Camtek Ltd Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third Quarter 2020 Results Conference Call. All participants are present in a 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin please?

Thank you. Good day to all of you. I would like to welcome all of you to Camtek's third 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, Camtek's COO. Rafi will provide an overview of Camtek's results and discuss market trends in the third quarter of 2020. Moshe will then summarize the financial results for 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 expectations or otherwise. Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual events or results to differ materially from those projected, including as a result of the effects of general economic conditions, the effects of the COVID-19 crisis on global markets and on the markets in which we operate, including the risk of a continued disruption to our and our customers' business partners and contractors due to the outbreak and effects of the COVID-19 pandemic. Risks related to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which Camtek expects to generate a significant portion of its revenues for the foreseeable future, but also Taiwan and Korea, including the risks of deviations from our expectations regarding timing and size of orders from customers in these countries. Changing industry and market trends, reduced demand for services and products, the timely development of new services and products and their adoption by the market, increased competition in the industry, price reductions, as well as other risks identified in the Company's filings with the SEC. Please note that the Safe Harbor statements and today's press release also cover the contents of this conference call. In addition, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results and evaluate the Company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investors' understanding and assessment of the Company's ongoing core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. I'd like to hand the call over to Rafi, Camtek CEO. Rafi, please go ahead.

Good morning, and thank you for joining our call today. In the third quarter, we continued the momentum of increasing sales to our existing customers as well as to new customers. Total sales in the third quarter were $14.1 million, close to a 25% increase over Q3 '19, and the record quarterly revenue. Gross margin was 48.8%, and operating margin was 19%. This marks a continued improvement in profitability compared with the first half of 2020. The orders we have received, together with sales in the pipeline, indicate a strong sales forecast for Q4, as well as the first half of 2021. In the first quarter, we specifically are facing a demand from customers to supply more systems than we had planned to ship. So, we are making considerable effort to meet customer requirements to ship on time. We estimate sales in the first quarter to be between $42 million and $44 million. Based upon orders received and the current pipeline, the Company believes that revenue in the first half of 2021 will be similar to the revenue level in the second half of 2020, representing approximately a 25% growth over the first half of 2020. Despite the high demands and the uncertainty we face, we must carefully assess that there might be fluctuations in revenue between quarters. The distribution of sales between the various territories is very similar to the second quarter, with about 90% in Asia and 10% in Europe and the U.S. It should be noted that our Asian revenue includes facilities of U.S. and European-based companies. The main applications that continue to lead the market are Advanced Packaging, CMOS Image Sensors, and RF devices. We have also expanded our presence in the front end mainly for macro inspection applications. Over the past few months, we have learned to operate our company alongside COVID-19 with installations being made by the local team in each of our territories. As special features have been developed for customers, guidance for installation is provided remotely by the R&D team at headquarters. In Israel, most employees work from the company's facility, while some work from home. We take all necessary precautions to keep our employees healthy and safe. We continue to follow developments in the global economy and our customers' situation. Currently, we do not see signs of weakness in demand. On the contrary, customers are continuing to order more systems and using our systems at normal utilization rates. Moreover, new packaging technologies will increase the need for our systems in customers' production lines. We continue to collaborate with leading IDM customers to develop metrology and inspection solutions for the next generation of advanced packaging. As we have said in the past, we expect these applications to become meaningful to our business. We reiterate the importance of cooperation with leading IDMs because once they move from the development stage to high-volume production, we will be there ready to run production with our qualified systems. We believe that new inspection companies who are not involved in the development process of the next generation of Advanced Packaging will require considerable time to develop suitable solutions. Our growth drivers have not changed. The main drivers in our market are Advanced Packaging, Memory, CMOS Image Sensors, and RF devices for 5G smartphones. 5G is pushing demand for high-end smartphone sales. Compared to previous generations, these 5G phones will include more silicon, more advanced packaging, and a larger number of RF devices in each phone. As a result, we are experiencing demand for 5G-related applications. We see the adoption of new packaging technologies by our customers. Adoption of new technologies requires extensive use of inspection and metrology systems. In addition, we are expanding our available market by penetrating new segments in the front end. To summarize 2020, it is shaping up to be another record year for Camtek. As for 2021, high demand from customer market drivers, the performance of our systems, and increasing market presence and customer satisfaction give us a tailwind toward 2021, but it is important to stress that we are still seeing the COVID-19 pandemic's effects causing risks and uncertainties. We examine the market demand and business situation of our customers on an ongoing basis. Before I hand over to Moshe for more details on the financial results, I would especially like to thank our employees for their dedicated work during this challenging time. Moshe?

Thank you, Rafi. In my financial summary ahead, I will provide the results on an ongoing 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, third quarter 2020 revenues were a record $40.1 million, an increase of 23% compared with the $32.5 million reported in the third quarter of 2019, and an 8% increase versus the previous quarter. Asia accounted for most of our revenues with an 88% contribution. Revenues from Europe and the U.S. accounted for 12%. Gross profit for the quarter was $19.5 million. The gross margin for the quarter was 48.8% versus 47.1% in the third quarter of last year and 46.1% in the previous quarter. This was in line with our expectations for higher gross margin in the second half of this year. Operating expenses in the quarter were $11.9 million. This is compared with $10.1 million in the third quarter of last year and $10.7 million reported in the previous quarter. The increase versus the second quarter is mainly due to the increased sales and marketing expenses on increased revenues and an increase in our R&D activities. We expect additional increases in these expense items in the fourth quarter in order to support the forecasted growth in business volume in the coming quarters and the development of capabilities for the next generation of advanced packaging requirements. Operating profit in the quarter was $7.6 million, an improvement of 19.6% versus the $6.4 million in the previous quarter. Operating margin was 19% compared to 17.2% in Q2, mainly as a result of the improved gross margin. Net income for the third quarter of 2020 was $7.3 million, or $0.18 per diluted share. This is compared to a net income of $5 million, or $0.13 per share in the third quarter of last year, and $6.3 million, or $0.16 per diluted share in the second quarter of 2020. Turning to some high-level balance sheet and cash flow metrics, we generated $5 million in cash from operations in the quarter. Net cash and cash equivalents and short-term deposits as of September 30, 2020, increased to $106 million compared with $101.5 million at the end of June 2020. With the current business momentum, we expect revenues of $42 million to $44 million in the fourth quarter. This means we expect our annual revenues to exceed $150 million for 2020. Rafi, Ramy, and myself will be open to take your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Craig Ellis from B. Riley FBR. Please go ahead.

I wanted to just start off by following up on an announcement that the company had recently on front end macro inspection. I think that's been an area of recent strength. Can you just give us a little bit more color on what you're seeing there from a demand standpoint? And how that factors into the visibility that you talked about for the first half of calendar '21?

Ramy, do you want to answer the question?

Yes, I will take the question. I think we've said it a number of times, we are getting into more segments on the front end. And definitely this is part of the forecast that we are seeing for the fourth quarter and the first quarter of next year. We are gaining traction from quite a few customers, and this is definitely becoming a segment that is meaningful to the Company.

That's helpful, Ramy. Can you just help us understand where you are now relative to what you think a longer-term opportunity is in front end macro inspection? So if we were to look out to say, calendar '23, where are we in late 2020, early 2021, relative to that longer-term market penetration potential?

Well, I think we're still in the first day. We are in a number of customers in different areas of the front end, as we said, it's the back end of the line, but definitely we are gaining more and more traction. Customers get to see our machines, they like them, they order more. Other companies hear about us, it's the market presence, it’s the overall market, and the technical capabilities that we are gaining as we enter more and more customers. So definitely, we are in the first stage. I believe that this is going to become a very meaningful part of our business, as we proceed over time. So, if you're talking '23, it will be definitely significantly more than it is currently today.

And then the next question, I'll go back to Rafi. Rafi, it seems that as you exit calendar '20 and look into '21, there is strength in the business across front end macro inspection, advanced packaging, and image sensors. Can you help us understand which of those areas have the potential to be the most significant growth drivers for the Company next year?

I would say in general, there are three countries that I think are taking the major market share: Korea, Taiwan, and China. If you look at the overall investment in CapEx in these three territories, you can see that they take most of the investment. Naturally, when you invest a lot of money in the semiconductor industry, we will enjoy it.

And in those areas, would you expect the growth in your key areas: advanced packaging, panel processing, and image sensors, to be fairly equal next year? Or do you have visibility on whether one would be materially greater than the other at this point?

It's not so easy to predict. But I would say we can see and understand the advantages that this packaging technology can bring in many aspects such as lower power consumption, better signal quality, and other factors, which are pushing the IDMs and mainly the IDMs to move towards these types of solutions. According to our experience, we can see the beginning of high-volume ramp-up starting at the beginning of next year. It is not just a long-term outlook; this is going to happen in the midterm as well.

Rafi, let me elaborate a little bit more. If you look at the opportunity level, there is no doubt that advanced packaging is the major opportunity. From the volume point-of-view, the different markets that it serves are ramping, even without the memory, and it is very significant. So, definitely, we think that advanced packaging is the largest opportunity, then will come CMOS image sensors, which will stay significant, followed by RF devices and then the general front end. So, I hope that this provides the right proportions to your question.

I appreciate that. And I don't want to ignore Moshe. So, I'll ask two questions to you please; first on gross margin, a very strong performance in the quarter from 48.8%. Moshe, what are some of the puts and takes as we think about either mix or any of the COVID-related issues that the Company might be navigating as we look out over the next two to three quarters for gross margin?

I think it mainly has to do with the improved mix; the business volume helps with fixed expense levels, but it definitely relates to the deal mix, and we are basically back on track to where the business model should be. The first half was a little unusually low. There was no major impact from COVID-19 on our results this quarter. There are some considerations to keep in mind; we saved a lot of money on travel, but at the same time, people didn't use much of their vacation because this was largely a lockdown year. Therefore, our vacation expenses went up. Overall, the COVID-19 impact is pretty insignificant this quarter.

Moshe, I would like to add that a little bit of technical data may help to understand the term 'mix' in terms of products. When we talk about mixed products and what really affects the pricing, if customers have two different applications, say 2D and 3D, that is one important issue. The second is the defect size; if customers are looking for very small defect sizes, they must use very high magnifications. The overall machine performance, accuracy, and critical throughput play important roles. In this case, the number of players that can provide customer solutions is limited, not everyone can offer everything together. These are the two major factors that really affect the ASP, and eventually, the mixed product.

And lastly, before I hop back in the queue, Moshe, you mentioned a couple of things that would impact operating expense in the fourth quarter, expenses related to new product development, etc. How do we think about the trajectory of OpEx beyond the calendar fourth quarter and into the first half of next year?

I think we will see some increase in operating expense levels due to the initiatives I've mentioned before. In the fourth quarter and probably also in the beginning of the year, I'm not sure how this will play out in the second half of 2021. Some items will probably decrease after we finish certain developments, projects, and investments in certain sales and marketing activities. So, we expect to see some increases in the fourth quarter and probably in the first quarter as well.

The next question is from Quinn Bolton of Needham and Company.

I wanted to follow up on Craig's question on the macro inspection business. I believe that business is probably running today in the high single-digit percentage of revenue. Do you think it can get to 10% or more of revenue in calendar '21, given some of the traction you've seen, and then you mentioned that in calendar '23 it would be a significantly larger percentage of the business? Do you think it could reach something in the range of maybe 15% to 20% of sales in that timeframe? And then I've got a couple of follow-ups.

Absolutely; the answer is yes. There are plenty of opportunities; the business is on track and growing. We are getting into new customers and expanding our work with existing customers.

Fantastic. And then following up, obviously advanced packaging you've highlighted for several quarters as one of your biggest opportunities. I think last quarter and again on this call you mentioned increasing traction with certain IDMs. Just wondering when you think that IDM business really starts to ramp for you? Is that included in the better pipeline for the fourth quarter and the first half of '21?

Definitely, we're already seeing this business starting to happen, and we expect it to start already in the fourth quarter and to be more significant next year.

And then lastly for Moshe, you'd given us a quarter ago sort of your outlook for improving gross margins in the second half of the year supported by the mix of business in the pipeline. Wondering if you might provide your thoughts on gross margins into the first half of '21 since it sounds like you've got a pipeline that gives you pretty good visibility in the first half? Can it stay in the current range of around 48% to 49%? Do you see it trending higher or lower than that level? Any commentary would be helpful? Thank you.

Quinn, we believe the second half of 2020 will be between 48% to 50% gross margin levels. Q3 is already within that range, and we believe that Q4 will be similar. We think that we have all the reasons to believe that the first half of 2021 will also be within this range of 48% to 50%.

The next question is from Shahar Cohen of More Investment House. Please go ahead.

Two questions, one is more operational, and the other is a technological question. Other big semiconductor companies mentioned their ability to offer remote support and put a lot of emphasis on their ability to use AI for remote support declines. To what extent do you believe COVID has eliminated or hindered your ability to support? To what extent do you use these kinds of tools? And the second question is more technological. I guess you are mostly in the CoWoS domain. To what extent do you believe you can play more in the Wafer on Wafer (WoW) or Chip on Wafer (CoW) events packaging area?

This is Ramy. From the remote support perspective, this is something that we've been doing for years, using this technology. The only difference today is that we just can't send people. So customers understand it, and they've implemented all the provisions from a cybersecurity point of view, which allows us to do this online. The difference is mainly that instead of having a person on site, a person here just connects to the machine and is able to do everything he needs to do as if he were there onsite. Overall, we're providing even faster support to our customers, so that would be the main difference. Regarding your second question, I didn't follow exactly, if you can repeat it and specify which part exactly of the advanced packaging you're referring to.

One of the larger clients, which is also one of the largest foundries in the world, claims they will open advanced packaging fabs next year. They mentioned they are currently focusing on the cost chip on wafer on substrate, but they are planning to move more towards chip on wafer and wafer on wafer technology. My question is: to what extent do you believe you can play in the chip on wafer and wafer on wafer technology?

We are already a significant supplier in these areas, specifically to the metrology and inspection. We play a major role now and will continue to play a major role in the future in all the new techniques and technologies. We are working with many of the major IDMs and organizations involved in the development of new technologies for advanced packaging. So, we will definitely provide solutions in the areas that you just mentioned.

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

Real quick on the front end macro opportunity. Can you give a little color as to where you're seeing the demand, geographically, memory versus foundry, and a few process nodes? Whatever color you can give on the customer concentration and where the interest lies?

I'm very hesitant to talk about geographies and customers because this is very confidential. Our customers prefer that we do not mention them publicly. What I can say is that we see it in IDMs and foundries; we see it across various applications and not just specific to one area. We are seeing a variety of applications with different customers across various geographies in the front-end market. Therefore, I believe that as we've stated before, we are in the high single-digit range of our revenues in this area. We are very optimistic that we are going to grow this business significantly over the next few years. Did I answer you, Gus?

Yes. Maybe I'll just try one more time. Is it 28 nanometer and above, or are you getting into the more advanced nodes?

Mostly at this stage, it's the 20 nanometer and above; but definitely at certain customers, we will go also to lower geometries.

And then on the advanced packaging, do you have a sense of what your total available market is for advanced packaging at this point?

250 million. I'm a little hesitant to throw in that number as we can follow up with you on this; it is something that we can calculate fairly quickly.

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 www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

Okay, thanks. I would like to thank you all for your continued interest in our business. I would like to thank all of our employees and my management team for their solid performance so far in 2020, and we look forward to continuing it. Thank you for your long-term support. We will be presenting at a number of virtual conferences in the coming weeks, and we hope to speak with many of you at these events. I look forward to talking with you again in three months’ time for our full year 2021 results. Thank you and goodbye.

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