Camtek Ltd (CAMT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek second-quarter 2011 results conference call. All participants are at 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 August 3, 2011.

I would now like to hand over the call to Mr. [Gabriel Frine] of CCG Investor Relations. Mr. Frine, would you like to begin.

Thank you and good day to you all. I would like to welcome you all to Camtek's second-quarter 2011 results conference call. I also would like to thank Camtek's management for hosting this call.

With us on the line today are Mr. Roy Porat, Camtek's CEO, and Mrs. Mira Rosenzweig, 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 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 or market trends; reduced demand for services and products; the timely development of new services and products and their adoption by the market; increased competition in the industry and price reductions; 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 contents 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 core operations 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 will be happy to answer your questions. I will now hand over the call to Roy. Please?

Thank you, Gabriel. Hello, everyone, and thank you for joining us. We are continuing a great start for 2011, and I am glad to announce that our top line of $28.8 million is a new all-time record for Camtek. This quarter's results are a milestone to our organization of our long-term plan.

I realize that Camtek's story has a number of moving parts that can sometimes be confusing. But we see the diversification in our business as an advantage which provides the ability to maintain our growth even within the softening environment in some of our markets. This quarter, the diversity in our business allowed us to continue to show growth while most of our peers in the semiconductor are seeing a softening in the markets.

These are times with some uncertainty, and there are mixed signals from the markets we operate in. On one hand, we had a few pushouts on orders and on new projects in the semiconductor side; and in Q2 our semi inspection business did drop a little bit, by approximately 5% sequentially.

On the other hand, we are also seeing steady investment in some of the technology market segments, and we do not see them slowing down into Q3. On the PCB and IC substrate side our business -- we grew more than 90% quarter-over-quarter.

Also in this market we are seeing mixed signals from different customers. Those busy with PCB manufacturing for handheld devices, especially smartphones and tablets, are still growing. Other manufacturers with less exposure to these market segments are more hesitant with their expansion plans.

Obviously, given the fact that our semiconductor business slightly declined this quarter and our PCB business was able to compensate for the continued -- continue our top-line growth, this did have its negative impact on our margins. The change in revenue product mix and the weakening of the US dollar against the Israeli shekel are the main two contributors to our slight drop in profitability compared to the previous quarter.

We expect that, looking forward over the next few quarters and based on our long-term models, the semiconductor part of our business will continue to grow at a higher rate than our PCB inspection business. We do expect that this will allow us to surpass the 50% level of our gross margin.

The growth this quarter symbolizes our sound position in both our legacy businesses. The fact that we are operating in the multiple markets -- back-end semiconductor front-end semiconductor, bare PCB, and IC substrate -- allowed us to exploit our diversity and continue to show growth. The leverage we get from utilizing technology and resources across the multiple markets we operate in, and the fact the cyclicality of these markets is staggered, come into play this quarter.

Second-quarter revenues included growth from our newer products including an additional sales of an Xact tool and a couple of front-end Gannet inspection tools. As we have advised in the past, these products are starting to gain traction. While the diversity in our business model will enable us to overcome the volatility that may occur along the way, the significant part of our growth will come from our new product lines.

I would like to provide a closer look at our markets. Our semiconductor market is certainly in a slight softening. We follow all the announcements of our biggest customers and our peers; and in general what we see in the field is very similar.

Our customers are still expanding and investing, but at a slightly little slower rate and with more hesitation and caution. There are still too many moving pieces -- holiday seasons, inventory effects, and a global economy -- that will change over the next few months.

In the short-term outlook of Q3 we see a higher demand for our semiconductor AOI. And based on what we see right now, in contrast with our peers, we expect to show growth quarter-over-quarter. But we have limited visibility into Q3 and beyond.

I think this statement demonstrates our market position in the back-end semiconductor inspection market. Looking into the second-quarter results and the third-quarter guidance, we strengthened our position as the leading number-one vendor in this market segment. The majority of our back-end inspection business in the second quarter originated from Asia, with both [OSET] and IDMs leading the revenue contribution.

We continue to see demand for LED inspection, CMOS, and 3DIC applications. We are also witnessing strength in demand from both our US and Europe back-end inspections. We expect to continue to strengthen our position in 3DIC bump, gaining more orders that are driven by advanced packages for flip-chip that have very small micro-bumps and request precise screening metrology in a fast and cost-effective solution.

Looking now to our new front-end semiconductor business that includes our macro inspection tool Gannet and the Xact sample prep tool, as we indicated these two products are our engines for growth going forward. Our revenues in the second quarter included one Xact.

We continue to see a lot of interest and confirmation of the leading capabilities of the technology. We continue to actively demonstrate our capabilities to new customers, and we expect these leads to mature into more orders in the next few quarters.

The front-end macro inspection Gannet tool has had a good quarter. Although we are currently only selling a couple of tools per quarter, we continue to penetrate new customers.

It is a long process, but I expect 2011 will bring continued growth. If we continue to qualify more tools at more customers, we will be able to show much more significant growth looking into 2012.

Looking at our PCB inspection business, we continue to see high demand for AOI with customers that are expanding their capacity. In the second quarter the PCB business sustained a high level of demand and was able to compensate for the weakening in the semiconductor side of our business.

Most PCB manufacturers are running at high utilization, with a lot of larger customers expanding. However, we do see cautiousness and hesitation looking into Q3, and we do not currently expect to maintain the same level of demand into Q3.

I'd also like to update you on the status of our direct material deposition business, or DMD for short. We continue to gain more confidence with the maturity of the product. The qualification process of this product at our beta test sites started with printing of test panels as first steps; printing of scrap PCB as the second step; and running production panels to real customers as the last step. We are currently starting the third phase at our two beta sites, and we hope to conclude this phase in the next three, four months.

This is a very important milestone that we have just entered. It is the first time in our development process that our customers are actually shipping boards to their customers printed on the GreenJet tool. Once this phase is concluded, we will be able to release the product for sale to the market.

We do need to keep in mind that the great potential of this new business still holds risks, and until we have multiple tools running in production we cannot eliminate this risk completely. We will keep you updated as things develop.

To summarize, I think the real story behind Camtek is not about the last quarter or even the last series of nine quarters, where we have consistently performed well. Rather, it is about our business outlook and prospects for the future growth, the strength of our business model, and the confidence that our execution and performance will continue to exploit the potential of our growth story.

I believe Camtek is in a good position in our traditional two vertical businesses, back-end semiconductor and PCB. Meanwhile we are growing additional two verticals in front-end semiconductor and targeting to pass the feasibility phase with our wild card, the digital solder mask printing technology. We are moving in the right direction in these three new verticals, and we expect to continue generating additional revenues going forward.

As I have mentioned before, the diversification in our business did allow us to continue to grow, and we were able to demonstrate continued top-line growth and sustain the bottom line, overcoming the market drop. I do expect our longer-term growth to come from the semiconductor side of the business that is allowing us to show higher margins as we continue to grow.

Finally, with regards to our outlook for Q3, while many of our peers expect a weaker third quarter, we expect a sequentially more or less flat quarter. Our guidance is slightly higher than what we originally issued for Q2. We expect revenues to be between $27.5 million to $29.5 million.

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

Thank you, Roy, and hello, everyone. You can find the detailed results in the press release issued earlier today.

Revenues for the second quarter of 2011 were $28.8 million, 12.8% above the $27.5 million reported in prior quarter, and 38% above the $20.8 million reported in the second quarter of 2010. Revenues from sales and service to the semiconductor manufacturing and packaging industries were 53% of the total and amounted to $15.4 million, 5% below the previous quarter.

With regard to the PCB and IC substrate, we generated $13.4 million in revenue during the quarter, contributing about 47% of our total revenue; $2.1 million or 19% above the previous quarter. A sequential shift in our revenue product mix from higher margin semiconductors to lower margin PCB and the strengthening of the Israeli shekel against the US dollar caused the decline in our gross margin and profitability this quarter.

Our geographical breakdown of the revenues for the quarter was -- the total Pacific Rim 75%, which consists of China 35%; Taiwan 12%; and the rest of Asia 29%. USA 15%. Europe 8%. And 1% for 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 and share-based compensation. 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 $13.1 million, representing a gross margin of 45.6%, compared to $12.9 million or gross margin of 47% in the previous quarter, and $9.1 million or 43.5% in the second quarter of 2010. While we saw an improvement in gross margin year-over-year, we did see a decline compared with last quarter, due to the shift in the product mix and the weakening of the US dollar against the shekel which I explained earlier.

Operating expenses in the quarter were $10.1 million, compared to operating expenses of $9.8 million in the previous quarter, and compared with $7.3 million in the second quarter of last year. Operating income for the second quarter of 2011 was $3 million or 10.5% of revenues, compared to an operating income of $3.1 million or 11.5% of revenues in the previous quarter, and an operating income of $1.7 million in the second quarter of 2010.

While the operating income grew strongly over the second quarter, [or flat year], it was slightly below that of the previous quarter due to the lower gross margin and approximately a $400,000 in additional expenses resulting from the strengthening of the Israeli shekel against the US dollar in the quarter.

Although we do from time to time hedge transactions, it is not at the 100% level. And the gain from the hedge transaction recorded in the income line item are based on the [sur] value of the [option] at a reporting date.

Our net income for the second quarter of 2011 was $2.9 million or $0.10 per share, compared to $3.1 million or $0.10 per share in the previous quarter and a net income of $1.4 million or $0.05 per share in the second quarter of 2010.

Cash balances, including restricted cash at June 30, 2011, totaled $17.4 million, of which restricted cash was in the amount of $5 million. This is compared to $14.4 million as of March 31, 2011, with restricted cash of $5.2 million.

The increase in cash is a result of increasing backlogs in the amount of $2.5 million and a positive operating cash flow of $1.5 million resulting from our net income and improved collection level this quarter.

This was partially offset by the increase in inventory. Our DSOs were 106 days based on our current level of revenues, compared with 109 days which we reported in the previous quarter.

That ends my summary, and we will now open the call for questions. Operator, please.

(Operator Instructions) Edwin Mok, Needham & Company.

Hi, thanks for taking my questions. So, a question on the guidance. Your guidance was flattish, and I think based on your comments you expect the PCB side to be down a little bit and the semi side to be up a little bit. Is that correct?

If that is the case, I was just wondering what is driving the sequential increase on the semi side.

Okay, hi, Edwin. First of all, it is correct. I think really what is driving our semi business is a couple of things.

One is the new product, which is -- difficult to talk about market share in terms of new products, but it is only a single, you know one tool and two tools and so on and so on. But that obviously helps to drive the growth.

Second our base back-end semiconductor business is doing well. We had a lot of thoughts before we gave this guidance; obviously we are very well aware of our peers and of some of our customers. But the places we see investments are really in LEDs, obviously something we still see expanding. CMOS-related business, which is tied to the tablet world and to the mobile devices world, is still very active. And we see -- as we are talking right now we see expansions.

There is obviously a couple of technology buys that are pretty interesting and maybe smaller numbers, but we see these as well. Really if you go combine all that together, we do expect our semi business or our back-end inspection, the semi business to grow quarter-over-quarter.

I see. Very, very helpful in quantifying that. Just touch quickly on the front-end semi business. You guys have placed a few tools at your customer right now.

How do you see that progressing? Any kind of update in terms of progress there?

It is still profits. If you look at last year we probably sold a tool a year; and if you look at this year, we are probably selling two tools a year. When you're talking about one tool or two tools, it could be some quarter zero another quarter three. It's a slow progress.

Each single customer is very significant because in many cases it's a question of qualification. So you put a tool; you work a couple of months of trying to make it work; and after it works he buys the tool.

But it doesn't tell the whole story there. The whole story is that on his next expansion you're a valuable player to compete on the bigger orders coming in the future.

I think it's a slow progress. I would like it to be faster, but it's not. Actually, the slowdown, especially in the front-end -- we definitely see more slowdown in the front-end -- I think to some extent could serve our targets because people have more time to qualify tools. When they are ramping up and running very fast, they have usually less resources or energy or focus to start qualifying new tools.

So to some extent I hope that this could actually be a good opportunity that we may be leveraging in the next six to nine months, later on.

Sure, slowdown sometimes gives you more time to work on that or on a customer; right?

So go back to the back-end. You mentioned the LED area. (technical difficulty) That is a -- call it a newer, how do I say it -- meaning that, is it true that your customer has buying more inspection tool now in the LED compared to before? Meaning the market itself is growing and obviously your [dependency] on that. And I have a follow-up on the back-end side. Thanks.

Two things on the LED. First of all, there is a lot of expansion being done today in the LED, and especially I would say in China. China is definitely -- there's a couple of new players, completely new players, who have entered this arena. They are doing big expansions right now, and they are buying tools.

We haven't seen this yet in our performance. We hope to get just a certain piece of that action in China.

If that happens that is probably going to be in Q4 or Q1, later on. That is the expectation of pretty big potential there.

The rest of the LED players are, I can say, expanding slowly. Not a lot of things happening. I would say excluding one account in Japan, the rest is kind of one, two tools a quarter; not more than that.

I see. Okay, that's very helpful. One question on the back-end side.

Do you see -- you mentioned that you expect the back-end to be a little bit higher in this quarter. Right? How do you look at that beyond this third quarter?

Do have any sense in terms of how that is trending into the fourth quarter? And within that growth on the packaging side, right, is more of that related to technology by -- for 3D packaging or TSV and stuff like that?

Well, first, we have very limited visibility into Q4. I think it's a hard guess.

If we even -- in general, delivery times for back-end tools in the back-end are usually six to eight weeks. So people tend to wait. So we have very little visibility into Q4.

In terms of the technology buys, yes; we see technology buys. We are selling into some of these places. The 3DIC, which is TSV and micro-bumps combined together, is definitely something we see picking up.

It is not high numbers. It is not -- each leading player is taking a one or two tools to qualify an R&D process.

I don't see it right now as really mass production. It is really more of developing a technology. In order to develop this technology they are buying one or two tools.

It is, however, very important to get qualified in this developing of technology. So once this technology picks up, if you are the tool of choice there, you have -- I don't say have the have the market, but you have an advantage, a certain advantage. And this is where we try to be.

Great. One last question relating to margins. So given that the PCB has been down a little bit and your semi business up a little bit, do you expect margins to recover in the third quarter?

It really depends on the mix. It really, really depends on the mix. If the mix will be more semiconductor-related, then the margins obviously will improve. PCB side of the business has lower margins, so that kind of -- there is a differentiation.

There is also -- it is even more complicated than I give you right now. Because there is also, even within each segment there is a higher margin product and lower margin product. So it is difficult to estimate.

But in general -- and I tried to emphasize this in the call -- if you look at the long term, two of our main growth engines right now is the sell on the front-end, and they're a high-margin tool. High-margin businesses.

That is where the growth will come from and that is why I expect, in general, that our semi side will grow faster than our PCB side. So looking more than one quarter ahead, I am pretty confident the margins will improve.

Great. Sorry, one more question than I will go away. So on the GreenJet product, just clarify the timing. So in the first quarter you expect to -- it is not a revenue event in the third quarter right? You still need to go through this process before you go to revenue probably in the fourth quarter and beyond; is that correct?

That is correct. That is correct. I mean we are very excited about this product. I am personally very much involved in this activity.

We have gone tremendous way in the last year with it. It is obviously a very important milestone for us. This is the first time we actually take panels that belong to our customers' customers; and we print them; and they ship into the customer. And the customer is actually assembling components on them and testing them and using them for a product.

So it is a very important milestone. It's I think the first -- this week we only get I think 4 production loss with 48 panels, okay? So we need to pass them.

It is an important milestone; but it's the beginning. We need to get a lot more of these to feel comfortable. If we feel comfortable in the next three to four months, we should be able to release the product to sell.

As you have said, it is to start selling. It is not -- we're not going to see it in the revenue line in Q3 or Q4. Maybe in Q4, but even if we see something in Q4 it will not be very significant.

I think the real significant item is to pass the feasibility. Right now it is more of a huge potential. If you have got the feasibility, this is a very important milestone for us.

Great. That's all I have. Thank you.

Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my question. Congratulations on a good quarter and strong guidance. Roy, given the landscape where semi business appears to be weakening, you're still feeling pretty comfortable about guiding higher, maybe flat to higher.

Can you share with us? Is there any market share shifts going on in that market that is favoring you? Or is it just end-customer demand that is bullish -- more bullish than people are expecting?

Hi, Jay, first of all. It's a touchy subject. If you look at our numbers and our competitors' numbers, not only this quarter but the past quarter and the guidance, and even the quarter before that, I think it is a long process. It is not something that has happened over a quarter.

In general, I mean -- well, it is kind of a neat story. We started a couple of years ago from nothing, from zero; and today we obviously have a business in this segment.

I think definitely we can today say that we are the number-one player in this back-end segment. I mean, the numbers are the numbers.

So I don't think there is a significant change in the competitive landscape. I think it is a long process, that over a few years we have been able to take some market share. I think this is one aspect to it.

The second aspect I think is focus. We have very, very tough competitors and very good -- I mean they are certainly worthy competitors, I can say it like this. And we are not better than our competitors in all the fields, but I think we are better than our competitors in some of the fields.

And luckily -- or smartly I would say -- we are better in those fields that are currently growing. These are really the bump area and the CMOS area and the 3DIC and the LED. It is not all of our business, but this business I think overall -- even there is a softening in the semiconductor side, these segments are still growing at least for now.

I can't tell you what is going to happen next year or Q4 even. But right now we have -- I'll just leave it with you there.

All right. In terms of the outstanding lawsuits, it looks like you settled a few. Can you give us a status -- is there on any one, any outstanding lawsuits still going on? And when do you expect some resolution there?

Okay. We did -- we had some ancient lawsuits with Orbotech that we buried, with agreement both sides. Basically there's two suits against us and one suit against them. We kind of buried all these three lawsuits. There's a few PRs before that; so that is off the table right now.

We are still waiting for the big one, which is the Rudolph lawsuit. There is absolutely no news from that quarter. We are really waiting for a verdict from the appeal court.

So these are the two main IP litigation issues that are outstanding. Basically there is only one, I can say like this. Only one. And that one is done, and we are actually waiting to see what federal court rules on the appeal.

Okay. Thanks, Roy.

[Ronnie Lipschitz], [Techtime].

Hello. I would like to go back to the GreenJet printer. Can you give some more information about what are your expectations from the GreenJet? And can you describe the competition picture for this product?

Okay. First of all, as far as -- I will start with the second question; I think it is easier. Just as far as we know there is no competition for this product yet and I think it is going to be a while before there is.

As far as we know we are the first to the market with such a solution. Okay?

Basically what this printer is doing, it's replacing four or five different processes in the manufacturing of the printed circuit board. And instead of using four or five pieces of heavy industrial equipment, we are using one single smart digital inkjet printer to replace all these five different processes and by that creating a significant value proposition for the product.

It is a pretty big tool or system business potential, and I think it is an even much bigger ink business potential. Obviously we developed both tool and the ink, and we see the margins or the potential margins for this business to come from both the ink and the tool itself.

So you mean that the margin in this business will be greater than the average margin of the PCB market?

Well, right now all the margins are on the [XL] because we haven't sold a single tool. But in general, where we view this business is -- yes, we see it is -- the machine business certainly a good margin machine business.

And as I said before, the more interesting part of this business is the ink side. There we also believe we can get a fair market.

Do you produce the ink yourself, or you have a subcontractor for this?

Right now we produce the ink itself. Actually most of the IP is in the ink.

Okay. Thank you. Okay.

Drew Besser, Manchester Management.

Hi, Roy. How are you today? Just I have two questions. The first one is, can you share a book-to-bill ratio with us for the quarter? And ideally break it down in terms of PCB and certainly more importantly on the back-end side of things.

We don't give this book-to-bill information normally.

So, you can't give us any insight as to above 1, below 1?

No, no, we don't give this number so I don't want to pull a rabbit out of my hat in general. But we did say -- and I can repeat it -- that we expect our semi, our back-end semiconductor inspection business to grow quarter-over-quarter from -- looking into Q3.

And I did say that I expect that -- we had a very nice quarter in the PCB side in Q2, and I am not sure we can keep the same levels in Q3. So that can give you I think what you want. I hope so at least.

I had a follow-up. Some of the competitors out there talked about borrowing from their backlog to hit these -- to make their number this quarter that just went by. You guys I assume keep some type of backlog.

Was there any borrowing? And does the backlog still look healthy going into next quarter and beyond?

You know, I always envy those companies. I wish I had a backlog. Sometimes companies really are our customers.

On the PCB side for sure you can't even talk about backlog. I mean customers usually, when they give you the order, they want a delivery yesterday. So you can't even keep the backlog.

In the semiconductor side especially, keep in mind most of our business in the semiconductor is still back-end. And in the back-end also the delivery times are very short, very short.

I talked to some of our peers in the front-end side of the business, and I understand there the delivery times are longer. Maybe they can kind of play around with things.

The best we can do is maybe one week here, one week there. But this does not give you any room to plan something.

Great. I guess the last question is on the front-end side of the business, the Gannet and the Xact tools, I think you said you did one of the Xact and a couple of the Gannets this quarter.

Do you still see being able to try to get it going to two or three of those Xact tools by the end of the year, or a couple more on the Gannet side? Is that still further out in next year?

I think going into this year I don't expect a change. Again, it could be that maybe next quarter you do two, and then you do zero. But in general I think the rate is about one a quarter. This is the rate.

We do hope that going into the beginning of next year and onward we can get higher numbers, maybe two or more than two a quarter. It is a question of qualifying tools at more customers, and that just takes time.

It is not a question of -- I really feel confident at least on the [sili] side or the sample prep side that we are going to get there very, very soon. It is going to take us probably six to -- maybe two or three quarters to get to the, let's say two Xact a quarter or something like that.

But we definitely see, even this is last Xact -- obviously we can't give you the name of the customer, but it is a leading top-five customer; and that is very significant for us. Okay? That is very significant for us.

That's great, Roy. Thanks a lot.

(Operator Instructions) Drew Besser, Manchester Management.

Hey, Roy. I had one more for you. So, on the back-end side it looked like you guys were obviously down sequentially a little, but far less than what some of the other guys out there were and are forecasting. Do you feel like you are taking share in that market?

You know, I tried to answer this is diplomatically last time, but we are Israelis so I will be more blunt. Yes, I think we are taking market share. I think we have been taking market share for the last couple of years.

So it is not something that happened this quarter. In general, we are taking market share.

I think we are maintaining the first position in the back-end side of the business. You can see it from last quarter or even the quarter before, and you can see it this quarter, and you can see it in the guidance for next quarter. So I think on that aspect we are kind of proud to say that we are continuing to take market share slowly.

But it is not something that happened this quarter. It is a long process. It has been happening for a couple of years now.

Okay, that's great. Thanks again.

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 would just like to thank everybody for joining us and taking an interest in the Camtek story. See you next quarter or maybe before. Thank you.

Thank you. This concludes the Camtek second-quarter 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.