Camtek (NASDAQ:CAMT) Q2 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by. Welcome to Camtech's second quarter 2020 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Camtech's investor relations team at gkinvestorandpublicrelations at Thank you and good day to all of you. I would like to welcome all of you to Comtech's second quarter 2020 results conference call and I would also like to thank Comtech's management for hosting this call.

1:02 With us on the line today are Mr. Rafi Amit, Comtech CEO, Mr. Moshe Eisenberg, Comtech CFO, and Mr. Ramy Langer, Comtech COO. Rafi will provide the overview of Comtech's results and discuss market trends in the second quarter of 2020 and Moshe will then summarize the financial results of the quarter. We will then open the call to take your questions. Before we begin, I'd like to remind our listeners 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 statements contained, whether as a result of new information, future events, changes in expectations, or otherwise.

1:54 Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual events or results to differ materially from those projected, including as a result of the effect of general economic conditions The effect of the COVID-19 crisis on the global markets and on the market in which we operate, including the risk of a continued disruption to our and our customers' providers, business partners' and contractors' business as a result of the outbreak and the effect of the COVID-19 pandemic. Risk relating to the concentration of a significant portion of expected business in certain countries, particularly China, from which we expect to generate significant portion of our revenues for the second half of 2020, but also Taiwan and Korea, including the risk of deviations from our expectations regarding timing and size of orders from customers in these countries.

2:50 Changing industry and market trends, reduced demand for services and products, the timely development of the new services and products and their adoption by the market, increased competition in the industry and price reduction, as well as due to other risks identified in the company's filing with the SEC. Please note that the safe harbor statement in today's press release also covers the content 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, focus future results, and evaluate the company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release.

3:39 And now I'd like to hand over the call to Rafi, Country CEO. Rafi, go ahead please. Hi everyone. The second quarter represents continued demand for our system primarily from Asia. Total sales in the second quarter were $37 million, a record quarterly level. Gross margin was 46.1 and operating margin was over 17%, marking a significant improvement in profitability compared with the first quarter. We expect continued improvement in profitability in the third quarter as well.

4:24 The ongoing demand from our customers for various applications point to a strong third quarter with encouraging backlog going into the fourth quarter. Our revenue guidance for the third quarter is $38 to $39 million, with persistent improvement in the profitability. This indicates strong performance in the second half of the year. We have significantly increased our market Our market share in 2D inspection mainly because our system performance and competitiveness have been dramatically improved in all 2D applications.

5:15 A key element in our strategy is having in place local professional teams that can independently install and support machines in all our territories and enabling us to continue growing our business even during the COVID-19 pandemic. We have also established a remote training and support infrastructure allowing us to remotely operate systems, upgrade machines with recently developed features, and train local teams on a regular basis. We invest considerable development effort in providing appropriate technological solutions to our IDM Tier 1 customers who developed innovative packaging technologies in the field of heterogeneous integration.

6:16 We have received a few initial orders and we believe we will soon receive multiple machines orders for production. We expect this segment to become meaningful to our business. Let me give you some highlights of the second quarter. Taiwan and China continue to be the largest territories in the quarter. USA and Europe are starting to pick up. We have received multiple machine orders for over 30 systems from 4 Tier 1 OSATs for 2D applications, mainly for advanced packaging. Some of these machines will be installed in the second half of the year.

7:10 The two Golden Eagle inspection systems for 600x600 mm panels that were installed at two Tier 1 customers in Q2 are running fan-out panels in production. We expect to deliver additional systems later this year. Our customers believe that fan-out packaging on panels will continue to grow as this is the cost-effective solution. Soon we will start planning our budget and work plan for year 2021. One of the most significant challenges facing management during COVID-19 is to assess what will be the scope of business activity in 2021.

7:58 We base our strategy of achieving continuous growth on several drivers and trends. The first is the increase in demand for semiconductor devices. The main drivers in our market are advanced packaging, memory, CMC sensor, and RF filter for 5G smartphones. 5G is pushing demand for high-end smartphone cells. Compared to previous generations, these 5G phones include more silicon, more advanced packaging, and larger number of RF chips in each phone. As a result, we are experiencing demand for 5G-related applications.

8:51 Regarding memory, new memory hubs are under construction in Korea and China, and we expect investment in capital equipment for memory packaging to increase in 2021. The second driver is the adoption of new packaging technologies by our customers. In general, we see considerable efforts in Tier 1 IDM and OSATs to adopt new packaging technologies and execute them to production. Adoption of new technologies require extensive use of inspection and metrology systems. For example, logic CPU and graphics CPU shift to heterogeneous integration packaging.

9:43 Continued transition of DRAM from wire bonding to 3D IC advanced packaging. Or power devices shift to advanced packaging, specifically FENAU. The third is penetrating to new segments in the front-end. We have already penetrated to the front-end market in the past two years, and we continue to discover more segments that our system can provide suitable solutions for. To summarize, 2020 is shaping up to be another solid growth year for Camtec. But it is important to stress that we are still seeing the coronavirus pandemic effect, which increases risks and uncertainties.

10:35 Coptic is a dynamic and flexible company that can adapt to any development in the market and to take advantage of the rapid changes in our industry. Before I hand over to Moshe for more details, On the financial results, I would especially like to thank our employees for their dedicated work during this challenging time. 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 appear in the tables at the end of the press release issued earlier today. As Rafi mentioned, second quarter 2020 revenues were $37 million at the record quarterly revenue level and an increase of 8% compared with the $34.3 million reported in the second quarter of 2019 and 22% increase versus the previous quarter.

11:39 Due to the fact that US and Europe were heavily affected during the second quarter, Asia accounted for most of our revenues with 95% contributions. The rest of the world, therefore, only accounted for 5%. Based on orders on hand, we expect US and Europe to pick up in the second half. Gross profit for the quarter was $17 million. The gross margin for the quarter was 46.1%. versus 48.4% in the second quarter of last year and 45% in the previous quarter. As we mentioned in our last call, in the first half of 2020 we have received orders for multiple 2D inspection machines with basic configurations, with relatively lower ASP, which resulted in lower gross margin.

12:34 We see a change in trend with order for third quarter for machines with more advanced capabilities compared with the first six months. And as Rafi mentioned, we expect continued improvement in the gross margin in the second half of the year. Operating expenses in the quarter were $10.7 million. This is compared with $9.6 million in the second quarter of last year and to the $10 million reported in the previous quarter. The increase versus the first quarter is mainly due to increased R&D activities. The COVID-19 environments resulted in certain savings, mainly in travel expenses, which were partially offset by higher shipping expenses.

13:19 Operating profit in the quarter was $6.4 million, an improvement of over 70% versus the $3.7 million in the previous quarter. Operating margin was 17.2% compared to 12.2% in Q1, mainly as a result of the increased volume. Overall, we expect a significant improvement in our gross and operating margin in the coming quarters. Net income for the second quarter of 2020 was $6.3 million, or $0.16 per diluted share. This is compared to a net income of $6.7 million or $0.18 per share in the second quarter of last year and $3.6 million or $0.09 per share in the first quarter of 2020.

14:12 Turning to some high-level balance sheet and cash flow metrics, we generated $11.1 million in cash from operations in the quarter. This quarter, we have received a significant amount of down payment from one of our customers which positively affected our cash flow. Net cash and cash equivalents and short-term deposits as of June 30, 2020 increased to $101.5 million, compared with $90.6 million at the end of March 2020. With the current business momentum, we expect revenues of $38 to $39 million in the third quarter. It is important to mention that the $37 million reported in Q2 included approximately $3 million as a result of the COVID-19 related delays from Q1 as discussed in our previous call. So practically, our guidance for Q3 represents significant increase of around 15% over Q2.

15:17 And with that, Rafi, Ramy and myself will be open to take your questions. Operator? Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift a handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Quinn Bolton of Needham and Company. Please go ahead. Hi, guys.

16:02 Congratulations on the nice results. I wanted to ask just in terms of the demand environment, have you seen any disruptions from your OSAT customers from the Commerce Department actions against Huawei? One of your competitors on to last evening discussing some order delays as a result of those Commerce Department actions. Just wondering if that's had any impact on your business. And then I've got a couple of follow-ups. Thanks. Hi, this is Ramy. Yes, I saw the discussion last night. We have not seen any disruptions from our outside customers or any other customers. And this specific discussion about Huawei at this stage has not affected our business.

16:55 Great. And then a second sort of business related question. You delivered two systems for panel level inspection in the second quarter and Expect more in the second half. Just wondering how meaningful can that panel level inspection business become over the next couple of years? It's hard to say because it depends who you ask. Some people believe it will be significant. Other people tend to think that it will be minimal. So I think we need to wait and see at this stage at least. If I look only 12 months ahead, I don't think it will be significant. Okay. Great. Then for Moshe, you talked about some meaningful increase in gross and operating margins into the third quarter, and I think beyond any chance you might be able to quantify what you think Hi, Quinn.

18:08 Typically, we don't provide specific gross margin guidance or operating margin guidance. Specifically, third quarter and fourth quarter that we are starting to shape up is populated with more favorable product mix. Machines are coming with more capabilities. and as a result we see a better gross margin coming back to the more normal gross margin that we have seen in previous quarters. This is probably, obviously will affect our operating margin as well. Understood. And lastly, you talked about your backlog giving you some visibility into the December and being supportive of a pretty healthy December forecast.

18:58 Thank you. Okay, understood. Thank you, guys. The next question is from Craig Ellis from B. Reilly FBR. Please go ahead. Yeah, thanks for taking the questions and team congratulations on the real nice second quarter execution.

19:48 The first question is a follow up on the earlier gross margin inquiry. I think Camtech and most other companies were impacted by adjustments to COVID-19 with COGS costs and certainly freight costs have been higher. Moshe, can you just help us understand to what extent those costs are lingering in the business in the third quarter and the fourth quarter? And to what extent are you seeing any abatement in any of those costs? That'll be the first question. Hi, Craig. There are some ins and outs, as you usually use the terms. The positive is that we have certain savings related to travel expenses, entertainment, conferences, and things like that. On the same time, there is a higher level of expenses, mainly on the shipments.

20:50 So, all in all, we do see some savings, and this will take us all the way through the end of the year or until the COVID-19 will be over. Okay. And then another final question for a couple inquiries to Rafi. So, there was a customer deposit in the quarter that helped increase the cash balance above $100 million. Is that kind of customer deposit something that we should expect in the future, or is this more of an unusual circumstance that we shouldn't expect to occur either in the back half of this year or next year? No, it's kind of a one-time event, and this is why we obviously disclosed it. Typically, we don't get a significant amount of down payment in advance. So no, we should not expect something like this in the next few quarters.

21:49 Got it. And then turning to some of the product dynamics and market dynamics, Rafi, you had mentioned the visibility for the fourth quarter. What I was hoping to understand is how that is shaping up from an end-use standpoint. You've had a real strong CMOS image sensor business. Year-to-date high bandwidth memory is a little quieter. It sounds like RF is really picking up with 5G. Any color on what you're seeing bottoms up for the fourth quarter would be helpful. Yeah, I would say that in general, the MIX application is very similar. We see it's about, there are three major drivers, as we mentioned, is the advanced packaging, the CMOS image sensor, and the RF and RF-related devices. This will almost take most of the capacity here.

22:47 Got it. And then as we look to calendar 21, you know, it seems like it should be just a real strong year for Camtech because in addition to what should be a doubling in 5G smartphone units from $200-plus million, over 400 and the strong RF and CMOS image sensor demand that would imply. But it seems like we've seen a lot of indications more broadly that high bandwidth memory on new memory capacity and new memory products is going to see an increase. So if we were to look at calendar 21, how would you Rafi rank The growth drivers in the business, largest to less significant on a year-on-year basis from what you see today.

23:40 Look, as I mentioned before, there are a few, I would say, elements or parameters that affect our growth. It's the technology, it's the level of support, our positioning, install base. All of these, we are in very good positions. The only thing that we cannot predict is the market behavior. We definitely do not know what is this all the corona virus effect, what is happening with the demand in the industry. This is something that we cannot expect. But as I mentioned, we are very flexible and we are ready for any change, any trend. And I think it's very important because if we believe that today we have a very large install base, we are in very high position as tier one supplier to the industry, I think that this is very important to growth. We are very in good position to take advantage of any demand. So in general, as I mentioned before, we talk about advanced packaging, heterogeneous integration, memory, CMOS, RF. All these continue to grow up, definitely.

25:04 Got it. And then the last question for me, and it goes back to a clarification that I had to Moshe, but with a different spin. Very significant cash balance. So congratulations. I think 100 million plus is easily a record for the company. How should we think about the way the company will deploy that cash balance to create value for shareholders? I think in the past there have been some special dividends. The company's also in the past expressed M&A interest. How do we think about the priorities and how quickly the company could act on those priorities? Thanks, Tim. I think definitely the first priority before we consider dividend is to look for opportunities in the M&A.

25:51 But we don't want to go to venture. Sometimes you make M&A and then all the management invest all the effort and attention and it can affect our potential to grow and to take advantage in the organic growth. So we have to do it very carefully. We are looking for mature companies, companies who don't have to do micromanagement. Companies that show stable profit. This is okay for us. And also, of course, we would like to look for a company in the semiconductor arena. We don't want to start with companies that we have no clue about market, what they do, or things that we cannot contribute to.

26:40 A very strong organization and definitely we can take small, mid-sized companies and give them a lot of tools to leverage their success. Right now we are evaluating a few companies. But as I said, we do it very carefully and we don't intend to make any venture by looking for startups or companies that are at the stage of investing and losing money. This is not the type of M&A that we are considering. Helpful color. Good luck, guys. Thank you. The next question is from Gus Richard of Northland Securities.

27:26 Please go ahead. Yes, thanks for taking the questions. I just wanted to dig into the advanced packaging opportunities, you know, co-packaging chiplets, CPU, GPU, high bandwidth memory and fan out. Could you sort of talk about where each of those are in terms of demand and sort of what you expect in 2021? Well, Gus, this is Ramy. If we look at 21, first of all, I think we talked about the memory that we believe there will be an opportunity in the memory space, in the bandwidth memory, and I think this will definitely be significant in 21. The rest of the industry, this is a major segment this year and will continue to dominate our business in 21.

28:25 I think the area of triplets or heterogeneous integration definitely is growing. People are getting into it. It's very hard to say at this stage how significant it will be, but it's definitely going to become significant over the next few years. And we are in it, we understand it, and we are going to be a major player in this. Got it. Is there a higher intensity of inspection and metrology on the chiplet side of things versus fan-out and HBM? Yes. There are additional steps that we don't see on the HBMs and on the regular fan-out. So I would say there is another level of metrology and inspection that doesn't currently exist.

29:26 So yes, definitely, we think that this will be heavily involved in a few steps of inspection and metrology. And that's no doubt an opportunity for us. I would like to add a few comments. The idea of heterogeneous integration Actually, you take very expensive components and put them together. So nobody wants to take any risk that such module will be rejected because something doesn't work properly. So this is why customers cannot skip any sampling inspection. They must make even 200% inspection to be sure that this model works perfectly.

30:12 It's a very expensive model. Talk about a few hundred dollars. Cost per module. So definitely everyone needs to make an inspection. It's not only inspection, it's inspection, it's metrology. There are many steps, the interposer, the chip itself, the hybrid memory. So there are many steps in this package that inspection and metrology is a must. So this is why we believe that when this trend is going up, we will see a lot of machines doing this job. Got it. And then on the panel level inspection, you know, you're sort of uncertain about the demand for that. Is that a function of panel level versus wafer level, or is that a debate over the proliferation of fan out?

31:04 I tell you, in general, the panel level is something new for the industry. First of all, the beginning of this process, you know, the industry needs to wait for the equipment supplier to build a machine for this size of panels. Now they focus on material. You talk about organic materials in most of the cases, and organic material is not silicon. You cannot make the same density. Their target is to make one, two micro-line space. Almost it is impossible right now to make it an organic material. So today, most of the line space is about 10 microns. They claim to achieve 5, 8 microns soon, but not yet. So I think that the density is the key factor to increase the use of panel level. And it takes time.

32:01 It takes time for the industry to know how to make it in high yield. This is why we don't see the acceleration in this process. Customer now, I would say, in the learning curve, and they want to make a good yield, and probably after that, they will go step by step. We don't expect to see, you know, dramatic needs for panel. It goes step by step and I cannot even predict how long it takes. I believe that in the next few years we will see more and more use of this technology. But it is not like silicon. Silicon, you know, the industry know how to handle it very well. All the process, everything is actually very experienced. So industry know how to do it.

32:57 Panel is totally new. New equipment, new process, new material. And by definition, it will take more time. Got it. Got it. That was very helpful. And then You mentioned in the front end that you were starting to trip over new applications for your equipment. Can you give a little bit of color? Are you moving from macro defect to metrology in the front end? What are you seeing there? You know, obviously, I don't want to get into too many details, but the applications where we are focused, we are focused in the area what we call the back end of the line. And in that space, we get experience, we uncover other applications that customers are doing.

33:49 It's around the macro, what you call the macro inspection, but not only macro inspection. Definitely, there is room to grow there. Got it. Okay, that's it for me. Thanks so much. Thank you. Thank you. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Amit to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available on ComTech's website at www.comtech.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

34:47 Okay, I would like to thank you all for your interest in our business and to our investors. I thank your long-term support. Unfortunately, we are unable to meet Thank you and goodbye. Operator, concluding the call? Thank you. This concludes the CAMTEC second quarter 2020 results conference call.

35:36 Thank you for your participation. You may go ahead and disconnect.