Camtek Ltd Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, welcome to Camtek’s second quarter 2020 results conference call. All participants are present in listen only mode. Following management's formal presentation instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Camtek’s Investor Relations team at GK Investor and public relations at 1-646-688-3559 or view it in the news section of the company's website, www.camtek.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin please?

Yeah. Thank you. And good day to all of you. I would like to welcome all of you to Camtek’s second quarter 2020 results conference call. And I would also like to thank Camtek’s management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek’s CEO, Mr. Moshe Eisenberg, Camtek’s CFO, and Mr. Ramy Langer, COO. Rafi will provide you the overview of Camtek’s results and discuss market trends in the second quarter of 2020, and Moshe will then summarize the financial results of the quarter. We will then open the call to take your questions. Before we begin, I'd 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 these forward-looking statements are subject to risk and uncertainties that may cause actual events or results to differ materially from those projected, including a result of the effect of general economic conditions, the effect of the COVID-19 crisis on the global markets, or on the market in which we operate, including the risk of a continued disruption to our and our customers' business providers, business partners and contractors business, as a result of the outbreak and the effect of the COVID-19 pandemic. Risk relating to the concentration of a significant portion of Camtek’s expected business in certain countries, particularly China, from which we expect to generate a significant portion of our revenues for the second half of 2020, but also Taiwan and Korea, including the risk of deviation from our expectation regarding timing and size of order from customers in this country. Changing industry and market trends, reduced demand for services and products, the timing development of the new services and products, and the adoption by the market, increased competition in the industry and price reduction 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, focus 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 cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today’s earning release. And now I'd like to hand the call over to Rafi, Camtek’s CEO, Rafi go ahead please.

Hi everyone. The second quarter represents continued demand for our system primarily from Asia. Total sales in the second quarter were $37 million, a record quarterly level. Gross margin was 46.1 and operating margin was over 17%, marking a significant improvement in profitability compared with the first quarter. We expect continued improvement in profitability in the third quarter as well. The ongoing demand from our customers for various applications points to a strong third quarter with encouraging backlog going into the fourth quarter. Our revenue guidance for the third quarter is $38 million to $39 million with persisting improvement in profitability. This indicates strong performance in the second half of the year. We have significantly increased our market share in 2D inspection mainly because our system performance and competitiveness has been dramatically improved in all 2D applications. A key element in our strategy is having in place local professional teams that can independently install and support machines in all our territories, hence enabling us to continue growing our business, even during the COVID-19 pandemic. We have also established a remote training and support infrastructure allowing us to remotely operate systems, upgrade machines with recently developed features, and train local teams on a regular basis. We invest considerable development effort in providing appropriate technological solutions to our IDM Tier 1 customers who developed basic packaging technologies in the field of heterogeneous integration. We have received a few initial orders and we believe we will soon receive multiple machines orders for production. We expect this segment to become meaningful to our business. Let me give you some highlights of the second quarter. China continues to be the largest territory in the quarter. The USA and Europe are starting to pick up, we have received multiple machine orders for over 30 systems from four Tier 1 subsidiaries for 2D applications, mainly for advanced packaging. Some of these machines will be installed in the second half of the year. The two Golden Eagle inspection systems for 600x600 millimeter panels were installed for two Tier 1 customers in Q2, running fan-out panels in production. We expect to deliver additional systems later this year. Our customers believe that fan-out packaging companies will continue to grow as this is the cost-effective solution. Soon we will start planning our budget and work plan for year 2021. One of the most significant challenges facing management during COVID-19 is to assess what would be the scope of business activity in 2021. We base our strategy of achieving continuous growth on several drivers and trends. The first is the increase in demand for semiconductor devices. The main drivers in our market are advanced packaging, memory, seamless image sensors, and RF filters for 5G Smartphones. 5G is pushing demand for high-end smartphone sales, compared to the previous generation, these 5G phones include more silicone, more advanced packaging, and a larger number of RF chips in each phone. As a result, we are experiencing demand for 5G related applications. Regarding memory, new memory fabs are under construction in Korea and China, and we expect investment in capital equipment for memory packaging to increase in 2021. The second driver is the adoption of new packaging technologies by our customers. In general, we see considerable efforts in Tier 1 IDM and OSAT to adopt new packaging technologies and execute them to production. Adoption of new technologies requires extensive use of inspection and metrology systems. For example, logic CPU and graphics TPU shift to heterogeneous integration packaging. The continued transition of DRAM for wire bonding to 3D IC advanced packaging or power devices shifts to advanced packaging specifically fan-out. The third is penetrating new segments in the front end. We have already penetrated the front end market in the past two years and we continue to discover more segments our system can provide suitable solutions for. To summarize, 2020 is shaping up to be another solid growth year for Camtek, but it is important to stress that we are still seeing the coronavirus pandemic effect, which increases the risks and uncertainties. Camtek is a dynamic and flexible company that can adapt to any development in the market and take advantage of the rapid changes in our industry. Before I hand over to Moshe for more details on the financial results, I would like to specially thank our employees for their dedicated work during this challenging time. Moshe.

Thanks, Rafi. In my financial summary ahead I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appears in the tables at the end of the press release issued earlier today. As Rafi mentioned, second quarter 2020 revenues were $37 million. It’s a record quarterly revenue level and an increase of 8% compared with the $34.3 million reported in the second quarter of 2019, and a 22% increase versus the previous quarter. Due to the fact that the US and Europe were heavily affected during the second quarter, Asia accounted for most of our revenues with a 95% contribution. The rest of the world, therefore only accounted for 5%. Based on orders on hand, we expect the US and Europe to pick up in the second half. Gross profit for the quarter was $17 million. The gross margin for the quarter was 46.1% versus 48.4% in the second quarter of last year and 45% in the previous quarter. As we mentioned in our last call, in the first half of 2020, we had received orders for multiple 2D inspection machines with basic integration with relatively lower ASP, which resulted in lower gross margins. We see a changing trend with orders for the third quarter for machines with more advanced capabilities compared with the first six months. And as Rafi mentioned, we expect continued improvement in the gross margin in the second half of the year. Operating expenses in the quarter were $10.7 million. This is compared with $9.6 million in the second quarter of last year and to the $10 million reported in the previous quarter. The increase versus the first quarter is mainly due to increased R&D activity. The COVID-19 environment resulted in certain savings, mainly in travel expenses, which were partially offset by higher shipping expenses. Operating profit in the quarter was $6.4 million, an improvement of over 70% versus the $3.7 million in the previous quarter. Operating margin was 17.2% compared to 12.2% in Q1, mainly as a result of the increased volume. Overall, we expect a significant improvement in our gross and operating margins in the coming quarters. Net income for the second quarter of 2020 was $6.3 million or $0.16 per diluted share. This is compared to a net income of $6.7 million or $0.18 per share in the second quarter of last year and $3.6 million or $0.09 per share in the first quarter of 2020. Turning to some high-level balance sheet and cash flow metrics. We generated $11.1 million in cash from operations in the quarter. This quarter, we have received a significant amount of down payment from one of our customers, which positively affected our cash flow. Net cash and cash equivalents in short-term deposits as of June 30, 2020, increased to $101.5 million compared with $90.6 million at the end of March 2020. With the current business momentum, we expect revenues of $38 million to $39 million in the third quarter. It's important to mention that the $37 million reported in Q2 included approximately $3 million as a result of the COVID-19 related delays from Q1 as discussed in our previous call. So practically, our guidance for Q3 represents a significant increase of around 15% over Q2. And with that, Rafi, Ramy, and myself will be open to take your questions.

The first question is from Quinn Bolton of Needham & Company. Please go ahead.

Hi guys, congratulations on the nice results, wanted to ask just in terms of the demand environment. Have you seen any disruptions from your OSAT customers, from the commerce department actions against Huawei, one of your competitors? Last evening discussing some order delays, as a result of those commerce department actions, just wondering if that's had any impact on your business. And then I've got a couple of follow ups. Thanks.

Hi, this is Rami. Yes, I saw the discussion last night. We have not seen any disruptions from our OSAT customers, any other customers, and this specific discussion about Huawei has not affected our business.

Great. And then a second sort of business-related question. You delivered two systems from panel level inspection in the second quarter and expect more in the second half. Just wondering how meaningful can that panel level inspection business become over the next couple of years?

It's hard to say because it depends on whom you ask. Some people believe it would be significant. Other people tend to think that it will be minimal. So I think we'll need to wait and see at this stage, at least if I look only 12 months ahead, I don't think it will be significant.

Okay, great. And then for Moshe, you talked about some meaningful increase in gross and operating margins into the third quarter and I think beyond, any chance you might be able to quantify what you think the gross and operating margins may how they will trend in the third quarter and whether that trend will continue into the fourth quarter and into ‘21?

Hi Quinn, typically we don't provide specific gross margin guidance or operating margin guidance, specifically, third quarter and fourth quarter that we are starting to shape up is populated with more favorable product mix. We've seen machines are coming with more capabilities. And as a result, we see a better gross margin coming back to the more normal gross margin that we have seen in previous quarters, this will obviously affect our operating margin as well.

Understood and lastly you talked about your backlog, giving you some visibility into the December and being supportive of a pre-healthy December quarter. Should we interpret those comments that the fourth quarter may be sort of flattish with the third quarter? Or how should we interpret those backlog comments? Thank you.

It's a bit too early for us to provide specific guidance for the fourth quarter, but currently it's looking good. I can't really quantify exactly how the fourth quarter is going to look like.

The next question is from Craig Ellis from B Riley, FBR, please go ahead.

Yeah. Thanks for taking the questions and team congratulations on the really nice second quarter execution. The first question is a follow up on the earlier gross margin inquiry. I think Camtek and, and most of the companies were impacted by adjustments to COVID-19 with cost of goods sold costs and certainly break costs have been higher. Moshe can you just help us understand to what extent those costs are lingering in the business in the third quarter and the fourth quarter? And to what extent are you seeing any abatement in any of those costs? That'd be the first question.

Hi Craig, it's there are some ins and outs as you usually use the terms. The positive is that we have certain savings related to travel expenses, entertainment, conferences, and things like that. On the same time there is a higher level of expenses mainly on the shipments. So only those, we do see some savings and this will take us all the way through the end of the year or until the COVID-19 will be over.

Okay. And then another final before a couple inquiries to Raft. So there was a customer deposit in the quarter that helped increase the cash balance above $100 million. Is that kind of customer deposits, something that we could, we should expect in the future? Or is this more of an unusual circumstance that we shouldn't expect to occur either in the back half of this year or next year?

No, it's kind of a one-time event and this is why we obviously disclosed it. Typically we don't get a significant amount of down payments in advance. So, no, we should not expect something like this in the next few quarters.

Got it. And then turning to some of the product dynamics and market dynamics, Rafi, you had mentioned the visibility for the fourth quarter. What I was hoping to understand is how that is shaping up from an end-user standpoint. You've had a really strong, seamless image sensor business, year to date, high bandwidth memory is a little quieter. It sounds like RF is really picking up with 5G. Any color on what you're seeing bottoms up for the fourth quarter would be helpful.

I would say that in general, the mix application is very similar. We see it's about, there are three major drivers as we mentioned: advanced packaging, the seamless image sensor, and RF and RF related devices. These three almost take most of the capacity here.

Got it. And then as we look to calendar ‘21, you know, it seems like it should be just a real strong year for Camtek because in addition to what should be a doubling and 5G smartphone units from 200 plus million to over 400 and in the strong RF and CMOS image sensor demand, that would imply, but it seems like we've seen a lot of indications more broadly that high bandwidth memory on, a new memory capacity, and new memory products is going to see an increase. So if we were to look at calendar ‘21, how would you Rafi rank the growth drivers in the business largest to less significant on a year on year basis from what you see today?

Look, as I mentioned before, there are a few elements or parameters that affect our growth. It's the technology, it's the level of support, our positioning, install base, all of this we are in a very good position. The only thing that we cannot predict is the market behavior. We definitely do not know what is the Corona virus' effect, what is going to happen with the demand in the industry. This is something that we cannot expect. But as I mentioned, we are very flexible and we are ready for any change, any trend. And I think it's very important because if we believe that today we have a very large install base, we are in a very high position as a Tier 1 supplier to the industry. I think this is a very important aspect for growth. We are in a good position to take advantage of any demand. So in general, as I mentioned before, we talk about advanced packaging, it's heterogeneous integration, memory, CMOS, RF, all of this continues to grow definitely.

Got it. And then the last question from me, and it goes back to a clarification that I had to Moshe, but with a different spin. Very significant cash balance, so congratulations, I think over $100 million is easily a record for the company. How should we think about the way the company will deploy that cash balance to create value for shareholders? I think in the past there've been some special dividends. The company’s also in the past expressed M&A interest, how do we think about the priorities and how quickly the company could act on those priorities? Thanks team.

Yeah, I think definitely the first priority before we consider dividends is to look for opportunities in M&A, but we don't want to go to any venture. You know, sometimes you make M&A, and then all the management invest all the efforts and attention, and it can affect our potential to grow and to take advantage of the organic growth. So we have to do it very carefully. We are looking for mature companies, corporations you don't have to do micromanagement, companies that show stable profits, and this is okay for us. And also, of course, we would like to look for companies in the semiconductor arena. We don't want to start with companies that we have no clue about the market, what they do, or things that we cannot contribute to. This causes a very strong organization. And definitely, we can take small to midsize companies and leverage and give them a lot of tools to leverage their success. So right now we are evaluating a few companies, but as I said, we do it very carefully and we don't intend to make any venture by looking for a startup or company that's at the stage of investing and losing money. This is not the type of M&A that we are considering.

Thank you. The next question is from Gus Richard of Northland Securities, please go ahead.

Yes. Thanks for taking the questions. I just wanted to dig into the advanced packaging opportunities, you know, co-packaging, chiplets, CPU, GPU, high bandwidth memory, and fan out. Could you sort of talk about where each of those are in terms of demand and sort of what you expect in 2021?

Well Gus, this is Rami. If we look at ‘21, at first of all, I think we talked about the memory that we believe there will be an opportunity in the memory space, in the bandwidth memory. And I think this will definitely be significant in ‘21, the rest of the industry, this is a major segment this year and will continue to dominate our business in ‘21. I think the area of the chiplets or heterogeneous integration definitely is growing. People are getting into it. It's very hard to say at this stage how significant it will be, but it's definitely going to become significant over the next few years. And we are in it, we understand it and we are going to be a major player in this segment.

Got it. And is there a higher intensity of inspection and metrology on the chiplet side of things versus fan out and HBM?

Yes. And there are additional steps that we don't see on the HBMs and on the regular fanout. So I would say there is another level of metrology and inspection that doesn't currently exist. So, yes, definitely. We think that this will be heavily involved in a few steps of inspection and metrology, and that's no doubt an opportunity for us.

I would like to add a few comments, the idea to give us integration, you actually, take very expensive components and put them together. So nobody wants to take any risk that such module will be rejected because something doesn't work properly. So this is why customers cannot skip any sampling inspections. They must make even 200% inspection to be sure that this model works perfectly. It’s a very expensive model, talking about a few hundred dollars cost per module. So definitely, everyone needs to make an inspection. It's not only inspection, it’s inspection and metrology. There are many steps, the interposer, the chip itself, the hybrid memory. So there are many steps in this package that inspection metrology is a must. This is why we believe that when this trend goes up, we will see a lot of machines doing this job.

Got it. And then on the panel level inspection, you're sort of uncertain about the demand for that, is that a function of panel level versus wafer level, or is that a debate over the proliferation of fan-out?

I tell you, in general, the panel level is something new for the industry. First of all, the beginning of this process, you know, the industry need to wait for the equipment supplier to build the machine for this size of panels. Now they focus on material. You're talking about organic material in most cases and organic material is not silicone. You cannot make the same density. Their target is to make one, two micro line space. Almost it is impossible right now to make it in organic material. So today, most of the line space is about 10 microns. They claim to achieve five to eight microns soon, but not yet. So I think that the density is the key factor to increase the use of panel level, and it takes time for the industry to know how to make it in high yield. This is why we don't see this acceleration in this process customers now, I would say in the learning curve and they want to make a good yield. And probably after that, they will go step by step. So we don't expect to see, you know, dramatic needs for panel. It's go step by step. And I cannot even predict how long it takes. I believe that in the next few years, we will see more and more use of this technology, but it is not like silicone, silicone, you know, the industry knows how to handle it very well. All the processes, everything is actually very experienced. So the industry knows how to do it. Panel is totally new, new equipment. You process new material and by definition it will take more time.

Got it, got it. That was very helpful. And then you mentioned in the front end that you were starting to trip over new applications for your equipment. Can you give a little bit of color? Are you moving from macro defect to metrology in the front end? What are you seeing there?

You know, obviously I don't want to get into too many details, but the applications where we are focused, we are focused in the area what we call the back end of the line and in that space, we, as more we get experienced, we uncover other applications that customers are doing. It's around the macro. Do you call the macro in spaceship inspection, but not only macro inspection? Definitely. There is room to grow there.

Got it. Okay. That's it for me. Thanks so much.

Thank you. [Operator Instructions] There are no further questions at this time. Before I ask Mr. Amit 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 at www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

Okay. I would like to thank you all for your interest in our business and to our investors I thank you for your long term support, unfortunately, we are unable to meet face to face during this challenging period. So we will continue to update you on our activities through virtual conferences. Thank you and goodbye.

Thank you. This concludes the Camtek second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.