Camtek Ltd

NASDAQ:CAMT

Earnings Call Transcript 2018-Q4

[Kenny Green, GK Investor Relations]

Thank you. Thank you, operator, and good day to all of you. I'd like to welcome all of you to Camtek's Fourth Quarter and Full Year 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, Camtek's COO. Rafi will provide the overview of Camtek's results and discuss market trends in the fourth quarter of 2018. Moshe will then summarize the financial results for the quarter. We'll then open the call for the question-and-answer session.

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 the 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 will 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, please go ahead please.

[Rafi Amit, Chief Executive Officer]

Good morning and thank you for joining our call today. Camtek delivered excellent results for the fourth quarter of 2018 and for the whole year of 2018. The company showed strong revenue in the fourth quarter of $33.2 million, up 28% over Q4 of 2017. We ended the year with record revenue of $123.2 million, 32% increase over 2017 revenue. We achieved a significant improvement in profitability parameters both in the quarter, as well as in 2018 as a whole.

As demonstrated in Q4 results, we reported over 50% gross margin and over 20% operating margin. Our outlook remained positive. The guidance for Q1, 2019 is $33.5 million to $34.5 million, which represent consecutive growth and year-on-year growth of 25%. In general, we do not give guidance beyond one quarter ahead as our lead time is 8 to 10 weeks. However, we would like to share with you our current general observation of what we see in our end market.

At this stage, we see normal level of activity in our market segments with people now return from the Chinese New Year holiday we will be in better position to evaluate our Q2 expectations in few weeks. We are aware of the temporary weakness of the semiconductor industry, but this specific segment we are focusing on such as CIS, RF, MEMS, and advanced packaging seem relatively stable at this point. The growth engines of our relevant market are first of all, they continue transition to advanced packaging solutions to improve the performance of electronic models.

Specifically in the memory space while the DRAM prices are undergoing some pressure, the transition into advanced packaging is nonetheless expected to continue, driven by the technical requirements for higher bandwidth and lower power consumption. In addition, the RF segment is expected to benefit from the introduction of 5G. The momentum in the CIS space is continuing at the similar pace as in the past year due to the increased number of cameras in many mobile phones and other applications.

Other market segment and trend this represent growth driver for us are the extensive and growing use of IoT devices, AI related devices as well as the transition to an automotive industry to increase use of electronic models. The market trend I just discussed along with Camtek market position is the reason for our expectation to remain our ongoing performance.

As testified by our strong 30% plus growth in 2018, it is clear that we are not only maintaining our leadership position in 3D metrology but we are also gaining market share in the 2D inspection sector and expanding to new applications such as Front End Macro Inspection and Compound Semiconductor. Our EagleT system continues to gain market share. In 2018, we won another of important add-on evaluation against our major competitor in 2D inspection and 3D metrology, demonstrating a superior performance and were selected as a supplier of the choice.

Needless to say that our talented R&D team continues to develop capabilities that will ensure that we remain competitive. Two days ago we announced a definitive agreement with Chroma, a leading Taiwanese company. Chroma is a leading provider of test and automation solution with annual revenue of over $500 million. Based on this agreement, Chroma will acquire 20% of Camtek and enter into a technological licensing and corporation agreement with us. Approximately 50% will be acquired from Priotech, and 5% new share issued by Camtek in total cash deal of $74 million.

The transaction is based on a share price of $9.5 which represents a 29% premium over the closing price before the announcement. As part of our strategy, we have been looking for a strategic partner in Asia to support the continuous growth. Over 80% of our sales and installed base are in Asia. And with this important partnership, we can strengthen our position in the region, specifically Taiwan and China. Moreover, strong relationship with customer will enable us to better understand our customers roadmap and develop new technological and solutions to meet their technological challenges.

The technological cooperation is expected to be in several areas. One, Camtek will grant Chroma a royalty bearing license to use its white light triangulation technology for non-semiconductor applications. This represents a new potential revenue stream for Camtek. Two, Camtek will in the future build inspection machines based on Camtek's technology to address a market niches in which we do not participate actively. Finally, Chroma and Camtek will explore other areas of operation in the development of technological solutions for the semiconductor industry.

We are confident that this strategic investment in Camtek together with the cooperation agreement between the companies will significantly strengthen Camtek position with major customers in Asia. In addition, Chroma and Camtek cooperation in the development of new products and solution for a semiconductor industry can expand the portfolio of product line that currently Camtek sells and through this accelerate Camtek's growth rate.

Our cash position at the end of 2018 was close to $55 million, which is a result of over $16 million positive operating cash flow in the year. The new investment will further strengthen our balance sheet which will enable us to potentially increase our growth through acquisition of companies in the market in which we operate.

I'd like to hand over to Moshe for more detailed financial discussions of the financial results. Moshe?

[Moshe Eisenberg, Chief Financial Officer]

Thank you, Rafi. Camtek showed very strong execution in the fourth quarter with results exceeding the top end of our guidance range and this performance filtered down our financial metrics to the bottom line. Our gross operating and net margins were all strong and at levels we are happy with. Showing the operating leverage inherent in our business model.

In my financial summary ahead, I'll provide the results on a non-GAAP basis. The reconciliation between GAAP results and non-GAAP results appeared in the table at the end of the press release issued earlier today. As you may recall, we sold our PCB inspection business in the third quarter of 2017. And this is considered discontinued operations. In my summary, the results of last year will include continued operations only.

Fourth quarter revenue for Camtek $33.2 million, up 28% year-over-year. Full year revenue was a record $123.2 million, up 32% year-over-year. The results were driven by strong demand across all our segments and applications. The geography revenue split for the quarter as follows.

Asia, 82%; US, 10% and Europe was 10%. Gross margin for the quarter was 55.6% versus 47.8% in the fourth quarter of last year. Gross profit for the year was $61.2 million, representing a gross margin of 49.7%. This is compared with the gross margin of 48.7% last year. The improvement in gross margin was mainly a function of the product and sales mix delivered, as well as the leverage we have in our financial mortgage. We see the margin remaining around the 60% level in future quarter and longer term as we grow our revenues, we expect that our margins would continue to show steady improvement.

Operating expenses in the quarter were $9.9 million which is compared with $8.5 million in the fourth quarter of last year and similar to the $10.1 million reported in the previous quarter. Operating profit in the quarter was $6.9 million, an increase of 179% over the $3.8 million reported in the fourth quarter of last year. Operating margin was 20.7%, a strong improvement versus 14.8% in the fourth quarter last year.

Our operating profit for the year was $22.2 million, or 18% of revenues. We have more than doubled our operating profit of $10.4 million in 2017.

Net income for the fourth quarter of 2018 was $6.4 million, or $0.17 per diluted share. This compared to a net income of $3.5 million, or $0.10 per share in the fourth quarter of last year. Net income for the year was $20.9 million, or $0.57 per diluted share. This is compared to a net income of $9.6 million or $0.27 per share in 2017.

Turning to some high level balance sheet and cash flow metrics. We generated $7.2 million in cash from operation. Net cash and cash equivalent as of December 31, 2018 increased to $54.9 million, compared with $48.3 million at the end of the third quarter of 2018.

During the last couple of quarters, we invested approximately $700,000 in our clean room, increasing its capacity to support the growing level of business moving forward. As Rafi mentioned earlier, revenue guidance for the first quarter of 2019 is between $33.5 million to $34.5 million. And with that Rafi, Ramy and myself will be open to take your question.

[Operator]

[Operator Instructions]

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

[Craig Ellis, B. Riley]

Yes, thank you for taking the question and team congratulations on the very strong financial performance, as well as the new Chroma strategic agreement. My first question, Rafi is just on some of the end market color you provided. So it sounds like the different end markets that you serve are relatively stable. But I am wondering if you could comment on two things. One, as you look at some of the risks that are out there whether be geographic or even in the end market or applications, where do you have greater concerns? And secondly, as you look longer term perhaps out through 2019 and definitely not asking for guidance here. But can you comment on your confidence that we could see another year of growth in 2019 following what was stellar year growth last year. Thank you.

[Rafi Amit, Chief Executive Officer]

Well, first of all, in general I would say we see - when you mentioned about the same level of activity, we see it all over in all territory not only in Asia. We see it in US, in Europe. And we believe that maybe it's more belonging to the segment we are focusing and not specifically because of the geographical. This is relating to what you asked the first question. Regarding the long term, look, we cannot predict long term because there are lots of event that can influence on that. But we can - we are very close to customer. We are visiting them all the time. We get all the time information and we can't see any negative signal from customers.

And top of that, we all aware about the fact that too many technology are on the way. And I can't believe that anyone has any intention to stop it. We believe the five generation definitely will start accelerating automotive electronic model continue. CIS all our type of applications continue, people continue to support technology. So we believe that as long as our main revenue is technology and not definitely quantities, we feel comfortable right now.

[Craig Ellis, B. Riley]

That's helpful. And then a follow up question for you before one more Moshe. The follow up. You mentioned with Chroma deal, there are number of ways you can that financially whether the royalty model with some technology or some expansion with new end markets served and potentially new products. When could we expect to see the benefit of some of those initiatives in your financial statements? Would it be the second half of 2019 or 2020 or 2021?

[Moshe Eisenberg, Chief Financial Officer]

Hi, Craig. This is Moshe speaking. We - since we've just signed the agreement couple of days ago and the closing process is expected to take a few months, practically speaking the technology transfer and all the walk that we will have to do with Chroma will start in the second half of the year. So we are expecting initial revenue stream at early 2020.

[Craig Ellis, B. Riley]

Thanks for that, Moshe. And then the last one for you. Excellent margin execution in the quarter, 55.6% gross margin, 20% operating margin. Are those sustainable margin levels as the business goes forward or for any reason new products or mix would we expect to see our gross margin dip back into 40s and operating margins into the 10s? Thank you.

[Moshe Eisenberg, Chief Financial Officer]

No, I think that gross margin is expected to stay at around 50% mark at least I see it in a next couple of quarters. It mainly depended on sales mix or product mix so it could vary 1% here and there but generally speaking we see that the gross margin trend going up as we increase the volume above the 50%. And with respect to the operating margin, at this point we don't have any major plans to increase significantly the operating expenses level. And as a result, we believe that we will be to maintain the 20% operating margin. And hopefully, as the year progressing and hopefully that things will continue as they are, we will be able to improve the operating margin slightly.

[Operator]

The next question is from Gus Richard of Northland Securities. Please go ahead.

[Gus Richard, Northland Securities]

Yes, thanks for taking the question. And congratulations on the great results. On Chroma is that going to have any impact on the P&L as you enter into that agreement and start to work with them?

[Rafi Amit, Chief Executive Officer]

No. Hi, Gus. We are not expecting any impact on the P&L. And if you are - I am sure that - I believe that you are referring to the expense level. So the answer is no. We are not expecting any major change or no change in the expense level. That the other way we are expecting to see some revenue stream. As I said before, starting from 2020 from royalties which are basically a 100% will carry 100% margin. So there should be positive impact on the bottom line.

[Gus Richard, Northland Securities]

Got it, okay. And then in terms of the advanced packaging, any color what areas are strong right now? Is it Fan-Out, chiplets, high-bandwidth memory? Any color there?

[Ramy Langer, Chief Operating Officer]

Hi, Gus. This is Ramy. No doubt the DRAM transition to advanced packaging is a major part and it's going to continue we believe in the next few years. The DRAM is going to transition from wire bonding to advanced packaging and this is definitely a major segment what we see. Fan-Out is continuing to grow and we have a number of activities in the Fan-Out area. I believe that these two areas are the major areas although in general in all of the new developments that we are seeing, and of the new boards we are seeing 40% and more a component say out of the bond that are manufactured in advanced packaging.

So there is a big increase in the volume of advanced packaging as a whole. But as I said specifically, the DRAM transition to advanced packaging and Fan-Out are, I would say the major flavors of advanced packaging that we see now in the market.

[Gus Richard, Northland Securities]

And what - just out of curiosity, advanced packaging and the DRAM area, what inning are we in, in that transition and what do you expect the displacement of wire boding to be over the next five years?

[Ramy Langer, Chief Operating Officer]

If I am not mistaken the numbers it is about 30% of the DRAM have already moved to advanced packaging. So there is another, I don't know, if the whole 70% but most of the remaining 70% over the next 3 to 5 years will move gradually to advanced packaging. So this is the trend, the rate, it's very hard to say what is the exact rate. But definitely that's the trend. And it's there.

[Gus Richard, Northland Securities]

Got it, very helpful. And then finally for me on the RF front and you also mentioned 3, 5. Can you talk a little bit about what kind of inspections you are doing or metrology you are doing for 5G and 4, 3, 5 in general?

[Ramy Langer, Chief Operating Officer]

Well, I would say primarily for these applications it's primarily inspection. There is some metrology obviously but it's 2D metrology, mostly 2D metrology. I think there is very, very little 3D metrology in these. There are some applications but that's not the major applications in these areas. As you all aware, the number of filters for cell phones moving to 5G will be significantly higher. So, obviously very similar trend to what you see in the CMOS image sensors where suddenly instead of one camera or two cameras you get five or six cameras on the cell phone. This is a very similar trend. So definitely this is going to be a segment that is going to be - is going to show a very significant growth starting, I would say late 2019 and onwards.

[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 at www.camtek.com beginning tomorrow. Mr. Amit would like to make a concluding statement?

[Rafi Amit, Chief Executive Officer]

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 2018 so far. And we look forward to continuing it. To our investors, I thank you long-term support. 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 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.