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Orbotech, Ltd. (NASDAQ:ORBK)

Q2 2008 Earnings Call

August 4, 2008 9:00 am ET

Executives

Rani Cohen - Chief Executive Officer

Amichai Steinberg - Executive Vice President and Chief Financial Officer

Adrian Auman - Vice President of Finance and Investor Relations

Analysts

Chuck Murphy - Sidoti & Co.

Jim Ricchiuti - Needham & Co.

Sergey Vastchenok - Oppenheimer & Co.

Andrew Abrams - Avian Securities

Eric Mydukel - Dominick & Dominick

Irit Jakoby - Susquehanna

Ziv Tal - Oscar Gruss

Matt Lipman - Tiedemann & Co

Darice Liu - Maxim Group

Operator

Welcome to the Orbotech, Ltd. Q2 2008 conference call. (Operator Instructions) Now I would like to turn the meeting over to Adrian Auman.

Adrian Auman

This is Adrian Auman, Vice President of Finance and Investor Relations of Orbotech. Joining me on the call today are Rani Cohen, Chief Executive Officer and Amichai Steinberg, Executive Vice President and Chief Financial Officer.

I’d like to take this opportunity to inform everyone that management will be presenting at the upcoming HSBC eighth annual emerging market, Investor Forum in London on September 2, the 2008 Maxim Growth Conference in New York on October 7, and the IMGTMT Forum in New York on October 17. 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 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 would like to turn the call over to Rani Cohen.

Rani Cohen

Our second quarter results reflect the challenging global environment in which we all find ourselves. As you know the current economic setting is unsettled and uncertain and Orbotech is not exempt from its effects. Both our PCB and Medical Imaging segments were particularly impacted, although FPD still remains strong reflecting the industry wide expansion. We are making good progress in the acquisition of Photon Dynamics and continue to balance the need to grow and develop our business with fiscal prudence.

Starting as usual with the PCB market, revenues from data and assembled PCB related products were down slightly on a sequential basis and down from last year. As we reported last quarter, we believe the decline in PCB bare board is due to the global environment and not competition. Customers are not canceling expansion plans, but are delaying deployment. Once confidence is restored we expect the market to reflect underlying demand.

During the quarter we introduced the PerFix, our new Automated Optical Repair System an important extension to our PCB bare board product line. The system allows for the automated repair of shorts in very high end PCBs, something that was not possible before. With the introduction of PerFix, Orbotech is creating a new product category, one which offers our customers considerable value. We expect first sales in the third quarter.

Market uncertainty has affected sales of our direct imaging systems, which is a big ticket item, but we believe that our leadership position in the market remains unchanged. In Q2 we sold 15 units. For the full year 2008 we expect to sell about 75 to 80 systems. Sales on Ink Jet printer systems are about flat with last quarter.

We are currently preparing to release the Sprint; our new model which offers significantly improves throughput and performance. We are optimistic about the outlook for these systems. As a reminder our Ink Jet business is the result of our acquisition of New Systems of Italy, a little over a year ago. We are very pleased to be introducing important new products in this time frame.

Turning to FPD; FPD remains strong. As you know the FPD market is driven by long term investment cycles and the continuing demand for flat panels and although there is some anxiety in the market and short term fluctuations in end user demand, the fundamental trend is clearly up with strengthening demand for panels and continuing stabilization in the panel prices.

Our customer’s expansion plans remain on track. We are raising our expectations for FPD revenues to approximately $110 million this year from our previous estimate of $100 million. As you know during the quarter we announced the definitive agreement to acquire Photon Dynamics.

We are excited about this step and optimistic about the synergies between the companies and the opportunity it offers to better serve our customers. It is a natural evolution for both companies. As we have said we expect the deal to be cash accretive immediately and expect the substantial contribution to the bottom line in 2009. We continue to expect the deal to close before the end of 2008.

Medical Imaging; that is 3D which we acquired last year had a disappointing quarter. We believe that the down turn in sales is due to economic uncertainty in the US which is causing private clinics to become very cautious about capital investment. At this point we are targeting sales of $20 million for the year and not the $25 million as previously felt.

Let me conclude by reiterating that the economic setting has obviously become very challenging. The diversity and breath of our product lines offer us some measure of protection, but we must remain cautious and vigilant. Orbotech has a long history of successfully balancing the need to grow and develop with fiscal responsibility in difficult environments well run company’s stand out.

Now let me give you some further guidance. For the quarter we expect revenues in Q3 to be similar to Q2, as for the outlook for the full year, given the uncertain environment even though we are raising our guidance for FPD we are leaving our guidance for the full year unchanged. I will now turn it over to Adrian for discussion of our finances.

Adrian Auman

Revenues for the second quarter of ‘08 totaled $105.1 million compared to $100.5 million in the first quarter of ‘08 and $88.6 million in the second quarter a year ago. Net income for the second quarter of ‘08 was $5.3 million or $0.16 per share diluted compared to net income of $3.7 million or $0.11 per share diluted in the first quarter of '08 and a net loss of $3.4 million or $0.10 per share diluted in the second quarter of ’07.

Sales of equipment to the printed circuit board industry relating to bare PCBs were $34.5 million in the second quarter of ’08, compared to $36.5 million in the first quarter and $44.4 million in the second quarter of '07. Sales of FPD inspection equipments were $29.8 million compared to $20.4 million in the first quarter and $11.2 million in the second quarter of last year.

Sales of equipment to the PCB industry relating to assembled PCBs were $7.5 million compared to $8.1 million in the first quarter of this year and $7.5 million in the second quarter of ‘07. Sales of our automatic check reading products were $2.7 million in the second quarter ’08 compared to $2 million in the first quarter of ’08 and $2.8 million in the second quarter of last year.

Sales of Medical Imaging equipment were $4.4 million in the second of ’08 compared to $7.3 million in the first quarter of ’08; don’t forget the company acquired this business in August 2007. In addition service revenue for the second quarter increased to a record $26.2 million from $25.5 in the first quarter ’08 and $22.5 in the second of ’07.

Let me give you the usual breakdowns of sales by products and geography by percent for the second quarter; PCB bare board equipment sales 43%, assembly 10%, flat-panel display 38%, medical emerging 6% and OrboCAR 3%. Geographically, for the quarter Pacific Rim 64%, Japan 8%, North America 13%, Europe and others 15%. Of the Pacific Rim sales revenues, 13% came from Taiwan, 46% from China and 37% from Korea.

Gross margins for the second quarter were 41.2% slightly below the range we provided to the street on our last call. We expect gross margins to be in the 41.5% to 42% range for the third quarter, lower than guided earlier due to the weaker U.S. dollar.

Our operating expenses increased from Q1 levels above what we guided the street. The weakness in the U.S. dollar aggressively impacted net income during the second quarter of 2008 by approximately $0.03 per share compared with the first quarter of ’08. If the Shekel-Dollar exchange rate remains at current levels it is expected to result in a similar adverse impact on net income in the third quarter of ’08.

Turning now to the balance sheet, our balance sheet remains strong. Our cash and marketable securities decreased to approximately $196 million. The company’s marketable securities currently include approximately $27.6 million of auction rate securities tied to student loans. While the company believes that there is no credit risk attached to this ARS portfolio, due to the lack of the liquidity which these securities have experienced during the last few months the company recorded a temporary write-down of approximately $1.1 million against these ARSs and we classified them as long-term cash investments.

Our DSO’s decreased to 133 days due to strong collections in the second quarter. We expect DSO’s to remain in the low 130’s for the remainder of the year. As to the Photon transaction we expect it to be immediately cash accretive. We expect to realize operational synergies of $10 million to $15 million during 2009. We will be more specific as to the exact timing of these synergies after the transaction closes which is expected to occur within the next two months.

This concludes our prepared remarks. At this point we’ll be glad to answer your questions; operator.

Question-and-Answer Session

Operator

(Operator Instructions) Chuck Murphy with Sidoti & Company, you may ask your question.

Chuck Murphy - Sidoti & Co.

First question as far as the currency stuff, the Shekel has falling in relation to the dollar so far this quarter. I mean even assuming that’s the case would you still have the negative impact in the third quarter?

Adrian Auman

Yes, we will because we had a certain amount of Shekel-Dollar hedged at a higher rate for the first half of the year which we don’t have for the third and fourth quarter, so we estimate it to be about $0.03 a share per quarter. We’re hoping that if the dollar rate does go up against Shekel, we can recover some of that.

Chuck Murphy - Sidoti & Co.

Okay and any sense yet, on what the amortization restructuring cost will be for Photon?

Adrian Auman

Chuck, at this point again it’s hard to estimate, but of course we will provide guidance on that as soon as we know the exact figures.

Chuck Murphy - Sidoti & Co.

Okay and my last question as far as the weakness in the medical area, I mean was hedges purely macro, was it any bit of order timing?

Rani Cohen

What we can is its general weakness in the medical market and the medical imaging market and I think its all of our sales are to North America and I think that was the main cause, it was a general market situation.

Operator

Jim Ricchiuti with Needham & Co.

Jim Ricchiuti - Needham & Co.

Just a question on the flat-panel business; we’ve seen very strong bookings out of Photon for the last three quarters and a record backlog; is there any reason why you haven’t been experiencing the similar trend, but you raised your guidance obviously, but I’m just trying to get an idea of how the magnitude of the bookings activity is tracking in your flat-panel business?

Rani Cohen

As you know we don’t disclosed our booking numbers and backlog numbers, but we’ve also experienced very strong bookings and have a very strong backlog record, if you want without disclosing the number, so yes we definitely see the same trends.

Jim Ricchiuti - Needham & Co.

Rani, how do you see the second half? I’m just curious if we’ve gone through a real burst of activity and things will slow down a bit and then do you see it accelerating in the flat-panel business for the latter part of the year?

Rani Cohen

If you’re talking about bookings, no I don’t think it will accelerate towards the second half of the year and we all know the names of the customers and what their investment plans are and so on and so forth, so I think the next wave of bookings is going to come next year when they start formulizing or start issuing the POs for the next fabs that are coming up. Some of them have been announced and some not to yet, but I think for the second half of ’08 we’ll see mainly the revenues of all these bookings that we have now, but I don’t think the bookings that we have now, but I don’t think the bookings are going to continue at the same phase.

Jim Ricchiuti - Needham & Co.

Right and then do you expect the next wave of this if you will; do you see that in the early part of ’09 or do you see that more towards the second half?

Rani Cohen

I think at this point and obviously it may change, I think it will be in the first half. I can’t say right now if it’s going to be more in the first quarter or second quarter, but I think it’s going to be in the first half, but again that can change according to the customer’s plans and when exactly they finalize their decisions initially the appeal.

Jim Ricchiuti - Needham & Co.

Okay and just a final question. Could you just remind us again, you said your guidance for the year is unchanged? Would you just remind us what that guidance is for revenues?

Adrian Auman

Yes, Jim just if I can phrase again the guidance mentioned by Rani, we are indeed increasing the guidance for the flat panel display by $10 million, but we keep the 425, the 430 number for the year given the uncertainty and the very limited visibility we have on the PCB and the assembled board.

Jim Ricchiuti - Needham & Co.

Okay. I mean just given the weakness in the medical area and the uncertainty in PCB, I’m just trying to get a sense, as you think about the PCB equipment business, can you just talk to us a little bit about what some of the dynamics are there in terms of your guidance? Are you assuming a decent contribution from the new PerFix products you talked about? I think direct imaging you’ve backed off what you’re assuming for the full-year? So again, I’m just trying to understand how you’re viewing the PCB equipment, the bare board business over the balance of the year?

Rani Cohen

Look Jim, as we always say, the PCB is very, very hard to predict and the backlog there is nothing like the SPG market. To try to give you a feeling of what we see right now and with the very limited confidence that we have in that, I think the new products are definitely going to start to contribute, the (Inaudible), the PerFix, but it won’t be anything significant compared to AOI or DI. We expect the DI to be a bit stronger in the second half compared to the first half and basically AOI more or less the same. So, basically that’s where we see the things going now, but again this is with a lot of uncertainty and we’ll have to see how the market turns out.

Jim Ricchiuti - Needham & Co.

Why do you see the DI running stronger second half?

Rani Cohen

Because the DI is a little longer sales cycle than our other equipment, because of the fact that it’s a higher ticket item and it needs more investment from our customers and we’re in sales cycles now that give us a bit of confidence that its going to be better in the second half.

Operator

Sergey Vastchenokw with Oppenheimer; you may ask your question.

Sergey Vastchenok - Oppenheimer & Co.

In regards to the acquisition of Photon Dynamics, I’m just wondering how do you see the company in a year or two years going forward when its going to be up 70% FPD play, which is a more volatile business that could increase the volatility of the total company revenues, so can you share with us, how do you look at it?

Rani Cohen

Hi, Sergey, it’s Rani. I’m not sure I understand your question. The way I see it is the Photon Dynamics acquisition puts us longer term in a situation of more or less half-and-half FPD and PCB and I’m not talking now about the medical which we obviously expect to grow, but within the electronic industry segment I would say its going to be more or less half-and-half, maybe a little bit more FPD, but I don’t know where you got the numbers of 70%, 30% and I’m not sure I understood what you meant by how do we see the company.

Sergey Vastchenok - Oppenheimer & Co.

Excellent summing up of Photon Dynamics, which is going to go to a run rate of $200 million; you’re at 1 to 1.50 FPD business, so it makes up for around 70% of ’09 forecast, but probably I didn’t do the right math, and how do you see from your client’s outlook for the FPD industry for ’09. Do you see any sings of slowdown or pushing back to the orders going into ’09?

Adrian Auman

No, push backs for sure, but on top of that customers are now busy in their ramp-up plans and they are full into it. The only thing they care right now is their vendors will meet their schedule for the move in and then we are a part of it and Photon Dynamics is also a part of it.

Given the recent announcement of the Photon Dynamics about the ending backlog as of June ’08 in our comment about the record level of backlog for Orbotech, I think we can say that we feel comfortable for the second half of ’08 and the first half of ’09 and as Rani mentioned beyond the summer ’09, right now it’s too soon to realize exactly what will be the exact shipment date or moving date and we are hoping that this picture will see more in the first half of ’09, but in summary we are pretty comfortable with the next 12 months.

Sergey Vastchenok - Oppenheimer & Co.

Okay and a question regarding the backlog in FPD business. What is the most part of the backlog; is it Gen 9, Gen 10, how do we see it?

Rani Cohen

If I look at our backlog and obviously I will not make any kind of reference to Photon Dynamics backlog, but more than half of our backlog, more than 60% is Gen 8 and above. Without going into the details of exactly which generation, but that’s the breakdown I can give you.

Operator

Andrew Abrams with Avian Securities, you may ask your question.

Andrew Abrams - Avian Securities

Just a quick question on the financing; you guys if I remember correctly had gotten a letter from one of the three bank consortiums that you were going to use to do the financing. Has that changed at all? Have you gotten a letter from any of the others or have you asked for a letter from any of the others?

Amichai Steinberg

We don’t need a letter for the. As far as the delivery regard we don’t need an additional letter, because we are fully covered with that, but we have a commitment and in the process of participating in this consortium from two other banks.

Andrew Abrams - Avian Securities

And would the percentage that you are doing through the banks have changed at all? Are you still in the same category as you were before?

Amichai Steinberg

If you are referring to around 50%, 55% based on the bank loan out of the overall consideration; yes it’s still the same.

Andrew Abrams - Avian Securities

Thank you Amichai and just one other thing; I know that this is a relatively complex deal to get done quickly. Is there a chance that this is going to get done in the third quarter?

Amichai Steinberg

In one word, yes; but if you want more there are a lot of disclaimers, so in one word, yes.

Andrew Abrams - Avian Securities

Okay I appreciate it, thank you.

Rani Cohen

Yet, there is a chance.

Operator

[Eric Mydukel] with Dominick & Dominick.

Eric Mydukel - Dominick & Dominick

In regards to the Photon Dynamics acquisition, would you be able to give us an update on the progress and maybe the regulatory approvals that are required to complete the transaction and it is quite a few?

Rani Cohen

The only update that I can give you is that they are all in the process and as you probably know in spite of doing the filing and preparing documents a lot of it is not in our control and we’re now waiting for authorities and governments.

Eric Mydukel - Dominick & Dominick

Right, I know it’s touch to say with some of your regulatory agencies, but did you anticipant potentially any delays especially going into the summer and I know it gets a little slower in some places in August; did you anticipate that or is anything’s going through September and being a little bit later?

Rani Cohen

Look, I may claim to be an expert in all kinds of things, but one thing I am not an expert in is all these questions you have and I really don’t know. I don’t know how these authorities work and what summer means and so on and so forth and as we said right now we’re expecting it to close within a couple of months, but it’s really not a lot of it’s in our control anymore.

Operator

Irit Jakoby with Susquehanna, you may ask your question.

Irit Jakoby - Susquehanna

With respect to the Photon acquisition, I think you mentioned on the acquisition call that you did plan to keep the solar initiative, could you elaborate on this at this time?

Rani Cohen

I can’t really -- I just want to make sure; did you ask about the solar?

Irit Jakoby - Susquehanna

Yes.

Rani Cohen

Well, right now before closing and before we had a chance to look any further into it, we are continuing to explore this opportunity and we’ll make our decision based on the plan that exists currently at Photon Dynamics. They have milestones and they have a plan they were working according to and we’re going to continue with that.

Irit Jakoby - Susquehanna

Okay and switching back to the Orbotech business, do you think with the current macro environment effects your ability to make a strategic move in your assembled PCB area?

Rani Cohen

It might. As we said in the past we’re looking for different ways, different avenues strategic avenues in the assembly market. I don’t know that the current economic or macro economic environment has a lot of effect on that. We are still working on that and obviously when we have something to announce we’ll do that.

Operator

Ziv Tal with Oscar Gruss; you may ask your question.

Ziv Tal - Oscar Gruss

Hi, guys with regards to the Medical Imaging can you please tell us about what the direction is far that segment; what are you plans for it and does it trend up towards the fourth quarter?

Rani Cohen

Basically as we said in the past the Medical Imagining is a new area of activity for us and we acquired 3D last year. As we said in the opening remarks this quarter was definitely disappointing and the way we see it is it’s a general market situation. I don’t know if its going to pick up in the next one or two quarters, but I do believe that eventually this market will pick up and we will take our share of the revenues there and we do have plans in general to expand our offering in this market and develop additional products in the areas of activity, but its too early to say anything more specific than that.

Ziv Tal - Oscar Gruss

And then what happened this quarter; I mean you were expecting significantly higher revenues maybe a revenue decrease in the second half, but what happened this quarter that looked so significant.

Rani Cohen

As I said our sales are to North America through the OEMs and from our understanding the market there is very, very weak now and because of the general economic situation and many of the items that we sell go to private clinics and that sector is obviously very cautious now about investments, and that’s what affected our sales.

Ziv Tal - Oscar Gruss

Okay and looking at your guidance again, you said sales probably similar to the second quarter; looking at the fourth quarter then it seems you expect a significant ramp up in the PCB. Can you comment a little bit on that; I mean that’s a significant increase that you’re expecting there?

Adrian Auman

Yes, again we are not seeing the recover in the PCB happening in this third quarter. Better class in the first couple of months of the first quarter, therefore we maintain the same level of revenues for the PCB going into the third quarter. Traditionally, the fourth quarter is the strongest quarter on the PCB and the electronic assembly and basically on the electronic universe and only based on that we are right now expecting a better fourth quarter compared to the first three quarters of the year all significant to assume.

Ziv Tal - Oscar Gruss

Just one last question; with regards to your investments in ARS, what is the cash invested in exact. If you could just elaborate on that; is it only student loans, can you please elaborate on that?

Adrian Auman

We have a total of $29.5 million in ARSs of which $2 million are in ARS tied to the Life Insurance or Life Insurance Investment then another $27.5 million that are tied to student loans. On the $27.5 million of student loans we do evaluation every quarter, the only write-down we did, the temporary write-down was based on the valuation that we received, was only due to the lack of liquidity and not due to any risk at all, because these student loan ARSs are fully backed.

On the $2 million Life Insurance also, we have a write-down there of about 15%; again these are all backed by actual insurance policies and again it’s only due to liquidity and this is actually projected to free up a lot sooner because of the higher interest rates that they have to pay because of their liquidity and that’s what over take. Those are the same ARSs we had for the less few quarters. Actually, less quarter $5.5 million of the student loan ARSs we’re actually redeemed at par.

Operator

[Matt Lipman with Tiedemann & Co].

Matt Lipman - Tiedemann & Co.

I had a couple of questions on [sifias] process in the whole Salvador and Imaging things. Are you guys currently working toward selling the Salvador business or are you guys going to wait until after you get some sort of a ruling from the government in that regards?

Rani Cohen

No. We are, without any connection to the government ruling we said upfront that we don’t see that fitting into our strategy and fitting into our ability to own it and manage it and therefore we are looking to sell it.

Matt Lipman - Tiedemann & Co.

Okay, so you’re trying to move that in advance. Now, when it comes to the required approval, in your understanding did you think that the government at [sifias] will you allow you to hold Salvador separate while you accel it or do you think you’re going to have to complete the sale before the transaction can close?

Rani Cohen

According to what I understand from our attorneys and I’ll say this very carefully, we first of all have no idea what sifias is going to rule, that’s clear, but as I said we’re going to try to sell it obviously in full coordination with Photon, because in foreclosing it’s their company and we are doing everything in full coordination with them and if we don’t succeed in that then we’ll have to go according to the sifias ruling. In any case closing is not depending on anything happening or not happening with Salvador imaging.

Matt Lipman - Tiedemann & Co.

Okay final question; do you expect that sifias is going to be the slowest process, the gating item if you will towards closing this deal or is there some other approval that’s going to be the last one you expect to get?

Rani Cohen

I have no idea. I really don’t know.

Operator

Darice Liu with Maxim Group, you may ask your question.

Darice Liu - Maxim Group

Many of the panel makers have expressed concerns on the second half ’08 demand and have consequently cut their utilization rate and actually talked about possible CapEx cut. With that have you seen any delays in deliveries and how panel makers alluded to you about possible changes in current tool delivery timeline?

Adrian Auman

Darice we see the same reports that you see, but we haven’t heard anything directly from our customers and we haven’t faced any push ups.

Darice Liu - Maxim Group

And then to an earlier question about the new wave of bookings that’s estimated to occur in the first half of ’09; what do you believe the magnitude of 2009 bookings will be in comparison to 2008?

Rani Cohen

It’s very hard to estimate right now because the visibility we have is until about and even that is limited to the middle of ’09. It’s really hard for me to answer that and obviously it depends on the first part of your first question. The anxiety today and the level of demand that will develop in the second half of ’08 and all those things will obviously affect the bookings of ’09.

Darice Liu - Maxim Group

I believe if you go about it a different way, can you talk about the number of projects that you’re tracking for 2009?

Amichai Steinberg

Well its looks to be a totally different way. Right now we assume that the overall CapEx for the flat-panel display in ’09 in total dollar amount will be similar or slightly less than 2008. It will be in the range of $12 million to $13 million. This is right now the assumption that we are planning to open for ’09 and then it’s too soon to break it down to a specific product.

Darice Liu - Maxim Group

And then on the housekeeping note can you provide some color on what we should be modeling for OpEx in the second half of ’08.

Amichai Steinberg

In the second half of ’08 we believe that it should remain approximately at Q2 levels except for the effect again of the dollar check up. We said it could be about $0.03 each quarter; yes of course the dollar strength and which it has done in the last week against the shekel, of course that reduced it.

Operator

C.J. Muse from Lehman Brothers, you may ask your question.

C.J. Muse - Lehman Brothers

I guess first just to clarify, you’re saying for the second half that we should see all things being equal, revenues holding flat for Q3, roughly $0.03 impact over Q2 because of hedging you did in Q2, but you’re not doing in Q3?

Amichai Steinberg

Again it has to do with hedging for the first half of the year. We had certain hedging in the first half of the year, but of course in the second quarter we also had a negative effect because even with the amount that we hedged which wasn’t the full amount on the expenses, the dollar still depreciated against the Shekel and the third quarter if this depreciation stays the same and now without hedging it should effect us about $0.03 a quarter negatively again for the third and fourth quarter.

C.J. Muse - Lehman Brothers

With the exchange rate held where it is today what impact would that be?

Amichai Steinberg

About $0.03 per quarter because we have very little, if any hedging in the third and fourth quarter.

C.J. Muse - Lehman Brothers

I guess then on the CapEx front you said flat to slightly down for 2009. In terms of I guess the order book or backlog you have currently how much visibility or cover does that provide for that number that you just provided us for 2009?

Rani Cohen

I think I said that we are pretty comfortable to the June quarter of ’09.

C.J. Muse - Lehman Brothers

I understand that, but I’m trying to understand the magnitude of how much has already been booked for 2009?

Rani Cohen

This one is basically representing around half of the overall CapEx plans for ’09.

C.J. Muse - Lehman Brothers

So you may need a meaningful pick up in orders in the first half of ’09, to get to that kind of flattish that number.

Rani Cohen

Yes, one way to say.

Adrian Auman

We still have the second half of ’08, we are not over. You’re not assuming that the second half of ’08 we’re not getting any orders right.

C.J. Muse - Lehman Brothers

In terms of your flat panel revenue guide of $110 million, I’m assuming that does not include service?

Adrian Auman

Does not include, excluding.

C.J. Muse - Lehman Brothers

Okay, and then I guess the trend over the last few quarters in LCD has been for service to be down relative to the run rate exiting 2007. Can you talk about what’s going on there?

Amichai Steinberg

Shouldn’t go down, it should not go down. It’s a combination of time and warranty and all kind of elements that goes into the service, but as a last statement, on these levels of revenue the service for the flat panels there should not go down.

C.J. Muse - Lehman Brothers

Okay and I guess more broadly speaking for overall service revenues, what kind of growth trends should we think about for 2008, 2009?

Amichai Steinberg

That’s a 5% to 7% gross year-over-year.

C.J. Muse - Lehman Brothers

And then I guess when you look at your overall revenue guide for Q4, how that does imply assuming flat panels comes in at 110 for the year; it does imply a PCB pickup for Q4; how should we think about the impact on mix shift for Q3, Q4 in terms of the gross margin?

Amichai Steinberg

I think in the gross margins again I gave guidance for Q3; we expect it to be in the 41.5% to 42% range, but again of course the fourth quarter we do expect the big pickup in the fourth quarter to go up to the 42.5% range.

C.J. Muse - Lehman Brothers

Okay and last question for me, the write-down you did on the auction rate securities, what line item was that in?

Amichai Steinberg

No, it’s not in the P&L because it’s a temporary, so it goes to get out the shareholders equity. The write down compared was about 5% on the ARS, so it’s a temporary write-down again due to the liquidity, so we reduced all the ARS’s what you said the 29.6 gross sit in the long-term marketable securities actually, so it’s less by about 1.4 between the different ARS’s that we have, so about $28 million is in the long-term marketable securities and that’s against the OCI account and the shareholders equity. It did not go through the P&L.

Operator

Chuck Murphy with Sidoti & Company, you may ask your question.

Chuck Murphy - Sidoti & Company.

I was just going to ask the same thing, can you explain also what the gain in the sale of fixed asset was as well?

Amichai Steinberg

Yes, a year ago we acquired an operation in Italy, New System as Rani mentioned in the call and they developed a legend inkjet system and they had a property, they have two buildings here in Italy and one of that we’ve moved into their new facility and the old facility we did sell and that was the profit based from the old facility that was sold.

Operator

(Operator Instructions) Ziv Tal with Oscar Gruss, you may ask your question.

Ziv Tal – Oscar Gruss

What was your cash from operations this quarter?

Amichai Steinberg

We had negative cash from operations and that was pretty much given that the inventory went up. We increased our inventory that’s mostly for the increased demand of our FPD products going forward which require a lot of longer lead term products. So, the operating cash, it was actually negative operating cash of about $5 million for the quarter.

Operator

At this time there are no further questions.

Amichai Steinberg

As there are no further questions thank you very much for joining us in the call. Additional information regarding Orbotech you could find in our website on www.orbotech.com. Thank you.

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Source: Orbotech, Ltd. Q2 2008 Earnings Call Transcript
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