Camtek Ltd Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's Fourth Quarter and Full Year 2020 Results Zoom Webinar. My name is Kenny Green, and I am part of the Investor Relations team at Camtek. This is the first time we're running our conference call as a live Zoom webinar, and I apologize in advance for any unforeseen technical issues we may face during the call. Our goal is to increase engagement with investors and analysts, and we hope this new type of quarterly call is a step in the right direction. All participants, other than presenters, are currently muted. Following our formal presentation, I'll provide some instructions for participating in the live question-and-answer session. At any time, during the call, you may also submit a question via the Q&A Chat, and we will endeavor to answer as many of those questions as possible. I would like to remind everyone that this conference call is being recorded, and the recording will be available for download from Camtek's website within two hours after the call. You should have all received by now the Company's press release. If you have not received it, please view it on the company's website. With me today on the call, we have Mr. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO. Rafi will open by providing an overview of Camtek's results and discuss recent market trends, and Moshe will then summarize the financial results of the quarter. Following that, Rafi, Moshe, and Ramy will be available to take your questions. Before we begin, I would like to remind everyone that certain information provided on this call are internal company estimates unless otherwise specified. This call may also contain forward-looking statements. These statements are merely predictions and may change over time. Statements made on this call are valid as of today, and the Company undertakes no obligation to update any of the forward-looking statements contained herein, whether due to 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 due to general economic conditions, the effects of the COVID-19 crisis on global markets, and the markets in which we operate, including the risk of continued disruptions to our and our customers', providers', business partners', and contractors' operations as a result of the outbreak and the 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 we expect to generate a significant portion of our income 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 our 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 in today's press release also cover the contents of this conference call. Furthermore, 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. We believe that the presentation of non-GAAP financial measures is useful to investors in understanding and assessing the company's ongoing operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. I would now like to hand the call over to Rafi Amit, Camtek's CEO. Rafi, please go ahead.

Okay, thank you, Kenny. Good morning. And thank you for joining our call today. I will start with some highlights from the fourth quarter, a few words on 2020, and continue with reviewing our current business. Total sales in the fourth quarter were $48.6 million, which represents a nearly 50% increase over Q4'19, and a record quarterly revenue. In the fourth quarter, we continued the momentum of increasing sales to our existing customers as well as to new customers. Gross margin was 48.2% and operating margin was 18.9%, marking an improvement in profitability compared with the first half of 2020. For the full year, we achieved record revenue of $156 million, reflecting a 16% growth over 2019 and a record operating profit of $26.8 million. In the last two weeks, we have received multiple system orders from several customers totaling about $25 million. The impressive backlog we have on hand along with our pipeline points to a strong sales forecast for the first half of 2021. We are anticipating sales of over $110 million in the first half of 2021, implying approximately 65% growth over the first half of 2020. We also see continued momentum of orders into Q3, but it is too early to provide an accurate forecast. For the first quarter of 2021, we expect impressive sales of between $54 million and $56 million. The year 2020 was exceptional for us, just as it was for the entire semiconductor industry. In the first quarter, we had concerns about our ability to install systems due to the COVID-19 restrictions on shipping systems to certain countries. Yet in the fourth quarter, we faced a completely different situation. We had to adjust our production capacity and field support due to the high demand for our systems. Our flexible operational infrastructure and our global organization allowed us to successfully execute this growth and meet the requirements of our customers. This trend has continued and even accelerated in the first quarter of 2021. Our strategy is to maximize growth in all segments in which we operate: the front end, mid-end, and back-end, primarily post-dicing. We continue to increase the number of new customers, penetrate new market segments, and strengthen our presence among existing customers. By providing the highest level of service and support, we create a strong commitment between Camtek and its customers. Our approach includes targeting a wide range of customers, including those with entry-level products that require only basic configurations of our systems, resulting in a lower average selling price in the short term. Our experience shows that many of these customers will later purchase systems with more complex configurations capable of detecting smaller defects to meet their end customer requirements. In the second half of 2020, we saw improved margin and can already see this trend continuing in the orders we have received for 2021. The configuration of systems ordered is more complex, and the average selling prices are higher than what we observed in 2020. As a result, we expect continued improvement in gross margin in the first half of 2021. The main drivers of our market segment have not changed from those I mentioned in previous calls. The main drivers are advanced packaging, memory, CMOS Image Sensors, and RF devices for 5G smartphones. The push for 5G is driving demand for high-end smartphone sales. Compared to the previous generation, these 5G phones contain more silicon, more advanced packaging, and a larger number of RF devices in each phone. Consequently, we are experiencing increased demand for 5G-related applications. We see the adoption of new packaging technologies by our customers. This adoption requires extensive use of inspection and metrology systems. All the drivers I mentioned cater to the demand for end products such as mobile phones, laptops, servers, automotive, medical devices, and more. Specifically, for 2021, the primary growth area is expected to be advanced packaging, both in inspection and metrology. The CMOS Image Sensor segment accounted for about 30% of our business in 2020. This is unusually high and was a result of healthy demand from our customers. In 2021, we expect the CIS segment to return to historical levels, comprising about 10% to 15% of our revenue. In the DRAM space, we see a lot of activity, but we believe it will be more at the end of the year or the beginning of next year before we see significant business. As previously announced, we continue to gain momentum in the front-end market. Penetrating this process in the front-end segment comes after a long, nuanced evaluation. We have penetrated several new customers in 2020 and expect to continue this trend in 2021. For 2021, we anticipate this segment to account for more than 10% of our business. In 2020, we achieved an important milestone by receiving qualification for our system used in production lines from one of the world's top integrated circuit manufacturers. Our systems have been implemented in the customer's development and production sites globally. We continue our development efforts on several levels, creating special features upon customer request, to support ongoing sales, consistently improving detection engines and continuing the development of new generations of systems and solutions based on key customer input and industry roadmaps. We plan to launch new products to the market this year. We've managed to operate optimally under the COVID-19 circumstances, but we cannot fully predict the global implications of the epidemic and its potential impact on our business. As things stand today, 2021 is set to be a record year in sales and gross along with improved profitability. During Q4 of last year, we raised about $64 million to support our growth strategy beyond organic means. We continue our efforts to find suitable companies for acquisition, particularly those whose products serve a market like ours and could leverage our sales and support infrastructures. Before I hand over to Moshe for more details on the financial results, I would like to especially thank our employees for their dedicated work during these challenging times. Moshe?

Thank you, Rafi. We apologize for the technical glitch, and I will begin now. Thank you, Rafi. We had record results in the fourth quarter, both in terms of revenue, which came in above our guidance, and in terms of growth and net profit levels. 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. Fourth-quarter revenues reached $48.6 million, which is a 46% increase over the $33.2 million recorded in the fourth quarter of 2019. Full-year revenues were a record $155.9 million, an increase of 16% year-over-year. These results were driven by demand across all our geographic segments and applications. The geographic revenue split for the quarter was as follows: Asia contributed 83%, while the rest of the world contributed 17%. The distribution of sales for the full year was 89% from Asia, with Western Europe contributing 11%. Gross profit for the quarter was $23.4 million, representing a gross margin for the quarter of 48.2% versus 48% in the fourth quarter of last year. Gross profit for the year was $73.7 million, yielding a gross margin of 47.3%. This is compared with a gross margin of 48.6% last year. After relatively lower gross margins in the first half of 2020, we observed improved margins in the second half of the year. We expect revenues to exceed $110 million in the first half of 2021. The combination of favorable order mix and leverage in our operating model is expected to support continued improvement in our gross margin, which we anticipate will exceed 50% in the first half of 2021. Operating expenses in the quarter were $14.2 million. This compares to $10.5 million in the fourth quarter of last year and $11.9 million reported in the previous quarter. The increase over the previous quarter is primarily due to heightened R&D and marketing activities to support revenue growth. Operating profit in the quarter was $9.2 million, compared to $5.4 million reported in the fourth quarter of last year. The operating margin was 18.9%, up from 16.3%, mainly attributable to increased revenue. Operating profit for the year stood at $26.8 million, or 17.2% of revenue, compared to an operating profit of $25 million in 2019, or 18.7% of revenue. I would like to briefly discuss the significant impact of the devaluation of the U.S. dollar in general and specifically against the Israeli shekel. As an Israeli-based company, a significant portion of our expenses incurred in Israel, primarily salaries, are paid in shekels. As a result of this devaluation, expenses have increased in dollar terms during 2020. Despite the negative impact, we managed to improve our profitability. One positive impact of the devaluation was relatively lower tax expenses in Israel in the first quarter due to the devaluation of dollar-based assets. Net income for the fourth quarter of 2020 was $8.8 million, or $0.21 per diluted share, compared to a net income of $5.4 million, or $0.14 per share in the fourth quarter of last year. Net income for the year was $26 million, or $0.64 per diluted share, compared to a net income of $23.9 million, or $0.62 per share in 2019. During the fourth quarter, we completed a public offering that raised approximately $64 million, issuing 4.025 million new shares, which affected the earnings per share in the fourth quarter and the year overall. In addition to the cash raised in the public offering, we generated $8.3 million in cash from operating activities in the quarter. Net cash and cash equivalents and short-term deposits as of December 31, 2020 increased to $177.8 million, compared with $106 million at the end of the third quarter of 2020. Throughout 2020, we generated $25.8 million in cash from operations. Certain balance sheet items such as inventory, accounts receivables, and payables levels increased significantly due to greater business volume and expectations for further growth in 2021. As Rafi mentioned, we expect revenues in the first quarter of 2021 to range between $54 million and $56 million. We have a strong sales forecast for the first half of the year and anticipate over $110 million during this period. With that, Rafi, Ramy, and I will be happy to take your questions. Kenny?

Thank you, Moshe. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question will be from Patrick Ho from Stifel. Patrick, please go ahead.

Patrick?

Patrick, you're muted.

Hello?

Okay. Now you're open.

Great. Thank you again and congratulations on the really nice quarter and the year. Maybe first off, given the rise in system orders over the next two quarters and given some of the space in the industry overall, how do you see your parts procurement and your ability to procure parts, given the supply environment that we're seeing today?

Ramy, do you want to answer, please?

Yeah. Patrick, can you hear me?

Yes.

Okay, so I missed the first part of your question. However, I will address the second part then if I missed anything, please ask me again. So, with respect to part procurement and the overall supply chain, we are well aligned. We have the inventory on hand that we need for the next quarter, and we have not experienced any issues related to procurement. Furthermore, we've increased the number of subcontractors, so we don't foresee any issues. With that said, we believe that we will be able to supply and install all the machines on time.

Great. And maybe as my follow-up question for Moshe, in terms of gross margins, really strong gross margins to end the year. And it continues to rise as we go into the first half of '21. What are the biggest influences? Is it simply volume, or are your new products also going to contribute to the gross margin uptick that we're going to see in the first half of '21?

I would say that both volume as well as new products, and some new orders that came in with a high gross margin will contribute to improved margins in the first half of 2021. Definitely, the new product that we are rolling out will have a meaningful impact on profitability.

Great, thank you very much.

Thank you.

Our next question will be from Charles Shi from Needham. Charles, we'll unmute you. Please go ahead.

Hey, can you guys hear me?

Sure.

Yeah.

Great. Thanks for taking my question. Congrats on the strong quarter and very bullish first half guidance. I have a few questions. So, first off, I noticed that your guidance for the first half revenue run rate is already above your $200 million target model that you think you can achieve within two years. I wonder whether the strong demand in the near term has changed your view on the timing of your $200 million target model?

Well, first of all, yes, we believe that in the first half of 2021, we are already on a run rate close to our $200 million target model. It's still early for us to provide a specific outlook for the second part of the year. Although, as Rafi mentioned, Q3 is also looking promising. But we don't have a specific guidance for Q3 at this time. However, as I mentioned, we are already on a run rate close to our target model, and we have managed to improve the gross margin, which we anticipate will be more than 50%, as indicated in our target model.

Okay, so maybe this is a very good segue into my question about gross margin. You mentioned a few of the favorable factors, including the more complex systems, higher average selling prices, especially for your 2D inspection products. May I ask whether the other two factors I'm thinking of are also contributing? First, do you see a mix changing back to a little bit more 3D for your overall shipments in the first half of '21, which essentially carries a higher margin if I understand correctly? And second, whether the currency depreciating U.S. dollar also impacts - has a positive influence on your gross margin?

Let's tackle the first part of your question. We definitely see in the mix of products that we are going to ship in the first half of '21, and throughout '21, we see a mixture that includes a lot more metrology equipment. This will certainly contribute positively to our gross margins and overall profitability. With respect to the devaluation of the U.S. dollar and its impact on our financial results, as I mentioned, in general, the devaluation has had a negative influence on our results. However, if the dollar stays approximately at its current level, we forecast a gross margin of over 50% in the first half of the year.

Got it. Thank you. Maybe my next question is a little bit more about the CMOS Image Sensor. Last year was unusually strong for you guys, nearly 30% of the revenue, and you've said that the overall contribution as a percentage will go down. I wonder, in dollar terms, are you seeing a growth year for CMOS Image Sensor revenue, or do you expect it to be relatively flat? Any color would be great.

So, let me address that. First of all, the CMOS Image Sensors were indeed very strong this year, which was mainly due to two reasons: first, there was strong demand from most of our customers; and second, we believe we gained market share with at least two major accounts. Therefore, this accounted for a very strong year compared to our previous percentage of the business. We continue to see this segment strong, but it will be in the range of double-digit growth, I would estimate 10% to 15%. Next year, it will not reach the percentage it has in this past year.

Got it. Thank you very much. I'll go back to the queue. Thanks.

Thank you, Charles.

Thank you. Next question will be from Craig Ellis from B. Riley. Craig, please go ahead. Craig, you need to unmute yourself.

Craig, you'll need to unmute yourself. I hope that -

Okay, we'll come back to Craig afterward. Our next question will be from Irvin Krause. Irvin, please go ahead.

Yes. Do you hear me?

Yes, we do.

Okay. In 2017, 2018, and 2019, you provided dividends to your investors. Is there any reason why there were no dividends given to investors in 2020?

We haven't decided yet.

You haven't decided? Okay, another question. Do you expect to do - to increase your business in China and Taiwan in view of the world situation there?

Well, why did you put together China and Taiwan, by the way?

Why do I put it together? I thought there was some sort of connection because of the difficulties that are going on there.

Yeah, but I don't think that. Taiwan is a different situation. If you look at the overall Asia, I would say Southeast Asia, Taiwan, Korea, Japan, they are out of the conflict. So, in general, I think that it's not under one package; it's a totally different situation. We don't see any limitation in Taiwan. However, there are some different environments in China because of the conflict with the U.S. So, it is not the same.

So, you expect - so there wouldn't be a conflict as far as increasing business for both countries. Is that right?

Correct.

Okay, and as well as those two countries, do you also expect to increase your business in Europe and the United States?

Look, in general, I think that if you look at the last few years, we can see that most of our systems are close to Asia, about almost 90%. In the first quarter, we see more from the U.S. and Europe. However, if we talk about the yearly overview, I would say that the trend of over 90% going to Asia is more reasonable.

I see. You expect to increase more business in Israel and then the friendly Arab countries in the Middle East?

Look, our business is where the semiconductor builds fabs. In Israel, we currently have Intel, which is a pure front-end fab. We don't do any packaging in Israel. So, we don't see any potential for selling machines in Israel. As for most of the Arab countries, we don't see any packaging industry in those countries.

I see.

Okay. Thank you, Irvin. We will now move on to Craig Ellis from B. Riley. Craig, I hope you can...

No, no, we had his questions.

Okay, let's see if Craig is on the line. Craig, are you there?

Okay, I guess we have a technical problem with hearing you, Craig. But we received a list of questions and we will address them. So, let's start with the first one and the profile of the $25 million business that we mentioned in the industry. I would - Craig, I want to give a profile; about 60% of this business is from several customers in the advanced packaging area for various applications. So, it's not tied to a specific application, but rather a broad range of applications that we address in advanced packaging. I would say about close to 20% is similar in potential, and the rest, I would say, comprises general views. Looking forward, this is more or less the trend of the business already, and I would say the percentage of business we expect also in the first quarter. The CMOS Image Sensors will definitely decline in dollar volume next year compared to the year just completed. Most of the growth will come from advanced packaging, which we expect will constitute over 50% of the business.

Our next question from Craig is about the CIS revenue mix declining with revenue dollars...

That's what I answered.

M&A funnel?

Yeah, there was a question about our M&A activities and as we mentioned at the beginning of the call, we are very active on this front. We are working to build a funnel and will work through it. Having said that, we do not expect immediate results, and we will provide an update on each call regarding our progress. At this point, there is nothing to report other than the fact that we have initiated the process.

I would like to add that people should remember we are still facing challenges due to COVID-19. We are unable to travel, and many countries have closed their borders. Even from Israel, you cannot fly today. Therefore, all M&A activities are very limited. We can conduct surveys and evaluations, but ultimately we have to meet potential companies and delve deeper, which cannot be accomplished without visiting.

One last question, Craig that we received from you was related to the operating expense levels next year. Overall, we expect G&A to remain fairly stable next year. Most of the growth in operating expense levels will come from sales and marketing, where we will utilize third-party agents to help us with the sales channel in specific areas of the world. As revenue grows, we will employ more agents, so this is the area where we expect an increase. Additionally, we will increase our R&D activity next year to support growth initiatives. As Rafi mentioned, we also plan to launch a new product, which will require more R&D resources.

If anybody has any additional questions, please either raise your hands or you may also ask in the question-and-answer box. We have an additional question from Patrick Ho of Stifel. Patrick, please go ahead.

Thank you very much for the follow-up question. You talked about advanced packaging being the growth driver for 2021, which makes a lot of sense. We've seen a lot of fan-out applications, particularly for the 5G marketplace. What other applications or market growth areas do you see? Do you see high-performance computing and some of the new techniques out there also gaining adoption in 2021 that will help your business?

Ramy, do you want to answer?

Yes. I would say that there are two additional areas. No doubt fan-out is growing, at a rate of about 30% annually; therefore, it is an increasing area of focus. The first one is, obviously what you call the high-performance computing, or heterogeneous integration. That's definitely an area that is gaining traction. You see the server market and all these markets adopting these technologies, and it's definitely an area where we are experiencing increased business. Another part is the overall trend toward high-bandwidth memory. This market is also using advanced packaging, and as previously mentioned, we expect to see business there in the latter part of the year or into the following year.

And I would like to add one more comment about wire bonding, which is still very common. However, we observe more of our customers shifting to what we call flip chips. Flip chip BGAs, featuring higher density and smaller pitch, are being utilized more, and they employ copper pillars to facilitate connections. Hence, we anticipate an increase in flip chip demand for these applications. Therefore, advanced packaging indeed covers a wide range of applications.

Great, thank you.

And we now have a follow-up question from Charles Shi from Needham. Charles, please go ahead.

Hi. Thanks for taking my follow-up. Just really following up on Patrick's question on advanced packaging. You mentioned that you are still seeing technology upgrades or transitions from wire bonding to flip chip, copper pillar, or fan-out HBM? I wonder, could you clarify how much strength is driven by the technology upgrades of advanced packaging? Or how much of that is truly driven by natural unit demand growth? We've received news about shortages in the automotive sector, and ECS has indicated they still see capacity constraints throughout the year. I wonder if you can help clarify the demand drivers here.

Ramy, do you want to address that?

Yeah, I think that the demand is primarily driven by applications. The most significant driver today is the 5G phones. Additionally, with 500 million 5G phones expected, these devices use far more advanced packaging than 4G phones. Therefore, that, I would say, is the largest application right now. Following that, high-performance computing is also embracing advanced packaging methodologies. I consider those two the main factors behind the observed demand. Furthermore, the fan-out trend is gaining traction, largely due to the current substrate shortage, as fan-out technology does not necessitate substrates, significantly enhancing demand. I'd say these three trends are pivotal in driving increased demand for advanced packaging. To clarify, advanced packaging overall is growing at about an 8% annual rate, leading to a decrease in wire bonding over time. This transition is primarily due to bandwidth and power requirements. Consequently, to fulfill the mobile requirements regarding power consumption, there is no alternative but to move from wire bonding to advanced packaging. This is a trend that we expect to evolve over the next five to ten years, leading to a gradual decline, or even elimination, of wire bonding.

Thank you.

Kenny?

Okay, thanks, Charles. Our next question is a follow-up from Shahar Cohen. Shahar, please go ahead.

Yeah, thank you guys. One follow-up on competition. We've seen one of your key competitors announce a rapid focus for the coming year. Can you speak about market share dynamics, where you think you might take market share in which segments or customers, and to what extent do you believe that will continue this year? Thank you.

Actually, there are few players, and many of you might not be familiar with the local competitors. There is a Japanese player, one U.S. company, and various others, therefore, I am unable to specify particularly who we may gain market share from. This can also happen to us as some low-end applications may not be where we wish to compete due to lower average selling price. Thus, we select the most complex and high-end applications wherever possible. I believe that competitors are likely to choose the same strategy; some might focus their efforts on the front end rather than exploring other applications. So, the market remains fluid, but we can assert that, particularly in high-end applications, customers will often prefer working with a leading company rather than a local provider. The market dynamics can vary from territory to territory and case by case.

Okay. Thanks.

Okay. That concludes our question-and-answer session. Before I hand over to Rafi, I would like to inform you all that in the coming hours, we will upload the recording of this conference call to the Investor Relations section of Camtek's website at www.camtek.com. I would also like to thank all of you for joining the call, and we would appreciate any feedback you have regarding this new format. Now, I'd like to hand over to Rafi for his closing statement. Rafi, please go ahead.

Okay, thank you, Kenny. I would like to express my gratitude to all of you for your continued interest in our business. Once again, I would like to thank all of our employees and my management team for their tremendous performance in 2020. We look forward to building on this success in 2021. To our investors, I thank you for your long-term support. I look forward to speaking with you again next quarter. Thank you and goodbye.