Camtek Ltd. (CAMT) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Fourth Quarter and Full Year 2017 Results Conference Call. [Operator Instructions] 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 & Public Relations at 1 (646) 688-3559 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?

Thank you, and good day to all of you. I would like to welcome all of you to Camtek's Fourth Quarter 2017 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. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO. Unfortunate, Rafi Amit, the CEO, got the flu, and therefore, Ramy will make the introduction instead. Ramy will provide the overview of our results for 2017. He will then talk about some of the recent trends in the market and will also provide an outlook into 2018. Moshe will then summarize the financial results for the fourth quarter and full year 2017. We will then open the call to take your questions. Before we begin, I would like to remind our listeners that certain information provided on this call are internal company estimates, unless otherwise specified. This call also may contain forward-looking statements. These statements are only predictions and may change as time passes. The 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, change in expectations 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 adoption by the market, increased competition in 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 covers 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, forecast 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 core operation and prospect 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 Ramy, Camtek's COO. Ramy, go ahead, please.

Thank you, Ehud. Good afternoon, and thank you for joining us on our call today. We are, again, proud to present record financial results for our semiconductor business. Before I go into more details about the 7 -- 2017 results, I would like to say that we are very optimistic regarding our prospects in 2018, due to the very strong order momentum we have seen in recent weeks. And now back to 2017 results. We are very pleased with the performance in 2017 as a whole as well as with that of the fourth quarter in particular. We presented revenue growth of 20% for Q4 2017 versus Q4 2016, and 18% for the full year. Not less important, the strategic steps we took throughout 2017 resulted in improvement in our profitability. We announced non-GAAP operating income of $10.4 million, which is well over 3x our operating income in 2016. In addition, our cash position is higher than ever, and we ended the year with close to $44 million in net cash and equivalents. This provides us with a strong balance sheet to take advantage and leverage on opportunities we are seeing in our markets. The highlight of 2017 is that we became a pure semiconductor player by completion of the sale of our PCB division. This was an important milestone in Camtek's history. The steps we took allowed us to focus on our semiconductor business and to demonstrate an attractive financial model with an immediate improvement in our operating expense structure. This is already reflected in the results of the second half of 2017, and we expect it in 2018 as well. 2017, as I said, is a record year for our semiconductor business. In only 4 years, we managed to double the revenues of this business. Moreover, we have established ourselves as the leading provider in 3D metrology for advanced packaging sector, and we took a leading position in some sectors of the 2D inspection. Our installed base is around 800 system, most of them are Tier 1 IDMs and OSATs. This 2017 was characterized by growth in our overall business, both in metrology and inspection, while introducing outstanding proprietary innovations to our products, that would provide Camtek with a competitive advantage in the market. Now looking out into 2018. We started 2018 with a record backlog, and we believe that 2018 will be, again, a record year for Camtek. The introduction of our next-generation metrology system, EagleT AP, a few months ago, a system that provides the highest accuracy and throughput in the market demonstrates, again, our leading position in metrology for the advanced packaging market. We see this trend growing into 2018. As we announced earlier this year, we have already received orders for 17 tools of our next-generation 3D metrology solution from multiple Tier 1 customers, most of them will be installed during the first half of 2018. An example for the demand of our 3D metrology DRAM sector, in line with this market trend, outstanding growth is apparent in DRAM memory as this market shifts into 3D IC to support high-end application with higher data transfer rates and lower power consumption. We are well positioned to support the new memory architecture detection requirements and further expand our presence in this fast-growing market. The greatest growth for us in the near term is the inspection and metrology of the new 3D -- of the new 2D application. Generally speaking, we have not been a major player in the 2D inspection space as yet. So this market represents significant growth potential to us. Over the last 2 years, we have developed new proprietary technologies with many improvements to our new 2D detection capabilities, which we expect will open more doors to us in the coming year and beyond. I would like to share with you some examples. Few weeks ago, we received an order for multiple systems from a top-tier customer totaling over $5 million for our 2D inspection system. This was following a customer's intensive qualification process. This is a testament to the success of our 2D inspection and metrology products and their capabilities. In recent years, we have invested late offer -- less effort in broadening our 2D systems capabilities. And already, as we start 2018, we are seeing the fruits of this investment. In the CMOS Image Sensors market, the camera resolution continues to improve. The demand is for defect-free pixels and detection of surplus defects below 1 micron in size. Camtek is ready to support this market and maintain its leadership position at top manufacturers. Another example of the growth potential is the recent launch of the new Eagle model for post dicing inspection. This model is based on a revolutionary technology that we developed over the last 2 years. The system detects side wall cracks, which can appear during the wafer dicing process. The inspection is made at the wafer level right after the dicing process, and it takes just a few minutes to detect the side wall cracks in the whole wafer. This outstanding technology, which we introduced at SEMICON Korea last week, makes the markets increasingly strict reliability requirement, and specifically, the safety standard in the automotive industry enabling manufacturer to only ship diced chips with no side wall cracks. One more example is inspecting the fine line of the redistribution layers or RDL for short. As the industry adapts the final technology, this requires very accurate inspection of RDL. One of the challenges of such inspection is to detect defects in the upper layer, while ignoring the bottom layers that are not -- that are synched through normal optical techniques. Our system is capable of meeting the challenging requirements of this application. With all this in mind, and with such a strong start of the year, we are expecting continued sequential growth into Q1 2018, and expect revenues in the first quarter to be between $26 million to $26 million (sic) [ $27 million ]. For the year, we expect to continue to grow at a double-digit rate in the mid-teens. This ends my summary. And I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

Thank you, Ramy. Unless I state otherwise, I will summarize the results on a non-GAAP basis. And in my comparison, I will compare the results of the semiconductor business only without the PCB business, which we saw during 2017. This will allow better analysis of our ongoing performance. The record creation between the GAAP results, which included, discontinuing PCB business in previous quarters and the non-GAAP results appear in the tables at the end of the press release issued earlier today. Fourth quarter revenues came in at $25.8 million, up 20% year-over-year. Full year semiconductor revenues were a record $93.5 million, up 18% 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 overall revenues; Europe in euros contributed 19%. Fourth quarter gross profit was $12.3 million, representing a gross margin of 47.8%. This is compared with a gross profit of $10.1 million, representing a margin of 46.9% in the fourth quarter of last year. Gross profit for the year was $45.6 million, representing a gross margin of 48.7%. This is compared with a gross margin of 47.3% last year. In general, Camtek's operating model calls for a gross margin at around 50%. This quarter, the gross margin was slightly lower. This was the result of a specific revenue mix in the quarter. However, we don't view this as a trend, and it is also important to bear in mind that there could be a variance in the gross margin level between periods, which is mainly a function of the revenue mix solely in the particular period. Operating expenses in the quarter were $8.5 million. This is compared with $8.9 million in the fourth quarter of last year. The increase was primarily due to the lower level of G&A expenses. Operating profit in the quarter was $3.8 million, an increase of 220% over the $1.2 million reported in the fourth quarter of last year. Operating margin was 14.8%, a strong improvement versus the 5.6% in the fourth quarter of 2016. I know that although operating expenses were lower than that of last year, we did see some negative impact from the strength of the shekel versus the dollar. A large portion of our operating expenses are generated in shekels, while the currency in which we report is the U.S. dollars. As a result, the exchange rate impact to our performance is such, that every change of ILS 0.1 has approximately $500,000 impact on our annual profits. Operating profit for the year was $10.4 million, up 11.1% of revenues. This is compared with an operating income of $3.3 million last year or 4.1% of revenues. We expect to continue the improvement in operating margin also in 2017. Net income for the fourth quarter of 2017 was $3.5 million or $0.10 per diluted share. This is compared to net income of $0.9 million or $0.02 per share in the fourth quarter of last year. Net cash and cash equivalents as of December 31, 2017 were $43.7 million compared with $19.7 million as of December 31, 2016. During the fourth quarter, we increased our cash position by $22.1 million. Given the strong momentum we have already seen in the beginning of 2018, we expect a sequential revenue growth for the first quarter of 2018 to between $26 million and $27 million. We will now open the call for questions. Operator?

[Operator Instructions] The first question is from Edwin Mok of Needham & Company.

So first question -- thanks for the color on the new product and the customer requirement and what's driving the demand there. I have a specific question on the new DRAM architecture that you mentioned on the call. Just curious what change did that drive demand for the new metrology too? And what are you guys doing? Or what have you done or what is the new requirement that caused your metrology to do a little bit different?

Well, in general, I think you are aware of the trend of DRAMs moving to 3D IC, it's the memory queue and other applications, primarily high end. It started with gaming and other applications that require these high-end performance. And obviously, we inspect the 3D metrology and other applications on the DRAM.

IC, okay. So it's 3D IC adoption. Okay, that's...

So our intention is 3D adoption. Yes, correct.

I see you are pertinent. Okay, great. And then on the $5 million order that you guys announced for the 2D inspection tool. You guys talk about basically winning the qualification there. What was the biggest driver of successfully winning that qualification? Was -- is it -- I think previously you guys talked about 100% inspection as being a driver, because customer want to inspect and they need that to run through pretty fast. Was that the biggest driving factor behind that win? Or is there another factor that we should be aware of?

No. This is a 2D application and the requirements were -- I couldn't -- I'm very careful, and I cannot talk about requirements, customer requirements anything in specific. I can say in general that the customer required mainly a very straight requirement on the inspection itself on the detection of specific defects. We worked with the customer. We developed those capabilities. He was very satisfied with what he got and as a result, he placed a big order.

Okay, great. That's fair. Can I ask you about your spare and service business? How much was that right now, either for this quarter or for this year? And have you seen that growing in 2017 or over the last few years?

Yes. We actually improved our service revenue close to $1 million versus last year. We see continued improvement quarter-over-quarter. We -- as you recall, we also are starting to offer some software packages, which will be -- which will start contributing revenue in 2018. So overall, I think, we are pretty happy with our service business.

Okay, that's helpful. The last question I have on gross margin. Moshe, you mentioned that there was -- mix was one of the reason why your gross margin was a little below 50%, which is what you are targeting for your business. Can you explain what makes -- was it one -- you have a large customer, the large order mix? Or is it just the type of tool that you guys are selling? Can you help us on that?

As a matter of fact, it wasn't in one specific order or one specific reason, it just happened to be that within the fourth quarter, we had a few revenue transactions with -- which are -- which were less profitable. As I said earlier, I don't think that this is in any way a trend and it's just a coincidence that it took place in one specific quarter. And we hope that -- to continue to go back to close to the 50% mark that we are targeting to.

The next question is from Craig Ellis of B. Riley.

I'll just start with a follow-up to Edwin's question to understand the dynamic a little bit further, Moshe. So it sounds like the issue is one that may be related to an evaluation tool or something like that rather than an ASP distinction between products in the quarter or a COGS-related issue, related to just some of the differences you would have on underlying profitability between different products that you would sell, is that fair?

No, it's not a matter of evaluation, if I understood your question correctly. It's just -- in a certain quarter, you could have a few very profitable orders or a few less profitable orders, and it just happened to be that this quarter was -- we had like 4, 5 different orders, which were -- which came in lower gross margin. Nothing specific to any application or any product or any geographies really. So I can't put my finger on a specific issue here that caused the gross margin to come a bit lower.

Okay, that's helpful. And then just a follow-up to that question. As we think about the business moving towards the 50% to 52% target range, how would you establish the milestones getting to that range? Or are we likely to see that level of margins in the first half of the year? Or is that something that would play out on a full year basis or perhaps even in 2019?

I think, our operating model target is to reach 50% to 52%. I think, I -- we are sure that we will be able to reach the 50% to 52% level within 2018. I think, this is more a 2018 target. We will see some improvement gradually over the quarter as we hopefully increase our revenues, but 52% is a bit in the far end of 2019.

Okay, that's helpful. And then switching to some of the near-term order dynamics. There was a comment in the prepared remarks that there were very strong orders in recent weeks. I was hoping to get some color on those either by customer type IDM versus OSAT or geographically or for end-use area MEMS versus Image Sensor versus other.

I would see -- I would try to give you a better overview of the business. First of all, from a geography point of view, no doubt Korea and China are very strong. And Korea -- and we are talking here across the board. It's not just metrology. We see this trend also on the inspection side as well. But the entire industry is very positive, so it's not related just to MEMS. We see that CMOS is strong, and we are getting repeat orders. The MEMS is strong. There is business on the average site. And no doubt, advanced packaging continues to be around 50% of our business and it's no doubt it's strong. And specifically, as we discuss the memory portion, the memory, in general, is very strong. And specifically, on the advanced packaging or the transition to advanced packaging is very meaningful than we see it.

Generally speaking, and maybe one last comment from my end. Overall, our business split is such that 70% of our revenue comes from the IDM of the world, and 30% is OSAT related.

That's helpful color. And related to that, as we talk to our semiconductor companies, one of the things that they're talking about in the back-end is the fact that to, your lead times are certainly much longer than they were a year ago. That should be providing significant visibility to equipment companies. Can you talk about the extent that your visibility, is it into 2Q? If so, to what extent? And does it yet reach into the third quarter?

So first of all, I think we talked about in our press release that we have the record backlog. So obviously, the backlog -- the strong backlog indicates immediately that we have a much better visibility into the first half. So I think we are pretty comfortable with the first half of the year. I don't think we have really good visibility into Q3, although we see some initial business in Q3, and we mentioned it in the orders of the 17 units of our next-generation 3D system that some of the installations will go as far as the third quarter. But in general, I would say, the lead times indeed from our point of view are slightly longer, but still we are getting orders that we require to deliver in very short delivery times. And we are all equipped to meet it, and we see no issue from our ability to deliver what our customers are requiring.

Okay. So it turns, business remains strong even as you're getting longer lead times orders. That's helpful. Lastly, for me on cash. A very nice increase in the cash balance. I don't remember when it was last at $43 million to $44 million, but very healthy levels. Can you help us understand the timing with which the company might act with that cash balance? And what the priorities are at present in putting that to work?

Okay. So first of all, we are really very happy with our current cash balance. And obviously, we will -- first thing that will comes to mind is your growth opportunities, potential, acquisitions, if something will be of an interest to us. In addition, we will consider continued dividend payments if we think the cash balance is healthy enough, and we will continue to generate cash.

The next question is from Jonathan Art of Kaufmann Fund.

I was wondering if you could talk about some of the new applications that you seem to be penetrating and to perhaps size what the relative opportunity is as compared with your traditional applications. And I'm probably missing a few, but maybe you could start with the side wall crack after dicing. And it seems like you have some new verticals like lasers for 2D inspections. And also, whether you think you can penetrate NAND, if that goes to TSV, and what you're seeing there?

From -- Jonathan, let me start with the last question. On the NAND TSV, I think this is still farfetched. I don't think the industry is going there yet. So this is not something that I believe we'll see in the short term. I think with the side wall cracks, which was your first -- the first application you mentioned, no doubt this opens a very nice opportunity to us. I believe, in General, this will increase substantially our post dicing business. This is roughly, today, something in the range of about 20% of our business, so there is here a significant opportunity to increase it and also to create a new step in the industry. Because no doubt, the side wall crack is a reliability issue, and especially, when you go to automotive applications. Did I answer your questions?

Yes. I think it seems like there are several other applications that are relatively new, maybe you could go over those whether the VCSEL opportunity, macro inspection and so on?

So in general, the 2D applications are -- there is no doubt we see more and more opportunities in specific niches. So if I talk about the RDL, for example, no doubt the Fan-out is going to be a big business. And there we have a very, very impressive technology that I believe can turn into real business. The question here comes -- how fast Fan-out will really catch up? At this stage, it's still the smaller portion of the advanced packaging. The other 2D applications that you mentioned, no doubt that's an opportunity. But I think this is more in line with our traditional businesses that we had, I think, a good grasp on them also in the past. So those businesses, I believe, will grow as those segments are going to grow, we will grow with them. I don't think that those will present something, I would say, breakthrough from our capabilities. It's our 2D execution that has improved significantly over the last 2 years that are enabling us to maintain and even grow the business in these segments. But overall, no doubt the applications, the new applications that we have mentioned during the call will grow our business significantly in 2018 and beyond.

[Operator Instructions] The next question is from [ David Kraus ].

I want to ask you a question. Do you have any Investor Relations number in New York City per se?

Can you please repeat the question?

Do we have an Investor Relations...

Okay. Do you have any Investor Relations in New York City?

Of course, we have. We have, right, a U.S.-based firm, yes.

Could I please have their number, because I don't have it. That's why.

Okay. They are showing up on the press release that we issued earlier today, and I encourage you to look into it.

Yes. But I don't have the press release in front of me. So I just want to know if you can give it to me.

Okay. Yes, I mean, the company is GK IR, and...

Wait, wait, wait. GK...

IR.

IR?

I stands for investor relationship. And I encourage you to contact them via e-mail. It's Ehud, E-H-U-D.

Wait, wait, wait. Just to make it easy. Just give me the phone number. That's all I need and I'll do the rest, okay? Please.

617.

What?

617.

617.

Yes. 318.

318.

3096.

3096. And this is New York City, right?

This is a telephone number in the U.S. Yes.

In the U.S.? Okay. So -- but it's not in Israel. That's why I want to make sure.

No, no. It's not in Israel. It's in the U.S.

Okay. 1 (617) 318-3096?

Yes. That's correct.

Okay. Now back to my questions. What amounts of each contract that you were getting, besides the $5 million that you guided in the first contract? Like, say, what's the additional -- about what they would may be? Would they be higher than $5 million? Or less? Or more? Or what?

Specifically, from this customer in Korea, additional revenues that will come from this specific customer?

Another one. This one customer, you got 5 -- you got these contracts, this multiple for this one particular customer?

This -- the $5 million was for one customer. Are you referring to additional business from this specific customer? Or other businesses?

No, no. You -- on January 9, you mentioned you got multiple contracts. You got multiple. So you're talking about how many multiple contracts? 1? 2? 3? 4? 5? What? You don't specify.

No, no. So this is specifically -- this is just one contract for $5 million that we received. And another one, which was -- we mentioned -- we even mentioned the dollar value of 17 systems, and this came from multiple customers. And I am very hesitant to tell the exact number, but this is confidential. But it's more than 2.

More than 2? I mean, more than $2 million each contract?

No. It's 17 machines.

More than 2 customers.

More than 2 customers. And this is for 17 machines.

17 machines?

Yes.

More than 2 customers, right? Machine, 2 customers. Okay, okay. Do you expect to receive any additional contracts in the coming months ahead?

Well, we intend to report about each and every significant order that we will get from the customer.

Or you will report if you get them, in other words.

Yes.

Okay. What percentage of business is done in, let's say, Asia -- in other words, Asia, Korea and China? Like what percentage?

We mentioned the 3. I think we also mentioned it during the discussion. 80% of our business comes from Asia, 20% comes from the USA and Europe. And obviously, it's not exactly evenly divided between the 2 countries. We mentioned also that, in general, the business in Korea and China is very strong this year as it has been for last year as well. And we're expecting, going forward, at least in the near future, both of these countries are very dominant in our business.

I see. Korea, and China as well, right?

Yes.

Okay, okay. Now let's see. Okay. And one thing, you increased your cash by $1 million over the last quarter? You did $43 million you said, last year for the same quarter. Now you did $44 million?

What -- are you referring to revenue?

No, not revenue. I'm talking about cash. Cash on hand.

Okay. We have the cash on hand. We have $43.7 million as of the end of 2017.

$43.4 million.

$43.7 million.

And now you -- how much gross profit margin did you did for the fourth quarter? I can't understand what you were saying for the gross profit margin?

The gross margin was 7 -- 47.8%.

47.8% of gross profit margin for the quarter. I see. And you expect to do about 50% next year for the first half, if you can? In other words, about?

So we -- what I said is our operating model calls for around 50% gross margin.

For the first half of next year, you mean right? I mean, for this year I meant. We're in 2018.

For 2018, yes.

For the first half of 2018. Okay.

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

I just wanted to dig in a little bit to the comments on the installed base with 800 systems. So one, I wanted to try and get some color on the breakdown between IDM and OSAT? I would suspect that it matches the recent revenue mix, but would like some confirmation there. And then a greater interest, given the significant size of the installed base is what you've seen over the last couple of years in terms of the replacement rate of those products. And how you would expect that to -- that dynamic to behave in 2018 and 2019? A fairly stable replacement rate, an accelerating replacement rate or would there be any reason that the replacement rate would go down?

So in general, the 70-30 is always correct. And I think, we generally -- if you look backwards, about 50% is for the advanced packaging, 20% is the CMOS Image Sensors, and then so forth, the rest of the segments. As for the replacement, the replacement is not a very high portion of the business. The amazing fact is that we have machines running for 10 years, and they are stabilized and they are running those products and our customers are very hesitant in replacing them. So there is some replacement, but it's in very small percentage of the business. Will it grow over the next few years? Yes, I do expect that at certain time, those machines will be -- will not be able to do the new applications, and there will be some replacement. I don't see it in large numbers in the very near future. Did I answer you? Craig? I think we lost Craig. Operator?

Yes. Please excuse the interruption. It seems that the questioner has disconnected.

Okay.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Ramy Langer to go ahead with his concluding 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. Langer, would you like to make your concluding statement?

Thank you. I would like to thank you for your continued interest in our business. We look forward to talking with you again next quarter. Thank you, and goodbye.

Thank you. This concludes the Camtek's Fourth Quarter 2017 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.