Camtek Ltd (CAMT) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third 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 & 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?

Thank you, and good day to all of you. I would like to welcome all of you to the Camtek's Third Quarter 2017 Results Conference Call. And I would like 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, Camtek's COO.

Rafi will provide an overview of Camtek's strategy going forward. Moshe will discuss some of the recent developments and summarize the financial results in the third 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 statements contained whether as a result of new information, future events, change 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 demands for service and products, the timely development of new service and products and adoption by the market, increased competition in the industry and price reductions and as well as due to other risks identified in company's filing with the SEC.

Please note that the safe harbor statement in today's press release also covers the content 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 operation and prospect 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 CEO. Rafi, go ahead, please.

Thanks, Helft. Good afternoon, and thank you for joining us on our call today. Over the next few minutes, I will share with you the highlights of the third quarter. After this, Moshe will cover the financial aspects, including our results as well as the new financial model of the business looking forward.

I'm very excited with the third quarter's strong performance. Our semiconductor revenue reached $23.8 million, with gross margin of close to 50% and non-GAAP operating margin of 12.3%.

This level of profitability represents the first step in reducing the expenses level of Camtek that is solely focused on semiconductor inspection and metrology and also increasing revenue. Unlike what some of the other players in the market are saying, I do not feel any seasonal or other slowdown in our market, and expect that our performance will continue to improve into next quarter and even further into the first quarter of 2018 and 2018 as a whole while we continue to grow our semiconductor revenue and improve our profitability.

The highlight of the third quarter was the completion of the sale of our PCB business for up to $35 million. As of October 2, we received $32 million in total, and the remaining $3 million is in earn-out depending on the performance in 2018. We have highly focused fast-growing semiconductor business which can demonstrate its strong profitability.

Furthermore, as of October 2, we have over $45 million in cash (sic) ["End of quarter net cash balance of $21.7 million; additional $22.0 million received on October

2, 2017"]. In light of this high level of cash on our balance sheet, the Board of Director decided to distribute a dividend to shareholders, which amounted to $4.9 million. This is a reflection of our continued success and our dedication to creation of shareholder value. We will continue from time to time to consider the distribution of dividend, subject to growth, strategic plan and cash requirement and availability.

I would like to spend few minutes talking more specifically about our performance and the trend we are seeing in the semiconductor space as well as covering some of our new products.

In line with the market range, our semiconductor sales in the third quarter continue to show solid growth. We are seeing strength in our end market. We expect continued growth into the fourth quarter and the guidance midpoint. We are showing 16% year-over-year growth for 2017 as a whole. We continue to grow our customer base and have installed multiple systems at a major OSAT. We now have presence at all top 5 OSATs in the world. The quarter was characterized by strength in our market, both in inspection and metrology. We recently completed developing another of breakthrough technologies, which will enable us to increase our total available market.

We expect them also to increase our market share both in metrology and the inspection segments. Our latest inspection platform, the Eagle 2D -- EagleT2D, launched at the beginning of the year has been installed at several Q1 customer since its launch, and some of the systems have been already accepted.

Furthermore, our new system dedicated for 3D advanced packaging market, EagleT AP, was tested by few Tier 1 customers, showing excellent performance in terms of accuracy and throughput, leaving behind all our competitors' latest systems.

As mentioned earlier in our press release, we expect to receive additional orders for multiple systems in the first half of 2018. We are now hearing from customers that they are considering leveraging the higher throughput capabilities by moving from sampling to 100% inspection for 3D metrology.

Our software solution business is progressing well and is being accepted by Tier 1 customers. Aligned with ongoing market expansion in China, our third quarter sales in this region have more than doubled over the previous year, both from existing accounts as well as from new accounts, with the latest 15 new fast projects underway or announced in China since the beginning of 2017.

Spending on semiconductor fabric (inaudible) is expected to surge to more than $12 billion annually by 2018. As a result, China is projected to be the top-spending region in fabric (inaudible) by 2019, and is likely to approach record all-time level for annual semiconductor spending for a single region.

As you know, Camtek is long being active in China, and I have been based near our customers in this region over the past 2 decades. We remain well positioned to leverage this market expansion.

Our CMOS Image Sensors, or CIS, sales during the third quarter grew by approximately 45% over the previous year.

This growth is driven by the transition in cell phones to 3 high-resolution cameras, coupled with increased camera and sensor content in cars. We expect this segment to contribute a significant 20% of our 2017 revenue.

To summarize, we are executing well on our plans and expect to see continuous growth trend in the fourth quarter and during 2018. We are well positioned in the market we serve, and we continue to explore new opportunities and markets. We are planning to introduce new advanced hardware and software capabilities, which enhance our detection engines, and will allow us to expand our inspection and metrology capabilities. We continue to dominate the 3D metrology segment of the advanced packaging sector. And with our new platform, we expect to further strengthen our leading position.

And I would like to hand over to Moshe for a -- more details, financial discussion of the recent strategic changes as well as our recent financial results. Moshe?

Thank you, Rafi. As Rafi mentioned, we are very pleased with our third quarter performance, both in terms of the record revenue as well as from the improved profitability. As a result of the recent changes, we have made offset by selling the PCB business, settling the long-time litigation process and the reduction in the inkjet expenses, our operating profit in the third quarter alone of $2.9 million is close to the full year 2016 profit. We expect to improve the operating margins to around 15% in the fourth quarter and onward.

Note that due to the sale of the Camtek's PCB business in the current quarter, the results of this business unit are reported as discontinued operations in the Camtek's financial statements in both the current year as well as the comparative periods, and therefore, are also excluded from the non-GAAP results.

In addition, as a result of the sale, we recorded a onetime income of $12.8 million (sic) [$12.5 million]. We excluded this income from the non-GAAP results as it is not reflective of the ongoing performance of our existing business.

I will summarize the results on a non-GAAP basis, as you can see the reconciliation between the GAAP and non-GAAP results in the table at the end of the press release issued earlier today.

Third quarter revenues, which are solely from our semiconductor business, were $23.8 million. This is an increase of 13% year-over-year and is a record for our semiconductor business. Third quarter gross profit was $11.8 million, representing gross margin of 49.4%. This is compared with a gross profit of $9.3 million, representing a margin of 44% in the third quarter of last year. The variance between -- in the gross margin between quarters is a function of the product and sales mix delivered in the quarter as well as the increase in business volume this quarter.

Operating expenses in the quarter were $8.8 million compared with $8.1 million in the third quarter of last year and $9.1 million in last quarter.

The increase from last year was primarily due to an increase in sales and marketing expenses due to the higher volume in the quarter. The decrease versus last quarter is mainly related to the reduction in legal expenses, following the settlement with Rudolph.

Moving forward, we do not expect litigation-related expenses. Operating profit in the quarter was $2.9 million, or $12.3 million as percentage of revenue (sic) [12.3% of revenue], and up 132% (sic) [increase from 1.3 to 2.9 is approximately 123%] compared with the $1.3 million or 6% of revenue as reported in the third quarter of last year.

Net income for the third quarter of 2017 was $2.9 million or $0.08 per diluted share. Net margin was 12% in the quarter. This is compared to a net income of $1 million or $0.03 per share in the third quarter of last year.

Net cash and cash equivalents as of September 30, 2017, were $21.7 million compared with $19.7 million as of December 31, 2016.

During the third quarter, Camtek paid Rudolph $13 million in the legal settlement, and received $10 million in initial proceeds from the sale of its PCB business.

Following the balance sheet date on October 2, Camtek received a further $22 million in proceeds from the sale of its PCB, effectively doubling the net cash positions.

In terms of our financial guidance ahead, fourth quarter revenues are expected between $24 million and $25 million. At the midpoint, this represents 16% growth for 2017 as a whole compared with 2016. Operating margin is expected to be approximately 15%.

We will now open the call for questions. Operator?

(Operator Instructions) The first question is from Edwin Mok of Needham & Company.

First question on just, call it, the macro. It sounds like you guys are really upbeat about your business prospect. And I think, Rafi, you said on the call that you see the market being really strong as well. Any way you can give us a little more color? It sounds like CMOS Image Sensors are a big driver there? But beyond CIS, where else are you seeing strengths? Is it across board between advanced packaging and some of these smaller device like MEMS, RF? Or is it mostly advanced packaging? If you give us some color on that.

This is Ramy. Actually, we are seeing the growth across the entire portfolio. We see it at advanced packaging, and there are a lot of discussions about adding more capacity for bumping. The CIS, we mentioned it, and I think definitely this is a strong business for us this year, doubling it compared to the previous year. But we also see it on the MEMS, the automotive applications, sensors and so forth. So to answer your question, yes, it's across the board, and it's not something very specific.

Okay, good. Just quickly touch CMOS Image Sensor. I think the last time we saw a big cycle maybe around 2014 time frame, it lasted around 6 quarters I -- what I remember. And then eventually, we had (inaudible) lower level of spending for a period. And since I -- we're seeing an odd cycle, do you see this time similar last multiple quarters? Or is there any kind of color you can provide around that?

Well, it's hard to call here, but at least what we are hearing from our customers that it's growing to last longer than the previous cycle. And the reasons are, obviously, from the number of cameras, and Rafi discussed it in the discussion before. So we don't see it ending so fast. We expect that it will run through 2018, and some reports that we've been reading indicated it will be even longer. But that's what we are hearing. Definitely, we don't expect it to end soon. Now, we also see high resolution in the car automotive industry, not only cellular industry.

Great. That's useful color. And question around that new technology that Rafi mentioned, you guys have developed a new platform. Do you -- is there a way you can kind of give us an idea when that -- do you expect that to come in? And is that a 2D- or 3D-based technology? Or is it something that you guys have new platform developed for testing the use of both inspection and metrology. Any color you can provide around timing and...

I will try to explain. When customer decides doing sampling, for example, I mean, or 100% inspection, it depends on the ROI. And sometimes, you cannot afford doing 100% although it maybe it's effected yield. Now, if we can develop technologies that maybe improve the throughput dramatically, we encourage customer to use instead of sampling, could move to 100% inspection, for example. So in this case, we can see more, I would say, trend to doing more inspection, more 100% inspection (inaudible) sampling, and definitely this increased the market. This is one example. There are also some issue in -- during the production, the customer suffer or some breaks or some other problem during the process. And right now, the solution not sufficient in term of security, in term of the cost of detecting defect. If we can come with a solution that give them ability to scan and to find the defect in a short time, definitely this will encourage them to do more and more inspection compared with the past. This is just few examples that I just mentioning to you.

Okay, great. Last question I have on the model. I think you guys talked about the 15% operating margin in the fourth quarter. Is that -- when you kind of think about longer-term, how do you think your model, its kind a long-term model. Obviously, you guys already talked about '18 being a growth year. Any longer-term model targets that you guys are willing to put out there?

Yes, so generally speaking, we are going to see, as we mentioned before, a 15% operating margin level already in the fourth quarter. This should be -- it should gradually improves as we continue into 2018 and 2019 for 2 reasons. One, the business -- we have certain fixed expenses that will remain pretty much fixed. And as we grow the business, the margins will improve. And second, there are certain expenses that we intend to fix as a result of the completion of the PCB business unit. So all in all, we expect to see improvement from the 15% operating margin level throughout the next couple of years.

And next question is from Craig Ellis of B. Riley & Co.

This is actually Peter Peng calling in for Craig Ellis. The first question I have is on the 2D front. I recall a few quarters ago, you set a maximum of 20% of sales. Where are you relative to that target?

Could you repeat? You mean what selling the 2D inspection systems only?

Yes, the 2Ds of total sales. I recall there was, like, a 20% of total sales a few quarters back. So wanted to know how's that progressing? And where we are in -- relative to that number?

So I would say, Peter, that in general, we are on track and we are increasing this percentage when we discussed in general the 20%. And it really depends -- and it varies sometimes from quarter-to-quarter. But in general, the third quarter, which we're talking it now, for the -- the 2D actually exceeded the number of 20%. And in general, we are seeing improvements on our 2D inspection performance in terms of sales, and it's growing gradually. I think Rafi discussed it in the last call that it's a gradual improvement as we enter more regions, more market segments, specific applications that customers like our machines and continue to buy them as new applications that we are (inaudible) to perform well as a result of the new technologies that we have been developing over the last year.

Great. And, kind of, just on the 4Q guide. Could you kind of give the put and takes on your end segments? So advanced packaging, CMOS, MEMS, is it kind of a broad-based growth that you're seeing?

It is a broad-based growth. And today, with the industry and with the different application, try going from the mobile applications throughout the memory and sensors applications. We see a very strong demand in each of the segments that we serve. So it's really very difficult to say that one specific segment or one specific application is contributing to the growth. I think that it's a much wider base, and I can say that we are seeing strong demand from all of the applications and most of the territories as well. So it's a very healthy industry at this stage, and we're enjoying it.

And then on just the advanced packaging. We heard from one of the semi-cabs pro specialists that they are starting to see activity in the 7-nanometer design and there's some motors coming. Are you kind of seeing something along the same lines of that? Or are you going to be participating heavy like you did in the last cycle?

Maybe you repeat the question, I didn't fully understand you. You wanted to tie the 7 nanometers with what? I couldn't hear it well.

With the info, just the second information.

Okay. I would be hesitant to comment on specific application or something that's related to a specific customer. I rather not comment on it.

Okay. Got it. And maybe you can kind of just elaborate on the BISTel software partnership. And when do you expect kind of incremental revenues to start flowing in?

Well on the BISTel, we are proceeding. When we mentioned during the call, we are starting to get acceptance for a number of Tier 1 customers. And this is a process that, obviously, took time. But we have acceptance on several. I expect that we will get additional acceptance during the fourth quarter. And I definitely -- I'm expecting that the overall BISTel in our overall offering for software solution will kick in, in 2018 and become more significant. But I would like to say one more thing. It is also important as part of over total portfolio because some of our -- some of the customers insist that we will have these capabilities. So these capabilities are important as a standalone revenue stream. But not less important to the overall portfolio and capabilities that we offer our customers. But specifically answering your question, we expect this to become significant in 2018.

Great. And one last question and I'll hop back into the queue. Could you just talk about the cash use priorities? So equity issuance (inaudible) versus dividend distributions near and long term.

Yes, so basically we have close to $45 billion by the end of the third quarter. And as we didn't see any immediate need for the cash, and this is definitely much more than the current business operation needs, we decided to share some of it with our shareholders, and, obviously, we will consider that from time to time based on growth opportunities and based on cash availability.

(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 Camtek's website, www.camtek.co.il, beginning tomorrow. Mr. Amit, would you like to make your concluding statements?

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

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