Camtek Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's results Zoom webinar. My name is Kenny Green, and I'm part of the Investor Relations team at Camtek. All participants other than the presenters are currently muted. Following the formal presentation, I will 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. You should have all now received the company's press release. If not, 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. Moshe will then summarize the financial results of the quarter. Following that, Rafi, Moshe, and Ramy will be able 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. And with that, I'd now like to hand the call over to Rafi. Rafi, please go ahead.

Thanks, Kenny. Good morning or good afternoon for everyone. As we announced a few weeks ago, we started 2022 with strong orders and with an impressive flow of orders. We continue with this momentum, and 2022 looks like another year of growth. Revenue in Q1 was over $77 million. This represents a growth of 35% over the first quarter last year. Gross margin was 52% on the high end of our model and operating margin of 28.8% is in line with our midterm target financial model. Furthermore, despite the ongoing negative global geopolitical environment, the company has received orders of more than $150 million since the beginning of the year. The orders were received from a broad range of customers and will be used for various applications such as advanced interconnect packaging, including advanced materials, compound semi, and front-end CIS. This supports our expectation for another record year with year-over-year revenue growth in the mid to high teens. The side effect of COVID-19 continues to interrupt our business, as delivery times for materials and parts are still long. Prices of components and parts are more expensive. Borders of some countries in Asia are still practically closed, and our field engineers cannot visit customers as often as they used to or travel for advanced training in Israel. In China, the situation is more complicated. Most of the semiconductor industry in China is in the Shanghai area; thus, the lockdown in Shanghai affects the whole industry. Parts are operating, but they do so at lower capacity than usual. All in all, the entire semiconductor manufacturing chain is disrupted due to the lockdown in Shanghai, including ports and airports in this area. The good news is the flow of incoming orders from China and from the rest of the world. We continue to receive orders at a very impressive rate, to some extent even exceeding our expectations. We are taking into consideration that there might be delays in installing machines at certain Chinese sites, but there will be catch-up. The semiconductor market forecast remains positive according to several sources. Our backlog is high, and when taking into account our pipeline, we are in a better position than at the same time in 2021. Based on our current estimate, our guidance for Q2 is for continued growth in revenue to between $77 to $80 million. The highlight of Q1 is that advanced interconnect packaging continues to be our largest segment with heterogeneous integration becoming a significant portion. We continue to expand our market share and sold 10 machines to new customers. Specifically, we are cementing our position in the front-end and compound semi segments and shipping machines to existing and new customers. We shipped several systems to new CIS customers and one order for RF filters for one of the largest RF filter manufacturers in the world. We shipped several systems for DRAM applications, and we predict additional systems in the second quarter and the second half of the year. We completed the development of new, important modules and features that will open additional segments for us. This quarter, the U.S. and Europe accounted for 21% of our sales, versus 18% in the last quarter and 12% in Q1 of last year. This trend highlights the strengthening of our position in the U.S. and Europe as a result of the major industry investments taking place there. That ends my summary. I would like to hand over to Moshe for a more detailed discussion of the financial results, Moshe.

Thank you, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis, with a reconciliation between GAAP results and the non-GAAP results appearing in the tables at the end of the press release issued earlier today. First-quarter revenue came at a record $77.2 million, an increase of 35% compared with the first quarter of 2021, and a 4% increase compared with the previous quarter. Revenue was mainly driven by advanced packaging, which accounted for about 50% of sales and approximately a 20% contribution from compound semi. The geographic revenue split for the quarter was as follows: Asia, 79%, and U.S. and Europe together, 21%. Gross profit for the quarter was $40.2 million. As we mentioned on our last call, gross margin for the first quarter was relatively high at 52%, compared to 50.7% in the first quarter of last year and 50.9% last quarter. The higher gross margin was due to a more favorable product mix sold during this quarter. Operating expenses in the quarter were $80 million, compared to $13.5 million in the first quarter of last year and $16.8 million reported in the previous quarter. The increase from the previous quarter is mostly due to increasing R&D and sales-related activities. Operating profit in the quarter was $22.2 million, or a 28.8% margin, compared to a $15.6 million, or 27.2% reported in the first quarter of last year. Net income for the first quarter of 2022 was $21 million, or $0.44 per diluted share. This is compared to a net income of $14.6 million or $0.33 per share in the first quarter of last year. The total diluted number of shares as of the end of Q1 was $48.1 million. Turning to some high-level balance sheet and cash flow metrics: inventory went up by $5 million from the end of December 2021. This is to support the current demand for our products and to ensure the availability of key components. The complicated geopolitical situation and the implications of COVID-19 create supply chain challenges. We are increasing the inventory levels to improve the flexibility in our sales channel in order to overcome these challenges. We used $0.4 million in cash from operations in the quarter due to the timing of collection related to the Chinese New Year, as well as increasing inventory levels and tax payments, including for the settlement we discussed last quarter. Total cash and cash equivalents and deposits as of March 31st, 2022, is $428.3 million, similar to the level we reported at the end of 2021. As Rafi stated before, the business looks healthy. We received approximately $150 million of orders since the beginning of the year, and we feel good about meeting our plan for 2022 of mid-to-high teens growth year-over-year. We expect revenues of between $77 to $80 million in the second quarter. With that, Rafi, Ramy, and myself will be open to taking your questions. Kenny?

Okay. Thank you, Moshe. If you have a question, please raise your hand on the platform. We will take your questions now. Our first question is going to be from Brian Chin of Stifel. Brian, your line is open. You may go ahead and ask.

Hi there. Can you hear me okay?

Yeah.

Great. Thanks so much for the call and good results. We've got a couple of questions. Maybe to start with, based on your disclosures, it looks like bookings this quarter in 2Q are tracking maybe around $40 million, similar pace, I think, to last quarter. And trying to extrapolate this out, do you expect a similar book-to-bill well above one this quarter? More importantly, given the rising cost environment, should we expect profitability on these systems in the backlog to be similar, or maybe lower relative to your typical gross margin level?

With respect to the book-to-bill, obviously, the first bookings until today are higher than the revenue. So, our book-to-bill is greater than one, but I'm not sure that this implies that our revenue is in line with the bookings that we had until today. So, basically, we don't expect— we're expecting some decline or some stabilization in bookings in the coming quarters that will meet our annual revenue of mid-to-high teen growth. With respect to the profitability, we expect pretty much the same level of profitability in terms of gross margin in the coming quarters. We don't expect any major impact of the costs on profitability.

That's impressive. Just to clarify growth for the year, you're indicating mid-to-upper teens overall revenue growth. How much does this range consider the risks of further disruptions to your customers' manufacturing or your own supply chain? Additionally, regarding that growth rate for the overall business, how do you anticipate advanced packaging front-end specialty to perform in relation to that overall growth?

Brian, this is Ramy. Let me answer. Let me start with the supply chain. Definitely, there are disruptions, but I think we have been able to learn how to manage and work in this environment. Moshe mentioned that we increased our inventories in order to be sure that we have enough inventory, even if we get a slightly different mix of orders. So, from that point of view, we feel comfortable that we will be able to supply all the requirements from the market. This is from the supply. From the advanced packaging point-of-view, we're definitely going to see the bookings. When we look at the mix of the products, we see that about 50% of our business continues to be in advanced packaging. It is healthy, and we mentioned that we got the orders for the DRAM segment. More specifically, the application is the high bandwidth memory. This definitely is an important segment. It supports the high-performance computing segment. So, it is in line with the growth that we see in the industry. From that point of view, we feel very comfortable with the current forecast and the influx of the orders and the customers' response.

Thanks for that color. Appreciate it.

Okay. Thank you, Brian. Our next question is going to be from Thomas O'Malley from Barclays. Thomas, your line is open.

Hey, guys, thanks for taking my question. Just the first one on gross margins. Obviously, in the supply environment, it seems like you guys are doing a good job of one, keeping inventory and two, being able to at least pass on some of these costs. Can you talk about any actions you might have taken with customers? Are you raising prices at all to keep these gross margins where they are? And then you made a comment just on the first question there that margin should stay at this level. Do you mean at the 52 level or do you mean within the range that you previously guided, which was 50.5 to 51.5? Thank you.

Hi, Tom. So, first of all, I think it's a good question about gross margin. I wanted to correct myself when I said we will maintain gross margin. I meant we will maintain the current range of 50.5% to 52%. It depends on product mix. We feel more comfortable anywhere between this range. Specifically, for the next couple of quarters, I would say gross margin will vary between 51% to 52%. Just to correct my previous statement. With respect to actions that we're taking, we're definitely looking for more suppliers to make sure that we're not going to be dependent on one supplier. We are building a higher inventory level. We are buying more inventory parts. We are getting some discounts on parts.

Let me add a couple of things. I think, Tom, what we were able to do is to find some sources in certain areas that actually reduced our costs. In specific areas of the machine bill of material, we were able to bring in significant cost that somewhat offset the rest. Obviously, there is an increase in the prices of the materials we buy, but due to these changes, we were able to offset some of it. So, all in all, there is an increase in the bill of material, but it is comparatively small. On the demand area, we are able to maintain average selling prices. In certain areas, we are able to increase the prices. But overall, we are maintaining a healthy leverage of prices to our customers. So, from that point of view, we are confident that we will be able to maintain the current level.

Helpful. The follow-up is just pro forma in some of the disclosures you gave. The last couple of quarters you gave advanced packaging, compound semi, front-end, and then others. And then this quarter, you gave CIS separately. It's the right way to think about it. I would assume you need to break out others into both front-end and others. It's the correct way to think about it. Advanced packaging, 48%, compound semi, 19%, front-end, around 13%. And then other, which is CIS, around 10%. I know you mentioned front-end was a little lower, but I just want to pro forma the disclosure there from the prior quarter. Thank you.

I think in general, the numbers you mentioned are correct. I don't have in front of me the exact number for the front-end. As I said, it was a little lower than usual, but we expect it to rise to more or less the same levels that we experienced last year. From that point of view, we don't see any weakness in this market segment, but your numbers are more or less accurate.

Could you provide an update on your operating expenses this year? You've indicated previously that you would stay under $70 million, but with the increased revenue you're observing, is there a possibility that your spending will exceed that amount? If so, by how much? Thank you.

Tom, the current level of OpEx, which is close to $70 million for the year, stayed the same. We're not changing anything, and we feel comfortable that this will be able to support the current level of business.

Thanks. Nice results, guys.

Thanks, Tom. Our next question is going to be from Charles Shi of Needham. Charles, you may go ahead and ask.

Hello, can you hear me?

Yes, we can hear you, Charles.

Sorry. I may have a little technical difficulty. So maybe my first question really wants to go back to the question around the China lockdown. I think some of the questions were asked around the supply chain side of it. I think you've mentioned something around delivery because a good amount of your customers are in the Shanghai region. They may be subject to some of the impact due to the lockdowns. So, my question is for your Q2 guidance. Have you risk-adjusted some of the delivery issues, potential delivery disruption of your tools into that particular area, or maybe overall China, and can you quantify that for us? Thank you.

So, thank you for the question, Charles. First of all, based on our current estimates, we went into great detail when we made these estimates. We've done a few things regarding delivery to really give priority to the areas across the world where we have good access and are sure that we can meet the deliveries, and these also include giving priority to customers that are not in the areas of the lockdown. So yes, we understand the issues with Shanghai. We looked at it, and we are comfortable that our current guidance takes into consideration the current issues we're seeing in China.

Got it. So maybe I want to ask a little bit more on the ordering front. I know this is not typically how you segment your end market. Any thoughts on the puts and takes in the order intake between the subcontractors and IDMs, because I understand you deal with both segments of the end customers?

So, Charles, it's hard for me to just provide specifics. I don't have the number just ready in front of me. But definitely, there is a significant number that goes to our IDMs. That's number one. In general, I have the names on my mind, but I will not say them. But definitely, a significant portion goes to IDMs. However, when I look at the influx of orders, it matches. When I look forward, all the orders we received are very evenly spread across the different applications we have. I think what we're seeing here is that there are technological shifts in the order types. For example, the DRAM, HBMs; DRAM may not be very strong, and it's a little bit weaker. However, there is a technological change moving to HBMs. We definitely see it in the orders. We see it in the shipments this quarter, and we see it in the orders we forecast for the second quarter and the second half for the rest of the year. Additionally, most of our customers are discussing long-term plans to increase their capacity. We are observing this reflected in the orders. There might be some small changes as we move along, but the overall business is very healthy. Did I answer your question, Charles?

Thank you very much for the great color. My last one. I think your annual guidance implies second half being flat or maybe slightly up relative to the first half. Any thoughts for the second half to be a lot higher than what you are currently guiding? What has to happen? I know this is probably a tough question, but I want to understand what can be the upside from what you are guiding and/or if you think this is a pretty full outlook guidance here. Thank you.

I'll tell you what's the good news, Charles, regarding what we are seeing. I think in our previous discussions, we were very hesitant from backlog and pipeline looking at the second half. The good news is that the backlog and the pipeline for the second half of the year is filling up, and overall, it looks good. What will be the extent of the business today? It's a little hard to talk about Q3 and Q4 and provide actual numbers. I can tell you that we're starting to receive orders for Q1 of '23, so you can see a lot of confidence from our customers about the forecast. At this stage, with all the volatility in the market, it's very hard to confidently state anything beyond that we expect this year to be a growth year in the mid to high teens. I think this is as much as we can say at this stage, but definitely, we're encouraged by the level of the backlog and the pipeline for the second half and for the first quarter of '23.

Thanks.

Charles, that answers your question? Okay. Thank you for that. The next question will be from Jamie Zakalik of Bank of America. Jamie, you may go ahead and ask.

Great. Can you all hear me okay?

We can.

Yes. We hear you well.

Great, thanks. And apologies if you guys maybe discussed this. I've been having back and forths between a few calls, but at a higher level, were there any puts and takes in the quarter in terms of end-market demand? I think there's some concern about weaker conditions in maybe smartphones or PCs for semiconductors overall. Did you see any markets that were weaker than expected? And I know there are those that were stronger than expected. Basically, what were the different puts and takes on the demand side?

Jamie, this is Ramy. First of all, let's clarify the general situation. Yes, we hear about the weakness. We are aware of the weakness in the cell phone market, in the PC market; even in multi-markets, it is below its usual numbers. So, definitely, we hear that and understand it. However, we have not seen any change in the behavior or in the focus of our customers that would indicate any issues related. There are two reasons for this. On one side, you've seen a significant technological shift. Good reason is what is happening in the DRAM area. There's a significant portion in advanced packaging, with the market moving towards the use of high bandwidth memory, supporting high-performance computing. This is definitely an area where we dominate, and we're enjoying business. Although the entire semiconductor market may not be increasing at this stage, the technology change is bringing us business on one side. On the other side, the long-term plans of our customers, not just in China but across the world, are to invest. We are shipping machines to customers that are making long-term investments in building capacity. The area of DRAM packaging is very strong, and this is not specific to one area; it’s across all regions, definitely not limited to China. So, heterogeneous integration, as Rafi mentioned, is taking hold, this is again high-performance computing, which is becoming a significant part of advanced packaging. These areas are growing, and we expect them to continue to grow. From that perspective, we do not feel the weakness people are talking about in the end markets at this stage.

I would also like to add the situation in China. Because China’s strategy is to become more independent, thereby decreasing dependence on imported components, they intend to expand their capacity and ability to produce items domestically. Right now, the amount of imports is significant, I think more than 80% of all components are imported to China. If they want to produce more made in China items, they need to continue building capacity in other areas. I think this is also a very important element. It doesn't relate to the end market; this is a mental strategy of China.

Got it. That's very helpful. And I actually had a follow-up on the China matter. Did you guys quantify your specific exposure to just the China region? And how much, or if any, of your tools are manufactured in the U.S. and shipped to China?

We don't manufacture in the U.S. We manufacture all the equipment here in Israel. We're using two very large subcontractors in electronics to build and support us. From that point of view, I think we feel very comfortable about the supply chain and the availability of parts that we will be able to ship all the machines that are forecasted.

Got it. That's very helpful. And then my last question is: Are there any risks that customers are hoarding tools or ordering more tools than they really need due to uncertainty about supply and about restrictions that maybe impact other suppliers? What are you guys doing to ensure that orders are really tied to true demand?

So, we've been monitoring this. I can tell you that the customers who are ordering machines, in most cases, are very upset if we are delayed. We are doing our best to ensure that the machines are going into production. We’re receiving a lot of requests about support, and those machines are going into production. To determine what the actual utilization is, obviously, no one provides those numbers. But we are confident that those machines are not just filling a room in a certain area of the world; they are going for production, and the people are using them. It’s for real.

Thank you, guys.

Thank you.

Thank you, Jamie. If there are any additional questions, please raise your hand on the platform. We will give a moment to see if there are any additional questions. It looks like there are no additional questions. So, before I hand over to Rafi, I want to point out that in the coming hours, we will upload the recording of this call to the Camtek Investor Relations website. Beyond that, the link for the live call will also automatically turn into a recording in the coming hour. I would like to thank everybody for joining this call, and I like to hand back to Rafi for your closing statements. Rafi, please go ahead.

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. We look forward to continuing 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 goodbye.