Camtek Ltd Q1 FY2023 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. 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 by 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; and 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 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 only predictions and may change as time passes. Statements on this call are made as of today, and the company undertakes no obligation to update any of the forward-looking statements contained whether as a result of new information, future events, changes in expectations, or otherwise. Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual events or results to differ materially from those projected, including as a result of the effects of general economic conditions, risks related to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which Camtek expects to generate a significant portion of its revenues for the foreseeable future, but also Taiwan and Korea. This includes risks of deviations from our expectations regarding timing and size from key customers in these countries, changing industry and market trends, reduced demand for services and products, timing of development of new services and products and their adoption by the market, increased competition in the industry, and 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. In addition, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results, and evaluate the company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings press release. And now I'd like to hand the call over to Rafi, Camtek's CEO. Rafi, please go ahead.

Thanks Kenny. Good morning or good afternoon, everyone. Camtek closed the first quarter with revenue of $72.5 million. The gross margin came in at 47.3%, affected mainly by product mix and cost increase of some of the components. Operating margin was 24%. Over 60% of our revenue came from advanced interconnect packaging applications. The front-end and compound semi segment accounted for about 20% of our revenue. In the first quarter, we shipped multiple system orders to 6 Tier 1 customers in the field of advanced packaging and heterogeneous integration. These orders accounted for over 40% of the quarterly revenue. Regarding the DRAM field, customers in the HBM segment account for over 10% of our revenue. In Q1, we saw significant revenue growth compared to Q1 last year. We see an expansion of our DRAM business despite the decline in the memory market. In the front-end segment, we delivered a system with a new module for the first time. These systems were installed at 2 customer sites. This module will expand our inspection capability in the front-end segment, and we anticipate potential for growth with these customers in the coming quarters. We installed 2 Golden Eagle systems for pattern inspection at a new customer site for fan-out application. We plan to ship additional systems to this customer in Q2 and Q3. During the first quarter, we received an order for 9 systems from a Tier 1 customer for advanced packaging to be delivered in the second and third quarters of this year. Regarding the second quarter, we estimate the sales to be similar to Q1 '23, which represents a decline of 9% year-over-year. As we have stated on our previous call, we continue to believe that our leading position in specific segments, broad and diversified customer base, and long-term strategic relationships with customers will enable us to outperform the industry. Regarding the second half of '23, based on our discussions with customers, there is potential for a moderate improvement in the business situation of our customers. At this stage, and considering the lead times which are becoming shorter, it is hard to foresee when this potential will translate into orders. At times like this, when the world is experiencing an economic slowdown, we conduct our business with utmost care. We are carefully monitoring our expenses and adjusting them to the current situation rather than to the long-term forecast. The area in which we cannot afford to reduce expenses is R&D because our customers continue to develop new technology such as hybrid bonding and heterogeneous integration. They have set a very aggressive roadmap with a very tough schedule, thus committing us to provide solutions on time. At the same time, we are aware of the fact that the transition from slowdown to growth is swift in our segment. That is why we need to maintain a sufficient inventory that will allow us to meet the demand for quick delivery of systems. Looking at the investments and increasing capacity in the R&D roadmap that our major customers are making in relevant segments, we are optimistic about growth potential. The release of new products later this year will expand our portfolio, allowing us to penetrate new applications. In addition, we continue our efforts in M&A, which will further increase our total addressable market. And now Moshe will review 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 table at the end of the press release issued earlier today. First-quarter revenue came in at $72.5 million, a decrease of 6% compared with the first quarter of 2022. The geographic revenue split for the quarter was as follows: Asia was 90%, and the U.S.A. and Europe accounted for 10%. We expect to return to the 80-20 mix for the year as a whole. Gross profit for the quarter was $34.3 million. The gross margin for the quarter was 47.3% versus 52% in the first quarter of last year and 49% last quarter. This decline is a result of the sales mix as well as continued inflationary pressures on raw materials and labor, which we cannot fully pass on to customers. As we mentioned last time, we have initiated a process focused on improving the gross margin through engineering and design changes, which in some cases require customer qualifications, as well as supply chain initiatives. We expect gradual improvement in the gross margin from the current level. I note that it will take time until we see the full benefit of these steps. Operating expenses in the quarter were $16.2 million. This is compared with $18 million in the first quarter of last year and to the $17.4 million reported in the previous quarter. The current strength of the U.S. dollar versus the Israeli shekel is beneficial to our current operating expenses level. Operating profit in the quarter was $17.4 million compared to $22.2 million in the first quarter of last year and $22.8 million reported in the previous quarter. Operating margin was 24% compared to 28.8% last year and 27.8% in the previous quarter. The decline is due to the decrease in business volume and gross profit. Financial income for the quarter was $5.1 million compared with $3.8 million in Q4 and only $400,000 last year. The majority of the increase relates to the significantly higher interest rates on our deposits on an increased cash balance. Net income for the first quarter of 2023 was $20.4 million or $0.42 per diluted share. This is compared to a net income of $21 million or $0.44 per share in the first quarter of last year. The total diluted number of shares as of the end of Q1 was $48.4 million. Turning to some high-level balance sheet and cash flow metrics. Starting from cash. Total cash, including cash, cash equivalents, short and long-term deposits as of March 31, 2023, was $493 million. During the first quarter, we had a positive cash flow, generating $17.1 million in cash from operations. Accounts receivable decreased from $81 million at the end of last quarter to $66 million, primarily due to strong collection within the quarter. Days outstanding for Q1 were 84 days, down from 90 days last quarter. Inventory level was at a similar level as of last quarter. In terms of guidance, in Q2, we expect revenue at a similar level as achieved in Q1.

And with that, Rafi, Ramy, and myself will be open to take your questions. Kenny?

Yes, I guess maybe to start with, you've referenced some meaningful Tier 1 customer activity. And I guess, one, what kind of impact does this have typically on blended gross margins? And two, can you describe what you're seeing from also your broader customer base? Clearly, wafer starts and utilization is lower as inventory corrections continue. But what are the specific areas where you do have some indications for some pickup in the second half? And I'm thinking also about China specifically.

So let me start with the answer. So first of all, when we talk about the second half, we are talking about multiple territories. It's not related to a specific territory. Definitely, it's not just China. The main drivers, I would say, are the advanced packaging. No doubt this segment is healthy and shows some strength. You can see that our Tier 1 customers are continuing to buy equipment, they are investing, and they are still increasing the capacity for certain applications. The second area that is driving growth is the compound semi. Definitely, the automotive market is strong, and this market will continue to be healthy at least for the foreseeable future. So I would say these are the major opportunities in general. I would also like to specify here that we have POs on hand for some of these opportunities. Now in general, the Tier 1 customers do not have a negative but a positive effect on our gross margin. Where we will see, and I think Moshe mentioned it in his notes, is the mix here; part from the issues of the increase in some of the cost side, there is definitely a mix issue, or a product mix in this quarter that is not favorable. And two of these reasons are for the low gross margin. I would state again, it's important. Our Tier 1 customers positively affect our gross margin.

Okay. That's helpful. And then just for my follow-up, was the significant advanced packaging order that's shipping in 2Q and 3Q? Is that memory related? And I guess, whether or not it's high bandwidth memory related, can you also discuss how large that market opportunity is and your market share? And how process control intensity is maybe favorably impacted as more die are stacked together?

So first of all, the machine orders are not related to memory. So that's, I would say, it's other advanced packaging applications. So now going back to the memory and the DRAM specifically, first of all, this is obviously a healthy segment because there is a transition to the use of high-bandwidth memory; I think everybody is using it. This is very much tied with the heterogeneous integration segment or for the high-performance memory going into servers and gaming and other applications. Definitely, that's an area that is going to grow, and we are seeing the other business. So in general, we have a very strong market share, and we serve all the major players. From the size of the business, I think we mentioned it in the notes; it was 10% of our revenues in this quarter. It's still too early to say what it will be in the next quarters, but it will be meaningful this year.

Our next question will be from Charles Shi from Needham.

I think the first thing I want to clarify a little bit more is that nine machine order. You used that in the press release, it's a strategically important order, can you expand a bit? I understand it's not in memory, it's other advanced packaging, but why do you consider it a strategically important order? Just need a little bit more color on that.

Charles, the reason that we see this as a strategic order, this is, first of all, a very important customer of ours. It's in the advanced packaging, and there is potential for a significant number of machines in the second half of this year and in '24. So definitely, the strategic nature is the potential quantity of machines that we will be selling to these specific customers in, I would say, the next 18 months.

Is there anything noteworthy from a technology or product perspective regarding the nine machine order? Does it involve fine pitch or higher bump density, meaning it requires high capability from your machines? I want to understand why this order is strategically important; I recognize the business side, but I'm also interested in the technology aspect.

From a technology perspective, the entire industry is tightening the specifications of all applications. We can expect a similar trend with this customer as we increase the number of bumps and decrease the pitch. The RDLs for fan-out applications are decreasing, and the defect size is also becoming smaller. Therefore, from the standpoint of application requirements, and considering the number of applications for this customer, there will definitely be several. Additionally, it's clear that the technology requirements will be more stringent for these customers as well. This is about all I can share at this moment, Charles.

Yes, Ramy. No problem. I appreciate your insights as always. So Moshe, I have a question regarding the financial aspects. In relation to your financial planning, I understand that you aim to exercise more cost discipline as we head into the next few quarters. I believe you mentioned that you would respond to the near-term dynamics a bit more. I am curious about your outlook on the overall operating expenses this year. Are you considering a flat year-on-year figure? Also, based on which market assumptions, especially for the second half, are you planning improvements in your operating expense budgeting as of today?

So in terms of the operating expenses, first of all, in general, you already see in the first quarter somewhat reduced operating expenses versus last year. We will continue with this level pretty much throughout the year. As Rafi mentioned in his prepared notes, the focus will be on R&D. So you will see over the next 2 quarters an increase in the R&D level, and to keep the OpEx at the same level, you’ll see on the other aspect, the SG&A, a reduced level of expenses.

Got it. Got it. That's kind of based on stable business outlook. Or do you expect some moderate improvement in the second half in that assumption? Just really want to understand how you're thinking about OpEx here relative to the market environment.

So just in general, we still don't have a clear view on the second half. On one hand, we do hear some positive feedback from customers, but we are not taking it to the bank yet, and we don't have all the orders in hand to support growth. So at this point, we provided guidance for the second quarter. We gave some indication for the second half. It's too early to say whether the second half is going to be stronger. My current assumption on the operating expenses is based on the current level of business.

I would like to add that the positive signs we observe are coming from discussions with customers across various territories, not just one or two. We are receiving positive feedback from several major customers. However, as Moshe mentioned, some of this feedback isn't yet backed by purchase orders. Nonetheless, it's too early to definitively predict what the second half will look like. I believe that in a few months, particularly by the third quarter, we will be in a much better position to provide more insights.

Our next question will be from Craig Ellis from B. Riley.

Congratulations on your revenue execution team. I wanted to start just by following up on one of the comments around high-bandwidth memory and just clarifying the business's potential for this year. Is the view that the strength you're seeing in high-bandwidth memory sufficient to drive year-on-year growth in 2023 versus 2022 level? So was that more about the business's strength in the very near term, perhaps in either 2Q or 3Q.

So first of all, I'm expecting, let's say, we are about 10% of our revenues for this segment alone. I would say that I'm expecting something similar at least for the next quarter. I think throughout the year, this is an area that is picking up, and you see everybody is talking; it's not just related to one specific vendor, people understand that this is a growth area. So definitely, this is something that will be significantly larger than what we saw in '22; it would be meaningful, and I think it will help us to keep the numbers.

That's really helpful, Ramy. And then the second question is regarding the compound semiconductor part of the business. And it's a longer-term question. One of the things that investors have been concerned about over the last few months given some of the pressures that have been seen in the global automotive market is the ability for compound semiconductors to be an intermediate term growth driver. So without providing any guidance, can you just talk about your confidence that compound semiconductors, after what looks like will be a strong year, could be a business that could provide growth in 2024? What are the gives and takes to that being a sustainable growth driver?

First of all, we are continuing at a similar rate than we experienced last year, which is already a good note. Now in this area, looking forward for this year, we are backed by POs from some of the customers. We are seeing, through discussions with specific customers that are thinking of expanding or getting into this market. I'm getting the feeling that this market will continue to invest in increasing the capacity at least throughout '23 and '24. So from that point of view, I would say we are looking at this market positively.

That's really helpful, Ramy. And then for my last question, and I'll flip it over to Moshe. Moshe, can you just talk a little bit more about some of the things that are happening with gross margin; there were repeated references to mix dynamics in the quarter. Was that mostly on a product line basis, or with the end market served, whether it was advanced packaging or high-bandwidth memory, et cetera? And then you mentioned that there would be some improvement in gross margin. Can you provide a little bit more color on the timing with which you'd expect to see that?

Thank you, Craig. With respect to gross margin, first of all, obviously, this is an area of focus for us at this point, and we understand that we need to improve the gross margin. So on the product mix, I would say that it's across the board. Ramy mentioned before that the Tier 1 customers are driving relatively higher gross margin. So it's relatively the smaller customers that are driving the margin a little bit down. But that's not the whole story. Most of the issue is on the cost side. We are very much focused on reducing the bill of material of the product through a few initiatives. First of all, we are making some changes in the design of the system. But you have to take into account that in some cases we need to get customer qualifications for that, and it's a long process. So it takes time until we will see the benefit of that. The other aspect is, obviously, through supply chain initiatives, negotiations with customers. Now that the market is a little bit softer, we believe that we will be able to achieve some savings as well. Given the fact that we are seeing certain levels of inventory with the higher cost structure, as I said, we will gradually see improvement, but it takes time until we see the full benefit of these activities.

Our next question will be from Dougson Zhang of Bank of America.

Just a follow-up on the margin front. I know you guys have a target model out that's a 52% gross margin target. Could you just remind us or what year that target is for? And if you still think that is a reachable target?

Yes. The target was not specific to a year, but more for a revenue level. The target was for about $400 million business. Yet, we are still operating at this point below our target model even for the $300 million revenue for the reasons that we've mentioned before. Yes, the answer is we are committed and we have a path. We know exactly what we need to do, and we are executing based on this plan to return to the 50-ish percent gross margin level. But again, I would say that it's a gradual process and we'll see the full benefit in a few quarters.

Understood. And then just one on China. So some of your front-end peers recently have received clarification from the U.S. government, and they believe they can ship incremental revenue to Chinese customers that they previously thought were restricted. I know you guys said you didn't have any direct impacts from these kinds of restrictions before. But are you seeing any sort of increased activities around this? Do you have any revenue potential from this new clarification?

I would say that definitely, we can see from China, a lot of efforts to come up with solutions where they cannot get or import the high-end component, and that should find a different way to get high performance. The efforts are focused on advanced packaging. This is the only way for them to try to achieve good performance and high performance. This is a segment that we are very strong in. We can definitely benefit from that.

Our next question will be from Vi from Jefferies.

So I just have one. Intel and TSMC have really talked about their bumps shrinking and eventually going into bumpless or hybrid bonding architectures. So how are you sort of strategically positioned for this? Does that involve sort of using the same platform of tools that you have? Or does it involve a full reengineering once we start going into hybrid bonding type architectures?

So thank you for the question. I would say there are 2 paths here. And definitely, even with people who talk about bumpless, it means very low-profile bumps. It's not exactly without bumps. But definitely, the hybrid bonding is a very big opportunity for us. We will be able to address some of the applications with the current products that we are making. But definitely, I think Rafi mentioned in his prepared notes that we are going to introduce new products, and these technologies are targeted not only for the hybrid bonding but definitely, the hybrid bonding is one of the targets of these new products. We are working with customers that are developing hybrid bonding today; we understand the market requirements. Our products will be able to address the challenges that will be needed from both inspection and metrology, I would say, in the future.

And a follow-up to that, does that kind of make this some more competitive part of the market versus where you are right now? Do you see yourself competing with some of the leading process control players? Does that change the competitive dynamics?

It's hard to say at this stage whether it will really change the competitive environment; it may change it in certain applications. But I think in most applications, I don't see it changing drastically. Again, there are many flavors to hybrid bonding. It's not just one flavor. I don't think there will be a change. But definitely, it's a new process, and I would say it's making the advanced packaging and heterogeneous integration even larger; more people will be using it. So definitely, there are going to be more opportunities. With more opportunities, it will be more competitive. The market today is competitive, but with our technologies and our R&D efforts, we are very confident that we will be able to continue and compete successfully there.

Okay. That makes sense. And then one final question. You talked about HBM being 10% of your revenues and heterogeneous integration sort of being that 40% of the revenues in the quarter. Are the gross margin profiles different when you start targeting a logic kind of an advanced package versus HBM? Or do you think they're similar dynamics?

So first of all, let's start. We said the 40% or the 6 Tier 1 customers accounted for 40% of the revenues, and it's advanced packaging and heterogeneous integration. So it's both. Heterogeneous integration didn't account for 40% in this quarter, just to correct it. But going back to your question, look, the more complex applications; high-bandwidth memory is definitely a complex application. You are required to inspect a very large number of bumps at a very small time with nominal accuracies and then do the inspection. These kinds of machines have higher gross margins. So definitely, all in all, advanced packaging, the DRAM portion of it, and the heterogeneous integration in general, the gross margins are healthy. I believe that this is a good area that we will be able to continue to dominate, and the overall margins will be good.

Our next question will be from Auguste Richard of Northland.

Just in terms of your Tier 1s giving you a forecast. And I'm just wondering, is the deliveries laying on top of that forecast? And how is your expectation for turns in a quarter changed over the last couple of quarters in terms of sort of hitting your guidance?

In general, the forecasts from our major customers are quite clear. Changes can occur suddenly, but this is a common aspect of regular operations and can be attributed to various factors. As we mentioned last quarter, forecasting has become difficult because even when customers place orders, they tend to specify delivery dates close to the shipment time. They will request main deliveries only when conditions are favorable. This is contributing to the challenges in providing long-term forecasts, a situation that is likely to persist until the industry experiences less uncertainty. Overall, we are confident in the size of the business and the forecasts and pipeline we have discussed. There is potential for a stronger second half, but the key challenge is helping the industry feel more certain about long-term projections. Once that is accomplished, I believe we can return to normalcy.

And turns in the quarter, how has that changed? Is there an increase in percentage? Or is it still a low number? Any color around that?

In general, I would say that the changes within the quarter are minimal. We don't have too many changes within the same quarter.

Got it. And then for a follow-up, it appears to have higher volume products are adopting heterogeneous integration. And I'm just wondering, is that a trend driving some of these large orders you're seeing?

No. Look, hybrid bonding is just starting. Until we see large orders from hybrid bonding, I think we are a while away. It will take time. This is clear. This is mostly today in R&D. We are working with our customers that are developing. We're involved in these activities, but the orders that you are seeing today are for advanced packaging. We are getting a lot of the high-bandwidth memory. Obviously, I think very much like a previous question that was asked, we are seeing more and more bumps going on the wafers, the dimensions are shrinking. The RDLs are tightening to 2 microns and even beyond. This industry is starting to get denser, and the next step will be hybrid bonding, but we are not there yet.

Our next question will be from Tom O'Malley from Barclays.

This is Will on for Tom O'Malley. Just a few questions. First question, it has to do with advanced packaging. Just curious how you see that trending in the second quarter and throughout the second half of the year.

I think that talking we discussed in one of the previous questions from talking to customers and multiple customers in different territories, we believe that this is a strength area. The business we mentioned is solid. When we talk about a potential improvement in the second half, it's coming with the advanced packaging and compound semi after discussions with customers. This is an area where we are positive about.

Awesome. Quick question on gross margin. I know it's been asked about enough. But as you guys introduced new products in the second half, do you see this as a tailwind for gross margin?

Yes, the answer is yes. The new products will come with a higher gross margin profile. But just to put things in perspective, the impact will be, at least in the second half of this year, relatively small because we will only introduce them at that point. So the big chunk orders and numbers will follow only in 2024. But they will definitely have a higher gross margin contribution.

Our next question will be from Alona Lahav of Aura Investments.

Could you please quantify the HBM still potential on the longer-term horizon? What's the size of the potential addressable market? And how do you see it evolving over the next couple of years?

First of all, HBM, we mentioned it to be about 10% of our revenues. I don't think it can be a lot more. It’s not just when you talk about the DRAM; there are other applications that can give us additional growth such as DDR5 and other applications that are driving the DRAMs to go to advanced packaging to move away from wire bonding. So definitely, all in all memories long term has the potential to be even more than 10%. The HBM, I'm not sure can be a lot more than 10% by itself.

Okay. And regarding the regional breakdown, could you please provide some color about which areas, which regions were stronger or less strong this quarter and how do you see the competitive landscape within each region?

So within Asia, the largest territory was China; then Korea and Taiwan. That's the largest, and with the dynamics that, with the competitive landscape within each territory.

I think the dynamics are not different between the territories. In general, I think we are ready. You would see some more startups, local competitors in China, but still, from their point of view, the market size is very small. All in all, we compete with our main competitor, which is on to innovation. There are a few second-tier players coming from Taiwan, Korea, and Singapore. These guys are competitive and have been competing with us for years. I don't see a change in the competitive situation in the last few quarters.

And what about the U.S. and Europe?

Same story.

Did you provide a breakdown of U.S. Europe or what's the size?

I think we mentioned it, and it's 10% for this quarter. It's a little low when compared to the previous year. As we look into the rest of the year, we believe that we will finish in the 20% as we did last year.

Last question will be from Shahar Cohen of Investment Capital.

It's difficult to understand how you cater to a higher-margin customer, benefit from the depreciation of the U.S. dollar, and still see a 5% to 6% decline in gross growth due to high costs. This situation is significant and impactful. Can you provide more detailed information about the cost issues, such as specific manufacturing mistakes? Additionally, regarding HBM and its relation to AMD and NVIDIA, why do you believe HBM represents 10% of your business?

Let me begin with the HBM and then address the gross margin question. Firstly, we are aware of the applications emerging from NVIDIA and the gaming market. Our understanding from discussions with our customers indicates that this is largely the scope of the business, and there is potential for some growth. However, I have reservations when considering the overall figures and the machinery needed. Based on our conversations with major customers, these are our numerical assumptions for at least the near future.

Let me address the first question regarding the gross margin, Shahar. We have very little Israeli-based expenses on the gross margin level. Most of the salaries are below the line at the OpEx level. So there is very little impact of the favorable exchange rate to the gross margin. Second, this quarter, it's a combination as we said, the combination of product mix as well as expense structure. Overall, what we described last time is that we experienced a gradual expense increase over the last couple of years on our material. Most of the inventory is with the higher material costs. This is why it will take time until we see the gradual improvement on the gross margin. I hope that this is helping you to understand the issue.

And that ends our question-and-answer session. Before I hand over to Rafi, I would like to let you know that in the coming hours, we will upload the recording of this conference call to the Investor Relations section of Camtek's website, and you should be able to access the recording soon. I would like to thank everybody for joining this call and hand back to Rafi for the closing statement. Rafi, please go ahead.

Okay. I would like to thank you all for your continued interest in our business. I want to especially thank the employees and my management team for their tremendous performance. 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.