Camtek Ltd (CAMT) 2022 Q1 法說會逐字稿

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)

Following the formal presentation, I'll provide some instructions for participating in the live Q&A session. I'd like to remind everyone that this conference call is being recorded, and the recording will be available on Camtek's website.

This meeting is being recorded.

You should have all now received the company's press release. 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. 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 able 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.

And with that, I'd now like to hand the call over to Rafi. Rafi, please go ahead.

Thanks, Kenny. Good morning or good afternoon for everyone. As we announced a few weeks ago, we started 2022 with strong backlog and with impressive flow of orders. We continue with this momentum and 2022 looks like another year of growth. Revenue in Q1 was over $77 million. This represents a growth of 35% over the first quarter last year. Gross margin was 52% on the high end of our model, and operating margin of 28.8% is in line with our mid-term target financial model. Furthermore, despite the ongoing negative global geopolitical environment, the company has received order of more than $150 million since the beginning of the year. The orders were received from a broad range of customers and will be used for various applications such as Advanced Interconnect Packaging, including DRAM, Compound Semi, Front End and CIS. This strengthens our expectation for another record year with year-over-year revenue growth of mid to high teens.

The side effects of the COVID-19 continue to interrupt our business as delivery times for material and parts are still long, prices of components and parts are more expensive, borders of some countries in Asia are still practically closed, and our field engineers cannot visit customers as often as they used to do in the past or travel for advanced training in Israel.

In China, the situation is more complicated. Most of the semiconductor industry in China is in the Shanghai area. Thus, a lockdown in Shanghai affects the whole industry. Plants are operating, but they do so at lower capacity, the usual. All in all, the entire semiconductor manufacturing chain is disrupted due to the lockdown in Shanghai, including ports and airports in this area.

The good news is the flow of incoming orders from China and from the rest of the world. We continue to receive orders at a very impressive rate, to some extent even exceeding our expectations. We are taking into consideration that there might be delays in installing machines at certain Chinese sites, but there will be a catch-up.

The semiconductor market forecast remains positive according to several sources. Our backlog is high. And when taking into account our pipeline, we are at a better position than at the same time in 2021. Based on our current estimates, our guidance for Q2 is for continued growth in revenue to between $77 million to $80 million.

The highlight of Q1, Advanced Interconnect Packaging continues to be our largest segment with heterogenous integration becoming a significant portion. We continue to expand our market share and sold 10 machines to new customers. Specifically, we are cementing our position in the Front End and Compound Semi segment, and shipping machines to existing and new customers.

We shipped several systems to new CIS customers and one order for RF filter for one of the largest RF filter manufacturers in the world. We shipped several systems for DRAM applications, and we predict additional systems in the second quarter and second half of the year.

We completed the development of new important modules and feature that will open additional segments for us. This quarter, the U.S. and Europe accounted for 21% of our sales versus 18% in the last quarter and 12% in Q1 of last year. These trends highlight the strengthening of our position in the U.S. and Europe as a result of the major industry investment taking place there.

Let's end my summary. I would like to hand over to Moshe for more detailed discussion of the financial results. Moshe?

Thank you, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between 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 $77.2 million, an increase of 35% compared with the first quarter of 2021 and 4% compared with the previous quarter. Revenue was mainly driven by Advanced Packaging, which accounted for about 50% of sales, and approximately a 20% contribution of Compound Semi.

The geographic revenue split for the quarter was as follows: Asia 79%; and U.S. and Europe together 21%.

Gross profit for the quarter was $40.2 million. As we mentioned on our last call, gross margin for the first quarter was relatively high with 52% versus 50.7% in the first quarter of last year and 50.9% last quarter. The higher gross margin was due to a more favorable product mix sold during this quarter.

Operating expenses in the quarter were $18 million. This is compared with $13.5 million in the first quarter of last year and to the $16.8 million reported in the previous quarter. The increase from the previous quarter is mostly due to increase in R&D and sales-related activities.

Operating profit in the quarter was $22.2 million or 28.8% margin compared to the $15.6 million or 27.2% reported in the first quarter of last year.

Net income for the first quarter of 2022 was $21 million or $0.44 per diluted share. This is compared to a net income of $14.6 million or $0.33 per share in the first quarter of last year.

Total diluted number of shares as of the end of Q1 was 48.1 million.

Turning to some high-level balance sheet and cash flow metrics. Inventory went up by $5 million from the end of December 2021. This is to support the current demand for our products and to ensure the availability of key components.

The complicated geopolitical situation and the COVID-19 implications create supply chain challenges. We are increasing the inventory levels to improve the flexibility in our sales channel in order to overcome these challenges.

We used $0.4 million in cash from operation in the quarter due to timing of collection, which relates to the Chinese New Year, also increasing inventory levels and a tax payment, including for the settlement we have discussed last quarter.

Total cash and cash equivalents and deposits as of March 31, 2022, is $428.3 million, similar to the level we have reported at the end of 2021.

As Rafi stated before, the business looks healthy. We received approximately $150 million of orders since the beginning of the year. And we feel good about meeting our plan for 2022 of mid- to high-teens growth year-over-year. We expect revenues of between $77 million to $80 million in the second quarter.

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

Okay. Thank you, Moshe. (Operator Instructions) And we will take all of your questions now. So our first question is going to be from Brian Chin of Stifel.

Thanks so much for the call and good results. A couple of questions. Maybe to start with, based on your disclosures, it looks like bookings this quarter in 2Q is tracking maybe around $40 million-ish kind of similar pace, I think, to last quarter. And so if trying to extrapolate this out, do you expect a similar book-to-bill well above 1 this quarter? And maybe more importantly, given the rising cost environment, should we expect the profitability on these systems in backlog to be similar or maybe lower relative to your typical gross margin level?

With respect to the book-to-bill, obviously, first, bookings until today are higher than the revenue. So our book-to-bill is greater than 1, but I'm not sure that this implies that our revenue is in line with the bookings that we had until today. So basically, we don't expect -- we expect some decline or some stabilization in bookings in the coming quarters that will meet our annual revenue of mid to high-teen growth.

With respect to the profitability, we expect pretty much the same level of profitability in terms of gross margin in the coming quarters. So we don't expect any major impact of the cost to the profitability.

Okay. Got it. That's impressive then. And maybe just sort of calibrating growth for the year. Again, you're talking about mid to upper teens overall revenue growth. To what degree does this range account for the risk of further disruption to your customers' manufacturing or even your own supply chain? And also that's kind of part A.

And part B would be, if you look at that growth rate for the overall business, how would you expect Advanced Packaging, Front End, and Specialty maybe to track relative to that overall growth?

So Brian, this is Ramy. Let me answer. Let me start with the supply chain. Definitely, there are disruptions, but I think we have been able to learn how to manage and work in this environment. Moshe mentioned it that we increased our inventories in order to be sure that we have enough inventory even if we get a slightly different mix of orders. So from that point of view, we feel comfortable that we will be able to supply all the requirements from the marketplace, so this is from the supply.

From the Advanced Packaging point of view. So definitely, we are running today and when we see the booking and when we see the mix of the products, whereabout 50% of our business continues to be in the Advanced Packaging. It is healthy. And we mentioned that we got the orders for the DRAM segment. What specifically the application is the high bandwidth memory. This definitely is an important segment. It supports the high-performance computing segment, so it is in line with the area of growth that we see in the industry. So from that point of view, we're definitely -- we feel very comfortable with the current forecast and the influx of the orders and the customers' response.

Now Compound Semi is definitely strong. And I think you saw in the previous that about 19% of our revenues for the quarter was for Compound Semi, it's a little high. And CMOS Image Sensors came at 10%. Front End was a little bit lower than the 25% we reported last year. But as we look at the forecast, definitely, it's going to be a healthy segment in this year. So overall, from the mix point of view, we do not see any major changes. The areas that we are strong continue to be healthy, and so from that point of view, we feel very comfortable.

Okay. Thank you, Brian. Our next question is going to be from Thomas O'Malley from Barclays.

Just the first one on gross margins. Obviously, in this supply environment, it seems like you guys are doing a good job of, one, keeping inventory; and two, being able to at least pass on some of these costs. Can you talk about any actions you might have taken with customers? Are you raising prices at all to keep these gross margins where they are?

And then you made a comment just on the first question there that margins should stay at this level. Do you mean like the 52% level? Or do you mean within the range that you kind of previously guided, which is 50.5% to 51.5%.

Tom, so first of all, I think it's a good question about gross margin. I wanted to correct myself. When I said we will maintain gross margin, I meant we will maintain the current range of 50.5% to 52%. It depends on product mix. We feel more comfortable anywhere between this range. And specifically, for the next couple of quarters, I would say, gross margin will vary between 51% to 52%. That just to correct my previous statement.

With respect to actions that we are taking, we are definitely looking for more suppliers to make sure that we are not going to be dependent on one supplier. We are building higher inventory levels, we are buying more inventory parts, and we are getting some discounts on parts.

Let me add a couple of things. I think, Tom, what we were able to do is to find some sources in certain areas that actually reduced our cost. And in specific area of the machine bill of material, we were able to bring in significant cost that somewhat offset the rest of the -- obviously, there is an increase in the prices of the material we buy. But given these changes, we were able to offset some of it. So all in all, there is an increase in the bill of material, but it is comparatively smooth.

On the demand area, we are able to maintain a high ASP, and we are in certain areas able to increase the prices, but overall, we are maintaining a healthy level of prices to our customers. So from that point of view, we are confident that we will be able to maintain the current level of synergies.

Okay, helpful. The follow-up is just kind of pro forma some of the disclosures you gave. The last couple of quarters, you gave Advanced Packaging, Compound Semi, Front End, and then others. And then this quarter you gave CIS separately. Is the right way to kind of think about it -- I would assume you need to break out others into both Front End and others. So is the correct way to think about Advanced Packaging 48%; Compound Semi 19%; Front End around 13%; and then other, which is CIS, around 10%. I know you mentioned Front End was a little lower, but I just want to pro forma kind of the disclosure there from the prior quarter.

I think in general, the numbers you mentioned are correct. I don't have in front of me the exact number of the Front End. As I said, it was a little lower than usual, but we do expect it to rise to more or less the same levels that we experienced last year. So from that point of view, we don't see any weakness in this market segment, but your numbers are more or less accurate.

Okay. And then just let me sneak one more in here. You guys have kind of talked about, for the entire year, just being under $70 million or so in terms of OpEx. If you look -- and you signaled pretty clearly at the end of last year that you need to invest more in the business. Just given the higher revenue that you guys are now seeing, are you updating what you think you're going to need to spend this year? Should that OpEx move a little bit above that $70 million range? And by how much?

No, Tom, the current level of OpEx, which close to $70 million for the year, stays the same. We're not changing anything, and we feel comfortable that this will be able to support the current level of business.

Thanks, Tom. Our next question is going to be from Charles Shi of Needham.

Yes. Sorry, I may have a little bit of technical difficulty. So maybe my first question, I really want to go back to the question around China lockdown. I think some of the questions were asked around the supply chain side of it. I think you mentioned something around delivery, because a good amount of your customers are in the Shanghai region. They may be subject to some of the impact due to the lockdowns. So my question is for your Q2 guidance, have you risk-adjusted some of the delivery issues, potential delivery disruption of new tools into that particular area or maybe overall China? And can you quantify that for us?

So thank you for the question, Charles. So first of all, based on our current estimates, and we went in very detail when we made these estimates. And we've done a few things from delivery to really give a priority to the areas across the world globally that we have good access and we are sure that we can make the deliveries. And this also includes really giving priority to customers that are not in the areas of the lockdown. So yes, we understand the issue, we sized it, we looked at it, and we are comfortable that our current guidance takes into consideration the current issues we are seeing in China.

Got it. Got it. So maybe I want to ask a little bit more on the ordering front. I know this is not typically how you segment your end market. Any of the, I mean, puts and takes of the order intake between the subcontractors and IDMs because I understand you sell to both segments of the end customers.

So Charles, it's hard for me to just supply -- I don't have the number just ready in front of me. But definitely, there's a significant number that goes through IDMs. That's number one. In general, I have the names on, I will not say the names now, but definitely, significant portion goes through IDMs.

But when you look at the influx of the orders, it matches -- and when I look forward, I take all the orders that we got. They are very evenly spread along the different applications that we have. And I think what we are seeing here, there are a number of things. First of all, there is a technological shift at this order takes. For example, the DRAM, the HBM, the DRAM may not be very strong, it's a little bit weaker. However, there is a technological change moving to HBMs. Definitely, we see it in the orders. We see it in the shipments this quarter. We see it in the orders that we forecast for the second quarter and for the second half, for the rest of the year. So that's one topic.

The second thing we're seeing is that most of our customers are talking about long-term plans to increase the capacity. So we see in both ways. So the overall demand, people making the strategic plans, we see it in the orders. Now there might be some small changes in it as we move along, but the overall business as we see is very healthy. Did I answer the question, Charles?

Yes. Thank you very much for the great color. So maybe my last one. I think your annual guidance kind of implies second half being flat or maybe slightly up relative to the first half. Any thoughts, I mean, for the second half to be, I mean, a lot higher than what you are currently guiding? What has to happen -- I know this is probably a very tough question, but I want to really understand what can be the upside from what you are guiding and/or what you think this is a pretty kind of full kind of outlook guidance here?

I'll tell you what is the good side, Charles, of what we are seeing. And I think if we -- in our previous discussions, we were very hesitant from backlog and pipeline looking at the second half. So the good news that the backlog and the pipeline for the second half of the year is filling up and overall, it looks good. What will be the extent of the business today? It's a little hard to talk about Q3 and Q4, what will be the actual numbers. I can tell you that we are starting also to get orders for Q1 of '23. So there is, you can see a lot of confidence from our customers about the forecast.

I think at this stage, with all the volatility in the market, it's very hard to really say more than we expect this year to be a growth year in the mid- to high teens. I think this is as much as we can say at this stage. But definitely, we are encouraged by the level of the backlog and the pipeline for the second half and the first quarter of '22.

Charles, does that answer your question? Okay. Thank you for that. Next question will be from Jamie Zakalik of Bank of America.

Apologies if you guys maybe discussed, as I've been hopping back and forth between a few calls, but at a higher level, were there any puts and takes in the quarter in terms of end market demand? I think there's some concern about weaker conditions and maybe smartphones or PCs for semis overall. And did you see any markets that maybe were weaker than expected and then others that were stronger than expected? Basically, what were the different puts and takes on the demand side?

So Jamie, this is Ramy. So first of all, let's say, the general statement, that yes, we hear about the weakness. We are aware of the weakness in the cellphone market, in the PC market. Even the automotive market is below its usual number. So definitely, we hear it and we understand it. We have not seen any change in the behavior or in the focus of our customers that would indicate any issues related to it. But I think there are 2 reasons for it. On one side, you see, and I think I mentioned it, maybe you missed it, there is a technological shift. Good reason is what has happened in the DRAM area, that is a significant portion in the Advanced Packaging area that the market is moving to the use of HBM, supporting the high-performance computing. This is definitely an area that we dominate, and we're enjoying now, although the entire DRAM market may be not increasing at this stage, but the technology change is bringing this business on one side.

On the other side, the long-term plans of our customers, not just in China, across the world, the long-term power to invest, and we are shipping machines to customers that are making long-term investments in building capacity.

Definitely, the area of the Advanced Packaging is very strong, and this is not specifically -- it's across all the regions, it's not just specific to one area. Definitely, not only in China. So the heterogeneous integration, as Rafi mentioned in the script, is taking, and this is, again, high-performance computing, that's definitely becoming a very significant part of Advanced Packaging.

So these areas are growing. We expect them to continue to grow. So from that respect, we do not feel at this stage the weakness that people are talking about the end markets. We are aware of them. We don't feel them at this stage.

And I would like also to add the situation in China, because China, the strategy of the government is to be more independent, less dependent on import component to China and expand their capacity and their ability to produce things in China. So right now, the amount of import is huge. I think it is more than 80%, all the components are imported to China. And if they really want to produce more made in China, they need to continue building more capacity in other areas. So I think this is also a very important element. It doesn't relate to the end market. This is a matter of strategy of China.

Got it. That's very helpful. And I actually had a follow-up on the China thing. Did you guys quantify your specific exposure to just the China region? And how much or if any of your tools are manufactured in the U.S. and shipped to China?

No. We don't manufacture in the U.S. We manufacture all the equipment here in Israel. We are using 2 very large subcontractors electronics and to build to support us. So from that point of view, I think we feel very comfortable from the supply chain the availability of parts that we will be able to ship all the machines that are forecasted.

Got it. That's very helpful. And then my last question is, is there any risk that customers are pulling in tools or ordering more tools than they really need for demand just because of uncertainty about supply and about restrictions maybe in other regions that don't affect you guys and maybe affect other suppliers? So what are you guys doing to ensure that orders are really tied to true end demand?

So we've been monitoring this. And I can tell you that the customers that are ordering the machines in most cases are actually very upset if we are delayed. We are aware at least to the best of our knowledge that all of those machines are going into production. We are getting a lot of requests to support questions. So the machines are going into production.

To tell you what is the actual utilization, obviously, no one gives you these numbers. But we are very confident that those machines are not going just to fill a room in certain areas of the world. They are going for production. People are using them. And no, no, it's for real.

Thank you, Jamie. If there are any additional questions, please raise your hand on the platform. And we will give a moment or 2 to see if there are any additional questions. It looks like there are no additional questions.

So before I hand over to Rafi, I want to point out that in the coming hours, we will upload a recording of this call to the Camtek Investor Relations website. Beyond that, the link for the live call will also automatically turn to a recording in the coming hour.

So I would like to thank everybody for joining this call. And I'd like to hand back to Rafi for your closing statement. Rafi, please go ahead.

I would like to thank you all for your continued interest in our business. Again, I would like to thank all our employees and my management team for their tremendous performance, and we look forward to continuing. To our investors, I thank you for long-term support. I look forward to talking with you again next quarter. Thank you, and goodbye.