Camtek Ltd. (CAMT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third Quarter 2022 Results Conference Call. [Operator Instructions] 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 Camtek's Investor Relations team at EK Global Investor Relations at 1-212-378-8040 or view it in the News section of the company's website at www.camtek.com. I would now like to hand over the call to Mr. Ehud Helft of EK Global Investor Relations. Mr. Half, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Camtek's Third Quarter 2020 Results Conference Call. Let me remind you that everyone that this conference call is being recorded, and the recording will be available on company's website within a few hours of the call. With me, today on the call, we have Mr. Rafi Amit, the 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 results and discuss recent market trends. Moshe will then summarize the financial results of the quarter. For that, Rafi, Moshe and Ramy will be available to take your questions. Before we begin, I'd like to remind everyone that certain information provided on this call are internal company estimates, unless otherwise specified. This call may also contain forward-looking statements, and I will refer you to our safe harbor statement that you can read in our press release. Furthermore, during this call, certain Non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, focus future results and the value of the company's current performance. We believe that the presentation of non-GAAP financial measures is useful for investors' understanding and assessment of the company's ongoing cooperation and prospect for the future. A reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. And now I would like to hand over the call to Rafi Amit, Camtek's CEO. Rafi, go ahead, please.

Thanks, Ehud. Good morning or good afternoon, everyone. Camtek ended another quarter of continued revenue growth. Third quarter revenues were a record of $82 million, a 16% increase year-over-year. Gross margin came in at 49% and operating margin at 28.3%. Close to 60% of our revenues came from advanced interconnect packaging implications. Heterogeneous integration and HBM account for over 30% of this segment. We continue to expand our customer base. We sold a system to 42 new customers in the first 9 months of this year. Specifically, we are cementing our position in the front end and compound semi segments. These 2 segments accounted for approximately 1/4 of our revenues. As widely reported consumer demand for PC and mobile is down. As a result, the contribution of CMOS sensor related system to this year's revenue will be slightly below 10%. This quarter, we continued to strengthen our position in the U.S. and Europe due to major industry investment made there. U.S. and Europe accounted for 27% of our sales versus 21% last quarter and 12% in Q3 of last year. Q4 revenues are expected to be similar to those of Q3, translating into record annual revenue of around $320 million for 2022. The company diversified exposure to multiple customers, secular trends and territories contributed to our success. Last month, the U.S. Commerce Department announced new regulations restricting the sales and support of semiconductor equipment for advanced nodes in China in both memory and logic. Our customers in China are mainly OSATs in the Advanced Packaging segment or manufacturers of trading edge silicon wafers. We continue to evaluate the impact of such restrictions on Camtek. But based on our initial assessment, we believe that the direct revenue impact would be marginal, if any. The global economy is projected to decline in 2023 and expected to affect both wafer and fab equipment in general and even more so in the memory segment. 2023 is expected to be a challenging year for the industry with customers being more cautious. We believe that although Camtek's business model is not immune, it is, however, more resilient. I will point a few reasons. One, -- we support a technology change in the industry of transition to advanced packaging and produce integration. 60% of our business is related to these segments. This trend is expected to continue… [Technical Difficulty]

Ladies and gentlemen, thank you for standing by. Mr. Ramy Langer, would you like to continue, please.

Thank you. And I apologize we have a technical issue, and I will continue on Rafi's behalf. And I will pick up where he stopped. And as we said, we believe that Camtek's business model is not immune, it is however more resilient, and let me give you the reasons for it. First is we support the technology change in the industry of transition to advance packaging and heterogeneous integration, 60% of our business is related to these segments. This trend is expected to continue in the next few years. Furthermore, the sales to the memory segment are limited to DRAM only, which historically accounted for less than 5% of our total business. This segment will mainly support the transition of the high-bandwidth memory, which is growing. Based on the orders we have on hand and in the pipeline, we expect increased sales in this space next year. Also, the increasing complexity of wafers being manufactured today means that manufacturers require ever more advanced inspection systems in their facilities. We believe that the full of inspection and the segments in which we operate will be less affected in the event of a slowdown. Moreover, Camtek has a wide and diversified customer base. This quarter alone, we sold systems to more than 40 different customers and added 8 new customers. Altogether, we had over 250 active customers. Despite the positive factors that I've outlined, we are progressing cautiously into the new year. We are carefully monitoring our balance sheet items such as inventory levels and accounts receivable as well as our headcount. However, we continue to invest in R&D and plan to introduce new products and capabilities next year, securing our long-term growth path. I would like to conclude by stating that semiconductor is a strategic industry and all leading countries are heavily invested in it. We expect that in 2023, the semiconductor industry will likely decline. Camtek is also not immune, but we believe our leading position, wide customer base and longer-term strategic relationship with customers will enable our business to be more resilient than the overall semiconductor intent. I would like to hand over to Moshe for a more detailed discussion of the financial results. Moshe?

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. First quarter revenues came at a record $82 million, an increase of 16% compared with the third quarter of 2021 -- the geographic revenue split for the quarter was as follows: Asia accounted for 73% and U.S. and Europe for 27%. Gross profit for the quarter was $40.2 million. The gross margin for the quarter was 49% versus 50.9% in the third quarter of last year. Indeed, this is below the typical range of our gross margin model. And this quarter, it was mainly driven by a less favorable product mix, resulting from a few large orders, and it does not represent a meaningful trend. We expect some improvement in our gross margin in the fourth quarter. Operating expenses in the quarter were $70 million, an increase of $2.7 million compared to the third quarter of last year and $300,000 compared to the previous quarter. The increase from last year is mostly due to the increase in R&D expenses and sales-related activities to support the increased revenue. Operating profit in the quarter was $23.2 million compared to the $21.7 million reported in the third quarter of last year and $23.2 million in the previous quarter. Operating margin was 28.3% compared to 30.6% last year and 29.9% in the previous quarter. Net income for the third quarter of 2022 was $23.3 million or $0.48 per diluted share. This is compared to a net income of $20 million or $0.45 per share in the third quarter of last year. Total diluted number of shares as of the end of the third quarter was 48.3 million. Turning to some high-level balance sheet and cash flow metrics. Cash and cash equivalents, including short and long-term deposits as of September 30, 2022, were $460.3 million, this compared with $438 million at the end of the second quarter. We generated $25.3 million in cash from operations in the quarter. Inventory levels remained flat compared to the end of the previous quarter. In the last few quarters, we increased the inventory to overcome potential supply chain issues. With the stabilization trends of the supply chain, we plan to reduce the inventory level. Accounts receivables went down by $9.7 million as we had good and strong collection in the quarter. This represents approximately 71 days outstanding. I would like to note that the company management is closely monitoring the different scenarios of market demand and customer investment plans for 2023 and is ready to respond accordingly. Regarding guidance, as Rafi mentioned before, we expect fourth quarter revenues to be around the same level as of the third quarter. And with that, Rafi, Ramy and I will be open to take your questions. Ehud?

[Operator Instructions] The first question is from Brian Chin of Stifel.

Maybe, kind of Rafi, first, following the recent U.S. export restrictions into China, I'm just curious, what is your sense on the new investments or how the new investments in fab and advanced packaging capacity might be directed and prioritized moving forward? And also, how big of a benefit do you see this for Camtek next year based on increased activity in China in areas like advanced packaging or specialty power, et cetera?

Yes. No, the situation in China, I think, remember, just 4 weeks ago, the Commerce Department made all this restriction and the announcement. And I think it's too early to evaluate the effect on the semiconductor industry in China. But at this point, when we discuss with customers in China, it looks like business as usual and utilization is okay and the PO, everything looks like normal. So I believe it's still too early to understand in this restriction, it will affect the whole industry or specific area. We don't know yet. But as I said, for -- at this point, it looks like business as usual.

Okay, and kind of moving beyond the geopolitical, but is it fair to characterize the environment you're seeing and sort of your order book and backlog and those patterns, as I try to characterize the advanced packing customers and maybe even more broadly as being in a digestion mode? And based on your order book, can you provide any sense on the revenue trajectory into Q1 or first half next year?

Look, first of all, as we mentioned, most of our customers are not in the high notes, and we are mainly support the OSAT. So they're not in this -- under this restriction. Second, about the backlog and pipeline, I would say that if we just look a year ago, definitely all the supply chain interruption caused too many customers to place order ahead of time to secure delivery. Now when delivery back to normal and people feel more comfortable and even some think about even probability slowdown -- definitely, customers are not so hurry to place order -- so we can see that the amount of pipeline is much bigger than backlog. So we discuss this customer. We see leads, but we can't see today forecast as we saw a year ago because the customer looking the place order when they really need it, and they don't feel they need to secure delivery a few quarters ahead. So as I said, if we talk together, the backlog and the pipeline, it's look, I would say, pretty normal. But I would say, to see when the pipeline will be converted to backlog -- this can take time and probably as before, we will know more before we start the new quarter, we get a better picture.

Yes, this might not be based on the huge sample size, but I've noticed or observed sometimes Q1 kind of maybe it's seasonal tends to be sequentially up in terms of revenue. But maybe looking to what you're saying, Rafi, maybe you could take a step down a little bit given sort of you don't have as much backlog -- defined backlog moving into next year.

Ramy can contribute on…

Let me try and be a little bit definitely our visibility at this stage looking into '23 is limited. Now the backlog is healthy, and we have a very strong pipeline. And I think as Rafi said, it is too early to assess how quickly this pipeline will turn into orders. And this is a little bit different than where we were, let's say, a year ago, but definitely at this stage, it's too early. We need to wait for another few weeks until we'll be able to really give a better assessment on the first half of '23.

The next question is from Tom O'Malley of Barclays.

I just had a question on the December quarter. So clearly, visibility isn't as strong as it was before, but you guys are guiding to a flat business. Could you just talk about how much of the December quarter is actually booked today already? And how much is influx as the quarter goes along?

No, the current or the current quarter is fully booked, and it really now is a question of executing the shipment and that's it. We don't expect any surprise sort of.

Okay. And then if I look at the mix set business, clearly, CMOS and the sensing is a little weaker. I think you said in the prepared remarks that that's coming in below 10%. It's already kind of tracking well below that. So that makes sense. But in the quarter for September, you saw a pretty big decline in what you've called the other or general business. What contributed to that decline sequentially? And will that go down again in December?

Tom, I'm not sure about which decline. I mean we are seeing, and I think we said it in the -- in the prepared remarks, our business for the advanced packaging is around 60%. It has been in the last few quarters, and it's a very similar rate. The fund and the compound sale is about 25%. So overall, I would say that 85% of the business is very, very stable. Now the rest, CMOS image sensor historically was above 10% this year, it will be a little bit less. And this will be compensated by what we call general 2D inspection applications things like MEMS and other applications, which are smaller in the volume. But from the business point of view, there aren't any differences or declines. The only thing I would say, is the CMOS image sensors, and this is strongly related to mobile phone sales.

Got it. And then just one more on the coverage. So totally understandable that you're seeing limited visibility. I think broadly, markets are just getting weaker in general. And you're kind of talking about a semiconductor market that's down next year. Have you thought about what your business can grow in a scenario where wafer fab equipment is down 20% plus. I'm just trying to understand, you guys have clearly outgrown the market for the past several years in a market that's down, say, 10% or 20%, how much growth do you think you see off of a market that's a little weaker next year?

Yes. So Tom, I think it is much too early to say today what will be with our current visibility to really say -- to be the good indication of the '23 business, what we believe that will do better than the industry. And at this stage, how much better than the industry, it is really too early to say. And I believe that within a quarter or so, we'll be in a much better position to give more accurate statements.

The next question is from Charles Shi of Needham & Company.

I have first a little bit longer-term question not specific to 2023. I think a lot underappreciated part of your business you have a very broad customer base, 250 active. I mean assuming each one of them just buy 1 or 2 systems, that's enough to support you to $300 million annual run rate. And I believe it was a big part of your story over the past few years that you keep adding customers either in the greenfield customers or competitive displacement. However, I do want to ask you this question from this point and forward -- how much of the incremental additions of new customers do you think it's going to be -- could there be a slowdown of the number of customers you can add going forward from here? And specifically, I want to ask you about wafer manufacturers. I don't recall you talked about that particular set of customers. And is that some competitive displacement there?

I didn't think about it before. First of all, I believe it will continue to add new customers. And the broad addition of customers is in general. It's not related to one specific territory. I think as we grow the business, we are getting into new segments. And therefore, yes, we'll continue to add the customers. Whether it will be in the range of this year that we've already added 42 customers, I'm not sure whether it will be or it will be in a different magnitude, but definitely, if you look also historically into previous years, we've been adding a significant number of customers every year. Now specifically, wafer manufacturers. Yes, we are adding new wafer manufacturers to our portfolio, and we continue to add. And when I look at the target market for 2023, I believe that we'll have new customers in this segment as well. Did I answer your question?

Yes. So the other question I have is, well, first of all, we appreciate you, from time to time, provide new press releases about the latest orders you received from your customers. But your last update was in early September. So between September to now over the last 2 months, how do you see the ordering rate going? And I may have another follow-up after this.

So I think Rafi, mentioned it in the previous remark that you talked about, yes, we've been adding orders. I think currently, we see customers are waiting to make sure that they're getting the business before they turn the pipeline into PO's. But when we look today at our backlog and as the pipeline, the business is healthy, really the big question, and this is why we are -- we have a limited visibility is the rate of the customer turning potential deals from the pipeline into PO's. They are taking more time and they will -- the lead times are shorter. And so I think we'll have a better assessment and we'll be able to give better numbers and more accurate numbers within a couple of months.

Yes. But I would like to add a formal comment. Usually, when we make announcement of order, it should be of what we call multiple system orders. We don't make announcement for 1 or 2 system per customers. That's a big difference. And if we look on our portfolio, it's definitely contained a lot of partial 1 and 2 this unit per customer. So definitely, we don't make any announcement of each order of debt.

So maybe my last follow-up is backlog. What's the -- based on your backlog, what's your visibility into first half 2030? Can you see something shipment scheduled what's the latest? Is it the second quarter '23? Or is it still first quarter '23.

Well, looking into the backlog, we have backlog today that is already including machine shipments in the first and the second quarter. However, we still need in order to complete shipments for both quarters, we will need to convert some of the pipeline into -- that's exactly what we're doing today.

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

Congratulations on the execution in the third quarter. A lot of discussion around backlog and orders and visibility into calendar '23. So I wanted to pivot to gross margin. Moshe, you talked about some large customer dynamics that impacted gross margin in the quarter. Can you just identify if there were any other factors that impacted gross margin? And what should be expected with gross margin beyond the calendar fourth quarter? Would they get back to that 51% level? Or are there input costs or other large customer items that would have been maybe sub-50 or right around 50%?

So the main impact of the relatively lower gross margin for the third quarter was indeed a few large orders that we have delivered in the quarter, and we will continue -- we will complete the delivery of them over the course of the fourth quarter. So you will see some improvement in the fourth quarter, but not to the full extent. We should go above the 50% mark next year. I'm not sure to the full 52% the upper limit, but we should be able to go back to above the 50% level.

And then the second question just relates to operating expense. And I acknowledge we're dealing with an unusually uncertain environment. But the question is this, if order trends and other dynamics meant that we weren't seeing the backlog conversion to firm orders. As you look at operating expense, do you feel like you have any flexibility to reduce operating expense tactically? Or given the significant increase in customer engagements, do you really have pressure on R&D to scale that up so that you can do the work that you need to do to serve all these new customers?

So the 2 key elements in our operating expense structure is the R&D and sales marketing G&A stays pretty much flat. We believe that our business model is pretty agile, so we can change some of the all the expense mix between direct and indirect. On the R&D front, I think Rafi, mentioned in his prepared remarks that we want to continue to invest. We have plans to introduce new products and new capabilities. So this is definitely an area that we don't want to affect. But within the sales and marketing, there are certain activities that can be changed based on activity level.

And then for my final question, a real strong cash performance in the quarter. Here we are with $460 million in cash and equivalent. Rafi, can you just give us an update on how you're thinking about M&A? I know you've talked about it in the past, and one of the things that precluded significant progress was that we had a COVID environment that really made it hard to get out and meet potential targets in person. But what should investor expectations be as we exit '22 and look into '23 on potential there?

Yes. Regarding M&A, definitely, we now invest a lot of efforts. And the same time, not participate the meeting in Israel because it also -- I'm investing on this issue. So we really believe that we can do something in the next few months, definitely. But it's a long process. Even if you find something you want to make today, especially good, good to check everything, to be sure that this is the right [ merge ] and not to do -- to make any mistake. So we do it cautiously. But definitely, we invest a lot of efforts to execute, I would say, in the next 6 months, something.

And can you talk a little bit about what your priorities are, whether it's increased geographic and market exposure, a particular technology capability?

You talk about M&A priority -- M&A?

Yes.

Look, I would say that since we've taken major market share, we are not looking for a company similar to Camtek or doing something like Camtek -- this is not so -- I don't think it bring any advantage for us. We focus more on some -- in one hand, should be in the same market segment, but on the other hand, in different technology or different product lines. And then we can still use our infrastructure of sales and marketing and support and enjoy this infrastructure to promote another product line. And this is roughly the way -- this is the priority that we are giving. And there are some areas there are metrology, there are some process. The other thing that's still targeting the same segment as we focus, and we really believe that we can bring some results very soon.

That make sense, not so much scale, but really technology extension, product line extension.

The next question is from Gus Richard of Northland.

Yes. Just on the firm end side, you mentioned you've got pretty good demand from excuse me, compound semis, and I was just wondering is that silicon carbide, gallium arsenide, [indiscernible] carbide, gallium nitride, which compound semiconductor is driving in that part of your business?.

I think today, what's dominant in the business in the last, I would say, couple of quarters, it's definitely the silicon carbide portion.

And how much of your front-end business is compound?

Now I would say, it differs from quarter-to-quarter. It is roughly, I would say, close to 10%. But it's 1 quarter or more 1 quarter less, roughly 10% of the business.

And then just one last attempt on visibility. 90 days ago, you were spotting out, I think, into Q1. Today, if somebody came in and wanted a tool as soon as possible, when could you accommodate that customer?

This is a difficult question, Gus, because it really depends on the kind of tool that he wants. So certain tools will be able to give him in less than 2 quarters. how much less it depends. But I would say it is the soonest we can give is roughly 4 months to 6 months. This is the soonest we can give somebody a tool.

Got it. And what is that in normal times, if we ever get back to that, what would that lead time be?

That's the lead time. I mean you're talking about 16 to 20 months -- 20 weeks. And if you go back, let's say, 6 months or a year ago, I think those lead times extended up to 2 quarters. So definitely lead times are shorter today by roughly, I would say, they have shortened by roughly number anywhere a bit around 1.5 months to 2 months. And that's exactly the difficulty that we have been describing now because having said that, people understand that we can provide machines at around 4 months. And therefore, the less quick to secure the stocks, they understand that there are slots in our manufacturing. And therefore, this limits our visibility to the first half of next year.

And do you have any supply constraints at this point? Or has the supply chain issues been alleviated?

I believe they have been alleviated. We -- there are some issues here and there. There is a missing component here and there. But we are able to get the material that we need. I don't see that supply chain issues today are -- will create any shorter date or lack of the ability to ship and machine. So I think this is not the main issue today that we have. Overall, we can get the parts, I say, the supply chain in general is getting to, I would say, more reasonable situation.

Okay. And then the last one for me. Today, roughly, what is your quarterly revenue capacity?

I think that we are not -- I think we discussed this in previous calls, we have made a significant investment in a [ clean room ] capacity. And today, the capacity is -- it's not a limitation anymore. We've increased our capacity by about 50%. We are today able from our facility to ship about $0.5 billion of revenues or in machines. So this is not a limitation anymore.

[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.cl.io beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

Yes. 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 their tremendous performance and we look forward to continuing. 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 Third Quarter 2022 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.