Camtek Ltd (CAMT) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's first quarter 2017 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. As a reminder, this conference is being recorded.

You should have all received by now the Company's press release, if you have not received it, please contact Camtek's Investor Relations Team at GK Investor and Public Relations at 1-646-688-3559 or view it in the news section of the Company's website www.camtek.co.il.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Thank you and good day to all of you. I would like to welcome all of you to Camtek's first quarter 2017 results conference call. I would also like to thank Camtek's management for hosting this call.

With us on the line today are Mr. Rafi Amit, Camtek's Chairman and CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Vice President, Head of the Semiconductor Division. Rafi will provide an overview of Camtek's strategy going forward and will discuss some of the recent developments. Moshe will summarize the financial results for the first quarter. We will then open the call to take your questions.

Before we begin, I would like to remind our listeners that certain information provided on this call are internal company estimates, unless otherwise specified. This call also may contain forward-looking statements. These statements are only predictions and may change as time passes. Statements on this call are made as of today and the Company undertakes no obligations to update any of the forward-looking statements contained, 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 and 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.

I would now like to hand over the call to Rafi Amit, Camtek's Chairman and CEO. Rafi, go ahead, please.

Okay, thank you, Ehud. Good afternoon and thank you for joining us on our call today. Camtek delivered strong and record results for the first quarter of 2017, exceeding our revenue guidance and achieving a multi-year high in earnings. Our gross margin was particularly high, due to the product mix this quarter.

Our operating margin was at 13%, a level we are very pleased with and in line with our long-term model. The operating income was $4 million and net income was $3.4 million, both up significantly from last year and last quarter. These results are due mainly to robust business performance on both the semiconductor side of our business and on the PCB side and we expect this strength to continue into the second quarter.

Our Q2 revenue expectations of between $33 million and $34 million imply year-over-year growth of approximately 25% and sequential growth of 10%. Our strength is built on relatively broad market strength but beyond that we believe that the areas we focus on, particularly spending on capital equipment for advanced packaging, are growing well ahead of the broader market. We see strong orders at many customers and we see these positive trends continuing through 2017.

I'd like to go into more details the performance of our semiconductor business. In line with the strong market demand that we are seeing in general, our semiconductor division sales in the first quarter grew by 26% over this of first quarter last year and contributed slightly over two-thirds of our revenues. Asia continued to dominate our sales, making up a 90% share of our semiconductor revenues. However, in addition, we also saw strong performance in our U.S. sales, which all together led to a strong quarter, and we forecast a strong 2017 in general across all geographies.

The semiconductor industry is expected to show robust growth in the second half of 2017. That should continue to strengthen into 2018. This improvement is reflected in ASP increases in both memory and non-memory products and are expected to positively affect the capital equipment market accordingly.

Our growth strategy is aligned with some of the fastest-growing segments of the semiconductor equipment industry. This includes the advanced packaging market, which makes up about half of our sales; also it includes the Fan-Out segment. In the advanced packaging space, our 3D technology is the industry standard and we plan to introduce new capabilities later this year.

The CMOS image sensor market is also growing well ahead of the general semiconductor industry. As sensor resolutions continue to grow, CMOS image sensors are becoming exponentially more complex and the role of inspection is becoming all the more crucial for end product quality and reliability. We are seeing strong and growing demand from this sector and we expect to maintain our leading position and strong presence at leading manufacturers.

In the RF and MEMS [strengths] we expect to continue growing, as in previous years. One of the fastest-growing markets for semiconductor devices is the automotive industry, which requires uncompromising quality. Many of our customers sell semiconductor devices for this market and are in part of the market growth, supporting the current needs and future developments driven by hybrid electric cars and autonomous cars. We see this market as providing Camtek with significant additional growth potential over the coming years.

Looking at some of our achievements in the first quarter, we reached several volume purchase agreements with leading semiconductor manufacturers and OSATs for delivery during 2017, with revenue potential of over $20 million. This agreement very much tightens our relationship and commitment with our business partners for the long term. This is proof that our customers realize the mutual benefits to all parties of volume purchase agreements and they consider us as a true long-term business partner.

We recently formed a dedicated software solutions team to address the growing demand for data management and analysis. This team provides solutions, including yield analysis tools in cooperation with BISTel, as well as automatic and manual defect classification and data storage. We have installed (inaudible) analysis system at one of our customers and have further installations of this software planned at several sites. In the coming months, our new advanced defect classification system MDC is being installed on a production line of one of our major customers and is currently in qualification stage.

As we mentioned in our previous quarterly discussion, we expect these activities to contribute to our revenue already this year. We are on track with our 2D inspection strategy and continue to increase our business in this space.

I want to share with you some details about the 2D inspection. There are many segments in this arena on top of the advanced packaging. Some inspection companies focus on outgoing quality control or OQC, others on memory and so forth. Camtek's focus is on CIS, RF, and MEMS. It takes time to build such expertise and pass qualification at customers' sites. Our success so far gives us strong confidence that we have a very competitive offering and we can gain market share in other 2D segments.

In the first quarter, we shipped 2D tools to new customers and plan to ship systems in the second quarter to additional new customers, as well as to existing ones. In addition, during the quarter we announced that a major CIS manufacturer placed multiple orders for our new 2D inspection system, the EagleT-i. To support our growth we have built a new clean room, a place where we build our tools. We have tripled our capacity compared to the capacity we had only two years ago in 2015. Looking ahead at 2017, we expect to maintain our double-digit growth rate and further expand our 2D market share using our new developed capability.

Regarding our PCB business, this business is also performing well, contributing overall just under a third revenues in the first quarter. We see four key drivers to the increased demand for the PCB products.

First, as a result of successful qualifications process by top tier customers, we have expanded sales to these customers and we are increasingly penetrating further tier-1 customers.

Second, the automotive industry, which requires uncompromising quality in their PCB, creates strong demand for high-quality inspection of the PCB. The same is for the semiconductor products going to that sector, that is zero defect demand. Another driver is technology-driven. New PCB process technology is dictated by the market leaders' needs for higher performance and densities. This leads to demand for high-quality AOI.

Lastly, as we discussed last quarter, new facilities and expansion are being built mainly in China, which calls for additional capital equipment.

Looking ahead, we have an active product development, which we believe will further cement our leadership in the PCB, AOI and AVI space. Furthermore, our backlog is strong, which gives us confidence for continued performance through 2017.

In summary, we are very pleased with the strong and accelerating traction we are experiencing across the semiconductor as well as the PCB business. It is clear that 2017 is setting out to be the strongest year in our history and we look forward to continue reporting on our progress through this year.

That ends the summary. I would like to handover to Moshe for a more detailed discussions of our financial results. Moshe?

Thank you, Rafi. We're very pleased with the financial results of the first quarter, which were ahead of our expectations. First-quarter revenues were $30.8 million, up 26% year over year and up 5% sequentially. Revenues from sales and services to the semiconductor industry in the first quarter were $21.1 million, representing 68% of our total revenues.

Sales grew by 26% over those of the first quarter last year. First-quarter revenues from sales and services to the PCB market were $9.7 million, representing 32% of our total revenues in the quarter. Sales in the first quarter grew by 26% over those of the first quarter last year and 23% over the previous quarter.

The geographic revenue split for the quarter was as follows. China was the strongest region during the quarter, representing approximately 31% of overall revenues. Korea was 23%. Taiwan was 21%. Rest of Asia, excluding China, Taiwan and Korea was 15%. U.S. and Europe sales were 10%.

Unless I state otherwise, I will summarize the rest of the results on an ongoing basis. The reconciliations between the GAAP and non-GAAP results appear in the tables at the end of the press release issued earlier today.

First-quarter gross profit was $14.9 million, representing a gross margin of 48.2%. This is compared with a gross profit of $10.3 million, representing margin of 42.3% in the first quarter of last year. The high gross margin in the quarter was a result of the sales mix and we expect to return to the more typical range of 44% to 46% in the coming quarter.

Operating expenses in the quarter were $10.9 million. This is compared with $9.9 million in the first quarter of last year.

Operating profit in the quarter was a $4 million compared with $0.5 million reported in the first quarter of last year.

Operating margin was 13% in the quarter.

Net income for the first quarter of 2017 was $3.4 million or $0.10 per diluted share. Net margin was 11.1% in the quarter. This is compared to net income of $0.2 million or $0.01 per diluted share in the first quarter of last year.

Net cash and cash equivalents as of March 31, 2017 were $24.3 million compared with $19.7 million as of December 31, 2016.

We generated a strong operating cash flow of $5.9 million in the quarter, due to a high level of collections. We are in a very aggressive growth period. As a result, cash flow tends to lag behind revenues and profits. We expect Q2 cash flow to be lower.

As Rafi mentioned, for the second quarter of 2017 we expect revenues to increase to $33 million to $34 million range, between 21% and 25% year over year, built on the continued strength we see in our end markets.

We will now open the call for questions. Operator?

(Operator Instructions). Craig Ellis, B. Riley.

Yes, thanks for taking the questions. Good afternoon, gentleman, and congratulations on the very strong executions throughout the year. I will first start with a -- just clarification on the financial commentary, Moshe. With regard to gross margins in the second quarter, you mentioned they would go back to the normalized range of 44% and 46%.

One, were there any one-time items in the first quarter's gross margin?

Two, given the volumes, it would seem that gross margins would be biased to the high end of the range in Q2. Is there any reason that would not be the case?

Oh, Q1 was definitely biased on the very high end of our range. This is due to a product mix, no specific deal or order. But generally speaking, we had very strong high-margin type deals and this is not going to repeat itself in the second quarter.

Okay, that's helpful. Rafi, you mentioned in your prepared remarks that there were some volume purchase agreements.

One, can you provide some color in terms of the extent to which those were with existing customers, OSATs or IDMs, or new customers.

Two, with the business showing very robust year-on-year growth of mid-20s in the first and second quarter, do those agreements and do trends in general portend that we could see sustained 20% plus year-on-year growth in the back half of the year?

I would say most of the volume purchase agreements came from the OSATs. As we mentioned, it's about $20 million potential sales. We already see results and get orders, so demand for delivery during Q2 and we feel very confident that they will meet this target. This also give us like a good feeling about the second half of the 2017.

You mentioned that there would be some new products coming in the 3D arena. Can you provide some more color as to whether those would be products that would expand the product line further or are they refresh products for things that are currently in the marketplace?

Okay. Like every case, all the time we continue developing and improving our performance because let's say the amount of [band and copper peel] are going up. More applications like the cube memory also requires more 3D and we have also to provide, I would say, better performance in accuracy and in throughput, in order to meet the expectations of customers.

So we all the time must develop and bring more capability to our tools. So I would say it will be -- definitely we are going to provide it soon and it will serve specific probably customer that needs very high volume, very high accuracy compared with the current one. Still our current performance are very well and as we mentioned, it's the industry standard. Now we'll have, I would say, a better capability. Some customers can continue using our current capability. Some customers would like to upgrade the capability to the new system or the new feature. Let's call it like that.

That's helpful. Last question for me before jumping back into the queue. Nice to see the software initiatives progress and on track for revenues this year. Is software revenue material enough later this year to impact gross margins in the range that the Company has talked about -- 44% to 46% -- or would materiality and gross margin impact be more of a 2018 event? Thanks, guys.

I would say that every new feature, new software, it takes some time to be adopted by the market. So I believe that we can see more of -- that it can affect the result mainly in 2018. This year it is going to be like penetration stage, so it will not be substantial compared with 2018.

Edwin Mok, Needham & Company. Please go ahead.

This is actually Arthur on for Edwin. Thanks for taking our questions and congrats on the great guidance.

Rafi, the first question for you -- with the strong 2Q guidance, can you provide some color on what are some of the main drivers for the strong guidance? Is it just continued growth in advanced packaging, along with the same momentum in PCB/AOI or are there any other markets that are driving this strong guidance?

I want to be sure that I understand you correctly. In general, in the semiconductor, as we said in the script, we can see very strong demands from almost all types of applications, if it's CMOS sensor, if it's MEMS, if it's memory, if it is advanced packaging, we can see it from all over. We cannot indicate that one area is growing more. All of them are really in the same, I would say, strength.

Regarding the PCB, we mentioned the major four key drivers and I would say that we can see that that's going to continue in the second quarter. We cannot predict for the whole year because especially in the PCB, delivery time is a little bit tight and not easy to predict for the whole year, but we believe that we can see this trend continue during the whole 2017.

Ramy, do you want to add something?

No, I think your answer was very precise and I think the main point that I would repeat, that we are see the significance on the applications that we participate in. I would even say that the CMOS image sensor is exceptionally strong, as we see from the marketplace the move to three high-definition cameras on the cellphones.

Got it. Thank you. Very helpful.

Second question is just on the 2D inspection tool. I think in your script you had mentioned you shipped new 2D tools to customers, both the new and existing ones. Can you talk about what type of opportunities that could present and also maybe talk about some of the progress you have on some evaluation tools you currently have in the market.

Ramy, do you want to answer for this?

Yes. I will take this question. In general, I think as we said in the script, the 2D is in several segments and we are seeing business in the CMOS image sensors, in the MEMS, in the RF, in the power segment. We're seeing also 2D in the advanced packaging, Fan-Out and regular surface inspection. So the way we are very focused on those specific segments and as Rafi mentioned, and we said in the script, we are moving towards the new customers. The evaluations that we're having are all on track. The performance from our 2D is as we planned. Our customers are giving us very good feedback and we definitely see the growth on the 2D on track, as we discussed in the previous quarters.

Got it. Last question from me -- can you provide an update on the process with the Gryphon? I think in the past you talked about finding strategic investors. Any update there would be helpful. Thank you.

Your question is about the Gryphon?

Yes that's correct.

Okay. In general we are, I would say, in line with the development plan. As we said, we can complete it by the beginning of next year and we definitely continue looking for partner to commercialize product. That's what we do right now according to this activity.

(Operator Instructions). There are no further questions at this time. Before I ask Mr. Amit to go ahead with his concluding 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. Amit, would you like to make your concluding statement?

I would like to thank you for your continued interest in our business. I look forward to talking with you again this quarter. Thank you and goodbye.

Thank you. This concludes the Camtek first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.