Camtek Ltd

NASDAQ:CAMT

Earnings Call Transcript 2022-Q1

[Kenny Green, Investor Relations]

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's Results, Zoom Webinar. My name is Kenny Green and I'm part of the Investor Relations team at Camtek. All participants other than the presenters are currently muted. Following the formal presentation, I will provide some instructions for participating in the live Q&A session. I would like to remind everyone that this conference call is being recorded and the recording will be available on Camtek's website.

[Kenny Green, Investor Relations]

You should have all now received the company's press release. If not, please view it on the company's website. With me today on the call, we have Mr. Rafi Amit, Camtek's CEO, Mr. Moshe Eisenberg, Camtek's CFO, and Mr. Ramy Langer, Camtek's COO. Rafi will open by providing an overview of Camtek's results and discuss recent market trends. Moshe will then summarize the financial results of the quarter. Following that, Rafi, Moshe, and Ramy will be able to take your questions.

Before we begin, I would like to remind everyone that certain information provided on this call are internal company estimates unless otherwise specified. And with that, I'd now like to hand the call over to Rafi. Rafi, please go ahead.

[Rafi Amit, Chief Executive Officer]

Thanks, Kenny. Good morning or good afternoon for everyone. As we announced a few weeks a go, we started 2022 with strong [Indiscernible] and with impressive flow of orders. We continue with this momentum. And 2022 looks like another year of growth. Revenue in Q1 was over $77 million. This represents a growth of 35% over the first quarter last year. Gross margin was 52% on a high end of our model and operating margin of 28.8% is in line with our midterm target financial model.

Furthermore, despite the ongoing negative global geo -political environment, the company has received order of more than $150 million since the beginning of the year. The orders were received from a broad range of customers. And will be used for various application such as advanced interconnect packaging, including [Indiscernible], compound semi, front-end CIS. This [Indiscernible] our expectation for another record year with year-over-year revenue growth of mid to high teens.

The side effect of the COVID-19 continues to interrupt our business, as delivery times for material and parts, are still long. Prices of components and parts are more expensive. Border of some countries in Asia are still practically closed, and our field engineers cannot visit customers as often as they used to do in the past, or travel for advanced training in Israel. In China, the situation is more complicated. Most of the semiconductor industry in China is in the Shanghai area, thus lock down in Shanghai affect the whole industry. Parts are operating, but they do so at lower capacity than usual.

All in all, the entire semiconductor manufacturing chain is disrupted due to look down in Shanghai, including ports and airports in this area. The good news is the flow of incoming orders from China and from the rest of the world. We continue to receive order at a very impressive rate. To some extent, even exceeding our expectations. We are taking into consideration that there might be delays in installing machines at certain Chinese sites, but there will be catch-up. The semiconductor market forecast remains positive according to several sources.

Our backlog is high and when taking into account our pipeline, we are at a better position than at the same time in 2021. Based on our current estimate, our guidance for Q2 is for continued growth in revenue to between $77 to $80 million. The highlight of Q1, advanced interconnect packaging continues to be our largest segment with heterogeneous integration becoming a significant portion. We continue to expand our market share and sold 10 machines to new customer. Specifically, we are cementing our position in the front-end and compound semi segment and shipping machines to existing and new customers.

We shipped several systems to new CIS customers and one order for RF filter for one of the largest RF filter manufacturers in the world. We shipped several systems for DRAM applications, and we predict additional system in the second quarter and second half of the year. We completed the development of new, important modules and feature that will open additional segments for us. This quarter, the U.S. and Europe accounted for 21% of our sales, versus 18% in the last quarter and 12% in Q1 of last year.

This trend highlights the strengthening of our position in the U.S. and Europe as a result of the major industry investment taking place there. That's ends my summary. I would like to hand over to Moshe for a more detailed discussion of the financial results, Moshe.

[Moshe Eisenberg, Chief Financial Officer]

Thank you, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis, that reconciliation between GAAP results and the non-GAAP results appearing the tables at the end of the press release issued earlier today. First quarter revenue came at a record $77.2 million. An increase of 35% compared with the first quarter of 2021, a 4% compared with the previous quarter. Revenue was mainly driven by advanced packaging, which accounted for about 50% of sales and approximately a 20% contributions of compound semi.

The geographic revenue split for the quarter was as follows: Asia, 79%, and U.S. and Europe together, 21%. Gross profit for the quarter was $40.2 million. As we mentioned on our last call, gross margin for the first quarter was relatively high, with 52%, the rest was 50.7% in the first quarter of last year, and 50.9% last quarter. The higher gross margin was due to a more favorable product mix sold during this quarter. Operating expenses in the quarter were $80 million. This is compared with $13.5 million in the first quarter of last year and to the $16.8 million reported in the previous quarter.

The increase from the previous quarter is mostly due to increasing R&D and sales-related activities. Operating profit in the quarter was $22.2 million, or 28.8% margin, compared to the $15.6 million, or 27.2% reported in the first quarter of last year. Net income for the first quarter of 2022, was $21 million or $0.44 per diluted share. This is compared to a net income of $14.6 million or $0.33 per share in the first quarter of last year. Total diluted number of shares as of the end of Q1 was $48.1 million.

Turning to some balance sheet -- to some high-level balance sheet and cash flow metrics. Inventory went up by $5 million from the end of December 2021. This is to support the current demand for our products and to ensure the availability of key components. The complicated geopolitical situation and the COVID-19 implications create supply chain challenges. We are increasing the inventory levels to improve the flexibility in our sales channel in order to overcome these challenges. We used $0.4 million in cash from operation in the quarter due to timing of collection, which relates to the Chinese New Year.

Also, increasing inventory levels and the tax payment, including for the settlement we have discussed last quarter. Total cash and cash equivalents and deposits as of March 31st, 2022 is $428.3 million, similar to the level we have reported at the end of 2021. As Rafi stated before, the business looks healthy. We received approximately $150 million of orders since the beginning of the year, and we feel good about meeting our plan for 2022 of mid-to-high teens growth year-over-year. We expect revenues of between $77 to $80 million in the second quarter. And with that, Rafi, Ramy, and myself will be open to take your questions. Kenny?

[Kenny Green, Investor Relations]

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

[Brian Chin, Stifel, Nicolaus & Company]

Hi there. Can you hear me okay?

[Kenny Green, Investor Relations]

Yeah.

[Brian Chin, Stifel, Nicolaus & Company]

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

[Rafi Amit, Chief Executive Officer]

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

[Brian Chin, Stifel, Nicolaus & Company]

Okay. Got it. That's impressive then. And maybe just calibrating growth for the year, again, you're talking about mid-to-upper-teens overall revenue growth. To what degree does this range account for the risk of further disruption to your customers manufacturing, or even your own supply chain? And also -- that's part A, and part B would be, if you look at that growth rate for the overall business, how would you expect advanced packaging front-end specialty, maybe to track relative to that overall growth?

[Ramy Langer, Chief Operating Officer]

Brian, this is Ramy. Let me answer. Let me start with the supply chain. Definitely there are disruptions, but I think, we have been able to learn how to manage and work in this environment. Moshe mentioned it, that we increased our inventories in order to be sure that we have enough inventory, even if we get a slightly different mix of orders. So, from that point of view, we feel comfortable that we will be able to supply all the requirements from the market. This is from the supply. From the advanced packaging point-of-view. So definitely, we're running today, and we're going to see at the booking.

And when we see at the mix of the products, we are about 50% of our business continues to be in the advanced packaging. It is healthy, and we mentioned that we got the orders for the DRAM segment. More specifically, the application is the high band with memory. This definitely is an important segment. It supports the high-performance computing segment. So, it is in line with the area of growth that we see in the industry. So, from that point of view, we're definitely -- we feel very comfortable with the current forecast and the influx of the orders and the customers response.

Now, compound semi is definitely strong, and I think we just saw in the previous, we were about 19% of our revenues for the quarter was for compound semi. It's a little high, CMOS image sensor came at 10%. Front-end was a little bit lower than the 25% we reported last year. But as we look at the focus, definitely it's going to be a healthy segment in this year. So overall from the mix point of view, we do not see any major changes. The areas that we're strong continue to be healthy and and so from that point of view, will feel very comfortable.

[Brian Chin, Stifel, Nicolaus & Company]

Thanks for that color. Appreciate it.

[Kenny Green, Investor Relations]

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

[Thomas O’Malley]

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

[Moshe Eisenberg, Chief Financial Officer]

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

[Ramy Langer, Chief Operating Officer]

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

[Thomas O’Malley]

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

[Rafi Amit, Chief Executive Officer]

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

[Thomas O’Malley]

And then just let me sneak one more in here. You guys have talked about for the entire year, just being under $70 million or so in terms of OpEx. If you look -- and you signaled pretty clearly at the end of last year that you need to invest more in the business. Just given the higher revenue that you guys are now seeing, are you updating what you think you're going to need to spend this year? Should that OpEx move a little bit above that $70 million range and by how much? Thank you.

[Moshe Eisenberg, Chief Financial Officer]

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

[Thomas O’Malley]

Thanks. Nice results, guys.

[Kenny Green, Investor Relations]

Thanks, Tom. Our next question is going to be from Charles Shi of Needham. Charles, you may go ahead and off your questions. Charles, you're on mute.

[Charles Shi, Needham & Company]

Hello, can you hear me?

[Rafi Amit, Chief Executive Officer]

Yes, we can hear you, Charles.

[Charles Shi, Needham & Company]

Hello.

[Rafi Amit, Chief Executive Officer]

Yes, we can hear you, Charles.

[Charles Shi, Needham & Company]

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

[Rafi Amit, Chief Executive Officer]

So, thank you for the question, Charles. So, first of all, based on our current estimates and we went in very details when we made these estimates. And we've done a few things from delivery to really give a priority to the areas across the world globally that are -- we have good access and we are sure that we can meet the deliveries and these also includes really giving priority to customers that are not in the areas of the lock-down. So yes, we understand the issue with size, date, we looked at it and we are comfortable that our current guidance takes into consideration the current issues we're seeing in China.

[Charles Shi, Needham & Company]

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

[Rafi Amit, Chief Executive Officer]

So, Charles, it's -- it's hard for me to just supply. I don't have the number just ready in front of me. But definitely, there is a significant number that goes to our dealings. That's -- that's number one. In general, I have the names on, I will not say the names. But definitely, significant portion goes to IDMs. But when you look at the influx of the orders, it matches. And when I look forward, I take all the orders that we got, they're very evenly spread along the different applications that we have.

And I think what we're seeing here, there are a number of things. First of all, there is a technological shift for these order takes. For example, the DRAM, the HBMs, the DRAM may not be very strong. It's a little bit weaker. However, there is a technological change moving to HBMs. Definitely we see it in the orders. We see it in the shipments this quarter. We see it in the orders we forecast for the second quarter and for the second half, for the third, for the rest of the year.

So that's one topic. The second thing we're seeing that most of our customers are talking about long-term plans to increase the capacity. So, we see in both ways. So, the overall demand people making this strategic plan, we see it in the orders. Now, they might be some small changes in it as we move along. But the overall business, as we see it, is very healthy. Did I answer your question, Charles?

[Charles Shi, Needham & Company]

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

[Ramy Langer, Chief Operating Officer]

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

[Charles Shi, Needham & Company]

Thanks.

[Kenny Green, Investor Relations]

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

[Jamie Zakalik, Bank of America Securities]

Great. Can you all hear me okay?

[Kenny Green, Investor Relations]

We can.

[Brian Chin, Stifel, Nicolaus & Company]

Yes. We hear you well

[Jamie Zakalik, Bank of America Securities]

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

[Ramy Langer, Chief Operating Officer]

Jamie, this is Ramy. First of all, let's [Indiscernible] the general [Indiscernible] that yes, we hear about the weakness. We are aware off the weakness in the cell phone market, in the PC market, even in a multi-market is below its usual number. So definitely, we hear it and we understand it. We have not seen any change in the behavior or in the focus of our customers that would indicate any issues related [Indiscernible] But I think that two reasons for it. On one side, you've seen I think I mentioned it may be your missed it.

There is a technological shift. Good reason is what is happening in the DRAM area. There's a significant portion in the advanced packaging area that the market is moving to the use of HBM supporting the high-performance computing. This is definitely an area that we dominate, and we're enjoying now. Although, the entire of the [Indiscernible] market, maybe not increasing at this stage, but the technical -- technology change is bringing us business on one side.

On the other side, the long-term plans of our customers, not just in China, across the world, the long-term are to invest. And we're shipping machines to customers that are making long-term investments in building capacity. And definitely the area of the drums packaging is very strong, and this is not specifically - it's across the all the regions. It's not just specific to one area, definitely not only in China. So, the heterogeneous integration as Rafi mentioned in discreet is taking, and this is again, high-performance computing, that's definitely becoming a very significant part of advanced packaging. So, these areas are growing. We expect them to continue to grow. So, from that respect, we do not a feel a t this stage, the weakness the people are talking about, the end markets. We are aware of them. We don't feel them at this stage.

[Rafi Amit, Chief Executive Officer]

And I would like also to add the situation in China. Because China, the strategy of the government is to be more independent, so this depends on import component to China and expand their capacity and their ability to produce things in China. Right now, the amount of import is huge. I think is more than 80% percent are -- all the components are imported to China. And if they really want to produce more made in China, they need to continue building more capacity in other area. So, I think this is also very important element. It doesn't relate to the end market. This is the mental strategy of China.

[Jamie Zakalik, Bank of America Securities]

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

[Ramy Langer, Chief Operating Officer]

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

[Jamie Zakalik, Bank of America Securities]

Got it. That's very helpful. And then my last question is, is there any risks that customers are hauling in tools or ordering more tools and they really need for in-demand just because of uncertainty about supply and about restrictions maybe another regions that don't affect you guys and maybe affect other suppliers? What are you guys doing to ensure that orders are really tied to true on demand?

[Ramy Langer, Chief Operating Officer]

So, we've been monitoring this. And I can tell you that the customers that are ordering the machine, in most cases, are actually very upset if we are delayed. We are [Indiscernible] at least to the best of our knowledge with all of those issues are going into production. We're getting a lot of requests to support questions. The machines are going into production. To tell you what the actual utilization is, obviously, no one gives you these numbers. But we are very confident that those machines are not going just to fill a room in certain area of the world, they're going for reproduction, and people are using them. And -- no, it's for real.

[Jamie Zakalik, Bank of America Securities]

Thank you, guys.

[Rafi Amit, Chief Executive Officer]

Thank you.

[Kenny Green, Investor Relations]

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

[Rafi Amit, Chief Executive Officer]

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