Camtek Ltd (CAMT) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek first-quarter 2012 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 May 3, 2012.

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, would you like to begin?

Yes, thank you and good day to all of you. I would like to welcome all of you to Camtek's first-quarter 2012 results conference call and I would also like to thank Camtek's management for hosting this call.

With us on the line today are Mr. Roy Porat, Camtek's CEO and Mr. Moshe Eisenberg, the Company's CFO. Roy will start by discussing recent developments within the Company and the market. Moshe will give an overview of Camtek's performance in the first quarter.

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 feels the presentation of non-GAAP financial measures is useful to enhance understanding and assessment of the Company's ongoing operation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. After that, we will open the call and we will be happy to -- sorry -- we will now move over to Roy and at the end, we will start the question-and-answer session. Roy, please.

Thank you, Ehud. Hello and good morning to everyone. Thank you for joining us. Allow me to start the call by saying that things are improving and the bottom is behind us. The first-quarter revenue came in line with our guidance and was aligned with the general business environment in the backend semi and PCB markets. However, these revenue levels are far away from our goals.

The markets that we serve are currently in high utilization and we are starting to see capacity expansions in both the semiconductor and printed circuit boards. We started the first quarter with a very low level of booked orders on hand while the second quarter has started with a very high level of booked orders on hand to the extent that in some products we have extended our delivery time.

The dynamics of the electronic supply chain that we serve is now finally coming into play. Most frontend semiconductor manufacturers started to increase capacity and buy equipment in the third and fourth quarter of last year. Backend semiconductor manufacturers started to show growth only recently in March and going into the second quarter and we anticipate this demand to reach the PCB sector with a greater impact in the next few months. The commentary we are getting from most customers anticipate a good second half; although not all of them have orders on hand to support this.

From the first-quarter results, it is evident that our semiconductor business is on its way to a full recovery and was the main contributor to our first-quarter top line. We still expect the demand for our PCB inspection products will start picking up during the second half of the year.

I would like to provide a closer look at the market. The semiconductor business in the first quarter was mainly driven by our backend inspection tools. As I indicated earlier, during the second quarter, the semiconductor part of our business is growing fast and returning to levels of demand that we witnessed back in 2011, especially the backend inspection. The drivers underlining current demands continue to be a combination of technology buys, as well as encouraging news that we started getting capacity buys orders, part of which will be shipped during the second quarter with a full delivery continued in the second half of 2012. These capacity buys are from both IDMs and OSATs mainly in Asia.

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

In the first quarter, we did not recognize revenues of Xact sales although we continue to be very active. We completed a very successful tool demonstration and expect to install two more tools in the next few months. The newly launched Xact200 allows us to achieve sample preparation of specific [stock] with a very high resolution STEM. It is in penetration with multiple customers and although the sales process is long, the market acceptance for this new technology is very positive.

With regards to the frontend macro inspection, we see continued penetration leveraging our backend inspection technology in order to penetrate new segments, addressing a much larger TAM. We expect to have an important new penetration into a new account with the first tool in the next few weeks. Although we are currently unable to offer customers the full range of their needs in the frontend macro inspection, we are expanding our ability in every new account we penetrate to.

Every new customer also includes significant potential for future orders, especially those that are ranked in the top five semiconductor manufacturers. The penetration is slow and long process that will use growth in the years to come.

Looking at the PCB inspection business, we witnessed a sharp decline in demand in our product in the fourth quarter last year with no real recovery yet in the first quarter of 2012. However, we are seeing a big increase in utilization of our installed base and customers are now discussing expansion plans.

Assuming that capacity increases we witnessed in the semiconductor business is not all to inventory, we expect some of it will be mounted on boards and therefore, we anticipate a rebound also in our PCB inspection business.

We enjoyed a favorable product mix in the first quarter that improved our gross margins and we would expect the trend to continue due to the launch of our new AOI Phoenix, which is advancing as planned and we have gained a very good feedback from the market. We are able to sell the Phoenix at higher end-user prices and we expect to see it becoming a larger portion of our inspection tools we sell to the PCB markets.

A short update on the status of our solder mask inkjet printer or [DMD] for short. We have launched this product for sale and we are currently active in pursuing first tool orders. The sale process begins with the supply of multiple samples to the customers that are looking to purchase the tools and need to qualify these samples. Currently, this stage is taking us more time than we initially planned as we encountered process issues that delayed our plans by about a few months.

These specific process issues were solved and we indicated a few times in the past there may still be a risk of problems ahead of us that we are not aware of. We do not anticipate this delay to have significant impact on our 2012 results. We will keep you updated as things develop.

To summarize, as you already heard, we are guiding revenues to be up more than 30% sequentially in Q2. I believe that Camtek is well-positioned in its traditional two vertical businesses -- backend inspection and semiconductor and PCB. The backend inspection business has rebounded and we expect the PCB to follow soon while our three new growth engines are coming into play.

I would now like to turn over the call to Moshe to review the financials. Moshe?

Thank you, Roy and hello, everyone. You can find the results in the press release issued earlier today. Revenues for the first quarter of 2012 were $18.2 million. This is (technical difficulty) compared with $21.1 million in the prior quarter. Revenues came in a little above the midpoint of the guidance issued last quarter of between $17 million and $19 million.

Revenues from sales and services to semiconductor manufacturing and packaging industries were $11.2 million, or about 61% of revenues. With regards to PCB and IC substrates, we generated $7 million in revenues during the quarter contributing about 39% of revenues.

Looking at revenues from a different perspective, our inspection products were the main driver of our revenue for the quarter, accounting for approximately 70% of revenue, failure analysis 7% and most of the remainder came from services.

Geographically, international sales represented approximately 93% of revenues and US sales accounted for 7%. China was the strongest region during the quarter representing approximately 35% of overall revenues. Taiwan accounted for 13% and the rest of Asia was 35%. The remaining 10% came from 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 GAAP and non-GAAP results appear in the table at the end of the press release issued earlier today. Gross profit totaled $7.7 million on gross margin of 42.5%. This is compared with $8.9 million or gross margin of 42.1% of revenue in the prior quarter.

Considering the revenue level this quarter and that portion of our cost of goods sold is fixed, our gross margin was on the high side, mainly due to a favorable product mix, including the increasing contribution from the Phoenix, our new PCB productline, which carries higher gross margins. This should have a positive impact on our margin moving forward as contribution of the Phoenix to the top line grows.

Operating expenses in the quarter were $8.6 million compared to $8.8 million in the previous quarter. We are continually focusing on keeping tight control over our operating expenses, especially during quarters of lower revenue levels. During the quarter, our operating expenses were lower mainly due to the timing of some expenses, which did not occur in the quarter. We expect expenses to slightly increase in the second quarter.

I know that our operating income breakeven point on revenue varies between $21 million to $23 million level and it depends on the product mix sold in the quarter, as well as timing of some of our operating expenses. Operating loss in the quarter was $900,000. This is compared with operating income of $100,000 in the prior quarter. Net loss in the quarter was $600,000, or $0.02 per share, compared to a net loss of $500,000, or a loss of $0.02 per share in the prior quarter.

We generated a positive operating cash flow of $600,000 and ended the quarter with cash and cash equivalents and short-term deposits of $25.9 million compared with $26 million as of December 31, 2011. The decrease is mainly a result of prepayments of a bank loan in the amount of $400,000.

Accounts receivable remained at the same level versus the December quarter. Inventory levels went up by $900,000 to support our expectations for growth in the coming quarter.

With regards to the outlook of the second quarter of 2012, given the recovery in the markets and significant improvement in our flow of orders, we expect revenue of between $23 million and $25 million. We do have limited visibility into the second half of 2012, but there are positive market expectations for continued growth. With these levels of revenue, we should return to profitability.

We will now open the call for questions. Operator?

(Operator Instructions). Edwin Mok, Needham & Co.

Thanks for taking my question. So I have a question on the guidance. So if I take the midpoint of your guidance and assume PCB is roughly flattish in the second quarter, do imply like a 50% sequential growth in the semi business. Is that how you think about your business in the second quarter and is that mostly driven by inspections for the second quarter?

Yes, so the quick answer is yes. We don't anticipate or in the guidance, we don't anticipate yet a full recovery in the PCB and I would say that most of the planned growth would be from our semiconductor sector. We do have to keep in mind that the semiconductor side of our business basically it is predominantly the backend inspection business, but it has also a contribution of the two new growth engines, which is the sample prep tool, the SELA division tools and the frontend tools. So I think all of them together would probably get you to the numbers you had in mind. I think you are pretty much on top of it, yes.

I see. So okay, maybe just a quick follow-up question. You said that, in the first quarter, you didn't have any revenue on the Xact product, right? Is that changing in the second quarter or do you expect to see revenues on the Xact product in the second quarter? Is that what's partly driving the growth here?

It is not a big part, but yes we do expect to have some revenues in the second quarter and even more in the third probably. I did discuss that we have had a pretty good demo a few weeks back and should have another one in the next couple of weeks and both of them should contribute some more orders going forward.

I see. So it is fair to say that the backend is growing and that it is driving a good part of the growth, but you do expect some incremental revenue from the other products as well. Is that how --?

That is correct. But as you said, the majority, the big portion of the growth is the backend inspection, yes.

Great. And then on the PCB side, just quickly, you mentioned that utilization has picked up and you had some incremental discussion with your customers about installation plans. Can you -- you have a rough idea of where we are in terms of utilization and historically what do you think utilization needs to get to before you start to see this investment?

That is a good question and I will try to answer it in two ways. I think we have discussed this in past quarters. We actually have an automated way from our extensive installed base to actually know how much each machine has used. And we have probably a few thousand or 2000 tools out there in production. So if you take a few hundred of them and you measure utilization, you get a pretty good sense of where the market is. And in the past, I would say when we passed the 85%, we would start seeing large orders. We have passed that threshold.

Having said that, we don't see yet the orders coming in, but the thing about the PCB market that anybody in this business really realizes is that when it comes, it comes very fast. Delivery times in the PCB market could be two to three weeks. So things could even turn during this quarter. And if you look at the wider picture, I mean as I have said before, frontend picked up in third, fourth quarter last year. Backend is picking up right now in March and the second quarter. So all this silicon will be mounted on boards or part of it will be mounted on boards. Part of it may go to inventory. So there is no way to go. It's one food chain, so we are pretty optimistic it is going to reach the PCB. It depends when.

I see. I see. So while you are not providing second-half guidance, you are more optimistic on the second half then. Actually I wanted to sort of go back and ask one question. This is a pretty strong uptick and I think even your competitor has talked about it and some of your peers in the backend have also talked about a very strong uptick in terms of business. Are you worried that this is just a one-quarter or maybe a one or two-quarter uptick and then you have -- you go back to a lower level or do you think this is sustainable?

I am paid to be worried, but I think the general atmosphere going to the second half is positive. I mean you guys -- I think even you guys cover TSMC or indicated TSMC indicated expansion of CapEx through the rest of the year and others as well. And as I've said before, I just came back from Asia two weeks ago and probably met 10 to 15 customers. I think all of them have a positive outlook going through the second half. To tell you that they have orders on hand to support this positive outlook, not necessarily, not all of them. So I think that is about as far as our visibility goes if you talk about the second half of the year.

I see. One last question and I will go away. On the Greenjet side, based on your commentary, it sounds like you guys are making some progress, but kind of no commitment here. Do you expect to start potentially seeing revenue later on in the year or this is more like 2013? How do you kind of think about that?

I think if it becomes significant only in '13, our plan is to start showing revenues during this year. As I have said before, we started shipping -- we started selling the product. So the first stage in selling the product is getting samples out to customers. After you convince the customer it is something interesting, that is a very easy step. The second step is, okay, give me a sample and when you started getting a variety of samples, we saw that we still have some process issues and that kind of took us back a few months back from our original plans.

To tell you that there are not additional process issues in front of us that we are not aware of right now, I can't tell you. The good news is really, and that is very encouraging news is that the process issues that we found our fixed already. So this is approximately where we are. I mean I think it is a new technology; it is not something that anybody else is doing. And it is a very high gain, but still a high-risk play. So we are very optimistic on it and we are going to continue to invest what is needed to make it work. It is a big question. I wouldn't really give a firm commitment right now to where we are going to start seeing significant revenues from this business.

Great, that was helpful. I guess I can't go away without asking a question on financials. So it looks like margin improved a little bit sequentially and you talk about product mix, right, but in the coming quarter, you expect the Phoenix 2 to be a driver. But I think -- if I kind of think about it, right, your PC business, you really don't anticipate much growth in the coming quarter. So does that really help your gross margin in the second quarter or is it more like second-half in terms of gross margin benefit from the Phoenix 2?

Hi, Edwin. This is a combination mainly of contribution from the new Phoenix 2, which carries a higher gross margin and the product mix that would be favorable into one, the ME and second, more Phoenix 2s will generate more gross margin for us. So between the two, we feel comfortable that the gross margin levels will go up.

I see. Okay, great. That is all I have. Thank you.

Jay Srivatsa, Chardan Capital Markets.

Thanks for taking my questions. Congratulations on a good quarter and good guidance. The question I have was on the PCB business. What are you looking for in terms of signs in the market as you start to look at Q2 and beyond for some bounceback in the PCB business?

Hi, Jay. Thanks for the question. It is really a straightforward simple indication. We are a major player in this arena and there is a few expansions on play right now, all of them in China. We are on top of all of them. We will probably get some of it once they come into reality as we always have done in the past. So I think it is only a hesitation of our customers, when is the point in time that they really need or must order the tools to support their expansion.

And as I have said before, normally in the market, it is a two, three-week leadtime for an inspection tool in the PCB arena. So once the trigger is launched, then we will have -- we will know if there is a rebound in this business. And as I've said before, if more silicon is made, there are going to be more boards to take the silicon. So we are pretty confident about an upcycle coming in or a correction in the downcycle. Obviously, I don't have a very good indication if it is going to be next week or next month or two months, but it is coming.

All right. Competitively, it looks like one of your largest competitors guided really only for 15% to 20% growth while you have guided north of 30%. What is the dynamic here? Are you seeing a marketshare shift to give you the confidence as you guide for next quarter or can you help to clarify what the competitive landscape is here today?

We started a couple of years ago basically from not a lot of business and we have grown the business at least in the semiconductor part dramatically. So it is just the math of things tell you that we are taking marketshare. I don't think there is any marketshare changes in the quarterly level. It is very difficult to estimate the changes in the quarterly level. I think us and our main competitor are pretty much even on the backend inspection in terms of marketshare. And on a single quarter, it would be very difficult to comment.

In general, I think the trend is good. I mean we are getting more traction, we are getting more penetrated into more customers and I am happy our competitors are doing well as well. But the numbers are the numbers. We are guiding 30% up and they are guiding less and I think it is a good sign for us.

All right. On the semiconductor side, given that all indications, as you pointed out, is that we are kind of hitting bottom in Q1 and things are picking up, what are some of the investments you are making on the R&D side in terms of products going forward to position yourself for the upturn in the cycle?

Our R&D investment is continuous. We have just launched a few months ago a new platform for the PCB side of the business. A few months, maybe two or three months prior to that, we have launched a new Condor tool, which is an additional improvement on the current technology. And obviously, we have projects that are on a yearly plan. Meaning a new platform to develop sometimes takes two to three years. So we are always working on the platform that will be available two to three years from now and that is a normal cycle in developing of optics, lighting and cameras. So we are always investing in that direction. I think we are pretty well-positioned to the changing technology, especially 3D IC and LED and things we have talked about in the past. So I feel comfortable in the level of R&D spending and our preparation for future growth.

Thank you. Good luck.

Krishna Shankar, ROTH Capital.

Yes, within the semiconductor business -- by the way, congratulations on a good quarter and guidance. Can you talk about the types of customers you are getting traction with in semiconductors, both in packaging and the failure analysis tool? Is it foundry, logic, memory? Can you give us some sense of the types of customers you are seeing the design wins in?

Sure. Well, on the packaging side, it is a variety of products, but it is mainly driven by -- well, it is mainly driven by both IDMs and OSATs. So a lot of major IDMs are ordering tools mainly in Asia and some of the OSATs as well. And most of the activity there is related to, I would say, flip chip packages, wafer level CSPs and advanced packaging. I would say the more expensive packages get inspected and measured where the what we call jellybeans or the cheap or less expensive packages are less inspected and measured. So that is on the packaging side.

On the sale of the sample prep side, it is really these customers who are actively investing in what we call I would say 28 nanometers and below. It is not that we don't have a technology advantage on the higher nodes; it is just when you look at sample preparation and our offer to the markets, our value proposition is almost unbeatable when you talk about very, very thin samples going below the 20, below the 30 nanometers. And to some extent, I can say that we are almost the only viable solution here.

On the other hand, we are in penetration. We are the new guy, we have to prove it, we have to show that it is working and so on and so on. So if I look at the guys who are buying the sample prep tools from us, it would be really those memory, foundry and IDMs. All of them are top guys, all of them are from the top five, top 10 players and all of them are doing it with relation to their next-generation technology nodes. So I hope that kind of shed some light on it.

Great and then so you have really multiple product lead orders for this sample preparation tool now?

Right now, we have about six customers with seven tools and we should have two more in the next couple of months. So that is the expectation. At least that's -- I have said before we had one successful demonstration a few weeks back and should have another very important demonstration in the next couple of weeks. And hopefully these will translate into additional activity.

Great, thank you and congrats again on the good results.

Thank you.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Porat to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Camtek's website, www.camtek.co.il, within the next 48 hours. Mr. Porat, would you like to make your concluding statement?

I just want to thank everybody for joining us on the call today and thank you and see you later.

Thank you. This concludes the Camtek first-quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.