Camtek Ltd (CAMT) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Camtek's Fourth Quarter and Full Year 2018 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 at www.camtek.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations.

Mr. Green, would you like to begin, please?

Thank you.

Thank you, operator, and good day to all of you.

I'd like to welcome all of you to Camtek's Fourth Quarter and Full Year 2018 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. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO.

Rafi will provide the overview of Camtek's results and discuss market trends in the fourth quarter of 2018.

Moshe will then summarize the financial results for the quarter.

We'll then open the call for the question-and-answer session.

Before we begin, I'd like to remind all our listeners that certain information provided on this call are internal company estimates unless otherwise specified.

This call may also contain forward-looking statements.

These statements are only predictions that 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, reduce demand for services and products, the timing and 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 statements 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 are useful to investor's 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 are included in today's earnings release.

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

Rafi, please go ahead.

Good morning, and thank you for joining our call today.

Camtek delivered excellent result for the fourth quarter of 2018 and for the whole year of 2018.

The company showed strong revenue in the fourth quarter of $33.2 million, up 28% over Q4 of 2017.

We ended the year with record revenue of $123.2 million, a 32% increase over 2017 revenue.

We achieved a significant improvement in profitability parameters, both in the quarter as well as in 2018 as a whole.

As demonstrated in Q4 results, we reported over 50% gross margin and over 20% operating margin.

Our outlook ahead remains positive.

The guidance for Q1 2019 is $33.5 million to $34.5 million, which represents consecutive growth and the year-on-year growth of 25%.

In general, we do not give guidance beyond one quarter ahead as our lead time is 8 to 10 weeks, however, we would like to share with you our current general observation of what we see in our end market.

At this stage, we see normal level of activity in our market segments.

With people now returning from the Chinese New Year holiday, we will be in a better position to evaluate our Q2 expectations in few weeks.

We are aware of the temporary weakness of the semiconductor industry.

But the specific segment we are focusing on such as CIS, RF, MEMS, and advanced packaging seem relatively stable at this point.

The growth engines of our relevant market are, first of all, the continued transition to advanced packaging solutions to improve the performance of electronic models.

Specifically, in the memory space while the DRAM prices are undergoing some pressure, the transition into advanced packaging is nonetheless expected to continue, driven by the technical requirements for higher bandwidths and lower power consumption.

In addition, the RF segment is expected to benefit from the introduction of 5G.

The momentum in the CIS space is continuing at the similar pace as in the past year due to the increased number of cameras in many mobile phones and other applications.

Other market segment and trend that represent growth driver for us are the extensive and growing use of IoT devices, AI-related devices as well as the transition to an automotive industry to increase use of electronic modules.

The market trend, I just discussed along with Camtek market position, is a reason for our expectation to remain our ongoing performance.

As testified by our strong 30%-plus growth in 2018, it is clear that we are not only maintaining our leadership position in 3D metrology but we are also gaining market share in the 2D inspection sector and expanding to new applications such as Front-End Macro Inspection and compound semiconductor.

Our EagleT system continues to gain market share.

In 2018, we won a number of important add-on evaluations against our major competitor in 2D inspection and 3D metrology, demonstrating a superior performance and were selected as the supplier of the choice.

Needless to say that our talented R&D team continues to develop capabilities that will ensure that we remain competitive.

2 days ago we announced a definitive agreement with Chroma, a leading Taiwanese company.

Chroma is a leading provider of test and automation solution with annual revenue of over $500 million.

Based on this agreement, Chroma will acquire 20% of Camtek and enter into a technological licensing and cooperation agreement with us.

Approximately 50% will be acquired from Priortech, a 5% new share issue by Camtek in a total cash deal of $74 million.

This transaction is based on a share price of $9.50, which represent a 29% premium over the closing price before the announcement.

As part of our strategy, we have been looking for a strategic partner in Asia to support the continuous growth.

Over 80% of our sales and install base are in Asia, and with this important partnership, we can strengthen our position in the region, specifically Taiwan and China.

Moreover, strong relationship with customer will enable us to better understand our customer's roadmap and develop new technological and solutions to meet the technological challenges.

The technological cooperation is expected to be in several areas: one, Camtek will grant Chroma a royalty-bearing license to use its recent triangulation technology for nonsemiconductor applications.

This represents a new potential revenue stream for Camtek; two, Camtek will, in the future, build inspection machines based on Camtek's technology to address a market niche in which we do not participate actively; finally, Chroma and Camtek will explore other areas of cooperation in the development of technological solutions for the semiconductor industry.

We are confident that this strategic investment in Camtek together with the cooperation agreement between the companies will significantly strengthen Camtek's position with major customers in Asia.

In addition, Chroma and Camtek's cooperation in the development of new product and solutions for semiconductor industry can expand the portfolio of product line that Camtek currently sells, and through that accelerate Camtek's growth rate.

Our cash position at the end of 2018 was close to $55 million, which is a result of over $16 million positive operating cash flow in the year.

The new investment will further strengthen our balance sheet which will enable us to potentially increase our growth through acquisitions of companies in the market in which we operate.

I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

Moshe?

Thank you, Rafi.

Camtek showed very strong execution in the fourth quarter with results exceeding the top end of our guidance range, and this performance filtered down our financial metrics to the bottom line.

Our gross operating and net margins were all strong, and at levels we were happy with, showing the operating leverage inherent in our business model.

In my financial summary ahead, I would provide the results on a non-GAAP basis.

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

As you may recall, we sold our PCB inspection business in the third quarter of 2017, and this is considered discontinued operations.

In my summary, the results of last year will include continued operations only.

Fourth quarter revenues came at $33.2 million, up 28% year-over-year.

Full year revenues were a record $123.2 million, up 32% year-over-year.

The results were driven by strong demand across all our segments and applications.

The geography revenue split for the quarter was as follows: Asia, 82%; U.S., 10%; and Europe was 10%.

Gross margin for the quarter was 50.6% versus 47.8% in the fourth quarter of last year.

Gross profit for the year was $61.2 million, representing a gross margin of 49.7%.

This is compared with a gross margin of 48.7% last year.

The improvement in gross margin was mainly a function of the product and sales mix delivered as well as the leverage we have in our financial model.

We see the margin remaining around the 60% level in future quarters.

In longer term, as we grow our revenues, we expect that our margins will continue to show steady improvement.

Operating expenses in the quarter were $9.9 million.

This is compared with $8.5 million in the fourth quarter of last year and similar to the $10.1 million reported in the previous quarter.

Operating profit in the quarter was $6.9 million, an increase of 179% over the $3.8 million reported in the fourth quarter of last year.

Operating margin was 20.7%, a strong improvement versus 14.8% in the fourth quarter last year.

Our operating profit for the year was $22.2 million or 18% of revenues.

We have more than doubled our operating profit of $10.4 million in 2017.

Net income for the fourth quarter of 2018 was $6.4 million or $0.17 per diluted share.

This is compared to a net income of $3.5 million or $0.10 per share in the fourth quarter of last year.

Net income for the year was $20.9 million or $0.57 per diluted share.

This is compared to a net income of $9.6 million or $0.27 per share in 2017.

Turning to some high-level balance sheet and cash flow metrics.

We generated $7.2 million in cash from operations.

Net cash and cash equivalents, as of December 31, 2018, increased to $54.9 million compared with $48.3 million at the end of the third quarter of 2018.

During the last couple of quarters, we invested approximately $700,000 in our clean room, increasing its capacity to support the growing level of business moving forward.

As Rafi mentioned earlier, revenue guidance for the first quarter of 2019 is between $33.5 million to $34.5 million.

And with that, Rafi, Ramy and myself will be open to take your questions.

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

And, team, congratulations on the very strong financial performance as well as the new Chroma strategic agreement.

My first question, Rafi, is just on some of the end market color you provided.

So it sounds like the different end markets that you serve are relatively stable.

But I'm wondering if you could comment on two things.

One, as you look at some of the risks that are out there whether it be geographic or even in the end markets or applications, where do you have greater concerns?

And secondly, as you look longer term, perhaps out through 2019 and definitely, not asking for guidance here, but can you comment on your confidence that we could see another year of growth in 2019, following what was a stellar year of growth last year?

Well, first of all, in general, I would say do we see -- when you mentioned about the same level of activity, we see it all over in all territory, not only in Asia, we see it in U.S., in Europe.

And I -- we believe that maybe it more belong to the segment we are focusing and not specifically because of the geographical.

This is relating to what you asked the first question.

Regarding the long-term -- look, we cannot predict long-term because there are a lot of events that can influence on that.

But we can -- we are in very close to customer, we are visiting them all the time, we get all the time information and we can't see any negative signals from customers.

And on top of that, we all are aware about the fact that too many technology are on the way.

And I can't believe that anyone has any intention to stop it.

We believe that the 5 generation definitely will start accelerating automotive, electronic model continue, CIS.

All our type of applications continue.

People continue to support technology.

So we believe that as long as our main revenue is technology and not definitely quantities, we feel comfortable right now.

That's helpful.

And then a follow-up question for you before one for Moshe.

The follow-up.

You mentioned with the Chroma deal, there are a number of ways you can -- that's financially, whether it be royalty model with some technology or SAM expansion with new end markets served and potentially new products, when could we expect to see the benefit of some of those initiatives in your financial statements?

Would it be the second half of 2019?

Or 2020 or 2021?

2021.

Craig, this is Moshe speaking.

We essentially have just signed the agreement couple of days ago, and the closing process is expected to take a few months.

Practically speaking, the technology transfer and all the work that we will have to do with Chroma will start in the second half of the year.

So we are expecting initial revenue stream at early 2020.

Moshe, and then the last one for you, excellent margin execution in the quarter, 50.6% gross margin, 20% operating margin.

Are those sustainable margin levels, as the business goes forward?

Or for any reason, new products or mix, would we expect to see our gross margins step back into the 40s and operating margins into the teens?

No, I think that gross margin is expected to stay at around the 50% mark, at least as I see it in the next couple of quarters.

It mainly dependent on sales mix or product mix.

So it could vary 1% here and there.

But generally speaking, we see the gross margin trend going up as we increase the volume above the 50%.

And with respect to the operating margin, at this point, we don't have any major plans to increase significantly the operating expenses level.

And as a result, we believe that we will be able to maintain the 20% operating margin.

And hopefully, as the year progressing and hopefully that things will continue as they are, we will be able to improve this operating margin slightly.

(Operator Instructions) The next question is from Gus Richard of Northland Securities.

On Chroma, is that going to have any impact on the P&L as you enter into that agreement and start to work with them?

No.

We are not expecting any impact on the P&L.

And if you -- I'm sure that you -- I believe that you are referring to the expense level.

So the answer is, no.

We're not expecting any major change or no change in the expense levels.

The other way, we are expecting to see some revenue stream, as I said before, starting from 2020 from royalties, which are basically a 100% -- will carry 100% margin.

So there should be a positive impact on the bottom line.

Got it.

Okay.

And then in terms of the advanced packaging, any color on what areas are strong right now?

Is it Fan-Out, chiplets, high-bandwidth memory?

Any color there?

Gus.

This is Ramy.

No doubt the DRAM transition to advanced packaging is a major part and it's going to continue we believe in the next few years.

The DRAM is going to transition from wire bonding to advanced packaging as definitely a major segment what we see.

Fan-Out is continuing to grow.

We have a number of activities in the Fan-Out area.

I believe that these 2 areas are the major areas.

Although in general, in all of the new developments that we are seeing and all of the new boards we are seeing, 40% and more a component, say, out of the bond that are manufactured in advanced packaging.

So there is a big increase in the volume of advanced packaging as a whole.

But as I said specifically, the DRAM transition to advanced packaging and Fan-Out are, I would say, the major flavors of advanced packaging that we see now in the market.

And what -- just out of curiosity, advanced packaging in the DRAM area.

What inning are we in that transition?

And what do you expect the displacement of wire bonding to be over the next 5 years?

If I'm not mistaken, the numbers -- it's about 30% of the DRAMs have already moved to advanced packaging.

So there is another, I don't know, if the whole 70%, but most of the remaining 70% over the next 3 to 5 years will move gradually to advanced packaging.

So this is the trend.

The rate, it's very hard to say what is the exact rate.

But definitely, that's the trend and it's there.

Got it.

Very helpful.

And then finally from me on the RF front and you also mentioned 3, 5. Can you talk a little bit about what kind of inspections you're doing or metrology you're doing for 5G and for 3, 5 in general?

Well, I would say, primarily in these applications, it's primarily inspection.

There is some metrology, obviously.

But it's 2D metrology.

Mostly 2D metrology.

I think there is very, very little 3D metrology and these are some applications.

But that's not the major applications in this area.

As you are aware, the number of filters for cell phones moving to 5G will be significantly higher.

So obviously, a very similar trend to what you see in the CMOS Image Sensors where suddenly instead of 1 camera or 2 cameras, you get 5 or 6 cameras on a cell phone.

This is a very similar trend.

So definitely, this is going to be a segment that is going to be -- is going to show a very significant growth starting, I would say, late 2019 and onwards.

(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 at www.camtek.com, beginning tomorrow.

Mr. Amit, would you like to make a concluding statement?

I would like to thank you all for your continued interest in our business.

Again, I would like to thank all our employees and my management team for their tremendous performance in 2018 so far and we look forward to continuing it.

To our investors, I thank your long-term support.

I look forward to talking with you again next quarter.

Thank you, and goodbye.

Thank you.

This concludes the Camtek's Fourth Quarter 2018 Results Conference Call.

Thank you for your participation.

You may go ahead and disconnect.