Camtek (CAMT) Q2 2021 Earnings Call Transcript

Camtek (CAMT 3.79%)
Q2 2021 Earnings Call
Aug 04, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kenny Green

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's results zoom webinar. My name is Kenny Green, and I'm part of the investor relations team at Camtek. [Operator instructions] I would like to remind everyone that this conference call is being recorded, and the recording will be available on Camtek's website from tomorrow.

You should have all received by now the company's presentation. If not, please view it on the company's website. With me today on the call, we have Mr. Rafi Amit, Camtek's CEO; Mr.

Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO. Ramy will open by providing an overview of Camtek's results and discuss recent market trends. Moshe will then summarize the financial results of the quarter.

Following that, Rafi, Moshe and Ramy will be available to take your questions. Before we begin, I'd like to remind everyone that certain forward-looking information provided in this call are internal company estimates, unless otherwise specified. 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 obligations 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 actual events or results may differ materially from those projected, including as a result of the effects of general economic conditions, the effect of the COVID-19 pandemic on global markets and on the markets in which we operate, including the risk of continued disruption to our and our customers, providers, business partners, contractors' business, the risk related to concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which we expect to generate a significant portion of our revenues for the coming few quarters, as well as Taiwan and Korea, including the risks of deviations from our expectations regarding timing and size of orders from customers in these countries, changing industry and market trends, reduced demand for our products, the timing development of our new products and their adoption by the market, increased competition in the industry, price reductions, as well as due to risks identified in the company's filings with the U.S. SEC. Please note that the safe harbor statement in today's press release also covers the contents of this conference call. In addition, during this call, certain non-GAAP financial measures will be discussed.

These are used by management to make strategic decisions, forecast future results and evaluate the company's future performance. Management believes that the presentation of non-GAAP financial measures are useful to investors' understanding and assessment of the company's ongoing cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings press release. I would now like to hand the call over to Ramy, Camtek's COO.

Ramy, please go ahead.

Ramy Langer -- Chief Operating Officer

Thank you, Kenny. Good morning, and thank you for joining our call today. We are enjoying a continuing growing demand for our systems, which has allowed us to demonstrate record-financial performance quarter after quarter. We ended the second quarter of 2021 with $67.5 million in revenues, over 52% gross margin and with 27% operating margin.

The strong stability is a result of a rapid increase in sales and favorable product mix. Before I review the second quarter, I would like to give a brief overview of the market environment. We're experiencing demand from all territories and especially from Asia. We expect to show continuous increase in sales in the next two quarters, and we see positive signs for Q1 of 2022, based on forecast from all segments and specifically the DRAM.

Our revenue guidance for the third quarter is $69 million to $71 million. The reasons for the increasing demand of semiconductors, as we mentioned in previous quarters, are fueled by the transition to 5G mobile phones and the increased demand in data centers. The 5G-based phones include new packaging technologies such as system-on-package, advanced CMOS Image Sensors, advanced packaging, RF and power device modules. In addition, we see the automotive industry undergoing the major change with electrification, connectivity and autonomous driving.

We expect Camtek to continue benefit from all these trends in the next few years. Our success is a result of secular trends that we have been discussing in the past, which has come to fruition, and we are enjoying them now. Mainly the transition to advanced packaging with heterogeneous integration and Fan-Out growing at a very fast pace, requiring extensive inspection and metrology, as well as the increased demand for CMOS Image Sensors. China is becoming a major territory in the packaging segment.

Three out of the top 10 OSATs are Chinese. Most of the other foreign OSATs have large facilities in China, and we see new Chinese OSATs entering the market. Camtek has been active in China for many years and is well-positioned in the semiconductors market. Our global market position, coupled with our technology leadership, enable us to leverage all the opportunities in the Chinese market, in addition, penetrate new segments such as the front-end.

We expect over 80% growth year over year for the first nine months of 2021. We believe that we will outperform the strong industry growth due to our focus on the fastest growing segments, technology leadership, our ability to respond quickly to customers' demand, excellent local support and our strong position in Asia. I would like to highlight a few points about Q2. 88% of our sales came from Asia, with China being the largest territory.

About 60% of the systems offer advanced packaging applications, including Fan-Out and heterogeneous integration, which are expected to continue growing in the coming quarters. CMOS Image Sensors is also a solid segment for Camtek, and 18% of our revenues were sold to these segments. We have a healthy backlog for the second half of the year. We are in the process of expanding our production capacity to address our long term growth strategy.

We are adding clean room space for integration and testing of our systems. In addition, we are increasing our inventory levels and headcount to support the increased demand. To summarize, high demands for semiconductor components have been leading to an increasing demand for inspection and metrology systems. Camtek is providing its customers with reliable, high-performance systems, tailored to their special requirements.

Camtek is strongly positioned in the market and as things stand today, we expect 2021 to be an exceptional record year in sales, growth and profitability. I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

Moshe Eisenberg -- Chief Financial Officer

Thank you, Ramy. In my financial summary ahead, I will provide you 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. Second-quarter revenues came at a record level of $67.5 million, an increase of 82%, compared with the second quarter of 2020 and 18%, compared with the previous quarter.

The geographic revenue split for the quarter was as follows: Asia was 88% of the quarter, with the rest of the world, 12%. Gross profit for the quarter was $35.2 million. The gross margin for the quarter was 52.1% versus 46.1% in the second quarter of last year and 60.7% in the previous quarter. The improvement in the gross margin was due to significant growth in revenues, as well as more profitable products and sales mix this quarter.

Operating expenses in the quarter were $16.7 million. This is compared with $10.7 million in the second quarter of last year and to the $13.5 million reported in the previous quarter. The increase from the previous quarter is mostly due to increased volume and sales channel mix. Operating profit in the quarter was $18.5 million, compared to $6.4 million reported in the second quarter of last year and $16.6 million in the previous quarter.

Operating margin was 27.4%, compared to 17.2% and 27.2% in the previous quarter. The high operating profit is a result of the high gross margin, together with the rapid growth in revenues, while we are still in the process of adjusting our expense structure to support the increased volume. We expect same level of operating margin in the next couple of quarters. Net income for the second quarter of 2021 was $17.1 million or $0.38 per diluted share.

This is compared to a net income of $6.3 million or $0.16 per share in the second quarter of last year. Total diluted number of shares at the end of the second quarter was 44.8 million. Turning to some high-level balance sheet and cash flow metrics. Inventory level was $59 million, and it went up by $10 million over the quarter.

This is to support the current demand for our products and to ensure the availability of key components. Accounts receivables went up by $5.8 million due to the increased sales, offset by improved collection in the quarter. We generated $19.9 million in cash from operations in the quarter. Net cash and cash equivalents and short term deposits as of June 30, 2021 were $189.3 million.

And together with the $10 million cash that we have in long term deposits, the total cash amount is $200 million for the quarter. This compared with $180 million at the end of the first quarter. With the current business momentum, we expect revenues of $69 million and $71 million in the third quarter. And with that, Rafi, Ramy and myself will be open to take your questions.

Kenny Green

[Operator instructions] Our first question will be from Craig Ellis from B. Riley. Craig, you may go ahead.

Craig Ellis -- B. Riley Securities -- Analyst

Yeah. Thanks for taking the question, and team, congratulations on a very strong result and a strong outlook. I just wanted to start with a clarification on the strength in revenues in the second quarter and in the guidance versus my model, at least. 2Q is about $3.5 million better.

The guide, about $5 million better. Can you just talk, Moshe or Ramy about where you might have seen strength that is above expectations from three months ago across the business, whether it's in CIS or advanced packaging or other areas.

Ramy Langer -- Chief Operating Officer

Hi, Craig. I think it's both. You can see there was a very strong quarter for the CMOS Image Sensors, 18% of the revenues came from it. It was more -- it was higher than we expected, as we discussed in the previous quarter.

No doubt on the advanced packaging, there is a lot of activities, and there is a good strength in the short term and strength looking forward in the use of heterogeneous integration and Fan-Out are both at a very high increase and we're getting a lot of repeat orders and also new customers. So, overall, there is, I would say yes, a little bit more revenues than we expected. And definitely, the outlook is very positive.

Craig Ellis -- B. Riley Securities -- Analyst

That's really helpful, Ramy. And as a follow-up question, I wanted to tack something that's little bit longer term. I think in the press release and in the comments, the company commented on visibility into early 2022, which is unusual for this time of year. I was hoping that you could frame up what you're seeing as you interact with your various customers as you look out to 2022 on trends that are at play, either with things that we've just talked about like image sensors or potentially High-Bandwidth Memory, Front-End Macro Inspection and then advanced packaging as we move to much more of that with high performance compute.

How do the revenue dynamics frame up with their gives and takes as you look to calendar 2022? Not asking for guidance, but just your sense of the market next year.

Ramy Langer -- Chief Operating Officer

No, no. I think at this stage, what we can see is people are positive and starting to ask for slots in early next year. I think I mentioned specifically on the DRAM, we have been asked -- we have a solid forecast for sales for the DRAM market, which shows some of the strength of the market. And it's -- I think when we look forward, there is nothing very specific that comes out.

I think it comes across from the -- from our applications, CMOS Image Sensors. It's, obviously, the advanced packaging and in the advanced packaging the memories and we see also strength in other areas as the compound semi, power devices, RF. No doubt, the industry is moving in a very positive momentum. People are very anxious to see deliveries.

They want to see their machines already in their facilities. And then as a result, people are starting to talk about slots for early in next year. And so the overall picture is definitely very, very positive.

Craig Ellis -- B. Riley Securities -- Analyst

That's encouraging, and thank you. I'll shift to next question before getting back in the queue. Over to Moshe. Moshe, real nice job on the margins in the business.

But the question is, one of the things we've seen, not just in semiconductors and capital equipment, but more broadly in technology is that there are supply chain costs that -- in many cases, are impacting margins. It doesn't appear that that was the case in the second quarter or in the color that we're getting on margins for the third quarter for Camtek. But can you just clarify, were there any supply chain issues that would have impacted shipments or your ability to deliver and is there any gross margin impact related to those issues in the quarter or the other?

Moshe Eisenberg -- Chief Financial Officer

Yes. So no doubt, there is some pressure from the supply chain across the boards. We see shortage, we see price pressures. And with such a huge growth year over year this comes into play in the last few months.

So far, we've managed to work around it. There are some price increases, but not significant that impacts our margins. We've managed to also look through the shipping expenses, and they are now in reasonable levels. So overall, I -- we do see some pressure and some supply chain issues, but not to the extent that they have huge impact on the margin itself.

Craig Ellis -- B. Riley Securities -- Analyst

That's helpful. Thanks team, and congratulations again.

Kenny Green

Thank you, Craig. Our next question will be from Charles Shi of Needham. Charles, please go ahead.

Charles Shi -- Needham & Company -- Analyst

Thank you for taking my question. I think the first question I want to ask is around your advanced packaging side of the business. Obviously, 2021 has been very, very strong. And I understand there are things you consider as secular, for example.

I do remember you've said your tools can inspect about -- from a few million to possibly a couple of 10s of million bumps per wafer. That requirement is really coming up and you've been asked to inspect about 500 million bumps per wafer at about the same time or maybe a similar throughput. So how do we think about that secular trend in terms of complexity? But we also face another thing that may be a little bit more transitory here because 2019, 2020, there may be a little bit underinvestment by the industry in '21. There was a little bit of catch-up demand.

How should we think about how the secular versus transitory demand are playing out in '22? How does that shaping up from your vantage point about the advanced packaging businesses of yours? Thank you.

Ramy Langer -- Chief Operating Officer

Let's talk about the secular. I think you mentioned the number of bands. So today, I would say the typical wafer would have about 10 million to 20 million bumps per wafer. We are getting wafers today from 60 million to 100 million bumps.

And obviously, down the road, there's going to be a lot more bumps per wafer. So this is something that the industry is going to go through because of the requirements for power consumption, for bandwidth, for all kinds of things that are required from the -- as the components grow and progress. So this is a trend, this is a secular trend. This is an enabling technology to move ahead in the roadmap of all the major players.

So that's something that is going to happen and to continue, and it relates to primarily heterogeneous integration, you talk about Fan-Out and all the other segments are going to grow. So maybe there is a catch-up this year, and there'll be less catch up next year, but when I look two, three, five years ago, no doubt that this trend is going to continue. And I think as the leader in this segment, definitely, we will -- we are going to enjoy it in the longer term. In the shorter term and in the longer term.

Charles Shi -- Needham & Company -- Analyst

Thank you for the nice color. I want to go over to the other segment of your CMOS Image Sensor. I heard you did say the other segment, DRAM, you see some pickup in early 2022 and how about the CMOS Image Sensor, which has been a very, very important sector and a segment that kind of serves as one that dampens the decline in bad years for other segments. So the thing I want to ask is, one trend we're really seeing in CMOS Image Sensor is the IDMs appears to be outsourcing more to foundries, especially to foundries in Taiwan.

We've heard Samsung maybe outsourcing more to UMC. We also heard TSMC maybe setting up a fab in Japan, which could take some of the outsourcing orders from Sony. I wonder whether you view that kind of outsourcing trend from a CMOS Image Sensor IDMs to foundries being net positive, net negative or neutral to your business? And the second part of this question is really it has been strong this year and especially this quarter, but on a run rate basis, CMOS Image Sensors seems to be lower this year than 2020. Are you seeing any signs so far that things could turn more positive next year? Thank you.

Ramy Langer -- Chief Operating Officer

So I'll start with the first question. I think the trend to outsource by some of the players to go to foundries, I think it's a neutral event from our point of view and I don't think it will affect drastically our business, and we are going to enjoy this business anywhere, wherever it goes. Now to your second question. I think, we said in previous calls that we expect that the business this year will be double digits.

We thought it will not be as high to the extent that we enjoyed from a percentage point of view as last year. We thought it will be lower in percentage, but still significant. Will be double digits. We still forecast it in the same way.

I think the second quarter was extremely strong. The next quarters may be a little bit lower the numbers, but all in all, we are seeing and talking to our customers. We continue to see in the next few quarters healthy growth in expenditure in this area. So no doubt, the CMOS Image Sensors we expect it to continue to be a significant part of our business.

Charles Shi -- Needham & Company -- Analyst

Thank you so much.

Kenny Green

Thank you, Charles. Our next question is going to be from Thomas O'Malley from Barclays. Tom, please go ahead.

Tom O'Malley

The first one is really for Moshe. When you look at this past quarter, you're already operating above your long term model. The gross margins are great and the follow-through is really great as well. You mentioned in your prepared remarks that you're adjusting expenses to kind of match the run rate of your business.

Can you talk, one, the timing of those rolling on expenses into the back half of this year? What should we see in terms of those additional investments and the timing around that? And then two, if you're able to operate at these better gross margins, could you kind of update us on what the -- what the new or what an updated model may look like given the success that you're having in some of the end markets you are?

Moshe Eisenberg -- Chief Financial Officer

Hi, Tom. So first of all, I'll touch upon the gross margin question. So we operated this revenue level between 50% to 52%, depends on revenue mix, depends on profitability of the deal mix, and also -- and I don't expect to deviate much from that perspective, even with the supply chain pressure or with other issues around it. So I believe that between 50% and 52% it drives margin for us to operate at this level.

With respect to operating expenses, we are in the process of adding headcount across the board, mainly in R&D functions, as well as in production and customer support. That's the main area that we are hiring for, and that these people are needed to support the growth. We are talking about the process that we will take, I would say, three quarters -- Q3, Q4 and Q1. And throughout this time, we will adjust the headcount level.

And at the same time, we are adding some other operating expenses to support the growth. All in all, I think that what we are going to see in the next three quarters is relatively higher gross operating margin than our target model. So the current level of 27%, will be -- will stay with us in the next three quarters. And then based on our ability to adjust the expense level, I think we will be anywhere between 25% and 27%.

So that's kind of how I see the long term or the midterm in terms of operating profitability.

Tom O'Malley

Great. That's helpful. My follow-up is really about the visibility into the beginning of '22. You mentioned some activity with DRAM customers.

You also mentioned in the prepared remarks about some new OSAT customers in China. Can you talk about the mix of business into next year that you're seeing? Where are you feeling most comfortable? I know you mentioned DRAM a bit earlier. But particularly in China, what's the cadence of new customers that are coming online and are they representing a large part of what your forecast is looking like into next year?

Ramy Langer -- Chief Operating Officer

I think when we talk about the applications, it's not just in China. I think it's similar in most of the territories. 60% is advanced packaging. In advanced packaging today, it's a technology that is used more and more for high-end applications, and we see it everywhere in all the geographies and this, definitely, is strong and going to stay strong.

When we talk about DRAM, it's again -- it's in the -- as part of the advanced packaging. It's -- I would say it's a specific application for advanced packaging. And then are all the rest of the applications. If it's Front-End, it's an area that we are gaining momentum.

It's power devices, compound semi, of course, CMOS Image Sensors that we discussed. So basically, we don't see a major change in the application mix. I think they're going to stay around the numbers that we mentioned.

Tom O'Malley

Great. Congrats on the nice results, guys.

Kenny Green

Thank you, Tom. [Operator instructions] Next question will be a follow-up from Craig Ellis from B. Riley. Craig, please go ahead.

Craig Ellis -- B. Riley Securities -- Analyst

Thank you for taking the follow-up question. Just a very strong performance on numerous assets of the business, including converting strong operating performance into cash. And with the cash investments balance up to $200 million, it's a good opportunity just to check in and see what the company is seeing on the potential acquisition front. I know that's part of the strategy.

I know that the COVID restrictions make it hard to do some of the front-end execution that go along with that. But can you give us an update on how you're thinking about M&A in this environment, team? Thank you.

Moshe Eisenberg -- Chief Financial Officer

Yeah. Craig, yeah, indeed, we are very focused on the M&A front. We said that this is our No. 1 priority for cash use.

We -- and actually, the team that is involved in this process is Rafi, Ramy and myself so we are really investing a lot of efforts and time on that. I think we are making progress. We have a list of targets and we are very active. Nothing that will be immediate, but we hope this -- we will have something to report at some point.

We are working hard on that and there are opportunities, and hopefully, something will come out of this process.

Craig Ellis -- B. Riley Securities -- Analyst

Moshe, I don't know if it's possible, but can you elaborate a little bit on areas of technology interest, geographic interest or maybe customer acquisition interest that might be at play as you and Rafi and Ramy work through different options and think about how you use M&A to position Camtek for another leg of growth.Rafi AmitOK. There are -- the way how we select the potential companies is, first of all, based on -- let's say, first priority to find a company that we can see a good synergy between us. That's No. 1 priority.

Other priority, of course, it's always to be in the same market that we are active and we try to select profitable company. We don't want to look on start-ups. And even if we find a some potential company, the fact that we cannot travel, we cannot visit, we cannot accelerate this process, this is definitely -- it is obstacle. And it's not so easy for us to manage it only by remote control.

So, definitely, this type of M&A right now in this time is going slower than we expected. But definitely, we try to find good companies with potential that could be [Inaudible] very well.

Indeed, Zoom works great for earnings call, maybe not it's great for the early part of an M&A engagement. Rafi, thanks so much for that color. Thanks team.

Ramy Langer -- Chief Operating Officer

Thank you.

Kenny Green

Thanks, Craig. Our next question will be from Patrick Ho from Stifel. Patrick, please go ahead.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much, and congrats on the nice quarter. Maybe a question for Moshe first, in terms of the supply chain, you addressed it in your prepared remarks and answer to questions. But I was just wondering from an inventory-building perspective, do you believe that 3Q is probably the peak in terms of trying to get additional parts to buffer yourself or is this something that could also carry into Q4 as well?

Moshe Eisenberg -- Chief Financial Officer

We are in the process of building up inventory further to support the growth and we are taking a commitment also for 2022 now, given the strengths and the improved visibility into the beginning of 2022. So no, it's not the peak. We are continuing to build up inventory as we continue to increase revenue levels. Yeah.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's helpful. And maybe just as a bigger picture question on the technology front, you mentioned heterogeneous integration several times on the call, and that's obviously a key growth market in the advanced packaging segment. From, I guess, the types of device that you're seeing the greatest interest, one of them is high-performance computing.

But what other areas or what other type devices are you seeing the interest, especially on the heterogeneous integration front?

Ramy Langer -- Chief Operating Officer

I think it's primarily today high-performance computing. This is, I would say, the main application.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Thank you very much.

Ramy Langer -- Chief Operating Officer

You are welcome. Thank you.

Kenny Green

And that concludes the question-and-answer session. Before I hand over back to Rafi, I'd like to remind everyone that in the coming hours, we will upload the recording of this call to the investor relations section of Camtek's website. I want to thank everybody for joining this call and again, we'd appreciate any feedback you have with regards to this new format. And with that, I'd like to hand back to Ramy for the concluding statements.

Ramy Langer -- Chief Operating Officer

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 the management team for their tremendous performance, and we look forward to continuing it. To our investors, thank you, long term for support. I look forward to talking with you again next quarter.

Thank you, and goodbye.

Kenny Green

[Operator signoff]

Duration: 36 minutes

Call participants:

Kenny Green

Ramy Langer -- Chief Operating Officer

Moshe Eisenberg -- Chief Financial Officer

Craig Ellis -- B. Riley Securities -- Analyst

Charles Shi -- Needham & Company -- Analyst

Tom O'Malley

Patrick Ho -- Stifel Financial Corp. -- Analyst

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