Camtek Ltd Q3 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Camtek’s Third Quarter 2022 Results Conference Call. All participants are present in listen-only mode. 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 EK Global Investor Relations at 1-212-378-8040 or view it in the news section of the company’s website at www.camtek.com. I’ll now like to hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin, please?

Yes. Thank you, Operator. I would like to welcome all of you to Camtek’s third quarter 2022 results conference call. Let me remind everyone that this conference call is being recorded, and the recording will be available on Camtek’s website within a few hours of the call. 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. This call may also contain forward-looking statements and I’ll refer you to our Safe Harbor statement that you can view in the press release. 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 core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today’s earnings release. And now I’d like to hand over the call to Rafi Amit, Camtek’s CEO. Rafi, go ahead, please.

Thanks, Edward. Good morning or good afternoon everyone. Camtek ended another quarter of continued revenue growth. Third quarter revenues were a record of $82 million, a 16% increase year-over-year. Gross margin came in at 49% and operating margin at 28.3%. Close to 60% of our revenues came from Advanced Interconnect Packaging applications. Heterogeneous Integration and HBM account for over 30% of this segment. We continue to expand our customer base. We sold systems to 42 new customers in the first nine months of this year. Specifically, we are cementing our position in the front-end and compound semiconductor segments. These two segments accounted for approximately a quarter of our revenues. As widely reported, consumer demand for PCs and mobiles is down. As a result, the contribution of CMOS Image Sensors-related systems to this year’s revenue will be slightly below 10%. This quarter, we continued to strengthen our position in the U.S. and Europe due to major industry investments made there. The U.S. and Europe accounted for 27% of our sales versus 21% last quarter and 12% in Q3 of last year. Q4 revenues are expected to be similar to those of Q3, translating into record annual revenue of around $320 million for 2022. The company's diversified exposure to multiple customers, secular trends, and territories contributed to our success. Last month, the U.S. Commerce Department announced new regulations restricting the sales and support of semiconductor equipment for advanced nodes in China in both memory and logic. Our customers in China mainly operate in the Advanced Packaging segment, all manufacturers of leading edge silicon wafers. We continue to evaluate the impact of such restrictions on Camtek, but based on our initial assessment, we believe that the direct revenue impact will be marginal, if any. The global economy is projected to decline in 2023, expected to affect both wafer fab equipment in general and even more so in the memory segment. 2023 is expected to be a challenging year for the industry, with customers being more cautious. We believe that although Camtek’s business model is not immune, it is, however, more resilient. I will point out a few presents. One, we support a technology change in the industry of transition to advanced packaging and heterogeneous integration. 60% of our business is related to these segments. This strength is expected to continue.

Rafi, we can’t hear you.

Operator, can you hear me?

Mr. Ramy Langer, would you like to continue please?

Thank you. And I apologize for the technical issue, and I will continue on Rafi’s behalf. And I will pick up where he started. And as we said, we believe that Camtek’s business model is not immune. It is, however, more resilient, and let me give you the reasons for it. First, we support a technology change in the industry of transition to advanced packaging and heterogeneous integration. 60% of our business is related to these segments. This trend is expected to continue in the next two years. Furthermore, the sales to the memory segment are limited to DRAM only, which historically accounted for less than 5% of our total business. In this segment, we mainly support the transition of the high bandwidth memory, which is growing based on orders we have on hand and in the pipeline, and we expect increased sales in this space next year. Also, the increasing complexity of wafers being manufactured today means that manufacturers require ever more advanced inspection systems in their facilities. We believe that the field of inspection and the segments in which we operate will be less affected in the event of a slowdown. Moreover, Camtek has a wide and diversified customer base. This quarter alone, we sold systems to more than 40 different customers and added eight new customers. Altogether, we have over 250 active customers. Despite the positive factors that I’ve outlined, we are progressing cautiously into the new year. We’re carefully monitoring our balance sheet items, such as inventory levels and accounts receivable, as well as our headcount. However, we continue to invest in R&D and plan to introduce new products and capabilities next year, securing our long-term growth path. I would like to conclude by stating that semiconductor is a strategic industry, and all leading countries are heavily invested in it. We expect that in 2023, the semiconductor industry will likely decline. Camtek is also not immune, but we believe our leading position, wide customer base, and longer-term strategic relationships with customers will enable our business to be more resilient than the overall semiconductor industry. I would like to hand over to Moshe for a more detailed discussion of the financial results. Moshe?

Thank you, Ramy. 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. Third quarter revenues came to a record $82 million, an increase of 16% compared with the third quarter of 2021. The geographic revenue split for the quarter was as follows; Asia accounted for 73%, and the U.S. and Europe for 27%. Gross profit for the quarter was $40.2 million. The gross margin for the quarter was 49% versus 50.9% in the third quarter of last year. Indeed, it is below the typical range of our gross margin model, and this quarter it was mainly driven by a less favorable product mix resulting from a few large orders, and it does not represent a meaningful trend. We expect some improvement in our gross margin in the fourth quarter. Operating expenses in the quarter were $17 million, an increase of $2.7 million compared to the third quarter of last year and $300,000 compared to the previous quarter. The increase from last year is mostly due to the increase in R&D expenses and sales-related activities to support increased revenue. Operating profit in the quarter was $23.2 million compared to the $21.7 million reported in the third quarter of last year, and $23.2 million in the previous quarter. Operating margin was 28.3% compared to 30.6% last year and 29.9% in the previous quarter. Net income for the third quarter of 2022 was $23.3 million or $0.48 per diluted share. This is compared to a net income of $20 million or $0.45 per share in the third quarter of last year. The total diluted number of shares as of the end of the third quarter was $48.3 million. Turning to some high-level balance sheet and cash flow metrics. Cash and cash equivalents, including short- and long-term deposits as of September 30, 2022, were $460.3 million. This compares with $438 million at the end of the second quarter. We generated $25.3 million in cash from operations in the quarter. Inventory levels remain flat compared to the end of the previous quarter. In the last few quarters, we increased the inventory to overcome potential supply chain issues. With the stabilization trend of the supply chain, we plan to reduce the inventory level. Accounts receivable went down by $9.7 million as we had good and strong collections in the quarter. This represents approximately 71 days outstanding. I would like to note that the company management is closely monitoring the different scenarios of market demand and customer investment plans for 2023 and is ready to respond accordingly. Regarding guidance, as Rafi mentioned before, we expect fourth quarter revenues to be around the same level as the third quarter. And with that, Rafi, Ramy, and I will be open to take your questions.

Operator?

You with us?

Yes, I continue with the sweep all the way. No problem.

Yes. Okay. Operator?

Hi there. Good afternoon and thanks for letting us ask a few questions. Maybe, kind of Rafi, first following the recent U.S. export restrictions into China. I’m just curious, what is your sense on the new investments or how the new investments in fab and Advanced Packaging capacity might be directed and prioritized moving forward? And also, how big of a benefit do you see this for Camtek next year based on increased activity in China in areas like Advanced Packaging or specialty power, etc.?

Yes. The situation in China, I think, remember just four weeks ago, the Commerce Department made all these restrictions and the announcement, and I think it’s too early to evaluate the effect on the semiconductor industry in China. But at this point, when we discuss with customers in China, it looks like business as usual and utilization is okay. The purchase orders look normal. So, I believe it’s still too early to understand if this restriction will affect the whole industry or specific areas; we don’t know yet. But as I said, for at this point, it looked like business as usual.

Okay. And kind of moving beyond the geopolitical, but is it fair to characterize the environment you’re seeing and sort of your order book and the backlog and those patterns? Is it fair to characterize your Advanced Packaging customers and maybe even more broadly as being in a digestion mode? And based on your order book, can you provide any sense on the revenue trajectory in Q1 or the first half next year?

Look, first of all, as we mentioned, most of our customers are not in the high notes, and we are mainly supporting the OSAT. So they’re not under this restriction. Second about the backlog and pipeline, I would say that if we just look, a year ago, definitely all the supply chain interruptions caused many customers to place their orders ahead of time to secure delivery. Now when delivery is back to normal and people feel more comfortable and even some think about the possibility of a slowdown, definitely customers are not in a hurry to place orders. So, we can see that the amount of pipeline is much bigger than the backlog. So, we discuss with this customer, we see leads, but we can’t see today, a forecast as we saw a year ago, because the customer is placing orders when they really need it, and they don’t feel they need to secure delivery a few quarters ahead. So, as I said, if we talk together, the backlog and the pipeline look pretty normal, but to see when the pipeline will convert to backlog can take time, and probably as before, we will know more before we start the new quarter, we’ll get a better picture.

Okay. Got it. Yes, I mean, I’ve this might have be based on a huge sample size, but I’ve noticed or observed sometimes Q1 tends to be sequentially up in terms of revenue. But maybe listening to what you’re saying, Rafi, maybe you could take a step down a little bit given sort of you don’t have as much backlog defined moving into next year.

Ramy can contribute that?

I, let me try and be a little bit, definitely our visibility at this stage looking into 2023 is limited. Now the backlog is healthy, and we have a very strong pipeline. I think as Rafi said, it is too early to assess how quickly this pipeline will turn into orders. This is a little bit different than where we were, let’s say a year ago, but definitely at this stage it’s too early. We’ll need to wait for another few weeks until we’ll be able to really give a better assessment on the first half of 2023.

Okay. Fair enough. I’ll hop out to move the line along. Thanks a lot. Bye.

The next question is from Tom O’Malley of Barclays. Please go ahead.

Hey, thanks for taking my question, guys. I just had a question on the December quarter. So, clearly visibility isn’t as strong as it was before, but you guys are guiding to flat business. Could you just talk about how much of the December quarter is actually booked today already? And how much is influx as the quarter goes along?

Now the current quarter is fully booked, and it’s really now a question of executing the shipment, and that’s it. We don’t expect any surprises this quarter.

Okay. And then if I look at the mix of business, clearly CMOS image sensing is a little weaker, I think you said in the prepared remarks that that’s coming in below 10%. It’s already kind of tracking well below that, so that makes sense. But in the quarter for September, you saw a pretty big decline in what you’ve called the other or general business. What contributed to that decline sequentially and will that go down again in December?

The decline. Tom, I’m not sure about which decline. I mean, we are seeing, and I think we said it in the prepared remarks, our business for Advanced Packaging is around 60%. It has been in the last few quarters, and it’s a very similar rate. The front-end and compound semiconductor is about 25%. So overall, I would say that 85% of the business is very, very stable. Now, the rest, CMOS Image Sensor historically was above 10%. This year it’ll be a little bit less, and this will be compensated by what we call general 2D inspection applications, things like MEMS and other applications which are smaller in volume. But from the business point of view, there aren’t any differences or declines. The only change, I would say, is the CMOS Image Sensors, and this is strongly related to mobile phone sales.

Got it. Got it. And then just one more on the coverage. Totally understandable that you’re seeing limited visibility. I think broadly markets are just getting weaker in general. And you’re kind of talking about a semiconductor market that’s down next year. Have you thought about what your business can grow in a scenario where wafer fab equipment’s down 20% plus? I’m just trying to understand. You guys have clearly outgrown the market for the past several years. In a market that’s down, say 10% or 20%, how much growth do you think you see off of a market that’s a little weaker next year? Thank you.

Yes, so Tom, I think it is much too early to say today what will be with our current visibility to really say to give a good indication of the 2023 business. What we believe is that we’ll do better than the industry. At this stage, how much better than the industry? It is really too early to say, and I believe that within a quarter or so we will be in a much better position to give more accurate statements.

Thank you.

Thank you.

The next question is from Charles Shi of Needham and Company. Please go ahead.

Hi. Yes, thank you for taking my question. I have, first, a little bit longer-term question, not specific to 2023. I think one underappreciated part of your business is that you have a very broad customer base—250 active, I mean, assuming each one of them just buys one, two systems, that’s enough to support you to a $300 million annual run rate. I think customers are either in a greenfield or competitive displacement. However, I do want to ask you, this question from this point and forward, how much of the incremental additions of new customers do you think is going to be? Could there be a slowdown in the number of customers you can add going forward? From here, and specifically, I want to ask you about the wafer manufacturers. I don’t recall you talking about that particular set of customers, and is there some competitive displacement there? Thank you.

Hey, I didn’t think about it before, but first of all, I believe we’ll continue to add new customers, and the broad addition of customers is, in general, not related to one specific territory. I think as we grow the business, we’re getting into new segments, and therefore, yes, we’ll continue to add customers, whether it’ll be in the range of this year that we’ve already added 42 customers. I’m not sure whether it’ll be, or it will be in a different magnitude, but definitely, if we look also historically into previous years, we’ve been adding a significant number of customers every year. Now, specifically wafer manufacturers, yes, we are adding new wafer manufacturers to our portfolio, and we’ll continue to add, and when I look at the target market for 2023, I believe we’ll have new customers in this segment as well. Did I answer your question?

Yes. So the other question I have is, well, first of all, I appreciate you from time to time providing new press releases about the latest orders you received from your customers, but your last update was in early September. So between September to now, over the last two months, how do you see the ordering rate going? And I may have another follow-up after this. Thank you.

So, I think what you mentioned in the previous remark that you talked about, yes, we’ve been adding orders. I think currently, we see customers waiting to make sure they’re getting the business before they’ll turn the pipeline into purchase orders. But when we look at our backlog and add the pipeline, the business is healthy. Really, the big question, and this is why we have a limited visibility, is the rate of the customers turning potential purchase orders from the pipeline into real purchase orders. They are taking more time, and they will complete times or shorter. And so I think we’ll have a better assessment, and we’ll be able to give better numbers and more accurate numbers within a couple of months.

Yes. But I would like to add a comment. Usually when we make announcements of orders, it should be over what we call multiple system orders. We don’t make announcements for one or two systems per customer. That’s the big difference. And if we look at our portfolio, it definitely contains a lot of what we call one and two units per customer. So definitely we don’t make any announcements of each order of that.

Got it. Got it. So maybe my last follow-up is, in your backlog, what’s the—based on your backlog, what’s your visibility into the first half of 2023? Can you see some shipments scheduled? Well, what’s the latest? Is it the second quarter of 2023? Or is it still the first quarter of 2023? Thank you.

Well, looking into the backlog, we have a backlog today that is already including machine shipments in the first and second quarters. However, we still need, in order to complete shipments for both quarters, we will need to convert some of the pipeline into purchase orders. And that’s exactly what we’re doing today.

The next question is from Craig Ellis of B. Riley Securities. Please go ahead.

Hey team. Thanks for taking the question and congratulations on the execution in the third quarter. A lot of discussion around backlog and orders and visibility into calendar 2023. So, I wanted to pivot to gross margin. Moshe, you talked about some large customer dynamics that impacted gross margin in the quarter. Can you just identify if there were any other factors that impacted gross margin and what should be expected with gross margin beyond the calendar fourth quarter? Would they get back to that 51% level? Or are there input costs or other large customer items that would have them maybe sub 50, or right around 50%?

So the main impact of the relatively lower gross margin for the third quarter was indeed a few large orders that we have delivered in the quarter. And we will continue to complete a delivery of them over the course of the fourth quarter. So you will see some improvement in the fourth quarter, but not to the full extent. We should go back above the 50% mark next year. I’m not sure to the full 52%, the upper limit, but we should be able to go back to above the 50% level.

Got it. That’s helpful. And then the second question just relates to operating expense, and I acknowledge we’re dealing with an unusually uncertain environment, but the question is this: if order trends and other dynamics meant that we weren’t seeing the backlog conversion to firm orders, as you look at operating expense, do you feel like you have any flexibility to reduce operating expenses tactically? Or given the significant increase in customer engagements, do you really have pressure on R&D to scale that up so that you can do the work that you need to do to serve all these new customers?

So, the two key elements in our operating expense structure are R&D and sales and marketing; G&A stays pretty much flat. We believe that our business model is pretty agile, so we can change some of the old expense mix between direct and indirect. On the R&D front, I think Rafi mentioned in his prepared remarks that we want to continue to invest. We have plans to introduce new products and new capabilities. So this is definitely an area that we don’t want to affect, but within the certain marketing, there are certain activities that can be changed based on the activity level.

Yes, that makes sense. And then for my final question, a real strong cash performance in the quarter. Here we are with $460 million in cash and equivalents. Rafi, can you just give us an update on how you’re thinking about M&A? I know you’ve talked about it in the past, and one of the things that precluded significant progress was that we had a COVID environment that really made it hard to get out and meet potential targets in person. But what should investor expectations be as we exit 2022 and look into 2023 on potential there? Thank you.

Yes, regarding M&A, definitely we are now investing a lot of efforts, and the fact that I’m not participating in the meeting in Israel because it’s also I’m investing in this issue, so we really believe that we can do something in the next few months definitely. But it’s a long process, even if you find something you want to pursue today, especially good, good to check everything to be sure that this is the right merge and not to make any mistakes. So, we do it cautiously, but definitely, we invest a lot of effort to execute, I would say, in the next six months something.

And can you talk a little bit about what your priorities are, whether it’s increased geographic and market exposure or particular technology capabilities?

You’re talking about M&A priority – look, I would say that since we take major market share, we are not looking for a company similar to Camtek or doing something like Camtek—that’s not, so I don’t think it brings any effort—any advantage for us. We focus more on some, in one hand it should be in the same market segment, but on the other end in different technology or different product lines. Then we can still use our infrastructure of sales and marketing and support and enjoy this infrastructure to promote another product line. And this is roughly the way this is the priority that we are giving. And there are some areas—there are metrology, there are some processes. The other thing that’s still targeting the same segment as we focus, and we really believe that we can bring some results very soon.

That makes sense. Not so much scaler, but really technology extension, product line extension. Thanks, guys.

Thank you.

Thank you.

Yes, thanks for taking my question. Just on the front-end side, you mentioned you’ve got pretty good demand from compound semis. And I was just wondering, is that silicon carbide, gallium arsenide, indium phosphide, gallium nitride? What compound semiconductors are driving in that part of your business?

I think today what’s dominant in the business in the last, I would say couple of quarters, it’s definitely the silicon carbide portion.

And how much of your front-end business is compounded?

Now, I would say it differs from quarter to quarter. It is roughly, I would say close to 10%, but it’s one quarter more, one quarter less, roughly 10% of the business.

Got it. That’s very helpful. And then just one last attempt on visibility. 90 days ago you were slotting out, I think, into Q1; today if somebody came in and wanted a tool as soon as possible, when could you accommodate that customer?

This is a difficult question, Gus, because it really depends on the kind of tool that he wants. So, certain tools will be able to give him in less than two quarters. How much less? It depends, but I would say, the soonest we can give is roughly four to six months. This is the soonest we can give somebody a tool.

Got it. And what does that, in normal times, if we ever get back to that, what would that lead time be?

That’s the lead time. I mean, you are talking about 16 months to 20 months – 20 weeks, and if you go back let’s say six months or a year ago, I think those lead times extended up to two quarters. So definitely lead times are shorter today by roughly, I would say they have shortened by roughly a month and a half to two months. And that’s exactly the difficulty we have been describing now because having said that, people understand that we can provide machines at around four months, and therefore there are less quick to secure the slots. They understand that there are slots in our manufacturing, and therefore this limits our visibility to the first half of next year.

Got it. Super helpful. And do you have any supply constraints at this point? Or have the supply chain issues been alleviated?

I believe they have been alleviated. There are some issues here and there; there is a missing component here and there, but we are able to get the material that we need. I don’t think that supply chain issues today will create any shortages or lack of ability to ship any machine. So, I think this is not the main issue today; overall, we can get the parts. I think the supply chain in general is getting to a more reasonable situation.

Okay. And then, the last one for me, today roughly what is your quarterly revenue capacity?

No, I think that we discussed this in previous calls. We have made a significant investment in clean room capacity, and today the capacity is not a limitation anymore. We’ve increased our capacity by about 50%, where we are today able from our facility to ship about $0.5 billion of revenues or in machines. So this is not a limitation anymore.

Okay. Great. Thank you so much for taking my questions.

Thank you, Gus.

Okay.

There are no further questions at this time. Before I ask Mr. Amit to proceed with his closing statement, I would like to remind participants that a replay of this call will be available on Camtek’s website, www.camtek.co.il beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

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

Thank you. This concludes the Camtek third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.