Camtek Ltd (CAMT) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek third-quarter 2010 results conference call. (Operator Instructions). As a reminder, this conference is being recorded, November 4, 2010.

Before I turn the call over to Mr. Ehud Helft, I would like to remind everyone that statements contained in this conference call, which are not historical facts contain forward-looking information with respect to plans, projections or future performance of the Company, the occurrence of which involve certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated.

Such risks and uncertainties include dependence on economic and political conditions in Israel, the impact of competition, supply constraints, as well as certain other risks and uncertainties which are detailed in the Company's filings with the various security authorities.

I would now like to turn the call over to Mr. Ehud Helft, of CCG Investor Relations. Mr. Helft, would you like to resume?

Thank you and good day to all of you. We would like to welcome all of you to Camtek's third-quarter 2010 results conference call. I would like also to thank management for hosting this call.

With us on the line today are Mr. Roy Porat, Camtek's CEO, and Mrs. Mira Rosensweig, the Company's CFO.

Roy will start the call by discussing recent developments within the Company and in the market, and will also discuss the outlook. Mira will give the overview of Camtek's performance in the third quarter and summarize the financial results. We will then open the call for questions and answers.

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

As you might believe, that the presentation of non-GAAP financial measures is useful to investors understanding and assessment of the Company's ongoing [operation] and prospects for the future. A full reconciliation of the non-GAAP to GAAP financial measures is included in today's earnings release.

I would now like to hand over the call to Royalties, Roy, please.

Thank you, Ehud. Hello everyone, and thank you for joining us. We are very pleased with third-quarter results. The increase in revenues and the bottom line are evidence of our initial success in the penetration of our new product lines. They are certainly a step in the right direction and a positive indication of the initial realization of the story for significant growth that we have been talking about for the past nine months.

Our third-quarter results came in on the high side of our target. During the third quarter the markets in which we operate were in high utilization, and companies were actively expanding their capacity by investing in capital equipment.

As we move into the fourth quarter, we do see a change in demand for our products, but we do see greater uncertainty in the market. The increase in the business has driven our operating cash position. And we have obtained an $11 million credit line from a leading bank in Israel to support our growth and to support a bond in the amount of $8.5 million in order to stay the judgment during the appeal process in the Rudolph patent litigation.

Mira will give more details with regards to our cash position as she reviews the financial results of the quarter.

As we anticipated in the last call, Q3 demonstrated a high level of demand for our products. The demand for our PCB AOI products in the quarter were flat with a slight to up. But we did witness a significant increase in our semiconductor products in both front and in back-end.

Expect going into Q4 and the next year the semiconductor part of our business will continue to grow and become a more significant portion of our business as our new product lines mature.

The anticipated growth does depend on the rates we penetrate these new markets, but will also provide our business with enhanced diversity and strengthen our vulnerability to exposure to the industry cycles.

I would like to provide a more closer look at the markets we operate in. Looking to the PCB inspection business, we continue to see demand for AOI, as customers are expanding their capacity. Most PCB manufacturers are running at high utilization, with a lot of large customers expanding, but we do see more cautiousness in the fourth quarter that is a result of lower visibility or demand in their business.

We are continuing our efforts to move more and more responsibilities and tasks related to our PCB AOI business from Israel to our Chinese subsidiary. We are in the final stages of uniting our operations in China to a single operation that will include moving to a new location in [Suzhou], China at the beginning of the year.

I would also like to update you on the status of our direct material deposition, or DMD for short. We are much more optimistic these days compared to where we were six months or even three months ago.

We were able to overcome a few key challenges that caused the delays in our initial plan. We do need to keep in mind that with R&D projects as complex as these there is still risk at hand. And until we see multiple systems working in a production environment, we will not be able to eliminate the risk completely.

We will be keeping you updated on things as they evolve. And we hope to bring the good news in the first half of next year with regard to the DMD project.

Turning to our semiconductor business, we continue to see strong demand. In the third quarter business [with the] semiconductor market amounted to $14.2 million or 59% of our revenue. It is a 40% growth compared to last quarter.

The increase in the semiconductor part of our business in the third quarter, and as we see it going forward, is a result of strong demand in our back-end semiconductor inspection business, and also due to the contribution of our new front-end macro inspection, and the new sample preparation tools for failure analysis. On some of the orders we issued PRs during the quarter.

The majority of our back-end inspection business in the third quarter originated in Asia, with both OSAT and IBM leading the revenues. We have been selected as a vendor of choice for a few projects that will contribute to our fourth quarter, and we anticipate additional orders in the beginning of 2011.

It is fair to say that we do see a general softening in the back-end market. Capacity ramp-ups remain, but not at the rate we saw in previous quarters.

We also continue to follow the reports of customers and other vendors, including our competitors, and most of them describe a slowdown in the fourth quarter or the first quarter of next year.

We do monitor these trends, yet it is important to understand that our back-end business is very technology and application segmented. Our back-end inspection business is relevant to very small parts of the wafers' process in the back-end.

We are selling equipment to flip chip technology that requires 3D metrology of bumps, CMOS image sensors, automotive applications and others. That is a collection of a wide variety of segments. Therefore, it is difficult to estimate how possible softening in the back-end market will actually affect our business looking into Q4 and the beginning of next year.

Looking now to our new front-end semiconductor business that includes our macro inspection tools in Gannet, and the SELA product portfolio. As I indicated earlier, these two verticals are our focus for growth going forward into 2011 and beyond.

In the third quarter we sold the third Xact machine to a major customer in Asia. With respect to the Gannet, we announced earlier on two new sales of macro inspection to front-end fabs also in Asia. And we do expect additional orders in 2011 from these specific customers.

In both of these markets we have started to recognize revenues. And as I indicated, we expect to see more contribution to the top line as we move to 2011.

We are very glad to report that we do see good success for Xact machine in the third quarter and also going to the fourth quarter. We expect to install additional three to four Xact tools going into the fourth quarter and the beginning of 2011. All of these tools are at leading top 10 semiconductor fabs. We do expect these new installations will pave the way to significant growth in the SELA productline going into 2011 and beyond.

I would like to address the press release we issued yesterday regarding the patent infringement lawsuit we filed against Rudolph. Camtek has been enhancing its IP portfolio through years of R&D spending and acquisitions of IP. Our IP portfolio holds today more than 40 granted patents and over 300 patents pending. We believe Rudolph's edge inspection equipment sold under the AXi and the [E-Series] trademarks infringe our patent. We are constantly evaluating our IP position and we do consider further and additional fronts to defend our IP.

To summarize, I believe Camtek is in a good position in our traditional two verticals businesses of PCB and back-end semiconductor, while growing additional verticals in the front-end semiconductor business. We are well-positioned with these two new verticals to start generating additional revenues in Q4 and going to 2011.

The answers from the Camtek story is coming to life. As discussed last quarter in a few of the investor conferences we have presented at, we are a company that has been operating over the past years in a market that we estimate the total available market to be around $250 million to $300 million to a company that is operating at a much bigger market that we estimate the total available market to be bigger than $1 billion.

We do understand the journey to significant growth is long and can take a few years, but I do think the last quarter has demonstrated we are on the right direction and on the correct path.

With regards to our outlook for Q4, guidance for the fourth quarter is more difficult, since there is more uncertainty in the markets we operate. We do expect the fourth quarter to be flat with the possibility of a small increase. But in view of the uncertainty surrounding the global economy in general and the markets -- and in our market specifically, we will give a wider guidance this time.

Our guidance for the fourth quarter is between $22 million and $25 million. We do anticipate continuing growth into 2011, regardless of cyclical effects since we base our growth expectation not only increasing our current business, but largely on the new businesses.

Now I would like to hand over the call to Mira Rosenzweig, our CFO.

Thank you, Roy, and hello everyone. You can find the results in the press release issued earlier today. Revenues for the third quarter of 2010 were $23.9 million, 15% above the $20.8 million reported in the prior quarter, and 65% above the $14.5 million reported in the third quarter of 2009.

Revenues from sales and service to the semiconductor manufacturing and packaging industries were 59% of our total revenues, amounting to $14.2 million. This is 40% higher than in the previous quarter.

With regard to PCB and IC substrates, we generated $9.7 million in revenues during the quarter, contributing about 41% of our total revenues, 9% lower than in the previous quarter.

Our geographical breakdown of the revenues for the quarter was the total Pacific Rim, 88%, which consists of China, [52]%, Taiwan 8%, and the rest of Asia, 48%. For USA 8%, Europe 3%, and 1% for the rest of the world.

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

The reconciliation between the GAAP and non-GAAP results appears in the table at the end of the press release issued earlier today. Gross profit for the quarter totaled $10.9 million, representing a gross margin of 45.8% compared to $9.1 million or gross margin of 43.5% in the previous quarter, and $6.1 million or 42% in the third quarter of 2009.

Operating income for the third quarter of 2010 was $2.5 million, compared to an operating loss of $1.7 million in the previous quarter, and an operating loss of $180,000 in the third quarter of 2009.

Looking ahead, we continue to keep a tight control on our operating expenses, and we expect to keep the fixed portion of it flat. We do, however, expect an increase in variable expenses correlated with our level of business, including direct labor and manufacturing variables, sales cost, and engineers that support increased installation.

Our net income for the third quarter of 2010 was $2.5 million or $0.09 per share compared to $1.4 million or $0.05 per share in the previous quarter, and a net loss of $0.3 million or $0.01 per share in the third quarter of 2009.

Cash and cash equivalents, including restricted cash, at September 30, 2010, totaled $13.1 million, and bank debt of $2 million, compared to $14.1 million and no bank debt at the end of prior quarter.

The decrease in cash resulted from a negative operating cash flow of $0.9 million due to an increase in accounts receivable and inventory and resulted from the increasing sales, as well as our expectation for increased future demand. We also repaid a loan of $1.7 million to a third-party in the first quarter.

In August 2010 we signed an agreement with an Israeli bank for a credit line totaling $11.5 million. Out of that, $2.6 million is a bank loan, of which we have already utilized $2 million.

The remaining $8.9 million is a bank guarantee to support a bond deposited with the U.S. Federal District Court in Minnesota in order to stay judgment during the appeal process in the patent infringement case find against us by Rudolph. To secure the above credit line, we deposited $5.2 million of our cash as restricted cash.

While the fast growing of our business has created a gap between purchasing and collection, we believe our operating cash flow will improve and catch up with a business profit going into next year.

Our DSOs were at 118 days based on our current level of revenue, compared with 113 days that we reported in the previous quarter.

We will now open the call for questions. Operator.

(Operator Instructions). Jay Srivatsa, Chardan Capital.

Congratulations on a strong quarter. A couple of questions in terms of the guidance. You talked about how there seems to be some weakness in the back-end market, but yet you have talked about how the semiconductor revenues you expect it to grow in Q4 and into fiscal '11. Could you highlight with us where you see the disconnect?

It is a good question. Actually, there is a disconnect. And that is why on the guidance we gave a wider range. And it is really an uncertainty.

Let's say it like this, I wouldn't be surprised if at the end of next quarter our semiconductor business will grow. But there is more uncertainty I would say. There is more uncertainty. Actually, looking at the current situation, we already have at hand a pretty nice portion of orders related to our expectation for the quarter.

But the remaining portion that we do anticipate to close within Q4 it is still not on hand. And I would say with the environment and the softening that customers talk about and other vendors talk about, it is creating some uncertainty, and this is why we opened the gap on our guidance. I hope I answered.

Yes. I guess the question is, clearly there is drop off in demand at the end markets and into the devices in semiconductor, but I haven't been able to glean whether there is any weakness in terms of CapEx expenditure by your end customers. Are you seeing that already?

So I also -- I think I said -- I talked about it a few minutes ago, but you've got to understand that I do believe that there will be a softening in the back-end market in January. What is unclear to us is how that will affect us since our back-end business is really, really segmented.

We are selling to -- basically our machines touch a very, very small portion of the wafers that are packaged in the back-end. We are very segmented. So the question, meaning that it could be that the total amount of wafers packaged by the back-end industry next quarter will be less, but at the same hand, the specific segments that are very technology oriented that we operate in could go up.

So we are much more influenced by the mix of products than by capacity. This is basically I would say the uncertainty that we are not sure how next quarter is going to end.

Fair enough. In terms of gross margins, it appears you have had a nice job in margins by almost 200 basis points. What do you expect your margin profile to look like as you look ahead to the next three quarters?

You have to keep in mind that a big part of our gross cost is fixed. So as the revenues -- the topline increase, I am sure the gross margin itself will improve. This is one aspect.

The second aspect, we are in a penetrating mode in two new markets. So the cost related to new products and penetration of new products is a little bit higher.

But on the long-term we haven't issued a model -- a long-term model, but we probably will do it as we get a better picture of our new products that we are launching into next year. But the general direction will, I believe, will improve, the gross margin will improve as we go into 2011.

On the DMD product, could you -- you talked about some delays. Could you highlight to us why the delay? What is causing problems? Is this something you believe will be fixed near-term or do you think it is more of a prolonged process?

Actually, my intention in the call was to give a positive indication. I think -- in general I think things are looking to us much better than they did a couple of months ago.

We did have some issues, actually, related to the ability of adapting the product to the current process without changing the current process. These process challenges are really not so much related to the machine but to our ability to adapt the machine to the process.

We have made very, very significant advances in our understanding and our ability to do that. And basically the challenges or other problems that we had before right are solved.

But as I have said, until we don't have a few of these tools running in production in facilities, I cannot really tell you that we're out of the woods. It is a very complicated and new technology. And as of right now I expect next year we will have some good news in launching these products.

Okay, fair enough. Last question on the litigation. You still have an outstanding litigation with Rudolph, where they filed a suit. It looks like you have -- you filed a suit here. What is the endgame here?

Wow, a tough question here. But tough not because of the answer, tough because of what I can say in and I can't say in terms of legal. But, you know, maybe I will try to answer it differently, and then maybe you can understand.

It is like an -- and excuse me for touching politics now, but it is like the Palestinian problem with Israel. They say it may get worse before it gets better. Our intention is really to put things behind us. We would like to resolve all the issues, but it seems right now it is not going that way. I hope that it will go that way, that we can really put litigation issues behind us and focus on customers and technology and not on litigation.

I am not sure I understand. Wasn't there a verdict against you to pay Rudolph a certain amount of money by the US court? Wasn't that where it was left before your most recent suit?

That is still where it was. We are still waiting for the appeal process. The next stage of the Rudolph lawsuit is waiting for the appeal in the federal court in Washington DC. That will happen next year sometimes, I hope. This is where things stand. So basically, we are waiting for an appeal process with the federal courts.

Okay, 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 at www.Camtek.co.il beginning tomorrow. Mr. Porat, would you like to make your concluding statement?

I Just want to thank everybody for joining us, and thank you very much.

Thank you. This concludes the Camtek third-quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.