Camtek Ltd Q3 FY2024 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 am part of the Investor Relations team at Camtek. All participants other than the presenters are currently muted. Following the formal presentation, I will provide some instructions for participating in the live Q&A session. I would like to remind everyone that this conference call is being recorded and the recording will be available on Camtek's website 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; 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 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, may, 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 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 PR, 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, today's call will include certain non-GAAP financial numbers. For a reconciliation between GAAP and non-GAAP results, please see the table included in today's press release, which is also posted in the IR section of Camtek's website. And I would now like to hand the call over to Rafi, Camtek's CEO. Rafi, please go ahead.

Hi, thank you, Kenny. Good morning or good afternoon, everyone. Camtek ended this quarter with a record quarterly revenue of $112 million, representing 40% growth compared with Q3 '23. The distribution of revenue in this quarter is as follows: around 50% of our sales were for HPC or high-performance computing-related products for the third quarter in a row, approximately 20% for other applications of advanced packaging, and the rest were split between other segments. This trend in product mix resulted in favorable profitability parameters of 51% gross margin and slightly over 30% operating margin. The main growth driver in the semiconductor market continues to be HPC modules for Generative AI, for which we are a key equipment provider. The demand in the HPC segment remained healthy, and overall, we expect the contribution of HPC to our business this year to be around 50%. Our future forecasts take into consideration a positive HPC trend from orders we have on hand in our pipeline and from discussions with customers. We expect the demand for our system for HPC-related products to continue into 2025. We also see an increased demand for our systems for a wide range of other applications. Based on our current order flow, backlog, and pipeline, our revenue guidance for the fourth quarter is around $115 million, representing about 30% growth year over year with sequential growth in Q1 2025. Given the guidance for Q4, we expect 2024 to be a record year for Camtek with revenue around $427 million, representing 35% growth year over year. Our expectation is that 2025 will be another year of growth. During SEMICON Taiwan, in early September, we introduced our fifth generation of the Eagle system, Eagle G5. The new system offers superior wafer throughput coupled with improved optical resolution, meeting both current market demand and the customer's future roadmap. Since the introduction, as we announced last week, we have already received orders for over $20 million, with delivery starting in Q4 this year. This system is the first in several new products that we have been developing in recent years and will provide inspection and metrology solutions for the upcoming advanced packaging technologies that are characterized by the fine pitch or micro bump and hybrid bonding interconnects. In addition to the Eagle G5 which has been officially presented, we also introduced our new and advanced system for the next generation of advanced packaging to several key customers. Some of them have already installed the new system for qualification while others have placed initial orders for it. This new system will be officially launched in SEMICON Korea in the beginning of 2025 and is expected to contribute tens of millions of dollars already within 2025. I would like to add a comment about the confusing estimates regarding the growth forecast of the HPC segment in 2025. Our understanding is that the demand for HPC modules continues to be high. And the reason some see a slowdown is due to a lack of production capacity. The cornerstones of HPC modules are logic and HBM components and the 2.5D substrate that pack all the components into one module. In our opinion, the bottleneck is currently due to a lack of capacity of 2.5D substrates. We estimate that this bottleneck will be released in 2025. The strong order flow and backlog for delivery in 2025 gives us a relatively clear long-term vision, which allows us to organize our operations efficiently to meet the expected demand. As indicated in previous calls, we are adding new manufacturing capacity in Europe that will start operating in 2025. To sum it up, I am excited about our business and outlook and expect 2025 to be another year of growth. And now Moshe will review the financial result. Moshe?

Thanks, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appears in the tables at the end of the press release issued earlier today. Revenue for the third quarter came in at a record $112.3 million, an increase of 40% compared with the third quarter of 2023 and a sequential increase of 10% from the second quarter of 2024. The geographic revenue split for the quarter was as follows: Asia was 87%, and the U.S. and Europe accounted for 13%. Gross profit for the quarter was $57.1 million. The gross margin for the quarter was 50.8%, similar to the second quarter of 2024 and improved from 49% in the third quarter of 2023. This is within our expected range, with the changes from prior periods mainly due to product mix in the quarter and increased revenue from last year. We expect similar levels in the next couple of quarters. Operating expenses in the quarter were $22.9 million compared to $18.6 million in the third quarter of last year and $21.6 million in the previous quarter. The increase is mostly due to a planned expansion to support the growth of operations and the continued investment in the development of new products referred to by Rafi. We expect a similar level of OpEx in Q4 as well. Operating profit in the quarter was $34.2 million compared to the $22.2 million reported in the third quarter of last year and $30.8 million in the previous quarter. The increase is mostly due to the increase in revenue and the improvement in the gross profit from last year. Operating margin was 30.4% compared to 30% and 27.6% respectively. Financial income for the quarter was $6.4 million compared to the $5.7 million reported in the third quarter of last year and $5 million in the previous quarter. The increase is mostly due to the increased cash balances and the positive impact of exchange rate differences. Net income for the third quarter of 2024 was $37 million or $0.75 per diluted share. This is compared to a net income of $25.2 million or $0.51 per share in the third quarter of last year. The total number of diluted shares as of the end of the third quarter was 49.4 million. Turning to the balance sheet and the cash flow metrics. Cash and cash equivalents, including short-term and long-term deposits and marketable securities as of September 30, 2024, were $489 million. This compared with $454 million at the end of the second quarter. We generated $36 million in cash from operations in the quarter on the back of increased revenue and profitability and strong collection. Inventory levels increased by $7 million to $116 million. The increase over the previous quarter is to support the anticipated sales growth in the coming quarters. Accounts receivables increased slightly from $68.2 million to $70.7 million in the quarter. I'm especially pleased to report that our days sales outstanding continue to improve, and they now stand at just 57 days, down from over 100 days last year. As Rafi said before, we expect revenue of around $115 million in the fourth quarter with sequential growth in Q1 of 2025. And with that, Rafi, Ramy, and I will open the call to take your questions.

Yes. Good afternoon. Thanks for taking my question. Thanks for that color. The Camtek's understanding about the HPC market going forward with respect to the pretty much a lot of noise about HBM overcapacity concerns. So I do want to ask a little bit more on this topic because from your perspective, it does sound like the chiplet side of the HPC demand may be stronger next year, given that it seems like it's the bottleneck for the industry. But on the other hand, it does sound like on the HBM alone, not just the overall HPC, on HBM alone, you're still expecting a good year next year. I want to understand if this is the understanding of the management: maybe chiplet grows a little bit faster next year, HBM still grows but not growing as much as the chiplet side, I wonder if this is the case. Thanks.

Hi, Charles, this is Ramy. No, look, this is hands in hands. And I think Rafi, in his prepared notes, the HPC includes the chiplets and the HBMs. They basically go hand in hand, and the growth will be together. Now what we do see, it's quarter by quarter, and it depends on the order entry. So it's not that every order we get exactly the same percentages. They may differ from quarter to quarter. But as we go into '25, we expect to see a similar pattern as this year with growth on both the chiplet side and the HBM side. This year, we anticipate it will be lower, approximately in the range of 30% to 35%. Looking ahead to 2025, the business in China appears to be solid and healthy. We expect it to be at least similar to this year or potentially a bit larger. Overall, China continues to invest.

Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe given the commentary around explaining some of the confusion about whether a slowdown or pause that some suppliers maybe have referenced around AI advanced packaging is more supply or demand related. You talked about constraints for advanced packaging substrates. I'm curious when in 2025 do you think those constraints will be relieved? And do you see that impacting either your Q4 revenue outlook or revenue trajectory into Q1 of next year?

Today, we are observing the ongoing positive trend in high-performance computing, particularly with the 2.5D substrates and high-bandwidth memory. We maintain a favorable outlook based on our backlog and project healthy performance in the fourth quarter. We anticipate sequential growth into the first quarter of 2025, which is clear to us. Looking ahead, we firmly believe that high-performance computing will play a significant role in our business next year. While it is still early to provide precise figures, we are very optimistic about both the fourth and first quarters.

Yes, that's helpful. And then maybe referencing the new product and then being sensitive that it hasn't formally, or won't be formally introduced into Q1 until Q1 of next year. But since you have referenced it in the slide, can you share some details on maybe the types of applications for this new product and/or maybe the size of the addressable market? You did reference that you could have tens of millions, maybe $20 million, $30 million, something like that contribution in '25. What's the addressable market? And I guess also in terms of that tens of millions, do you think it will be more Q1 first half or second half or kind of across the year?

We will begin the product launch and gradually increase production, which will lead to higher revenues throughout the year due to this new offering. As Rafi mentioned, this is a high-end product designed to complement the Eagle, targeting more advanced applications. We're focusing on inspection capabilities for 2D functionalities, featuring a faster machine that can detect much smaller defects compared to the Eagle. This machine is suitable for applications like hybrid bonding and advanced packaging, where the number of bumps can reach hundreds of millions per wafer with a fine pitch of five microns. These are the types of applications this machine will serve. Rafi, would you like to add anything?

No, I think actually, you summarized it very well. And okay, if they understand the roadmap of the customer, where they want to go or what does it mean small pitch to go from 15 micron to five, six, or eight micron, what does it mean in terms of the amount of bumps, all of it, you cannot do it with the current system because you need much more, I would say, better accuracy, and also customers expect higher throughput. So this is totally a new platform that can meet this type of demand.

Well, I wouldn't go now to specific applications as TSVs, but in general, the capabilities of this machine in the inspection space are far more superior than what we can achieve on our current machines. From the total available market, definitely, it will substantially increase our total available market. It's hard for us to say at this stage to take a number, but definitely, it will significantly increase it.

Thanks, Brian. Our next question is going to be from Tom O'Malley from Barclays. Tom, you may go ahead and ask.

Guys, thank you for taking my questions. So this is Kyle Bleustein on for Tom. The first question I have is last earnings, you guys kind of talked about countries investing in domestic manufacturing as one of your growth drivers and it seems like most of your geos were up sequentially. So my question is, how much of like that sequential growth was from like the memory guys in each country either increasing orders or versus some of those domestic initiatives that you guys talked about last time?

We're not sure that we fully understand the question. If you can just repeat it again for us.

Sure. In the last earnings call, you mentioned that sovereign growth could be a potential driver as companies invest in independent semiconductor assets to enhance their domestic manufacturing. Given that all your geographical regions are performing better sequentially, I am curious to know how much of that improvement is attributed to initiatives in those countries for domestic manufacturing versus an increase in orders from your large memory customers in Korea or the U.S. Can you clarify how to break down the factors contributing to the sequential increase?

So I think our discussion on longer-term geographic diversity of manufacturing, this is something that is ongoing, but it's not something that happened this quarter. And I think we will see probably new facilities in different geographies going up. It will take some time. But I think definitely from a longer-term prediction, this will contribute to our business, but it's not in the short term.

Okay. That makes a lot of sense. And then just a quick follow-up on that. You talked about like your new capacity that you guys are building in Europe. What is like the total revenue number that you guys are able to support? I think last time I have it, it was greater than $600 million.

Yes.

And like, do you have like an expectation of I know this is like a longer-term trail question, like when you might be able to get closer to filling that capacity or when you would need to increase it again?

So at this stage in our current capacity, in our current facility, we can go over $600 million. We are adding at least 10% in this European location which will happen next year. So this will bring us closer to $660 million, and that capacity can be grown further. So definitely, from a capacity point of view, we don't have any limitations to grow in the foreseeable future.

Thanks, Tom. Our next question will be from Craig Ellis from B. Riley. Craig, you may go ahead and ask.

Thanks for taking the question, guys, and congratulations on the nice execution. I wanted to start just by asking a contextual question for some of the nice comments around the fourth quarter guide and the first-quarter strength. And that is, can you comment a little bit on what you've seen over the last three months with just pipeline discussions with customers on the chiplet and HBM side and the degree to which activity is trending versus what you saw in the first half of the year or accelerating or decelerating as we think about the implications for 2025?

There has been significant discussion about HBM and the growth of capacity and 2.5D substrates. From our conversations with customers, most players are quite optimistic and are continuing to increase their capacity. At this point, we don't see any signs of slowing or reduced optimism. Ongoing discussions are happening, and it varies from customer to customer. Some are ready to make commitments and are asking for production slots, while others are a bit more cautious. Overall, the sentiment regarding HPC is positive.

That's helpful, Ramy, and it clarifies some of those comments. Are you seeing reported intentions, particularly from Eastern sources, to adopt either HBM4 or 16 high or 20 high stacks? Are you noticing customer engagement at the pipeline level for these technologies, or is that still some time away?

I think it's a little bit further out in time. I don't think there is a pulling at this stage.

Got it. And then looking at the color on calendar '25 continuing to reiterate growth potential. The question is, after all the attention on chiplets and HBM, can you comment on the degree to which other things, whether it's a recovery in the CMOS Image Sensor side of the business, things like the potential benefit from specialty materials or silicon carbide or other things are going to contribute to growth next year? Thank you.

So that's interesting. You're asking, yes, it is. Actually, CMOS Image Sensors is starting to see a lot of interest and discussions from customers, suggesting that this market will contribute significantly more than it has in the past couple of years when the business was quite low. There is definitely growth there. I believe there will be more activities in the fan-out area than we have seen recently. We are witnessing increased interest in shipping machines for these applications. We are observing more front-end applications and gaining more market traction. I think we will make progress or increase our market share. Additionally, silicon carbide, which had struggled in the past 12 months, is starting to pick up.

Got it. And is the silicon carbide point a point that dovetails with growth in China next year or is that in other regions, Ramy?

I think it's also China.

Thanks for taking the questions and congratulations on the strong results. I'm curious about the increase in demand for fan out. Can you provide any more color on what that application is? Is it mobile phones, is it regular old PCs? Can you just talk a little bit about where that's coming from?

This is coming from OSATs. We don't have a clear view of the application. They tend to be cautious about communicating their needs—sometimes they require support with the application, and other times they don't. What I'm noticing is an increase in requests for fan out. However, I don't have details about the specific applications at this time.

Got it. And okay, I think that's it for me. Thanks so much.

This is Michael Mani on for Vivek Arya. So to start, it seems like it's been well-reported that one of your customers may be encountering some issues in the qualification process for their latest HBM products. So in the scenario that they might be unsuccessful in qualification, how should we think about any impact to your ability to grow next year? And should we think about this demand potentially being made up somewhere else at another customer? Thank you.

This is a question that we've always been asked. If I can look at '24, I think all the players made investments. Moving forward, obviously, this may change, but then you would probably see more capacity requests on the others that are serving this market. But at least at this stage, we did not encounter any changes in our customers' plans. But I don't think this will make a major change next year.

I see. Thank you. And just on gross margins, just what are the puts and takes for gross margins heading into next year, especially as you release these new products and they ramp into production? Should we think about those potential tailwinds given that they're coming at higher ASPs and, what I'm assuming is a more margin-accretive profile? Thanks a lot.

Hi, Michael, this is Moshe. Over the past year and a half, we have implemented initiatives to enhance our gross margin. However, the primary determinant of our gross margin is the product mix. Currently, we are operating within a range of approximately 50.5% to 51.5%, potentially reaching 52%. This range will be significantly influenced by the product mix. While our new product offerings may contribute positively to the gross margin, it is still too early to evaluate their impact. We have indicated that we anticipate a contribution in the tens of millions, but in the broader context, it won't account for a majority of our margin. Therefore, it may have a slight positive effect, but not substantially.

Great. Thank you very much.

Hi, thanks for taking my question. So the first one I had was, I think last quarter you talked about the HPC contribution being 50% to 60% for the total year and now it's 50%. Is there something in the second half that sort of pulled it down to 50%? Just trying to make sure I fully understand that change.

Hi, Vedvati. This is Ramy. So, when we looked at the beginning of the year, we had this discussion, and we said we'll do 50% to 60% in revenues for the HPC. At that time, the revenues we assumed for this year were lower than what we eventually finished the year or going to finish the year with our estimates for the fourth quarter. So actually from the numbers we anticipated that we will do for the HPC, we are very close to the target. And therefore, the 50% is really for the good news of the whole business this year and rather bad news, it's not a bad news for the HPC. There we are really on the target that we anticipated.

Noted. The second question I had was more longer term. So we are transitioning into HBM 3E and then potentially HBM 4 maybe end of '25, '26. How is this impacting the inspection or the 3D metrology intensity you're seeing on your tools? Maybe are you seeing more color on how that's shaping up to be?

No, I don't think we will see any change in intensity. Generally, we are focused on identifying non-good dies in this segment of the business. Therefore, even if yield changes, we will continue to inspect the entire wafer to ensure there are no non-good dies. We are observing that HBMs are increasing in stacks, which means we will be scanning more wafers. As they progress to 12 and 16 stacks, this is positive news for us from a business perspective. We are actively involved in developing these next generations and are closely collaborating with our customers, aiming to enhance inspection and metrology processes. This ongoing effort has not changed in the past year and I don't foresee any changes at least until 2025.

Understood. Regarding the HBM side, is there a hypothesis that after a year of doubled and tripled capacities, demand will be strong next year? Are Korean manufacturers looking for local suppliers to assist with their processes? Is that trend developing? Are you noticing an increase in competitors as this demand continues to grow? Yes.

In Korea, there is a small competitor that we are very familiar with. However, I don’t believe they have been significant in this market for about 10 years. Most of the business is primarily between us and Onto, with some involvement from KLA, making us the main players. I don’t anticipate any major changes from this perspective, and I don’t see any local competitors emerging in Korea at this time.

Understood. Thank you. That's all from my end.

Thanks so much. I have two questions. I just wanted to go back to the outlook for HPC. I mean this has been much covered that there's a lack of clean room space. If you look at the additions of CoWoS capacity, it does seem to incrementally go up every quarter. So I'm just kind of curious, is the equipment orders a little bit more lumpy? And when you say growth in March, are you expecting it to resume there, or is it further in '25?

So yes, first of all, you're correct that there is also a discussion about room, say, clean room space and how they are going to make and find the capacity. This has been ongoing in Taiwan for the past few quarters, but I think they are managing to find a place and getting hold of clean room space, and that's at least the information that I have. And there are not too many competitors there or players there. So I think from a capacity point of view, they are on track. I think that from the forecast that we are seeing, and I said it earlier, we have very good visibility six months forward. And of course, we understand how the business is going, but our visibility is not as good when we look further into next year. What we are seeing today is, as we said, we gave the guidance for the fourth quarter. We will have sequential growth in the first quarter. And definitely, we have a positive outlook into '25 that we feel that it will be and we expect it to be a growth year. And this is more or less what we can really see today or can discuss it. I mean, more details about it. I think things will become more clear as we go into the beginning of a finish this year, get into the beginning of next year, and people will make their plans. And obviously, the picture will get clearer, but always it's around two quarters ahead that we really have a very good closure and understanding of the situation.

Thanks. And then maybe I'll reverse the question for my second one. Just if HBM, it sounds like you're not seeing a huge pickup even in Q1. So can you talk about the strength you're seeing outside of HPC, particularly September quarter? I think you've mentioned compound semis. What else grew in kind of September? Where are you seeing the strength that's giving you this growth while you wait for HBM to reaccelerate?

First of all, I want to clarify that HBM is on track, and the business is performing well in the first quarter. As indicated, both the fourth quarter and the first quarter involve HPC, which includes the chiplet business and HBM, both of which are doing well. We are beginning to see some improvement in other areas, such as the CMOS Image Sensor, fan-out, and various smaller applications. There is significant interest from numerous customers, especially in tools. We are now shipping nearly 40 machines to about 40 customers each quarter. Many smaller players are starting to purchase equipment for a range of applications, along with a few larger customers for agency and other uses that require a bigger number of machines. In summary, this is the foundation of our optimistic outlook.

Thank you, Blayne. And that will end the question-and-answer session. Before I hand back over to Rafi, I would like to let you all know that in the coming hours, we will upload the recording of the conference call to the Investor Relations section of Camtek's website at camtek.com. I would like to thank everybody for joining this call and hand back to Rafi for his closing statement.

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.