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Camtek (NASDAQ:CAMT)
Q3 2021 Earnings Call
Oct 27, 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 third-quarter 2021 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 press release. If not, please view it on the company's website. With me on the call today, we have Mr. Rafi Amit, Camtek's CEO; Mr.

Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, COO. Rafi 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 would 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. 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 markets and on the markets in which we operate, including the risk of a contained -- of a continued disruption to our and our customers' providers, business partners and contractors' businesses as a result of the outbreak and effects of the COVID pandemic. Risks related to the concentration of the 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 foreseeable future, but also Taiwan and Korea, including the risks of deviations from our expectations regarding timing and sizable orders from customers in these countries, changing industry and 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 risks identified in the company's documents filed with the SEC. Please note that the safe harbor statement in today's press release also covers the contents of this conference call.

Furthermore, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future events and evaluate the company's current performance. We believe that the presentation of non-GAAP financial measures are useful to investors' understanding and assessments of the company's ongoing operations and prospects of the future. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings press release.

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

Rafi Amit -- Chief Executive Officer

Thanks, Kenny. Good morning, and thank you for joining our call today. We continued the momentum of growth from quarter to quarter. In Q3, we demonstrated another record financial performance.

We ended the third quarter with $70.7 million revenue over 50% gross margin with 30.6% operating margin, and we generated over $60 million in cash. The strong profitability is due to several factors: an increase in revenue, attractive product mix, the leverage that we have in our financial model and the fact that the increase in expenses doesn't keep pace with rapid growth in sales. We are in a process of gradual increase in R&D investment and marketing channels to respond to market and customer demands. I will further discuss it later.

We estimate that we will continue to see a moderate revenue increase for the next quarter, and we see positive signs for the first half of 2022. Our revenue guidance for the fourth quarter is $72 million to $73 million. The reasons for the increase in demand of semiconductor, as we mentioned in previous calls, have not changed. We expect Camtek to continue benefiting from all these trends in the next few years.

In the third quarter, approximately 50% of our sales were for inspecting advanced packaging wafers especially for Fan-Out application, supporting mainly mobile phones. 20% of our revenue were for inspecting compound semi wafers. This wafer are used for power devices and RF devices, which will go into mobile phones and for automotive industry, especially for electronic cars. About 15% of our sales were for front-end applications, which continue to grow and will account for about 15% of our business this year.

A few words about the potential of the compound semi market. A major segment of compound semi silicon carbide used for power device market and has been driven by power supply applications. The automotive industry is becoming the major market for silicon carbide applications, following notable adoption by Tesla in 2018. Since then, more Tier 1 OEM component and carmaker has made announcement on their adoption of silicon carbide technology in some of their product.

In the prospering silicon carbide to power the devices market, the automotive segment is the foremost driver and as such, will hold more than 50% of total device market share in 2025. Other application include lidar and face recognition. The compound semiconductors and especially silicon carbide manufacturing process is unique and requires dedicated solution for inspection and metrology. In Q3, sales to Europe and the U.S.

accounted for about 18% of the total sales, and I expect continued growth from these territories. China continues to be our largest territory this quarter. We are aware of the energy problem that exists in China and may affect our customers. But we also understand the importance and strategic role of the semiconductor industry to China.

From our discussion with several customers, we believe that the semi industry will get the priority in energy allocation. We are monitoring the China situation closely. Lately, we have won a major evaluation at a global Tier 1 player and received an order for our latest Eagle mod. We expect additional order in 2022 from this customer.

This month, we are celebrating the shipment of 1,000 Eagle system since we introduced this mod in late 2014. Our Eagle platform was originally designed with modular concept. Since the production of the Eagle, we have developed three new generations of the same basic platform and have recently started to ship the fourth generation. This modular design has enabled us to maintain our leadership position and to ramp our business while meeting our customer requirements in a very efficient manner.

In addition, we are in the process of developing new products based on new technologies that we intend to introduce in 2022 and beyond. We will continue to invest in R&D and adjust the level of investments to the technological challenges we see in the coming year. R&D capabilities is a key factor to continue maintaining our leadership position and meet our customers' road map. To summarize, high demand for semiconductor component have been leading to an increased demand for inspection and metrology systems.

Camtek is strongly positioned in the market, and we expect the fourth quarter to close an exceptional record year in sales growth and profitability. I would like to hand over to Moshe for more detailed financial discussion of the financial results. Moshe?

Moshe Eisenberg -- Chief Financial Officer

Thanks, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appear in the tables at the end of the press release issued earlier today. Third-quarter revenues came at a record $70.7 million, an increase of 76% compared with the third quarter of 2020 and 5% compared with the previous quarter.

The geographic revenue split for the quarter was as follows: Asia, 82%; and the rest of the world, 18%. I would note that this represents a significant increase in revenue from U.S. and Europe. Gross profit for the quarter was $36 million.

The gross margin for the quarter was 50.9% versus 48.8% in the third quarter of last year and 52.1% in the previous quarter. This is the third quarter in a row of gross margin of above 50%, a result of a significant increase in the business volume. The change in the gross margin from the previous quarter was due to the slightly different mix of products. Operating expenses in the quarter were $14.3 million.

This is compared with $11.9 million in the third quarter of last year, and to the $16.7 million reported in the previous quarter. Our quarterly operating expenses are mainly influenced by the sales channel mix and the level of R&D expenses. In Q3, we enjoyed relatively favorable sales channel mix. Both R&D and sales expenses are expected to increase in Q4.

As Rafi mentioned, we plan to continue to invest in R&D. Operating profit in the quarter was $21.7 million, compared to the $7.6 million reported in the third quarter of last year and $18.5 million in Q2. Operating margin was 30.6%, compared to 19% and 27.4% in previous quarter. The high operating profit is a result of the factors I've just mentioned.

Net income for the third quarter of 2021 was $20 million or $0.45 per diluted share. This is compared to a net income of $7.3 million or $0.18 per share in the third quarter of last year. Total diluted number of shares as of the end of the third quarter was $44.7 million. Turning to some high-level balance sheet and cash flow metrics.

Inventory level was $61.8 million, and it went up by $2.8 million over the quarter. This is to support the current demand for our products and to ensure the availability of key components. We monitor the supply chain concerns on an ongoing basis. At this point, we do not foresee any issues there.

We generated $16.5 million in cash from operations in the quarter. Net cash and cash equivalents and short-term deposits, together with $10 million cash that we have in long-term deposits as of September 30, 2021, is $215 million. Since the beginning of October, we have received orders for over $26 million, which definitely gives us confidence in our business momentum. We expect revenues of $70 million to $73 million in the fourth quarter.

With that, Rafi, Ramy and myself will be open to take your questions. Kenny? 

Kenny Green

Thank you, Moshe. [Operator instructions] Our first question is gonna be from Craig Ellis of B. Riley. Craig, you may go ahead.

Craig Ellis -- B. Riley Securities -- Analyst

Yes, thanks for taking the question, and congratulations on the strong revenues and the robust margin performance, team. Moshe, I'll start just following up the comment that you and Rafi made about quarter-to-date orders. I was hoping you could provide some insight on the competition from an end-use standpoint whether those were predominantly advanced packaging, high bandwidth power or whether you are seeing continued strong momentum out of compound semi, which was very strong in 3Q.

Ramy Langer -- Chief Operating Officer

Yeah, Hi, Craig, this is Ramy. First of all, what is interesting about these type of orders, they are from multiple Tier 1 customers, mostly IDMs. And from application point of view, it really follows the applications that we are seeing for our -- as Rafi mentioned. It's the 50% advanced packaging.

It's the compound semi that is coming very strong and also front-end application. So it really is across the entire application range that we have been experiencing lately. And also what is interesting about this batch is from all the territories. It's not related to a specific territory. 

Craig Ellis -- B. Riley Securities -- Analyst

That's really helpful color, Ramy. Thank you for that. My next question is related to the comments on the compound semi market. So one, I was hoping the team could just provide some context on that market size, say, a year ago because certainly, 20% of sales in the third quarter, it looks like it's growing quite dramatically.

And is it the company's view that this is a level of revenue that could be sustainable going forward? And is this something that is completely semi expansive? Or is this cannibalizing some of the power management market and the IGBT area that we might have thought that the company could have had too much exposure to?

Ramy Langer -- Chief Operating Officer

No, no, this is not compromising any other application. I mean, this is definitely a segment that has been growing. I would say it's surprising, growing a little faster than we thought. It's very hard at this stage to tell you whether this is sustainable at the level of percentage from our overall business, but it's definitely building up to be a sizable business.

And I believe within a few quarters, we'll be able to size it better from the opportunity point of view. What is interesting about this specific market that we said both the front-end portion and also the back -- the end of the process until post dicing. So really, there are a few steps that we are doing. It's for few -- I would say, it's from different customers in different territories.

So definitely, the opportunity is there. And as I said, we will size it over time more accurately. 

Craig Ellis -- B. Riley Securities -- Analyst

Well, congratulations on that important progress in a fast-growing application area. My last question before I hop back in the queue, I'll direct to Moshe. Moshe, opex came in much better than I expected in the calendar third quarter. Were there any timing issues or onetime items there? And you mentioned that opex would be up in the fourth quarter.

Can you provide some qualitative or quantitative color on that? And then, just help us with the trajectory of opex from there given the expected investment in R&D and sales and marketing. Thank you.

Moshe Eisenberg -- Chief Financial Officer

Yeah, thanks, Craig. So the issue with the opex is -- as I mentioned in my prepared remarks that beforehand is that it's influenced by -- mainly by two factors: the level of R&D spending and sales and marketing. And R&D, Rafi mentioned, we are in a process of gradual increase of the R&D -- level of R&D expenses. And you will see some increase over the course of the next few quarters, and that's definitely in the plans.

With respect to the other item, it's mainly sales channel mix. In some territories, we work directly and in other territories, we use reps and agents to support the sales activity. This quarter, indeed, it came a little bit lighter or lower than we anticipated. Our plans for the fourth quarter is that it will come back to a more sustainable level.

So we will see some increase on the sales and marketing level of expenses in the fourth quarter. 

Craig Ellis -- B. Riley Securities -- Analyst

Thanks, Moshe. And congratulations, again, team.

Kenny Green

Thank you, Craig. Thanks, Craig. Our next question is from Charles Shi from Needham. Charles, you may go ahead.

Charles Shi -- Needham & Company -- Analyst

Also my congratulations on the strong result. I did notice your Q3 sales is almost close to the 2016 semiconductor sales for the full year and very few companies can achieve that kind of level of sustained growth. Congratulations. So I want to follow up the orders you recently received since October.

You mentioned a little bit about the application space, what kind of customers. What's your expected delivery date for those batch of orders? Can you give more color on that? 

Ramy Langer -- Chief Operating Officer

Some of these orders will be shipped in the fourth quarter, very few, but mostly are for the first half of next year. 

Charles Shi -- Needham & Company -- Analyst

Thank you. So my second question is on the DRAM side. I noticed that unless I missed it, you didn't make a comment in the prepared remarks. Obviously, you were expecting DRAM to come back.

But in recent months, there has been lots of crosscurrents in this part of the market. So are those orders -- are you seeing those are still firm or you're seeing any changes?

Ramy Langer -- Chief Operating Officer

No, we don't see any changes. We are expecting to ship multiple machines to more than one customer for DRAM applications in the first half of next year.

Charles Shi -- Needham & Company -- Analyst

Got it. Thank you. So my last question is around CMOS Image Sensor. I want to look a little bit ahead into 2022.

Obviously, this has been a little bit -- investment level has been coming under a little bit in 2021. Do you sort of expect that things will come pick up again? I know that has been your stance, but I just want to understand what you see in that part of the market and how much upside it can drive for our 2022 sales. Thank you.

Ramy Langer -- Chief Operating Officer

So Charles, I do expect -- yes, '21 is a little bit lower or slower in the investment side compared to the previous year. But still, it's gonna be a sizable number this year, and we expect to maintain the double digits next year as well. It's definitely a significant market for us. We're speaking with our customers.

There is a lot of activities there. So it might go up a little better, but all in all, we're talking about double digits for the CMOS Image Sensors market.

Charles Shi -- Needham & Company -- Analyst

Thank you.

Kenny Green

Thank you, Charles. 

Rafi Amit -- Chief Executive Officer

Thank you, Charles.

Kenny Green

Our next question is a dial-in question. Please identify yourself as we only have your number here.

Tom O'Malley -- Barclays Investment Bank -- Analyst

This is Tom O'Malley from Barclays. My first is related to the major evaluation at a global Tier 1 player that you mentioned in the preamble. You said you expected additional orders in 2022 from this customer. Could you just size for us what that opportunity looks like in terms of total revenue over the next couple of years? 

Ramy Langer -- Chief Operating Officer

Well, I would say that definitely, obviously, we cannot go into details and names as we are under our NDAs, but it's definitely, it's in the area of advanced packaging. This is a very important customer and also a big name, so it's influential in the industry. It's multiple machines over the next couple years.

Tom O'Malley -- Barclays Investment Bank -- Analyst

All right. That's helpful. And then, I just wanted to ask a question on the geography split. This quarter, it looks like you're seeing some increased exposure for the rest of the world and you specifically called up the U.S.

and Europe. Could you talk about what trends are going on there that's making those regions be a bit better and call out the particular area where you're seeing the success there? 

Ramy Langer -- Chief Operating Officer

Well, what I can say about the -- in Europe and in the U.S., they are similar in the sense that is mainly Tier 1 IDMs, that where we do most of the business. And what we are seeing expansion in these Tier 1 IDMs and this is the reason for the increase in the business. 

Tom O'Malley -- Barclays Investment Bank -- Analyst

Thank you. I appreciate it.

Ramy Langer -- Chief Operating Officer

And what I can add a little bit more, these are IDMs that we have penetrated in the last several years. And I think, this is the reason for the upside in the business that we are currently seeing. 

Tom O'Malley -- Barclays Investment Bank -- Analyst

Thank you.

Kenny Green

Thanks a lot, Tom. [Operator instructions] And we have a follow-on question from Craig Ellis of B. Riley. Craig, your line is open.

Craig Ellis -- B. Riley Securities -- Analyst

Yes, thanks for taking the follow-up questions, team. I wanted to just ask a longer-term question. Really, and I'm not looking for specific guidance. I know the company doesn't provide that out for the next year, but I wanted to get a sense qualitatively some of the things that you were seeing on the growth horizon as we look at calendar '22.

And I wanted to get your perspective on that in a way that I don't typically ask -- because typically, I would be focused on things like advanced packaging or compound semi or RF, etc. But given some of the big fab projects that we are seeing being built, I'm wondering if that has an impact to next year's growth. So if you could just help us understand what you're seeing as you look ahead to calendar '22 with some of your key growth drivers, that would be helpful. 

Ramy Langer -- Chief Operating Officer

Let me try. I'll give you an answer and if I'm not clear enough, you can just ask further. But first of all, the $26 million that we just received is definitely an indication that the kind of business momentum we are starting to see for the next year. So this is a strong indication.

Now we are looking at our backlog for next year. We are looking at the pipeline. We're having a lot of discussions with our customers. And also the DRAM specifically, as I said, we are expecting to get -- we are expecting to ship things in the first half.

So if you take all of this together, this gives us a very, I would say, positive feeling moving into '22. So now, you asked specifically, and so I'm very hesitant to answer about specific fabs because this would indicate some delicate customer information that we are very sensitive about. But definitely, I can say that the tailwind from building all these fabs, we are feeling it. And it's definitely a business that eventually from these expansions, we will see additional business. 

Craig Ellis -- B. Riley Securities -- Analyst

That's really helpful, Ramy. Thanks for providing that color. The second thing I wanted to follow up on is really a clarification. Moshe, from your comments, I inferred that there wasn't a material negative impact in the third quarter from supply chain issues either to revenue or gross margin.

Was that right? Or was there just not a material sequential impact? And to what extent are things like higher shipping costs and other things impacting the gross margins that we're now seeing. 

Moshe Eisenberg -- Chief Financial Officer

It was a very, very minimal impact. Obviously, shipping expenses are going up, that's for sure. And we see some components prices are going up. But overall, the impact of these are very limited and minimal to the results in the third quarter and also in the fourth quarter.

Craig Ellis -- B. Riley Securities -- Analyst

Got it. OK, thank you very much. Appreciate the help.

Moshe Eisenberg -- Chief Financial Officer

Thank you.

Ramy Langer -- Chief Operating Officer

Thank you.

Kenny Green

We have questions over the chat, which I'll read out. Can you discuss whether any of the big orders are from new fab builds as opposed to capacity increases?

Ramy Langer -- Chief Operating Officer

The new order is $26 million which we mentioned. I'm looking at the list, it's in front of me and it's mostly at this stage, I can say that there is one specific order that comes from a new facility. They are mostly expansions of existing facilities.

Kenny Green

OK. We have a follow-up to that. How much of the new business appears to be due to new technology nodes requiring new inspection techniques such as what we see with the new stack DRAM requirements?

Ramy Langer -- Chief Operating Officer

So there is some business that is related. It's very hard for me to quantify it on this call, but definitely some of the business go into technological changes. But as I said, I would say the bulk of the business is expansion. But there is significant, I would say it's in double digits this quarter, definitely going to technological changes.

Kenny Green

OK, thank you for that. [Operator instructions] Looks like there's no additional questions. So before I move back to Rafi, this call will be available from Camtek's website in the coming hours. Thank you, everybody, for joining.

And now back to you, Rafi. 

Rafi Amit -- Chief Executive Officer

OK. 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 continue it. To our investors, I thank your long-term support.

I look forward to talking with you again next quarter. Thank you, and goodbye.

Duration: 13 minutes

Call participants:

Kenny Green

Rafi Amit -- Chief Executive Officer

Moshe Eisenberg -- Chief Financial Officer

Craig Ellis -- B. Riley Securities -- Analyst

Ramy Langer -- Chief Operating Officer

Charles Shi -- Needham & Company -- Analyst

Tom O'Malley -- Barclays Investment Bank -- Analyst

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