Camtek Ltd (CAMT) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek third-quarter 2011 results conference call. All participants are, at present, in listen-only mode. Following management's formal presentation, instructions will be given (technical difficulty) question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded November 3, 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 development, and the effect of the Company's accounting policies, as well as certain 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, please begin.

Thank you, and good day to all of you. I would like to welcome all of you to Camtek's third-quarter 2011 results conference call, and I would like to thank Camtek's management for hosting this call. With us on the line today are Mr. Roy Porat, Camtek's CEO; Mrs. Mira Rosenzweig, the Company's CFO; and Mr. Moshe Eisenberg, the Company's incoming CFO.

Roy will start the call by discussing with you recent development 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 the Q&A session.

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, focus future results, and evaluate the Company's current performance.

Management believes that the presentation of non-GAAP financial measures is useful to investor understanding and assessment of the Company's ongoing [core operation] and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

I would now like to hand over the call to Camtek's CEO, Roy. Roy, please?

Thank you, Ehud. Hello, everyone, and thanks for joining us. We are continuing 2011 with another all-time record quarter that will bring us to an all-time best year on our top line.

While it is still difficult to see the long-term operational model really coming into place, I think this quarter we are getting some good indications that we are headed in the right direction, and that the leverage in our model is feasible.

As you saw in our PR earlier, I'm glad to announce that our top line of $29.7 million is once more a new all-time quarterly record for Camtek. This quarter's results are milestones in the realization of our long-term plan, despite the bump along the way that the fourth quarter will likely bring.

Most of our peers in the electronics industry have shown a decline in business in the past two to three quarters, while our revenue diversity have allowed us to outperform and continue to show growth in both our top line and bottom line.

As I discussed in the last call, given the uncertainty and the mixed signals from the market, we believe that the fourth quarter will be affected by the market softening.

While we see it the across the board, it is more on the PCB side of our business, which is a more capacity-driven business. It is also true in our semiconductor business, though slightly less severe.

The good news is that the industry analysts in our markets do not foresee this softening as long-lasting, and some projections talk about Q4 being the bottom of the turning point.

We are following these trends very closely, with plans to react fast to any possible changes. The diversity in our business model may at times make it difficult to follow, but obviously it will also have benefits.

There is a limit to the drop in the legacy business, as the new products can compensate for it, and as a result, we can still maintain our growth. The growth in the third quarter symbolizes our sound position in both our legacy businesses.

The fact that we are operating in multiple markets allows us to enjoy the staggered effect that occurs in the electronics supply chain during the drop in the business. There is a time delay from the top of the supply chain to the bottom of it. Our diversity moderates these changes.

We are planning to launch three new products in the fourth quarter, in both our PCB and semiconductor businesses, some of which are the results of a [three year] of R&D projects that are only now coming to the market. I will give more details later on.

Obviously, the introduction of our new product lines has increased our inventory levels, which impacted our cash flow. As we look towards the fourth quarter, we do see a softening in demand in both our legacy businesses. The demand for AOI in the PCB markets has significantly declined compared to the last few quarters.

On the semi side of the business, we do see more moderate softening in demand, and the technology-driven demand still remains very active. I will address our guidance later on.

I would like to provide a closer look at the markets. In the third quarter, we had a record in our semiconductor revenues, mainly as a result of our inspection products. Actually, it is our best-ever quarter in terms of semiconductor inspection tool shipments. The demand came from various IDMs and OSATs, while I do want to mention that we have had a good quarter in Japan, a territory that we have not been very active in the past few years. The majority of our backend inspection business in the third quarter originated in Asia.

We continue to see demands for LED inspections, CMOS and 3DIC applications. We actually had a very important penetration with a new LED customer that we hope will lead to more LED potential business in the future.

The demand for our semiconductor product is soft in the fourth quarter. This is evident in the semiconductor market in general. For the last three to five months, it was more evident in the front end of the market, and looking at the last two months, we see it affect -- reach the back end, while the OSATs and IDMs are postponing or delaying expansion plans. We also see a delay in a few Chinese LED manufacturers that had big expansion plans a few months ago and are now on hold.

Looking now to our new front-end semiconductor business that includes the macro inspection tool, Gannet, and the Xact sample prep tool, as we indicated, these two products are our engines for growth going forward. We are very active in both of these areas and expect our future growth to come from these products.

One of the new products that we have that we are in the processing of launching is the new generation of our Xact tool, called Xact 200. This newer version of the Xact allows us to achieve sample preparation of a specific site with a very high-resolution stem. We expect to see orders coming in from leading IDMs starting from the fourth quarter.

Looking at the PCB inspection business, we continue to see high demands for AOI with customers that are expanding their capacity in the third quarter. In the third quarter, the PCB business still sustained a high level of demand and was at levels similar to the first half of the year. Most PCB manufacturers were running at high utilization, with a lot of larger customers expanding. Since then, the PCB market has significantly softened in the fourth quarter. Most customers are now running at low utilization, and you will see a big drop in demand for new equipment.

We do need to consider three things -- first, that this business is very much a local Chinese business, and the Chinese banks are limiting the finance possibilities to our customers. And this has its influence on demand for our product. Second is that the inspection tools for PCB are very much capacity-driven business, very different from our semiconductor side, which has a big portion of demand coming from technology-driven demand.

Last, but not least, the printed circuit board is a non-inventory product. Unlike semiconductor chips that are made to inventory and given very short lead times for delivery, this market tends to change very fast. Normally, we do have a much more limited visibility, and it could come back very fast in just a few weeks.

The second new product we plan to launch would be first launched next week in Taiwan at the TPCA show. We are proud to introduce a new generation of PCB inspection tools called [Phoenix]. This new tool is a result of three years of extensive R&D efforts that bring to the market an enhanced capabilities and improved cost performance for our customers. We believe this new generation of Phoenix inspection tools will improve our gross margins in the PCB inspection business looking forward to the next few years.

Finally, I'm very excited to update you on the status of our direct material deposition business, or DMD for short. While later than we had originally planned, we are soon launching this product for sale. This is the third product we plan to launch in the fourth quarter. We have reached a point with the GreenJet that we believe is ready for release to the market. This is certainly an important milestone, and we believe we will start getting orders and installing tools in the beginning of the year.

We do need to keep in mind that this is a revolutionary technology and the sales cycle is long. We also need to keep in mind that the great potential of this new business still holds risk, and until we have multiple tools running in production, we can't eliminate these risks completely. We will keep you updated as things develop.

To summarize, I am pleased with the progress in our business in the last several quarters. The coming fourth quarter is a bump in the road. We are carefully examining the levels of expenses. To the extent needed, we will make necessary adjustments in our cost structure.

I believe that Camtek is in a good position in its traditional two vertical businesses -- back-end semiconductor and PCB inspection. The fact that we have passed one more milestone with the GreenJet products should start to have its effect on the business in 2012.

As I have mentioned before, the diversification in our business does allow us to continue to grow. We were able to demonstrate continued top-line growth and sustained bottom-line, overcoming the recent market drop. I do expect our longer-term growth to come more from semiconductor side of the business that's allowing us to show higher margins and improve profitability as we continue to grow.

Finally, with regard to our outlook for Q4, given the weakness in the markets, we expect revenues to be between $22 million and $24 million.

And now, before I hand over the call to Mira to update you on the financials, I would like to say a few words of thanks and welcome to Moshe Eisenberg to the team. As we indicated in the PR, Mira has decided to move on and seek new opportunities. I do want to take this opportunity and thank her for the years of hard work and dedication that's helped us bring Camtek to many great achievements.

I do want to wish Moshe success with the great challenges that lay ahead, and I am sure he will soon meet all of you. Mira?

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

Revenues for the first quarter of 2011 were $29.7 million, 3.1% above the $28.8 million reported in the third quarter and 24% above the $23.9 million reported in the third quarter of 2010.

Revenues from sales and service to the semiconductor manufacturing and packaging industry were 58% of the total and amounted to $17.2 million, 12% more than the previous quarter.

With regard to the PCB and IC substrate, we generated $12.4 million in revenues during the quarter, which account to about 42% of our total revenue, [7]% less than the previous quarter.

Our geographical breakdown of the revenues for the quarter was -- 81% of our revenues came from Asia-Pacific Rim; USA, 13%; Europe, 4%; and the rest of the world, 2%.

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 share-based compensation. The reconciliation between the GAAP and non-GAAP results is included in the statements at the end of the press release issued earlier today.

Gross profit for the quarter totaled $13.6 million, representing a gross margin of 45.9% compared to $13.1 million of gross margins or 45.6% in the third quarter, and $10.9 million or 45.8% in the third quarter of 2010.

Operating expenses in the quarter was $9.4 million compared to operating expenses of $10.1 million in the previous quarter and $8.4 million in the third quarter of last year.

Operating income for the third quarter of 2011 was $4.2 million or 14.1% of revenues compared to an operating income of $3 million or 10.5% of revenues in the previous quarter and an operating income of $2.5 million in the third quarter of 2010.

Our net income for the third quarter of 2011 was $3.4 million or $0.11 per share compared to $2.9 million or $0.10 per share in the current quarter and a net income of $2.6 million or $0.09 per share in the third quarter of 2010.

Cash balances including restricted cash at September 30, 2011, totaled $19 million, of which restricted cash was in the amount of $5.1 million. This is compared to $17.4 million as of June 30, 2011, with restricted cash of $5.1 million.

As you may know, we won the appeal on the infringement dispute with Rudolph. Following our successful appeal, the bond in the amount of $8.9 million provided to the federal court was officially released on September 27, 2011. The restricted cash in the amount of $5.1 million was released as of the close of the quarter.

The increase in cash is as a result of an increase in backlog in the amount of $2.4 million, partially offset by positive operating cash flow of $0.2 million and by a $0.7 million cash invested in investing and financing activities.

Our DSOs were 116 days based on our current level of revenues compared with 106 days that was reported in the previous quarter.

Finally, on a personal note, after three years at Camtek, I am leaving Camtek. I would like to take this opportunity and thank my finance team for all the hard work. I also want to thank Roy, Raffi and the rest of the management team for their support. I wish Camtek and Moshe great success in the future.

I will now open the call for questions. Operator?

(Operator Instructions). Edwin Mok.

Thanks for taking my question. Congrats for a good quarter and good luck with you, Mira.

So my first question regarding your guidance, you mentioned that PCB will see a much bigger drop in the coming quarter and semi will decline a little bit. Just wondering if you can quantify that a little bit. And in terms of a decline [into] PCB, do you expect that to persist beyond this quarter?

First of all, on the PCB side, I don't have the numbers in front of me right now, but I can tell you, a much bigger -- a much bigger drop. If I had to guess, and this is again a stipulation and looking forward into the first quarter or maybe forward, it would be very difficult.

As I said before, the PCB -- the good news about the PCB side of our business is that it drops normally very fast and comes back very fast because the leadtimes of equipment in this industry is very short. Customer expectations from issuing an order until getting a machine could be two to three weeks, where in the semi side, it could be two to three months, easily. So it's very difficult to say. We don't have a good indication of how the PCB side of the business looks beyond the fourth quarter, but I can tell you it's a big drop.

And the semi side still has -- we are still seeing orders, more I would say like this than the other, but both of them are softening.

And we do expect to get more orders from the new products in the fourth quarter. And it really depends, looking forward after the fourth quarter is how fast we can compensate with the new products on decline of the legacy business. I hope I answered.

That was helpful. Just stay with the PCB a little bit, so is that a function of customer overbuilt capacity over this past year, and therefore they run a little bit (inaudible) basis just don't need to buy AOI equipment right now? Or is it -- is it a function of them doesn't need to have as much AOI equipment? I'm just trying to understand is this just a general sector, PCB sector, or is this specifically related to AOI?

I think it's a general sector to the PCB in general. It's -- if you walk into any of our customers these days, you would see that the lines are just not busy. And if you would've walked into these lines at two months ago, they would probably be in a very high utilization mode and most machines running. So I would say it's the general atmosphere with these big fabs. They're just running at very low utilization.

Again, we are seeing some orders from some niche players. We are seeing some orders from different territories or different aspects. But the big guys are simply -- have less work right now on their floors, on their production floors. So that's the PCB side.

And keep in mind -- and I've mentioned this again, the PCB side is a pure capacity business, okay? It's a really, really pure capacity business, so --.

And in our customers don't really have a very good forecast in their hand. You have to know a PCB manufacturer gets an order, he ships this order in three to four weeks. So basically, theoretically I'm saying our customers could still get new orders this quarter and they will ship machines this quarter. So things in this area change very fast.

I can say and I did say on the script that -- on the semi side, we see some better indications towards the end of the quarter. We see better atmosphere, meaning in the semiconductor side. And I'm sure you're very much aware that other people are saying the same thing that the end of the fourth quarter seems to be changing the direction. Is it a slight bump and it's going to -- I don't know what Q1 will bring. But at least it looks more positive like -- that's our guess.

Yes, we definitely have started to hear that. Just on the semi side, just quickly touch on that. You know, as you mentioned on the prepared remarks, there's start to have some slowdown on the back end side, right? Can I offer is that mostly from the OSAT or is it more from the IDM's or just across the board on the back-end side?

I think it's really across the board. It's really across the board. Obviously, we have some LED big projects in China that were put on hold. And there's at least two or three big projects there that are putting on hold.

Certainly OSATs -- some of these OSATs really depend on IDM business. So you could easily have a good -- a very big subcontractor of OSATs depending on his work from a big IDM, and the IDM slowed down, so he is going to slow down. So we see it pretty much all across the board.

On the other hand, we are still going to have a relatively busy quarter in the first quarter in semiconductor inspection from the technology-driven orders. So we still see a lot of investment in 3D I.C., in advanced CMOS, in LED, still investments. We've got -- so it's not -- certainly not a complete stop, okay, and we still expansions there.

Great, that's helpful. One last question and I'll go away. You mentioned the Xact 2 product that you guys are launching in the fourth quarter. Have you started to place eval for that product? And how do you think that will change your position there versus your Xact product?

We've launched the Xact product about a year, more than a year ago. And it has done extremely well, at least much better than we expected two years ago, which is when we bought SELA. And -- but we've had -- we were limited. We couldn't do a site-specific application, meaning anytime a customer wants us to prepare a sample on specific, very pinpointed sides, we just didn't have enough resolution on the tools to do that. The new tool we launched does have this capability, and it really aligns us and opens the potential markets very wide for us.

And actually while we are talking right now, next door to this room here, we have two very big customers that are in the process of qualifying and buying in Xact tools. And as we said in the script, I'm pretty sure the new tool we are going to start to sell from the fourth quarter, meaning from this specific quarter, we should start selling, and onto the beginning of next -- beginning of the year, we will have more orders from the new Xact tool. So it's looking very, very well. We're very (multiple speakers)

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

Okay.

Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my question. Congratulations on a good quarter, Roy.

Let me ask you, in terms of order patterns, as you look at Q4, you mentioned weakness across the board. Can you kind of walk me through how you see the quarter playing out? Is it going to be back-end loaded or are you seeing pretty normal patterns in terms of orders?

We said we didn't give -- I am trying -- I'm hesitating whether -- you know how detailed we want to give the answer, but we said we are going to see a big drop in our PCB side of the business. And we are going to see a slighter -- or less of a drop in the semiconductor side of our business.

I think this would be a good indication in terms of what we expect in the fourth quarter. And on the first quarter, I really don't have that much visibility.

All right. I know you didn't talk about this in the script, but there is a press release from Reuters where you've talked about 25% sequential growth in 2012. Is that something that you are talking -- feeling comfortable about?

I think it may be a misunderstanding on the part of Reuters. We haven't issued any guidance for the year. We normally don't give guidance for the whole year, as you guys know. And we actually -- internally we haven't even finished our budget and the plans for next year. So if you ask me if I even have a fixed number in my head in terms of the targets, so, no. It's a bit too early. I hope that by the end of this year, beginning of next year, we should have an approved budget and a target that we are all synchronized on.

To tell you that this is out of the question, I don't want to tell you it's out of the question, but I don't want to give hopes that this is the number we're going to come out with.

All right; it looks like you've been misquoted there. Let me ask you about market share.

In the past, you've gained some market share relative to some of your competitors. As you look at Q4 and into Q1, do you expect any shift in market share as the overall business slows down, or you don't see any change there?

On the PCB side, I think it's relatively kind of stable. I don't see -- there wasn't really any shift in market share; when you look at us and Orbotech, I think pretty stable. It could be a move this quarter or that quarter, but if you look at the general trend, it's pretty stable, like a third, two-thirds kind of a market share, a third for us and two-thirds for them. And that's pretty stable. I don't see any changes in that.

If we align ourselves against the semiconductor competition, which is mainly Rudolph, about two or three or maybe four quarters ago, we've gained the first position in the back-end side of the business. And we are -- I think we're going to keep this position and being -- and being in the number one back-end semiconductor inspection tool supplier. And we -- if we continue to do so, we may even gain more market share as going into next year.

Okay. Last question on DMD, as you look at fiscal '12, and you launch the product, what type of revenue contribution do you expect from DMD next year?

It's a big question mark. I don't want to throw a number up in the year. It's a very new technology. The demand is there, so I think it would be more a question of our delivery. I don't think it's going to be a question of the market. I think it's really going to be the question of how mature is the product, and how well we can educate the market to take it and adopt it.

I don't think it's going to be a question of demand. Demand or the solution to this product provides is great. I mean any customer that looks at it says hey, I want one.

So I think the challenge next year and -- with DMD will actually be a more up to us and less up to the market. And it's a question we need to think about how we fit, involves risk planning and cash as well. We feel comfortable with it. It took us quite a while to get this product out to the market. Two weeks from now, there's a pretty big show in Germany. And this is where we are going to offer this product for sale the first time. And I'm pretty sure we're going to start seeing orders coming in very soon.

How fast and to what extent and how much will 2012 bring? I think it's an early stage for us to give an indication. It's a beginning; it's not going to be fast sales process. It's going to take -- every sale is going to take a few months at least to qualify and then for us to feel comfortable with it, and so on and so on. So I don't want to throw up a number in the year.

I think it's really important milestone, really. We've been waiting for this for two years. It's a very, very important milestone for us, that we feel good enough and we are jumping into the pool, basically, to get our feet wet. And then we believe we will be able to cross it.

I think the best thing is really for us, if we release any forecaster numbers based on this, we'll let you guys know. Right now I don't think I want to give any number on this.

All right. Good luck.

Patrick Ho, Stifel Nicolaus

Thank you. And I also want to send my best wishes to Mira; good luck.

Roy, in terms of the semiconductor back-end side of things, following up on the market share question, one, can you just I guess give a little bit of qualitative color whether some of the recent revenues have come from I guess your existing customers that you've had in the past, or I guess capacity ramps from some of your share gains with newer customers? And secondly, have you felt any I guess responding competitive pressures, given some of the gains you've made?

I don't think there is any distinct changes this quarter in terms of the customer mix, excluding what I said about Japan. We have I think three new customers in Japan this quarter. I'm talking about the third quarter, which is fairly interesting. It's a new territory and new customers. So that's kind of been playing towards us.

I have to remind all of you that Japan is actually a territory that not -- that we are not very strong in, and also Rudolph is not very strong in. So there's some local competitors there in Japan, and the potential is very big. Japan is estimated to be 25% of the global market. So the potential there is very big. And so we are very hopeful that next year we'll be able to penetrate more customers.

On the rest of the world, I think it's pretty much the same. Yes, we have a few new customers and the majority of the business is from the existing customers, but nothing significant on the back-end side of the business.

And I guess also the competitive -- have you felt any I guess responding competitive pressures in the marketplace over the last quarter or so?

The competition is tough, has been and probably will be. I don't -- we haven't felt a change in competitiveness. You have to understand that many of these purchases are very, very technologically driven, so it's -- in most of the cases it's more a question of performance.

And it's not that price doesn't play, but it's first performance, then price in most of these cases. And it allows not all of them -- but a lot of the cases that we do take market share are really performance driven, and less of price issue.

But we do have very tough competition. We have very tough competition in Japan and outside of Japan. And I don't -- it's not a walk in the park. Every deal, every business is really a tough competition.

Great. Final question for me -- in terms of the overall supply chain and your ability to respond, the semiconductor environment can turn very quickly. How responsive do you believe you'll be able to, should the environment turn?

I don't -- just right now we don't see an issue with our supply chain in terms of being able to react fast. And we have good partnering suppliers, and we have good internal capabilities. And if things turn, I think we've demonstrated enough times in the past that we are able to grow very fast if there is an opportunity.

Great. Thank you very much.

(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 reminder participants that a replay of this call will be available on Camtek's website, www.Camtek.co.il, beginning tomorrow. Mr. Porat, please go ahead with your concluding statement.

I just want to thank everybody for joining us today, and thank you. See you next time.

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