Orbotech (ORBK: US)-1Q16 Results

Makor Securities Makor Securities London Ltd (Paris Rep. Office) 51 rue Francois Premier 75008 Paris, FRANCE +33 1 42 99 69 41 Makor Capital Markets Makor Securities London Ltd (Geneva Rep Office) 27 rue de la Croix-d’Or 1204 Geneve, SWITERLAND +41 223 106 916 Makor Capital Rogovin Tower Menachem Begin 11 52689 Ramat Gan, ISRAEL +972 3 545 3777 Makor Securities London Ltd 7/8 Savile Row 2nd Floor London W1S 3PE, ENGLAND +44 207 290 5777 1 ISRAELI TECH ORBOTECH LTD. (NASDAQ:ORBK) May 6, 2016 Orbotech (ORBK: US) Solid results and positive outlook; Reiterate buy, PT raised to $30 Results summary: Orbotech reported 1Q16 results that were ahead of our expectations and in line with management prior guided range. Non GAAP diluted EPS was $0.53 on revenue of $190.4 million, ahead of our expectations for $0.48 EPS on revenue of $185 (Street - $0.52 EPS on $188 million revenue). Management guided 2Q16 revenues in the range of $190-$198 million above our estimate of $188.5 (in line with street consensus - $194.6 million), and gross margin of approximately 45%-45.5%, in line with estimates. Management continues to expects an acceleration in 2H16 driven by large investments in FPD and continued strength in SD. 1Q Revenue was up 3% compared to 1Q15 and up 1% sequentially. Growth in the quarter was driven by an 18% yoy increase in the SD segment (up 3% q/q) and a 17% increase in the PCB segment (flat q/q). As expected the FPD segment was down by 22% yoy (down 2% q/q) ahead of new orders that are expected to be recognized in the next quarters. Management noted on the call that during the quarter it saw very strong bookings for FPD equipment that will be translated into strong revenue in 2H, and that the number of projects planned for the remainder of 2016 and 2017 is unchanged. In addition, it noted that it has begun to see traction for OLED displays, and referenced three wins across three geographies over the last few months. The industry focus on OLED is a positive trend for Orbotech as it may provide the company an additional revenue opportunity going forward given the complexity of this manufacturing process (especially flexible OLED). With regard to the SD segment management noted that expectations regarding capital investments for advanced packaging (in fan-out architectures and in plasma dicing), power, RF, and MEMS in general remain unchanged. With regard to the PCB segment – during the quarter the company saw strength in direct imaging solutions for flexible PCBs and from the wearables supply chain. Service revenues for 1Q16 were $49.5 million, down 8.5% from $54.1 million in 1Q15 and slightly below our $52.0 million estimate. Gross margin in 4Q was 45%, in line with our expectation and management’s guidance, and flat sequentially. We expect to see improvement in gross margin in the second half of the year when quarterly revenues are expected to exceed the level of $200 million. Non GAAP operating profit in 1Q was $31.3 million reflecting 16.4% operating margin vs. our expectation for 15.6%. Capital allocation– cash from operation in the quarter was $15.7 million compared to $21.6 million 1Q15. During the quarter management made another $26M prepayment on its term loan, and as of the end of 1Q net debt is ~$30 million (down from ~$50 million in the end of 4Q). With a strong balance sheet and a $177 million cash position we wouldn’t be surprised to see ORBK executes additional acquisitions in the future, though probably at a smaller scope than SPTS. Valuation –following 1Q results and 2Q guidance we tweak our projections and raise our price target to $30 up from of $28. We maintain our FY16 revenue forecast of $804 million (reflects approx. 7% annual growth) and raise fully diluted Non GAAP EPS to $2.44 up from $2.38 (street - $2.45 EPS on $809 million revenue). For 2Q we expect revenue of $194.1 million and fully diluted Non GAAP EPS of $0.55. Our new price target is based on ~12.5x P/E to the projected Non-GAAP FY16 EPS, implying approx. 20% upside from current levels. We see this multiple appropriate given the multiple growth opportunities headed in the short and long term, high visibility in the FPD segment, new product offering in PCB, strong performance in SD all together with potential for further improvement in margins and excellent execution. Shares of ORBK are up 12% YTD. This is following a 50% increase in the share in 2015. As we mentioned several times in the past we view ORBK as one of the most interesting investment ideas on our coverage and maintain our buy rating. Risks - the industries in which the Company operates are highly cyclical and therefore a deterioration in global economic conditions will have a negative impact on growth opportunity and performance. Specifically it may cause PCB customers to delay their capacity investments and lead to lower than expected LCD investments (and even cancellation of investments for new fabs). Company Description ORBK is a leading global provider of yield-enhancing and production solutions for PCBs (Printed Circuit Boards), LCDs and SDs (Semiconductor Devices) and provide similar solutions to manufacturers of other electronic components, such as touch screens and interconnect substrates.