Camtek Ltd (CAMT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Camtek second-quarter 2010 results conference call.

All participants are at present in listen-only mode.

Following management's formal presentations instructions will be given for the question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded August 5, 2010.

I would now like to hand over the call to Mr.

Ehud Helft of CCG Investor Relations.

Mr.

Helft, would you like to begin?

Thank you and good day to all of you.

I would like to welcome all of you to Camtek's second quarter 2010 results call.

And I would like also to thank Camtek's management for hosting this call.

With us on the line today are Mr.

Roy Porat, Camtek's General Manager, and Ms.

Mira Rosenzweig, the Company's CFO.

Roy will start the call by discussing recent developments within the Company in the market and will also discuss the outlook.

Mira will give the overview of Camtek's performance in the second quarter and summarize the financial results.

Before we begin, may I remind our listeners that certain information provided on this call are internal Company estimates unless otherwise specified.

In addition, this call may contain forward-looking statements.

These forward-looking statements are only predictions and may change as time passes.

Statements on this call are made as of today and the Company undertakes no obligation to update any of the forward-looking statements contained herein whether as a result of new information, future events, changes in expectations or otherwise.

Investors are reminded that actual events or results may differ materially from those projected including as a result of changing industry and market trends, reduced demand for services and product, the timing and development of new services and products and their adoption by the market, increased competition in the industry and price reduction as well as due to other risks identified in the Company's filings with the SEC.

Please note that the Safe Harbor statement in today's press release also covers the content of this conference call.

In addition during this call, certain non-GAAP financial measures will be discussed.

These are used by management to make strategic decisions, forecast future results and evaluate the Company's current performance.

Management believes that the presentation of non-GAAP financial measures is useful to investors' understanding and assessment of the Company's ongoing cooperation and prospects for the future.

A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

We will then open the call and we will be happy to answer your questions and I would like now to hand over the call to Roy.

Roy, please?

Thank you, Helft.

Hello everyone and thanks for joining us.

We are pleased with the second quarter results and we see it as a step in the right direction and a positive indication of the realization of our future goals.

Our second quarter results came in on target as anticipated.

During the second quarter and as we move into the third quarter, our markets in which we operate are all in high utilization and companies are actively expanding their capacity by investing in capital equipment.

Looking ahead into the third quarter, we anticipate another quarter of sequential top-line growth for our business and I will provide guidance for the third quarter later on.

Already by last quarter and continuing into Q3 most of our back-end semiconductor and our PCB inspection businesses have now reached full recovery.

In fact looking forward into the second half of 2010, we anticipate an even higher level of demand for our products.

The diversity in our business allows us to enjoy the balance of cycles.

While both of the markets we operate in are in high demand, in Q2 we saw a relatively high demand for our PCB products while in Q3, we anticipate the back-end semiconductor inspection business to be high and taking the lead.

Going forward we foresee Camtek's business evolving from a two vertical business to a four vertical business in the second half of 2010 and going into 2011.

This will further diversify our exposure to the industry cycles in which we operate.

The two new additional product lines in the front-end semiconductor of Macro Inspection and Sample Preparation are starting to contribute to our top line.

We target to see an additional $2 million to $4 million in revenues per quarter from these two new verticals going into the second half of 2010.

We are still hopeful that the fifth vertical of DMD will kick in once we eliminate the existing risk and bring the product to market.

Moving to provide a closer look at our markets we sell to, the PCB.

Looking into the PCB inspection business, strength has developed as we anticipated.

In the second quarter, we witnessed a strong demand for our AOI products and we saw customers expanding their capacity.

In addition, our customers' end customer that are ordering PCBs these days witnessed longer lead times and had difficulty getting their needs fulfilled because of capacity shortages.

The current utilization level is still high and we do expect these high demands to slightly adjust to levels we experienced in the past years.

It is important to note that our visibility in this market is very short.

We are continuing our efforts to move more and more responsibilities and tasks related to our PCB AOI business from Israel to lower-cost Chinese subsidiaries.

We target an operating cost structure that is at Chinese level excluding our R&D that still remains in Israel.

We believe that operating in a close proximity to our customers in the China, Taiwan and Asia which is close to 90% of our PCB revenues and being prepared to sustain a competitive advantage and hopefully expand our PCB businesses strategically we must be doing all this from China.

I would also like to update you on the status of our direct material deposition business, DMD for short.

We are still in beta testing and with an R&D project as complex as this we are taking more time to complete the product than was in our initial plan.

It is important to note that it is a new technology and there are still some risks pending proof but we remain very excited regards the technology and the business potential.

Although we do see significant market demand for these systems, it is currently difficult to estimate the time it will take us to bring this technology to the market.

We will keep you updated as things evolve and we hope to bring good news soon.

Turning to our semiconductor business, we continue to see strong demand in our semiconductor business as both capacity utilization remains high and repeat orders together with new technology buys are driving a big part of our current business.

The $10.1 million in revenues from this business in the second quarter is a continuing indication of a healthy expansion in this business.

Last quarter we reported a high activity level on new leads and new customer penetration.

We are glad to share with you that a high portion of these leads have materialized into orders and we expect this trend to continue into the second half of this year.

We are only at the beginning of August and are with high level of orders on hand for the third quarter.

We anticipate that as time passes the semiconductor part of our business will grow and become a bigger part of our overall business.

The growth we are witnessing in the third quarter in 2010 is a multiple segment and application in the market.

We see a lot of orders in the Bump and Micro Bump, an area driven by technology advancements that is leading the next generation packages related to TSV and stacking of devices, seamless image sensors, automotive application and [LED] are segments we excel in and we do see many repeat orders coming in.

Looking now to our new front-end semiconductor business that includes our macro inspection tool, Gannet and the SELA product portfolio.

As I indicated earlier, these two verticals are focused for growth.

In both of these markets, we have started recognizing revenues and have indicated that we expect to see a contribution to our top line of between $2 million to $4 million per quarter as we move into the second half of this year.

As we reported last quarter, we recognized a second Xact machine in the second quarter of 2010.

We remain very optimistic with regards to the growth and look forward to the contribution of these two new products will start having on our top and bottom lines.

With regards to the front-end macro inspection we continue to sell our Gannet tool and expect additional sales in the second half of 2010.

It is important to note that the sales process is long and we are currently working on numerous opportunities which we hope will materialize into revenues in the coming quarters.

In our SELA product line, we have committed a number of new customers to install tools going into the second half of the year.

Accordingly, we expect these planned installations to become recognized revenues in the second half of the year.

These planned new installations follow the performance evaluation prior to the commitment of our technology by these customers.

The sales process includes multiple demo testing, reviews of our performance compared with other vendors.

The positive results of this process is a good indication of the numerous advantages the Xact technology and our ability to penetrate this new market.

On the legal front, as you saw from our press release a few days ago, the Minnesota court finally issued its verdict.

This was a necessary step that we had to wait for to enable us to appeal the ruling in Washington DC in front of a federal judge, a process that does not include a jury.

We expect that we will prevail at this appeal.

A few words about our supply chain.

We are in an interesting situation.

All of our supply chain is very busy with very good indications of the health of our industry and the global economy but at the same time it does make our life more complicated.

We are witnessing a very high demand all across the supply chain globally.

Lead times on a wide variety of components have become much longer and -- as we know in the past.

This includes electronic components, linear motors, cables and casting optical parts, metal parts and more.

We manage this risk by increasing inventory levels to long lead items.

In addition, we closely monitor all our suppliers and keep a tight plan on our obligation to our customers.

Our plans and guidance take into consideration these new lead times of our suppliers and we do hope they will not put a risk to our plans.

To summarize, I believe Camtek is in a growth phase of the cycle in our traditional two vertical businesses, PCB and back-end semiconductor while growing additional two new verticals in the front-end semiconductor business.

We are positioned well with these two new verticals to start generating additional revenues in Q3 and going forward to Q4 and 2011.

As I said, this is -- as I said this in the past and I would like to repeat myself since I think the following statement summarizes the essence of our current position and story.

Our traditional businesses of PCB and back-end inspection has the potential that is limited by both our market share but also the size of the total of available market, that we estimate this market to currently be not bigger than $300 million.

However, the penetration into additional new market segments with three new growth engines opens the door for us for a much bigger total available market that we estimate is in excess of $1 billion.

Success in any one of these businesses can really change the face and style of our business.

And with regards to outlook of Q4, our guidance is for revenues between $22 million and $24 million.

We anticipate continued growth in the fourth quarter of the year.

And with that, I would like to hand over to our CFO, Mira Rosenzweig, to summarize the financial results.

Thank you, Roy, and hello, everyone.

You can find the results in the press release issued earlier today.

Revenue for the second quarter of 2010 were $20.8 million, 18% above the $17.6 million reported in the prior quarter and 66% above the $12.5 million reported in the second quarter of 2009.

Revenue for the second quarter of 2010 from sales and service to the semiconductor manufacturing and packaging industry were 49% amounted to $10.1 million in this quarter.

This is 8% higher than in the previous quarter.

With regard to PCB and IC substrate, we generated $10.7 million in revenue during the quarter contributing about 51% of our total revenue, 29% higher than in the previous quarter.

Our geographical breakdown of the revenues for the quarter was the total Pacific Rim 73% which consists of China 41%, Taiwan 4%, and the rest of Asia 28%.

USA 17%, Europe 8% and 2% for rest of the world.

I will now summarize the rest of our results on a non-GAAP basis which excludes expenses with respect to the acquisition of SELA and Printar and reorganization expenses in our subsidiary in Europe.

The reconciliation between the GAAP and non-GAAP results appear in the tables at the end of the press release issued earlier today.

Gross profit for the quarter totaled $9.1 million, on gross margin of 43.5% compared to $7.3 million on gross margin of 41% in the previous quarter and $4.2 million and 33.5% in the second quarter of 2009.

Operating income for the second quarter of 2010 was $1.7 million compared to operating loss of $0.1 million in the previous quarter and operating loss of $2.1 million in the second quarter of 2009.

We expect our operating expenses to slightly increase in addition to increasing the variable expenses correlated with our level of business including direct labor and manufacturing, variables sales costs and engineers that support increased installations.

Our net income for the second quarter of 2010 was $1.4 million or $0.05 per share compared to a net loss of $0.3 million or $0.02 per share in the previous quarter and $2.0 million, or $0.07 per share in the second quarter of 2009.

Cash and cash equivalents at June 30, 2010 totaled $14.1 million compared to $16.2 million at the end of the prior quarter.

The decrease in cash resulted from an increase in accounts receivable and inventory due to the increase in sales as well as the Company's expectations of future demand.

As Roy mentioned above, a few days ago the Minnesota court entered its final judgment against us.

We now can defend our right in the appeal process before the Federal Circuit in Washington DC.

In order to appeal we are required to deposit a bond.

We estimate the amount of the bond to be around $8.5 million.

Therefore, we signed agreement with the bank in Israel according to which the bank will provide us with the bond together with a long-term loan of approximately $1.3 million.

We are required to deposit around $5 million as restricted cash.

We continue to closely monitor our cash position mainly due to the above event and the growth of the business that creates a gap between purchasing and collection.

We expect that we will prevail in the appeal.

Our DSOs were at 130 days based on our current level of revenue compared with the 106 days that we reported in the previous quarter.

We will now open the call for questions.

Operator?

(Operator Instructions).

Jay Srivatsa, Chardan Capital Markets.

Thanks.

Thanks for taking my question.

Can you tell me what the revenue contribution from the PCB business was?

Yes.

The PCB was $10.7 million.

And the semiconductor business or is it combined?

Semiconductor including the front-end was $10.1 million.

Okay, thank you.

Let me ask you in terms of your gross margins, it looks like it has improved pretty nicely.

What is your longer-term gross margin profile as you look at the rest of the year?

Of course it depends on the mix but we are estimating it to be around 43% to 45%.

Okay.

Roy, it looks like business is (inaudible) very well across the board but yet your revenues in the June quarter came in at kind of the low end of the guidance.

What held back?

Is it the lead times or are there other factors?

I think we are pretty much in the middle of our guidance so I think we said what -- 20 to 22 and we came in pretty much close to the middle.

I don't think we have a surprise.

I mean from our point of view it is as we planned.

An order can slip from one quarter to the second to another quarter very simply because of you delay a shipment by one week then it jumps through a quarter.

But overall I think we came in pretty much as we expected.

I don't see any surprise on that.

But as I said before and in our presentation, Q3 looks nice and also Q4 looks nice for us.

So I think if we maintain the expenses at plus, minus as Mira indicated where we are today with the slight increases and revenues growth, I think it is going to improve the gross margin and it is going to improve the bottom line as well.

Okay.

You put out a press release not too long ago about a new order of $2 million for three new machines.

Can you elaborate on when you expect the revenues from that to be hitting your income statement?

This is a very established customer of ours.

It is a repeat order for an application we already have really a good advantage of our competitors in this segment and actually I think we are going to see additional orders before the end of the year from this same customer.

It is a back-end inspection customer with a very specific application.

The question was when do you expect the $2 million to be realized?

This quarter.

In Q3.

In Q3.

All right.

Last question on the tax rate, it looks like it has been up and down.

What kind of tax rate should we be modeling for going forward?

I estimate it to be the same as today.

10%?

Yes, 10%.

Okay.

Thank you very much.

Abba Horwitz, Old School Partners.

Hi.

I am just wondering if you can tell me in terms of the DSOs, I thought this was something that was going to come down and it actually came up.

And I understand that you had a huge increase in sales but will we see in Q3 this number come down?

Okay, in this quarter in Q2 the DSOs increased.

We do our best and we think our collection is the same as we expect more or less.

I think it will be the same in the next quarter, between the 106 and [113].

That's it.

Probably should do a better job in collections but --

Okay.

Because I mean if you just got back to the level of last quarter, it would be -- you would have generated $7 million of cash.

So you would have extra -- you have almost $21 million of cash on your balance sheet.

Yes, yes (multiple speakers)

Just to get back to last quarter's receivable level.

Yes.

Okay.

So can you do me -- how would you look at this from a free cash flow perspective?

In other words, net-net cash on cash, how much have you really made from the business assuming you eventually collect this cash?

Can you repeat the question?

I'm sorry --

What I mean is like this.

Is that you sold all these machines but they are a negative cash draw on your cash because of the receivables.

But once you get the money back from them, you have made money on these machines and that is what I want to understand is on a cash-cash basis, how much money have you made on all these machines?

How much money are you making on your business on return on capital?

Okay.

As you see, we are -- we reach a profitability and then therefore we of course expect to be balancing cash as well.

We have at the moment a gap between purchasing and collection.

We believe we will collect the money in the late of Q3 or beginning of Q4 and then we start generating a positive cash flow.

Okay.

And just could you not have done in terms of the bond -- could you not have done this with the bank based on the future receivables?

In other words, why did you actually have to take out these loans?

Couldn't you just have done this saying we are going to be getting all this cash back and we don't really need to take out a bond?

We need the bond in order to appeal.

This is the process so we got the bond from the bank.

We also received a long-term loan.

It is our decision if we want to utilize it or not.

I think it is a safer approach generally taking the money from the bank.

The money is not that expensive on one hand and second, we are growing right now so we need a lot of cash to sustain the growth.

So I don't see it as a -- and keep in mind other than this, the Company was not leveraged at all.

Okay?

So I think it is not bad to be leveraged a little bit.

We want to keep the flexibility because of the growing in our business.

Okay, fair enough.

And just -- what do you think the margins will be and profitability be in Q3?

You made $0.05 on an adjusted basis this quarter.

What do you think you can do next quarter?

We don't give guidance usually to the profitability of -- we give guidance only to the -- I'm pretty sure you guys can do all the math and estimations.

Okay.

But on a gross margin basis, what do you think you can do for Q3?

In general I can tell you that as the top line increases, the gross margin should increase because a big part of our expense is the fixed expense.

As I explained between 43% to 45%.

Okay.

And just Q3, this particular quarter you are correct because you give guidance of 20 to 22 and you did 20.8 so you actually did mid guidance.

Were you hoping for better?

I mean, what was the 22 number or better?

Was that contingent on something that didn't materialize or is it just that you give a range and you do what you can do?

I think in the previous three quarters, we gave a range and we always came in the middle of this range.

This is what we usually plan.

But there is a -- there is a risk factor.

It is capital equipment.

It is a sale here a sale there could easily take you to the low end or to the high end of the range.

But (multiple speakers)

One order pushes you over.

Easily, easily.

Okay.

And just Q3, what could make the numbers even better?

Is there anything that could contribute upside to the numbers in Q3?

I don't think we have -- I think one of our constraints right now in Q3 is supply chain.

So we are very limited in our ability to actually move more products out the door in the third quarter.

Even the existing plan is stretched from our supply chain point of view.

The markets here we feel comfortable with it, we feel comfortable with our market share.

We feel comfortable with continuing to improve our position especially in the semiconductor part of the business.

So I don't think we are going to -- I think we are going to try to meet our plans and as we have done in the past, this is what we try to do also in Q3 and going forward.

Okay.

And just my final question, on Printar, what is the reason for the delay on the product?

I know that this was the risky part in terms of whether or not this thing would get out the door on time or at all.

But can you give us a sense of what is the issue right now that you are seeing with the Printar part of the business?

Actually I would rather not but we have some -- the issues are related to the technical aspects of the product itself.

We are putting efforts to overcome them but as you said, there is still risk.

This could happen and be something very interesting.

It could be also nothing.

We are very optimistic.

We are very -- there is some fallback plans that we have in mind if it doesn't work exactly the way we want it to work.

But right now we are still on target and trying to make this work.

Okay.

Fair enough.

Thank you.

(Operator Instructions).

There are no further questions at this time.

Before I ask Mr.

Porat to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Camtek's website, www.Camtek.co.in beginning tomorrow.

Mr.

Porat, would you like to make your concluding statement?

I would like to thank you for continued interest in our business and thank you for joining this call.

Thank you.

This concludes the Camtek second-quarter 2010 results conference call.

Thank you for your participation.

You may go ahead and disconnect.