Camtek Ltd

NASDAQ:CAMT

Earnings Call Transcript 2022-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'm part of the Investor Relations team at Camtek. [Operator Instructions].

Following the formal presentation, I'll 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've all received by now 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 begin, I would like to remind everyone that certain information provided on this call are internal company estimates, unless otherwise specified. This call also may contain forward-looking statements. These statements are only predictions and may change as time passes. Statements on this call are made as of today, and the company undertakes no obligation to update any of the forward-looking information contained, whether as a result of new information, future events, changes and expectations or otherwise.

Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected, including as a result of the effects of general economic conditions, risks related to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which Camtek expects to generate a significant portion of its revenues in the foreseeable future, but also Thailand and Korea, including risk of deviations from expectations regarding timing, size of orders from customers in these countries; changing industry market trends, reduced demand for services and products, the tiny development of new services and products and their adoption by the market, increased competition in the industry and price reductions as well as due to other risks identified in the company's filings with the 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 release.

And with that, I'd now like to hand the call over to Rafi, Camtek's CEO. Rafi, please go ahead.

[Rafi Amit, Chairman & CEO]

Thanks, Kenny. Camtek ended another quarter of continued growth. Second quarter revenues were $79.6 million. Gross margin was 51% and 13% operating margin. We have a diversified customer base. This quarter, we sold to over 40 different customers. Advanced interconnect packaging accounted for more than 50% of our revenue, and continued to be our largest segment with its reduced integration accounting for 20% of this segment.

We continue to expand our customer base and sold systems to 10 new customers in the first half of this year. Specifically, we are cementing our position in the front-end and compo semi segment and shipping systems to existing and new customers. These 2 segments accounted for 23% of our revenues.

CIS was about 10% of our business. This quarter, we see the same trend of strengthening our position in the U.S. and Europe due to major industry investments taking place there. U.S. and Europe accounted for 21% of our sales versus 12% in Q2 of last year.

In these days of economic uncertainty, I assume that our investors are interested in hearing what are we estimating for the coming quarters and how we view the semiconductor market.

We are experiencing a challenging period. On one hand, there are concerns of a slowdown in the semiconductor industry. And on the other hand, we see continued demand for our systems. The macroeconomic environment is not positive, high inflation, rising interest rate, high fuel prices, sharp prices of basic products, all of which lead to a decline in GDP and may lead to a slowdown in the semiconductor industry.

There are several reasons for the ongoing demand for our systems. The main driver of our market is a transition to more digital products that heavily use semiconductor devices, such as computing and data storage, automotive in general and the transition to electric cars, wireless communication advancing to 5G, higher use of Internet and more. I believe that there is a consensus among all analysts that all the above will continue to grow.

The wafer manufactured today and in the coming years are much more complex due to new technologies adopted by the industry, leading countries realizing that the semiconductor industry has become a strategic industry and are heavily investing in building new fabs.

In China, China's policy of replacing imports of strategic end products and semiconductor devices for domestic production means a continued expansion of production capacity of semiconductor industry, not necessarily related to a global economic situation.

To summarize, these 2 opposing forces make long-term focusing much more difficult than in the normal time. Anyway, at this stage, we do not identify a slowdown in the demand for our systems. The production utilization in the industry is high. And total incoming order is also high and the backlog is healthy.

Moreover, we believe that the field of inspection and the segment in which we operate will be less affected in the event of a slowdown. Our systems are used by customers for inspection and metrology of 100% of patterned wafer. The more the geometry density increases, the higher optical magnification needs to be used. As a result, our customers order more systems. Hence, during the downturn, whereby the number of wafer may decrease, pattern and density speed increases, and therefore, the demand for our systems is likely to be less impacted.

Regarding our forecast for the second half. With our strong backlog, we see continued growth into the second half of the year. And our forecast for the third quarter, revenue is expected to be between $81 million to $83 million.

Let me give you some color on what we see in the second half of this year. The product mix is expected to be similar with advanced interconnect packaging reaching more than 55% of our annual revenues. The U.S. and Europe will continue to grow as a percentage of revenue. At this point, we don't see any potential disruption to our supply chain.

As I have said, we do not see any signs of declining demand for our systems. Moreover, we believe that our markets will continue to grow in the long term, even though there may be a few bumps along the way. However, regarding a possible slowdown in our industry, we are managing our headcount and balance sheet items.

We are keeping a very watchful eye on overall expenses and the business situation of our customers. We also believe that the market condition, especially in the capital market, may generate M&A opportunities. We are actively looking for opportunities and ready to use our well-capitalized balance sheet in order to execute M&A transaction that will enhance our long-term growth potential.

That ends my summary. I would like to hand over to Moshe for a more detailed discussion of the financial results. Moshe?

[Moshe Eisenberg, CFO]

Thanks, 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 appeared in the table at the end of the press release issued earlier today.

Second quarter revenues came at a record level of $79.6 million, an increase of 18% compared to the second quarter of 2021. The geographic revenue split for the quarter was as follows: Asia accounted for 79% and the rest of the world, 21%.

Gross profit for the quarter was $40.5 million. The gross margin for the quarter was 50.9% versus 52.1% in the second quarter of last year. This is within the range of our gross margin of our models. And as in previous quarters, the deviation has to do mainly with the product mix and does not represent the trends.

Operating expenses in the quarter were $16.7 million, similar to the level in the second quarter of last year and lower than the $18 million reported in the previous quarter. The decrease from the previous quarter is mostly due to sales channel mix.

Operating profit in the quarter increased to $23.8 million compared to the $18.5 million reported in the second quarter of last year. Operating margin was 29.9% compared to 27.4%. Net income for the second quarter of 2022 was $22.2 million or $0.46 per diluted share. This is compared to a net income of $17.1 million or $0.38 per share in the second quarter of last year. Total diluted number of shares as of the end of Q2 was 48.1 million.

Turning to some high-level balance sheet and cash flow metrics. Cash and cash equivalents, including short- and long-term deposits, as of June 30, 2022, were $438 million. This compared with $428.3 million at the end of the first quarter.

We generated $30 million in cash from operations in the quarter. Inventory level went up by $5.9 million over the quarter. This is the result of a strategic decision to support the current demand for our products and to ensure against potential availability issues in key components.

Accounts receivables were around the same level as in the previous quarter and were presented approximately 80 days. As Rafi said before, we expect revenue of $81 million to $83 million in the third quarter.

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

[Kenny Green, IR]

[Operator Instructions]. Our first question will be from Charles Shi of Needham.

[Charles Shi, Needham & Company]

Just want to make sure, can you hear me, okay?

[Rafi Amit, Chairman & CEO]

Yes, we can.

[Charles Shi, Needham & Company]

Rafi, Ramy and Moshe, maybe on my first question, going back to 2022 growth in certain geographies. Looks like U.S. and Europe seems to be contributing to demand of the incremental growth this year.

I want to ask you about China. From other companies, we follow they are saying , they think -- to point to some, sort of a weakness of China spending, especially in the packaging space. I understand you have your unique growth drivers like complexity growth, strategic investments.

But I want to ask you, compared to last year, are you seeing some sort of slowdown in China? And going into '23, if they were a slowdown in '22, so do you see it's more like going -- I mean there is some stronger growth next year or flat? Or what do you think or could that deteriorate in '23?

[Rafi Amit, Chairman & CEO]

Ramy, do you want to comment on that, please?

[Ramy Langer, COO]

Charles, we do not see any weakness in China compared to last year. We see investments all around and are very much like we are talking about the split. Over 50% of our business goes to advanced packaging, and the investments in China and this area are ongoing.

Looking forward, as we said, we do not see any weakness moving forward. And specifically in China, it seems as if the investments are ongoing, the utilization, at least what we can see to our equipment is high, and we do not see any change moving forward.

[Charles Shi, Needham & Company]

Got it. Got it. I mean maybe just a quick follow-up to that. I understand you're not seeing weakness, it probably means the absolute dollar base is probably still very strong. But in terms of growth rate of your business in China, is any deceleration or acceleration this year or next year? What's your view there in terms of the growth rate?

[Ramy Langer, COO]

Well, it's hard for me at this stage to talk about the growth rate. It's too early in the game. What I can tell you from what I see on the backlog and on the pipeline looking into the first and second quarter, we see that the investment in the third and fourth quarter is very important. And even looking at what I see and start to get, comparing next year, we definitely see the ongoing investments across the board in all the different applications. So we definitely do not see any slowdown.

[Charles Shi, Needham & Company]

Got it. My second question is around memory. That seems to be another weakness, at least that's something quite identifiable, if we only look at the headlines. I understand probably earlier this year, you have a good amount of orders and shipment into DRAM application.

I understand historically, this is a kind of a slightly lumpy side of your business. What do you see for that part of your business? I know it's probably not as a big contributor as of today. But do you see slightly down to going from here maybe into next year? Or do you think the rest of the business still ask that, any of the weakness coming from members?

[Ramy Langer, COO]

Yes. So if I look at the growth driver, the main growth driver for our business in the DRAM space, it's primarily the HBM that is ramping and the high-performance computing segment is very healthy. I think the server market is going to show a down growth of 17% this year. And that's exactly the area where these HBM components are going into.

So from that point of view, this is a growth area, and I expect this to continue into next year. And just to give you a feel on the number, it's about 5% of our revenues this year. So it's not a huge number, but it's not a negligible number. And definitely, that's an area with a high deliver continue to grow will be into '23.

[Charles Shi, Needham & Company]

Maybe the last question. I'm going to ask you probably your strength in the front-end space. Obviously, we started from a relatively low base a few years ago, and it has been growing at least in line with your very strong product line growth.

What is the outlook there? Do you see any additional incremental opportunities there for you to either gain more shares in the branded space or new applications owing more slots?

[Ramy Langer, COO]

Okay. So definitely, the front end is one of the areas that we see potential growth moving to next year. And I think I will couple it together with the compound semiconductors. So in this area, I think, first of all, we are gaining some share. I think the other area that we are seeing incremental business is to a number of new applications. We are starting to take more and more new steps that we've not taken. We do not believe our equipment was not used for, in previous years. So definitely, that's an area that we continue to grow along, and I expect this to become more and more significant in the forthcoming years.

[Kenny Green, IR]

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

[Thomas O'Malley, Barclays Bank]

I just wanted to look into the June quarter from a segment perspective a little more closely. You gave a pie chart at the beginning of your presentation that showed compound semi and front-end combined. Could you break out for us what the percentage of revenue was for both of those?

I think last quarter, you said compound semi was 19% and front-end was like 23%, or at least you had to bucket it as other. Can you just break out what the exposure was between compound semi, front-end and then the CMOS image for this quarter, please?

[Ramy Langer, COO]

So I would say, look, first of all, this will vary from quarter-to-quarter. But overall, I think the number for these 2 together is about 25%. It will be about half and half, and it depends per quarter the product needs from customers.

This quarter, specifically, the compound was a little higher than the front-end portion. And definitely, moving forward, this is more or less the portion of the entire business that I see this business moving on.

[Thomas O'Malley, Barclays Bank]

Helpful. And then you guys talked about an environment which you're not seeing a demand profile change. You talked about potentially some lumpiness, but really, you're just not seeing any kind of change from customers at this point.

Could you just talk about what you guys do in terms of conversations with your customers to kind of keep a check on both their demand profile and also just to make sure that they are weakening? Just any kind of conversations or how you guys check in with those customers so you would see weakness coming potentially?

[Ramy Langer, COO]

So, in general, Tom, what we do, we have a biweekly call every 2 weeks. We have a session with most of the main customers checking, understanding on the applications and the issues they are seeing, talking on the forecast.

We take the entire inputs from our customers and received with our sales team and look forward and see exactly what is the forecast that they see in the next day. Usually, we try to look 4 quarters ahead. Of course, the good visibility is 2 quarters ahead.

Beyond that, it's more for discussion than explaining. So at least from all the accumulated discussions that we had over the last, the latest was yesterday, we definitely disrupting saving the opening statement. We do not see any weakness at this stage.

[Kenny Green, IR]

The next question will be from Craig Ellis of B. Riley.

[Craig Ellis, B. Riley Securities]

Congratulations on the performance. I wanted to start off just by following up on some of the prepared remarks that commented on the healthy backlog. Is it possible that you can quantify where backlog is? And as you look at the mix of backlog, give us some further color on what you specifically see for orders that would relate to 2023 delivery? And if you can provide any color on that, that would be helpful as well.

[Ramy Langer, COO]

So what I can tell you on the color of the backlog, and of course, I want to be very careful here, so let's talk about, first of all, the third and the fourth quarter is where the visibility is much harder.

So I think that if I look at the entire business, no doubt the advanced packaging portion is very strong and will be very strong throughout this year. And we will probably reach very close to 60% of our business will be in the advanced packaging.

No doubt, this segment is very strong, not just in a specific area, but across the group. The compound and front-end business continues to be healthy and will be in the range of about 25%, very similar to what we have seen this quarter.

The same sensors will be a little weaker this year. I expect it will be just a little bit less than 10%, which is our average revenues for this segment. That's more or less the color from -- almost this point of view, and I think we said it in the opening statement, definitely, we see the U.S. and Europe getting stronger. It's 21%. It will be even a little bit higher moving forward. Definitely, this is good news for us from a diversification point of view.

One point that we mentioned, it is also can share some color on the business that we are seeing new customers. And in the first half of this year, we had over 10 customers, which is relatively high. So that's also a very good sign of more new people still investing in the equipment, opening new places. So that's definitely a good sign.

Moshe, you want to add anything? No? Craig, anything else?

[Craig Ellis, B. Riley Securities]

That was great color, Ramy. I wanted to follow up on the comment you made on CMOS Image Sensors. So the business is still active this year, but not as strong in the mix standpoint is 2021. If you look at 2023, what's your expectation or the sense mandate production build shape up? And what does that mean for potential mix?

[Ramy Langer, COO]

So first of all, in the backlog that I know, some of the major players are planning to invest, and we are talking with people also about the investments even in '23. So definitely, we will see investments in the same center.

I don't think there will be above the 10%, the average 10%. I think that we stay in the range of 10% -- around 10%. I don't expect anything beyond that.

Now taking account that the smartphone is relatively weak. So this effect is segmented. But even though, we're still seeing a significant business.

[Craig Ellis, B. Riley Securities]

Got it. And then, Moshe, I don't want to ignore you on the call. I wanted to follow up on gross margin and OpEx as it relates to the third quarter. So the guidance that you identified caused some movement for both those line items makes total sense. I get the mix gross margin dynamics and the channel mix OpEx-related dynamics.

The question is for the third quarter. Given that we would expect to see fairly similar and demand composure relative to 2Q, should we expect flattish trends there? Or are there any one-off items that would move either gross margin or OpEx materially north or south?

[Moshe Eisenberg, CFO]

Thank you so much for not ignoring me, Craig. Appreciate it. I think from a mix perspective, we are going to see pretty much the same mix in the second half of the year as well. So from a gross margin perspective, I expect pretty much the same level, the same margin profile.

Operating expenses are expected to go up a little bit slightly. It mainly has to do with the R&D investments and some with sales channel mix. Not something dramatically, so I basically expect a healthy operating profitability next quarter as well.

[Craig Ellis, B. Riley Securities]

That's great. And then I'll conclude with a more strategic question for Rafi. Rafi, one of the things that was mentioned is the potential for M&A. And clearly, the company has an exceptionally robust cash balance.

The question is this, as you look at potential areas of strategic interest, whether it's technology or customer, geographic, et cetera, can you just give us some color on things that be interesting complements to the Camtek business as we think about where M&A can create value for the business and for shareholders?

[Rafi Amit, Chairman & CEO]

Yes. Of course, if we're talking about having more value, so we have to look for a company that has a good synergy to Camtek in terms of technology, in terms of expanding our markets, et cetera. So this is our first priority, to look for companies that can expand our portfolio and -- but we still have some similarity in technologies, so we can enjoy each other of sharing technology and it's help to both sides.

Another issue is also if we take a company, let's say, mid -- small to midsized, most of them cannot -- I would say the sales channel are not so developed as Camtek did in the last 10 years. So definitely, we can accelerate revenue for a company with the potential, a good technology, a good product, but missing a good search channel.

Definitely, we can promote the product much quicker. So this is roughly the portfolio that we are looking for. And this is our first priority. But sometime we can -- we get information about the company not exactly meeting this profile, but still, we find other advantages. So definitely, we can consider it.

[Kenny Green, IR]

Our next question is from Denis Pyatchanin from Stifel.

[Denis Pyatchanin, Stifel, Nicolaus & Company]

Can you hear me?

[Kenny Green, IR]

Yes, hi there, we can hear you.

[Denis Pyatchanin, Stifel, Nicolaus & Company]

This is Denis on for Brian Chin. I have a question related to weakness in smart sell-through and production. Do you get the sense there is any digestion of recent wafer-level packaging capacity expansion occurring in the back half of the year, like not necessarily your machines but also other process equipment? And why do you believe your inspection systems' may be less affected?

[Ramy Langer, COO]

Okay. Rafi, you want to take it? Or should I take it? Yes. Okay. So let me start, first of all, with the digestion of the content.

So first of all, we are more exposed to our machines. So it's very hard for me to speak about other equipment. But specifically, we still do not see a digestion. In fact, with the equipment that we have been selling and highly utilized by our customers, this is something that we are checking continuously.

The machines are -- all the time, they are immediately installed and used and going into production. So from that point of view, I still see or I still -- what we are experiencing the digital equipment from our customers.

Now while we are less sensitive, and there are a few reasons for that. In the industry that we are serving, the wafers are becoming more and more complex. And as a result, they are used more heavily, they are used in more steps. And a lot of the times, they also require hydrification, which means that from a number of issues that are used for those steps is higher.

So I would say this is just briefly one of the main reasons why our machines are needed all the time and are used more and more in compared to other equipment. Did that answer your question?

[Rafi Amit, Chairman & CEO]

I want to add one more comment on that. We have to take in consideration that there are today new packaging technology enter to the market. And then we find ourselves doing more steps compared with what we used to do in the past.

So any new technology adopted by customer, it takes some time until the yield is high and everything is okay. So by that time, they need a lot of inspection. Not randomly, they do, I would say, almost 100% inspection. And they try to make many steps to help them to stabilize the process and getting that achieved. So all this together, it definitely give us some, I would say, benefit as an inspection company.

[Denis Pyatchanin, Stifel, Nicolaus & Company]

Great. And then my next question is, how long do you think it is before heterogeneous integration becomes something like 15% to 20% of revenue? Do you see it reaching that level over the next several years?

[Ramy Langer, COO]

First of all, in our opening statement, we said that 20% of the 50% of advantaged packaging today's for heterogenous integration, which is roughly 10% of our revenues for the quarter. But definitely, heterogenous integration is something that will continue to grow. And I expect it to be, in foreseeable future, taking these kind of numbers of our revenues.

No doubt, the high-performance computing, is the, I would say, the main driver to heterogenous integration. And as I mentioned before, the server market is growing at 17% this year, and these are the range of growth that is expected in the foreseeable future. Definitely, this segment is going to be very healthy.

[Denis Pyatchanin, Stifel, Nicolaus & Company]

And then for my final question, so you've seen a recent shift in your geographic mix with the EU and the U.S. growing as a part of that. Can you speak to kind of which end markets within those geographies are driving the shift?

[Ramy Langer, COO]

Well, it's -- we want to be very careful because we are very sensitive about customers' need. But I think that I will be trying to be very broad, I think it's very clear.

First of all, in Europe, it's very automotive-related. Business there is highly effective from this industry. I would say in the U.S., the business is more diversified, and it would be from leading-edge technologies through our ways and some remotely. I think all across the board, we see customers that are using for these applications or machines.

[Kenny Green, IR]

Our next question is from Raman [indiscernible]. Are you there? Okay's. Okay. We'll poll again for questions. If anybody has a question, please raise your hand. If not, we will move to the final part -- we'll give him another moment. Raman you are unmuted, so you may ask your question.

Our next question is from [indiscernible].

[Unidentified Analyst]

Can you hear me?

[Kenny Green, IR]

Yes, we can hear you.

[Unidentified Analyst]

Two questions, please. One, you talked about the strategic decision to impact inventory. Could you speak about the levels that you see going forward? And second, you talked about new customers. Any original bias for those new customers?

[Moshe Eisenberg, CFO]

Okay. I'll start with the inventory, and then Ramy will address the other part of your question. With respect to inventory, we have raised the inventory in the last few quarters in order to make sure that we have enough inventory for to address the demand.

I think that what we are going to see start some stabilization in the next few quarters. So we don't intend to continue to increase the inventory levels, but it could vary $5 million plus minus in the next couple of quarters ahead.

[Ramy Langer, COO]

Alon, I missed your question on the new quest of the last word. You were not clear. So what did you want to understand about the new customers?

[Unidentified Analyst]

Of which regions are they coming?

[Ramy Langer, COO]

They come from all around the geography, not necessarily one country. They come from Asia, Europe -- and I don't recall if we had any in the U.S., but definitely it's not just related to one.

[Kenny Green, IR]

Okay. I think Raman is unavailable. So I think that will end our Q&A session. Rafi, do you have any closing remarks?

[Rafi Amit, Chairman & CEO]

Okay. 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 my management team for the tremendous performance, and we look forward to continuing it.

For our investor, I thank you for long-term support. I look forward to talking with you again next quarter. Thank you, and goodbye.

[Kenny Green, IR]

Thank you. That ends our conference call. You may all disconnect.

[Operator]

Goodbye.