Camtek Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek’s First Quarter 2021 Results Zoom Webinar. My name is Kenny Green and I am part of the Investor Relations team at Camtek. All other than the presenters are currently muted. Following the formal presentation, I’ll provide some instructions for participating in the live Q&A session. I would like to remind everyone that this conference call is being recorded and the recording will be available on Camtek’s website from tomorrow. You should have all received by now the company’s press release, and if not, you can review 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, 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. 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 information 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', providers', business partners', and contractors' businesses as a result of the outbreak and effects of the 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 revenue 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 and price reductions, as well as due to risks and uncertainties identified in the company’s filings with the SEC. Please note that the Safe Harbor statement in today’s press release also covers 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' understanding and assessment of 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. And with that, I would now like to hand over the call to Rafi Amit, Camtek’s CEO. Rafi, please go ahead.

Yes. Thanks, Kenny. Good morning and thank you for joining our call today. High demand in our market, excellent performance of our systems, and the strong position that Camtek has gained in the market allow us to continue demonstrating record financial performance quarter after quarter. We ended the first quarter of 2021 with $57.4 million in revenue, a 51% gross margin and a 27% operating margin. The impressive profitability is a result of a rapid increase in sales and favorable product mix. Before I review the first quarter, I would like to give a brief overview of the market environment. We are experiencing demand from all territories and especially from Asia. We expect to continue showing an increase in sales in the next two quarters. Our revenue guidance for the second quarter is between $63 million to $65 million. There are several market trends driving the demand for semiconductor components and for our systems. The demand for products such as laptops and tablets that had stabilized before COVID-19 is increasing due to working from home. Working from home has also led to heavy investment in data centers, cloud and communications infrastructures. The massive amount of data that is sent and stored in the cloud is driving demand for advanced memory, AI devices, and high performance computing. 5G cellular communications has been adopted by the market earlier than expected, resulting in high demand for electronic components. 5G cellular phones contain more RF devices, cameras, and advanced packaging compared with previous generations, thus requiring more inspection and metrology of all components. The automotive industry is also undergoing major changes with the shift to electric cars and advanced driver assistance systems technologies, resulting in demand for extensive electronic components. These components must meet zero defect policy requiring 100% inspection of all components in cars. We see the adoption of high-end advanced packaging in new devices, as the industry is driving smaller geometries and using heterogeneous integration to deliver products with higher performance and lower power consumption. We are major players in this space and we expect to expand our business as the industry implements new applications with high-end advanced packaging. Regarding Q1 highlights, 88% of our sales came from Asia, with China being the largest territory. 50% of our installed systems are for advanced packaging applications, which is expected to continue growing in the coming quarters. Other applications in which we play a major role are compound semiconductor, MEMS, CIS, RF, and macro defect inspection in the front end. During the quarter, we delivered multiple system orders to several Tier 1 customers, as well as single system orders to over 20 customers. We continue to execute well under the COVID-19 circumstances. Most of our employees in Israel are vaccinated and have returned to work from the office which will undoubtedly improve our overall efficiency. To summarize, high demand for semiconductor components has been leading to an increasing demand for inspection systems. Camtek can provide its customers with reliable high-performance systems tailored to their special requirements. Camtek is strongly positioned in the market and as things stand today, we expect 2021 to be an exceptional record year in sales, growth, and profitability. I would like to hand over to Moshe for a more detailed financial discussion of the financial results. Moshe?

Thank you, 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. First quarter revenues came in at a record $57.4 million, an increase of 90% compared with the first quarter of 2020 and 18% compared with the previous quarter. Assuming the mid-range of our Q2 guidance, we expect the revenue in the first half of 2021 to be 80% higher than the same period last year. Gross profit for the quarter was $29.1 million. The gross margin for the quarter was 50.7% versus 45.2% in the first quarter of last year and 48.2% last quarter. The improvement in the gross margin was due to the significant growth in revenues, as well as a more profitable product mix this quarter. Operating expenses in the quarter were $13.5 million, compared with $10 million in the first quarter of last year and to the $14.2 million reported in the previous quarter. The decrease from the previous quarter is mostly due to a more favorable sales channel mix. Operating profit in the quarter was $15.6 million, compared to the $3.7 million reported in the first quarter of last year. Operating margin was 27.2%, compared to 12.2% in the first quarter of last year and 18.9% last quarter. The rapid growth in revenue while we are still in the process of adjusting our expense structure to support this increased business volume contributed to the high operating margin. Yet I expect that our operating profitability will be ahead of our model. Net income for the first quarter of 2021 was $14.6 million or $0.33 per diluted share. This is compared to a net income of $3.6 million or $0.09 per share in the first quarter of last year. Total diluted number of shares, as of the end of Q1 was 44.5 million shares. Turning to some high-level balance sheet and cash flow metrics. The inventory level went up by $5 million to support the continuing growth expected in the coming quarters. Accounts receivable went up by $13.5 million due to the increased sales and timing of collections. We generated $2.7 million in cash from operations in the quarter. This quarter’s cash flow was affected by the above-mentioned working capital requirements. Net cash, cash equivalents, and short-term deposits as of March 31, 2021, were $169.9 million. And together with the $10 million that we have in long-term deposits, the total cash and deposits amounted to $180 million, compared with $177.8 million at the end of 2020. With the current business momentum, we expect revenues of $63 million to $65 million in the second quarter. And with that, Rafi, Ramy, and I will be open to take your questions. Kenny?

Thank you, Moshe. We will now start the question-and-answer session. Our first question will be from Craig Ellis of B. Riley. Craig, please unmute yourself and go ahead.

Yeah. Thanks for taking the question and congratulations on a very strong first quarter results and second quarter outlook team. I’ll start with a clarification just on two income statement items. Moshe for operating expense, you talked about expanding to support growth in the business, how quickly can operating expense dollars expand? And then, secondly, related to the income statement, very nice gross margin improvement and with the increase in the second quarter, should we expect the volume part of the gross margin drivers to mean that gross margin could even expand further in 2Q?

Okay. Thank you, Craig. So, well, I will start with the second question. With respect to gross margin. Overall, indeed the business volume contributed to the improved gross margin also the product mix was very favorable this quarter. We believe that the company can operate within this magnitude in the next few quarters. So, we are talking between 50% to 52% gross margin in the coming quarters. With respect to our operating expenses, obviously, with the increased volume we will increase operating expenses to support it, a delayed item that will be increasing R&D obviously, as well as several markets in which has a direct relationship to the business volume and sales channels, whether we are working directly or indirectly has a major impact on the operating expenses. So, it will go up but not significantly in the coming quarters. So, we expect operating profitability to remain high this year.

That makes sense. And then the first real question is for Rafi. Rafi, I think, I heard in your prepared remarks, an expectation for the third quarter’s revenues to increase sequentially. So, the question is really two-fold. One, given that the trailing five quarter average sequential revenue gains have been around $6 million or $7 million, is that a reasonable expectation for the third quarter? And where do you have comparatively higher visibility in your business for the third quarter in the back half of the year across CMOS Image Sensor, front-end background inspection or high bandwidth memory? Thank you.

No. In general, we anticipate continued growth in the second and third quarters. I believe we can expect a few million in gross revenue each quarter. As previously mentioned, advanced packaging is the primary focus, but we also see consistent performance across compound semiconductors, CMOS Image Sensors, RF, and MEMS, all maintaining a similar level.

That’s helpful. And then finally for me, the company has a very substantial cash balance of $180 million, including $10 million of securities. So the question is, how are you thinking about redeploying that to create value, I know in a COVID world it’s hard to get out and do the things that are needed that are often precedent actions to M&A. But can you just express how you’re looking at activating that cash for creating further value for shareholders? Thanks.

Okay. Look, we invest a lot of efforts searching for available companies for M&A. I would say that assuming we eventually find a good company, hopefully we can visit. We can do due diligence. And we can come to a decision. This is something that is unclear at this point. It’s depending on where. In some territories, you can fly, you can visit. In some of them you cannot do it. So we don’t know yet. We have a few potential companies that we consider and definitely this is one of our strategies to do it and we invest a lot of efforts. But it’s too early to say something. I would say, when we find a company and when we start the process, we will share it with the public.

That’s helpful. Thanks, team. I’ll get back in the queue.

Thank you.

Thank you, Craig. Okay. Our next question will be from Charles Shi of Needham. Charles, your line is open. Go ahead.

Thanks for taking my question. Can you hear me?

Yeah. We can.

Great. Thanks. So I want to ask slightly longer-term questions a little bit looking beyond 2021 into 2022. So, first, let me start with your memory business. One of your largest memory customers, SK Hynix, yesterday announced that they are pulling in 2022 CapEx in 2021. The decision was made near the end of last month. I know you’ve been expecting your memory revenue, which has been quite muted since last year, but that pickup could happen as early as the end of this year or the first half of 2022. Do you see any of the pull-ins, I mean, maybe not specifically from this customer, but overall DRAM or memory in general into the second half of this year?

Hey, Ramy, would you like to answer, please?

Yeah. I will answer. Look, Charles, in general, we see a lot of activity in this case and we’re working very closely with our customers. I expect that there will be business; I still believe that will only happen starting early next year. If there will be any business, of course, we will be able to accommodate it. But I’m not sure we will see it in the second half, I believe it will be very late this year or early next year.

Okay. Thanks, Ramy. So it looks like that there is at least for now there’s a no change in terms of color for your memory side of the business. So I want to…

At least there is no change.

Thank you. So let me move on to the CMOS Image Sensor market segment. Rafi mentioned that you expect revenue to remain steady at about the same level throughout this year. I am curious if you are seeing any indications for 2022 regarding an increase in investment for CMOS Image Sensors next year. We heard from one of the largest CIS customers, Sony, who updated their mid- to long-term capital expenditures and indicated they plan to increase their CapEx by 25% over the next three years compared to the previous three-year period. Is it reasonable for us to expect your CIS revenue to return to the 2020 levels, or close to those levels, next year, which would imply year-over-year growth from this year's figures?

So, Charles, first of all, this year's level is not low. We will see about 10% of our revenues and it’s significantly increased compared to last year. So 10% of the business this year will go to CMOS Image Sensors. And it’s very hard to say at this stage whether we will see the increase or what is the magnitude of the increase. In general, we’re speaking with several customers. They are all talking about adding capacity in the foreseeable future, meaning late this year beginning of next year. So I do expect 2022 will be a positive year for the CMOS Image Sensors. Whether it will reach last year, it’s hard to say, but definitely it will be a positive year for this segment.

Correct. Maybe for my last question, we know there’s potential growth in memory and CMOS Image Sensors. Your advanced packaging segment is certainly performing well this year. Some more pessimistic observers might think that your advanced packaging business could be at its peak. However, you've demonstrated a strong and diverse business model, achieving seven straight years of growth due to your varied exposure to different markets. Specifically regarding advanced packaging, I wonder what your current outlook for 2022 is?

When we engage with our customers and analyze trends, we are confident that advanced packaging will continue to grow in the coming years. One significant development is the ongoing integration focused primarily on high-performance computing. This is a trend noted by Rafi, and we believe this market will keep expanding. There are numerous new devices adopting advanced packaging for various benefits. Currently, the majority of our business comes from Fan-In or wafer-level chips in packaging and Fan-Out, while integration accounts for about 10% of our business. This last segment is expected to grow significantly in the next few years. From a market perspective, we monitor trends and understand where our customers are headed, and we are certain that advanced packaging will remain a key part of our business and will continue to expand.

Thank you. Thanks. Congrats on the nice results. I’ll go back to the queue. Thanks.

Thank you.

Thank you.

Thank you, Charles. We now have a question from Raymond Rund of Shaker Investments. Raymond, your line is open.

Thank you very much. I was wondering if you could just give us the quarter’s breakdown in revenue by application, if you gave that earlier, I’m sorry, but I didn’t hear it?

Hi, Raymond. We don’t provide specific details of the breakdown of the applications. But as we’ve mentioned before on a very high level, we said that we are around 55% in advanced packaging. And we said around 10% on the CMOS Image Sensors and the rest is all other applications that we support.

Thank you. That satisfies the need.

Thank you.

Thank you, Raymond. And I believe that ends our Q&A session. Before I hand over back to Rafi for his closing statements, I want to let you all know that, in the coming hours, we will upload a recording of this conference call to the Investor Relations section of Camtek’s website at www.camtek.com. I would also like to thank Rafi, Moshe, and Ramy for hosting this call with investors. I also want to thank all of you for joining this call, and we would appreciate any feedback you have regarding our new format. And with that, Rafi, I would like to hand over to you for your closing statement. Please go ahead.

Okay. I would like to thank you all for your continued interest in our business. Again, I would like to thank all our employees and my management team for their tremendous performance and we look forward to continue it. To our investors, I thank you for your long-term support. I look forward to talking with you again next quarter. Thank you and good-bye.