Camtek Ltd (CAMT) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek Ltd. fourth-quarter 2005 results conference call. All participants are at present in a listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded March 2nd, 2006.

I would like to remind everyone that the conference call may contain projections or other forward-looking statements regarding future events or the future performance of the Company. These statements are only projections and may change as time passes. Camtek does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for our products, timely development of our new products and their adoption by the market, increased competition in the industry and price reductions as well as due to risks identified in the documents filed by the Company with the SEC.

You should have all received by now the Company’s press release. If you have not yet received it, please call Gelbart-Kahana at 1-866-704-6710. I will now hand over the call to Mr. Ehud Helft of Gelbart-Kahana. Mr. Helft, would you like to begin?

Good afternoon for all the listeners in Israel and Europe. I would like to welcome all of you to the conference call and thank Camtek’s management for hosting this call. With us on the line today are Mr. Moshe Amit, Executive Vice President and Chief Financial Officer; and Mr. Yuval Attias, the Controller of Camtek; and Mrs. Ronit Dulberg who will be replacing Moshe as of March 19 as the CFO of the Company.

Mr. Amit will start the call by giving an overview of Camtek’s performance in the fourth quarter and for the full-year 2005, followed by Mr. Attias who will summarize the financial results. Finally, Mr. Amit will discuss the guidance and then we will open the call for questions. I will now hand over the call over to Mr. Moshe Amit. Moshe--?

Thank you, Ehud. Hello everyone, and welcome to our fourth-quarter 2005 conference call. Joining me today are Yuval Attias and Ronit Dulberg and together we would like to thank every one of you for your interest in Camtek and for joining us on this call.

We’ll start with the overview. Around four years ago we embarked on a strategy to transform ourselves from a one-market company to a more diversified company. The rationale behind this strategy was our assessment that our core inspection technology and know how we have developed can be easily adapted to other markets and leveraged for other growth. Another objective of the diversification was reducing the risks associated with being a single-market company. We judge the semiconductor inspection arena is a viable, growing, unsaturated marketplace where the synergy with our existing products could launch us into the fast lane.

The year 2005, and in particular the second half of the year, has proven we have made the right decision. Nearly two years after the first installation, Camtek is a recognized player in this arena, with a total of nearly 50 systems sold, a respectable customer base, and a growth rate beyond our own expectations.

While our revenues from the PCB industry have declined in 2005, the near $20 million in Falcon sales cushioned that decline, linking our total 2005 revenues to $63 million. Moreover, in the second half of the year, they set the pace that supports our expectations for significant growth in 2006. We are now shooting toward the $100 million mark, which is a top-line year-over-year growth of almost 60%. Most of the growth should come from the sales of various Falcon models. We believe that the PCB market will grow moderately relatively to 2005.

The main highlights of the year and for the quarter are; 2005 is no doubt the year of the Falcon, as revenues of $19.8 million, up from $4.9 million in 2004; and qualifications by 6 of the top 15 semiconductor manufacturers around the world. We have established ourselves in this market. Nearly half of the annual Falcon family revenues, $9.5 million, came in during the last quarter, compared to $4.8 million a quarter in the third quarter of 2005. This represents a run rate of over 36 million annual Falcon revenues.

This achievement came primarily thanks to the Falcon’s competitive performance and its ability to meet the customer needs, not from lower pricing. In fact, the typical Falcon margins are among the highest in our product portfolio. We expect Falcon sales to contribute around 50% of our 2006 revenues, and believe that this market will provide us with head room to continue growing.

We continue to expand the Falcon customer base, qualified by strategic global accounts and winning orders from new geographic zones, including sales to some big names in the semiconductor industry. In fact, we are already receiving repeat orders for the Falcon, which is a clear indication of a satisfied customer. 60% of Falcon sales in the fourth quarter were repeat orders.

2005 sales to the PCB industry declined from $62.5 million to $43.3 million. This was mainly due to the weakness in the first quarter of 2005 and to heavy competition for pricing pressure for most of the year. Nevertheless, we were able to maintain our strong market position in our [service] market, and we believe that we will continue to further improve it.

We consider the PCB industry a core business, and continue to develop our competitive edge there, primarily in its more rewarding segments.

Our revenues in the fourth quarter were $19.4 million, up 10% from both the third quarter of 2005 and the fourth quarter of 2004; both net income $2.1 million and gross margin 14.9% are better than in the previous quarter.

I will now provide more details on the performance of the various sectors of our business during the fourth quarter. I’ll start with the semiconductor and packaging market. As I mentioned before, we are very proud of our achievement with the Falcon, which continued to exceed our expectations. The semiconductor industry is characterized by a long sales cycle to first-time customers, typically 8 months or more. During this period, the customer expects a supplier to prove his equipment-production readiness beyond a shadow of a doubt in each aspect of its performance. However, once a buyer accepts a system, high customer loyalty to supplier and [adherence] to having a second source, means the likelihood of receiving follow-up orders is significantly higher.

Purchasing decisions in this industry are affected more by system performance and the supplier responsiveness than by competitive pricing.

The Falcon market [correctory sequence] has worked to our advantage is such a relatively small number of semiconductor manufacturer and packaging-service suppliers control the bulk of production capacity worldwide through their multiple sites.

Various Falcon models have been already qualified and purchased in multiples by 6 out of the top 10 semiconductor suppliers, as well as by smaller but still significant manufacturer assembly and sub-contractors. Currently we have six systems undergoing evaluation with new customers. With this, we can declare our penetration phase a success, and move on to continue building market share and establishing long-term partnerships with our customers.

We estimate that the semiconductor market for the Falcon is still unsaturated as we have seen more and more applications beyond our initial definitions that our customers can use the Falcon for. We believe that the potential market size for the Falcon is much greater than our $130-million estimate for the total revenues of all the [nine] competitors manufacturing similar products.

We currently have a very strong pipeline of Falcon orders and evaluation requests. In fact, because the demand has turned out beyond our expectations, we estimate that deliveries of some those orders will be made only in the second quarter. Therefore, we believe that in the first quarter the sequential growth of the Falcon will be more moderate.

We’ll move now to the PCB and HDI substrate. During the fourth quarter, PCB sales contributed 41% of our revenues and HDI substrate sales contributed 12%. Overall, there was a decline in our PCB and HDI business in the quarter; however, with this is stabilization in selling prices, which we believe indicates that we have reached a turning point.

In the PCB market our strategy is to maintain and leverage our strong market position. We are doing this by continuing our investment in R&D, developing more competitive capabilities. In particular, we focus our efforts in the HDI and Fine Line segments of the industry. These segments support higher margins, are growing faster, and our technological advantages provide us with a greater competitive edge there.

Despite the decline in this market over last year, we believe that our [served] market position has remained strong, and we have leveraged our presence among key global manufacturers.

As I have spoken about in the past, the HDI market segment reflects the higher end of the PCB market and naturally the growth potential in the HDI market for our product is higher, and with better margin. Recently we have seen prices stabilizing and demand increases in our HDI product, such as the Pegasus, Orion Fine Line, the LAM and Dragon HD2. The decline in shipments over the fourth quarter of 2005 may have resulted in part from us having to push deliveries over to Q1 and Q2 of 2006 due to a shortage in [inaudible], as we had not anticipated that level of demand. We expect revenue from this segment to increase throughout 2006.

The PCB and HDI business made up a total of 53% of our overall revenues. Our service revenues contributed a total of $1.8 million or 18% of the revenues in these two sectors. 86% of the non-service revenue achieved in these two sectors, were through repeat orders, while 57% of these were to the top 100 PCB manufacturers. Based on these market trends, we expect that in the first quarter the PCB and HDI segments will show a healthy sequential growth, providing a significant part of the growth we are expecting in the first quarter.

I would like now to turn the call over to Yuval to go through the financials.

Thank you, Moshe. Revenues for the fourth quarter of 2005 were $19.4 million, 10% above $17.6 million as reported in the fourth quarter of 2004, and up 10% sequentially from $17.7 million reported in the third quarter of 2005.

The revenue breakdown for the fourth quarter of 2005 between the sales of PCB, HDI and semiconductor manufacturing and packaging product was 7.9%, 2.4% and 9.1% respectively. Our geographical breakdown of the revenues for the quarter was USA 4.4%, Europe 2.4%, Japan 0.2%, and the Pacific Rim 12% which consisted of China 6.3%, Taiwan 4%, and the rest of Asia 2.1%.

Gross profit for the fourth quarter of 2005 was $9.601 million dollars, representing a gross margin of 49.5%; this compared with $9.439 for a gross margin of 53.7% as reported in the fourth quarter of 2004; and $8.547 million for a gross margin of 48.2% as reported in the previous quarter. The lower gross margin was due to the erosion in selling prices in the PCB sector.

Operating profit for the fourth quarter of 2005 was $2.087, representing an operating margin of 10.8%; this compared with $3.006 for an operating margin of 17.1% reported in the fourth quarter of 2004; and $1.513 or an operating margin of 8.5% as reported in the previous quarter.

Fourth quarter net income was $2.1 million, or $0.07 per share; compared to net income of $3 million or $0.11 per share in the fourth quarter of 2004; and $1.5 million or $0.06 per share in the third quarter of 2005.

Turning to the balance sheet, our net cash and equivalent at the end of the fourth quarter of 2005 stood at $10.815 million; compared with the net cash we had at the end of 2004 [6.806 million]. The balance for 2005 includes the $5 million of convertible loans from Fimi from August 2005.

Our inventory consisted of 50.922 million of finished goods and work in process and $9.020 million in raw materials and components. Our DSOs increased to 115 days, while this is higher than what we would like to see, it is still within the norm in our industry. In any case, we have collected already over $9 million in January and we therefore expect that our DSO in the first quarter will go down.

With that, I will return the call back to Moshe.

Thank you, Yuval. I would now like to introduce our 2006 guidance. As I mentioned, 2006 started stronger than anticipated in both of our core markets, but particularly in the PCB sector where our base assumption was that this sector would remain flat.

We are therefore adjusting our previously-issued first-quarter revenue guidance upward from $20 to $23 million to $22 to $24 million; and expect that the PCB market will contribute a substantial portion of this expected growth. Moreover, our strong pipeline and the demand in the market that we are experiencing, allows us to increase our revenue guidance for the year 2006 from $85 to $95 million to $90 to $100. We believe that most of the expected year-over-year growth will come from the semiconductor manufacturing and packaging industry, while our revenues from the PCB industry will grow, but more moderately.

Finally, on a personal note, Ronit Dulberg who is sitting right next to me at the moment will replace me as the CFO of Camtek for March 19. I have very much enjoyed my five years as the CFO, though I feel it is time for me to take a step back. However, I will stay with Camtek as an Executive Vice President and as part of the senior management, and will assist in the various areas that are important to the Company’s continual growth and profitability, particularly in these exciting times for the Company.

Obviously, I will be helping Ronit to ensure a smooth transition into the position and many of you will get a chance to meet us on our next road show.

Finally, I would like to thank you all for your continual support and I look forward to seeing the Company continue to progress from strengths to strengths. On that positive note, I would like to turn over the call to the question-and-answer session. Operator--?

Thank you, sir. [Operator Instructions] We have a question from [Nathan Powell] of [Powell] Equity Funds. Go ahead, sir.

Yes, good evening everybody. I was looking at your profit and loss statement and we see nice sales development. However, I am a little bit worried about the shrinking of the profit margins. If I compare the numbers, taking back the last two quarters of 2005 and as it compares to 2004, we see a considerable decrease in the profit margin starting from the gross profit margin and going through to the operating income. I see a very significant increase, especially in the selling, general and administrative expenses. You know which are higher; it’s about 1.3 million for the half year in 2005 compared to 2004. There is also a significant increase in R&D expenses, and there is shrinkage in the gross profit which we heard already that is due to probably shrinking profit margins in the PCB market. My question is – looking forward into 2006, what can we expect in terms of profit margins?

Okay, thank you very much for your question. I believe these topics were covered already in the last conference call, but I will gladly repeat our answers.

I would say for Camtek, and especially for this period comparison of the last quarter of this year to the last quarter of 2004, it is not a kind of an apple-to-apple comparison. We are a different company right now. In 2004 we were basically a one-product-line company. Out of $7.6 million of revenue, for instance in Q4, and then we achieved 53.7% gross margin. [15%] was just from one market segment, PCB. Now with a similar revenue of 17.7, the PCB contributed only $10 million. In other words we had carried out a different cost structure which basically increased our break-even point. In order to go back to the values of 2004, we definitely need to increase our overall revenues toward the $24 and $25 million a quarter, or perhaps even more.

Let me just try to repeat our target model and this target model of course is based on the cost structure and is something that we believe that we can achieve under market optimal condition. Our modeled cost for a target gross margin of 50 to 52%; we are just touching it. It’s 49.5. R&D expenses, 11 to 13%; we are just about there. In 2004 we were a little bit low because we could not hire enough R&D people at the growth rate we achieved in 2004.

Sales and marketing expenses; you are right; they are a little bit on the high side. But once again, we are working now with two divisions and we need to get a kind of minimum critical mass in order to reach a similar level of SG&A as we had in 2004.

But overall, we believe that it is within our reach to estimate, and this is what our target models calls for operating income of the range of 13 to 15% and net income of 12 to 14%. I believe this will answer your question.

Yes, it does, more or less. I still have another question concerning the balance sheet. Just going back to the profit and loss statement, I looked at just for comparison at the Orbotech statements and I see while you have like better gross profit margins and even you have lower percentage of R&D expenses in comparison to sales. The SG&A expenses are considerably higher, Orbotech is like 16% of sales as opposed to 27% that you have. Do you think that the venture, once you get your sustained growth, you will be back at like 20-20-something % levels?

Well, as I mentioned, our target for the SG&A are quoted for 24 to 26%. Don’t forget that we are working again with two divisions. And yes, there is some overlap of expenses in terms that we still are using on one hand a direct sales force and we’re still paying sales commissions direct. This is typical to a company in a penetration and a growth [rate]. Later on into the future, it will be a change either way, selling indirect or selling with a direct sales force. So as we move on and as we will grow, we expect to see a reduction in the percentage of the sales and marketing or in general, the SG&A.

Okay, thank you. Now just to the balance sheet. You talked already about it; you’ve got $11 million in cash. You have basically no bank debt and you have a convertible loan which at this level may be converted into shares and we then maybe further strengthen your balance sheet. And my question is – are you anticipating raising maybe new equity or debt and if there are any – are you going to solely rely on internal growth or are you maybe looking at possible acquisitions?

You know, merger and acquisition, this is a topic that from time to time an idea will come, and when there will be something actual to report, of course you know we’ll report it. We never said that the only way to grow is going to be in organic growth. We are going to work on many and any good idea. As far as the cash flow and the cash burning, yes I’ll answer it by a very good collection. And I just want to remind you that the way I represent the numbers, the way I develop and represent the numbers are all on a cash basis. We definitely can finance the working capital or the receivable adjusted by early cashing of a letter of credit already accepted by the bank and about 70% of our business in Asia, for instance, this is most of our business, is supported by this type of letter of credit.

And also we have a credit line from the bank of $10 million which we have not been using it so far. On the other hand, as we say, two years ago even in 2004, that the right time and whenever there will be the right time and right terms we may consider raising up and adding more partners to our shareholders and to Camtek as the main shareholder is really willing to reduce its share and to increase the float.

Okay, thank you very much and good luck to you.

You’re very welcome. Thank you.

Thank you. [Operator Instructions] There are no further questions at this time. Mr. Amit, would you like to make your concluding statement?

Yes, thank you. Ladies and gentlemen, on behalf of the management of Camtek, I would like to thank you for your continued interest in our business and we very much look forward to reporting positive results to you over the next few quarters. Thank you and we look forward to speaking to you in the next quarter.

Thank you. This concludes Camtek Ltd. fourth-quarter 2005 results conference call. Thank you for your participation. You may go ahead and disconnect.