Camtek Ltd (CAMT) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek second 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 August 1, 2012.

I would like to remind everyone that forward-looking statements for the respective Company's business, financial condition and results of its operations are subject to risks and uncertainties which may 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 like to hand over the call to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

Thank you, operator, and good day to all of you. I would like to welcome all of you to Camtek's second 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 the call by discussing recent developments within the Company and in the market and will also discuss the outlook. Moshe will give an overview of Camtek's performance in the 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, 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 cooperation and prospects for the future. A full reconciliation of the non-GAAP to GAAP financial measures is included in today's earnings release.

We will then later on open the call for the question-and-answer session. Now I would like to hand over the call to Mr. Roy Porat. Roy?

Thank you, Ehud. Hello and good morning to everyone. Thanks for joining us. We have had a good rebound this quarter, and as we see things now, we can confirm the bottom is behind us. The markets we operate in are volatile and uncertain, and uncertainty is the main theme looking towards the end of the second half of the year and the beginning of next year.

Looking to the near-term, we see customers operating in the front-end wafer fabrication, lowering their capital investment and delaying their plans, although it's an optimistic view of 2013. The OSATs and customers operating the back-end wafer packaging are still growing, although we expect a softening in the front end to reach the back end of the same supply chain.

Second-quarter results demonstrate well our tangible breach of our long-term operational model. We expect our long-term product mix to be more semiconductor oriented, thus improve our margins. Revenues came in at the high end of our guidance, and we also enjoyed a favorable product mix. Moshe will elaborate more on this later on.

I do want to outline that we have had an extremely good second quarter on the semiconductor inspection business that is actually an all-time record of top-line revenues. The markets that we serve are currently at high utilization, although we still see an uncertain dissonance between the semiconductor and the printed circuit board markets. Obviously, we can try to explain this dissonance by inventory levels or shortage of 28-nanometer capacity. But I'm not sure we have the full picture yet. I would like to provide a closer look at the market.

The semiconductor business in the second quarter was mainly driven by our back-end inspection tools. As I indicated earlier, during the second quarter the semiconductor part of our business has reached an all-time record level on top-line revenues. The main drivers are both technology and capacity buys all across the application spectrum, mainly related to flip chip packaging. LED manufacturers continue to be a small part of our back-end inspection business, and participation for significant capacity expansions for this year are still delayed, although some of these customers are renewing their plans and there is anticipation for more growth.

Although we do see slight softening in the back end, we believe it may have an impact only on the fourth quarter of this year or the beginning of next year. Obviously, these uncertain times may churn in both directions very fast, especially in the OSAT part of the business; to a less degree, in business coming from IDMs.

Looking now to our new front in semiconductor business that includes the macro inspection tool Gannet and the Xact sample prep tool, as we indicated, these two products are a base for our growth plans going forward. In the first half of the year, we did not recognize revenues of Xact sales. Although we continue to be very active, the new Xact tool is finalizing the actual maturity steps of any new product launch to the market, especially a product with such technological complexity. We installed the new tool at an additional new leading customer in the second quarter and are in the process of proving our technology advantage while focusing efforts on establishing the Xact as a production tool. Some of these sales processes can take six to 12 months and require time and effort to establish a market position.

With regards to the front end macro inspection, we see continued penetration leveraging our back end inspection technology in order to penetrate new segments addressing a much larger TAM. We have concluded an important new penetration into a new leading IDM account with [first tool]. We expect this new account will yield repeat orders of capacity expansion in the next few years. Although we are currently unable to offer customers a full range of needs to the front-end 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.

Looking at our PCB inspection business, we witnessed a sharp decline in demand for our products in the fourth quarter last year with no real recovery yet in the first half of 2012. However, we are seeing an increase in utilization of our installed base, and customers are now discussing expansion plans. Actually, we see more demand in the third quarter. As a result, we expect a slight improvement in this part of the business but not reaching yet our normal run rate we enjoyed last year. As indicated before, there is still a dissonance within capacity expansions in the back-end semi side and the three quarters of hesitation and softness we see in the PCB inspection side. Obviously, this is one of the moving parts in the uncertainty puzzle.

A short update on the status of our solder mask inkjet printer, or DMD, for short. This is a complex and high-risk, high-gain potential research and development project of a technology that does not exist yet. To the best of our knowledge, we are the first in the market with this revolutionary solution. I do want to emphasize that the project has also a research element to it as we have described in the past; has not passed feasibility stage yet. We did hope to have initial sales of the GreenJet during 2012. The delays in our plans continue more than anticipated. I do not expect passing feasibility that will allow us to relaunch this product to the market before 2013.

Obviously, this is far from our previous plans, although we need to point out we had minor expectations for top-line revenues from this product in 2012. On the other hand, we plan to continue our R&D efforts to make this dream a reality. We believe it is feasible and the potential return is worth the effort.

To summarize, we have had a good second quarter on both top line and margins. The results reassure our long-term operational plan for higher margins are within tangible reach. Despite the softening in the market we operate in, we believe we can keep our guidance range flat just like last quarter.

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

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

Revenues for the second quarter of 2012 were $25 million. This is an increase of 13% compared to $28.8 million in the second quarter of 2011 and an increase of 38% compared with $18.2 million in the prior quarter. Revenues came in at the top end of our second-quarter guidance range which we issued with last quarter's results, at between $23 million and $25 million.

Revenues from sale and services to the semiconductors manufacturing and packaging industries were $18.1 million, or about 73% of revenues. Revenues from PCB inspection business were $6.9 million, contributing about 27% of revenues. Geographically, China was the strongest region during the quarter, representing approximately 25% of overall revenues. Taiwan was 11% and the rest of Asia was 45%. US sales accounted for 13% with the rest of the world with the remaining of 6%.

I will now summarize the rest of our results on a non-GAAP basis, which mainly excludes expenses with respect to acquisition of SELA and Printar and share-based compensation. The reconciliation between the GAAP and non-GAAP results appears in the tables at the end of the press release issued earlier today.

Gross profit totaled $12.2 million or gross margin of 48.6%. This is compared with $13.1 million or gross margin of 45.6% of revenues in the second quarter of last year and $7.7 million or 42.5% of revenues in the prior quarter. The increase in gross margin was mainly due to the larger than usual proportion of sales to the semiconductors business in the quarter. While this provides a good indication of the margin profile in our long-term model, we don't expect that the third quarter gross margin will be as high.

Operating expenses in the quarter were $8.7 million compared with $10.1 million in the second quarter of last year and $8.6 million in the previous quarter. During the quarter we had an extraordinary operating income of approximately $1 million related to a settlement with a former service provider of the Company. We already had provisions for this expense in the higher amount, and as result of the settlement we are now reversing $1 million out of this provision.

The actual cash payment of $1.25 million will be made during the third quarter of this year, and therefore will affect our Q3 cash flow. We also had some increasing legal expenses above our normal rate during the quarter that relate to our IP litigation. The net result was that our G&A expenses were a few hundred thousand dollars lower than the normal level we have seen over the past few quarters. We also note that during the quarter the US dollar has strengthened compared to the shekel and a significant portion of our expenses is in Israeli shekels. The devaluation of the shekel has reduced our expenses in US dollar terms.

Operating income was $3.4 million or 13.8% of revenues. This is compared to operating income of $3 million or 10.4% of revenue in the second quarter of 2011 and an operating loss of $0.9 million in the prior quarter.

Financial expenses net was $0.9 million. This is compared with financial expenses of $0.4 million in the second quarter of 2011 and $100,000 in the prior quarter. The increase is mostly related to hedging activity between the shekel and the US dollar. Although this has helped reduce our operating shekel expenses in dollar terms, it also created a loss on our foreign currency hedging position included in our financial expenses.

Net income was $3 million or $0.10 per diluted share. This is compared with net income of $2.9 million or $0.10 per diluted share in the second quarter of 2011 and a net loss of $0.6 million or $0.02 per share in the prior quarter. Cash and cash equivalents and short-term deposits as of June 30, 2012 were $21.6 million or $15.7 million net of bank loans. This is compared with $26 million or $19.6 million net of bank loans as of March 31, 2012.

As a result of an increase in business and accounts receivable during the second quarter of 2012, the Company reported a negative operating cash flow of $3.1 million. We expect our operating cash flow to catch up with the increase in our net profit and be positive again by the fourth quarter of this year.

We will now open the call for questions. Operator?

(Operator instructions) Jay Srivatsa, Chardan Capital Markets.

Thanks, Roy. In terms of Q3, where are you seeing using the weakness -- in the PCB side or in the semi side, or both?

Actually, in the PCB, we see a slight improvement. We've had a pretty slow or flat three quarters, maybe up and down a little bit, but in general really three quarters of very, very low activity, as you can see in our past reports. And things are picking up, actually, on Q3 -- not a whole lot, not a whole lot, but a little bit. And we expect improvement in Q3 on the PCB side of the business. Obviously, as you probably know better than I do, everybody in the front end are talking about slowing down and pulling back, pushing out orders and so on and so on.

So activity related to front end -- we see, certainly, a softness in it. And it has an effect -- it does have an effect on our back-end side, although, you know what, I don't expect a big drop. I don't expect a big drop in semi side or the back-end side of our business. We are starting the quarter with some pretty good bookings on hand, and we expect some more orders to come through in the next couple of months. And, hopefully, we will be very close to what we did this quarter in terms of back end. But the general atmosphere in the back end -- obviously, the front end part does reflect, and it does reflect on the back end.

On the contrary, I can tell you we had a call today from a customer who said, you know what? Listen, do you have a machine? Can you supply me a machine now? The first guy who can supply a machine, I'll buy from him, basically. So there is kind of a mixed signal, I would say, from different aspects of the market. I hope I answered.

Yes, so given that backdrop, what gives you the sense that the bottom is behind the Company? There's still a lot of uncertainty in semis, isn't there?

There is uncertainty in semis. Keep in mind, we are back end shifted, and PCB oriented. I think we've had a very not so good first quarter. So second quarter seems to be, what, 38% better, so it's a big jump for us. And I think the next quarter will be pretty much flat, plus or minus. We see -- and the softening the front-end guys are talking about are not that significant. If you look -- off the top of my head -- I don't have the list in front of me. But if I remember, Intel and TSMC and some of the OSATs, even [starts] (inaudible) if I remember correctly -- this is from my memory, now -- I think most of them guided up Q3 compared to Q2. So there is a mixed signal, really.

All right, thank you.

Michael Bertz, Kennedy Capital.

Just a couple questions -- first, on the Xact business, and I know you talked about the need for people to take some time to look at the new ways of doing things. Are you seeing in any of the -- I won't say delays or concerns from the macro from people -- any more openness to them to evaluating your tools or technologies in terms of integrating them into the production process? Or is it simply a matter of -- I'm going to need it when you go down node, and you are going to need that technology?

Hi, Michael, thanks for the question. I think it's more up to us and less -- right now, less up to the market, meaning we are only selling very few tools a year right now. And some of the customers that have a tool and are talking about additional tools want to see the tool mature. And I think it's a normal process, at least for our Company, when we launch a new tool it takes is a few months to mature the tool. This is where we are with most of our current installations. As I've said, we have one more new installation which is a very, very significant installation, very important customer, certainly top five or top three even, I can tell you, guys. And every such installation takes a lot of effort, a lot of time to take a position in it.

But in general, to answer your question, I think it's more up to us, less to the market.

Okay, that's great. That leads me to my second question. As you think about -- particularly not just limited to Xact, but even some of the other, newer programs that you are starting to develop that may be more in 2013. How should we think about the inventory and the kind of resources you will need to carry or support the market and the customer acceptance of this, looking at next year? So what kinds of requirements are you going to need to have? And should we expect inventory to be carried at a higher level even from here, into next year?

I'll let Moshe answer this one.

Actually, we do have -- I'm quite comfortable with the current level of inventories, looking into Q3 and Q4. We do have some inventory also to support the growth expected in the Xact business, getting into 2013.

With respect to the DMD, we also have a minimal level of inventories to -- for initial sales. So I would say, at least for the first half of 2013, we should be good with the current level.

Just to add one more thing, Michael (multiple speakers), understanding, when I said, okay, we penetrate to a new customer, it means that we didn't book an order yet, but we put a tool that sits on this floor for six months, maybe nine months. And every such new customer, basically we have inventory on the customer floor. So when you are talking about penetration with a new product and new customer, usually it has an inventory cost to it. What Moshe was trying to say is that I think right now, basically, at least on the Xact node, which is the main penetration tool right now and the most expensive one in terms of inventory, we're okay. We have enough inventory to support our sales efforts right now in the penetration.

Okay, fair enough, thanks for the clarification, Roy. And just to follow up, then -- let's say you get decent or reasonable penetration for what you think you can get in 2013. What do you think you could exit 2013 at? I know it's looking a long way out in terms of an inventory turn rate. How would you want to think about hitting that? And it may not even be at your target model, but where do you think that could get to?

I think we have quite a lot of thoughts about it, but I'm not sure we want to share them at this point with (multiple speakers) --

Okay, fair enough, thanks, guys.

(Operator instructions) Jay Srivatsa.

Roy, one of the questions I wanted to ask was on the competitive landscape. Can you give us some update on what has been happening relative to Rudolph and some of the other competitors as the market transitions out of a bottom in the semi space?

Okay, first of all, I'm pretty sure you guys follow Rudolph. They had a very good report yesterday. And I think they are enjoying the same market we are enjoying. I think they reported also an all-time record in their back-end inspection business, and so did we. We've had our best-ever quarter in back-end inspection, and I think in general it indicates that the total market is growing a lot, for all those reasons we've discussed in the past, of technology trends in wafer-level packaging and 3D IC and flip chip packages. That's a big driver that drives our business and their business.

I think, to some extent, they had a slightly better quarter than we did. It really depends, I think, more on the accounts, meaning some accounts they are very strong in and dominate, and some accounts we are very strong in and dominate. And this quarter, I think the accounts that they are stronger bought more tools than the accounts we are stronger in. But in general, I don't think there's any change in the competitive landscape in our semi side of the business.

On the PCB side, I would say the same thing. I don't think there's any significant change, or I don't see any significant change in the competitive landscape. We launched a new product called the Phoenix a couple of quarters ago. It's been getting very good traction, we are very content with its capabilities and its abilities. I still believe the new Phoenix, the new tool, will be able to improve our gross margins going forward, depending on the mix between the old tools and the new tools.

I think this covers the majority of our competitive landscape. I hope I answered the question.

All right, one question on DMD. I believe you mentioned in your opening script about potentially starting to ship later part of this year. Can you give us some update on how the performance has been, in terms of -- relative to where it was before and in terms of technical improvements? And how do you see that playing out as you look at next year?

Okay. To be fair, we've obviously -- I've obviously missed our estimations in the past, and we want to be more careful this time. Right now, I think we won't see any first installations, not this year. And as I've said before, we did not have a lot of plans on the top-line revenues coming from this product for 2012. So the impact is not that dramatic. But in terms of reaching the milestone that we can actually launch the product on a full production, full scale, we are not there yet. We are still in R&D stage. And I don't think we'll leave the R&D stage this year. I think we are only going to be able to talk about initial sales going into 2013.

All right, 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 want to thank everybody for taking the time in joining our call and hope to talk to you and see you soon. Thank you.

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