Camtek (CAMT) Q3 2020 Earnings Call Transcript

Camtek (CAMT -0.19%)
Q3 2020 Earnings Call
Oct 27, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's third-quarter 2020 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 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. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin, please?

Kenny Green -- GK Investor Relations

Thank you. Good day to all of you. I'd like to welcome all of you to Camtek's third-quarter 2020 results conference call and I would also like 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; and Mr. Ramy Langer, Camtek's COO. Rafi will provide an overview of Camtek's results and discuss market trends in the third quarter of 2020.

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. 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 effects of general economic conditions, the effect of the COVID-19 crisis on global market and on the markets 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 effects of the COVID-19 pandemic; 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 for the foreseeable future, but also Taiwan and Korea, including the risks of deviations from our expectations regarding timing and size of orders from customers in these countries, changing industry market trends, reduced demand for services and products, the timely 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 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 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.

I would now like now to hand the call over to Rafi, Camtek's CEO. Rafi, please go ahead.

Rafi Amit -- Chief Executive Officer

OK. Good morning, and thank you for joining our call today. In the third quarter, we continued the momentum of increasing sales to our existing customers, as well as, to new customers. Total sales in the third quarter were $40.1 million, close to 25% increase over Q3 '19, and a record quarterly revenue.

Gross margin was 48.8% and operating margin was 19%, marking a continued improvement in profitability compared with the first half of 2020. The order we have received together with sales in pipeline indicate a strong sales forecast for Q4, as well as, the first half of 2021. In the fourth quarter, we specifically facing a demand for customer to supply more systems than we had planned to ship. So we are making considerable effort to meet customer requirements to ship on time.

We estimate sales in the fourth quarter to be between $42 million and $44 million. Based upon order received and current pipeline, the company believes that revenue in the first half of 2021 will be similar to the revenue level in the second half of 2020, representing approximately 25% growth over the first half of 2020. Despite the high demand and uncertainty we face these days require a careful assessment as we must consider there might be fluctuation in revenue between quarters. Distribution of sales between the various territories is very similar to the second quarter, about 90% in Asia and 10% in Europe and the U.S.

It should be noted that our Asian revenue includes facilities of U.S. and European-based companies. The main application that continue to lead the market are advanced packaging, CMOS Image Sensors, and RF devices. We have also expanded our presence in front-end, mainly for macro inspection applications.

Over the past few months, we have learned to operate our company alongside COVID-19. Installation are performed by local teams in each of our territories. When a special feature has been developed for a customer, guidance for installation is provided remotely by the R&D team at headquarters in Israel. Most employees work from company's facility while some work from home.

We take all necessary precautions to keep our employees healthy and safe. We continue to follow development in the global economy and our customer situation. Currently, we do not see a sign of weakness in demand. On the contrary, customers are continuing to order more systems and using our systems at a normal utilization rate.

Moreover, new packaging technologies, we increased the need for our systems in customers' production line. We continue to collaborate with the leading IDM customers to develop metrology and inspection solutions for the next-generation of advanced packaging. As we said in the past, we expect these applications to become meaningful to our business. We trade to importance of cooperation with the leading IDMs because once they move from development stage to high-volume production, we will be there, ready to run production with our qualified systems.

We believe this new inspection companies who are not involved in the development process of the next-generation of advanced packaging will require considerable time to develop suitable solutions. Our growth drivers have not changed. The main drivers in our market are advanced packaging, memory, CMOS Image Sensor, and RF devices for 5G smartphones. 5G is pushing demand for high-end smartphone sales.

Compared to previous generations, these 5G phones include more silicon, more advanced packaging, and larger number of RF devices in each phone. As a result, we are experiencing demand of 5G-related applications. We see adoption of new packaging technologies by our customers. Adoption of new technologies requires extensive use of inspection and metrology systems.

In addition, we are expanding our available market by penetrating to new segments in the front-end. To summarize 2020 -- to summarize, I'm sorry, 2020 is shaping up to be another record year for Camtek. As for 2021, high demand for customer, market drivers, the performance of our systems, and increasing market presence and customer satisfaction give us a tailwind toward 2021, but it is important to stress that we are still seeing the COVID-19 pandemic effect causing risks and uncertainties. We examine the market demand and business situation of our customers on an ongoing basis.

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 times. Moshe?

Moshe Eisenberg -- Chief Financial Officer

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 tables at the end of the press release issued earlier today. As Rafi mentioned, third-quarter 2020 revenues were a record $40.1 million, an increase of 23%, compared with the $32.5 million reported in the third quarter of 2019, an 8% increase versus the previous quarter.

Asia accounted for most of our revenues with 88% contribution. Revenues from Europe and U.S. accounted for 12%. Gross profit for the quarter was $19.5 million.

The gross margin for the quarter was 48.8% versus 47.1% in the third quarter of last year and 46.1% in the previous quarter. This was in line with our expectations for a higher gross margin in the second half of this year. Operating expenses in the quarter were $11.9 million. This is compared with $10.1 million in the third quarter of last year and to the $10.7 million reported in the previous quarter.

The increase versus the second quarter is mainly due to the increased sales and marketing expenses or increased revenues and an increase in our R&D activities. We expect additional increases in these expense items in the fourth quarter in order to support the forecasted growth in business volume in the coming quarters and the development of capabilities for the next-generation advanced packaging requirements. Operating profit in the quarter was $7.6 million, an improvement of 19.6% versus the $6.4 million in the previous quarter. Operating margin was 19%, compared to 17.2% in Q2, mainly as a result of the improved gross margin.

Net income for the third quarter of 2020 was $7.3 million or $0.18 per diluted share. This is compared to a net income of $5 million or $0.13 per share in the first quarter of last year and $6.3 million or $0.16 per diluted share in the second quarter of 2020. Turning to some high-level balance sheet and cash flow metrics. We generated $5 million in cash from operations in the quarter.

Net cash and cash equivalents and short-term deposits as of September 30, 2020, increased to $106 million, compared with $101.5 million at the end of June 2020. With the current business momentum, we expect revenues of $42 million to $44 million in the fourth quarter. This means we expect our annual revenues to exceed $150 million for 2020. And with that, Rafi, Ramy, and myself will be open to take your questions.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question is from Craig Ellis from B. Riley FBR. Please go ahead.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Thanks for taking the question and good afternoon, and congratulations on the very strong quarter and guide team. I wanted to just start off by following up on an announcement that the company had recently on front-end macro inspection. I think that's been an area of recent strength. Can you just give us a little bit more color on what you're seeing there from a demand standpoint and how that factors into the visibility that you talked about for the first half of calendar '21?

Rafi Amit -- Chief Executive Officer

Ramy, do you want to answer that?

Ramy Langer -- Chief Operating Officer

I will take the question. Well, I think we've said it a number of times. We are baking two more segments on the front-end. And definitely, this is part of the forecast that we are seeing into the fourth quarter and the first quarter of next year, and we are getting traction from quite a few customers.

And definitely, this is becoming the segment that is meaningful to the customer -- to the company.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's helpful, Ramy. Can you just help us understand where you are now relative to what you think the longer-term opportunity is in front-end macro inspection? So if we were to look out to, say, calendar '23, where are we in late 2020, early 2021 relative to that longer-term market penetration potential?

Ramy Langer -- Chief Operating Officer

Well, I think we're still in the first stage. We are in a number of customers in different areas of the front-end, as we said, it's the back end of the line, but definitely, we are gaining more and more traction. You know our customers get to see our machines, they like it, they order more. Other companies hear of us, it's the market presence.

It's the overall market and technical capabilities that we are gaining as we enter more and more customers. So definitely, we are in the first stage. I definitely believe that this is only to become a very meaningful part of our business as we proceed over calendar time. So if you are talking '23, it will be definitely significantly more than it is currently today.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's helpful. And then the next question, I'll go back to Rafi. Rafi, clearly, it seems that as you exit calendar '20 and look into '21, there is strength in the business across front-end macro inspection, advanced packaging, image sensor. I assume high-bandwidth memory comes back, but can you help us understand as you look at the business, which of those areas have the potential to be the most significant growth drivers for the company next year?

Rafi Amit -- Chief Executive Officer

I would say, in general, there are three countries that I think taking the major market share. It's Korea, Taiwan and China. If you look at the overall investment in capital -- capex in these three territories, you can see that they take most of the [Inaudible] investment. So naturally, when you invest a lot of money in the semiconductor, we will enjoy.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

And in those areas, would you expect the growth in your key areas, advanced packaging, panel processing, and image sensor to be fairly equal next year? Or do you have visibility on whether one would be materially greater than the other at this point?

Rafi Amit -- Chief Executive Officer

It is not so easy to predict, but I would say we can see and understand the advantages that this type of -- this packaging technology can bring in many, many aspects, of low power, of better signal, many things, and it's pushed the idea -- mainly the idea to move toward this type of solutions. And according to our experience, we can see the beginning of a ramp up -- of high-volume ramp-up, I would say from the beginning of the year -- of the next year. So it is not something in the long-term. This is going to be, I think, in the midterm as well.

Ramy Langer -- Chief Operating Officer

Rafi, let me elaborate a little bit more. And if you look at the opportunity, there is no doubt that advanced packaging is the major opportunity. And from the volume point of view, the different markets that it serves, the ramp, even without the memory, it is very significant. So definitely, we think that the advanced packaging is the largest opportunity, then will come the CMOS Image Sensors that is going to stay significant and then RF devices, and then the general 2G, which includes the front-end.

So I hope that these colors will put you in the right proportion of your question.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That does. I appreciate that. And I don't want to ignore Moshe, so I'll ask two questions to you, please. First, on gross margin, very strong performance in the quarter from 48.8%, Moshe.

What are some of the puts and takes as we think about either mix or any of the COVID-related issues that the company might be navigating as we look out over the next two to three quarters for gross margin?

Moshe Eisenberg -- Chief Financial Officer

Hi, Craig. No, I think it mainly has to do with the improved mix. Also, the business volume helps with fixed expenses level, but it definitely relates to the deal mix, and then we are basically back on track to where the business model should be. The first half was a little bit unusually low.

No COVID-19 major impact on our results this quarter. Some puts -- you know, ins and outs, we -- obviously, we saved a lot of money on travel, but at the same time, people really didn't use much of their vacation because basically this was a lockdown here. So our vacation expenses went up. So I think overall, the COVID-19 impact is pretty insignificant this quarter.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

And then -- go ahead --

Rafi Amit -- Chief Executive Officer

And then -- sorry, I would try to add maybe a little bit technical data will help you to understand the term mixed product. When we talk about mixed product that would really affect the price, I would say there are -- let's talk about 2D and 3D. Each customer has two different applications, so two different sensors for 2D and 3D. This is one important issue.

The second is the defect size. If customer is looking for very, very small defect size and you must use the very high modifications, then overall machine, the accuracy, the performance, the throughput becomes critical. In this case, the amount of players that can provide to customer such solution is just a few, not everyone can make all these together. I mean, detect the small defect with very high volume, with reasonable price, all this together.

So this is the two major issue that really affects the ASP and what we call later on as a mixed product.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's very helpful color. I appreciate that. And then lastly before I hop back in the queue, Moshe, you mentioned a couple of things that would impact operating expense in the fourth quarter, expenses related to new product development, etc. How do we think about the trajectory of opex beyond the calendar fourth quarter and into the first half of next year?

Moshe Eisenberg -- Chief Financial Officer

I think we will see some increase in operating expense level due to the things that I've mentioned before, in the fourth quarter and probably also in the beginning of the year. I'm not sure how this will play out in the second half of 2021, some items will probably go down after we finish the certain developments and projects, and investment in certain sales and marketing activities. So I think that we will see some increase in the fourth quarter and probably in the first quarter as well.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

That's helpful, team. Thank you.

Moshe Eisenberg -- Chief Financial Officer

Thank you.

Operator

The next question is from Quinn Bolton of Needham & Company. Please go ahead.

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Let me extend my congratulations as well. I wanted to follow-up on Craig's question on the macro-inspection business. I believe that business is probably running today in the high single-digit percentage of revenue.

Do you think it can get to 10% or more of revenue in calendar '21, given some of the traction you've seen? And then you mentioned out in calendar '23, it would be a significantly larger percent of business. Do you think it could get to something in the range of maybe 15% to 20% of sales out in that time frame? And then I've got a couple of follow-ups.

Ramy Langer -- Chief Operating Officer

Absolutely. That sort of -- the answer here is yes. We definitely, there are lots of opportunities. The business is on track.

It's growing. We are getting into new customers, into existing customers. So definitely, the numbers, the ballpark is in the right way.

Quinn Bolton -- Needham and Company -- Analyst

Fantastic. And then following up, obviously, advanced packaging, you've highlighted for several quarters as one of your biggest opportunities. I think last quarter and again on this call, you mentioned increasing traction with certain IDMs. Just wondering, when do you think that IDM business really starts to ramp for you? Is that included in the better pipeline for the fourth quarter and the first half of '21?

Ramy Langer -- Chief Operating Officer

Definitely, we are seeing already this business starting to happen. And we expect it to start already in the fourth quarter and definitely will be more significant next year.

Quinn Bolton -- Needham and Company -- Analyst

Great. And then lastly for Moshe. You had given us a quarter ago sort of your outlook for improving gross margins in the second half of the year supported by the mix of business in the pipeline. Wondering if you might provide sort of your thoughts on gross margin into the first half of '21 since it sounds like you've got a pipeline that gives you pretty good visibility in the first half.

Can it stay in the current range of sort of 48% to 49%? Do you see it trending higher or lower than that level? Any commentary would be helpful. Thank you.

Moshe Eisenberg -- Chief Financial Officer

Right. So, hi, Quinn. We believe that second half of 2020 will be back to like 48% to 50% gross margin level. Q3 is already within the range and we believe that Q4 will be similar.

We think that we have all the reasons to believe that Q -- the first half, actually, of 2021 will be also within this range of $48 million to $50 million.

Quinn Bolton -- Needham and Company -- Analyst

Great. Thank you very much.

Moshe Eisenberg -- Chief Financial Officer

Thank you.

Operator

The next question is from Shahar Cohen of MORE Investment House. Please go ahead.

Shahar Cohen -- MORE Investment House -- Analyst

Hi, guys. Thank you and congrats for great results. Two questions, one is more operational. Other big semi [Inaudible] companies mentioned their ability to remote support and put a lot of entities on their ability to use AR to remote support the client.

To what extent do you believe the COVID eliminate or hinder your ability to support the client, to what extent do you use this kind of tools? And the second one is more a technological question. I just see -- again, correct me if I'm wrong, I guess you're mostly in the CoWoS domain. To what extent do you believe you can play now in the WoW or the CoW advanced packaging area?

Ramy Langer -- Chief Operating Officer

Hi, Shahar, this is Ramy. So from the remote support, this is something that we've been doing for years using this technology. The only difference today, we just can't send people. So customers understand it and they have put all the provisions point of view from cybersecurity so we can do it online.

And then the difference -- the main difference here is that instead of having a person on-site with the customer, a person here just connects to the machine and have the ability to do all what he needs to do as if he's there on-site. That's the main difference, but it's a big difference. And all in all, we are providing even faster support to our customers. So that, I would say, the difference.

Regarding your second question, I didn't follow exactly the -- if you could repeat at which part exactly of the advanced packaging you were referring to?

Shahar Cohen -- MORE Investment House -- Analyst

One of the largest clients, which is also one of the largest foundries in the world, they plan to open two advanced packaging fabs next year. And I think they mentioned in one of their blogs that while currently they focus on the CoWoS, chip-on-wafer-on-substrate, they are moving more to chip on -- or they also introducing more chip-on-wafer and wafer-on-wafer technology. So my question is whether the -- to what extent do you play currently in chip-on-wafer-on-substrate and to what extent should we expect you to play more in the chip-on-wafer and wafer-on-wafer technology?

Ramy Langer -- Chief Operating Officer

OK. So now I understand. So first of all, what you are talking about are the current technologies. We are one of the major supplier to these areas, specifically to the metrology and also to the inspection.

And we play a major role and we will continue to play a major role in the future on all of the new techniques and technologies. And I think Rafi mentioned, if you talk in specifics, that we are working with many of the major IDMs and companies and organizations that are involved in development of new technologies for the advanced packaging. So definitely, we will provide answers or solutions to the areas that you have just mentioned. Shahar?

Shahar Cohen -- MORE Investment House -- Analyst

Thanks.

Ramy Langer -- Chief Operating Officer

All right.

Operator

The next question is from Gus Richard of Northland Securities. Please go ahead.

Gus Richard -- Northland Securities -- Analyst

Yes. Thanks for taking my questions. Real quick on the front-end macro opportunity. Can you give a little color as to where you're seeing the demand geographically, memory versus foundry, maybe process node, whatever color you can give on sort of the customer concentration and where the interest lies?

Ramy Langer -- Chief Operating Officer

I would like -- I'm very hesitant to talk about geographies and customers because this is very confidential and customers -- our customers don't like us to talk or mention them in public. So what I can say that, first of all, we see it in IDMs and foundries. So we see, I think, across -- it's not just specific, just foundries or IDMs rethinking several areas that we are getting this business. It's not only in one geography and it's not only in one specific application.

So really, this is a variety of applications, different customers. It's also in different geographies across the front-end market. And this is why I believe, that as we said and mentioned before, we are in the high one-digit number from our revenues point of view. We are very optimistic that we are going to grow this business significantly over the next few years.

Did I answer it, Gus?

Gus Richard -- Northland Securities -- Analyst

Yes. Just maybe I'll just try one more time. Is it 28-nanometer and above? Or are you getting into the more advanced nodes?

Ramy Langer -- Chief Operating Officer

Mostly at this stage it's the 20 and above, but definitely, at certain customers, we will go also to lower geometries.

Gus Richard -- Northland Securities -- Analyst

Got it. That's helpful. And then on the advanced packaging, can you -- do you have a sense of what your total available market is for advanced packaging at this point?

Moshe Eisenberg -- Chief Financial Officer

$250 million?

Ramy Langer -- Chief Operating Officer

You know, I'm a little hesitant to throw in a number. We can definitely follow-up with you on the number. It's something that we can't come up with fairly quickly.

Gus Richard -- Northland Securities -- Analyst

OK. That would be very helpful. And then --

Ramy Langer -- Chief Operating Officer

We will follow-up with you.

Gus Richard -- Northland Securities -- Analyst

Yeah. Thank you. That's it for me.

Ramy Langer -- Chief Operating Officer

All right. Thank you.

Operator

Thank you. [Operator instructions] 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 Camtek's website, www.camtek.com, beginning tomorrow.

Mr. Amit, would you like to make your concluding statement?

Rafi Amit -- Chief Executive Officer

OK. Thanks. I would like to thank you all for your continued interest in our business. I would like to thank all of our employees and my management team for their solid performance so far in 2020, and we look forward to continuing it.

To our investors, I thank your long-term support. We will be presenting at a number of virtual conference in the coming weeks and we hope to speak with many of you at these events. To the rest of you, I look forward to talking with you again in three months' time for our full-year 2020 results. Thank you, and goodbye.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Kenny Green -- GK Investor Relations

Rafi Amit -- Chief Executive Officer

Moshe Eisenberg -- Chief Financial Officer

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Ramy Langer -- Chief Operating Officer

Quinn Bolton -- Needham and Company -- Analyst

Shahar Cohen -- MORE Investment House -- Analyst

Gus Richard -- Northland Securities -- Analyst

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