Camtek Ltd (CAMT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek Limited second quarter 2006 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 August 7, 2006. I would like to remind everyone that the conference call may contain projections or other forward-looking statements regarding future events or future performance of the Company. These statements are only projections and may change as time passes. Camtek does not assume any obligation to update this information. Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demands for our products, the 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 the risks identified in the documents filed by the Company with the SEC. You should all have received by now the Company's press release. If you have not received it, please call called Gelbart Kahana at 1-866-704-6710. I would now like to hand over the call to Mr. Kenny Green of Gelbart Kahana, sorry. Mr. Green, would you like to begin?

Thank you. I would like to welcome all of you to Camtek's second quarter 2006 results conference call and thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's CEO; Mrs. Ronit Dulberg, Chief Financial Officer; and Mr. Yuval Attias, Director of Finance.

Ms. Dulberg will start the call by giving an overview of Camtek's performance in the first quarter -- in a second quarter 2006, followed by Mr. Attias, who will then summarize the financial results. Finally, Ms. Dulberg will discuss recent developments within the Company and in the market, discuss the guidance. And then Rafi, Ronit and Yuval will answer questions from participants. I would now like to hand the call over to Ronit.

Thank you, Kenny. Hello, everyone, and welcome to our second quarter 2006 conference call. On behalf of Camtek management, I would like to thank every one of you for your interest in Camtek and for joining us on this call.

In the second quarter of 2006, we set another record, the third in a row, and the sixth quarter of consecutive growth. Our revenue came in at $27.9 million, which is at the upper end of our guidance range. Net income was $5.2 million, which is our best ever. Gross margin followed the revenue growth, reaching 54.6%. These excellent results demonstrate our continuing improving operational and financial performance.

There is like a strong demand for our products in all marketplaces. The highlight of our activity this quarter was Falcon sales reached $13 million, managing to normal growth and winning market shares while supporting customers with installation of more than 60 machines within one year is a major task. It requires taking time occasionally for reinforcing the support infrastructure in preparation for the next phase of our growing.

Therefore, we intend to invest major efforts in this task. Winning new semiconductor customers who presents substantial business potential. Two side achievements which we have announced this quarter were multiple system orders from Toshiba and the first sale of the Falcon system in Korea. This was a significant milestone in building our co-leadership as we continue to finish work for expectant markets.

We see continuing high demand in our PCB and HDI-S subsegment that contributed $14.9 million to our revenues. We recorded positive operation cash flow of $3.4 million since the beginning of the year, along with expanding the organization. We continue to expand our product portfolio. We are about to introduce a new model Pegasus, our high-speed inspection systems for the HDI-S substrate industry. We have also recently announced an OEM agreement with Mania Technologies for marketing the advanced field level technology on the Camtek grid.

And a couple of points pertaining to our shares. Our earnings per share grew further in the quarter. We achieved earnings of $0.17 per diluted share, compared with $0.16 per diluted share in the previous quarter and earnings of $0.05 in the second quarter of the previous year. Two developments substantially increased the public shares in the Company. In [equity], we completed a private placement of over 2.5 million shares to Institutional clients in Israel. In June, Camtek's holding company Priortech sold nearly 2.5 million shares also to Israeli long-term Institutional Investors. I will discuss further the markets we completed later. First I would like to turn the call over to Yuval to go through the financials.

Thank you, Ronit. Revenues for the second quarter of 2006 were $27.9 million, 66% above $16.8 million reported in a second quarter of 2005 and up 12% sequentially from $24.9 million reported in the first quarter of 2006.

The revenue breakdown in the second quarter of 2006 between the sales of PCB, HDI-S substrate, and semiconductor manufacturing impacting further was 50%, 3% and 47%, respectively. Our geographical breakdown of the revenue for the quarter was USA 13%, Europe 12%, and the Pacific Rim in total 75%, which consisted of China 29%, Taiwan 11%, and the rest of Asia 35%.

Gross profit for the second quarter of 2006 was $15.2 million, representing the gross margin of 64.6%, still compared with $8.3 million or gross margin of 49.7% and reported in the second quarter of 2005 and $13 million or gross margin of 52.5% as reported in the previous quarter.

Operating profit for the second quarter of 2006 was $35.4 million, representing an operating margin of 19.5%. This represents sequential growth of 23%, compared with an operating income of $4.4 million, or operating margin of 17.8%, which we reported in the previous quarter. In the second quarter of 2005 we reported an operating profit of $1.4 million.

Finally, second quarter net income was $5.2 million, or $0.17 per share which is a net margin of 18.6%. This represents sequential growth of 17.5% over the first quarter of 2006, in which we had a net income of $4.4 million, or 16% per share, and the net margin of 17.8%. For the second quarter of 2005, we reported a net income of $5.5 million, or $0.05 per share -- $0.05 per share. On all counts, this result sets new records for Camtek.

Turning to the balance sheet, our net cash and equivalent at the end of the second quarter stood at $28.4 million, compared with net cash we had at the end of previous quarter at $12.2 million. The increase in our reserve during -- cash reserve during the second quarter was mainly due to private placement we had of about $15 million and a positive operating cash flow of about $2 million. Our DSO decreased to 110 days which is within our target range, down from 112 days in the previous quarter. With that, let me return back the call to Ronit.

Thank you. Department continued to progress according to our plans, both in winning new customers and in securing repeat business from our existing customers. For example, we have recently been qualified by a major customer for an optical mass application. Following several months of cooperation with the customers in adjusting the type of the application. We estimate that the qualifications for this application may lead us to supply a significant number of systems to this client as well as (indiscernible) of products.

Judging by the signals we have received, the market for Falcon (indiscernible) with significant long-term opportunities. We are working closely development in our industry to take (indiscernible) reports in the various market channels. The PCB and HDI-S business continue to show active demand as we reported in the previous quarter. We continue with our strategy of focusing (indiscernible) in this high-end segments. The new Pegasus model is one result of this effort.

We expect records set order of this model in the very near future and introduce other new offerings in the coming tradeshows. As far as our outlook for the rest of the year, our results make us ever more confident and we have seen our annual 2006 revenue guidance of between $100 million to $110 million which represents between 60% to 75% year-over-year growth. Naturally, managing such fast growth may exhibit fluctuations from quarter-to-quarter, as large orders may shift forward or backward. In the third quarter we expect to recognize between $26 million and $30 million in revenue.

Finally, I would like to mention our Investor Relations activities in the coming quarters. Firstly, we will be presenting Camtek at the RBC Conference in San Francisco this week, August 9. If you intend to be there and want to meet us, then please contact RBC. Secondly, during the first week of September, last year Rafi Amit was CEO, and I will be in New York visiting the institutional investors. Please contact our IR team if you would like to schedule a meeting with us. On that note, we will be happy to take any questions that you may have. Operator?

(OPERATOR INSTRUCTIONS). Stuart Muter of RBC Capital Markets.

Thanks for taking my questions. A couple of questions, first for Rafi, how do you see the outlook for business trends with the Falcon from your customers? Are you seeing signs of a slowdown or how is the outlook for the Falcon?

Okay. For the Falcon, as we mentioned to a few time, we feel very comfortable with the market environment. It is very positive, and we continue working with the key customers and with more applications. So we feel very comfortable, as I mentioned. I believe that right now we are going to complete a few projects with few customers, and all these projects will give us in the near future more opportunity to increase our sales in this product.

Excellent. Thanks, Rafi, and a couple of questions for Ronit. Gross margins were very strong this quarter. Do you think they could continue to increase if revenues increase? If your revenues come in at the high-end of your range in Q3, do you think your gross margins could be higher?

As you know, how do I want to say, our accountants' model, we have gross margin between 52% to 55%. We believe that we can reach it and go forth with increasing the revenues. There is a possibility -- of course, we will keep this level, but there is also a possibility to increase gross margin.

That's helpful. And then one final question, what do you think the share count will be in Q3?

Actually, nothing special should be in a second, third quarter except for regular exercise of options which are usually not a significant amount.

We don't see any major activity if you ask about warrants or options. We don't have any information about this at the moment.

Rami Rosen, Oscar Gruss.

Good afternoon and congratulations. A question regarding your operating expenses for the next quarter, is that expected to change materially from the level of this quarter?

As you know, we are trying to increase our R&D activity. We have a lot of effort in this rate, but if you are asking if the percentage of R&D out of -- out of our (indiscernible) annuity, it will grow dramatically, probably not. So the level of between 10% to, let's say, maximum 12% is reasonable.

Regarding your PCB activity, any sense of -- I mean, how significant is the ASP decline that you sense in the market?

Okay. As you know, we are not publishing the ASP, but we can say that there is some increase in the PCB market that we are starting to see, but there is no major trend of price reductions.

Last question is regarding your semiconductor activity. If you can provide roughly maybe somewhat more color on the nature of competition that you're seeing and again if you are sensing the ASP decline.

Okay, I'll discuss a little bit about the competition. Right now I couldn't mention any change or any special. I would say that this market right now is monitored by, I would say, about two or three major players, some of them only playing in Japan, the other in the rest of the world. And I think that every major competitor find his own niche the same as we, with few applications that we have -- you're successful. And most of our customers, we sell them this type of application. So, of course, like everything we can see some competition, but I wouldn't say that this is any threat of competition.

And we continue with more applications. I would say it was unique applications because when companies start with the semiconductor, the only way to start or to penetrate was with technical issues, special applications, technology benefits. And so this is our main core technology and assets, so we use it to increase our sales. I am sure that sooner or later we will see more competitors, but right now, it seem okay from us.

Is there any change in the quality of visibility that you have?

On the semiconductor?

Yes.

No, I would say that the semiconductor, if I can talk about the second half. Right now it is okay. All the leads that we see -- most of them have a budget and most of our customers are busy. I couldn't say that we see any special booming, but at least slight, but you have to understand that some of our customers, the main trigger for purchasing equipment or NOI is technology, not always it is capacity.

And when you come to a special application and this type of application is -- grow demand, so we are very busy with this application. And we also can see some moving from one quarter to the second quarter or if it comes sometime in between the quarter, but in general the environment is very positive.

Lastly, for me, can you quantify the amount of services revenue you have this quarter?

In Q2, we have about $2 million of service, which was a little bit higher than our usual service revenue for a regular quarter. We expect it to be in the future a little bit less than $2 million, but not much.

Okay, guys. Congratulations for the good results and good luck going forward.

Sergey Vastchenok, CIBC.

Congratulations on a good quarter. We see you have a very good traction in Falcon systems. You announced some pretty big clients, and actually it is a booming market. So what is the reason you have been so conservative from the next quarter and to your guidance? Actually your guidance was the same range you did for Q2, $26 million to $30 million and so the question is what kind of conservatism you put into this guidance?

Maybe I answer you too, especially with the Falcon. As you know, during the last 12 months we have installed over 60 Falcons worldwide. All Falcons were accepted and have qualified you by the customer and their site. Following such an intensive penetration process, we have to support our install base and complete custom application. We also have to finish the process of establishing the procedure of the communication protocol between our Falcon and the customer main server.

So all these tasks take some time and we prefer to make our install base and our customer very satisfied, very happy before we continue going to new customer and more application. So we have to keep ourselves to or maintain our customers and related to our size and our efforts. So we believe that after such intensive penetration, we have a little bit making sure that all the record is perfect and then to go to the next step. So this is why we still believe that next quarter we put a lot of efforts of these tasks and from that point I believe we can easily go to a second stage.

So when are we supposed to see the ramp up? It should be more in Q4 or Q1 '07?

I would say that if the market demand will stay the same from Q4 and the other, we can see, I would say, the ramp up of this product, definitely.

Can I specify how many systems you recognize this quarter in Falcon?

This quarter?

Yes.

Really it's about 20. Just looking, I'm not sure about the number.

20 Falcon.

20, and how many of them follow on orders, and what are the new orders?

It was about 60% was repeat orders.

Okay. And 60% was -- completely new customers?

Just let me look at it again. Yes, 60% were repeat orders.

So actually we can assume we will see some ramp up from the new customers. What is the place -- when the follow on orders come? When the clients come back with new orders from the initial purchase? It's a matter of, say, one quarter or two quarters? What is the pattern you see from the customer side?

It is depending on the project. Some customers get the usual order and then they need a few systems. We have one customer that talks about 20 systems within a few months, so we couldn't say that every customer has the same demand. It changes from customer to customer, from project to project. So it is not so easy to talk for all of them.

Where are you see the demand coming from? Which geographies do you see?

I would say we see it all over. We see it all over.

So Korea, you see the possibility of follow-ons in this region?

In Korea, we can see a new customer definitely. You have to see -- the process in the semiconductor to go through the presentation qualification, it can take a few months. Until you qualified by the customer and until you can connect your system to its own server, its own standard, its own communication system. So this is a very long process, but when we have -- after that, then you start to get more easy repeating order. So this is why we have to invest so much effort in order to get this position and after that when you get more order and increased capacity, then we can enjoy getting more orders. And we believe that in one or two customers, we came to this position right now.

Okay. And regarding complete of landscape in the semiconductor industry, you see some changes following the rolled off acquisition by -- August acquisition by Rudolph Technologies, you see them being more aggressive in the space?

I would say it's about the same. I would say they own their install base and there is some advantage in some special segment. We have our own advantage in some other segment. From time to time, we are fighting on the same niche, some segment, but in principle we don't see any change from the time they made the merger.

The last question is regarding the political developments in Israel. You know the state of war in the northern border. Do you see some significant impact? What degree of impact to your revenues, to your supplier?

I would say right now we are not seriously affected by the war. A few of our employees serve in the reserve and a few of our contractors from up north have delayed shipment of machine components, but we have enough in stock to allow for such situations. So, hopefully, this war will soon end and we come to make the decision.

Thank you. Good luck.

Just one comment to your first answer -- question. Our guidance on the previous quarter was $26 million to $29 million and this quarter, $26 million to $30 million, so we increased the upside of the guidance.

Okay. Thank you.

Nathan [Pulwar], a private investor.

Hello to everybody. First of all, congratulations on excellent performance. I'm looking at the share price, what it is right now. Maybe an hour ago, it didn't look too good. Surprising enough, you know the share price does not reflect your performance. And I'm looking at the market cap of $195 million, with a share price about $6.5 a share, and what is $30 million in cash and about $20 million of net profit for the year. So you're talking about a net market rate of 8 to 9, which I think is very low.

My question is, having sold 5 million shares to the Israeli Institutional Investors, between you and your parent company, might that be some downside pressure on the share price by Israeli Institutions having to sell because of the situation? Do you have any information on that?

No, we don't have any information on that, and you know that the (indiscernible) market is something that we don't have any influence on. We are trying to do our best, and we have the best performance of the Company. And I believe that the results that we achieved is something to be proud of and we are -- we're going to continue to do our best.

I agree with you that you should be proud of the results, but the performance of the share which is not something that you are influencing is a little disappointing. Are you still doing some efforts to increase your customer base with some -- I might say American or International Institutional Investment?

As I said before, we are having a lot -- many (indiscernible) shows around, and we said actually for the last three months. We are doing these every month, and we are trying to do our best to expose the Company to Institutional Investors in the States and in Israel.

Okay, thank you. You know you have to a cash level of about $30 million which may be so more cash coming in by conversion of (indiscernible) in the future. Do you have any plans on how to use the cash? Are you looking at more dividend acquisitions, maybe possibly a buyback of shares at this level?

We have, as I said, actually in the previous quarter we have expansion plans and we actually have two reasons to have the private placement. One of them is an expansion plan and the other is to strengthen our networking capital. And these were the two targets and these are still the targets for the money.

Well, you know, talking about the current level, your (indiscernible) cash survival, do you need such a big cushion of working capital?

We need some cushion, and the other is for expansion plans.

Expansion plans. Okay. When do you think that could translate in increased sales?

I cannot commit to this question at the moment.

Thank you very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Before I asked Mr. Amit to go ahead with his closing statements, I would like to remind participants that the replay of this call be available in three hours on Camtek's website www.camtek.co.il. Mr. Amit, would you like to make your concluding statements?

I will do it. Ladies and gentlemen, on behalf of Camtek and the rest of the management team, I would like to thank you for your continued interest in our business and we very much look forward to continue reporting for the (indiscernible) to you over the next few quarters. Thank you and we look forward to speaking with you again next quarter.

Thank you. This concludes Camtek Limited second quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.