Camtek Ltd (CAMT) 2017 Q2 法說會逐字稿

Welcome to Camtek's Second Quarter 2017 Results Conference Call.

(Operator Instructions) 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?

(inaudible) to all of you.

I would like to welcome all of you to Camtek's Second Quarter 2017 Results Conference Call.

And I would like to also to thank Camtek's management for hosting this call.

With us on the line today are Mr. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, VP Head of the Semiconductor Division.

Rafi will provide an overview of Camtek's strategy going forward.

Moshe will discuss some of the recent development and summarize the financial results in 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 obligation to update any of the forward-looking estimates contained whether as a result of new information, future events, changes in expectation 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 demands 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 filing 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 investor 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.

And I would like now to hand over the call to Rafi Amit, Camtek's CEO.

Rafi, go ahead, please.

Thanks, Ehud.

Good afternoon, and thank you all for joining us on our call today to discuss many of the changes that Camtek has undergone recently.

As you recall, our strategy has been to become a leading company in the semiconductor space in which we operate.

Over the next few minutes, I would share with you the strategic steps we've taken and the rationale behind them.

After this, Moshe will cover the financial aspects, including our result as well the new financial model of the business looking forward.

Three years ago, we made a strategic decision to focus on the semiconductor space and specifically the advanced packaging segment, which is showing a very high growth rate.

This trend is driven by new packaging technologies requiring higher level of inspection and metrology capabilities, expertise in machine customization, quick customer response and excellent on-site support.

Over the years, we have built an outstanding team with unique expertise for this market.

This differentiated Camtek from the competition and set a high barrier for newcomers, enabling high margins over time.

Since we made this decision, we have managed to more than double our semiconductor revenue from $44 million in 2013 to over $90 million expected this year.

We expect this trend to continue and add-- identify additional opportunities that may even accelerate the growth rate and further improve our profitability.

To support the strategy, we have taken a few steps.

First has been to build and maintain our state-of-the-art semiconductor product portfolio.

We have launched several new Eagle models, and we are seeing excellent performance in both to the inspection as well as 2D and 3D metrology.

The second step, as we announced 2 weeks ago, was the sales of the PCB inspection business unit to a Shanghai private equity firm Principle Capital.

We sold the business up to $35 million, of which the $32 million, we will receive in cash on closing, and up to $3 million as an earnout depending on performance of the business in 2018.

In general, the PCB industry has shown flat to modest growth rate with occasional peaks.

Recently, an improvement in this sector opened up the opportunity to divest this business.

The first step was to resolve the ongoing dispute with Rudolph despite our confidence that our technologies do not infringe Rudolph's patent.

After more than a decade with the dispute with Rudolph, we decided it is in our best efforts to close this chapter and come to a final settlement.

The fourth step we have recently taken relate to our functional inkjet technologies or FIT as we call it.

In parallel to our effort of finding a strategic investor, we decided to focus on ink development for the most stringent market specification and slow the development of the next-generation printer.

To achieve it, we formed strategic cooperation with award leader in the manufacture and supply of liquid solder mask and other ink for electronic manufacturing.

As a result, we adjusted our FIT expense structure to between $100,000 to $125,000 per quarter.

All these steps enable us to become highly focused on our target market, that of semiconductor inspection and metrology and positions Camtek as a leader in this high growth rate market with better profitability than before.

Our next steps will be to leverage our strong infrastructure and hedge position to strengthen our market position possibly through an accretive acquisition of a company with synergistic value to Camtek.

Moving on, I will now talk more specifically about our performance with respect to the semiconductor market.

Again, we performed well, built on relatively broad market swings.

We see strong overflow from many customers, and we see this positive trend continuing through the second half of 2017 and beyond.

In line with the market trend, our sales in the second quarter grew by 14% over those of the second quarter of last year and 8% over the previous quarter.

We are on track with our forecast for double-digit growth in 2017.

The advanced packaging segment accounted for about 50% of our sales.

The CMOS Image Sensor market had strong quarter, doubling our sales compared to the previous quarter.

We saw continuous growth in the RF power and MEMS segments.

We continue to promote our software solutions and their several successful installations.

We saw growth in our 2D sales, resulting from the successful penetration of our new technologies for 2D inspection and 2D metrology.

In summary, Camtek today has not only become a pure play semiconductor inception and metrology focused company, it has also done significant work in improving the financial model of the business so we can maximize our profit going forward.

As a semiconductor company, we will potentially see higher growth rate with strong and improving profitability.

Management will now be fully focused and engaged with the semiconductor sector where we see many growth opportunities ahead.

This ends my summary, and I would like to hand over to Moshe for more details, financial discussion of the recent strategic changes as well as our recent financial results.

Moshe?

Thank you, Rafi.

I will first present our results of the second quarter.

Following the results summary, I will discuss our new financial model ahead.

Note that due to the expected upcoming sale of the Camtek PCB business, the results of this business unit are reported as discontinued operations in the Camtek's financial statement, in both the current period as well as the comparative period.

Furthermore, following the settlement with Rudolph Technologies, there is a onetime impact of $13 million on the GAAP results in the second quarter and we have booked a related deferred tax benefit of $1 million accordingly.

These amounts are excluded from the non-GAAP results.

In addition, as a result of the expected PCB business sale, we recorded a deferred tax asset of $4.5 million, which we expect to utilize as part of the transaction completion.

Second quarter revenues were $22.7 million, up 14% year-over-year.

I'll note that the revenue do not include those of the PCB business, which were strong at $11.7 million.

Given the guidance we issued last quarter of between $33 million to $34 million, our semiconductor and PCB revenues combined would have been $34.3 million, ahead of our guidance range.

The rest of the results will be related to the continuing operation only on a non-GAAP basis.

A reconciliation between the GAAP and non-GAAP results appear in the tables at the end of the press release issued earlier today.

Second quarter gross profit was $11.2 million, representing a gross margin of 49.2%.

This is compared with a gross profit of $10 million, representing a margin of 50.5% in the second quarter of last year.

Operating expenses in the quarter were $9.1 million, same as the second quarter of last year.

Operating profit in the quarter was $2.1 million compared with the $0.9 million reported in the second quarter of last year.

Operating margin was $9.2 million in the quarter.

Net income for the second quarter of 2017 was $3.8 million or $0.11 per diluted share.

Net margin was 17% in the quarter.

This is compared to a net income of $1.5 million or $0.04 per share in the second quarter of last year.

Net cash and cash equivalent as of June 30, 2017, were $27.1 million compared with $19.7 million as of December 31, 2016.

We generated a strong operating cash flow of $3.8 million in the quarter due to a high level of collections.

We expect to close the sale of the PCB business, receiving $32 million and paying $13 million to Rudolph in the coming quarter.

This will strengthen our cash position and balance sheet.

Due to the significant business changes that Camtek has undergone to date, providing additional metrics more than what usually provide to enable investors to analyze -- analysts, sorry, to better model the new business structure for the remainder of 2017.

I'll remind you that our guidance moving forward reflects that of the continuing business only.

Third quarter revenues are expected to between $23 million and $24 million.

At the midpoint, this represents 12% year-over-year growth.

Fourth quarter revenues are expected to be slightly higher than those of the third quarter, also representing a midteen percentage growth rate year-on-year.

Due to the segments, our semiconductor business has a higher gross margin profile than the PCB business.

We expect our gross margin to increase to around the 50% level.

Operating expenses are expected to be reduced significantly as a result of the lower ongoing legal cost and the reduction of FIT expenses, as Rafi mentioned earlier today.

As a result of all this, our non-GAAP operating margin is expected to improve to approximately 15% in the fourth quarter of 2017 with further expense structure improvement in 2018.

We will now open the call for questions.

Operator?

(Operator Instructions) The first question is from Craig Ellis of B. Riley.

Rafi, congratulations on the evolution of the business that you had announced and are detailing today.

The first question that I wanted to ask is related to the semi business.

It's very helpful to have the health for not only the third quarter and the fourth quarter.

With fourth quarter semi revenues rising quarter-on-quarter, can you help us understand where the strength is coming from as we move out into the last quarter of the year?

Okay.

I -- Rafi, could you please comment on this.

In general, I think as we mentioned, there is a diversity to the business.

And we see strength today in all of the relevant segments that we address.

Obviously, the advanced packaging, which is 50%, continues to be strong.

And all of the discussions with customers and surveys and analysts, we see this growth going into 2018.

And definitely, we see the strength in the second half of the year.

Overall, what we see -- and we mentioned also the CMOS Image Sensor business has doubled in the last quarter, and we see this strength moving forward.

So overall, most of the segments that we serve are strong, and we see the trend.

We see -- we are talking to customers and we're very confident about the second half as we mentioned before.

That's helpful color.

And related to that, a quarter ago, the company talked about volume purchase agreements, which have been executed, large in nature.

Can you give us an update on whether there were any new volume purchase agreements announced in the second quarter and the extent to which you're shipping under those prior agreements in the back half of the year with some of the strength that you're seeing?

So in -- so we did not sign any new ones.

However, we've actually -- 3 of the volume purchase agreements that we mentioned, we're at -- we nearly fulfilled and we assume that we will probably even exceed the sales as we discussed in those volume purchase agreements.

There is one volume purchase agreement that we've already started to shift, but we don't think that we will exceed it or even get to the next.

So overall, most of them will be completed.

We assume that one of them will probably see about 50% of what we assumed in the volume purchase agreement.

That's helpful.

And then the next question is with regards to operating expenses.

If I heard you correct, Moshe, I think I heard you say that even after the further reduction in operating expense in the fourth quarter, there would be some optimization in 2018.

When did I hear that correctly?

If so, how significant would that be?

And would that result in an absolute dollar decrease or simply maintaining operating expenses while continuing to grow the top line very significantly?

So just let me summarize this topic.

First, the 15% operating margin that we are talking about, we can achieve it without any major expense structure adjustments between now and the fourth quarter.

This is basically taking into account the 4 steps that Rafi mentioned earlier: mainly, the fixed adjustments, the legal expenses, which will be reduced dramatically, and the focus in the business.

Moreover, between now and the end of the year, we are working -- we will be working on adjusting our G&A expense structure to adjust it to the level of the current business.

And the full impact will be shown and reflected in our 2018 financial model on an absolute dollar value, not just a percentage of business.

That's helpful.

And then the last question is a higher level question, and I'll take it back to Rafi.

Rafi, it was helpful to get your strategic update on things.

Hence, as we look ahead, with the business concentrated now in the high growth semi business, can you help us better understand where your investment priorities will be, both with incremental organic R&D and with the potential to redeploy either cash that currently exists or proceeds from the PCB sale in either advanced packaging, image sensor, MEMS technologies or in new areas that would add further portfolio breadth to what you already have?

Okay.

As I mentioned, now we are going to focus on our segment.

We have to understand that there are some subsegments that we haven't really penetrated until now because it takes time.

So we are quite sure that we have the capability, we have the technology that -- even with this product.

But we need to do some marketing penetration efforts in order to go to new subsegments in the overall semiconductor area that we are operating.

This is one, I would say, one area that we are going to see expansion.

The second one is definitely, we consider M&A, we consider acquiring.

As I mentioned before, a company in synergistic areas like Camtek with -- that's already showing profit and positive cash flow.

And I would say that with these 2 efforts, I would like to see Camtek, within 3 years, to about $200 million revenue per year.

So we definitely are going to put more efforts on executing the strategy.

The next question is from Edwin Mok of Needham & Company.

So actually, Rafi, just a follow-up on that -- the answer you just gave to Craig.

So the $200 million per year long-term target, I -- based on your commentary, I assume that's the combination of organic growth and inorganic growth, meaning like organic as well as the acquisition.

And is there a way to think about how much you're targeting in terms of acquisition?

No.

Look, this is -- I would say, any size from $25 million to our size, above $100 million company, is fine with us to fulfill this target.

Definitely, we have to select, we have to check out the parameter, but this roughly, I think, is a reasonable size for us.

Okay, that's helpful.

Moving on to the business.

Actually, with the settlement with Rudolph, have you guys start to just -- or your conversation with customer, has that made any change to your conversation with the customer?

Has that come -- made your customer more willing to get to from you or more interested in talking to you guys now that there's legal -- this legal issue is behind you?

Any kind of feedback you got from customer on this settlement?

In general, the litigation, as concerned to customers, did not really affect the business.

We've been operating, and Rafi talked about doubling the business over the past 3 years.

We did it while the litigation was ongoing.

So no, this was not an issue with customers.

I think customers understood and understand there are lots of companies that have litigations between them.

Obviously, as Rafi mentioned, this is something from -- a distraction from management that is helpful moving ahead, but definitely did not affect any of the business in the past.

Okay, great.

And then, I think you guys talked about -- actually, last year, you guys launched a new 2D inspection tool, right?

And you guys talk about going after that market given that your share in 3D is much higher and therefore, makes sense to offer a 2D type.

Can you give us an update on where you are with that market traction of the 2D product in, I will call it, various markets that you highlight beyond advanced packaging like RF power, MEMS.

Have you seen more traction in those markets or is it a new win for multi and advanced packaging?

So let me first of all talk about 2D in general.

Yes, we are continuing on the penetration of a new segment in the 2D and it's moving ahead.

We are definitely getting a lot of customer traction with our new technology that is showing, improving very good performance at several customer sites.

So that's 2D in general.

You are talking about subsets of the 2D like MEMS, RF.

Obviously, those, as we said, we're seeing more business.

But that's not only because of the 2D improvement.

These have been, I would say, a segment where have been strong for quite a few years.

And now -- and we have performed very well there in the past.

So not everything that we do in 2D is related to the improvement in the technologies.

To those, I would say, the RF demands is more -- I would say business development of the existing businesses that we have addressed in the past.

Yes.

The efforts of the 2D that we mention all the time is mainly in the advanced packaging.

Because in the advanced packaging, at the beginning we focused on the metrology of the 3D.

Now we've seen more and more penetration not only metrology and 3D, but 2D inspection and 2D metrology.

This is the big change that we can see now.

Yes.

I totally understand your focus is on advanced packaging.

Any way we can think about -- I think, Rafi, you talked about the size of the market opportunity there and 2D being actually frankly a bigger market than 3D metrology and advanced packaging.

Any way you can -- we can think about where you stand in terms of market share and where do you think the market share and where you're seeing the markets?

Market share of 3D?

Can you repeat the question please?

Sorry, yes.

No, the question is, our understanding is 3D market share is higher than 2D, especially in advanced packaging, right?

Any way you can describe where you think will -- where you are in terms of your market share in 2D market right now and where do you think they'd go?

I think we're well over 50%, well over 50% on the 3D.

On the 2D, this is very hard to measure and the reason that there are many segments.

If you take the CMOS Image Sensors, where it's a 2D business, and there, we dominated with very high market share.

In others, it's much harder to put a number.

But I -- we're definitely in the double-digit market share.

How far along in certain segments, it's hard for me to say.

Actually, that's a good color there.

Yes, go ahead.

At the beginning, some customers use our tool for 3D, but we already gave them capability for 2D.

Now we can see more customers that use the high-grade solution.

They can use the same machine only for 2D.

So they start to use more and more 2D in the machine that's probably used only for 3D.

So when they get the technology and found very positive results, they now qualified our capability for 2D as well.

Okay, great.

That's very helpful.

Lastly, Rafi, you mentioned on the call that you see some good traction of the software assets probably coming from this BISTel partnership.

Can you tell us where you are with that?

And how do you envision that, the software sales?

Do you think that can get to like a 10% sales?

Just kind of comment into your software sales.

So we've started to install the software and we have already installed in several Tier 1 customers.

So it's there, it's operating customers are happy with it.

And I think we will not see a very large dollar value -- dollar revenues this year.

But it's definitely -- we're setting the foundation for a more significant business next year.

But overall, the software solution business that consumes several solutions, several software solutions, is definitely showing a lot of interest from the customers, good performance and we're very happy with the results so far.

(Operator Instructions) There are no further questions at this time.

Before I ask Mr. Amit to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on the Camtek's website at 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 and look forward to seeing you in the Jefferies semiconductor conference at the end of the month in Chicago and with the TMT Drexel conference in early September in New York.

I look forward to talking with you again next quarter.

Thank you and goodbye.

Thank you.

This concludes the Camtek Second Quarter 2017 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.