Camtek Ltd. (NASDAQ:CAMT)
Q2 2016 Results Earnings Conference Call
July 21, 2016, 10:00 AM ET
Ehud Helft - IR
Rafi Amit - Chairman & CEO
Moshe Eisenberg - CFO
Craig Ellis - B. Riley
Edwin Mok - Needham & Co
Larry Litton - Second Line Capital
Ladies and gentleman, thank you for standing by. Welcome to Camtek's Second Quarter 2016 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.
Yes, thank you and good day to all of you. So I would like to welcome all of you to Camtek's second quarter 2016 results conference call and I would like to thank Camtek's management for hosting this.
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 strategy and performance and Moshe will summarize the financial results in the second quarter. 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 may also contain 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 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 cover the content of this conference call.
In addition, during this call certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, 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 cooperation 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 Rafi Amit, Camtek's Chairman and CEO. Rafi, go ahead, please.
Thank you, Ehud. Hello to everyone and thank you for joining us today. We are very pleased to present strong quarter to date with revenues coming in slightly ahead of our guidance range, with solid profitability. Our revenues reached $27.3 million up 7% over Q2 last year and 12% sequentially. Our gross margin the quarter came in at almost 47%, the highest in eight quarters.
If you remember last quarter, we felt that gross margin would return to its normal range and we are pleased with the outcome. We are also satisfied with the solid level of non-GAAP operating income which came in at $1.9 million, a net income of $1.5 million. Our result are built on a solid performance from the semiconductor side of our business and the positive trend continuing to third quarter, where we are expecting revenue of between $27.5 million and $29 million.
I would like to go into more of the details of the performance of our semiconductor business. Sales in Q2 grew by 15% over those of last year specifically machine sales grew 18% year-on-year. We expect this business to show strong annual double-digit growth and it is shaping up to be growth driver for Camtek in 2016 and beyond. We continue to experience growth in all our major market segments. The advanced strategy, CMOS image sensor and MEMS.
The trend of Q1 remained robust and we are continuing to dominate the 3D metrology segment in the advanced packaging market. As we discussed last quarter, we have introduced new 2D inspection capabilities and in the first half of the year we installed multiple system for 2D applications as a few major customers in Asia for qualification process, some of which have already purchased multiple system from us. We are focusing on this segment and expect to increase our market share in the 2D market.
Regarding the fan-out. We are very active in the fan-out market segment which is one of the growth engines of the advanced packaging. We have introduced a new inspection method that compares the image acquisition of the dies and the constructed wafer with the CAD data used in fabricating the wafer. This new technology leverage our PCB inspection competent which are application to fan-out inspection requirements.
We installed the first system with good result and expect to ship additional systems later with this year. The CMOS image sensor and the MEMS market revenues account for about 20% of our semiconductor business and we expect to keep this level in the second half of the year as well. In general, our revenue mix in Q2 includes a number of repeat order from several strategic customer that are expanding their capacity and we expect more of such order in the next few quarters.
We are experiencing balanced contribution from all different region to which we sell. To summarize, we expect our semiconductor segment to continue to grow throughout this year and we expect double-digit growth over last year.
In the PCB market, the AOI business remains steady and solid. Recently we started selling our new AVI [ph] product line the Unicorn family and we believe that this year we will sell about $3millon of AVI related systems. With regard to our FIT business, the Gryphon we continue investing in improving the system, the ink and the process.
In addition to improving our ink, we are working together with living Solder Mask [ph] companies to allow the use of their ink in our system.
In addition to that we are continuing our efforts to look for strategic partner to take this business to the next level and we will update you when we have news to share. And with that, I would like to hand over to Moshe for a more detailed discussion of the financial results of the quarter. Moshe?
Thank you, Rafi. As Rafi mentioned, we are happy with our revenue trend -- this quarter. Second quarter revenues came at $27.3 million, revenues were 7% above those of the second quarter last year and 12% above those of the prior quarter.
Revenues from sales and services to the semiconductor industry in the second quarter were $19.8 million, representing729% of our total revenue. Second quarter revenues from sales and services to the PCB market were $7.5 million, representing 28% of our total revenues in the quarter.
The geographic revenue split for the quarter was as follows: China was the strongest region during the quarter representing approximately 35% of overall revenues. Taiwan was 30%, Korea 16%, rest of Asia 6%. USA sales were 12% and European sales were 1%. I will summarize the result on a non-GAAP basis. You can see the reconciliation [ph] between the GAAP and non-GAAP results in the tables at the end of the press release issued earlier today.
Gross profit for the quarter was $12.8 million representing a gross margin of 46.8%. This is compared with the gross profit of $10.9 million representing a margin of 42.7% in the second quarter of last year.
The improvement in the gross margin is due to the increased revenue in the quarter and the general product mix sold in the quarter. Operating expenses in the quarter were $10.9 million. This is compared with $9.7 million in the second quarter of last year and $9.9 million in the last quarter.
The rise in operating expenses versus Q1, 2016 is mainly a result of higher sales and marketing expenses specifically sales commissions to support the increase in the business activity during Q2 as well as higher legal expenses relating to the [Indiscernible] process. We expect lower legal expenses in Q3.
Operating profit in the quarter was $1.9, an increase of 68% over the $1.1 million reported in the second quarter of last year. Operating margin was 6.7% versus 4.2% in the second quarter last year. We know that approximately $1.5 million in quarterly operating expenses are attributed to our digital printing business unit reducing our overall profitability.
Net income for the second quarter of 2016 was $1.5 or $0.04 per diluted share. This is compared to a net income of $825,000 or $0.03 per share in the second quarter of last year. Cash equivalent short and long term restricted deposit as of June 30, 2016 were $31.8 million out of which, $7.9 million are restricted deposit, compared with $33.7 million as of March 31, 2016.
The Company reported a negative cash flow of $1.6 million during the quarter principally due to the expected growth in business in the second half of the year. Due to a local tax issue, the $14.6 million judgment payment to Rudolph Technologies has not been paid yet and is expected to be paid in the coming weeks. For the second quarter of 2016, we expect revenues of between $27.5 million to $29 million.
We will now open the call for questions. Operator?
Thank you sir. [Operator instructions] the first question is from Craig Ellis of B. Riley. Please go ahead, sir.
Thank you for taking the question and congratulations on the nice performance in the second quarter. I was hoping just to start with some additional color on where you see the strength in the third quarter and in more detail on what you see in the back half of the year from a sales standpoint?
As we said before, its look, I would say, very promising and we can continue seeing strong demand in the semi definitely for the second half. You know, our visibility is not more – usually we can see more clearly one quarter ahead, but this time even we can feel very comfortable with the first quarter, but we cannot say something for the 2017 yet, too early.
And what do you attribute that increased visibility to roughly sense, it would be typically be a quarter and now your visibility seems like it's stretched out a little bit, which is certainly encouraging?
Look, you know, we have a few parameters. First of all it’s a matter of backlog. Second, we can see utilization level of customers. Third, you know, we have daily meeting and discussion with customer where we can see what's going on. So we have whole parameter giving us this information.
That's helpful. And then the follow-up is on the gross margin. It looks like the margin dynamic should be sustainable. So, should we look fattish gross margins in the third quarter? Moshe, would gross margin revert back more towards the mid 40s level?
I believe that you know this is really a product mix-related more than anything else. To begin with I don't see any major change in the gross margin profile. Therefore, I would go back to the 44% -- 46% range. This quarter we experienced a few nice orders with healthy margin, but lot has said, this is going to be the case in Q3 as well.
Okay. That's it. And I'll get back in the queue. Thanks guys.
The next question is from Edwin Mok of Needham & Co. Please go ahead.
Hey. Thanks for taking my questions. So, first question I have is, trying to understand the 2D Inspection contribution, as you guys talked about introducing the new tool. I think you said, you have already received purchase order from some of your customers. Trying to understand how much that the 2D can field [ph] growth in the first half of this year? And do you expect that contribution to become bigger in the second half or is the same level, or when do we expect to kick-in as a driver?
Okay. In general, as we mentioned, when we introduced a new tool to the market we're first of all to pass qualifications. And this takes time. This is a matter of few months per customers, so, the first customers we already been qualified. We get a nice multiple system order. If we can mention without saying who is the customer of the both end systems.
And I assume that when we pass more qualification we can see more multiple order, but what we believe that it takes some time until then or the year to pass most of the major OSAT customer to pass the qualification.
The 10 system order you just mentioned is that something that you have already shipped or is it going to be ship in the second half of the year?
Part of it was already shipped. And part will be shift in the second half of the year.
Great, that's helpful color. You mentioned on the prepared remarks that your machine sales grew 18% year-over-year, if I did the math right that imply your service revenue or it's actually a little bit on the second quarter. Can you explain why?
Yes. This implies obviously that we express some reduction in service revenue, most of our service revenue at least on the semiconductor side of the house is timing material based and not service contract. Therefore it varies from quarter-to-quarter. And I assume this was the case in the second quarter of -- this year was a little bit down, nothing major though.
So, do you expect that part of your business that you can't and the one more than $1 million a quarter run rate. Is that fair?
I think that you know, as we increase our installed base and we will see more and more service revenue, but it could vary quarter-over-quarter depends on the timing material in the calls, the service call that we get from customers.
Okay. That's great. Last question I have on the advanced practicing that you had highlight and the new offering that you guys are introducing. And just, maybe just talk a little bit about the industry in general? Where do you guys see the investment is? We've obviously heard a lot of investment by the large foundry there, but on the OSAT investments are still carve [ph], somewhat more moderate if you will. Just give us some color in terms of how you see the fan-out investment would continue in the second half and how do you see that will go into 2017? Thanks.
Yes. I would say that, right now we can see one big customer that already start shipping high volume product to the market. We know there another one that's start now ramp-up his capacity for fan-out, some other customer still in R&D stage. So, I would say we can see more and more entering into this area, but it will take some time. I assume it’s a new technology. I assume that right now most of the product will be based on wafer level size. And I think that we can see maybe next year more for going to panel size, much bigger than wafer size, but still – most of them are still under R&D. But definitely this will take more and more market share in the next two years.
Great. That's all I have. Thank you.
The next question is from Larry Litton of Second Line Capital. Please go ahead.
Good morning. Moshe, I had some balance sheet questions. First of all, I think you said, the full Rudolph payment is coming due and if that's $15 million, did that eliminate the short-term restricted deposit, so then it will be down to a $15 million cash balance?
Yes. First of all, it will obviously eliminate the $7.9 million restricted cash and it will reduce our overall cash balance by $14.6 million to be precise.
Okay. And then just three items, I don't have the first quarter balance sheet, so maybe I'm just missing that. But can you just run through the increase in the trade accounts receivables, the inventories and even though long-term inventory. What's the implications or the meaning of those numbers?
Yes. Do you want to get the numbers or do you want to get the explanation for the increase?
Explanation. Okay. So account receivables and inventory are actually related to the cash – negative cash flow that we mentioned before. We see an increase in business volume in second quarter and also in third and fourth quarter. The increase in business volume in second quarter resulted in slightly increase in account receivable. Nothing major and we do expect Q3 to be with a positive cash flow and some improvement in the accounts receivable.
On the inventory, most of the increase relates to increase in the semiconductor space in anticipation for a stronger second half and specifically strong Q3. On the long-term inventory this is mainly spare parts to support the installed base and this is the most of the long-term inventory that we have.
So, it's not a big component of Gryphon and any of the inventory changes?
Can you repeat the question please about the Gryphon?
There's not a big Gryphon inventory in terms of any beta testing or something like that shows up in inventory?
No. All the Gryphon including the qualification, those systems that are in qualification process are all included in our inventory as we never really recognized any revenue. So, we do have few millions of dollars of the seeps [ph] business included in the inventory.
Okay. And lastly, but the account receivable increased, does that reflect to some extend that the shipments happened late in the quarter?
Some of them were late deliveries, but not much. But we did have slightly backend loaded quarter deliveries.
I would like to add something about to understand the mix of our product and the effect of this on inventory collection and everything. In general the advance packaging includes a lot of new technologies and each technology needs different feature on the system.
Now, we don't know – when we start building the machine, we don't know yet what is going to be the configuration. So – and delivery time in the market right now could be six weeks, eight weeks. So, if we want to serve customer and ship machines on time, it affect our inventory. We have to build the machines [indiscernible]. We have to be ready when we get the final configuration. We have to develop and install the new feature. We have to ship it to customer and some time to finish the integration in customer sites. All these definitely affect the collection affects the inventory, but this is the type of or the portfolio of the market right now.
Okay. Thank you.
Thank you. [Operator Instructions] 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?
I would like to thank you for your continued interest in our business. I look forward to talking with you again next quarter. Thank you and good bye.
Thank you. This concludes the Camtek's second quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.
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