Camtek Ltd.
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Camtek Second Quarter 2013 Results Conference Call. All participants are 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 August 8, 2013. I would like to remind everyone that forward-looking statements for the respective company’s business, financial condition, and the results of its operations, are subject to risks and uncertainties which could cause actual results to differ materially from those contemplated. Such forward-looking statements include but are not limited to product demand, pricing, market acceptance, changing economic conditions, risks in products and technology development and the effects of the company’s accounting policies as well as certain other risk factors, which are detailed from time to time in the company’s filings with the various securities authorities. I would now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helft, would you like to begin?

[Ehud Helft:]

Thank you and good day to all of you. I would like to welcome all of you to Camtek’s second quarter 2013 conference call. And I would like also 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 an overview of Camtek's performance in the second quarter and summarize the financial results. We will then open the call for the question-and-answer session. Before we begin, may I remind our listeners that certain information provided on this call are internal Company estimates, unless or otherwise specified. 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 Roy. Roy, please.

[Roy Porat:]

Thank you, Ehud. Hello and good morning to everyone. Thank you for joining us. Let me begin by saying that we are content with Camtek's financial results in the second quarter. On a sequential basis, we grew revenues by 23% and reported non-GAAP operational profit of $1.2 million or $0.04 per share. We witnessed growth and demand for both our semiconductor and PCB product while the diversity in our product offering allowed us to smooth the fluctuations and demand. A slight drop in demand in one product is compensated by an increase in demand in the other product. The overall strength in our core business continued to improve during the quarter, including the PCB side of our business. Revenues of $22 million is a good indication for the return and spending cycle. We do expect some bumps along the way, but the overall expectations are for long semiconductor capital equipment spending. Camtek is enjoying the technology dynamics in the industry, the stride to 2X and 1X nodes in the front-end of the semiconductor market, and to accelerate growth in advanced packaging back in semiconductor markets, create opportunities for process controls and yield enhancement solutions with our customer base, in which we enjoy a partnering relationship. Looking ahead into the second half of 2013, we do see some pushouts in expected orders and in some orders on hand. Having said that the general atmosphere is cautious, but positive. With planning, discussion and expectations for a continuous growth into the second half or the beginning of the next year. The market holds numerous opportunities that we aligned to our plans, the first and most immediate is the continued strengthening of a leading position in the back-end semiconductor market. The challenges that new advanced packaging technologies are creating may add additional data point’s collection to the process and allow us to sell our products into more areas along the new process, which are being developed. We are certainly in a good position to enjoy these opportunities as they enfold. We continue to see good market acceptance of our Phoenix system in the PCB inspection business. Last but not least, as contribution of the exact sales and expectations for future 3D inkjet printer sales, all outline our long-term plans. I would like to provide a closer look at the markets. The semiconductor business in the second quarter was driven by Asian OSATs, mainly ramping up capacity for their advanced packaging products in general with flip-chip, CMOS and wafer level CSP segments driving the demand. The second quarter started with very little backlog of orders, with demand picking up during the quarter and some of them spending over into the third quarter. As we are in the middle of the third quarter, we can require to see witness some push-outs and hesitation at various OSATs and the IDMs. The market demand mix in Apple, [3D-IC], Samsung are certainly part of the softness and hesitation, I mentioned earlier. Excess inventory and the timing of new products all contributes to the overall business environment in the semiconductor industry. I would like to reemphasize the opportunity we see in the back-end semiconductor part of our business. If you look at the inspection and metrology strategies that are confluent on current advanced packages, find in most devices. We see two to three stages in the process where most our customers use inspection and metrology tools to collect data, improve the process and sort bad devices from good devices. The Advanced Packaging technologies of 3D-IC, may require five to seven data collection points to ensure the process yield. Well, currently sell tools for these application to process development teams with IDMs, foundries, and OSATs including a few research institutions, it has yet been adopted for 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 of these emerging technologies we bring. The good news is that this opportunity is still in front of us. I would like to mention a few words on our front-end business, particularly our Xact sample preparation system. We’ve continued to strengthen our position in traditional repeat orders coming from existing customers during the first half and we expect additional orders in the second half of the year. We are very pleased with the advance we have made in this product and receiving repeat orders is a reassuring indication of the value proposition of the AIM technology. We are also continuing our gradual penetration from a macro-inspection market and have made some significant advances with the products developed and it has been proven in some initial business testing. We expect a few orders in the second half of the year. For the PCB market, the second quarter was a fairly strong quarter for the PCB inspection business with high demand for our products. As always, this business is driven mainly by Chinese and Taiwanese accounts expanding 41 in China. During the quarter we received orders from a few IC substrate manufacturers at high-end technology trends that tends to substrate to drive their businesses. We are pleased that our Phoenix platform was selected for this high-end demanding application as the prudent choice. I want to add a short update on our 3D digital inkjet printer. It has been a while since we talked about this very promising development project. 3D printing is a very challenging technology. 3D functional printing is an even more challenging technology. The functionality is critical. We are not printing a 3D mockup, but the functional 3D layer of a real product, in our case solder mask layer of a printed checkerboard. It has to meet all the specifications. We have invested in this project up to date over $10 million and we are glad to report that we have internally passed the technology feasibility phase and expect to bring a product into testing early next year. As we have indicated many times before, although this milestone represents a very significant step towards a working product there is still risk ahead of us. To summarize the second quarter, I’m pleased with Camtek’s financial results. On a sequential basis, we do 23% and reported a non-GAAP operating profit of $1.2 million. Although we expect a slight pause in the growth trajectory of our business in the third quarter the general environment is positive. We are positioned well with new products and we have correct cost structure that will allow us to leverage in up cycle. I’m especially content with the advances we’ve made with the 3D printer DMD. Although this part of Camtek story will not come into play this year, it potential is very significant. In terms of guidance for Q3, we expect revenues to be between $19 million and $21 million. I would like now to turn the call over to Moshe, to review the financials. Moshe?

[Moshe Eisenberg:]

Thank you, Roy. Hello, everyone. You can find the detailed results in the press release issued earlier today. Revenues for the second quarter of 2013 were $22.3 million. This is a growth of 23% compared to a $17.6 million in the prior quarter. For the quarter revenues from sales and services to the semiconductor industry were 62% of our total revenues, amounting to $13.7 million. Revenues from sales and services to the PCB market were 38% of our total revenues amounting to $8.6 million. Our geographic breakdown of the revenue for the quarter was as follows; China was the strongest region during the quarter representing approximately 29% of our overall revenues, Taiwan was 19%, Korea was 24% and the rest of Asia was 12%. U.S. sales accounted for 9%, Europe and the Rest of the World was the remaining 7%. Unless otherwise mentioned I will now summarize the rest of our results on non-GAAP basis, which exclude any revaluation in respect of our Sela and DMD product lines and share-based compensation. The reconciliation between GAAP and non-GAAP also appear in the table at the end of the press release issued earlier today. Gross profit for the quarter totaled $9.9 million, representing a gross margin of 44.5%. This is compared to $8.3 million of gross margin of 45.8% in the previous quarter. The change in gross margin compared with the prior quarter is due to the change in the product mix between quarters and we don’t see any underlying trends here. Operating expenses in the quarter were $8.7 million compared with $8.2 million in the previous quarter. The main contributor to the growth in operating expenses was an increase in SG&A expenses in the quarter. Sales and marketing expenses grew to $3.2 million from $2.9 million in the prior quarter primarily due to the higher level of revenues in the quarter. R&D expenses were $3.5 million, marginally below the R&D expenses level of $3.6 million in the prior quarter. Operating profit for the second quarter of 2013 was $1.2 million or 5.4% of revenues compared to an operating profit of $0.1 million in the previous quarter.Net income for the second quarter of 2013 was $1 million or $0.03 per share compared to a net loss of $0.2 million or $0.01 per share in the previous quarter. Net cash and cash equivalent and short term deposits as of June 2013 was $17.6 million compared with $17.3 million as of March 31, 2013. It is important to note that in the quarter we reduced our debt level by $3.1 million. In this quarter we generated $1.1 million of operating cash flow. We will now open the call for questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen at this time we’ll being the question-and-answer session (Operator Instructions) The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

[Jay Srivatsa:]

Thanks for taking my question. Roy, in terms of guidance, where are you seeing the push-outs, is it in the semiconductor space or in the PCB space?

[Roy Porat:]

Hi, Jay. Semiconductor space, I think some expected orders we have for in this quarter are actually pushed out and some orders we actually had on hand were customers called up and said, we want to pushed into Q4. I think the general indication right now is not a significant drop, but some push outs.

[Jay Srivatsa:]

Okay. Now Q4 tends to be seasonally soft in the past, do you expect these push outs to buck the trend or what is your read on how the rest of the year plays out because of these push outs?

[Roy Porat:]

I think, it’s a little bit too early for us to give a general guidance for Q4. But the general atmosphere not only from us, but I think for a lot of people in this industry is for a relatively good second half. So it’s going to be for sure better than the first half, as far as I see, sure as we can ever be sure. But I think being specific on Q4 other than difficult right now. But in general, I think that atmosphere is still positive, it’s not – I think at least from our view right now it’s more of a small pick up. Okay, but we’ll see. I think Q4 is a bit far processor to give specific indications.

[Jay Srivatsa:]

Okay. Well, in that case, can you quantify the magnitude of the push outs in terms of dollar terms?

[Roy Porat:]

From our point of view it’s probably around $2 million like I said.

[Jay Srivatsa:]

Okay. Let me ask a question at a higher level. Your commentary seem to suggest that the order activity is picking up and that is potentially on the beginning of some recovery in the capital equipment sector for semiconductors, help us understand how you see this recovery playing out, is it going to be a short upturn or is it going to be more gradual over the coming quarters. Help us understand that if you could.

[Roy Porat:]

I think there is a lot of hesitation it has to deal with some of the big players, it has to deal with some of the things we will hear about a capacity clearing out from, Apple moving from Samsung to (inaudible) excess capacity in Samsung on one hand. on the other hand, so I expect some things to clear out there, but things are developing also with Korea food-chain, I think a little bit difficult to foresee how things will pick up. And in general, as I said, some of the back-end guys are talking about excess inventories and then reducing this inventory attrition point and then things would pick up again, but to say that we have a very good global economic market oversight is difficult.

[Jay Srivatsa:]

Okay. Last question, I might have missed this, but did you give the split between PCB and semiconductors for Q2?

[Roy Porat:]

You have 62% is semiconductors related and 38% is PCB.

[Jay Srivatsa:]

Thank you.

[Operator:]

The next question is from Edwin Mok of Needham. Please go ahead, sir.

[Edwin Mok:]

Hi, thanks for taking my question. So first question, just to be clear on your guidance, $19.1 million, how much do you expect the PCB versus semi?

[Roy Porat:]

We normally don’t break out this guidance in general, but quarter-over-quarter, I expect the semiconductor to grow more and the PCB to grow to maybe fall a little bit, okay. And so expect a slightly better quarter on our semiconductor side of our business and slightly a decrease in our PCB side of the business. So I think…

[Edwin Mok:]

I see, okay. Okay, that’s helpful. And then, on the push-out you mentioned, is it due to the OSATs or back-end packaging device or do you think some of that will come on the IDMs too?

[Roy Porat:]

I think it’s fair to say at least the specific ones and we don’t want to get too specific here. It’s related to a leading IBM and some of his connected subcontractors.

[Edwin Mok:]

I see. Okay, I got you. Okay, that’s helpful. And then on the second quarter as well as comp, baking in here for a quarter guidance. Are you guys baking in any exact revenue that you might have recognized in the second quarter and how is that product, how do you see that product trending in the back half of this year?

[Roy Porat:]

As I’ve said, we did recognize the Xact sales in the first half and we’ll recognize additional revenues in the second half. And most of these orders or all of these orders right now, are repeat orders from existing customers. So I don’t expect a huge jump in the business, but on the other hand, reassuring and these customers are tier one customers. So we are talking right now at least for this year, that two customers and both of them, I would say top five, one of the top five global guys. So it’s a good indication that we are on track at least in the area where we play and it’s going to be a reasonably good year. I think on the last call we talked about hitting around plus minus $10 million on a yearly basis from exact or Sela product.

[Edwin Mok:]

Okay great and then, can you update us on in terms of the LED space have you seen activity and then, in terms of orders for equipment and any change in the competitive side?

[Roy Porat:]

Actually, a very slow business this year coming from LED, a few tools but not a whole lot. I think a few years ago or last two years were expected some significant growth coming and increasing capacity and that has not matured. I don’t think the competitive landscape has changed at all. I think in that class if it’s basically asking KLA which dominates that segment and it hasn’t changed a lot but there is very small activity this year and it’s for us and I think for KLA as well.

[Edwin Mok:]

Okay great, so you have already kind of aggregate all the commentary, it sound like at least in the third quarter seeing some sequential, decline is all related to this back-end related push-out that you have to see, right. Beyond that all these pieces of business is all trending in line, then if anything is exactly is getting a little bit better. Is that correct way of thinking about that and I guess tied to kind of the earlier question on the fourth quarter, is it true that historically, your PCB business tend to be seasonally weaker in the fourth quarter. I’ll try and understand just (inaudible) beyond this quarter basically?

[Moshe Eisenberg:]

No. I think, PCB business is really I’d say aligned with global economy as much less I would say exposed to technology, and it’s really much more a capacity driven. If there is no such seasonality in the fourth quarter, the only seasonality that we do see some times is in the first quarter actually, and that normally depends on where in the quarter does the Chinese New Year fall in. So if it falls in towards the second half of the first quarter, you might get a bump or hiccup in the market. But there is no seasonality in the fourth quarter in PCB side of our business.

[Edwin Mok:]

Okay, thanks, that was good color. Thanks a lot. That’s all I have. Thank you.

[Roy Porat:]

Okay, thanks Edwin.

[Operator:]

(Operator Instructions) The next question is from (inaudible). Please go ahead.

[Unidentified Analyst:]

Hi. I would like to know if at the moment, you think that Q4 will be a bit or much better than Q3 or in the worst scenario it can be seen in also Q3?

[Moshe Eisenberg:]

Hi, (inaudible), as I’ve said earlier, I think Q4 is a bit far from us and we don’t give any, we are not able to give any estimations on the fourth quarter right now.

[Unidentified Analyst:]

Okay. But three months ago you said that you see pretty strong second half. So what happened in the last weeks and the last months that changed your earlier guidance?

[Roy Porat:]

As I said, I think we had a few push outs on the third quarter and that’s I would say the reason for, I would say slightly shorter numbers that we initially expected. And as I said, again, we do expect the general environment with all the risk involved and giving the forward-looking statement further than a single quarter is still positive.

[Unidentified Analyst:]

Okay. Thanks.

[Roy Porat:]

To draw our conclusions for that, is it going to be better than first quarter or flat or worse, I think it’s too difficult for us at this stage to give an indication.

[Unidentified Analyst:]

Okay. Thanks.

[Moshe Eisenberg:]

Thank you.

[Operator:]

The next question is from George Melas of MKH Management. Please go ahead.

[George Melas-Kyriazi:]

Good morning. Could you give us little bit more information the 3D inject segment. Can you say how much have you actually invest in [quarter] in that business, and are you actually working with – how many customers are you working with there?

[Roy Porat:]

Okay. It’s something we’ve talked about quite a lot in the past, but in general, this product is not released for sale yet. This is a new technology that we’re developing. The investment is about $2 million a year, something like that’s roughly the run rate that we spend on this. So it’s R&D investment with zero yield years in top line or any revenues. We did pass a very, I would say important internal milestone with this quarter development. And we expect the next milestone to be around the end of the year beginning of next year when we start beta testing of this product. In the beginning it’s going to be two initial customers.

[George Melas-Kyriazi:]

Okay, very good. Thank you very much.

[Roy Porat:]

Sure.

[Operator:]

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:]

Thank you everyone for joining the call.

[Operator:]

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