Camtek's (CAMT) CEO Rafi Amit on Q4 2015 Results - Earnings Call Transcript

| About: Camtek Ltd. (CAMT)

Camtek Ltd. (NASDAQ:CAMT)

Q4 2015 Earnings Conference Call

February 11, 2016 9:00 a.m. ET

Executives

Ehud Helft - GK Investor Relations

Rafi Amit - Chairman and CEO

Moshe Eisenberg - CFO

Analysts

Craig Ellis - B. Riley

Brian Kinstlinger - Maxim Group

Edwin Mok - Needham

Craig Ellis - B. Riley

Operator

Ladies and gentleman, thank you for standing by. Welcome to Camtek's fourth quarter and year end 2015 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. 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 Relations or view it in the news section of the company's website, www.camtek.co.il.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

Ehud Helft

Thank you and good day to all of you. I would like to welcome all of you to Camtek's fourth quarter and full year 2015 results conference call and I would like also to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's Chairman and CEO and Mr. Moshe Eisenberg, Camtek's CFO.

Rafi will provide an overview of Camtek's performance and strategy going forward. Moshe will discuss then the recent development and summarize financial results. We will then open the call to take your questions.

Before we begin I would like to remind our listeners that certain information provided on this call are internal company estimates unless otherwise specified. This call also contains forward-looking statements. These 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 this forward-looking statements contained whether as a result of new information, future events, changes in expectation or otherwise.

Investors are reminded that the actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for services and products, the timely 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 content of this conference call.

In addition, during this call certain non-GAAP measures will be discussed. These are used by management to make specific decisions, focus future results and evaluate the company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing co-operation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

And now I would like to hand over the call to Mr. Rafi Amit, Camtek's Chairman and CEO. Rafi, go ahead, please.

Rafi Amit

Thank you, Ehud. Hello to everyone and thank you for joining us today. We are pleased with our financial results of the fourth quarter and especially our overall performance in 2015 as a whole.

Our revenues in the fourth quarter grew by 25% over those of last year to $25.8 million. For the year we reached revenue just shy of $100 million, up 12% over last year and our highest level since 2011. Our non-GAAP operating income was $1.8 million for the quarter, a 151% increase over the fourth quarter of last year. For the year our operating income was $6 million, a 5% increase over last year.

Our results in the quarter and throughout 2015 as a whole were driven by strong semiconductor sales, in particular solutions through the advanced packaging market, as well as CMOS Image Sensors and MEMS sectors. In this business, over the past few months we have had number of successful penetrations with our Eagle systems into global customers, especially in Asia to which we have never sold systems in the past. We see the advanced packaging part of the semiconductor space continuing its growth and the increasing demand.

In the PCB market, the AOI business remains fairly steady and our focus on high end customers positions as a leading supplier in this segment. With regard to our digital printing technology, we do see very positive progress and result in our four sites that are now running the Gryphon. I will elaborate on these in few moments.

Overall looking into 2016 we expect continued double digit growth from our semiconductor business combined with a relatively stable PCB business. We have all heard and read the analyst report with regard to the recent slowdown in sales of the smartphone and tablets which no doubt will have some effect on capital expenditure by some of our large manufacturers that we sell to. We all are [ph] keeping a close eye on development. However we remain encouraged from the discussions we have had with our customers, specifically with regard to their plan in expanding their capabilities in the important growth area such as advanced packaging, CMOS image sensor and MEMS.

Moving into more detail on our semiconductor inspection and metrology business, sales in Q4 were on track and we achieved 24% growth for 2015 and record sales for this business, despite another flat year of CapEx for the semiconductor market as a whole. As we stated last quarter, the growth in 2015 was evident in the major market segments that we focus on – the advanced packaging, CMOS image sensor and MEMS. I am pleased to say that all our regions contributed significantly to our revenues with Taiwan, China and Korea being the dominant territories. We managed to increase our market share in Asia and specifically in Taiwan where we were able to penetrate new tier 1 account.

The advanced packaging market represents about 50% of our semiconductor business. This segment is expected to grow about 20% per year for the foreseeable future and we believe it will be the main growth driver for Camtek business in the year ahead, including our PCB inspection business.

Historically we have dominated the 3D metrology applications in the advanced packaging market and few 2D application such as CMOS image sensor and MEMS. During the quarter, we introduced our new 2D inspection capabilities on our Eagle at Semicon Korea and expect to gain substantial market share for all 2D applications as 2016 progresses.

In addition, we are planning to announce next month in Semicon China a new Eagle version for 2D applications that will utilize new technology and will enable us to address new applications and markets. While we are seeing of its cuts [ph] at some of the major industry players, at this point our market segments are less sensitive to these. We believe that there is a specific segment in which we are the major player, in particular the advanced packaging segment, we continue to grow on an absolute basis as well as the overall portion of wafer fabrication equipment spending. We expect our semiconductor segment to continue growing in 2016 at a double digit rate while first quarter sales will be well ahead of the first quarter of last year. They will be similar to what we did in the fourth quarter mainly due to the impact of the Chinese New Year holiday.

2015 has indeed turned out to be a very strong year for semiconductor sales and as I said earlier, we closed the year with a 24% growth in our semiconductor business.

Regarding the AOI business for the PCB market, in general and specifically in the IC substrate segment, our high end customers are investing a lot of efforts in new technologies for advanced IC carrier and embedded IC. We are supporting the R&D efforts of our customers with 2D and 3D integrated AOI and new features. During Q4, over 50% of our business came from five customers from the top 10 PCB manufacturers.

With regard to the Gryphon, as I mentioned, we continue to take feedback from customers and make improvements and adjustment to our products, enabling Gryphon to feed most of the customer requirements more effectively. We currently have four system with customers one of which is now being used actively in production and shipping finished products with printed soldermask and legend to the customers and the rest are under evaluation process.

We are collecting ongoing feedback from these four customers and the end-user of these customers. The comments we have collected so far have led us to allocate and focus all the resources to meet this particular customer demand and their end-user requirements before we continue to approach new customers. However, we do hope to ship a few more systems to customers at a later stage this year.

Our marketing team is also consistently identifying new and interesting applications that can replace and improve many of the conventional and critical PCB manufacturing process. As time passes and we continue to improve Gryphon, we are increasingly confident that Gryphon will succeed and we remain bullish about its long term potential. However we recognize that commercialization process has been progressing at a slower pace than we had hoped. Given the annual expenses of approximately $5 million to $6 million and its impact on our profitability, we are considering bringing a strategic investor that can help take it to the next level and also lower the burden and the risks on Camtek side.

As I said, all this doesn’t change our overall confidence in our digital printed technology which we see as revolutionary and disruptive technology which will eventually change the way that PCB companies manufacture.

Before moving over to Moshe, I would like to discuss the Rudolph litigation which came to an end after close to 10 years. Obviously we are disappointed with the final outcome in connection with the Falcon system. The overall effect on us will be a one-time payment to Rudolph of $14.6 million. I do stress that this ruling is limited to our Falcon sales in the United States which we have not solved in the last few years. This ruling also doesn’t limit our ability to continue providing maintenance and repair services for these Falcons previously sold. While this episode is finally drawn to a close, Rudolph has launched other patent litigation against us in which it demands as part of their strategy to compete with Camtek.

With respect to our other products, the Eagle and Condor products use a different technology. We have been very careful and mindful to take into account all the claims that appeal in the Falcon trial. These products do not strobe based on velocity to face continuing [ph] inspection as required by the Rudolph patent. Moreover, Camtek holds the US patent for its strobe concept. Camtek’s US and advanced technology to be introduced next month in Semicon China move to different direction, it doesn’t use strobe at all. We believe that this change makes the patent infringement allegation a non-issue with respect to Camtek’s future sales. Just to emphasize, their litigation is only limited to sales in the US which makes up less than 10% of our revenue.

And with that, I would like to hand over to Moshe for a more detailed discussion of the financial results of the quarter. Moshe?

Moshe Eisenberg

Thank you, Rafi. As Rafi mentioned, we are happy with our financial results of the fourth quarter and the full year, which were in line with our strong expectations. We also expect mostly our semiconductor business to continue into 2016 and we look forward to another year of strong growth.

Before I will comment the fourth quarter results and provide a summary of the full year financials, I would like first to cover all the one-time expenses and adjustments affecting our results this quarter.

The first and the most significant one is the $14.6 million provision with respect to Rudolph litigation as discussed just now by Rafi. This amount will be paid in the next few weeks as required. With regard to the digital printing, as a result of the slower than anticipated penetration process of the FIT technology into the PCB market, we recorded $1 million inventory writedown provision to the one color Gryphon systems. This is the initial model which we have – by now replaced with a new two color model. In addition, we recorded $1.6 million impairment charge against the remaining goodwill and technology included in the Printar acquisition in 2009.

Finally, we successfully renegotiated the contingent liability to the shareholders of Printar. Instead of the original $2 million conditional payment, we have paid off the liability with a $400,000 payment mostly in stock. As a result, we recorded an income of $1.4 million.

All of these one time expenses and adjustments have been excluded from the non-GAAP numbers which I shall now explain. Unless otherwise stated, I will summarize the rest of the operating results on a non-GAAP basis. You can see the reconciliation between the GAAP and non-GAAP results in the table at the end of the press release issued earlier today.

Fourth quarter revenues came at $25.8 million. Revenues were 25% above those of the fourth quarter of last year. Revenue from sales and services to the semiconductor industry in the fourth quarter were $18.4 million, representing 71% of our total revenues. Fourth quarter revenues from sales and services to the PCB market were $7.4 million, representing 29% of our total revenues in the quarter.

The geographic revenue split for the quarter was as follows. For the first time in many years, Taiwan was the strongest region during the quarter, representing approximately 38% of overall revenues. China was 21%, Korea 16%, rest of Asia 15%, US sales accounted for 7%, and European sales were 3%.

Gross profit for the quarter was $11.7 million, representing a gross margin of 45.4%. This is compared with a gross profit of $9.7 million, representing a margin of 47.2% in the fourth quarter of last year.

Operating expenses in the quarter were $9.9 million. This is compared with $9 million in the fourth quarter of last year. Operating profit in the quarter was $1.8 million, an increase of 151% over the $700,000 reported in the fourth quarter of last year. Operating margin was 6.8% versus 3.4% in the fourth quarter last year.

Net income for the quarter of 2015 was $2.9 million or $0.08 per diluted share. This is compared to a net income of $480,000 or $0.01 per share in the fourth quarter of last year.

I will now discuss results for the full year of 2015. Revenues for the year came at $99.3 million and were up 12% over those of last year. Revenues from the semiconductor industry were $69.1 million representing 70% of our total revenues. Revenues from the PCB business were $30.1 million representing 30% of revenues.

Gross profit for the year was $44.2 million representing a gross margin of 44.5%, this is compared with a gross margin of 46.8% last year. Operating expenses in the year were $38.2 million. This is compared with operating expenses of $35.6 million last year. Operating profit for the year was $6 million or 6% of revenues. This is compared with an operating income of $5.7 million last year.

Net income for the year was $5.2 million or $0.16 per share. This is compared to a net income of $4.5 million or $0.15 per share last year. I would like to note that our direct expenses toward the digital printing went up from approximately $3 million in 2014 to around $5 million in 2015, while we were able to improve our operating income in 2015.

Net cash and cash equivalents and restricted short term deposits as of December 31, 2015 were $38.7 million, compared with $26.8 million as of December 31, 2014. We generated an operating cash flow of $2.4 million in the quarter and $1.5 million during the year.

For the first quarter of 2016 we expect revenues of between $24 million and $25 million. As is typical in the first quarter, the Chinese New Year holiday period leads to a seasonal sequential decline in revenue mainly due to a weaker sales to the PCB markets. Given this 13% year-over-year growth as the guidance we told, we are very satisfied that our growth remains robust driven by strong demand for our solutions and ongoing semiconductor sales.

Our gross margin and operating expenses in Q1 2016 are expected to be around the same level of those recorded in Q4 2015. I also note that in view of the further ongoing claims being pursued against us by Rudolph, our IP legal expenditure is not expected to be significantly reduced.

We will now open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Craig Ellis of B. Riley.

Craig Ellis

Thank you for taking the question, gentlemen. I wanted to follow up on some of the product and regional commentary first. Rafi, you mentioned that in calendar ’16 you expect a substantial inspection share gain. I was hoping to get some color regionally on where you expect to be picking up share?

Rafi Amit

Look, in general when we analyze the market, and what we call the back end market, we estimate it is something like about close to $200 million per year. Still I would say that most of it is to the surface inspection and the 3D metrology. So right now most of our revenues come from the 3D, I would say Camtek is the leading supplier in this application, practically except the few application like CMOS image sensor, MEMS, most of the 2D inspection, we were not involved and recently we developed a very nice solution for the 2D inspection, so we believe that in 2016 we will take definitely more market share on the 2D application as well. I would say it’s almost every customer, most of this application is for 2D and so actually every customer that we already penetrated with 3D definitely will give us a chance to improve our capabilities in 2D. So it’s not any specific customer, it’s lot of customers.

Craig Ellis

And then switching gears to the new Eagle product that you will be introducing next month at a trade show. What are the implications for gross margins and is there any operating R&D impact as you transition to that new product line that we should think about as we look at our models for this year?

Moshe Eisenberg

We’re definitely going to increase some of the operating expenses in 2016 in light of the expected growth in the semiconductor space. Yet, we expected to report the higher revenue and actually higher operating profit this year than last year.

Craig Ellis

Thanks for that and then lastly from me and then I will get back in the queue. 2015 marked a very successful year for the company with the share gain that picked up in Taiwan. Would you expect to sustain the mix – the geographic mix of business that you had in the fourth quarter through 2016, or should we expect the Taiwan portion would move back towards more historic levels?

Operator

The next question is from Brian Kinstlinger of Maxim Group.

Moshe Eisenberg

Just before maybe you asked the question, Brian, I want to address Craig’s points on Taiwan, and to your point, Craig, the answer is yes. We intend to keep higher portion of our revenue in Taiwan as we had in 2015. We were able to gain a few top tier 1 customers in Taiwan in the last few quarters, and we expect to sell to those customers during 2016.

Brian Kinstlinger

Based on the additional pending litigations you have talked about, are there any changes to your operations at all in the US?

Rafi Amit

No, we don’t have because in the last few years we sell Falcon and Condor as we mentioned and discrete, all of them do not make any infringement, and with the new product, the new generation of our Eagle that we introduce next month, definitely I don’t see any reason for Rudolph to file any lawsuit because it’s far away from its patent. So I don’t see any reason that something has changed in the US. In general, US – most of the back end industry moved to Asia, and what’s happened in the US from year to year we can see less and less, this is naturally, but on top of that, we continue it as usual in the US.

Brian Kinstlinger

And then can you highlight when you expect your next generation printer will be ready for available for sale and then can you talk about the performance and feedback from your one customer where you have it in production right now?

Rafi Amit

I would say that actually when we introduce it next month it will be ready for sales within weeks, it’s not something – and it will be improved during the 2016 all the time. So we had a lot of feature from hardware and algorithm software and especially light system, light system is definitely different technology. So we got very very good result in the detection false solid, any aspect of the inspection. So that’s why we feel very encouraging to – that we can take more – gain more market share in all the 2D applications especially with this model.

Operator

The next question is from Edwin Mok of Needham.

Edwin Mok

So first, just quick follow up on the Eagle. Rafi, you said that it will be introduced next month. Have you guys placed any evaluation there already and you’ve mentioned you have some customer feedback, maybe just doing customer there already, can you kind of give some color on that, the customer marketing or the customer communication part of it?

Rafi Amit

We do some – definitely we do some evaluation on customer side. I would say that – as I mentioned there are few models, the optics is one, the algorithm, the software, there are a few elements and every one of them was testing as standalone and altogether we made a few testing and add-on evaluations, so we feel very confident with the results. That’s why I said that it’s almost ready for sales. I believe that by the Q2 we’d see more and more system on this new model.

Edwin Mok

And then I think on the recurring margin, you mentioned penetrate into your one customer in Taiwan. Just to clarify, is that – are those CMOS image sensor or are those for MEMS customer? I just want to clarify that. And then are those – were those penetration already – did you already decide shipping to those customers or are those – some of those penetration are wins that you expect to develop greater revenue in 2016?

Rafi Amit

No, when we mention penetration, it means we already sold systems to these customers, and in Taiwan, I would say that right now I think most of the tier 1 customers we’ve already penetrated and a year ago we didn’t fuel them more out of the installed base. Some of there we started with the 3D, Camtek is the leading supplier and later on and in the last few months we made some 2D application and based on the result we believe that now we go also with 2D. So I would say that two, three of them already qualified Camtek also in 2D application. As I mentioned, for every 3D probably you sell two, three 2D. So the potential is huge, if customer opens the budget and start to purchase more systems, probably this is the proportion 2D and 3D. So then we have much more potential to sell to these customers.

Edwin Mok

Are these OSATs or are these actually –

Rafi Amit

Both.

Edwin Mok

I guess I have two other questions. In the fourth quarter, Moshe, on the fourth quarter financials, I noticed that there is a tax gain in the quarter beyond, how to gain from the litigation expense that you guys have. What was the gain?

Moshe Eisenberg

The gain has to do with some different calculation of the future tax rate and as a result, we had to create a tax asset. And this is the gain.

Edwin Mok

Can I ask how much was that?

Moshe Eisenberg

$1 million.

Edwin Mok

And then lastly on the Gryphon, I think you guys have indicated that you are looking in and talking to strategic investor. Can I ask, how do you guys think about that, is the direction to spin it off, to become a private investment, or is it just specifically on Gryphon, and maybe you give us some color on that, and have you started the process on that, that would be helpful.

Rafi Amit

I would say right now we cannot make any decision because it portends on the strategic partner, some partners can come and if you look, we need also the marketing organization of the PCB inspection, look, I already sold to this industry, I only mean that this technology, so I would say that this depends on the investor. So it’s too early to say what is going to be the structure. But in general we are open to future combinations but the main target is to reduce the investment in this venture and to get more help on accelerating the penetration to the customer. So if we can find the investor that helped us doing this would be excellent for us.

Operator

We have a follow-up question from Craig Ellis of B. Riley.

Craig Ellis

Thank you. Just following up on Edwin’s last question. With respect to timing on – find a potential strategic investor, can you help us understand the timeframe that you are looking at and would you like to do something in the first half for assist, a longer term desired to get some something done some time in calendar ’16.

Rafi Amit

Yes, hopefully we do enjoy the 2016. We already started – we’re submitting, I would say that I invest most of our my efforts for this project and hopefully we get result during this year.

Craig Ellis

Thank you Rafi and then Moshe, can you talk about the post litigation payment, cash position of the company and how you are feeling about the location of cash and use of cash as you continue to grow the business and use working capital to support that growth?

Moshe Eisenberg

So we ended the year with $38.7 million of cash. The expected payment is around 14.6 million which will leave us with close to $24 million. The business is generating cash. So I feel very comfortable with the cash position that the company has and for now I don’t see any need for any additional cash resources for us.

Operator

The next question is from John Art [ph]. Please go ahead.

Unidentified Analyst

Hi, could you talk about what your market share and the size of market is for both 3D and 2D inspection, and are you providing any preview at all as to how significant the new 2D capabilities are that you’re going to be announcing next month?

Rafi Amit

In general, as I mentioned before if I take the Rudolph sales and the Camtek sales together and the rest of the work sales, so we are maybe about 200 million, 220 million, total analytical [ph] data market, and I would say that it’s about, I think 50% goals for 2D and little bit more and maybe 60%, 70% to 2D and the rest is for 3D. This is roughly the market now. So it’s easy for us to collect data because nobody distinguishes between 2D and 3D, they talk about one market, they call it like the back end market. This is our NOI, the way we made the calculation and decision, we figure customer and applications and system. So this is roughly the overall number.

As I mentioned, except the CMOS image sensor or MEMS, most of the 2D applications, I would say definitely Rudolph is the dominant player in this area and Camtek is a dominant player in the 3D. And since our system can do both, 2D and 3D and now our 2D capability is superior, I believe that we can start taking more 2D applications and – I’d say based on the evaluation, testing that we did in some customer and we saw results and the appreciation of the customers. So based on this I believe that if we talk – a year from now we can see more market share in 2D compared with this year.

Unidentified Analyst

And so when you say your 2D capabilities are now better, is that dependent upon the product announcement at Semicon China or is that already the case?

Rafi Amit

It’s already the case. What we do in the – there are always ongoing improvements. Even right now we have – when we make some few add-on evaluations, it’s based on the current Eagle. Now the new Eagle that we introduce next month will have more improvements. And it will increase our capability in 2D. That’s what I feel more comfortable when we have the new model next month but even with the current model we definitely will get qualification already by few major customers on the 2D only. So we feel very comfortable with the current capabilities but definitely we have a lot of idea how to make better improvement in the next model and during 2016.

Unidentified Analyst

And are you willing to talk about what qualifications you’ve already received for 2D?

Rafi Amit

What is – name of customers?

Unidentified Analyst

Yes. Is that possible?

Rafi Amit

We couldn’t mention name of customers but I just can tell you there are – one of them is OSAT, the second is also OSAT and two of them provide the product and it was approved by the end user that is a big company. So I would say that the tier 1 and plus that already qualify our capabilities. It is not a minor customer, it’s definitely tier 1 customers.

End of Q&A

Operator

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 www.camtek.co.il beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

Rafi Amit

I would like to thank you for your continued interest in our business. We intend to present to investor and analyst at the Roth Conference in March as well as on a road show in New York and San Francisco. And we look forward to seeing some of you there. To the rest of you, I look forward to talking with you again next quarter. Thank you and good bye.

Operator

Thank you. This concludes the Camtek’s fourth quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.

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