Camtek Ltd Q3 FY2023 Earnings Call

Hello, everyone, and good morning. Hosting today's call is Rafi Amit, Camtek's Chief Executive Officer; Ramy Langer, Chief Operating Officer; and Moshe Eisenberg, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended and the Securities Exchange Act of 1934 as amended and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may use terminology such as believes, expects, will, may, should, anticipates, plans, or similar expressions to identify forward-looking statements. Such statements reflect only current beliefs, expectations, and assumptions of Camtek. However, actual results, performance, or the achievements of Camtek may differ materially as they are subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, those that are described in Camtek's most recent annual report on Form 20-F and as may be supplemented from time to time in Camtek's other filings with the SEC, including today's earlier filing of the earnings press release, all of which are expressly incorporated herein by reference. Camtek undertakes no obligation to update any such forward-looking statements unless required by law. Camtek's public filings are available on the Securities and Exchange Commission's website at www.sec.gov and may also be obtained from Camtek's website at www.camtek.com. Also, on today's call, we will include certain non-GAAP numbers. A reconciliation between the GAAP and non-GAAP results can be found in the table attached in today's press release, which is also posted in the investor relations section of Camtek's website. So with us today, we have Moshe Eisenberg, CFO; Rafi Amit, CEO; and Ramy Langer, COO. And I would now like to turn the call over to Rafi Amit. Rafi, you may go ahead.

Okay. Thanks, Kenny. Good morning or good afternoon, everyone. Camtek closed the third quarter with revenue of $8.5 million. Gross margin came in at 49%, which is a continued improvement over previous quarters, as we indicated earlier this year. Operating margin was 28%. Over 60% of our revenues came from advanced interconnect packaging applications, with a significant portion coming from HBM and chiplet modules. The remaining 40% is divided between compound semiconductors for power devices, CIS, and process control applications. Regarding the war in Israel, I would like to explain how we have managed this situation. About 10% of our employees in Israel are on active reserve duty. The remaining workforce has managed to compensate for their absence. Our facility is quite far from the border, and we have some redundancy in our operations, which are done in three different locations. Thus, any risk of interruption is minimized. Our delivery to customers has not been affected, and we have not experienced any material or supply shortage. So, all in all, the war has not affected our operations or business. On October 31, we completed the process of acquiring FRT from Four Factor, and we have begun the integration of FRT into Camtek. We are in the final integration process of FRT sales and customer support functions into our global organization. The synergy of our products makes this process straightforward. We have also started the integration of other organizational functions into Camtek, and we plan to expand the facility in order to support potential growth and implement Camtek's workflow into FRT. Now, I would like to add a few words about the business environment. Since the beginning of the third quarter, we have reported orders received of about 150 systems, and since then, we have received additional orders for about 90 systems. The last order we reported yesterday was for 28 tools from a Tier 1 customer. For HBM and heterogeneous integration applications, most of the orders are for installation during 2024. This healthy backlog and ordering pipeline point to a year of growth for Camtek, and we expect a record year in sales in 2024. No doubt that our high-performance computing segment is the bright spot for us. Based on several surveys, the number of chiplets is expected to grow at 35% CAGR in the next four years and the HBM market at a CAGR of 22%. We have a strong position in this market, so we expect to expand our market share by winning additional inspection and metrology steps together with FRT products. In addition, in some territories, we see demand for other applications that are not related to high-performance computing, but fueled by mobile phones, servers, automotive, and other segments. We are also enjoying healthy demand from OSAT, serving multiple applications. We are greatly encouraged by the number of orders we receive for HBM and chiplet modules to be installed in 2024. At the same time, we are aware of the technological changes soon to be adapted by our customers. We are totally prepared with innovative and creative solutions and will start the qualification process at customer sites soon. With respect to Q4, we expect continued organic growth, and with the contribution of FRT, our revenue guidance is $87 million to $89 million. 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 GAAP results and the non-GAAP results appears in the tables at the end of the press release issued earlier today. Third quarter revenue came in at $80.5 million, a decline of 2% compared with the third quarter of 2022, but an increase of 9% from the second quarter of 2023. The geographic revenue split for the quarter was as follows: Asia 81%, and the U.S. and Europe accounted for the rest 19%. Gross profit for the quarter was $39.4 million. The gross margin for the quarter was 49%, similar to the third quarter of last year and an improvement from the second quarter of this year, which was 48%. As mentioned before, we've been taking measures to improve the gross margin. In the last two quarters, we have seen the initial impact, and we expect to see continued gradual improvement in the coming quarters, subject to sales mix. Operating expenses in the quarter were $17.2 million, very similar to the third quarter of last year and to the previous quarter. Operating profit in the quarter was $22.2 million, compared to the $23.2 million reported in the third quarter of last year. Operating margin was 27.6 compared to 28.3. Financial income for the quarter was $5.7 million, at a similar level to the previous quarter and much higher than the $2 million reported last year. The increase from last year relates to the significantly higher interest rates on an increased cash balance. Net income for the third quarter of 2023 was $25.2 million, or $0.52 per diluted share. This is compared to a net income of $23.3 million, or $0.48 per share in the third quarter of last year. The total diluted number of shares as of the end of Q3 was 49 million shares. Turning to some high-level balance sheet and cash flow metrics. Cash and cash equivalents, including short and long-term deposits and marketable securities, as of September 30, 2023, were $517.1 million. This compared with $506.3 million at the end of the second quarter. I know that in line with the FRT closing in October, our cash balance has decreased by approximately $100 million, which will also affect our interest income. We generated $12.4 million in cash from operations in the quarter. Inventory level was $72.7 million; it went up by $4.4 million over the quarter to support the anticipated sales growth in the coming quarters. Accounts receivables increased to $91.4 million from $79 million in the previous quarter, primarily due to the increasing revenue and the timing of collections. As Rafi mentioned before, we expect revenue of between $87 million to $89 million in the fourth quarter, which is about a 7% increase over the fourth quarter of last year. And that we look forward to a year of growth in 2024. We will provide more color next quarter after we announce our Q4 results. And with that, Rafi, Ramy, and I will be open to take your questions. Kenny?

Our first question is from Brian Chin from Stifel.

Hi, there. Firstly, best wishes and I hope that you're all well. And thank you for letting us ask a few questions. Maybe to start. Rafi, of the 240 system bookings since the beginning of Q3, is the right way to think about this as maybe 80% to 90% of that relates to shipments that will occur next year? And also, I think your book-to-bill was probably at least 2 times, 2 to 1 in Q3. So maybe it won't be quite that high, but do you expect the book-to-bill to still be well above 1 in Q4?

Look, as we mentioned in all the announcements, most of the orders we receive are for 2024. Okay. And on top of that, I think we don't really discuss any specific, we don't answer any specific questions about the backlog or about the book-to-bill and other types of that, but maybe Moshe can elaborate a little bit about that. Moshe, could you add something?

Yes, indeed, most of the orders, the 240 machines that we have received so far are for deliveries in 2024. I don't have the exact percentage, but most of it is for 2024 deliveries. With respect to book-to-bill, obviously, in Q3, the book-to-bill was much higher than one. We are still in the middle of the fourth quarter, so it's still early for me to say whether the book-to-bill this quarter will be greater than 1, but my expectation, based on orders that we have received so far, plus orders that we have in the pipeline, is that indeed it will be greater than 1.

For a follow-up, for calendar '24, you stated that this should represent a record revenue year for the company, and FRT certainly adds to this. Can you give us an idea of the impact on the model, gross margins, and expenses from FRT? And also, how do you plan to integrate the technology into new and existing platforms? Does the acquisition also provide favorable customer synergies?

By the way, regarding the acquisition of FRT, I think that in 2024 when we discuss about integrating FRT into Camtek, we mainly mean the operation in sales and customer support; we do not have any plan right now to start integrating the model from here to there and come with some new tool. This is not in our priority. FRT has its own backlog for what they did in the last few years; Camtek also has enough backlog. So, we believe that 2024 in terms of R&D integration, let's call it, we are not going to put too much focus, but more on the administration, operation, and other aspects of the two companies to work together as one. This is regarding the FRT and Camtek.

Just to add, you asked about the contribution to the financial model. I would say the following: when we announced the deal, we planned a contribution of around $30 million for FRT next year, and we feel that this is still a good number. For the fourth quarter, their contribution is expected to be pretty much in line with this run rate.

And just to clarify, Moshe. You said 4Q in line with the $30 million run rate, or is that 1Q? Because I guess 4Q, you only have it for 2 out of 3 months?

So the 2 out of the 3 months is within the run rate. It's only 2 months within the fourth quarter. Correct.

Next question will be from Tom O'Malley from Barclays.

So just a little confusion on Q4 there, and I want to kind of…

Oh, sorry. Tom, you there? We lost you.

Yes. Can you hear me?

Yes.

So just wanted to run through Q4 a little bit here. In the slide deck you had on the web this morning, you had $82 million to $83 million for Q4. So I assume that that was the organic revenue, and then you're guiding to $88 million, so that would imply a $5.5 million contribution from FRT. Can you just walk through what the exact contributions are in Q4? Just because I'm seeing a couple of different numbers here?

No. I'm not sure what the $82 million to $83 million is or where this number comes from, but maybe it's a typo. As I said, you know, our $87 million to $89 million includes some organic growth from Camtek plus contributions from FRT. In a level that is pretty much the run rate of the $30 million that we expect next year. So the correct guidance is $87 million to $89 million combined with the FRT contribution.

So $30 million run rate and you're going to adjust that for the 2 or 3 quarters. That makes sense. Going into the out year, are you expecting an acceleration of that FRT business, or is that $30 million still what you're sticking with for the contribution from the acquired business for '24?

For '24, what we said and we're staying with this assessment is that it will be $30 million for '24. Of course, as we learn the business, we will learn more, but that's the expectation as we go into 24.

And then lastly, when you guys look at a bookings year traditionally, I would imagine that just given the amount of orders that you guys have, your visibility is a lot better. When you guys say record revenue for '24, is that record revenue fully backed on existing orders today? AKA with the orders that you have in the book, is that already a record revenue year, or are you expecting some turns business year-over-year to get you above that record revenue?

So first of all, the record revenue today, it's an expectation. The backlog today that we have in hand still does not support the record revenues. But understanding what we have with the pipeline and talking to customers, our expectation is to achieve a record year, very similar to what we said a quarter ago.

Next question will be from Craig Ellis of B. Riley.

Thanks for taking the questions. And I also wanted to pass on just the best wishes for operating in a very unusual and war-impacted environment and best wishes to the team. So the first question I wanted to ask is around some of the orders that are in hand and some that could come in. There's a lot of attention on both AI-related orders and heterogeneous die, and yes, there have been parts of the business for the industry that have seemed pretty muted this year, whether it's CIS or front-end and some other areas. So one of the things I wanted to better understand is the degree to which the orders for the 240 systems that you have are really more heterogeneous plus AI versus some of the other applications and areas of exposure that the company has? And then the second part of the question is to what extent do you think some of the areas that have been more muted this year have the potential to emerge as areas of strength next year?

So first of all, thank you for the best wishes, Craig. Yes, it's indeed a challenging time, but we'll manage through it. When we look at the business overall, I see that we're looking forward to what is in the backlog. So, we are above 60% of our business which we classify as advanced packaging. No doubt the chiplets and the HBMs account for about half of that. This is indeed emerging as a relatively new business. We had this business, but from the volume point of view, it was much smaller. Indeed, this is an area that will take us to a different level in the business, and this is why this contribution gives us the expectation for a record year next year. Now when we look at the other areas, we see that heterogeneous integration is definitely becoming more dominant in the business. We're seeing a lot of business from OSATs and also from IDMs. That's another portion that is growing in advanced packaging, and we are also seeing that fan-out is still being dominant in this business. So I think that these three areas really make today our advanced packaging business. The rest of the businesses are still relevant. Healthy backlog from OSATs has lots of applications including advanced packaging, CMOS image sensors, and some RF applications; they are also available. The silicon carbide and the front end, when we look forward for next year, they account for above 20% of our business. I think these businesses are going to be healthy. It's very hard to give the exact extent of what they will do, but definitely, these are areas that will continue to see business. What is interesting is that when you look at the FRT business, it is really positioned in these areas of Silicon Carbide and the advanced packaging. This strengthens our position, as we are going to undertake more steps in the same processes and will be exposed to new opportunities that were not available to us in the past.

The second question may be more of an operational question, and it's regarding tool lead times given how significant the recent order activity has been, and admittedly, to your point, Rafi, this is vastly for shipment in 2024. But can you just talk about tool lead times, shipment times, and the company's confidence, given how dramatically orders have surged, that you can hit end customer shipment windows and capture all of the order potential?

So I think with that, Craig, the fact that these orders we are receiving today for 2024 gives us enough time to really get prepared. We do not see any issues with our supply chain; it's very solid. We have the inventory in place, and we have the manpower necessary to meet the forecast we are looking at, along with the surge in the business that we are anticipating. From that point of view, we are ready, and I think we have enough, I would say, head-on-time or we are seeing the things early enough to ensure that we have all the material and we’re prepared to deliver all the machines on time.

And then lastly, for me, before I drop back in the queue. Rafi, you and I have talked on numerous calls in the past about the company's M&A aspirations, and FRT looks like a really nicely synergistic fit and it looks very EPS accretive, intermediate, long-term. With that deal now closed and working nicely through integration, does that mean M&A is something that will be off the table for a while? Or how do you think about M&A from here with FRT now in the fold?

I know it's not off the table, but we continue searching for potential. Just like FRT, this represents what we call a perfect synergy. We are definitely looking for M&A considerations. We want to look for companies that are easy to integrate and that operate in a similar environment to us; not entirely different from what we are currently doing, to avoid situations where we do not understand the market and potential well. So we will continue considering more M&A.

Our next question is going to be from Gus Richard of Northland.

Just in terms of, as you ramp, do you foresee any capacity constraints or maybe a better way to ask the question is, where do you need to focus to make sure you have capacity as demand grows?

Are you talking about the capacity to manufacture, Gus?

Correct. Yes. Is it in lead times on OpEx? Is it manpower, floor space? Just sort of where would you first run into a capacity constraint?

So first of all, I think we discussed in previous calls that we have sufficient capacity. We've increased our capacity last year, and today we have enough capacity for roughly $0.5 billion in sales annually. So the clean room, which is the longest time, is arranged, and regarding manpower training, we also have enough. The rest is really about planning. As I said, because we understand more or less what is going to happen next year, we already have a backlog for next year. We are talking to customers and understanding what we will need to ship. We have already put in orders for what we will need from a material perspective. We have enough inventory on hand for the next few months, so we do not foresee any reason not to ship all of the machines in 2024.

And then I think in your prepared remarks, I think you're starting to see chiplets expand into auto and I think you said mobile as well. I'm just wondering if you could talk a little bit more about those opportunities and when you might start to see those impact your backlog or your shipments?

No, I think here in our remarks, we stated that there are other opportunities for business that are not related to chiplets and HBMs. We see opportunities there as well. Our business will be in the range of more than 30% for the HBM and the chiplets. The rest will come from other segments that we serve. I think today, the market is primarily focused on the chiplets and HBM, which are seen in high performance computing applications. This focus will be the main application for the next two to three years, no doubt, and this market will likely set the standard in the industry. But I believe there is still time before we reach that point.

And then the last question for me in terms of demand. Obviously, it is going up because of unit volume, but I also wonder if you could comment a little bit about inspection times and increasing bump density and what's happening for how long it takes to inspect a wafer?

You know, this is really application-dependent, but there's no doubt. Rafi mentioned in the prepared remarks that we understand where the market is going. We've talked about the fact that the number of bumps is increasing, and they are becoming denser and smaller. This will require new capabilities. Some of those capabilities we already have installed with customers. There are new capabilities that we are going to qualify at customer sites. So those capabilities will first of all improve throughput while meeting the increase in the numbers of bumps or the density. But definitely, all-in-all, some of these applications slow the inspection and metrology time in certain situations. Obviously, this is the physics of the business, and customers are required to purchase more machines. But we are doing our best to provide the best ROI in the industry by improving the throughput and accuracy of our machines.

Next question is from Vedvati Shrotre from Jefferies.

The first one I had is on the 240 system orders that you have for packaging. Could you help us understand how these convert to revenues in the first half of '24 versus the second half? Is there, is it more first half weighted versus second half? Any color there would be helpful.

Vedvati, obviously, the orders that we see for '24. So we said most of the 240 orders went to Q3 and Q4; some needed quick deliveries. However, when we look at next year, the orders typically lean more towards the first half naturally. In the second half, we have less backlog, but we have an understanding from customers. This is where the pipeline comes into play; with discussions with customers regarding their need for certain machines in the third or fourth quarters, some have asked for a slot but have not yet finalized the deal. Transforming the pipeline into orders will definitely be our focus in the next couple of months.

And maybe zooming into that a little bit. Since most HBM manufacturers and the chiplet manufacturers have talked about doubling their capacity by 2024, with these kinds of order volumes, do you think they have all the tools they need to achieve that target? What is your sense here? I know the visibility may be limited, but any color here?

Well, from what I understand and from what we see, we believe they are securing the tools that they need. If there is a shortage and they feel that they require additional tools, we have enough capacity and inventory in place to manufacture more machines. We do not see ourselves as a bottleneck if this will be needed. For '24, at least in the first half, we believe they have sufficient tools.

And then another question I had was, there are some notebook and desktop chips that are starting to use chiplet architectures which will start ramping soon. Can you help me understand what this opportunity means for you? Do you think it becomes an opportunity as big as HBM that you're seeing right now?

That's definitely something that will enlarge our market. And this is what I think will happen. I think people are starting to adopt the same architecture without necessarily adding the HBMs. Some applications, such as gaming, will require HBMs, but many won't. I believe that as they ramp the HBMs, they will achieve a cost structure which is limiting right now. The HBM cost structure should decrease with the increase in volume. I don't want to say that it will become standard, but it will certainly become the preferred architecture for most computers. Historically, high-end components eventually become standard over time, and I believe this will happen in this case as well.

Our next question is from Vivek Arya from Bank of America Securities.

This is Dodson on behalf of Vivek. A question on gross margins. I'm curious about your outlook into '24. Not looking for a guide obviously, but what are some of the puts and takes and drivers of margins next year? Could it return to your target of over 50% levels?

Yes, we said basically that we took certain steps in the beginning of the year. We are starting to see the fruits of these efforts, which have begun to affect our gross margin. This is the second quarter or the third quarter, actually, in a row of improved gross margin. We expect continued improvement, gradually. The target is to reach the 50% mark. The only variable here is that this is all subject to sales mix. In some cases or in certain quarters, we may have a more favorable product mix, while in other quarters, this may be less favorable. So this will also have an impact on the margin. Overall, our target for next year is to be at least 50%.

And then could you talk about your order trends outside of advanced packaging? Maybe some visibility in compound semiconductors? You mentioned that mobile phones and automotives have shown encouraging trends. So I'm curious about your outlook there. Thank you.

In general, our advanced packaging, which includes the chiplets, HBMs, heterogeneous integration, and so forth, accounts for above 60%, and it can come up to 65%. Then I would say the next sizable business is what we call silicon carbide and the front end. When combined, they would account for anywhere between 20% to 25%. CMOS image sensors have been low lately, as mobile phones are down, so this has somewhat coupled this business with mobile phone outcomes; I assume that next year, it will be better. This business can be anywhere between 5% to 10%. Finally, there are RF-related applications and several smaller businesses that will represent the remaining portion. However, if we analyze the strongest driver, there is no doubt today that the advanced packaging part, namely the chiplets and the HBMs, will remain the most significant growth driver for the next couple of years, at least. The silicon carbide and the front end, while possibly growing a little slower now, will definitely present a sizable opportunity with an annual growth rate in the range of 20%.

Our next question is from Shahar Cohen of Lucid Capital.

Going back to Vedvati's question about some of the laptop or desktop applications. You spoke about HBM, but I'm not sure if HBM is applicable to these. Were you trying to understand in your answer if HBM will be adopted in laptops and desktops, or were you referring to advanced packaging techniques being adopted in those? Given the magnitude of laptop CPUs compared to GPUs, wouldn't you expect a significant leap in your advanced packaging next year, given the anticipated ramp-up of laptop CPU advanced packaging applications?

There are two questions, and let me start with the first one. The question that came before is that you see notebooks and, in general, PCs starting to adopt the chiplet architecture. Now down the road, they will add also HBMs. Currently, they are not. I think the only application that I know of in the PC arena using chiplets and HBM is in some gaming applications. But from a structural standpoint, they're starting to use the structure of chiplets, which will eventually probably include also HBMs as they require more power. But this remains a prospect for the future. Now regarding your second question, no doubt there is an opportunity, but the question is how fast it will grow and how swiftly HBMs will transition to applications beyond AI; this remains unclear. Hence, as we mentioned, this segment will be more than 30% of our business. This marks a notable growth compared to the previous year and dramatically larger than it was one or two years ago. This certainly contributes significantly to the growth of Camtek over the last few years and presents a substantial potential for us. How fast it will grow beyond the current rate is still difficult to assess.

That looks like it ends the Q&A session. Before I turn the call back to Rafi, just to let everybody know that a recording of this call will be available from the same zoom link on Camtek's website in the next couple of hours. Rafi, please go ahead and make your closing statements.

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.