading edge customers are required to accelerate their advance node transitions to meet the growing demand for high computing applications like 5G, AI and HPCs. On the other hand, the acceleration in digital evolution in many applications also drive demand for the more mature nodes across various markets such as consumers, automotive and industrial. As a result, our quarterly mix was weighted towards logic with around 72% of the revenue derived from this segment.
Although we just started 2021, we expect the same healthy demand to continue across various logic generations this year as well. Although 2020 was more robust in logic demand, our memory customers also started to increase their investment in the fourth quarter mainly in DRAM, which grew more than 25% sequentially in our quarterly revenue mix. We expect this moderate growth to continue in 2021 as well in other various memory segments. The evolving semi market during COVID is also fueling memory demand across broadening application space. As a result of decreasing inventories and more balanced supply-demand levels we expect a better investment cycle in memory both in NAND and DRAM throughout 2021.
Our progress along the year to balance our revenue mix is highlighted also this quarter by the customer mix, which yielded three major customers that contributed more than 10% each to our revenue. This includes a leading foundry manufacturer, a leading memory provider and a growing foundry in China. One of the more notable achievement in the fourth quarter was the record revenue contribution from our materials metrology sales. During the quarter we received multiple orders from multiple leading logic customers for our most advanced material metrology solutions. The bookings were for Nova’s VERAFLEX materials metrology platform, which provide breakthrough thin film thickness and composition process control capabilities for the current and emerging technology nodes.
The recent wins marks Nova’s growing penetration into all leading industry manufacturer and cement Nova’s position as a material metrology leader. As part of a consistent approach to expand our exposure to more materials applications we announced in December the launch of Nova ELIPSON a revolutionary materials metrology solution. The new in-line standalone metrology platform is designed to measure materials properties such as stress, strain and surface for both memory and logic applications. Following the announcement and the outstanding progress we had with multiple customers we recognized the initial revenues from several accounts already in 2020. Let me now shine some light on our yearly benefits. Nova’s quarterly performance signifies an optimistic add note to a challenging year in which COVID-19 threatened world stability.
We concluded the year better than previously anticipated — growing our revenue to a record high representing a compound annual growth rate of 13% for the past plus five years. Our profitability continued to strengthen as well with net income earnings growing significantly also year-over-year. During these disruptive periods multiple factors contributed to our strong performance in 2020 and I would like to mention four major ones. First, is the advanced operational model that we built during this period to allow better agility and resilience, which allow Nova to function well and adopt faster to the changing conditions. This model is currently guiding our product development cycles, go-to-market strategies, flexible lead times, tighter supply chains, a safer environment for employees, stronger territories support and robust recovery plans.
As a result we continue our manufacturing plans according to customers’ demand and increased capacity by around 25% without a single shutdown day. Additionally and in light of the continued travel restrictions we invested significantly this year to strengthen our global teams by increasing professional headcount and expanding the facilities around the globe to shorten customer response and time to service. Second is the enhanced product portfolio we introduced during the year. Our investment in research and development, which grew at around 20% year-over-year was focused on two main pillars; introducing new product generations both in the optical and x-ray lines, and the development of entirely new products from the ground up. In light of the technology involvement in the industry we introduced a new generation platform to all our traditional product lines including the integrated and standalone OCD, the advanced software package and XPS.
All of them are already installed, accepted and generating revenues. Regarding our new innovations we continue to proliferate the newly introduced PRISM platform in multiple accounts gaining share and winning new positions in both memory and logic. On this front, we are also excited this year to introduce the ELIPSON, a new materials metrology platform based on Raman technology that aims to deliver additional materials information like stress and strain unmatched by any other inline materials metrology system. As a result of this product initiatives in both our sustained and new innovative portfolio we could reach record annual revenues in both the standalone and integrated optical CD metrology growing significantly year-over-year.
The third highlight I would like to mention is the continued diversification of our revenue mix that allows us to mitigate different demand cycles in the industry. Although this year was weighted towards logic with roughly 68% of revenue contribution, we also had significant win and penetrations into other customers including a large IBM global memory manufacturer and other accounts in China. This creates a healthy balanced mix that will continue to support our long-term strategic targets and interim growth plan in 2021. The last highlight I would like to mention in regard to 2020 is the growing importance we have been given to our social responsibility plan. The reality of COVID-19 solidified our commitment to support communities across the globe.
Over the past year, we proactively supported our partners and customers as well as families, individuals and health organizations in the communities. Our recently announced corporate social responsibility strategy is a natural evolution of our ongoing practice aiming to continuously enhance our ethical, social and environmental performance. We are committed to incorporating social responsibility into our daily operations and business management while inviting all stakeholders into our socially responsible ecosystem. To wrap up and before I hand over the call to Dror let me briefly summarize our results and market position going into 2021.
Despite continuous disruptions and growing challenges associated with the pandemic spread, Nova’s global teams adapted quickly to the new dynamic environment performing well and driving a solid growth year. While the industry is going through tremendous structural changes and adjusting to the different demand catalysts as a result of the accelerated transition to a more data-driven world, our offering is rapidly evolving to meet these changes and expand our available markets. Even our agile operational model, innovative portfolio, new product rollouts and growing exposure to a broader opportunity range we believe that Nova is well-positioned to continue capitalizing on growth opportunities in 2021 as well.
Now, let me hand over the call to Dror to review our financial results in details. Dror?
Dror David — Chief Financial Officer
Thanks, Eitan. Good day everyone. Total revenues in the fourth quarter of 2020 exceeded our previously announced guidance and reached an all-time record of $76 million, 18% higher than the fourth quarter of 2019. Product revenue distribution was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan and Korea each contributed more than 20% to our product revenues while China contributed slightly less than 20%. On a per customer basis, three major customers contributed 10% or more to our product revenues including two foundry customers and one memory customer. Blended gross margin in the fourth quarter was 55% on a GAAP basis and 56% on a non-GAAP basis.
Product gross margin increased to 63% on a GAAP basis and 64% on a non-GAAP basis due to favorable product mix. Service gross margin reduced to 22% on a GAAP basis and 23% on a non-GAAP basis due to lower revenue levels, less favorable mix between contracts and time and materials, higher materials consumption for warranty and contracts and end of year inventory related adjustments. Operating expenses in the fourth quarter of 2020 on a GAAP basis increased to $25 million and included a one-time income of $2.9 million presented in general and administration related to cash recovery of an unauthorized transaction previously made by a financial institution.
Operating expenses in the fourth quarter on a non-GAAP basis increased to $26 million reflecting increased headcount and end-year closing costs as well as the impact of unfavorable Israel currency exchange rate. In the fourth quarter of 2020 the company presented net financial expenses on a GAAP basis due to $0.9 million of expenses related to amortization of debt discount and issuance costs from the October convertible note issuance and $1.4 million of expenses related to the reevaluation of our operating lease liabilities as a result of the unfavorable Israel currency exchange rate. Both of these financial expense elements were adjusted for non-GAAP purposes. Earnings per share on a GAAP bases in the quarter were $0.47 per diluted share above our guidance of $0.32 to $0.43 for the quarter mainly as a result of the previously mentioned onetime income of $2.9 million.
Earnings per share on a non-GAAP basis in the quarter were $0.55 per diluted share at the high end of our guidance of $0.45 to $0.56. On an annual basis, revenue grew 20% year-over-year to over $269 million in 2020. Product revenue distribution on an annual basis was approximately 70% from logic and foundry and approximately 30% from memory. Geographically, Taiwan, Korea and China each contributed between 20% and 30% to our product revenues. On a per customer basis, three major customers contributed 10% or more to product revenues including two foundry customers and one memory customer. Annual blended gross margin was 57% within our target model range.
Product gross margin grew to 62% on a GAAP basis and 63% on a non-GAAP basis as a result of significantly higher revenues utilizing similar infrastructure as well as favorable product mix. Service gross margin reduced to 37% on a GAAP basis and 38% on a non-GAAP basis mainly due to higher personnel and material costs. Operating expenses in 2020 grew approximately 15% year-over-year mainly in research and development reflecting the significant investments in developing, introducing and proliferating new technologies and products. Operating margin in 2020 grew to 21% on a GAAP basis and 24% on a non-GAAP basis. Effective tax rate in 2020 was approximately 15%.
In 2020, earnings per share on a GAAP basis grew to $1.65 per diluted share, while earnings per share on a non-GAAP basis grew to $2.06 representing a 30% year-over-year growth, which significantly outpaced the revenue growth in the same year. In 2020, we generated free cash flow of $54 million and in parallel successfully concluded a 0% convertible bond offering in the amount of $200 million. As a result, we enter 2021 with gross cash reserves in excess of $420 million, which enables us to pursue business opportunities within the year.
Moving into our outlook for the first quarter of 2021, we expect the following: Revenues to be between $76 million to $83 million, GAAP earnings per diluted share between $0.41 and $0.53, non- GAAP earnings per diluted share between $0.55 and $0.66. At the midpoint of the first quarter guidance, we expect the following: Blended gross margin to be approximately 57%, while service gross margin is expected to increase to between 35% to 38%. Operating expenses to be approximately $27.5 million on a GAAP basis and approximately $25 million on a non-GAAP basis. Effective tax rate to be approximately 15% in the first quarter of 2021 and throughout the year.
With that, I will turn the call back to Eitan. Eitan?
Eitan Oppenhaim — President & Chief Executive Officer
Thank you, Dror. With that we will be pleased to take your questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] We now take our first question from Quinn Bolton from Needham and Company. Please go ahead. Your line is open.
N. Quinn Bolton — Needham & Company, LLC — Analyst
Hey, guys. Congratulations on the strong finish to 2021 and a very strong first quarter guidance. I guess my first question for you as you sit here today looking into 2021 you’ve guided us to a very strong first quarter. I’m wondering if you could make any comments about how sustainable you think that that revenue level is? There’s been a debate among some of your WFE peers about whether spending in 2021 would be sort of front half loaded, balanced or second half weighted? I’m just — would love your perspective as you sit and you look at your order book and your backlog. What do you think your revenue profile this year is front half weighted or more balanced through the year? Thank you.
Eitan Oppenhaim — President & Chief Executive Officer
Thank you, Quinn and it’s Eitan here. So regarding the market review and what we should expect in 2021. So as I said in my prepared remark entering in 2021 there are two main catalysts that fueled the growth at least in the first half, which is the healthy demand in logic foundry that will continue at least in the first half. And secondly, is the growing investment in DRAM. Now regarding the second half as you know although we don’t guide for the year and the visibility right now for the Q4 is not so great. I can be cautious and say that I support the analysts and the prediction in the market that saying that the WFE in 2021 will grow at around 10% to 15%. I think that if you looking right now on the segments I think that H1 probably will be fueled by logic and foundry. If I’m looking on the second half, the foundry and logic will continue on the same healthy demand basically on the 7 nanometer, 5 nanometer, 3 nanometer. And I think that that NAND — mainly VNAND will be added in the second half as well, okay? So I am looking right now on a balance here at least from our prediction.
N. Quinn Bolton — Needham & Company, LLC — Analyst
Great. And then for Dror, you mentioned that the appreciation of the shekel was one of the things that added to costs in the fourth quarter. Just wondering as you’re looking to 2021 you’ve given us opex guidance for the first quarter. How are you thinking about foreign currency exchange? Do you expect that those are going to remain elevated costs and leads to higher opex this year, or how are you thinking about that sort of that foreign exchange effect on opex in 2021?
Dror David — Chief Financial Officer
Yeah. So obviously it’s hard to predict these economic elements of the market. What I can say is that during the first quarter the foreign exchange rate did hit some kind of a low level and started recovering since then. Our guidance for the first quarter is already embedding an additional small impact as a result of that and assuming the currency will remain stable at these levels again. It did hit some kind of a low in January. So expenses will not get another hit from that aspect in the coming quarters.
N. Quinn Bolton — Needham & Company, LLC — Analyst
Okay, great. Thank you.
Eitan Oppenhaim — President & Chief Executive Officer
Thanks.
Operator
We will now move to our next question from Atif Malik from Citi. Please go ahead. Your line is open.
Atif Malik — Citigroup — Analyst
Hi. Thank you for taking my questions and good job on the [Indecipherable] guide. Eitan, first on the logic demand very strong last year, if you can parse the metrology demand between matured technologies versus leading edge? And also if you can comment on the intensity of your products as you move to 3D be it all around devices, the 5 nanometer and 3 nanometer?
Eitan Oppenhaim — President & Chief Executive Officer
Thanks, Atif for the question. So if we’re looking right now on metrology intensity, well, there are two pillars. The first pillar is that always in logic foundry the intensity is higher or the highest in the semi segments after that is the DRAM and at the end is the VNAND, okay, or the NAND. This is the way that the intensity has been allocated. The reason is that mainly that in foundry there are many products and there are changes also in the materials and the dimension. And as you go along to the DRAM and the VNAND the number of products is reduced and it’s more a stable product.
So the intensity wise is always higher in the logic foundry. So this is one pillar. The second pillar is always when you are moving to a new generation of a chip and you are moving to a new complex device and the current movements that we see that — the logic is moving to a three and two in — and changing also the architectural structure to go to nanowires and changing the materials and also if you’re looking right now on the memory as well, when you are scaling down the device, of course every change on every — a move to a new generation is increasing the intensity itself for the segment.
So if you have both logic and the memory as we see that in 2021 replacing generations and also changing and replacing materials and going to a very complex devices of course — the intensity is going up. We need to always when we’re talking about intensity try to offset it by the capacity, right? So if your intensity is going higher and capacity is not going on the same level. So then you have some offset, but if you are normalizing it to 100 wafers or 1,000 wafers always logic and foundry is higher and when you’re looking right now on the next one year all the intensity and the tax rate in all the new technology nodes are going to be higher as well.
Atif Malik — Citigroup — Analyst
Great. And as my follow-up, if you can talk about what’s driving the service gross margins higher in the March quarter? Is it just the volume and thank you for baking out the two margins?
Dror David — Chief Financial Officer
Yeah, sure. So obviously the phenomena in Q4 was a one-time phenomenon related to the aspect that I mentioned before more materials consumption in the specific quarter and end-year adjustment. So actually what we see in the first quarter is that service gross margins are returning to the normalized level. And this is what you should expect along the year. If we will see pickup in service revenues along the year, margins can even further improve from these levels.
Atif Malik — Citigroup — Analyst
Thank you.
Operator
We will now move to our next question from Mark Miller from The Benchmark Company. Please go ahead. Your line is open.
Mark Miller — The Benchmark Company — Analyst
Based on the midpoint of your guidance it appears, R&D went up significantly last quarter and it looks like that trend is going to be continuing in 2021. Is that correct?
Dror David — Chief Financial Officer
Yes.
Mark Miller — The Benchmark Company — Analyst
Okay. Taiwan Semiconductor is putting up a major fab in Arizona. It’s a key customer view. Are orders starting to flow in from that or is that could be later in this year?
Eitan Oppenhaim — President & Chief Executive Officer
So the orders for the Arizona fab will probably start to arrive and then I don’t know the orders and I don’t know when exactly they are going to come but probably towards the end of the year.
Mark Miller — The Benchmark Company — Analyst
Thank you.
Operator
And we’ll now move to our next question from Jaeson Schmidt from Lake Street. Please go ahead. Your line is open.
Jaeson Schmidt — Lake Street Capital Markets, LLC — Analyst
Hey guys. Thanks for taking my questions. I think at one-time there was talk that the goal for the service revenue line would be sort of targeting 10% growth. Is that still a good ballpark growth rate to think about for that revenue stream?
Dror David — Chief Financial Officer
Well, I would say the following, our current assumption for services growth is between 5% and 10% depending on the install base growth and also value-added services in this specific year. So obviously this year it was around 5%. There could be years where it’s going up to approximately 10%. But it’s between this level, 5% to 10% a year.
Jaeson Schmidt — Lake Street Capital Markets, LLC — Analyst
Okay. That’s helpful. And then just as a follow-up, just curious if you saw any constraints on the supply side in Q4 or if you are anticipating any going forward here in the near term?
Eitan Oppenhaim — President & Chief Executive Officer
So Jaeson, if you’re talking about the supply chain for our production facilities, I think that we managed very well in 2020 trying to secure everything that we can in the supply chain. So, it means that we increase the inventories and you’ll see that in our financial reports. And also we tried to qualify actually a second or third supplier in each one of our elements in the supply chain. And the way that we are looking forward is trying to — try to order and try to make sure that we have enough capacity for the next six to nine months and this is secured. And we need also to remember that we need to secure extra capacity because we see a growth in the production. But regarding the bottom line, we don’t see any disruption currently. So if the worst is behind us through 2020 and we could succeed increasing the production, I think that 2021 can be the same and even higher.
Jaeson Schmidt — Lake Street Capital Markets, LLC — Analyst
Okay. Thanks a lot guys.
Operator
And we will now take our next question from Patrick Ho from Stifel. Please go ahead. Your line is open.
Patrick J. Ho — Stifel — Analyst
Thank you very much, and congrats on the nice finish to the year. Eitan, maybe first off on the materials metrology front, it’s good to see the traction and the adoption very quickly for these new products. As you look at the memory side of things and you mentioned DRAM has higher metrology intensity. Can you maybe give a little more color on some of the applications and some of the potential wins on the memory side with the materials, metrology offerings that you have today.
Eitan Oppenhaim — President & Chief Executive Officer
Yeah, thanks Patrick for the question. So the two main applications that are running on the — specifically on the X-ray or the previously ReVera products is the composition, material composition and ultra-thin thickness measurement, okay? This is the two main applications and we are running on these two applications in all the customers. Now, because it’s a unique metrology capabilities, the way that it started, it started from taking it from 2015 from the lab to fab, which started with a couple of system per phase or per fab. Some of them were in R&D, some of them were in production and in the last five years we could move those tools to be real in-die, in line production tools so once you move them to in line and in production you also improve the attach rate and the intensity.
So once you start to get the customer’s confidence because it’s non-destructive and it’s becoming a very fast meteorology capability you start to get into the fab with more capacity, more attach rate and more intensity. I can say that without getting to the exact numbers but the distribution between memory and foundry or logic it’s around 50%, 50% so we have applications coming from the memory mainly the win on sides when they’re changing materials and they’re starting to have a very old thickness applications and also for the logic and foundry when they are moving to a new structure. So it’s two different directions. But both of them are increasing the intensity of the usage once we move to be in line and in-die systems that have the capability to measure really fast.
Patrick J. Ho — Stifel — Analyst
Right. That’s really helpful. And maybe as my follow up question it’s good to see the services business continue to grow. And you mentioned the margin improvements as we move forward into 1Q. maybe draw from that standpoint on the margin improvements. How much is the service business evolving where you’re helping customers more not only with the traditional type of services — breaking fixed type of model but would enhance features and enhance products, upgrade. How much of that is contributing to the services growth as well as the uptick in margins?
Dror David — Chief Financial Officer
That’s a good point, Patrick, because actually in 2020 at least in the first half of the year because of the situation of the COVID-19 the ability to enter the fab and do these mega projects of upgrade cycles was a little bit limited. And this probably had some impact on the growth of the services in 2020, which was at the low end of the 5% to 10% that I mentioned. Looking forward when we move into 2021 obviously these limitations are less significant. And hopefully this can contribute more to our revenues in 2021 and hence accelerate the growth of services in [Indecipherable]
Patrick J. Ho — Stifel — Analyst
Great. Thank you very much again.
Eitan Oppenhaim — President & Chief Executive Officer
Thank you, Patrick.
Operator
[Operator Instructions] We now take our next question from Krish Sankar from Cowen and Co. Please go ahead. Your line is open.
Krish Sankar — Cowen and Company — Analyst
Yeah, hi, thanks for taking my question and congrats on the really strong results. Eitan or Dror, one quick question now look at your calendar ’20 numbers. You guys definitely seem to have grown really nicely both the outperformed industry growth and also some of your peers. So I’m kind of curious is there a way you can quantify how much of your growth came from share gains and which vertical were those share gains? Was it in foundry, logic or memory? And then I had a follow up.
Eitan Oppenhaim — President & Chief Executive Officer
So Krish, thank you very much for the question. So we are looking right now on the average growth in the market, as you said it was around 15%. And if you’re looking right now on our products, growth rate in the year was above 25%. So I think that there were two strong catalyst to our growth. One of course is capacity because capacity demand is growing in all segments. And the second is purely share gains but I they cannot mention exactly where. But once you are doing outperformance, it’s either you open a new market or you’re taking a market share in this specific year. As I said in my prepared remark, we took market share in a one big IDM as I discussed before and I mentioned it in a couple of my calls as well as in a global memory customer that took our old portfolio starting from integrated standalone as well as materials and software.
And it’s also adding to that is couple of other customers in China that in some of them we are holding a high percentage of market share in light of the performance this year So definitely there is increase in market share this year on top of the demand. And I also would mention that if we’re looking right now on 2021, it’s the new product that we are bringing in will probably open new applications that were not answered in production for many years. So we can increase beside the market share also getting applications that were measured before in the lab and now is moving to in-line production.
Krish Sankar — Cowen and Company — Analyst
Got it. Got it. Very impressive. And then I just had a quick follow up. Thanks for the color on the service and product gross margin. At a op margin level, is it fair to assume service and products have similar op margins?
Dror David — Chief Financial Officer
Can you repeat the question?
Krish Sankar — Cowen and Company — Analyst
The service and product divisions from a op margin level, are they similar to corporate average? In other words, services has lower opex, lower R&D. So it’s similar to that op margin level similar to products?
Dror David — Chief Financial Officer
Yeah. So actually the situation is that the service business as a whole is heavy on personnel and headcount and field service engineers in the field, relative to maybe products, which is more heavy on materials. So practically this is the main reason for the difference between gross margins of services and products. Service is around 40% and product is around 60%. Again the main reason is that the infrastructure of the service organization is heavy on headcount and personnel across the globe — it’s 150 sites and so forth.
Krish Sankar — Cowen and Company — Analyst
Got it. All right. Thank you very much appreciate the color. Thank you.
Operator
And there were no further questions. So I’d like to hand the call back to Eitan Oppenhaim, Nova’s President and CEO for any closing remarks.
Eitan Oppenhaim — President & Chief Executive Officer
Thank you operator and thank you all for joining our call today. Please stay safe and healthy and we meet you in the next earning call. Thank you.
Operator
[Operator Closing Remarks]