Camtek Ltd.
Q1 2013 Earnings Call Transcript

Published: 20 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek First Quarter 2013 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 May 20, 2013. I would now like to hand over the call to Mr. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

[Kenny Green:]

Thank you, and good day to all of you. I would like to welcome all of you to Camtek’s first quarter 2013 results conference call, and I’d 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, Camtek’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 the overview of Camtek's performance in the first 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, this call may contain forward-looking statements. These forward-looking 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, 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 market trends, reduced 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 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 like to hand the call over to Mr. Roy Porat. Roy, please go ahead.

[Roy Porat:]

Thank you, Kenny. Hello and good morning to everyone. Thank you for joining us. Let me begin by saying that in light of the market conditions in the first quarter, I am content with Camtek's business performance. We came in slightly above our guidance range. Although the market demand in the first quarter for our products dictated low top line, our financial results were around operating breakeven due to our reduction in our expenses structure. I am pleased to say that looking ahead, we see increasing demands for our products in all fronts and expect the rest of the year to be better in terms of top line and profitability. We can therefore report that the low level of top line revenues that we saw in the Q4 last year and this current Q1 were in fact the bottom of the cycle. Although the global economic environment that we operate in is unpredictable, we have a good level of booking in Q2 and expect to see continuous improvements in demand into Q3. Relative to 2012, an additional revenue stream that will contribute to our top line in the next few quarters, are sales of Xact systems. Given that we did not recognize any Xact revenues in 2012, I'll elaborate more on this later on. Looking ahead into 2013, we see numerous opportunities that are aligned to our plans. The first and most immediate is the continued strengthening of our leading position in the backend semiconductor market. The challenges that the new advanced packaging technology is creating may add additional data point collections to the process and allow us to sell our products in more areas along the new process that are being developed. We are certainly in a good position to enjoy these opportunities as they unfold. We continue to see good market acceptance of our Phoenix system in the PCB inspection business and we expect to enjoy a solid footing of our PCB inspection business for the coming quarters. Last but not least, the contribution of the Xact sales, as I mentioned, all point to improving signs for our performance in 2013. I would like to provide a closer look at the market. The semiconductor business in the first quarter was driven by our backend inspection tools, mainly in the advanced packaging segment. As I mentioned earlier, the softness we witnessed in the fourth quarter last year continued into the first quarter, but we can report improvements in demands going into the second quarter and we foresee positive signs for the third quarter. The improvement is not all across the market but mainly related to our customers that are suppliers to specific end markets, Samsung mobile phones being a dominating example. Looking at the market, the foundries and the OSATs and the IDMs that are suppliers to these specific markets that are growing, are expanding their capacity across to analog, logic and memory segments. Other customers that are not positioned in the currently growing supply-chain are running at low utilization rates. I want to try to give more insight on the advanced packaging opportunity I mentioned earlier. If you look at the inspection and metrology strategies that are deployed on our current advanced packaging found in iPhone 5 or Galaxy 4 for example, we see two to three stages in the process where most of the customers use inspection and metrology tools to collect data, improve the process, and sort bad devices from good ones. The advanced packaging technology of 3D-IC may require five to seven data collection points to ensure the process yield. While we currently sell these applications to process development teams with the IDMs, foundries and OSATs, including few research institutions, it has yet been adopted in mass production mainly due to cost and process stability. Obviously, its cost benefit to the end customer is yet to be proven and it will certainly dictate its penetration rate. Camtek is well positioned to offer customers numerous solutions for inspection and metrology to cope with the challenges that this new emerging technology will bring. We do need to keep in mind that the opportunity is still ahead of us but I'm sure that when it's adopted, we will enjoy a part of its opportunity. I would like to mention a few words on our front-end business, particularly our sample preparation system known as Xact. As you may have seen a few weeks ago, we reported an additional sale of an Xact tool to an existing customer. This sale was the first in more than a year after a successful 2011 in which we generated approximately $10 million from Sela products. In 2012, we did not recognize any revenues from Xact sales. As we discussed in the past quarters, we focused on solving some product maturity issues that we have now overcome. We expect to generate revenues in 2013 in a similar range to our 2011 revenues from the Sela division's product lines. The expected revenue stream from the year will most likely be repeat orders from existing customers, but we are very active with sales efforts with new customers as well. Going to the PCB market, the first quarter included the Chinese New Year which normally tampers sales in our PCB inspection business, which is mainly Chinese and Taiwanese business. We are seeing increasing capacity expansion at a few major customers that we estimate will translate into slightly increasing business in the second quarter. Our Phoenix platform is getting very good traction and response from our customers is very positive. Although the sales of inspection products for the PCB market make up just over 20% of our business, it continues to be a very stable and dependable revenue stream that is good and an important part to execute our long-term strategy. To summarize the first quarter results, I am pleased with Camtek's business performance this quarter. The first quarter came in at top end of our expectations even though at still a relatively low level. We see improvements in the second quarter and indications are that the bottom of the current industry cycle is now behind us. I'm also pleased that even at the bottom of the cycle, we reported operating results around the breakeven level, demonstrating the success of our efforts over the past few quarters to reduce our breakeven point. Looking ahead, we see increasing demand for our products on all fronts and expect the rest of the year to be much better. In terms of guidance for Q2, we expect revenues to be between $21 million and $23 million, this representing a significant 20% growth over the first quarter. I would like now to turn the call over to Moshe to review the financials. Moshe?

[Moshe Eisenberg:]

Thank you, Roy, and hello everyone. You can find the detailed results in the press release issued earlier today. Revenues for the first quarter of 2013 were $18.1 million. This is compared to $17.6 million in the prior quarter and $18.2 million in the first quarter of 2012. For the first quarter, revenues from sales and services to the semiconductor’s industry were 59% of our total revenues, amounting to $10.7 million. Revenues from sales and services to PCB market were $7.4 million, contributing 41% of our total revenues. Our geographic splits of the revenue for the quarter were; China was the strongest region during the quarter, representing approximately 36% of overall revenues; Taiwan was 21%; Korea was 18%; and the rest of Asia was 2%; U.S. sales accounted for 16%, with the rest of the world with the remaining 7%. Unless otherwise mentioned, I will now summarize the rest of our results on a non-GAAP basis which excludes re-evaluation in respect of our Sela and DMD product lines and share-based compensation. The reconciliation between the GAAP and non-GAAP results also appear in the tables at the end of the press release issued earlier today. Gross profit for the quarter totaled $8.3 million, representing a gross margin of 45.8%. This is compared to $7.6 million or gross margin of 42.9% in the previous quarter and $7.7 million or 42.5% in the first quarter of 2012. The improvement in gross margin compared with the prior quarter is primarily attributed to a more favorable product mix. Operating expenses in the quarter were $8.2 million, similar to previous quarter and $8.6 million in the first quarter of last year. At the end of last year, we took steps to reduce our operating expenses and lower our breakeven point. I'm happy to report that the new quarterly breakeven point on the operating level is down from around $21 million to $22 million a few quarters ago to between $18 million and $20 million now, depending on product mix and timing of operating expenses. The initial positive result from this process is already reflected in our Q1 results and we expect the full impact of the cost reduction in the coming quarters. Operating profit for the first quarter of 2013 was $0.1 million compared to an operating loss of $0.6 million in the previous quarter and an operating loss of $0.9 million in the first quarter of 2012. Net loss for the first quarter of 2013 was $0.2 million or $0.01 per share compared to a net loss of $0.8 million or $0.03 per share in the previous quarter and a net loss of $0.6 million or $0.02 per share in the first quarter of 2012. Cash and cash equivalents and short-term deposits as of March 31, 2013 were $23.1 million compared with $26 million as of December 31, 2012. This quarter we used $2.2 million of operating cash. This was as a result of our expectation for improvements in the business in the coming quarters. During the quarter, we took some supporting steps in order to ensure we will be in the right position to capitalize our improved business environment. We expect to return to positive operating cash flow in the second quarter. Before I open the call for questions, please note that we will be attending the SEMICON West Show in July, following which we will be meeting investors on a roadshow. If you would like to meet with us in the coming months, please contact our investor relations team. We will now open the call for questions. Operator?

[Operator:]

(Operator Instructions) The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

[Jay Srivatsa:]

Congratulations on a good quarter and solid guidance. Let me ask a few questions, Roy. In terms of the product mix, obviously it looks like the semiconductor business appears to be ramping up nicely, how do you see the PCB side going into Q2, and then in terms of the mix itself, what do you think will continue to dominate next quarter versus the full year?

[Roy Porat:]

As I said, I think we're seeing an increase I think in most fronts, also in the PCB. And I have to say as well, also in the PCB, I think it's a lot related to specific customers who are connected to specific food-chain. If you are a PCB supplier of Samsung mobile phones, you'll probably be very busy today, and if you're a supplier of maybe other mobile phone makers, you might be less busy today. So we expect the second quarter PCB side of the business also to increase. Having said that, remember that the new tool sales is not a big part of our total business with regards to PCB. So if I look ahead, I think we're going to grow a lot more in the semi side and a little bit in the PCB side.

[Jay Srivatsa:]

Okay. And as far as your comments related to the mobile phone markets and the overall semi market, you seem to suggest that the bottom is behind the company, but the mobile segment is still a small portion of the overall semiconductor market, I mean so the PC segment and the networking segment which tends to dominate total semiconductor sales, so the question is, what gives you the confidence that the recovery in the semiconductor market is well underway and what do you think could go wrong as you look ahead?

[Roy Porat:]

First of all, I agree with you that mobile is just an example we use. We've taken quite a few other applications. So it's not the only indication, it's just a simple indication we like to use. It's certainly a change in direction, and again, our visibility is I would say Q2 is relatively clear to us and we have some impact into the third quarter, and in general most customers are relatively more optimistic on the second half than the first half. What I can say is, it's a very booming market, the market has changed directions for sure, we see some capacity buys for sure, and I think we're just coming out of a very low market to a normal kind of pace. So don't expect something out of the normal. I think the last two quarters were out of normal in terms of low demand, but I think we're getting back into normal demand.

[Jay Srivatsa:]

Alright. Given that backdrop, I know you don't provide full-year guidance, but I mean are you comfortable as you look ahead to the second half to feel that you could have year-over-year growth in terms of revenues?

[Roy Porat:]

As we said, we don't give that kind of guidance, but in general I think the industry in general is relatively positive on the second half.

[Jay Srivatsa:]

Alright. Moshe, a question for you on the breakeven, given some of the cost reductions, what is the breakeven revenue run rate going forward for the Company?

[Moshe Eisenberg:]

As I indicated earlier, we are going to breakeven between $18 million to $20 million. This quarter we reported $18.1 million and we were able to show a marginal profit on the operating level. So this is pretty much the run rate. It all depends on product mix and timing of operating expenses. I keep on mentioning it because it has a lot to do with the breakeven. So somewhere between $18 million to $20 million is where I feel comfortable with the breakeven point.

[Jay Srivatsa:]

Alright. Roy, last question for you. One of your competitors, Rudolph, missed their guidance numbers for Q1 and then guided only modestly for Q2 between 5% and 15% growth. I mean you've beat numbers in turn and come in better than guidance and guided massively higher than what they have guided. So help us understand, is there any market share shifts that you've experienced or is it just the front-end versus the backend demand that seems to be the difference here?

[Roy Porat:]

It's a complex answer in terms of – I think in the last two quarters actually, our competitors kind of showed better numbers than we did on the backend, but I listened to their call and I'm sure you guys did as well, they had, even this quarter, I think they reported that 10% of their revenues were from a single backend customer. What I'm trying to say is that, I think in the last couple of quarters, they had two very large orders from two very large customers and I think these orders were kind of delivered already, so I think we're back to normal where we approximately I would say share the market share very, very similar, us and them. So excluding a few big orders they've got, I think we're almost the same. Hopefully very soon we'll have some good news for us, from our point of view for some big orders, but we have to wait a couple of weeks and see how it turns out.

[Jay Srivatsa:]

Alright, thank you. Keep up the good work.

[Operator:]

Thank you. (Operator Instructions) 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?

[Roy Porat:]

Just thank you everyone for joining us today, thank you.

[Operator:]

Thank you. This concludes the Camtek's first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.