Orbotech Ltd. Q3 2009 Earnings Call Transcript

Nov. 2.09 | About: Orbotech Ltd. (ORBK)

Orbotech Ltd. (NASDAQ:ORBK)

Q3 2009 Earnings Call

November 2, 2009; 09:00 am ET

Executives

Rani Cohen - President & Chief Executive Officer

Amichai Steinberg - Deputy Chief Executive Officer, Global Finance & Operations

Erez Simha - Vice President of Finance & Chief Financial Officer

Adrian Auman - Corporate Vice President

Analysts

Jim Ricchiuti - Needham & Co.

Sergey Vastchenok - Oppenheimer

Shannon O’Callaghan - Barclays

Operator

Welcome to the Orbotech Limited Q3 2009 conference call. At this time all participants are in a listen-only mode. (Operator Instructions)

Now I’ll turn the call over to Mr. Adrian Auman. Sir, you may begin.

Adrian Auman

Thank you, operator. Good morning. This is Adrian Auman, Corporate Vice President at Orbotech. Joining me on the call today Rani Cohen, President and Chief Executive Officer; Amichai Steinberg, Deputy Chief Executive Officer, Global Finance and Operations; and Erez Simha, Vice President of Finance and Chief Financial Officer

You should have all received a copy of the press release, which was issued for earlier today. If you have not received this released, please refer to Orbotech’s website at www.orbotech.com. I’d like to take this opportunity to inform everyone that management will be presenting at the upcoming First Midwest Securities Small Cap Ideas Conference in New York City on November 16. The Barclays Capital Global Technology Conference in San Francisco on December 9 and Needham & Company 12 Annual Growth Conference in New York City on the January 13.

Now before starting the call I’d like to mention that certain statements that are not historical or 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 intending to identify forward-looking statements and 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’d like to turn the call over to Rani Cohen.

Rani Cohen

Thank you, Adrian. Hello everyone, thank you for joining us. In general, business conditions continued to improve in both at PCB and FPD markets we see more confidence and less anxiety, businesses are beginning to come out of the bunkers. We nevertheless have to continue to be vigilant in monitoring business conditions.

Starting with the FBD market, the industry is doing well with existing fabs running it close to full capacity utilization in most geographical regions and supply and demand appear to be equilibrium. Growth in the industry is being driven by significantly higher LCD-TV demand from China and other emerging economies.

We expect this to lead to significant increases in CapEx over the next two years and this in turn should lead to increased business for Orbotech in late 2010 and into 2011. In this type of industry environment, the competitive landscape will be challenging, but we are confident in our ability to maintain our leadership in this industry. I’d also like to mention that a full year has now passed since we closed our acquisition of PDI.

Thank to the outstanding efforts of our employees all over the world, we have successfully concluded a very complex and challenging integration process. Our comprehensive product portfolio combined with our significant accumulated, FPD know how and expertise has positioned us very well to face the challenges, which the coming ramp up in the FPD industry will present.

Turning now to the PCB market, in general the market conditions to improve, IT budgets essentially frozen for the last two years are now being released. There’s increased confidence and optimism, in addition to the general recovery, there are emerging technologies and significant new product introductions and applications that are contributing to the recovery.

They include smartphones and netbooks as well as the introduction of Microsoft’s Windows 7 operating system, these should all helps stimulate growth. Industry fabs are currently operating at over 80% capacity utilization driven by these communications, consumers and computer related products. These trends are most evident in China and Taiwan, where significant investments are being made. Other regions, such as Japan and the west, which are characterized by niche applications and technologies, are stabilizing as business conditions continue to improve.

We had a good quarter and direct imaging. We sold 11 systems, the same as last quarter. In addition, we recently introduced a new direct imaging system. The Paragon-Xpress 9 was designed for high speed throughput and addresses the need for mass production of advanced applications. It offers much higher throughput with the same resolution and performance of previous systems. It compliments our already strong portfolio of direct imaging solutions, broadens our addressable market and significantly strengthens our competitive position.

The new system reflects our ongoing commitment to our customers by continuously developing better solutions even during tough times. The system has already been field proven in rigorous mass production environments with excellent results. We expect the new system to start contributing to revenues already in the fourth quarter.

Gross margins in the third quarter were adversely affected by the product and geographic mix of our product sales. Adrian will elaborate more on this later on. So I will just say that we expect them to improve in the fourth quarter. As for guidance, we expect revenues in the fourth quarter to be around $95 million to $100 million.

With that, I’ll pass it over to Adrian, who will review the number.

Adrian Auman

Thank you, Rani. Revenues for the third quarter of 2009 totaled $92.3 million, compared to $94 million in the second quarter of ‘09 and $94.8 million in the third quarter year ago. GAAP net loss for the third quarter of ‘09 was $5.5 million or $0.16 per share, compared to GAAP net loss of $1.2 million or $0.03 per share in the second quarter of ‘09 and GAAP net loss of $43.1 million or $1.29 per share in the third quarter of ‘08. Non-GAAP net income for the third quarter of ‘09 was $1.1 million or $0.03 per share compared to non-GAAP net income of $800,000 or $0.02 per share in the third quarter of 2008.

Sales of equipment to the PCB industry were $20.3 million in the third quarter of ‘09, compared to $17 million in the second quarter of ‘09 and $31.6 million the third quarter of ‘08. Sales of equipment to the FPD industry were $37.6 million, compared to $41.4 million in the second quarter of ‘09 and $31.7 million in the third quarter of last year. Sales of character recognition products were $2.4 million in the third quarter of ‘09, compared to $2 million in the second quarter of ‘09 and $2 million in the third quarter of last year.

Sales of medical imaging equipment were $4.1 million in the third quarter, compared to $6.2 million in the second quarter, and $3.4 million in the third quarter of last year. In addition, service revenues increased in the third quarter to $27.9 million, compared to $27.3 million in the second quarter and $26 million in the third quarter of ‘08. The financial data, including revenue data, presented in respect of the third quarter of ‘08 does not include results attributable to the business of PDI, which was acquired on October 2, 2008.

Let me give you the usual breakdowns of sales by products and geography by percent of the third quarter, FPD 58%, PCB 32%, character recognition 3%, and medical imaging 7%. Geographically for the quarter Pacific Rim 55%, Japan 32%, North America 11% and Europe 2%. Of the Pacific Rim sales revenues 39% came from Taiwan, 34% from China, and 25% from Korea.

Our gross margins for Q3 were 36.1% lower than the guidance we provided to street. This was driven both by product sales mix, lower FPD product sales, which usually have higher margins and increased PCB product sales, which generally have lower margins and the underutilization of our manufacturing capacity. For the fourth quarter, we expect gross margins to be in the 37.5% range due to higher forecasted revenues. The impact of currency rates in the third quarter of ‘09 was similar to that in the first and second quarters of ‘09.

The company generated EBITDA for third quarter of $5.1 million or 5.5% of revenues, bringing the total EBITDA generator for the first nine months to $20.2 million. The company continues to maintain the tight control of its operating expenses, which remained at similar levels to second quarter. The company is well positioned to leverage on its current infrastructure as business conditions improve.

Turning now to the balance sheet; the company generated in the third quarter operating cash flow of approximately $30 million. This was derived primarily from strong collections as well as a reduction in inventory levels. The company completed the quarter with cash, cash equivalents and marketable securities of approximately $170 million compared with approximately $140 million at the end of second quarter of ‘09 and $160 million in debt. This is the first time since the PDI acquisition the company has been in a net cash position. The company’s marketable securities include approximately $19.1 million of auction rate securities primarily tied to student loan.

Let me conclude by saying that, we are pleased with our performance of the Q3 given the prevailing market conditions. We continued to strengthen our financial position in place a high priority in monitoring our infrastructure and related expenses closely. This concludes our prepared remarks.

At this point, we would be glad to answer your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

I was wondering if you could comment on pricing in the quarter, just given what we saw in margins. Are you seeing any unusual pricing pressure in either PCB or flat panel?

Amichai Steimberg

Pricing pressure not on the PCB, seen PCB both on AOR and directing imaging pricing is not an issue right now. We do see some pricing pressures on some of the FPD product, yes.

Jim Ricchiuti - Needham & Co.

Would that can have contributed in the quarter, or is that something you worry about as you start seeing the recovery in flat panel?

Amichai Steimberg

This is very much a future worry.

Jim Ricchiuti - Needham & Co.

Can you talk a little bit about bookings in flat panel in the quarter and how you see bookings in Q4? I know you don’t specifically give bookings, but maybe you could just talk qualitatively.

Amichai Steimberg

There was no big change in the trend of booking in the third quarter compared to this first and the second quarter. We believe that the change will materialize whoever will take in terms of new bookings during the fourth quarter.

Jim Ricchiuti - Needham & Co.

Is Q1 also a quarter where you expect to see increased order activity?

Amichai Steimberg

Yes. The other trends of order flow or increasing order flow, we believe should start as we speak, and will go somewhere to the summer of 2010. I’m talking about new orders flow that the deliveries and revenue is of course is a different story.

Jim Ricchiuti - Needham & Co.

Last question, do you think the flat panel business from a revenue standpoint would be up next year? You have some visibility. What’s your sense?

Amichai Steimberg

We have some visibility as you stated and based on some visibility we believe next year will be stronger than 2009.

Operator

Your next question comes from Sergey Vastchenok - Oppenheimer.

Sergey Vastchenok - Oppenheimer

I would like to ask you about visibility for the second half of the next year, it was very limited on the recent call and we see it improving. If you do expect the Q2 or else the second half of ‘10 will be stronger than the first half of ‘10?

Amichai Steimberg

I’m not sure I followed all of the questions, but in terms of second half of 2010 visibility, it is much better not because we have orders, but mainly because we see and hear all releases and forecast released by some of the main customers, and then analyst of course. Overall, the next wave in China, the next wave of new investments, a new fab in China should materialize into deliveries second half of 2010 and 2011.

We share the same feeling that the new guys share in terms of the potential new fabs in China. So basically from that aspect you can say the visibility is slightly better than the second half of 2010. Again it is not backed off by orders, which hopefully will start to come during this quarter and maybe first half of 2010. Specifically, for the second quarter of 2010, this is premature to say anything, but again if all of these will eventually happen and we will get them, then I think as I said in previous answer, 2010 should be a better year than 2009.

Sergey Vastchenok - Oppenheimer

The major source of trends it’s actually as the Chinese domestic clients or some kind of clients you’re seeing in the particular strength with?

Amichai Steimberg

It’s a combination of the investment in China, for generic kind of fabs, to whether with some to the sales fabs that we will be built in 2010 and ‘11, and of course we also believe that there are some positive ingredients out there for continuing the growth on the PCB from the point we are at now. Not saying that we’ll return to 2008, but definitely next quarter and hopefully the first half of 2010, we will continue with the sequential growth that we will be facing the last two quarters in the PCB.

Sergey Vastchenok - Oppenheimer

You said sequential growth, does it mean that Q1 ‘10 will be better than the Q4 ‘09?

Amichai Steimberg

If things will continue as if they are now, I’m talking about the PCB, using some push and enter should be, but then come to issue of course of strong Q4 traditionally versus somewhat weak first quarter, but the overall trend I think should support the sequential growth going into the next few quarters into PCB. Based on what you are seeing today, again, as we all know things can change very rapidly.

Sergey Vastchenok - Oppenheimer

I do see a pricing pressure on DI all this quarter. Do you see some competitive landscape changing in this particular segment?

Rani Cohen

No, we don’t see any specific pricing pressure on DI and I think that the growth with the business picking up in the market, I think we’ll see a pick up in our business DI specifically and generally in the business, and I think the new product that we introduce can provide a lot of the growth potential for us.

Operator

Your next question comes from Shannon O’Callaghan - Barclays.

Shannon O’Callaghan - Barclays

In the press release you talked about a couple of points from your customers. Can you talk about, which geographic region that came from?

Adrian Auman

Although basically it came from all kind of places in the overall regions if FPD are very limited, so more or less we see the pickup everywhere. I don’t want to talk about specific customers, but generally the trends of things picking up and customers are trying to ramp up capacity. We see that in Korea, Japan, and Taiwan.

Shannon O’Callaghan - Barclays

I guess now that you have a full year of the PDI behind you. Can you talk about market share trend either overall for the entities combined or individually within test and if rate, how the hedge trended over the last 12 months even though business has been fairly low?

Rani Cohen

As you know, we don’t discuss market share numbers and figures, but I think that as expected, the PDI acquisition provided us with more comprehensive product this full year. It complimented the AOI that we had with additional yield management equipment and I think that we’re in a very good position going into this next what hopefully looks like an upturn in the industry.

The next round of CapEx increase, and that we don’t have competition, there’s competition everywhere. The competitive environment obviously, is challenging and gets more challenging as the years goby and technology matures and the things to become more of a commodity, but we feel very confident in our leadership position the market.

Shannon O’Callaghan - Barclays

One last question on the cost side, as you talk about where your current GAAP breakeven stands, and how do you see your OpEx trending into 2010?

Amichai Steimberg

GAAP breakeven point is around, I would say $90 million, $95 million a quarter, and non-GAAP $5 million, $6 million $7 million less than that in the quarter.

Operator

Your final question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

I was just hoping, you could give us a sense as see operating expense in Q4.

Erez Simha

I think the OpEx, we expect to project to remain at the same levels in Q4 as Q3 and that’s again is the continued ability to maintain the cost controls in this environment. We showed it very well. Q3 was similar to Q2 and we expect the Q4 to begin within the same range.

Jim Ricchiuti - Needham & Co.

Can you talk about the new DI machine that you’ve introduced? Can you elaborate on whether this expands your available market and maybe if there’s anyway that you can size the incremental of market opportunity or perhaps do you see this cannibalizing from your existing equipment?

Erez Simha

Let me try to take it one by one. The new DI, which we introduced, the main difference it has with compared to the existing systems in the market, ours and all of the rest, is the very high throughput. This machine is build and designed and there has been tested to work in a real volume production environment where DI as of today, talk to the DI was known for a quick turnaround prototype being a small volumes.

This machine is the first on the market that’s going to really give the high performance for a high density a circuitry act a very high throughput. So, one it doesn’t cannibalize anything that we have today, because it’s an additional market. It opens up the mass production or high volume production of what is called the HDI, High Density Interconnect and we’re talking today about in that category, mobile phones, smartphones, netbooks, all those applications or all those products fall under more or less under that category.

It’s difficult to estimate the size of the market for DI especially since it’s going to being a new technology for that market, it will probably take it some time for the penetration rate is something we have to see, but to give you an idea, this machine is supposed to replace an automatic exposure systems that are used today.

There’s about I would say hundreds of automatic exposure machine sold via to this market. So that kind of gives you an idea not that we’re going to start selling hundreds of DI next year, but that’s more or less the total available, potential for this application.

Jim Ricchiuti - Needham & Co.

Can you talk about pricing versus the older machines?

Rani Cohen

Again it depends very much on the configuration and whether it’s with automation or without, and we’re lines and so on, but, basically the ASP-0 are above $1 million.

Jim Ricchiuti - Needham & Co.

The margin profile, any sense, can you tell us if it’s higher than your existing PCB margins?

Rani Cohen

Again, depending very much on the exact deal and the exact integration, but basically yes it should be higher than our traditional margins.

Operator

At this time, there are no further questions.

Adrian Auman

Okay. Operator, thank you very much. We would like to thank you all for participating in today’s call. Again if you have any other questions or other materials, Please visit our website at www.orbotech.com. Thank you.

Operator

Thank you for joining us today’s conference call. All parties may disconnect at this time.

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