Camtek Ltd

NASDAQ:CAMT

Earnings Call Transcript 2021-Q2

[Kenny Green, IR]

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 in Camtek's website from tomorrow. You should have all received by now the company's presentation, 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. Ramy will open by providing an overview of Camtek's results and discuss recent market trends. Moshe will then summarize the financial results of the quarter. Following that Rafi, Moshe and Ramy will be available to take your questions.

Before we begin, I'd like to remind everyone that certain forward-looking information provided in this call are internal company estimates, unless otherwise specified. 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 obligations to update any of the forward-looking statements contained, whether as a result of new information, future events, changes and expectations or otherwise.

Investors are reminded that actual events or results may differ materially from those projected, including as a result of the effects of general economic conditions, the effects of the COVID-19 pandemic on global markets and on the markets in which we operate including the risk of continued disruption to our and our customers, providers, business partners, contractors business, the risk related to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China from which we expect to generate a significant portion of our revenues for the coming few quarters, as well as Taiwan and Korea, including the risks of deviations from our expectations regarding timing and size of orders from customers in these countries, changing industry and market trends, reduced demand for our products, the timely development of our new products and the reduction by the market, increased competition in the industry, price reductions, as well as due to other risks identified in the company's filings with the US SEC.

Please note that the safe harbor statement in today's press release also covers 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 are 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 are included in today's earnings press release.

I'd now like to hand the call over to Ramy, Camtek's COO. Ramy, please go ahead.

[Ramy Langer, COO]

Thank you, Kenny. Good morning and thank you for joining our call today.

We are enjoying a continuing growing demand for our systems, which has allowed us to demonstrate record financial performance quarter-after-quarter. We ended the second quarter of 2021 with $67.5 million in revenues, over 52% gross margin, and with 27% operating margin. The strong profitability is a result of a rapid increase in sales and favorable product mix.

Before I review the second quarter, I would like to give a brief overview of the market environment. We are experiencing demand from all territories and especially from Asia. We expect to show continuous increase in sales in the next two quarters and we see positive signs for Q1 of 2022. Based on forecast from all segments and specifically the DRAM.

Our revenue guidance for the third quarter is $69 million to $71 million. The reasons for the increasing demand of semiconductors as we mentioned in previous calls are fueled by the transition to 5G mobile phones and the increased demand in data centers. The 5G base phones include new packaging technologies such as system and package, advanced CMOS image sensors, advanced packaging, RF and power device modules.

In addition, we see the automotive industry undergoing a major change with electrification, connectivity and autonomous driving. We expect Camtek to continue benefit from all these trends in the next few years.

Our success is a result of secular trends that we've been discussing in the past, which have come to fruition and we are enjoying them now, mainly the transition to advanced packaging with heterogeneous integration and fan-out growing at a very fast pace requiring extensive inspection in metrology, as well as the increased demand for CMOS image sensors.

China is becoming a major territory in the packaging segment, 3 out of the top 10 OSATs are Chinese. Most of the other foreign OSAT have large facilities in China and we see new Chinese OSATs entering the market. Camtek has been active in China for many years and is well positioned in the semiconductors market.

Our global market position, coupled with our technology leadership enables us to leverage on the opportunities in the Chinese market, in addition, penetrate new segments such as [indiscernible]. We expect over 80% growth year-over-year for the first nine months of 2021.

We believe, that we will outperform the strong industry growth due to our focus on the fastest-growing segments, technology leadership, our ability to respond quickly to customers' demand, excellent local support and our strong position in Asia.

I would like to highlight a few points about Q2. 88% of our sales came from Asia, with China being the largest territory. About 60% of the systems are for advanced packaging application, including fan-out and introduce integration, which are expected to continue growing in the coming quarters. CMOS image sensors is also a solid segment for Camtek and 18% of our revenues were sold to this segment.

We have a healthy backlog for the second half of the year, we are in the process of expanding our production capacity to address our long-term growth strategy. We are adding cleanroom space for integration and testing of our systems in addition, we are increasing our inventory levels and headcount to support the increased demand.

To summarize, high demands for semiconductor components have been leading to an increasing demand for inspection and metrology systems. Camtek is providing its customer with reliable high-performance systems tailored to their special requirements. Camtek is strongly positioned in the market and as things stand today, we expect 2021 to be an exceptional record year in sales, growth and profitability.

I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

[Moshe Eisenberg, CFO]

Thank you, Ramy.

In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appear in the tables at the end of the press release issued earlier today.

Second quarter revenues came at a record level of $67.5 million an increase of 82% compared with the second quarter of 2020 and 18% compared with the previous quarter. The geographic revenue split for the quarter was as follows.

Asia was 88% of the quarter with the rest of the world 12%. Gross profit for the quarter was $35.2 million. The gross margin for the quarter was 52.1% versus 46.1% in the second quarter of last year and 50.7% in the previous quarter. The improvement in the gross margin was due to significant growth in revenues, as well as more profitable product and sales mix this quarter.

Operating expenses in the quarter were $16.7 million. This is compared with $10.7 million in the second quarter of last year and to the $13.5 million reported in the previous quarter. The increase from the previous quarter is mostly due to increased volume and sales channel mix. Operating profit in the quarter was $18.5 million compared to $6.4 million reported in the second quarter of last year and $15.6 million in the previous quarter.

Operating margin was 27.4% compared to 17.2% and 27.2% in the previous quarter. The high operating profit is a result of the high gross margin together with the record growth in revenues, while we are still in the process of adjusting our expense structure to support the increased volume. We expect same level of operating margin in the next couple of quarters.

Net income for the second quarter of 2021 was $17.1 million or $0.38 per diluted share. This is compared to a net income of $6.3 million or $0.16 per share in the second quarter of last year. Total diluted number of shares at the end of the second quarter was $44.8 million.

Turning to some high-level balance sheet and cash flow metrics, inventory level was $59 million and it went up by $10 million over the quarter. This is to support the current demand for our products and to ensure the availability of key components. Accounts receivables went up by $5.8 million, due to the increased sales offset by improved collection in the quarter.

We generated $19.9 million in cash from operations in the quarter. Net cash and cash equivalents and short-term deposits as of June 30, 2021 were $189.3 million and together with $10 million cash that we have in long-term deposits, the total cash amount is $200 million for the quarter. This compared with $180 million at the end of the first quarter. With the current business momentum, we expect revenues of $69 million and $71 million in the third quarter.

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

[Kenny Green, IR]

[Operator Instructions] Our first question will be from Craig Ellis from B. Riley. Craig, you may go ahead.

[Craig Ellis, B. Riley]

Thanks for taking the question, and team congratulations on a very strong result and a strong outlook. I just wanted to start with a clarification on the strength in revenues in the second quarter and the guidance versus my model at least, our 2Q is about $3.5 million better the guide about $5 million better. Can you just talk Moshe or Ramy about where you might have seen strength that is above expectations from three months ago across the business, whether it's in CIS or advanced packaging or other areas?

[Ramy Langer, COO]

I think it's both. You can see, it was a very strong quarter for the CMOS image sensors 10% of the revenues came from it. It was more - it was higher than we expected as we discussed in the previous quarter.

No doubt on the advanced packaging, there is a lot of activities and there is a strength in the short term and strength looking forward in the duce of heterogeneous integration and fan-out are both at a very high increase, we're getting a lot of repeat orders and also new customers. So overall, there is, I would say yes, a little bit more revenues than we expected and definitely the outlook is very positive.

[Craig Ellis, B. Riley]

That's really helpful, Ramy. And as a follow-up question, I wanted to talk to something that's little bit longer term. I think in the press release and in the comments the company commented on visibility into early 2022, which is unusual for this time of year. I was hoping that you could frame up what you're seeing as you interact with your various customers as you look at 2022 and trends that are at play either with things that we've just talked about like image sensors or potentially high bandwidth memory, front-end macro Inspection and then advanced packaging as we move to much more of that with high performance compute.

How does the revenue dynamics frame up with the gives and takes you should look to calendar 2022, not asking for guidance but just your sense of the market next year?

[Ramy Langer, COO]

No. I think at this stage what we can see is, people are positive and starting to ask for slots in early next year. I think I mentioned specifically on the DRAM, we have been asked - we have a solid forecast for sales for the DRAM market, which shows some of the strength of the market.

And it's - I think when we look forward, there is nothing very specific that comes out. I think it comes across from the - from our applications, CMOS image sensors, it's obviously the advanced packaging and in the advanced packaging the memories and we see also strength in other areas as the compound semi power devices, RF, no doubt the industry is moving in a very positive momentum.

People are very anxious to see the Middle East, they want to see their machines already under fixed in their facilities. And then, as a result, people are starting to talk about slots for early in next year. And so the overall picture is definitely very, very positive.

[Craig Ellis, B. Riley]

That's encouraging, and thank you. I'll shift the next question before getting back in the queue, over to Moshe. Moshe, real nice job on the margins and the business. But the question is one of the things we've seen, not just in semiconductors and capital equipment, but more broadly in technology is that there are supply chain costs that in many cases are impacting margins, it doesn't appear that, that was the case in the second quarter or in the color that we're getting on margins for the third quarter for Camtek. But can you just clarify, were there any supply chain issues that would have impacted shipments or your ability to deliver and is there any gross margin impact related to those issues in the quarter or the outlook?

[Moshe Eisenberg, CFO]

Yes. So no doubt that there is some pressure from the supply chain across the board. We see shortage, we see price pressures and with such a huge growth year-over-year, this comes into play in the last few months. So far we've managed to walk around it, there are some price increases but not significant that impact our margins. We've managed to also walk through the shipping expenses and they are now in a reasonable levels. So overall, I - we do see some pressure and some supply chain issues. But not to the extent that they have a huge impact on the margin itself.

[Craig Ellis, B. Riley]

That's helpful. Thanks, team, and congratulations again.

[Kenny Green, IR]

Thank you, Craig. Our next question will be from Charles Shi of Needham. Charles, you may go ahead with your question.

[Charles Shi, Needham]

Thank you for taking my question. Congrats to the nice - on the nice results. I think that the first question I want to ask is around your advanced packaging side of the business. Obviously, 2021 has been very, very strong, and I understand there are things you consider as secular for example, I do remember, you've set your tools things back and about from a few million to possibly a couple of 10s of million bumps wafer. But that requirement is really coming up and you been asked to inspect about 500 million bumps per wafer at about the same time or maybe a similar throughput.

So how do we think about that secular trend in terms of complexity but we also faced another thing that may be a little bit more transitory here because 2019, 2020 there may be a little bit under investment by the industry and '21 there was a little bit of catch-up demand. How should we think about, how the secular versus transitory demand are playing out in '22? How does that shaping up from your vantage point about advanced packaging business of yours? Thank you.

[Ramy Langer, COO]

Let's talk about the secular. I think you mentioned the number of bumps. So today, I would say, the typical wafer would have about 10 million to 20 million bumps per wafer. We are getting wafers today from 60 million to 100 million bumps. And obviously down the road it is going to be a lot more bumps per wafer.

So this is something that the industry is going to go through because of the requirements for power consumption, for bandwidth, for all kinds of things that are required from the - as the components go and progress. So this is a trend, this is a secular trend, this is an enabling technology to move ahead in the road map of all the major players.

So that's something that is going to happen and to continue and it relates to primarily heterogeneous integration, you talk about fan-out and all the other segments are going to grow. So maybe there is a catch up this year and there'll be less catch up next year. But when I look two, three, five years ago, no doubt that this trend is going to continue. And I think as the leader in this segment, definitely we are going to enjoy it in the longer term - in the shorter term and in the longer term.

[Charles Shi, Needham]

Thank you. So - thank you for the nice color. I want to go over to the other segment of your CMOS image sensor. I heard you did say the other segment DRAM, you see some pickup in early 2022. And how about the CMOS image sensor, which has been a very, very important sector and a segment that kind of serves as one that dampens that the decline in bad news for other segments.

So, the thing I want to ask is, one trend we're really seeing in CMOS image sensor is the IDMs appears to be outsourcing more to foundries especially to foundries in Taiwan. We've heard Samsung may be outsourcing more to UMC, we also heard TSMC may be setting up a fab in Japan which could take some of the outsourcing orders from Sony. I wonder whether you view that kind of outsourcing trend from the CMOS image sensor, IDMs to foundries being net positive, negative or neutral to your business.

And the second part of this question is really, it has been strong this year and especially this quarter. But on a run-rate basis CMOS image sensor seems to be lower this year than 2020. Are you seeing any signs so far that things could turn more positive next year? Thank you.

[Ramy Langer, COO]

So I'll start with the first question. I think the trend to outsource by some of the players to go to foundries, I think it's a neutral event from our point of view and I don't think it will affect drastically our business and we are going to enjoy this business anyway wherever it comes.

And now to your second question. I think we said in previous calls that we expect that the business this year will be double-digits. We thought it will not be as high to the extent that we enjoyed from percentage point of view as last year, we thought it will be lower in percentage, but still significant will be double-digits.

We still forecasted in the same way, I think the second quarter was extremely strong, the next quarters may be a little bit lower the numbers. But all-in-all, we are seeing and talking to our customers, we continue to see in the next few quarters healthy growth and expenditure in this area. So, no doubt, the CMOS image sensors we expect it to continue to be a significant part of our business.

[Charles Shi, Needham]

Thank you so much.

[Kenny Green, IR]

Thank you, Charles. Our next question is going to be from Thomas O'Malley from Barclays. Tom, please go ahead.

[Thomas O'Malley, Barclays]

Thanks for taking my questions and congrats on the nice results. My first one is really for Moshe. When you look at this past quarter, you're already operating above your long-term model, the gross margins are great in the fall, they are really great as well. You mentioned in your prepared remarks that you're adjusting expenses to kind of match the run rate of your business. Can you talk about one, the timing of those rolling on expenses into the back half of this year? What should we see in terms of those additional investments and the timing around that?

And then two, if you are able to operate at these better gross margins, could you kind of update us on what the new or what an updated model may look like given the success that you're having in some of the end markets you are?

[Moshe Eisenberg, CFO]

Hi, Tom. So first of all, I'll touch upon the gross margin question. We operate at this revenue level between 50% to 52% depends on revenue mix, depends on profitability of the deal mix, and also - and I don't expect to deviate much from that perspective, even with the supply chain pressure or with other issues around it. So I believe that between 50% and 52% is the right margin for us to operate at these levels.

With respect to operating expenses, we are in a process of adding headcount across the board mainly in R&D functions as well as in production and customer support. That's the main areas that we are hiring for, and these people are needed to support the growth. We are talking about a process that will take, I would say three quarters, Q3, Q4 and Q1, and throughout this time, we will adjust the headcount level.

And on the same time, we are adding some other operating expenses to support the growth. All-in-all, I think that you know what we are going to see in the next three quarters is relatively higher gross - operating margin than our target model. So the current level of 27%, will be - will stay with us in the next three quarters. And then based on our ability to adjust the expense level, I think we will be anywhere between 27% and - 25% and 27%. So that's kind of how I see the long-term or the mid-term in terms of operating profitability.

[Thomas O'Malley, Barclays]

Great, that's helpful. My follow-up is really about the visibility into the beginning of 22. You mentioned some activity with DRAM customers, you also mentioned in the prepared remarks about some new OSAT customers in China. Can you talk about the mix of business into next year that you're seeing, where are you feeling the most comfortable. I know you mentioned DRAM a bit earlier. But particularly in China, what's the cadence of new customers that are coming online, and are they representing a large part of what you're forecast is looking like into next year?

[Ramy Langer, COO]

I think when we talk about the applications, it's not just in China, I think it's similar in most of the territories 60% is our - is advanced packaging. And advance packaging today it's a technology that is used more and more for high-end applications, and we see it everywhere in all the geographies. And this definitely is strong and is going to stay strong.

When we talk about DRAM, it's again it's in the - as part of the advanced packaging. I'd say it's a specific application for advanced packaging. And then our all the rest of the application, if it's front-end, it's an area that we are gaining momentum, and it's power devices compound semi of course, CMOS image sensors that we discussed. So basically, we don't see a major change in the application mix. I think they're going to stay around the numbers that we mentioned.

[Thomas O'Malley, Barclays]

Great. Congrats on the nice results, guys.

[Ramy Langer, COO]

Thank you.

[Moshe Eisenberg, CFO]

Thank you.

[Kenny Green, IR]

[Operator Instructions] Our next question will be a follow-up from Craig Ellis from B. Riley. Craig, please go ahead.

[Craig Ellis, B. Riley]

Thank you for taking the follow-up question. Just a very strong performance on numerous facets of the business including converting strong operating performance into cash and with the cash and investments balance up to $200 million. It's a good opportunity just to check in and see what the company is seeing on the potential acquisition front, I know that's part of the strategy. I know that the COVID restrictions make it hard to do some of the front-end execution that go along with that. But can you give us an update on how you're thinking about M&A in this environment team? Thank you.

[Moshe Eisenberg, CFO]

Yes. Craig, yes, indeed we are very focused on the M&A front, we said that this is our number one priority for cash use. We - and actually, the team that is involved in this process is Rafi, Ramy, and myself. So we are really investing a lot of effort and time on that. I think we are making progress. We have a list of targets and we are very active, nothing that will be immediate.

But we hope that we will have something to report at some point. We are working hard on that and the opportunities and hopefully, something will come out of this process.

[Craig Ellis, B. Riley]

Moshe, I don't know if it's possible, but can you elaborate a little bit on areas of technology interest, geographic interest or maybe customer acquisition interest, that might be at play as you and Rafi and Ramy work through different options and think about how you use M&A to position Camtek for another leg of growth.

[Moshe Eisenberg, CFO]

There are - the way how we select potential companies is first of all based on let's say, first priority to find company that we can see a good synergy between us, this number one priority. Other priority, of course, it's always to be in the same market that we are active, and we're trying to select profitable company, we don't want to look on startup.

And even if we find some potential company, the fact that we cannot travel, we cannot visit, we cannot accelerate this process. This is definitely, it is obstacle. And it's also easy for us to manage it only by remote control. So definitely, this type of M&A right now in this time is going slower than we expected. But definitely, we try to find good companies with potential that could be more comfortable very well.

[Craig Ellis, B. Riley]

Indeed. I assume works great for an earnings call, maybe not as great for the early part of an M&A engagement. Rafi, Thanks so much for that color. Thanks, team.

[Moshe Eisenberg, CFO]

Thank you.

[Kenny Green, IR]

Thanks, Craig. Our next question will be from Patrick Ho from Stifel. Patrick, please go ahead.

[Patrick Ho, Stifel]

Thank you very much, and congrats on the nice quarter. Maybe a question for Moshe, first, in terms of the supply chain, you addressed it in your prepared remarks and so the question is, but I was just wondering from an inventory building perspective, do you believe that 3Q is probably the peak in terms of trying to get additional parts to buffer yourself or is this something that could also carry into Q4 as well?

[Moshe Eisenberg, CFO]

What we are in a process of building up inventory further to support the growth. And we are taking a commitment also for 2022 now, given the strengths and the improved visibility into the beginning of 2022. So, no, it's not the peak, we are - continue to build up inventory as we continue to increase revenue levels. Yes.

[Patrick Ho, Stifel]

Great, that's helpful. And maybe just as a bigger picture question on the technology front. You mentioned heterogeneous integration several times on the call, and that's obviously a key growth market in the Advanced Packaging segment. From --I guess, the types of devices that you're seeing the greatest interest. One of them is high-performance computing, but what are the areas or what are the type of devices are you seeing the interest especially on the heterogeneous integration front?

[Ramy Langer, COO]

I think it's primarily today, high-performance computing. This is I would say the main application.

[Patrick Ho, Stifel]

Great. Thank you very much.

[Ramy Langer, COO]

You're welcome. Thank you.

[Kenny Green, IR]

Thank you, Patrick.

[Moshe Eisenberg, CFO]

Thank you, Patrick.

[Kenny Green, IR]

And that concludes the question-and-answer session. Before I hand over back to Rafi, I would like to remind everyone that in the coming hours we will upload the recording of this call to the Investor Relations section of Camtek's website. I want to thank everybody for joining this call and again would appreciate any feedback you have with regards to this new format. And with that, I'd like to hand back to Ramy for the concluding statement.

[Ramy Langer, COO]

I would like to thank you all for your continued interest in our business. Again, I would like to thank all of our employees and the management team for the tremendous performance and we look forward to continuing it. To our investors, thank you, long-term for support. I look forward to talking with you again next quarter. Thank you and good-bye.

[Kenny Green, IR]

That ends the conference call. You may go ahead and disconnect. Thank you very much.