Camtek Ltd (CAMT) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek fourth-quarter 2010 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded February 22, 2011.

I would like to remind everyone that forward-looking statements for the respected Company's business, financial condition, and results of its operations are subject to risks and uncertainties which could cause actual results to differ materially from those contemplated. Such forward-looking statements include but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in product and technology developments, and the effect of the Company's accounting policies as well as other risk factors which are detailed from time to time in the Company's filings with the various securities authorities.

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 fourth-quarter 2010 results conference 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, the Camtek' 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 you the overview of Camtek's performance in the fourth quarter and summarize the financial results.

Before we begin, may I remind our listeners that during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, process future results, and evaluate the Company's [current] performance. Management believes that that the percentage of non-GAAP financial measures is useful to investors' understanding an assessment of the Company's ongoing cooperation and [process] 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 will be up -- I would like now to hand over the call to Roy Porat. Roy, please.

Welcome, everybody, to the call. We have had a great year and a good quarter. The year started at a run rate of $17 million in Q1 and has been growing every quarter, reaching $25 million in Q4. Actually this is the seventh consecutive quarter that we have been able to grow our business from a bottom of 2009 crisis.

Our profit trend has been growing continuously throughout the year and our operational cash generation has followed. We are presenting great numbers and certainly demonstrated we are headed in the right direction and on the right path.

In fact, hidden within these numbers are a few milestones related to our new growth engines. The financial contribution to our business is only starting. They are first indications of the potential for strong growth that I believe the next years will bring.

The Xact and the GANNET tools which we started to sell are gaining maturity and the core technology they hold is recognized by the market we serve as superior. The markets we operate in are also contributing to our strong performance and are all in high demand for our products.

We certainly see increasing capacity mainly driven by new devices such as smart phones, tablet computers, and require complex PCBs and IC substrates, ITO technology, and advanced packaging to achieve smaller and thinner geometrical dimensions of [DNA] products.

Chips being fabricated at leading-edge geometries of 3X and even initial spending on 2X nodes require more investment and yield enhancements since these process technologies are less mature and require tighter process control.

Our fourth-quarter revenues came in on the high side of our target. During the fourth 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 first half of 2011, we see continued high demand in the markets we operate in. We had some higher than normal legal expenses in the quarter related to our dispute with Rudolph. We have also been increasing our R&D expenses mainly in relations to developing of the new products. As a result, we saw an increase in our OpEx level.

We are happy that operating cash flow has finally caught up with our profits and Mira will give more details later on in the call.

In the fourth quarter, we witnessed growth across all our inspection products both in the PCB and semiconductors. Although we are seeing increased interest in the Xact we did not recognize any Xact sales in the fourth quarter, which led to a slightly sequential drop in the semiconductor business. However it is important to remember that we are in the early ramp stage of this product. We are seeing individual machines and we obviously expect lumpiness between quarters in terms of when revenue is recognized from the sale of a single machine.

I would like to provide a closer look at our operating markets. Looking into our PCB inspection business, we continue to see demand for AOI with customers that are expanding their capacity. In the fourth quarter, the PCB business grew to $12.4 million. Most of the PCB manufacturers are running at high utilization, with a lot of larger customers expanding.

The beginning of 2011 is looking good, which is continued high utilization on demand, but we need to keep in mind this industry has very limited visibility.

It is important to note that the Chinese New Year is now behind us. It came earlier this quarter -- this year -- so we believe the effect in the first quarter should be less significant this year compared to previous years.

We have finally some restructuring in our China organization and included a unification of our two sites in Suzhou into one new facility and gradually into one entity. We are following very closely the changes that are occurring in the competitive landscape in the PCB AOI market. We do hope that our focus on the higher-end of the inspection market will allow us to improve our gross margins looking into the second half of 2011.

We are ready with the correct R&D efforts to adapt to a changing environment as things unfold.

I would also like to update you on status of the direct material deposition business, or DMD for short. It has been a longer road than we had originally planned. While we remain cautious going forward on the estimated time to market of the Green Jets, we target to start selling the Green Jet product at the second half of 2011.

Turning to our semiconductor business, we continued to see strong demand in these inspection tools. Demand for our semiconductor inspection tools in the fourth quarter grew compared to last quarter. In the second half of 2010, semiconductor inspection sales have been at levels breaking records for more than three years, with the clear growth trends of seven quarters. The semiconductor sales in the fourth quarter included strong demand for our backend semiconductor inspection business and our new front-end macro inspection.

I also note that as I indicated earlier, it is -- it did not include any Xact sample preparation tool sales. The majority of our backend inspection business in the fourth quarter originated from Asia, with both OSAT and IDMs leading the revenues.

We continued to see demand for LED inspection in the fourth quarter. One tool in particular was sold to a leading-edge foundry that is entering the LED business, and we expect to see repeat orders as their business is expected to grow during the year.

We are also active in a few more tool selections in the LED arena and expect some of these will turn into orders in the course of 2011.

CMOS inspection tools were also an important part of our Q4 backend and front-end inspection business. We issued a PR last week with regards to a new customer penetration with multiple tools. We expect also to see additional orders from this same customer during 2011.

We continued to strengthen our position in 3-D IC bump, gaining more orders that are driven by advanced packages for flip chip as they are very small micro bumps that require precise 3-D metrology in a fast, cost-effective solution. The fourth quarter included repeat orders and one new significant customer with installations at multiple agent fabs that have been selected for and we expect to see more orders from this customer as well in 2011.

Last quarter, we were cautious anticipating a general flatness or softening in the inspection markets. We are glad to report that we are still able to increase our business in the fourth quarter despite the market softening. Looking at the first half of 2011, the market still looks good within the high utilization, which speaks further growth.

Looking out to our new front-end and semiconductor business that includes our macro inspection tools GANNET and the Xact. As we indicated in the past, these two products are focused for growth going forward into 2011 and beyond.

Although no Xact tools were recognized as revenues in the fourth quarter, this business is very active. We see a lot of interest and confirmation of the leading capabilities of the technology. We concluded a successful evaluation of a tool at the leading top 10 semiconductor new customer and we also are currently in evaluation of another tool at another top five semiconductor potential customer. We believe we can receive orders for two to three tools in the first half of 2011.

We do need to keep in mind that the average selling price of an Xact tool can be around $1.5 million per tool, which on a single quarter basis is a significant contribution to both top and the bottom line. We expect 2011 will continue to show more growth and penetration to new customers with the Xact.

The front-end macro inspection, GANNET tool has had a good year also. Although we are only selling a few tools per quarter, we continue to penetrate new customers. In Q4, we sold a system to one new -- one more new customer in Asia. Each has been -- each such penetration to a new customer can take up to six months and sometimes even nine months to qualify the tool. Without such a qualification, we are not able to compete on business regardless of the price of the tool and the performance. It is a long process, but I expect 2011 will bring continued growth and hopefully, if we qualify, more tools and more customers, we will be able to make a much more significant growth looking in 2012.

To summarize, I believe Camtek is in a good position in our traditional two verticals based businesses, PCB and backend semiconductor. Exploiting the current high demand in these markets, meanwhile we are growing additional verticals at the front end semiconductor business. We are well-positioned with these two new verticals to start generating additional revenues going forward into 2011.

And with regards to outlook for Q1 2011, our guidance for the first quarter is between $25 million to $27 million. We do anticipate continuing growth into Q2 of 2011 since we base our growth anticipation not only on the increasing of our current business but largely on the new businesses.

And now I would like to hand over the call to Mira -- Mira Rosensweig, our CFO. Mira?

Thank you, Roy, and hello, everyone. You can find the (inaudible) in the press release issued earlier today. Revenues for the fourth quarter of 2010 were $25.4 million, 6% above the $23.9 million reported in the prior quarter and 48% above the $17.2 million reported in the fourth quarter of 2009.

Revenues from sales and service to the semiconductor, manufacturing and packaging industries were 51%, amounting to $13 million. This is, as Roy mentioned earlier, slightly below the previous quarter, mainly due to the fact we did not recognize any revenues from the Xact tool this quarter.

With regard to the PCB and IC substrate, we generated $12.4 million in revenues during the quarter, contributing 49% of our total revenues -- sorry -- 28% higher than the previous quarter.

Our geographical breakdown of the revenues for the quarter was the total Pacific Rim, 83%, which consists of China 44%, Taiwan 10%, and the rest of Asia 29%; USA 11%; Europe 5%; and 1% for rest of the world.

I will now summarize the rest of our results on a non-GAAP basis, which mainly exclude expenses with respect to the acquisition of SELA and Printar and some restructuring expenses with respect to our reorganization in China.

The detailed 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 $12 million, representing a gross margin of 47% compared to $10.9 million or gross margin of 45.8% in the previous quarter and $7.3 million or 43% in the fourth quarter of 2009.

Operating income for the fourth quarter of 2010 was $2.3 million, compared to an operating income of $2.5 million in the previous quarter and an operating loss of $0.8 million in the fourth quarter of 2009.

Our non-GAAP operating expenses in the quarter reached $9.7 million, a substantial increase of $1.2 million. As Roy mentioned earlier, in the quarter, the legal dispute with Rudolph led to legal expenses which were higher than usual, increasing our general and administrative expenses revenue. Apart from that, our R&D expenses increased this quarter by $0.5 million to $3.6 million due to the expansion of our R&D plans mainly with respect to our new growth engine products.

Looking ahead, we continue to keep a tight control on our operating expenses, although in terms of our ongoing operating expenses excluding legal expenses we expect some increase in 2011 compared with the run rate of the fourth quarter due to an increasing employee-related and R&D expenses mainly due to the expansion of R&D plans.

We also expect an increase in variable expenses correlated with our level of business including [those labeled] in manufacturing, variable sales costs, and engineering that support increased installation.

Our net income for the fourth quarter of 2010 was $2.1 million or $0.07 per share compared to $2.5 million or $0.09 per share in the previous quarter and a net loss of $0.5 million or $0.17 per share in the fourth quarter of 2009.

Cash and cash equivalents including restricted cash at December 31, 2010 totaled $14.8 million and bank debt of $2.6 million compared to $13.1 million and bank debt of $2 million at the end of the prior quarter. The increase in cash resulted from operating cash flow of approximately $1.8 million, resulting mainly from the net income recorded this quarter together with higher collections of sales by the increase in inventory due to the increase in sales as well as our expectations for increased future demand.

This quarter we invested approximately $0.8 million in fixed assets mainly with respect to our new facility in China. We also received an additional bank loan net if repayment in the amount of $0.6 million.

As reported in previous quarter conference call, we deposited $5.2 million in restricted cash to secure our credit line. Our DSOs reduced to 110 days based on our current level of revenues compared with 118 days that we reported in the previous quarter.

We will now open the call for questions. Operator?

(Operator Instructions) Jay Srivasta, Chardan Capital Markets.

Thank you for taking my question and congratulations on a good quarter and strong guidance. Just a couple of questions. At least one of your competitors in the semiconductor equipment space posted not so good numbers for Q4 and guidance wasn't as good as well. I wanted to ask do you have a sense that you are gaining market share in that market especially in the front-end space as you look ahead or can you kind of paint a landscape for us relative to what our competition is?

Okay. Hi, Jay, thanks for the question. I think if you -- it's more difficult to answer on a specific quarter base, but if you look at the past few quarters even more than a few quarters, a few years, you'd see that we are gaining market share from year to year. I think this trend is continuing.

If you are referring to Rudolph, I think all of us read their reports and understand and I think, yes, this quarter we will probably gain some market share on Rudolph on the backend especially. But it's a long trend. It's not something new, I would say. I hope I answered this question.

Sure. Speaking of Rudolph, can you give us an update on where things are in terms of the legal settlement?

Actually there's not a lot of news at all. We are still waiting for the appeal process to take course. Actually this quarter there's no news with this regards. All documents were served. The increase or unexpected increase in legal fees is I would say an aftershock of our conflict. It's not something we planned on.

It's not something that there's something new on the appeal. It's just additional I would say steps of this conflict that has expanded (inaudible) beyond what we expected initially. It has no effect on the business now. It has no effect on the outcome of the business or even the trial in the future. The only people who are gaining from this is I think lawyers on both sides. That's it.

All right. In terms of the DMV, you mentioned you are expecting some revenue contribution in the second half of this year. Could you elaborate and tell us if you've been qualified with some of those machines some place or are you expecting to get qualified later this year or can you give us again some update on where things are?

Sure, in terms of installations, we don't have more installations. We still have two installations. I think the good news -- in past calls I was kind of hesitant in giving some kind of date and in this call we did say we are going to selling at the third quarter at the second half of 2011. And we are more confident to say this today compared to let's say last quarter is because we feel much more comfortable with the tool. I think major, major risk factors were eliminated this quarter.

We are now I would say in the maturing process of the tool with mainly machine problems. A machine problem is something we like. It's something that we know how to handle and this is our business, this is our recession. So we feel more comfortable with it and this is why we are saying probably start selling in the second half of the quarter.

So really we are pretty positive. We are encouraged with where we are and I think we are on the right track on the DMD.

Okay, on -- for Q1, where do you expect the growth to come from from the PCD business growing or some bounce back in the semiconductor space? Or can you give us a sense of how the split is going to be?

I think the main growth that we expect is from the semiconductor. Maybe small growth in the PCB, not sure about that, flat or so. But the main growth we expect is from semiconductor in both inspection and in the sample prep, both of these we expect to see growth there.

Okay. Last question on tax rate, it looks like the rate has been all over the place in fiscal '10. What do you expect the tax rate to be in 2011?

I'll let Mira answer that one.

Thanks, we expect it to be slightly higher. It is now around 10%. I assume it will be slightly higher, not much above that.

Okay, thank you very much. Good quarter.

(Operator Instructions). Sergei Vastchenok, Oppenheimer.

Hi, guys. Congratulations on a good quarter. Can you specify please the mix of the new products you spoke about on the press release on the conference call, which part of revenues it accounts for for the recent quarter and for the next year, probably?

Okay, it's a complicated answer, but we don't break down the new products and old products. We break down the revenues from a market point of view, PCB and semiconductor. But obviously we expect most of the growth to come from the semiconductor side of the business which is the GANNET and the Xact.

I think as I indicated, every tool, every single sale of a tool like this is a significant contribution to both topline and the bottom-line on a quarter basis because it's a high number and it's a high margin. So if we get additional orders of even single machines of GANNET and Xact, we expect the revenues to grow from that side of the business going forward.

Of course once the DMD -- Jay asked before that the print or the DMD business would start to kick in -- this is a pure PCB business, so we expect that to start showing some effect in the second half of the year. So I will say the first half should be most of the growth will be semiconductor, pure semiconductor.

Okay, so actually the ramp-up of the new lines including GANNET and Xact, its second half of the year?

No, it's the first half. I'm sorry, the first half. The second half the Printar, the DMD should also in addition -- on top of the GANNET and Xact should come. We should see some revenues coming in from DMD and that we classify as PCB product because it is sold to PCB manufacturers.

Okay, in terms of indications you are getting from clients and backlog, book to bill, which kind of revenue contribution could be on a quarter basis from this product?

From which one?

From semiconductor products, looking at the near-term opportunity?

I think semiconductor business in general is looking very good right now and we expect growth in both our inspection tools and in the Xact going forward at least let's say Q1, we have pretty good visibility also Q2. We also are starting to get some first orders into Q2.

So things are looking I will say at least as far as we see right now, the market is pretty busy and the segments that we are focused on are very even more busy. Meaning the LED or the CMOS or the kicking in of the iPad and all the handheld tablets is really helping our business.

Okay, so the most part of your revenues from your orders coming from foundries or from memory side? Which kind of clients are we talking about?

Actually memory is not a big part of our business. The majority in the backend is the big OSATs, the subcontractors for packaging. All the leading -- really all the top five, top 10 are big customers. And we also have the IDMs, the people who do both design and manufacturing and packaging, the leading IDMs are also a big part. Memory is not a big part of our business.

Okay, thank you. Good luck.

Isaac Vidomlanski, Ridgeway & Conger.

In the past, there was a merger between Orbot and Orbotech in Israel because both of them were competing each other in the space and they realized that they will save a lot of money by merging. Do you consider a merger?

If you are talking about a merger with Orbotech, I get this question so many times. But I think that today, in today's environment, I don't think it would make sense in terms of -- and I don't want to speak in the name of Orbotech, but I think the overlapping business between us and Orbotech from Orbotech's side is less than 10%, meaning AOI or PCB is less than 10% of their business. And also for us looking forward, I don't think this is the main point of focus for a business going forward, keeping in mind we have moved most of this business unit into China. The only thing left in Israel is the R&D for the inspection business for PCB.

So generally I would say I don't -- I think looking for a merger or acquisitions in other direction would be more sensible, but there's nothing on the table right now.

Okay, thank you.

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.il beginning tomorrow.

Mr. Porat, would you like to make your concluding statement?

I just want to thank everybody for joining us today for the call and thank you very much.

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