Orbotech's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Orbotech Ltd. (ORBK)

Orbotech Ltd. (NASDAQ:ORBK)

Q42012 Earnings Call

February 19, 2013 9:00 am ET

Executives

Adrian Auman - Vice President of Investor Relations and Special Projects

Asher Levy - Chief Executive Officer

Doron Abramovitch- Corporate Vice President and Chief Financial Officer

Amichai Steimberg - President and Chief Operating Officer

Analysts

James Ricchiuti - Needham & Company

Andrew Uerkwitz - Oppenheimer

Joseph Wolf - Barclays Capital

Darice Liu - National Securities

Operator

Welcome to the Orbotech Ltd Q4 2012 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr. Adrian Auman from Orbotech. Sir, you may begin.

Adrian Auman

Thank you, operator and good morning. This is Adrian Auman, Corporate Vice President at Orbotech. Joining me on the call today are Asher Levy, Chief Executive Officer, Amichai Steimberg, President and Chief Operating Officer and Doron Abramovitch, Chief Financial Officer.

You should have all received a copy of the press release which was issued earlier today. If you have not received this release please refer to Orbotech's website at www.orbotech.com.

Now, before starting the call, I would like to mention that certain statements that are not historical are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. The words estimate, project, intend, expect, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risk and some uncertainties. Any factors could cause the actual results, performance or achievements of the company to be materially different from those that maybe expressed or implied by such forward-looking information. Additional information regarding risk and uncertainties associated with the company's business are included in but not limited to the company's reports filed from time to time with the SEC.

With that said, I would like to turn the call over to Asher Levy and this is Asher's first conference call in his capacity as CEO.

Asher Levy

Hello everyone and thank you for joining us. The significant decline in CapEx in the markets we serve made 2012 a challenging year. We experience a significant decline in revenues but were still able to squeeze out a small non-GAAP profit. Most importantly, though, is the fact that we were able to improve our market position. During the quarter, we took steps to reduce our expense structure. This was better provisioned to benefit from the improvement we are already beginning to see in the FPD market. The measures we took should result in an annual saving of approximately $10 million operating expenses in 2013 and will give us significant operating leverage. These cuts will not impair our service business, nor would they diminish our ability to continue to develop the best solutions for our customer's needs.

Service was a focus area for us in 2012 and we are very pleased that even service revenues were down slightly on a sequential quarter-by-quarter basis. They were at all-time high record of $154 million for the year. Service continues to an important source of recurring high quality revenues and we are dedicated to providing the customers with the best possible customer service.

Okay, focusing now on our key product areas. Results of our PCB business reflects overall industry conditions. In general, uncertainty in the global economy continues to cast a shadow over the market even though manufacturers of high-end PCB's were quite busy, specifically through additional mature industries like personal computers and automotive continue to suffer while manufacturers of smartphones and tablet computers continue to do very well.

During the quarter, we sold about the same number of Direct Imaging systems as we did in the third quarter. Direct Imaging remains a promising growth engine for the company and we are continuing to invest heavily in this product line. In spite of the legal issues in Korea, our PCB business there broke all sales and service revenue records. During the quarter, we saw a rebound in our ECM business. That trend is continuing in to the first quarter of 2013 and we are excited about our prospects here.

Turning now to our FPD business. There are clear signs of improvement in the FPD industry. We have been expecting an improvement in the second half of 2013 and we see evidence that this is likely to occur. In generally, we announced that we won significant bids for flat panel display related equipment of approximately $40 million from the largest domestic LCD panel manufacturer in China. The systems include several of our latest generation automated optical inspection in our latest models.

They would be used in the fabrication of mobile devices and large screen televisions. The customer would be deploying their equipment in multiple facilities and most of it is expected to be delivered during 2013.

Recently we received the AUO 2012 Best Partner Award. This is the third year in a row that we have won this award. As you know, AUO is one of the largest FPD manufacturers in Taiwan and we have been a key supplier of both equipment and service. We are very gratified by the comments made by AUO at the award ceremony. They stressed our technological leadership and our importance to their move to the high-end market. They view us as a partner and not just as a vendor.

Between this award and the large LCD order I described, it is clear that we continue to have a very strong market position and enjoy the confidence of many of the largest and most important manufacturers.

A couple of more points. Our $30 million stock buyback program which began in December continues. So far, we have bought back approximately 425,000 shares. I also want to briefly mention an accounting change that affects the way we recognize the PCB CAM business of our 50% owned subsidiary, Frontline. The impact will be about $3.5 million per quarter on the revenue line. Doron will explain this and we are trying to present in greater detail in a minute.

Finally, as to the guidance. For the first quarter of 2013, we expect to be about breakeven on revenues of approximately $93 million or about $90 million under the new accounting treatment of Frontline. This should be our lowest quarter for the year. Let me conclude by reiterating that 2012 was a challenging year but as satisfied by how we met the challenges and with the steps we took to enable us to make advantage of the opportunities going forward, I am encouraged by our strong market position and by the continuing confidence we enjoy from our customers.

I will now turn the call over to Doron for further financial details.

Doron Abramovitch

Thank you, Asher and good morning to everyone. Let me start by giving you a short summary of key financial results. Revenues for the quarter were $100.3 million and for the year $400.7 million, in line with the guidance we provided. In spite of the significant decline in revenues for the year, we nevertheless managed a non-GAAP profit of $2.3 million and $3.9 million for the quarter.

We are proud we have record service revenues for the year despite a sequential decline in the fourth quarter. We generated $12.7 million cash from operations for the quarter and our net cash position reached $215 million at the end of the year. I will discuss cash in more detail in a few minutes. We took certain steps in the fourth quarter which will result in a reduction of approximately $10 million in our annual operating expenses going forward.

Now, I would like to give the basic numbers for those who may not have the press release in front of them. My remaining comments will focus on the non-GAAP financials for the fourth quarter of 2012.

Revenues totaled $100.3 million, compared to $98.9 million in the third quarter of 2012 and $133.3 million in the fourth quarter of 2011. 68% of our sales of equipment in this quarter were to the PCB industry and totaled $42.2 million compared to 64% or $ $52.6 million in the fourth quarter of 2011. 28% of our total quarterly sales of equipment were to the FDP industry totaling $17.6 million compared to 34% or $ $42.5 million in the fourth quarter of last year.

Service revenues for the fourth quarter of 2012 was 38% of total revenues of $38 million, compared to 27% of $36 million in the fourth quarter of 2011. Our service continues to have a very positive impact on our business and we manage to achieve record revenues from service in 2012 totaling $154.2 million.

Gross margins were 39.2%, 2.3 basis point below the fourth quarter of last year. This decline resulted from the revenue mix and the under-absorption of some of our (inaudible) capacity. Our operating expenses were $35.7 million in line with (inaudible) level. This represents a minor decrease in operating expenses as a percent of revenue.

The company's expenses relating to the Korean Matter were essentially offset by an insured refund. Non-GAAP net income was $3.9 million or $0.09 per share diluted compared to non-GAAP net income of $6.5 million or $0.15 per share diluted in the fourth quarter of 2011.

During the fourth quarter, the company adopted certain measure of design to realign its infrastructure with current revenue levels and business conditions. This included reduction in the company's worldwide workforce consolidation of certain company facilities and other cost measures and resulted a restructuring charge of $3.2 million.

Turning now to the balance sheet. Our working capital management performance was positive this quarter and we continue to enjoy very strong balance sheet. Our inventory declined to $93.8 million from $97.9 million last quarter while our quarterly revenue increased a bit. We ended the quarter with almost $279 million. Our net cash position increased to approximately $215 million and is a sulphuric acid for us.

Our free cash flow generation and balance sheet trends and flexibility and at last to pursue business opportunities and we are well positioned going in to the new year. we recently strengthened our balance sheet even further by preparing $32 million of our long-term loan which will allow us to save approximately $1.8 million in interest expenses in 2013.

Let me explain the accounting change that Asher mentioned. As you may know, we have an investment called Frontline, a 50% interest Mentor Graphics for CAM for PCB. Until now, we had them accounting for it on a proportional basis. However, Israeli GAAP requires us to switch to the equity method. As a result, as of January 1, Frontline is integrated on an accounting basis into the operations of the company and will be presented in one line on the P&L before operating income. This will have the effect of reducing revenues by about $3 million to $4 million per quarter. Obviously it will not hurt the bottom line.

I will conclude by iterating the guidance of approximately $93 million in earned revenues for the first quarter or about $90 million after the accounting change. As a result of our strong market position and the steps we have taken to reduce our expense structure which will weigh position going into 2013.

Adrian Auman

That will conclude Doron's comments. At this point, we are open for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Jim Ricchiuti from Needham & Company. Your line is open.

James Ricchiuti - Needham & Company

Yes, good afternoon. Just a question with respect to the flat panel equipment business. Would you anticipate the revenues for that area of the business to be up in the March quarter versus Q4?

Asher Levy

Very similar, as a said, maybe slightly even lower than that/

James Ricchiuti - Needham & Company

Okay, and then you sound more positive on the margin on that business. Clearly the order out of China is sizeable. Should we think of that, the improvement in that business as more of a second half loaded as you ship against that order?

Asher Levy

Slightly a shift more to the second half but starting already from the second quarter.

James Ricchiuti - Needham & Company

Okay, and then one final question from me. Just with respect to the PCB business, how would you characterize the utilization rate right now that you are seeing from your major customers and are you any more confident of that business over the near term?

Asher Levy

The PCB business?

James Ricchiuti - Needham & Company

Yes?

Asher Levy

Generally speaking?

James Ricchiuti - Needham & Company

Yes?

Asher Levy

Well, we are very confident about that business. We see specific expansion plans for 2013. I think we have a very comprehensive list of expansion plans by customer. Obviously most of them are, close to 90% of them in China, but that gives us a high level of frequency there in to the business. We will continue to grow in 2013 and that we should be able to benefit from that.

James Ricchiuti - Needham & Company

Okay, thank you.

Asher Levy

You are welcome.

Operator

Thank you. Mr. Andrew Uerkwitz with Oppenheimer, your line is open

Andrew Uerkwitz - Oppenheimer

Hi, guys, thanks. Just one quick one. It looks overhead capacity ramps are occurring with new facilities being built, namely in Korea. Could you talk about this dynamic and then intertwine, the pending lawsuit, does that affect your sales here?

Doron Abramovitch

Not yet. We are following that very closely on the opportunity. Obviously there are some discussions, some news that are coming out almost on weekly basis. If all of that will turn in to a reality, then it is a good opportunity for Orbotech, but I think at this point of time, nothing is concrete yet.

Andrew Uerkwitz - Oppenheimer

Got you. All right, I appreciate it. Thank you.

Doron Abramovitch

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Mr. Joseph Wolf with Barclays. Your line is open.

Joseph Wolf - Barclays Capital

Hi, thanks. I just had two questions. One is with the progress on the services side of the business, given where revenues are and on the products side, where can that mix go in 2013 in terms of how much that could grow versus the growth rate for the product business?

Then just a more general question for Asher. Adrian mentioned that its your first conference call. Now that you are in the driver's seat, but you have been with the company for a long time. What kind of changes should we expect to see as we progress through 2013 in terms of your direct imprint on the company?

Asher Levy

Maybe I would start and then I will turn to Amichai in terms of the split between serving, customer support, the mix for 2013. In terms of changes, I am expecting the company to do and planning to lead, obviously a part of that has to do in the areas of improving our current business. I think we can do better than what we are doing in both PCB and FPD, both on the top line and bottom line.

The second area is driving the growth of the company. I am planning that we will have both in terms of process as well as structure and effort. Much more focused on growth opportunities in our core markets and also outside of our core markets.

Amichai Steimberg

In terms of the customer support contribution, we are running on a level of 150, 160 per year from service. Looking at in to 2013, we see more of same level. The question, well, obviously will be, what would be the numbers for the products.

Right now, as you notice, we did not provide guidance for the year, for the full year on the products side. So its still a question mark and given the low visibility and then the changes that we are seeing in the market on a daily basis, if you will, we are feeling that it is too soon to give an annual guidance. Nevertheless, if the product will grow more then 2013 will develop to be as strong as in 2012, actually if we reduce the portion of the service out of the overall pie.

Joseph Wolf - Barclays Capital

Okay, thank you.

Operator

Thank you. Darice Liu with National Securities. Your line is open.

Darice Liu - National Securities

Thank you for taking my question. I wanted to talk a little bit about the product portfolio. I was wondering if you can provide some updates on the traction with the Emerald UV product as well as the (inaudible) solar tool. Can you talk about your product roadmap? Any new products planned for this year?

Asher Levy

Okay, so the VS, that’s the Emerald 150, I think we are at a point that we have a good system. I think that we have the stat of that system is definitely something that is doing a significant better, more tuning value proposition to leading PCB producers. As is expected from production tool, the reliability of that system is also at the adequate level. We are competing right now on several projects.

Obviously, you have to understand that not like with most of our other products that we serve company to bring new solutions to the market, here there are already a couple of companies that established leadership position. If we want to gain significant part of the business, we have to come with something which is not incremental but rather a game changer.

So I think we have that but the start, winning the first one or two projects, I am not talking about selling one system, but really making an impact in the market is a long process. As I said, we are competing right now on a couple of what I would consider as a significant promising project and I think if we will be able to make a significant progress there, the potential is obviously very big because as I mentioned, we are not bringing a solution with incremental advantage.

As far as the second part of your questions, I think it will be fair and safe to say that with all of our existing products, within 2013, we are planning to bring a new improved better system as the next generation of (inaudible) solution.

Darice Liu - National Securities

Is that next generation tools for both PCB as well as LCD?

Asher Levy

That’s correct.

Darice Liu - National Securities

Okay, and just a follow-up on your earlier point regarding the pipeline for the UV product. You mentioned that you are competing on a couple of projects right now. Is there any, in timeline terms, when those bake offs will conclude?

Asher Levy

I am sorry. Are you mentioning the UV product or the VF?

Darice Liu - National Securities

The Emerald product.

Asher Levy

Okay, can you repeat it because for some reason I heard a different name.

Darice Liu - National Securities

Oh, sorry, just regarding the Emerald product. You mentioned that you are currently in some bake offs on some promising projects. I was wondering if there was any visibility in terms of when those bake offs would conclude?

Asher Levy

We are working under the assumption that H1 is a quarter where we need to be able to make a change with this product.

Darice Liu - National Securities

I guess then on the display front, you seem to have good visibility in terms of revenues picking up in the second quarter, notably in the second half of this year. Any visibility on the PCB side, which I know is a little bit more turnkey but any color there would be appreciated.

Asher Levy

So the visibility on the PCB side comes from several directions. The first one is the implication on Orbotech and ourselves coming from the expansion of our plan in the PCB market currently, and the list is changing all the time. There are expansion plans for about $11 million square feet of additional capacity in 2013, something like 90% out of that is in China. So we can basically make a calculation also given our position in the market what the potential implications on ourselves.

The second area, in terms of visibility for the PCB comes from the ECM. Its another area that we will be operating in the ECM and we already establish our name and solutions in some of the markets. Also, specifically in 2013, we hope we are expecting to benefit more from the trend of more and more touch panel producers moving to the OGS 2 technology.

Darice Liu - National Securities

Okay, and my last question. Just on the display front. Can you provide any color on what stage you are in, in regards to Korean investigation? Is it coming to an end? Any visibility there?

Adrian Auman

Darice, we didn’t hear you well. Can you repeat the question?

Darice Liu - National Securities

Just on the Korean investigation. I was wondering if you can provide any color on what stage you are in? Is it coming close to an end? Is there any visibility there on when you think it will conclude?

Adrian Auman

Well, we are in the middle of the trial. I believe we are right in the middle of it. Right now, its expected to last at least for the next three or four months. That’s what we worked out. But we are just in the middle of trial.

Darice Liu - National Securities

Okay, thank you very much.

Asher Levy

Thank you.

Operator

Thank you. Jim Ricchiuti with Needham & Company, your line is open.

James Ricchiuti - Needham & Company

Yes, with respect to the cost savings, the $10 million that you have alluded to, can you give us some sense as to how we might see that breakout in SG&A and R&D and is there any of that savings that you anticipate hitting above the line in COGS?

Doron Abramovitch

Jim, Doron here.

James Ricchiuti - Needham & Company

Hi, Doron

Doron Abramovitch

Most of the $10 million, something like $7 million to $8 million would go to the OpEx. So if you take the $35.5 million that we, in the last two quarters, that have been in OpEx, you can assume that $1.5 million to $2 million is something that we should target to reduce from this amount. The rest of the money, something line $2 million to $3 million would go to the customer support which is also in the gross margin area and in to the COGS. This is the variation of this $10 million.

James Ricchiuti - Needham & Company

Okay, that’s helpful. Then with respect to the II, I guess you had a flat quarter shipment wise, so that 23 units or so. Do you see that improving in the early part of 2013? Are you anticipating units, for instance, to be up in the first quarter?

Doron Abramovitch

Clearly to say, what will be in the first quarter, I think that generally speaking we expect the number to pick up, part of that because the industry, as a whole, is expecting growth in 2013. This was a situation that the industry experienced. Something like a minus 5% growth in 2012. So that’s one reason.

The second reason is because last year, in 2012, we had some positive expectations from sales of Direct Imaging systems to the OGS 2 touch panel technology. The migration was by far slower than expected but if you look at the number of companies that made a commitment to the OGS in 2013 versus 2012, I think in 2012 there was only one company who was committed in terms of final product two years ago, OGS2 technology, that was HTC.

If you look at the list for 2013, I think there are something like 10 companies, consumer electronic companies that made commitment to the OGS 2. So if we get the 20 something systems that the market owes us from 2012, I think we should be able to do better.

Now we can discuss also some long term plans for Direct Imaging because we invest a lot in Direct Imaging because we believe there is a big future for Orbotech in Direct Imaging and on top of all the PCB and ECM and incremental growth that we expect from DI within the current applications, we are investing also in solutions, future solutions that can target in much larger business opportunity.

Just as an example, about 200 automatic exposure systems that are sold to the PCB industry, we believe that at a certain point of time, we will have a system that can compete on the performance of automated exposure system. We can slowly and gradually take some of that market and maybe if want to, as a big vision, also even consider replacing some of the installed base of systems exposure systems.

So DI, for us, is still a big opportunity and the fact that we sold 23 systems in one quarter and we will sell a similar number or slightly higher number in the next quarter. That’s part of the process. We are here for the long-term. We believe we have a great product and a great future in Direct Imaging.

James Ricchiuti - Needham & Company

And this subsequent generation of DI equipment that potentially could go after this market opportunity that you just alluded to, is that something you could see happening later this year, or is that more 2014?

Doron Abramovitch

We are planning, if all goes well, to release two new DI products in 2013, but these are not the products that fall in to the definition of potential replacement of automated exposure systems. That will come later.

James Ricchiuti - Needham & Company

Okay, thank you.

Operator

Thank you, and at this time, I am showing nothing further.

Adrian Auman

Thank you, operator, and thank you everyone for participating in the call. Again, if you require any additional information on Orbotech, please visit our site at www.orbotech.com, the investor site. Thank you very much and have a nice day.

Operator

Thank you for joining today's conference call. You may disconnect at this time.

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