Camtek Ltd

NASDAQ:CAMT

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Camtek Second Quarter 2018 Results Conference Call. All participants are at present in a 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 and Public Relations at 1-646-688-3559 or view it in the news section of the Company's Web site, www.camtek.com.

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

[Ehud Helft, GK Investor Relations]

Thank you, and good day to all of you. I would like to welcome all of you to Camtek's second quarter 2018 results conference call, and I would also like to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, COO. Rafi will provide an overview of Camtek's results and discuss market trends in the second quarter of 2018. Moshe will then summarize the financial results for the second quarter. We'll 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 may 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 the 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 demands for services and products, the timing and 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 filing with the SEC.

Please note that the Safe Harbor statement in today's press release also cover the contents of this conference call. In addition, during this call, certain non-GAAP financial measures would be discussed. These are used by management to make strategic decisions, forecast future results and evaluate the Company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investors’ understanding and assessment of the Company's ongoing core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

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

[Rafi Amit, Chief Executive Officer]

Okay, thanks Ehud. Good afternoon and thank you for joining us on our call today. Camtek's results for the second quarter of 2018 include record sales, operating margin and net profit in the last 10 years. The performance we have presented are the result of continuous efforts by our management and dedicated employees, as well as direct continuation of the strategy we have adopted to focus on the semiconductor business in general and specifically on segment with high growth rates such as Advanced Packaging segment where new and advanced production technology require advanced inspection and meteorology solutions.

Q2 revenue of $30.5 million is up 34% year-over-year and ahead of our guidance range. It is the first time we have had a quarter more than $30 million. Our operating income was $5 million for the quarter, representing on operating margin of 16.3%, which is well in line with our business model. While hearing rumors about some weakness in the semiconductor market, in general, the specific end market segments on which we focus continue to show strong growth.

Looking at guidance, our Q3 guidance reflects over 30% year-over-year growth for the third quarter and for the first nine months. I'd like to spend a few moments discussing the business performance itself before handing over the discussion to Moshe. Our metrology business is maintaining its leadership position. Our new metrology platform the EagleT-AP is performing in line with our expectation, and we have been receiving very positive feedback from our customers on the performance of this new system. We received repeat business for multiple EagleT-AP systems from four tier one customers including OSAT and memory manufacturers. We have started installing tools at these customer sites in the second quarter and we will continue shipment and installation into the third quarter.

Regarding our 2D inspection, we continue to expand our market share. We have recently received orders from three new customers, and have expanded our 2D business in the three existing tier one accounts. Our side wall crack inspection technology for post dicing application, which we announced last quarter, is gaining momentum. Several customers have started to evaluate this innovative technology and we have already secured order from two major customers.

As previously discussed, we are moving into new 2D market segment in the front end. We have already installed multiple systems for macro inspection in China as announced last quarter and shipped systems for inspection of compound semiconductor during this quarter. Our strategy is to continue focusing on semiconductor industry where the new production and packaging technologies need advanced inspection tools. We see many opportunities in our markets and also in adjacent segments. These opportunities will expand our total addressable markets. This strategy has proven itself so far and we believe it will continue to bear fruits in the future.

I remain very optimistic and excited about the growth potential ahead of us. And I wish to again thank all our dedicated employees and management for the excellent job they are doing in capturing opportunities. This end my summary and I would like to hand over to Moshe for more a detailed financial discussion of the financial results. Moshe?

[Moshe Eisenberg, Chief Financial Officer]

Thank you, Rafi. Unless I state otherwise, I will summarize the results of the continuing operations on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appear in the table at the end of the press release issued earlier today. Second quarter revenues came in at $30.5 million, which is a record for Camtek, up 34% year-over-year. The geographic revenue split for the quarter was as follows; Asia was the strongest region during the quarter, representing approximately 81% of our overall revenues; U.S. and Europe contributed 19%.

Second quarter gross profit was $14.9 million, representing a gross margin of 49%. This is compared with a gross profit of $11.2 million, representing margin of 49.2% in the second quarter of last year. Operating expenses in the quarter were $10 million or 32.7% of revenues compared with $9.1 million or 40% of revenues in the second quarter of last year. The increase in the absolute amount was primarily due to increased commissions we paid on our higher level of revenues. Additionally, I would like to point out that our G&A expenses were reduced in both absolute terms from $2.2 million to $1.6 million as well as in relative terms from 9.7% to 5.2% of revenues.

We increased our operating profit in the quarter to $5 million, an increase of 139% over the $2.1 million reported in the second quarter of last year. Operating margin was 16.3% versus 9.2% in the second quarter of last year. Net income of the second quarter of 2018 more than doubled over those of last year and was $4.6 million or $0.13 per diluted share. This is compared to a net income of $2 million or $0.06 per share in the second quarter of last year.

Net cash and cash equivalents as of June 30, 2018 were $41.2 million compared with $47.2 million at the end of the first quarter of 2018. During the second quarter, we paid $5 million in dividend and used approximately $750,000 in operating cash, which was primarily to support working capital requirements in order to meet the strong level of demand we are seeing in our end markets. In addition, I would like to point out that during the first week of July we have collected $8 million of open account receivables. Guidance for the third quarter of 2018 is revenue of between $30 million to $31 million. As Rafi mentioned, it represents year-over-year growth of over 30%.

We will now open the call for questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session [Operator Instructions]. The first question is from Edwin Mok of Needham and Company. Please go ahead.

[Edwin Mok, Needham and Company]

First question I have is, I think, you guys talked about very strong demand from Advanced Packaging. Just curious what type of applications that you’re seeing a big demand, is it around channel or is it around memory that you guys as talked about. Can you give some color around that?

[Rafi Amit, Chief Executive Officer]

Ramy, could you answer to that please?

[Ramy Langer, Chief Operating Officer]

I will elaborate on it. Edwin, we see this across the board. It's not just one specific segment. Definitely, memory is an important part of the growth but we seek in all around applications, in IDMs, in OSATs. So that overall market of the Advanced Packaging is strong and we continue to see the annual growth. So we are very positive about this market. And no, it's not specific to one specific application.

[Edwin Mok, Needham and Company]

And then on 2D inspection, looks like you guys have a good momentum there. And on the core, I think you mentioned you have some wins. Is there a way to quantify the revenue opportunity of those wins? And is there a way to talk about where your market share position right now and how the things are progressing?

[Ramy Langer, Chief Operating Officer]

I wouldn't like to grow over the market share in specifics, because it's very hard to judge the market share. What we are seeing today, because of the requirements in the market, the densities, the resolutions and all the different technical requirements, they are driving an increase in the 2D measurement, 2D inspection, in general. So we see people moving from sample to 100%. All of this together is creating a lot of demand and this means more machines. We are seeing this on a regular basis. We've seen this in the last the previous quarters. I think we mentioned it last quarter and it's true this quarter. We are selling more machines to 2D applications than 3D applications and that's definitely changing our business in a very positive one.

[Edwin Mok, Needham and Company]

Just to clarify that. Is it more number of inspection points along the semiconductor production, like from [indiscernible] finished wafer all the way to package or is it just more longer inspection time, because there is up to 100% inspections?

[Ramy Langer, Chief Operating Officer]

It's both. It's more statutory the inspection stages during the processing stages, that's one aspect and obviously, longer time and going to 100% from sample. And this is required in many of the automotive applications and the high-reliability applications that we see throughout the market.

[Rafi Amit, Chief Executive Officer]

And on top of it Edwin, if for example, customer before the demand, now he defined he would like to detect smaller defect, so probably he need higher magnification, higher magnification reduce the throughput. So there are many, many reasons for spending more time on inspection, it's not only one reason. So we cannot say that there’s one rule for that.

[Edwin Mok, Needham and Company]

Last question I have, on operating expenses, there is some increases now because of higher sales levels. Moshe is there a way to think about OpEx, is this the level we should think about, or maybe even more step up? Anyway you can give us some color how we should expect OpEx for 3Q and 4Q?

[Moshe Eisenberg, Chief Financial Officer]

So first of all, I would like -- I just misspoke in my financial section. And I mentioned that the guidance is between 30 to 31 and I wanted to correct it. It’s between 31 to 32 as we reported in our press release, and as Rafi mentioned. Second, regarding your question about the operating expenses level, yes, I believe that we will see some increase in our operating expenses over the next couple of quarters. As we see revenue going up and as we use some of the channels that we use, agents and distributors, this may require higher level of commissions. And we believe that this level of operating expenses will remain with us in the next couple of quarters.

[Operator]

The next question is from Craig Ellis of B. Riley. Please go ahead.

[Craig Ellis, B. Riley]

Thank you for taking the question and congratulations on the very strong execution in the business, the first question that I wanted to focus on. With the business performing at very strong 30% year-on-year growth rate, can you highlight what some of the faster growing businesses are around that average and what would be coming in below the 30% year-on-year growth rate? Just looking for a sense of what percent of the relative performances within the portfolio?

[Ramy Langer, Chief Operating Officer]

Rafi, you want to answer or you want me answer it.

[Rafi Amit, Chief Executive Officer]

You can start answering.

[Ramy Langer, Chief Operating Officer]

So I think what characterizes our business is relevantly high number of customers and the very high number of applications. So from that sense, it is very hard to pinpoint a specific application. I think what characterizes this quarter and the previous one as we move forward this year is; first of all, we see business from all of the geographies; from all the different regions; they are all contributing a business in very good way; meaning, we don’t have a specific weak region, that’s number one. From applications point of view, definitely the 2D became larger than the 3D. And as the 2D market, in general, is bigger than the 3D metrology that is a big important -- it’s a big important addition.

In parallel, we went into two new applications or segments. One is the compound semi or many people call it VCSEL and the other one is the Front-End Macro Inspection. So all of this together, obviously, builds a much better, I would say, application portfolio for Camtek as we move on into the year as we seek contribution from all the different applications.

Did I answer your question, Craig?

[Craig Ellis, B. Riley]

Yes, you did. And Ramy, that was very helpful. And the follow-up question really goes along with the way you concluded that. So it looks like there are a number of things that are driving growth that are fairly early innings for the Company, Macro Inspection just getting started there on the front-end, pixel technology that seems to be in the early phases of adoption. As we look at 30% year-on-year growth and that level being achieved on a calendar ‘18 year-to-date basis. How would you characterize the business’ ability to sustain that growth as you look out over the second half of 2018 and then into 2019?

[Rafi Amit, Chief Executive Officer]

Maybe I will answer to you. I would say right now what we can see through the eyes of our customer. We cannot really identify the all segments in the semiconductor. We can see it with our over 80 customers. And we mentioned before there are few parameter that it’s -- I would say this is today an evolution. And definitely when the front-end move from 20 to 10 to 7 nano; the densities of wafer become much more dense; more density is more inspection time; if you talk about even bumps the density of that become more dense, so increasing density is one big part of it; throughput more wafer, second target; new technology, Fan-Out, wafer level package, compound semiconductor, flip chip, stack memory; you can see so many new technology that already adapted and moved to ramp up in production; altogether, all these factors give us very good feeling.

On top of this, there is a lot of talking about the few generation of the cellular that will bring a lot of order. The industry talks about the automotive that increasing using electronic component and more chip engaged car. So in one hand, we see a lot of applications. New application on the other end, we can see a lot of new technology, reducing density and all this together give us a very, very confident that we continue maintaining such growth.

[Craig Ellis, B. Riley]

The final question I have before going back into queue, and I don’t want to ignore our CFO here. So Moshe, just question for you, as we look at the performance of the business you’re seeing very good margin expansion as you get revenue growth. Can you just give us your view on the potential of the business to attain 50% gross margin and your visibility into the potential to get to high-teens operating margin. Thanks guys.

[Moshe Eisenberg, Chief Financial Officer]

So gross margin level are more a factor or function of sales mix, and I'm sure that within the next few quarters we will reach this level of 50%. With respect to operating margin, we have spoken few times in the past about our operating leverage that we have in our business model. And the second quarter results definitely reflect this levers that we have in the model, reporting over 16% of operating margin. And we believe that as we grow the business towards the end of the year, this operating margin will improve and will get closer to 20%.

[Operator]

[Operator Instructions] There are no 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 available on Camtek's Web site at www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

[Rafi Amit, Chief Executive Officer]

Okay. I would like to thank you all for your continued interest in our business. Again, I would like to thank all our employees and my management team for their tremendous performance in the past two quarters. And we look forward to continue it. Fellow investor, I thank your long term support and look forward to talking with you again in next quarter. Thank you and good bye.

[Operator]

Thank you. This concludes the Camtek second quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.