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Edited Transcript of ORBK earnings conference call or presentation 3-May-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Orbotech Ltd Earnings Call

YAVNE Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Orbotech Ltd earnings conference call or presentation Wednesday, May 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rami Rozen

Orbotech Ltd. - Director, IR

* Asher Levy

Orbotech Ltd. - CEO

* Ran Bareket

Orbotech Ltd. - Corporate VP & CFO

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Conference Call Participants

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* Jaeson Schmidt

Lake Street Capital Markets - Analyst

* Jim Ricchiuti

Needham & Co. - Analyst

* Delos Elder

Jefferies & Co. - Analyst

* Joseph Wolf

Barclays Capital - Analyst

* Timothy Arcuri

Cowen & Co. - Analyst

* Bill Peterson

JPMorgan Chase - Analyst

* Andrew Abrams

Supply Chain Market Research - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Q1 2017 earnings conference call. Today's conference is being recorded and at this time, I would like to turn the call over to Mr. Rami Rozen. Please go ahead, sir.

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Rami Rozen, Orbotech Ltd. - Director, IR [2]

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Thank you, operator. Joining me on the call today are Asher Levy, Chief Executive Officer and Amichai Steimberg, President and Chief Operating Officer and Ran Bareket, CFO.

Please note 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 risks and some uncertainties. Any factors could cause the actual results, performance or achievements of the Company to be materially different from those that may be expressed or implied by such forward-looking information.

Additional information regarding risks 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 Securities and Exchange Commission.

During May management will precipitate in the Jefferies Technology Conference in Miami; JPMorgan TMT conference in Boston; and during June, in the Cowen TMT conference in New York.

With that said, I would like to turn the call over to Asher Levy.

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Asher Levy, Orbotech Ltd. - CEO [3]

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Thank you, Rami. Good morning, everyone and thank you for joining us today for the review of our first-quarter results. Our results for the first quarter of 2017 were within our planned range and reflect the normal seasonal dynamics of our sales market. Although the business model is well-balanced and diversified across end markets, products and geographies, our bookings for the first quarter were strong for all three divisions, which further supports our growth plan and growth assumptions for 2017.

All in all, we are very excited by the growth opportunities presented in our served markets, including the adoption plans for new and advanced PCB manufacturing technologies for smartphones by an increased number of manufacturers, enhanced investments in flat-panel display in China and growth in flex OLED.

The new products introduced during 2016 in all three divisions continue to gain market acceptance and improve our market positioning and collaboration with major industry manufacturers. Once again it demonstrates our commitment to achieving growth and market leadership through innovation that meets our customers' requirements. We believe that these innovative solutions will play a significant role in our growth during 2017 and beyond.

Now let me briefly touch upon the results from each of our three divisions. The PCB division started 2017 with particularly strong performance and sales revenues grew by more than 25% year-over-year, far outpacing the industry's growth rate. This is a direct result of the unique solutions that Orbotech is bringing to the marketplace and how well it is being adopted by our customers.

During the first quarter, revenues of the AOS, automated optical shaping, products experienced strength and reached record revenues. Sales of direct imaging continue to enjoy excellent momentum boosted by accelerated sales of the Nuvogo Fine, which is part of the new and advanced manufacturing technologies of premium smartphones. Sales of the Diamond system, our direct imaging solution for the solder mask application, grew significantly as well.

The product strength was complemented by strong demand in the Korean market, as well as more broadly in the APAC region. As we mentioned in previous calls, we are the only company in the industry to offer AOS enabling solutions, which benefits our top line and improves profitability. This is another example of how Orbotech creates enabling solutions for advanced manufacturing challenges.

Turning to the FPD division. Revenues of the FPD division during the first quarter of 2017 were in line with our expectations. The underlying market continues to show strength and our bookings this quarter were in line with that trend. Growth drivers for the FPD division during the first quarter were similar to those which we experienced during 2016, including accelerated investment in flex OLED production, the buildup of gen 10.5 plus fab for large-size TVs and the continuation of investment in China.

OLED revenues continue to grow and this quarter accounted for more than 30% of the division's total revenues. We also experienced growth in OLED bookings during the first quarter. Growth in OLED revenues is also the result of the market acceptance of our wide set of unique solutions, especially developed to address flex OLED needs.

During the first quarter, we introduced a few new models of AOI and testing focusing mainly on non array layers. We expect that the new models will create new market opportunities for the FPD division and will increase our total available market in the flex OLED universe.

We continue to recognize the high potential derived from investments made in new gen 10.5 fabs for LCD. There are currently several significant such opportunities and we believe that we are very well-positioned to benefit from the expected growth in this area.

At the beginning of March, Foxconn had a groundbreaking ceremony for a new gen 10.5 plus plant in the Chinese city of Zengcheng and Orbotech was among the few FPD equipment vendors invited to attend the ceremony followed by a meeting with Mr. Terry Gou, Foxconn's Founder and CEO. This is another testimony for our leading position in the FPD industry and a recognition of the unique value that our advanced solutions bring to the manufacture of gen 10.5 plus LCD.

Moving on to the semiconductor device division. While the first-quarter results reflect the normal seasonal dynamics of the semiconductor equipment market in our served market, we are encouraged by the strength of our bookings level, which was 60% higher year-over-year and 20% up sequentially.

We are also encouraged by the strong business momentum in RF, power, high brightness LED and MEMS sectors. Overall, investment in equipment for advanced packaging remains positive. However, we can see that some of the expected customers' investment plans in high-density IO fan-out application will shift from the first half of the year to the second half of 2017.

With those comments, during the first quarter, we experienced strong demand for etch and deposition systems for use in power and RF device manufacturing, along with systems for use in advanced packaging for low IO fan-out, dicing and copper bumping.

Results for MEMS for the quarter were in line with our expectation and we expect further growth in this category throughout the year. The demand for MEMS continues to derive from growth in advanced smartphones, automotive, Internet of Things and wearable applications.

Lastly, we continue to make progress with the Mosaic plasma dicing system designed to process 300 millimeter tape on framed wafer. This system is one of our most heavily used demonstration platforms as the industry explores alternate metals to singulate wafers.

During the quarter, JCAP, a leading Chinese advanced packaging services provider to the global semiconductor companies, selected Orbotech's plasma dicing solution because of its demonstrated superior results and lower cost of ownership compared to other dicing solutions. This achievement further supports our growth assumption for the product during 2017.

And with that, I will turn the call over to Ran.

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [4]

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Thank you, Asher and good morning, everyone. Our well-balanced and diversified business model supported our solid performance on top line and profitability during the first quarter of 2017.

Turning to the results in more detail. Revenues for the first quarter totaled $187.6 million, a decrease of 1.5% year-over-year or 13% compared to the previous quarter. Products' sales accounted for 73% of total revenues while services accounted for 27%.

The PCB division generated total revenues of $77.5 million in the first quarter of 2017, up 14% year-over-year and flat with the previous quarter. Sales revenues for the PCB division grew by 25% year-over-year. The year-over-year growth achieved during the quarter reflects the strength of the new products' launched during 2016. These products are well-accepted by our customer thus creating new business opportunities, which are more significant for us compared to what we assumed at the end of 2016.

The FPD division revenues were $53.4 million, up 20% from the first quarter last year and down 25% from the previous quarter. The FPD division performance this quarter is in line with our plans and timing of deliveries of large projects. We expect the tailwind for the FPD division performance during 2017 as a result from favorable industry trends to be even more significant than what we assumed at the end of 2016.

The FPD division generated total revenues of $52.5 million down 28% from the first quarter last year and 15% down compared with the previous quarter. We are encouraged by the 60% growth in bookings year-over-year recorded during the first quarter mainly in areas like power and RF.

Turning to profitability metrics. Gross margin reached 46.4%, an improvement of 140 basis points year-over-year. GAAP operating expenses were $67.5 million during the first quarter of 2017. Non-GAAP operating expenses were $60.8 million. Our level of OpEx for the first quarter was slightly higher than what we expected.

In the second quarter of 2017, we expect these expenses, which we define as R&D and SG&A expenses adjusted for equity-based compensation, to be flat to slightly down compared with the first quarter reflecting our ongoing cost structure.

GAAP net income for the first quarter of 2017 was $14.9 million. Non-GAAP net income for the first quarter was $22.3 million compared with $23.1 million in the first quarter of 2016. GAAP EPS for the first quarter of 2017 was $0.31 compared with $0.36 in the first quarter of 2016. Non-GAAP EPS for the first quarter was $0.46 compared with $0.53 in the first quarter of 2016 all on a fully diluted basis.

Adjusted EBITDA was $32.5 million for the quarter, reflecting a margin of 17.3%. Cash used in operating activities during the first quarter of 2017 was $9.2 million, mainly due to working capital needs associated with the growth of the PCB business.

During the first quarter of 2016, cash generated by operating activity was $15.7 million. As of the end of the first quarter of 2017, our net cash position was $133.8 million.

Moving on to the outlook for the second quarter of 2017. We expect revenues for the second quarter of 2017 to be in a range of $200 million to $210 million and gross margin will be 46% based on our expectation for product mix. I will now turn over the call back to Asher.

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Asher Levy, Orbotech Ltd. - CEO [5]

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Thank you, Ran. Before Amichai, Ran and I take your questions, I just want to close with a few thoughts. Our performance during the first quarter of 2017 was within our planned range and reflects a solid start of the year.

Despite the fact that we are at a relatively early stage in the year, the results of the first quarter and the outlook for the second quarter give us confidence that we will be able to meet our growth plans for 2017. Operator, please open up the lines for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Jaeson Schmidt, Lake Street Capital Markets.

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Jaeson Schmidt, Lake Street Capital Markets - Analyst [2]

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Just want to start with a quick clarification. Did I hear you correctly that you guys now have increased confidence in the tailwinds for the FPD division this year?

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Asher Levy, Orbotech Ltd. - CEO [3]

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That is correct. Yes, that is correct.

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Jaeson Schmidt, Lake Street Capital Markets - Analyst [4]

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Okay. And then just looking at the Q2 guidance, can you help us understand some of the puts and takes between the three segments to get you there?

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Asher Levy, Orbotech Ltd. - CEO [5]

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Can you repeat the question please, Jaeson?

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Jaeson Schmidt, Lake Street Capital Markets - Analyst [6]

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Can you help us with the puts and takes to get to your Q2 guidance between the three segments?

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Asher Levy, Orbotech Ltd. - CEO [7]

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So in general, the three should be billed on the first one, but the real significant increase should come from the flat-panel display.

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Jaeson Schmidt, Lake Street Capital Markets - Analyst [8]

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Okay. And then the last one from me, and I will jump back into queue, how should we think about OpEx trending beyond Q2?

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [9]

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So as I mentioned before, this quarter, the OpEx was slightly higher than our expectations and Q2 will be similar to Q1 or even slightly lower than Q1. And from there on, you will see the same trend like we had in 2016.

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Jaeson Schmidt, Lake Street Capital Markets - Analyst [10]

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Okay. That's helpful. Thanks a lot, guys.

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Operator [11]

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Jim Ricchiuti, Needham & Co.

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Jim Ricchiuti, Needham & Co. - Analyst [12]

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Maybe we could start by just if you could remind us of your growth expectations for the year. I think, in the past, you have talked about all three businesses being up this year. Is that something you still see?

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Asher Levy, Orbotech Ltd. - CEO [13]

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Yes, that is still our assumptions for 2017.

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Jim Ricchiuti, Needham & Co. - Analyst [14]

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Are there changes within the categories? It sounds like you are a little bit more positive on flat panel. Do you have some visibility in that market? Would you be willing to maybe give us a sense as to how much that business could be up? PCB I recognize is a lot more volatile.

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Asher Levy, Orbotech Ltd. - CEO [15]

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Well, FPD, all right. There was a better visibility and we experienced acceleration in investment plans related to the gen 10.5 and above and also gen 8.6. We also see or we also have better visibility for investment in flex OLED lines. So several months ago, our visibility was looking at something like 25 new flex OLED lines between 2017 and 2018, now we see higher numbers, which gives us more confidence that we will experience stronger momentum in flat-panel display. So that's on FPD.

On PCB, if you'll remember, last year, we spoke about the adoption of new PCB technology with one of the leading smartphone companies adopting mSAP as a new PCB technology, modified semi-additive process, and we are very happy to report that we see start of an interest in test in this new PCB technology also by other small format companies, which, as was the case in 2016, should be a significant opportunity for us.

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Jim Ricchiuti, Needham & Co. - Analyst [16]

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So looking at PCB, there's a lot more momentum that appears to be coming from new products. I don't know if you are in a position where you can say if you look at the products that you introduced in the past year, what percentage they might have contributed to the PCB business? It sounds like that's where a lot of the demand is coming from; is that fair to say?

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Asher Levy, Orbotech Ltd. - CEO [17]

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Yes, it is fair to say. I think it would be safe to say that more than 50% of the revenues came from new products. We also, as I mentioned in my script, we had also a great quarter in terms of the automated optical shaping solutions. That is part of what we call enabling solution to enable the production of the mSAP technology and mSAP in general impacted our sales in inspection, AOS, as well as direct imaging.

Another interesting phenomena, about one-third of the inspection systems we sold in PCB in Q1 were related to the automotive industry, which reflects a growing trend of the automotive industry of looking for or moving to HDI PCB production and looking for better inspection solutions than before.

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Jim Ricchiuti, Needham & Co. - Analyst [18]

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Okay. Thank you. That's helpful.

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Operator [19]

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Delos Elder, Jefferies.

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Delos Elder, Jefferies & Co. - Analyst [20]

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I wanted to ask how much of your revenues today are related to OLED and what are expectations for the next few quarters?

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Asher Levy, Orbotech Ltd. - CEO [21]

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Okay, so, overall, it's something that is in the range of 30% or even exceeding 30%, in the FPD -- clearly, in the FPD. And the interesting phenomenon is that, as we get more and more involved with flex OLED manufacturers, we see growing demand for the solutions that we offer, high and far beyond the requirements that we are familiar with from the traditional LCD production process.

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Delos Elder, Jefferies & Co. - Analyst [22]

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Interesting. Thank you. And then what are some of the next catalysts within the semiconductor division that we should be aware of?

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Asher Levy, Orbotech Ltd. - CEO [23]

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So clearly, it's the next generation of smartphones, which will require advanced packaging for the processors and will further support growth in fan-out application. Another area has to do with MEMS. We see a growing demand for MEMS actually both in smartphones, automotive where there is a need for small sensors, IoT.

Overall, we see that, at least based on the Q1 performance, that growth in that division will come from all the sectors we are covering, including also for a change the LED sector, which was very quiet over the last several years. The only area where there is some uncertainty is in the high density interconnect fan-out which currently there is mostly one company who moved to production and they depend on order from one company. And it seems that the adoption process for this segment of high density interconnect fan-out is taking a bit longer than expected before.

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Delos Elder, Jefferies & Co. - Analyst [24]

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Great. Thank you. Moving on to the financial side, you have previously expressed a target of 48% to 50% gross margin. I was wondering if you could help us understand what are the steppingstones to reach those targets or that target. Is there a certain revenue level, mix or other cost initiatives?

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [25]

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Sure. So first of all, let me start with the margin that we currently have in Q1, which we are very proud of the 46.4% if we compared it to almost the same level of revenue last year where we had 45% margin. So that improvement coming from many areas.

The first one is obviously those products, new technologies that Asher talked about that we introduced to the market are traditionally coming with a higher margin and we enjoy that, so that is the first point. And secondly, some cost-reduction activity that we are doing, like common platform and other cost-reduction activities that we are doing and the Company helped us to improve the margin.

Looking forward, if you recall when we presented our financial model, what we aim to is that when we will be a $900 million company and a run rate of a $900 million company, we aim to a 48% to 50% margin and that was a really tough target, but we are in the process to get there.

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Delos Elder, Jefferies & Co. - Analyst [26]

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Great. Thank you. Finally, a question on capital allocation. What are your priorities for the use of cash?

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [27]

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So we have a capital allocation policy and we are working based on that, which means that everything is on the table, but if you ask us what is the first priority, it's definitely doing an M&A, which we are very actively looking to do the next M&A and this is the first priority of use of our cash.

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Delos Elder, Jefferies & Co. - Analyst [28]

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Great. Thank you and congratulations again.

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Operator [29]

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Joseph Wolf, Barclays.

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Joseph Wolf, Barclays Capital - Analyst [30]

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Thank you. A couple of questions. Wanted to start just on the OpEx side. Ran, as part of that shekel/dollar adjustment or is all of that just higher levels of investment?

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [31]

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There is some impact of the shekel that obviously the shekel got stronger against the dollar this quarter. Keep in mind that we are doing hedging, so the impact on the Company was -- there was an impact, but it was not that significant. The higher OpEx was mainly from some increase in investment in R&D, as well as some one-time expenses there and that's it.

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Joseph Wolf, Barclays Capital - Analyst [32]

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Okay. I wanted to go a little bit -- you mentioned SD doing well in all the businesses except the fan-out seems to be still something which is going to be strong, but it seems to be slowed down. Could you give us any mix kind of sense right now between the RF and the MEMS as you think about that business this year in terms of where that growth can come from?

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Asher Levy, Orbotech Ltd. - CEO [33]

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First of all, let me make sure we look at the same situation. You have advanced packaging and you have fan-out and within fan-out, we have the high density interconnect and the low IO. So the only uncertainty right now is related mainly to the high density. There are some cost issues, rampup issues, orders from customers -- end customers.

Nevertheless, we still expect to see growth 2017 from advanced packaging, power, MEMS, RF and LED. So from all the main sectors we are covering, we expect to see growth in 2017.

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Joseph Wolf, Barclays Capital - Analyst [34]

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Okay. With the PCB growth, and you mentioned the automotive industry as being an interesting one, first of all, in automotive, are you selling to the same vendors? And I guess just overall in PCB, if you look at your total addressable market and what the new products have provided you, how much longer can you actually have such an extended growth over the rest of the end market?

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Asher Levy, Orbotech Ltd. - CEO [35]

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It's a function of two drivers. The first one is the adoption of new PCB technologies, not necessarily the mSAP. The mSAP maybe is an extreme case of totally changing production process, which requires heavy investment in almost all types of equipment that we provide.

So if last year we spoke mainly about mSAP in the context of one company, we are already engaged and received orders for mSAP-related investment with another company and there are some first discussions, early discussions also with another company that is considering going into mSAP production.

Companies I mean smartphone companies, not PCB production companies. So mSAP, like I said, is one extreme case, but any upgrade of technology capabilities, as is the case in automotive, is great news for Orbotech.

On top of that, you have the new products. Some of them are new and improved models of existing products, which further improve our positioning in the market and some of them are creating additional new opportunities for business that we didn't have before like the AOS.

So the AOS is a product category that we never had before. It is getting to the point that, in some cases, it's an enabling for production of advanced PCB technologies and this is totally additional TAM to what we experienced before in the PCB market.

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Joseph Wolf, Barclays Capital - Analyst [36]

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Has it increased your total addressable market for the next three years? I guess I am just trying to put a ballpark on the -- because the growth was so much more than we expected, how excited should we be?

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Asher Levy, Orbotech Ltd. - CEO [37]

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First of all, Joseph, you know quite well the PCB market. Talking in the PCB market about three years visibility is a very risky. I think that at least the new production technologies gives better visibility because those are long-term plans that requires heavy investment and that's something that cannot dramatically change from one quarter to the next one.

So at least in terms of new technologies, we have higher confidence. At least in terms of the higher requirements in the automotive industry as a result of all the trends that we see in automotive recently are also more long term. The more what I would say -- the area where it is a little bit more dynamic in terms of potential ups and downs are the traditional markets for the consumer PCB like PCs, notebooks and that type of market.

But I think that the shift to new PC production technologies, automotive industries are two examples we believe that it's longer term in terms of the visibility, but, like I said, it will be very difficult to focus or to give an outlook beyond 2017.

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Joseph Wolf, Barclays Capital - Analyst [38]

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Okay. And then just finally there was optimism on the number of flexible OLED opportunities that are out there. Do you have an update for us because I think originally OLED was something that was stated as having a potential for a higher percentage of CapEx than you got in the regular FPD market. Is that part of the equation as well or is this still like-for-like same percentage CapEx of these builds for the flexible OLED?

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Asher Levy, Orbotech Ltd. - CEO [39]

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Our estimates are that flex OLED will require more of the type of solutions that we are providing. Just to share with you one example. If you look at inspection for OLED flex displays, we recognize currently -- the number may go up in the very near future, but currently we identified 14 different inspection points in the production process of flex OLED. Just to put it into context, when you look at our traditional LCD production process, you have about between 8 to 10 inspection points.

So the more we get involved with the production process of flex OLED, we see increased opportunities for the type of solution we develop and provide. On top of that, as I said, at the beginning of the year, we are looking at one number in terms of the expected new lines of flex OLED in 2017 and 2018 and now the number is quite higher than it used to be only four, five months ago.

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Joseph Wolf, Barclays Capital - Analyst [40]

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Thank you.

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Operator [41]

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Timothy Arcuri, Cowen and Company.

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Timothy Arcuri, Cowen & Co. - Analyst [42]

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Okay, I had a couple questions. So in the semiconductor division, it's down a lot year-over-year, but you still seem to think that it's going to grow this year year-over-year. So I guess that would mean that you would have to add $30 million to $35 million to the current quarterly revenue run rate. And so I guess my question is what's going to drive that? Does that go back to your comment about some of the fan-out revenue pushing out into the back half of the year? Is that the issue?

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Asher Levy, Orbotech Ltd. - CEO [43]

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Without getting into specific numbers how much we expect the semiconductor device division to grow, you are right that we are expecting growth in all three divisions. We basically expect growth from all the sectors within the semiconductor device division. Some of that has to do with quite aggressive plans that we have for new products. One good example is the plasma dicing, the Mosaic.

The number of systems that we have on evaluation that we expect them to be converted to a sale between now and the end of the year, that number keeps growing and even though as I mentioned in the high density fan-out, progress is slower than expected in all other applications for advanced packaging, as well as the other segments that we discussed, we see growth opportunities for 2017.

One additional point. I mentioned during the conference call the growth in bookings in the semiconductor device division that we experienced in Q1 in comparison to first quarter of 2016 and in comparison to the last quarter of 2016.

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Timothy Arcuri, Cowen & Co. - Analyst [44]

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Yes, yes, got it. And I guess just a question on orders. Have you given any thought to providing orders (technical difficulty)? For a business like yours that has fairly significant lead times, it would be helpful, but I don't know what your thought is there?

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Asher Levy, Orbotech Ltd. - CEO [45]

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For some reason, the line had some noises and I couldn't hear the first part of the question. Can you please repeat?

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Timothy Arcuri, Cowen & Co. - Analyst [46]

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Sure. So the question really is on giving orders to us because you do have fairly long lead times and a lot of lead time businesses give us orders. Do you have any plans to give us orders?

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Asher Levy, Orbotech Ltd. - CEO [47]

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No, so the reason we have not given out a specific number for the orders is primarily due to the fact that even now most of our orders are within the quarter and it changes a lot and it's not necessarily that we can say that the specific number -- specific levels of orders indicate a very precise number. It is true that the pickup that we are seeing in the FPD translate into a better lead time on the FPD, but on the semiconductor and definitely on the PCB, we are still talking about a very short lead time relatively speaking.

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Timothy Arcuri, Cowen & Co. - Analyst [48]

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For sure, yes. Okay. Got it, got it. And then I guess last question. You said that OLED is a little more than 30% of the display division revenue. You're not saying how much the division is going to grow year-over-year this year, but can you give us an idea of basically OLED versus TFT and what the relative growth rates of those pieces will be?

In other words, is TFT going to be down a lot and how much will OLED be up this year? I'm just wondering if you can break between OLED and non-OLED.

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [49]

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Yes, we can. Basically what we said is that 30% of the business or about 30% of the business is coming from OLED-related investment. It means that the rest is coming from the more traditional technologies. But within that, you need to remember that there are growing opportunities related to the gen 10.5 and above investment. Those are heavy significant investment and each one represent quite a big opportunity for Orbotech and also some additional investment in gen 8.6 that we also benefit from them.

So yes, OLED is growing. There is more need for the type of solutions we provide, but don't count down yet the investment in LCD technology because that is still quite significant.

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Timothy Arcuri, Cowen & Co. - Analyst [50]

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Great. Thank you so much.

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Operator [51]

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Harlan Sur, JPMorgan.

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Bill Peterson, JPMorgan Chase - Analyst [52]

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Good morning. This is Bill Peterson calling in for Harlan. I would like to ask a few questions that have already been answered a little bit differently. First, on the OLED side. You have talked about I think in the past around 2% to 2.5% of capital spending is on your equipment in the case of traditional, more for silicon. And I believe you talked about 3% -- 3% or more in the case of OLED. How should we be thinking about that today? Is it more like 4%? What percentage of the TAM can you address with your equipment?

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Asher Levy, Orbotech Ltd. - CEO [53]

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What we said before, if I remember correctly and I think I do remember correctly, is that, in traditional LCD, we see an opportunity that is about 2% of the total CapEx and in OLED, it's about 2.5% to 3%. What we feel right now is that the opportunity in OLED may be even higher than the initial number that we provided. And by the way, even when we said 2.5% to 3%, we said that the more we get involved with our flex OLED, we see higher opportunities.

Actually we are now in the process of trying to estimate even some of the exposure that we have to the requirements in inspection, testing and repair of OLED display, what is the new number or the new estimate that we look at or forecast for our share of the total investment. I think I gave you one example of the inspection points in flex OLED production, which is higher, maybe even much higher than the initial expectations that we have.

So it's almost like a moving target, but we feel very comfortable with the 2.5% to 3% and now are calculating the new estimate and I hope and expect that it will be higher than the estimates we provided last year.

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Bill Peterson, JPMorgan Chase - Analyst [54]

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Okay. That's helpful. Last quarter, you provided the percentage of bookings that were OLED within FPD and I believe it was 25% and now you are saying 30% of revenues. Can you share with us the percentage of bookings that were OLED-related in the first quarter?

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Asher Levy, Orbotech Ltd. - CEO [55]

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Yes, I think I said that, Bill. I said that it was above 30% both in revenues and in bookings.

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Bill Peterson, JPMorgan Chase - Analyst [56]

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Okay. Can you get any more granular? Is it half of bookings or how should we think about that?

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Asher Levy, Orbotech Ltd. - CEO [57]

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So in the FPD, it is above 30% in the FPD.

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Bill Peterson, JPMorgan Chase - Analyst [58]

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Okay. Fair enough. I guess in light of -- and this is more of a gross margin question -- in light of the back half appearing to be much stronger for semiconductor devices and also considering the growth trajectory, that would put you most likely on the revenue run rate of $900 million, so around 225 or so. Do you think that the gross margin targets you said earlier, the 48% to 50%, does that become in play especially in light of semiconductor devices? Does that tend to have higher gross margins than FPD?

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Ran Bareket, Orbotech Ltd. - Corporate VP & CFO [59]

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So definitely one of the important factors of our gross margin is the mix between the different divisions. We mentioned in the past that the SDD and the PCB are coming with a little bit higher than the average margin where the FPD is coming with a lower margin than the average, not significant, but lower than the average. So there is an impact to the mix.

So yes, when we will grow the business, we anticipate that the margin will be better. Obviously, we are not giving guidance to the end of the year and it is hard to say if we will get to the 48%, which is a very tough target. I assume that we are not there yet, but we are aiming there, but definitely where we will grow the business, the margin will grow as well.

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Bill Peterson, JPMorgan Chase - Analyst [60]

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Thanks for the color and congrats on the quarter, guys. Thank you.

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Operator [61]

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(Operator Instructions). Andrew Abrams, Supply Chain Market Research.

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Andrew Abrams, Supply Chain Market Research - Analyst [62]

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A question on the SDD side. If you had to estimate how long it takes bookings to turn into revenues, can you give us an idea of what that number is like and has it changed because of any impact on -- from plasma dicing or other products -- does that change on a quarter-to-quarter basis?

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Asher Levy, Orbotech Ltd. - CEO [63]

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It takes the same time from the time we get orders in the semiconductor device division until we ship the equipment. Usually it's between one to two quarters or between one month to four months. So that hasn't changed at all.

Specifically with regard to the plasma dicing, because it's a new platform, it's a new solution. As I mentioned, it's being used a lot for evaluations right now, so evaluations in this market normally takes more than a quarter or two, but our experience shows that currently 95% of the evaluations that we have in this market we are able to convert them to a sale within no more than four quarters.

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Andrew Abrams, Supply Chain Market Research - Analyst [64]

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Got it. Okay and on the FPD side in terms of large fabs, you announced your BOE project and it sounds like you are either very comfortable or have already gotten bookings on other projects. Is the strength coming from additional work from BOE or are there other projects that you now are booking?

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Asher Levy, Orbotech Ltd. - CEO [65]

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Okay. First of all, in total news, we are starting deliveries of the equipment that was ordered in the context of the first business that we had and we mentioned the name of the customer, [BOEB9], nine so we are actually starting the deliveries of the equipment and that's good news.

In terms of additional customers, there are a lot of discussions, but it's in process and we expect to see orders from additional investments related to gen 10.5 and above in the next few months.

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Andrew Abrams, Supply Chain Market Research - Analyst [66]

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Okay. And you mentioned gen 8.6. I believe there's only one gen 8.6 fab that's being developed or being added to. Were you being specific to gen 8.6 or was that just a general gen 8.0 statement?

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Asher Levy, Orbotech Ltd. - CEO [67]

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That was a general gen 8.0 statement.

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Andrew Abrams, Supply Chain Market Research - Analyst [68]

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Okay. Thanks. And just lastly on the new product side, the shaping technology, is there a way you can bracket the shaping technology as a percentage of your divisional business on the PCB side? Or is it too small to be put in a single perspective?

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Asher Levy, Orbotech Ltd. - CEO [69]

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Well, it is growing. As I mentioned that was the strongest quarter ever we had with that type of product, but it's still relatively early in terms of the adoption process for this new AOS category. But within the first quarter, about 15%, 1-5 percent, of the sales revenue in the PCB was directly related to this AOS category.

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Andrew Abrams, Supply Chain Market Research - Analyst [70]

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Great. Thank you. And I know I always ask this question, but what's the status of the potential shaping product for the LCD space?

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Asher Levy, Orbotech Ltd. - CEO [71]

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Still in field test. We shipped recently another two to another leading display company, so still in field test stage.

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Andrew Abrams, Supply Chain Market Research - Analyst [72]

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Got it. Thanks very much.

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Operator [73]

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As there are no further questions in the queue, that will conclude today's Q&A session and I would now like to turn the call back to Mr. Rami Rozen for any additional or closing remarks.

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Rami Rozen, Orbotech Ltd. - Director, IR [74]

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Thank you all for joining us today. We look forward to meeting you at one of the upcoming conferences. Thank you.

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Operator [75]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.