Camtek Ltd. (CAMT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's First Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. You should have already seen by now the company's press release. If you have not received it, please contact Camtek's Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559 or view it in the News section of the company's website, www.camtek.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Yes. Thank you, and good day to all of you. I would like to welcome all of you to Camtek's First Quarter 2020 Results Conference Call, and I would like also to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's CEO; Mr. Moshe Eisenberg, Camtek's CFO; Mr. Ramy Langer, Camtek's COO. Rafi will provide the overview of Camtek results and discuss market trends in the first quarter of 2020. Moshe will then summarize the financial results for 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 expectation or otherwise. Investors are reminded that actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for services and products, the timing and development of new services and products and their adoption by the market, increased competition in industry and price reductions 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, forecast future results and evaluate the company's current performance. Management believes that the percentage of non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing core operation and process for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. I would now like to hand over the call to Rafi Amit, Camtek's CEO. Rafi, go ahead, please.

Good morning, and thank you for joining our call today. First quarter 2020 shipment amounted to approximately $33 million, in line with the company original guidance for the quarter. However, recorded revenue were $30.2 million due to incomplete installation of a few machines caused by the coronavirus situation. Based on order on hand, we have a very good visibility into the second and third quarters, and we expect our second quarter revenue to be $36 million to $38 million. Despite the coronavirus situation, the company is experiencing strong business momentum. The demand from our customers for various applications point to strong record. In first quarter, we are well organized to execute our plan. I would like to reiterate points mentioned on our last call regarding the gross margin in the first half of 2020. Our strategy is to expand our installed base worldwide in the mid end, the back end and in the end of the line of the front end. We are already the leading 3D metrology supplier and in the process of becoming a leading supplier in the 2D inspection as well. For the first half of 2020, we have received orders from some of our customers for multiple 2D inspection machines with basic configuration, and is relatively lower ASP, which resulted in lower gross margin. In the first quarter, we indeed reported as expected, a relatively low gross margin of 45% due to this product mix and the lower revenue. Customers who have ordered machines with basic configurations also have more complex applications. And in the future, they are expected to purchase machines with more capabilities at a higher ASP. Looking to the second quarter, our revenue guidance is $36 million to $38 million, with continued revenue growth and improved profitability in Q3. We are already seeing a change in trend with orders for the third quarter for machines with more advanced capabilities compared with the first 6 months. Let me give you some of the highlights of the first quarter. Taiwan and China were the largest territories in the quarter. Since the beginning of the year, we have received orders for approximately 50 machines for CMOS Image Sensor applications. Machines' installation will be completed by the end of third quarter. We have received order for multiple machines from a Tier 1 RF customer mainly for 5G applications. We delivered the first Golden Eagle inspection machine for 600-by-600 millimeter panel size. This machine is for Tier 1 customer for Fan-Out applications. We expect to deliver the second machine to a different customer during the second quarter. Our customers believe that Fan-Out packaging on panel will continue to grow as this is cost-effective approach. Needless to say that we continue our R&D efforts together with Tier 1 customers to develop new inspection and metrology capabilities, supporting the next-generation packaging technologies. Regarding the corona pandemic and its impact on the global economy and our business. So far, we are performing well but we are monitoring the situation closely, and we will update our plans as things change. I do hope that for all of us, we can put the pandemic behind us and move back to normal life. I would like to specifically thank our employees for their fantastic work and ability to adapt quickly to this new environment. I would like to hand over to Moshe for a more detailed financial discussion of the financial results. Moshe?

Thank you, 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 table at the end of the press release issued earlier today. As Rafi mentioned, first quarter 2020 shipments of machines to customers amounted to approximately $33 million, in line with the company original guidance for the quarter. However, first quarter revenues came at $30.2 million, a decrease of 11% compared with $34 million reported in the first quarter of 2019. Coronavirus caused delays in installations. And as the company recognizes system revenues only after installation, it impacted revenue recognition of a number of most systems, which were delivered, but installation was not completed during the first quarter. The geographic revenue split for the quarter was as follows: Asia, 89%; and rest of the world, 11%. Gross profit for the quarter was $13.6 million. The gross margin for the quarter was 45.2% versus 50.6% in the first quarter of last year due to the lower revenue and sales mix affecting the margin, as Rafi mentioned already before. Operating expenses in the quarter were $10 million, this is compared with $9.9 million in the first quarter of last year and to the $10.5 million reported in the previous quarter. We expect our operating expenses in the second quarter to return to the Q4 '19 levels and certain R&D project expenses will be recorded then. Operating profit in the quarter was $3.7 million compared to the $7.3 million reported in the first quarter of last year. Operating margin was 12.2% compared to 21.5%, mainly as a result of the lower gross margin. Overall, we expect significant improvement in our operating margins over the coming quarters. Net income for the first quarter of 2020 was $3.6 million or $0.09 per diluted share. This is compared to a net income of $6.7 million or $0.18 per share in the first quarter of last year. Turning to some high-level balance sheet and cash flow metrics. Inventory level has gone up by approximately $3 million. Some of it has to do with the shipped machines that were not recognized and are included in the inventory, and some is to support the increase in business volume, which we expect in the coming quarters. We generated $1.3 million in cash from operations in the quarter. Account receivables increased from $31.4 to $37.1 million. This is due to timing of payments from customers. During April, we already collected more than $50 million, and we expect a strong positive cash flow during the second quarter. Net cash and cash equivalents and short-term deposits as of March 31, 2020, increased to $90.6 million compared with $89.5 million at the end of 2019. As Rafi mentioned earlier, we had a record backlog. We, therefore, expect revenues of $36 million to $38 million in the second quarter, with continued revenue growth and improved profitability in the third quarter. And with that, Rafi, Ramy and myself will be open to take your questions. Operator?

[Operator Instructions] The first question is from Quinn Bolton of Needham & Company.

Guys, nice results and good to see the strong guidance for the second quarter. I wanted to start on the profitability of the gross margins. You sort of went through the lower margins on the basic 2D systems that you're shipping in the first half. You've talked about out seeing the backlog supporting a higher gross margin into the third quarter. And just wondering if you might be able to give us some sense, is that on the range of 50 to 100 basis points improvement into the third quarter? Could it be higher? Just any sense you could give us on what the trend might be into the third quarter for gross margin.

Thank you, Quinn. Yes, basically, as you mentioned, our current backlog supports higher gross margin account in the third quarter. We believe that we can basically go back to the kind of normal level which we reported throughout 2019, probably closer to the second half of 2018.

Great. And then on the CMOS Image Sensor, I believe you said that you've already received orders for 50 systems this year. I think that would imply a pretty strong mix shift in your business towards CIS this year. Wondering if you see that strength continuing past the third quarter or does your visibility just today extend into the third quarter for the CMOS Image Sensor portion of the business?

Well, it's -- Quinn, this is Ramy. We are seeing today 2 quarters ahead, which is more than we usually see. It's very hard at this stage with everything that is going around to grow and anticipate what will happen in the fourth quarter. We don't see any negative signs at this stage. However, I think this is the most that we can say at this stage. We definitely see the CMOS Image Sensor strong in the first 3 quarters of this year.

Great. And then the last question I had was you mentioned the panel-level packaging inspection system. I think you said you shipped one system in the first quarter, expect to ship the second system here in the second quarter for Fan-Out applications. Just wondering if you could give us more details, are those systems going to a large foundry? Is it going to a more traditional OSAT customer? Just wondering about the adoption of panel-level packaging more broadly.

So the panel level machines are going to OSAT. As you know, panels is related to the cost reduction of Fan-Out applications and it's a very important trend. We see this trend of Fan-Out increasing overall. And Fan-Out was always on the road map of the OSATs and indeed it is starting to happen. It's very hard to say today to what extent it will go. But definitely, people believe in it and believe that this will provide a cost-effective way for Fan-Out applications. And as we said, we are shipping to a Tier 1 OSAT, which is shipped to a Tier 1 OSAT in the first quarter, and we will ship to another Tier 1 OSAT on the second quarter.

And, by the way, we see more -- I would say that most of -- not most, but power devices are probably much very -- very nice, this concept, and we see more and more power devices that are tossed to this direction, Fan-Out panels.

The next question is from Craig Ellis of B. Riley FBR.

This is Carlin Lynch on for Craig. I guess, starting with the gross margin front. Some of your -- some of the other people in semi cap side have noted higher freight costs impacted margins. I just wanted to know if you guys are seeing any of that. And how much of an impact that might have had in the quarter and the outlook?

So yes indeed, freight and shipping expenses went up pretty sharply. We will see most of the impact, actually, I think, in the second quarter, not so much in the first quarter as most of the first quarter we still did not -- suffer much from the coronavirus impact. But yes, we will see -- and we are seeing an increase in shipping expenses in the next couple of quarters.

Got it. And then I guess kind of turning to OpEx, obviously, ticking up a little bit in the second quarter. Can you just give us a sense for what the linearity is through the year? Do you have further R&D kind of projects in the pipeline that you'll have to increase OpEx for in maybe the third quarter or the fourth quarter?

So in terms of R&D, I don't expect a much increase over what I just mentioned before. So it will be pretty linear moving from second quarter to the rest of the year. We do -- there is some fluctuation on sales and marketing or could be based on the way we approach sales. When we sell direct, obviously, the level of commissions to agents are lower. If we work through agents, there is an impact on the sales and marketing expenses.

Got it. Okay. That's helpful. And then I guess last one for me. Obviously, it sounds like the image sensor business is doing well. Can you just kind of talk through some of the puts and takes in the quarter and the outlook in some of the other end markets? Just kind of how those are playing out. Any color there would be great.

I think overall, our end markets are behaving so far in a very -- in the way we anticipated. CMOS Image Sensors, as I said, they are going to be strong for the first 3 quarters. We don't see any negative in the fourth quarter, but we don't know enough about it. Advanced packaging is the second portion, and it is healthy. And there are many activities there, and we are shipping machines to this market. I think the memory portion of the advanced packaging is still not picking up. I expect this portion to pick up towards the latter part of this year or early next year as the DRAM manufacturer starts or continue to add capacity. What we are seeing is also an increase in our RF business. We mentioned it -- Rafi mentioned it in his summary. We have a nice order for multiple machines from one of the Tier 1 players in this market. And this is, again, related to the same end markets of 5 -- primarily 5G. And of course, there are only 1s and 2s and other 2D applications that, in general, complement the rest of the applications. But overall, the 3 main applications are the ones that I just highlighted.

The next question is from Gus Richard of Northland Securities.

Can you talk a little bit about linear shipments in the quarter and logistical issues, getting things installed? You obviously had -- there have been some problems and just want to sort of know what you guys were doing address those.

Well, if I talk about linearity, I think the first quarter, the linearity with Chinese year, the January, and the first 3 months of the quarter was pretty -- I would say, was pretty low. But the second and third months of the first quarter, we were strong, both of them, and they were the same, more or less. And I think overall, there isn't a big linearity. I think in most of the month, the growth is across the entire quarters in the next, let's say, if I look at the second and third quarter. We are going more or less to ship similar number of machines with some increase, per the increase in the revenues. But overall, the number of machines will be similar from month-to-month. This is very important for us as this allows us to streamline the manufacturing and the installation of the machines in a better way. As for installations, we have dedicated teams or our own teams in each of the regions, in each of the territories, and they will be doing the installations. And there is very little support that they require from here from our headquarters. So from that point of view, I don't foresee any major issues with the installations. We think that they are a nice -- there are now flights out to the different regions. We'll be able to ship all of the machines. And if we look at the situation today, we don't see any issues. Of course, as we said, this whole situation, some of the things we don't know. And we will update if something needs to be updated. But at this stage today, we do not foresee any issues in shipments in installation in the next couple of quarters.

Okay. And then just a little bit of a further revenue breakdown. What percentage of revenue is China in Q1 and the next couple of quarters? And also, what's the mix these days between front-end macro defect inspection and back end?

Well, we don't look at it. We look at it as front end, mid-end and back end. So it's very hard for me just to pick the numbers out of my sleeve here, but I will tell you, I think the main business is in the mid-end. The smaller part is in the front end and I would say the second in the middle is the back end, some of the applications in the back end, and I would say these are #2. So definitely, the mid-end is the most dominant part in our business. Regarding China, we don't give the accurate numbers, but definitely, it is significant. And I think it is similar to other semiconductor companies. There is a lot of investments in China, and they are going on. I think what makes things more the Asian way as the coronavirus is less -- affecting less at this stage in the second quarter. The U.S. and Europe are very heavily affected by the coronavirus. So we will see more business coming out of Asia. No doubt, China is very important and it's very significant.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Amit to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Camtek's website, www.camtek.co.io beginning tomorrow. Mr. Amit, would you like to make your concluding statement? .

Now I would like to thank -- to first 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 -- for business performance, and we look forward to continuing it. To our investors, I thank your long-term support. I look forward to talking with you again next quarter. Thank you, and goodbye.

Thank you. This concludes the Camtek's First Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.