Camtek Ltd (CAMT) 2006 Q4 法說會逐字稿

Welcome to the Camtek Ltd. fourth-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 March 20, 2007.

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 predictions 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, 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 risks identified in 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 GK Investor Relations at 1-866-704-6710. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you. Good morning and good afternoon to everybody. I would like to welcome you all to Camtek's fourth-quarter 2006 results conference call and thank management for hosting this call today. Before I introduce the speakers, I would like to apologize for the delayed release of the results due to technical problems; but they are now available on all wires and on the website of the Company.

With us on the line today are Mr. Rafi Amit, Camtek's CEO; and Mrs. Ronit Dulberg, Camtek's Chief Financial Officer. Mrs. Dulberg will start the call by summarizing the main business achievements of the year, market trends, and reviewing Camtek's performance, followed by a summary summarizing the financial results. Rafi Amit will then answer questions from the participants. I will now hand over the call to Ronit. Ronit, please?

Thank you, Ehud. Hello, everyone, and welcome to our fourth quarter and full-year 2006 conference call. On behalf of Camtek's management, I would like to thank everyone (inaudible) for your interest in Camtek and for joining us on this call.

2006 was another record year for Camtek, growing nearly 60% over our 2005 revenues with (indiscernible) sales of semiconductor inspector products. Revenues from the PCB and HDI-S industries grew by 42%. We achieved this outstanding growth while maintaining healthy margins and profitability and despite a softening in demand we began observing in the last part of the year.

We link this softening to the inherent cyclicality of the microelectronics industry. As several other suppliers in our marketplaces have reported, the industry appears to be going through a certain correction of overcapacity.

Another aspect of our fast growth was the need to operate at less than perfect efficiency to support it with the infrastructure, people, and materials. The [coming] period with a reduced pressure allow us to examine the organization and improve its efficiency.

We feel that this softness will continue through the first quarter of 2007. Based on this assumption, we have implemented cost-reduction measures. Nevertheless, based on input from our customers, we expect a shift in the market and an increased demand for our products in the second quarter of 2007 and a further increase in demand for our products during the second half of the year. We're maintaining our capability to support this anticipated increased demand.

2006 we generated a record $100 million in revenue compared with $63 million for 2005 which represented 59% growth. Additionally, we are presenting an impressive EPS of $0.39 compared to $0.10 for 2005.

In the semiconductor manufacturing and packaging business, we have established a strong (indiscernible) position in this technology-driven market, having developed a substantial customer base and [sold] this year over [60%] worldwide.

This year we generated a total of $39 million in revenue from semiconductor manufacturing and packaging, approximately [0.5%] higher than in 2005 and far higher than the growth of semiconductor equipment according to the published estimates. Our success results mainly from our ability to respond fast to customer needs with high-performance products and provide [flow support].

We continue to invest substantial R&D efforts in enhancing our products. We recently introduced the Falcon 600 for MEMS and other special applications and are planning to launch additional enhanced models later this year.

In 2006, we continued to see strong steady demand in the PCB and HDI inspection business. Our revenues from these segments reached [$53] million, about 42% over 2005. The PCB and HDI inspection market has proven itself again a clearly growing business. Our position in it remains strong. We consider it as a viable market and intend to continue our investment (indiscernible).

During the fourth quarter, we introduced the Pegasus 200-S, a new model of the Pegasus product line of automated optical inspection systems for [finished] high-density interconnect [packages]. This new model increases our competitive advantage and opens before us new market opportunities.

Toward the end of 2006, we began deliveries of the new generation of our Dragon and Orion systems. These new systems implement, among other features, a totally new approach to the way users communicate with their equipment such that even a basic level operator can optimize the system [detection] profile to the specific application (inaudible) preferences.

Looking ahead, we continue to see strong growth potential for this market and continue to develop new PCB and HDI-S products which we anticipate launching through 2007.

Revenue for the fourth quarter of 2006 was $21 million, 8.4% above the $19.4 million reported in the fourth quarter of 2005 and down 20.1% sequentially from $26.3 million as reported in the third quarter of 2006.

The revenue breakdown in the fourth quarter of 2006 between the sales of PCB, HDI-S, and semiconductor manufacturing and packaging products was 69%, 2%, and 29%, respectively. Our geographical breakdown of revenue for the quarter was USA 28%; Europe 6%; and total Pacific Rim 66%, which consisted of Japan 9%, China 40%, Taiwan (indiscernible) 7%, and rest of Asia 10%, including service.

Revenues for the full year were a record $100 million, 59% increase over $63 million reported in 2005.

Gross profit for the fourth quarter of 2006 was $9.3 million, representing a gross margin of 44.5%. This compared with $9.6 million or a gross margin of 49.5% as reported in the fourth quarter of 2005, and $13.9 million or a gross margin of 53.2% as reported in the previous quarter. Gross profit for the year was $51.6 million representing a gross margin of 51.6%, compared with $30.2 million or a gross margin of 48% as reported in 2005.

We recorded in the quarter operating expenses of $11.8 million compared with $7.5 million in the fourth quarter last year and over $9.4 million of expenses recorded in the previous quarter. We continue to maintain tight control over our expenses. We have completed building our global organization and production capacity to support our expected growth.

Operating expenses for the year were $39.7 million compared with $27.2 million in 2005. Given the anticipated weakness in the industry, we have initiated several measures with a view to better aligning our expenses.

Operating loss for the fourth quarter of 2006 was $2.4 million, representing an operating margin of 11.6%. This loss represents a decrease of 216% compared with an operating income of $2 million in the fourth quarter of 2005. Sequentially, we had a decrease of operating profit from previous quarter by 154%. Operating profit for the year was $11.9 million or 11.9% of revenue compared with $3 million or 4.8% of revenue in 2005.

Finally, fourth-quarter loss was $2.2 million or minus $0.07 per share, representing a net margin of minus 10.6%, compared with $2.1 million net income or [$0.08] per share in the fourth quarter last year.

Net income for the third quarter of 2006 was $4.2 million or $0.13 per share. Full-year 2006 net income was a record $11.6 million or $0.39 per share, representing a net margin of 11.6% compared with $2.7 million net income or $0.10 a share in 2005.

During 2006, we recorded a positive operating cash flow of $761,000. Throughout the year, we further increased our cash reserve while expanding the organization, allocating funds for a valuation (indiscernible) and building inventory to enable goods deliveries.

Now turning to the balance sheet, our net cash and equivalent at the end of the fourth quarter stood at $23.3 million compared with $8.7 million at the end of fourth quarter of 2005. We had negative operating cash flow of $3.5 million in the fourth quarter. Our DSOs increased to 128 days, up from 109 days in previous quarter.

Moving into 2007, Camtek offers a leading set of inspection solutions for the semiconductor manufacturing and packaging, PCB, and HDI substrate industries, continuing to invest in the most [advantaged] technologies and solutions. We are proud of the substantial improvements that we have made in our business in the past 24 months, and we are energized by the opportunities in front of us. On that note, we will be happy to take any questions that you may have. Operator?

(OPERATOR INSTRUCTIONS) Mahesh Sanganeria of RBC Capital Markets.

It seems like the weakness you saw in the December quarter was a surprise. When is it you found out that the business was turning south? Can you give us more color on exactly what happened? Because that seems like your expenses have ballooned, and the revenues even in Q1 looks like it is not recovering. So what exactly happened? Can you give us some more idea about that?

Okay, we saw specific signals from the market by the mid of December, especially for the semiconductor industry. Regarding the PCB industry, I would say that most of the year we can say that due to the Chinese New Year, we always can see this first quarter as a quarter that most of the customers prefer to wait with the order after the holiday.

So what happened this quarter that PCB, as was expected always, the Q1 was a little bit less than the normal; and the semiconductor, due to the weakness of the semiconductor industry, saw (indiscernible) results by the second half of December through Q1 2007.

By the way, when we start to feel this signal, we start to do a lot of steps to minimize the expenses and to make adjustments with our cost structure based on the current situation.

So you are saying that you found out in the middle of December that the business was going to be so weak in the semiconductor side?

(indiscernible) Our last announcement about delaying of orders and about reducing the revenue, we did it by the 20th of December. This was about the day that we realized that something was going on. Excepting through a few key customers that were under a freeze policy or some other delayed order, this was the first time that we really realized such signals.

Well, what I am trying to understand is if you can give me more confidence that this is an overall market situation and not a market share loss. The question I am asking is that the back-end spending has been trending down throughout 2006, and the expectation is that it is close to bottoming in Q1. It has been a steady down while your revenues have been increasing.

So this sudden drop actually does not match with what we have heard from other back-end suppliers. So how can you explain that? How can you give me confidence that you have not lost share here?

In 2005, we actually -- and also in the first quarter of 2006 -- we worked a lot to acquire market share. This is why we didn't feel maybe the downturn that started earlier.

If you talk about our competitors, actually, they started to feel the softness even before. Actually, they are talking about some flatness in all of 2006. We didn't notice it because of acquiring market share in the semiconductor.

Now I think at the end of 2006, we already acquired a market share, which put us in a situation that the changes in the market and the softness already impacts our income, which we didn't predict at the beginning of the quarter. We were still under the assumption of continuing earning market share.

As to the current situation, of course we have enough market share to be impacted by any change in the market.

By the way, I would like to add, if you go and look all the recent conference calls, all our head-on competitors indicated the same as we. All of them mentioned softening and reducing of the revenue. It is not something only for Camtek, as far as I know.

Okay. So how should we look at 2007? How should we model in terms of the revenues and expenses? What would be the base number?

Okay. So I would say that 2007, in this case, is a little bit tricky year, because Q1 is a weak quarter. We, based on all the analysts and forecasting and input from our customers, the second half is looking as very prospective second half.

So we can say that we can see the change of the direction from Q2. It is the amount of lead, the amount of input requirements from customers. So we definitely can say that from Q2, we can see the changing of the direction.

So I would say that our assumption from the second half will be about the same run rate as we did in 2006. [Just look] right now, based on all the input. I believe that Q2 will be the beginning of this trend.

Okay, so you think that start increasing -- you see an uptick in revenue in June quarter and then a substantial increase in September and December quarter?

Yes, definitely.

So how do you -- what level of costs, R&D and SG&A, should --? I mean, can you describe more about the cost-cutting measures so that we can get an idea of where the expenses are?

We believe that at the end of 2007, we will be back at the level of profitability we were in 2006. We probably will be in a different situation in the first half of 2007; but the second half of 2007 going back to a revenue run rate of 2006. We also will be back to profitability level of 2006.

Okay, thank you.

(multiple speakers) Are you ready to take another question? (technical difficulty) Are you ready to continue with the question-and-answer session?

Sure.

Mary Brixie of Avian Securities.

I was hoping to follow on the last question a little bit in terms of market share gains. You said that you had experienced share gains going into '06. I was hoping you could give me some figures of what you believe your market share was in '05; and where you stood in '06; and who you believe you gained market share from? Thank you.

I'm not sure that I am able to answer this question, because there is no independent research on this data. So we can say that in 2005, we were something between 10% to 20%. In 2006, we are somewhere between 20% to 30%.

This includes both your semiconductor -- your inspection, the semiconductor market? Is that what we are specifically talking about? We are specifically talking about the semiconductor market, correct?

Yes.

Who do you believe you (technical difficulty) share from? Could you talk a little bit about who your competitors were that you were gaining share from?

(technical difficulty)

I just have one other question, and that is who you believe you guys are taking market share from.

This is a very tricky question, you know? We don't want to make anyone angry. Listen, I think the most dominant competitor in this market before Camtek got into the semiconductor market, there was August Technology, acquired by Rudolph. I assume that they are still the biggest player in this market. Should I continue?

Yes.

Okay. So we believe that today the biggest players in this market today are Rudolph and ourselves.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Thank you; there are no further questions at this time. I would now like to turn the call over to Mrs. Ronit Dulberg. Mrs. Ronit Dulberg, would you like to make your concluding statements? (multiple speakers) (technical difficulty) There are no further questions at this time. Okay, so please go ahead.

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. We very much look forward to continue reporting positive results to you over the next few quarters. Thank you and we look forward to speaking with you again next quarter.

Thank you. This concludes the Camtek Ltd. fourth-quarter 2006 results conference call. Thank you for your participation. You may go ahead and disconnect.