Q2 2021 Camtek Ltd Earnings Call
This meeting is being recorded.
We will start in <unk> and in all the minutes.
Okay.
And.
Okay.
Ladies and gentlemen, thank you for standing by.
I would like to welcome all of you to <unk> result, Zoom Webinar. My name is Kenny Green Unempowered of the Investor relations team of cancer.
All participants other than the presenters are currently muted following the formal presentation I'll provide some instructions for participating and the live Q&A session.
Like to remind everyone that this conference call is being recorded and the recording will be available and context website from tomorrow.
You should have all received by now the Companys presentation, if not please viewed on the company's website.
With me today on the call we have Mr. Rafi, Amit <unk> CEO, Mr. Moshe Eisenberg, <unk> CFO and Mr.
Rami line got Canpotex CFO.
<unk> will open by providing an overview of <unk> results and discuss recent market trends Moshe will then summarize the financial results of the quarter following that Rafi Moshe and Rami 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 on the less other was 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 and expectations or otherwise invest.
The investors I'll remind you the actual events or results may differ materially from those projected including as a results of the effects of general economic conditions the <unk>.
And of the COVID-19, pandemic on global markets and on the markets and which we operate including the risk of continued disruption to our and our customers' providers business partners contractors business the risk related to the concentration of a significant portion of capex expected business and 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 from customers and these countries changing industry and market trends and reduced demand for our products the timing of development of our new products and the reduction.
And the market increased competition and the industry price reductions as well as due to other risks identified and the company's filings with the U S. SEC.
Please note of the Safe Harbor statements in today's press release also covers the contents of this conference call. In addition, during the skill sets and non-GAAP information measure certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions forecast future results and evaluate the companys current performance managing.
And believes that the presentation of non-GAAP financial measures are useful to investors understanding and assessment of the company's ongoing cooperation.
And prospects of the future.
Fully conciliation 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 Rami Comtech CLO Rami. Please go ahead. Thank you Kevin Good morning, and thank you for joining our call today.
We are enjoying the continuing growing demand for systems, which has allowed us to demonstrate record financial performance quarter after quarter.
We ended the second quarter of 2021 with $67.5 million and revenues group of 52% gross margin and with 27% operating margin.
The strong profitability is a result of the rapid increase in sales and favorable product mix.
Before I review of the second quarter I would like to give a brief overview of the market environment.
We're experiencing demand for wound territories, and especially from Asia.
We expect to show continuous increasing sales in the next 2 quarters and we see positive signs for Q1 of 2022.
Based on forecasts from all segments and specifically the DRAM.
Our revenue guidance for the third quarter is $69 million to $71 million.
The reasons will be increasing demand for semiconductors as we mentioned in previous calls are fueled by the transition to 5 <unk> mobile phones, and the increased demand and data centers defined G. Based loans include new packaging technologies, such as system and package advancing.
C image sensors advanced packaging, RF and power device modules.
In addition, we see the automotive industry undergoing major.
And with electrification and connectivity and autonomous driving we expect <unk> to continue benefit from all of these trends and the next few years.
Our success is the result of secular trends that we've been discussing in the past, which have come to fruition and we are enjoying the mill, mainly the transition to advanced packaging with heterogeneous integration and fair amount of growing at the very from space requiring extensive use of.
Fiction and metrology.
1 is the increased demand for Cmos image sensors.
China is becoming a major territory and the packaging segment.
3 out of the top 10, and <unk> are Chinese and most of the other for renewals that have large facilities in China and.
We see new trainees all sorts of entering the market.
Comtech has been active in China for many years and is well positioned and the semiconductors markets, our global market position, coupled with our technology leadership and enable us to leverage from the opportunities and the Chinese market. In addition, penetrate and you said.
And such as the front end.
We accept we expect over 80% growth year over year for the first 9 months of 2021.
We believe the.
But we will outperform the strong industry growth due to the focus on the fastest growing segments technology leadership, and our ability to split to respond quickly to customers' demand.
Excellent local support and our strong position in Asia.
I'd 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 application, including the fan out and introduce integration, which are expected to continue growing in the coming quarters.
Most of the image sensors is also solid segment for countries and 18% of our revenues were sold to the segments.
We have the healthy backlog for the second half of the year. We are in the process of for expanding our production capacity to address our long term growth strategy.
We're adding clean room space for integration and testing of our systems. In addition, we are increasing our inventory levels and head count to support the increased demand.
To summarize high demand for semiconductor components have been leading to increasing demand for inspection and metrology systems.
Thank you for providing its customers with.
With reliable high performance systems tailored to their special requirements Comtech.
Comtech is strongly positioned and the market and as things stand today, we expect 2021 to be and exceptional record year and sales growth and profitability.
I would like to hand over to Moshe for a more detailed financial discussion since the <unk>.
Actual results.
Thank you Rami.
And my financial summary ahead, I will provide the results from a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results.
In the tables at the end of the press release issued earlier today.
Second quarter revenues came at the record level of $67.5 million and increase of safety for percentage compared with the second quarter of 'twenty and 18% compared with the previous quarter.
The geographic revenue split of for the quarter was as follows.
<unk> was 88 per cent 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 57% and the previous quarter.
The improvement in the gross margin was due to significant growth and revenues as well as more profitable product and sales mix this quarter.
Operating expenses in the quarter were $16.7 million Daus and this is compared with $10.7 million daus and the second quarter of last year and to the $13.5 million reported in the prerecorded the.
The increase from the previous quarter is mostly due to increased volume and sales channel mix.
Operating profit in the quarter.
And was $18.5 million compared to $6.4 million reported and the second quarter of last year.
And $15.6 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 the result of the high gross margin together with the rapid growth in <unk>.
Revenues, while we're 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 'twenty for anyone was $17.1 million daus of 38 cents per diluted share of.
And this is compared to a net income of $6.3 million of doors or 16 cents per share in the second quarter of last year.
Total the 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.
And 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 and the quarter.
We generated $19.9 million and cash from operations in the quarter.
Net cash and cash equivalents and short term deposits as of June 32021 were 190, $189.3 million and.
And together with the 10 million door of cash that we have and long term deposits. The total cash amount is 200 million daus for the quarter.
This compared with $180 million at the end of the first quarter.
With the current business momentum, we expect revenues of $69.71 million and in the third quarter.
And with that roughly of the army and.
Myself will be open to take your questions.
Thank you Ms share at this time and we'll begin the question and answer session and the other question. Please raise your hand by the zoom platform and I would introduce you and ask it's on mute after which you may ask your question as we have a lot of people on the call. We will take a few moments the pulse your questions.
Yeah.
Our first question will be from Craig Ellis from B Riley Craig you May go ahead.
Yes, 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.
And the strength and revenues and the second quarter and and the guidance.
Versus my model of at least 2 of curious about 3 and a half million better. The guide about 5 million better can you just talk Moshe or army about where you might've seen strength that is above expectations from from 3 months ago across the business, whether it's and.
C I S for advanced packaging or for other areas.
And Greg and I think it's both of you can see and it was a very strong quarter of for the Cmos image sensors, the 10% of the revenue came from it. It was more of 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.
And the use of the.
Heterogeneous integration and frame out of both at the very high increase.
We're getting a lot of repeat orders and also new customers. So overall there is I would say, yes, a little bit more revenue than we expected and definitely the outlook is very positive.
And Thats really helpful Rami and and as a follow up question I wanted to tack for something that's a little bit longer term I think and the press releases and in the comments of the company commented on visibility and to early 2022, which is unusual for this time of year I was hoping that you could frame of.
And what you're seeing a share interact with your various customers as you look out to 2020.2.
And 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.
The advanced packaging as we move.
And move to much more of that with high performance compute how did the heart of the revenue dynamics frame up with their Gibson takes the ship book to calendar 2022, not asking for guidance, but just your sense of the market Nexgen No no I think of these stage what we can see.
Is people are positive and starting to ask for slots in the early next year.
I think I mentioned, specifically on the deal we have been asked we have the solid forecast for sales for the DRAM market, which which so some of the strength of the market.
And.
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 of the advanced packaging and in the advanced packaging the memories and you can see also strength.
Other areas as the compound semi power devices RF no doubt the the.
Industry is moving in the very positive momentum people are very anxious to see the legalese they want to see the other machines already in there and their facilities and.
And then as the result people are starting to talk about slot for early next year.
And so some of the overall picture is definitely very very positive.
And that's encouraging and thank you all ship. The next question before getting back and the Q over to Russia, Russia real nice job on the margins and the business.
But the question is 1 of the things we have seen not just and <unk>.
Semiconductors and capital equipment of more broadband technology is that is that there are supply chain costs debt and <unk>.
Many cases are impacting margins if the.
Doesn't appear that that was the case and the second quarter or and the color of that we're getting on margins for the third quarter per cap tech, but can you just clarify.
Are there any supply chain issues that would've impacted shipments or for your ability to.
And to deliver and and is there any gross margin impact related to the issues in the quarter or the outlook.
Yes so.
And no doubt and there is some pressure from the supply chain across the board.
C and the shortage, we see price pressures.
And with such and <unk>.
<unk> growth year over year of.
This comes into play.
And then in the last few.
Months.
So far we've managed to work around it.
There are some.
Price increases but not.
The significant impact our margins.
And we've managed to.
And also walk through.
Through the shipping expenses and we are now in the reasonable.
Level.
So overall, we do see some pressure and some supply chain.
The.
Issues, but not to the extent that they have.
A huge impact on the on the margin and expense.
That's helpful. Thanks, Tim and congratulations again.
Thank you Craig.
Our next question will be from Charles share of Needham.
Charles You May go ahead with your question.
Thank you for taking my question.
And that's up to the nice on the nice results.
I think of the first question and I wanted to ask.
Is a route and the advanced packaging side of the business, obviously plenty plenty of 1 has been very very strong and I understand there are things you consider a secular for example, I do remember you've set of tools gain spec and about from of Mcveigh of Mel and to them.
Possibly a couple of tens of millions of bumps per wafer.
That will require minutes and really coming up and of you being asked to inspect the about the 500 million bumps of wafer at the about the same time or maybe maybe a similar throughput.
So how do we think about.
That secular trend in terms of complexity, but we also faced another thing that may be a little bit more transitory here because 2019 plenty plenty there may be of load with the other investment by the industry and plenty of 1 there was a lot of it that catch up demand how should we think about how the debt the secular versus.
Transitory demand are playing out and plenty of 2 how does that shaping up from your vantage point about the best our best packaging business of yours. Thank you.
And.
Let's talk about the secular thank you and you mentioned the the number of bonds. So today I would say the.
Typical wafer would have about 10 to 20 million bumps per wafer and.
We're getting wafers today from 60 to 100 million bumps and obviously down the road is 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 the bandwidth.
And for all kinds of things that are required from the us as the components go and progress. So this is a.
The 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.
And it's to happen and to continue and it relates to primarily introduce integration you talk about fell out and all the other segments of 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 235 years ago No doubt. The this trend is going to continue and I think as the leader in this segment definitely we will go and we're going to enjoy it in the loan growth there in the shorter term and in the longer term.
Okay.
Thank you. So thank you for net of other nice color I went up of the.
Over to the other segment of your some of Cmos image sensor.
I heard you say.
And say the other segment DRAM Youll see some pickup in <unk>.
Early on the appointed to and how about the Cmos image sensor and which has been a very very important the sector and the effect of.
The segment that kind of.
Serves as 1 that campaigns and that the that the decline in bat and years for for our other segments. So that's the thing I want to ask.
Is.
1 trend, we're really seeing in Cmos image sensor is the idea and appears to be outsourcing more of the boundary safe, especially 2 boundaries and Taiwan, a way part of Samsung may be outsourcing more to UMC. We also acquired TSMC and maybe set out of fab in Japan, which could take some of the outflows from orders for Sony.
I Wonder, whether you view that kind of outsourcing trend and the final Cmos image sensor the idms to foundries being net positive net negative or neutral for your business and the second part of this question is really.
It has been strong this year and the specialty at this quarter bad debt. The all of the rotary basis. The Cmos image sensor seems to be lower this year than on the upon the are you seeing any signs so far that things could turn more positive next year.
Yes.
So.
And I'll start with the first question and I think the trains to outsource by.
Some of the players to go to foundries I think it's the neutral event from our point of view and I don't think it will affect drastically our business and.
And we're going to enjoy this business any way wherever it goes.
And.
Now.
And to your second question I think we said in previous calls that we expect that the business. This year will be double digits. We solved it will not be as high to the extent that we enjoyed from percentage point of view is last year, we thought it will be lower in percentage, but still significant.
We'll be double digits, we're still forecasted in the same way I think the second quarter was extremely strong.
The the next quarters may be a little bit lower the numbers, but the only 1 we are seeing and talking to our customers. We continue to see in the next few quarters healthy growth and the.
And the expenditure in the in this area. So it's of no doubt the Cmos image sensors, we expect it to continue to be a significant part of our business.
And just thoughts.
Thank you Charles.
Our next question is going to be from Thomas O'malley from Barclays.
Please go ahead.
Hey, guys can you hear me alright.
Yes, we hear you well.
Great great. Thanks for taking my questions and congrats on the net results, but first of all its really for Moshe when you look at this past quarter Youre already operating above your long term model. The gross margins are great and the fall through is really great as well.
Mentioned in your prepared remarks that youre adjusting expenses to kind of match the run rate of your business can you talk about 1 of the timing of those rolling on expenses into the back half of this year, what should we see in terms of of those additional investments and the timing around that and then 2 if you are able to operate at these these better gross margins could you kind of update us on.
And what the whether new or what and updated model and May look like given the success that youre, having and some of the end markets you are.
Hi, Tom So first of all.
Touch upon the the gross margin of question.
<unk>.
We operated this revenue level between 50% to 52% depends on revenue mix depends on profitability of for the deal mix.
And I don't expect to deviate much from that perspective.
Even with the supply chain pressure or with other.
The issues around it.
I believe the between 50 and 52% is the right.
The margin for us to operate the decent revenue.
With respect to operating expenses.
We are in the process of adding headcount.
Across the board, mainly in R&D functions as well as your production and customer support.
Main area of that we are hiring for.
And these people are needed to support the growth.
We are talking about the process that will take I would say 3 quarters.
Q3, Q4 and Q1.
And throughout this time, we will adjust the head count level and at the same time, we are adding some other operating expenses to support the growth.
All in all I think that thing of what.
We are going to see and the next 3 quarters is a relatively higher growth operating margin gain our target model.
So the current level of 27%.
We will stay with us and the next 3 quarters.
And then.
Based on our ability to adjust the expense level I think we will be anywhere between 27% and 2025 and 27.
Percentage.
So that's kind of how I see the long term.
For the mid term.
In terms of operating profitability.
Great. That's helpful. My follow up is really about the visibility into the beginning of 'twenty..2 you mentioned and some activity with DRAM customers. You also mentioned in the prepared remarks about the new OCR customers and China can you talk about the the mix of business into next year that you're seeing where are you feeling the most comfortable I know you mentioned DRAM a bit earlier, but particularly in <unk>.
China.
What's the cadence of new customers that are coming on line and are they representing a large part of what your forecast is looking like into next year.
I think when we talk about the applications. It's it's not just the in China I think at the similar as the most of the territories, 60% is out of it is advanced packaging and advanced packaging today. It's a technology that is used more and more for high end application.
And we see it everywhere and all the geographies and this is definitely is strong and we're going to stay strong when we talk about DRAM. It's again, it's in the in the as part of the advanced packaging.
And I would say, it's a specific application for advanced packaging and then our all of the rest of the application if its front and it's an area that we are gaining momentum.
And it's a power devices compound semi is of course Cmos image sensors, and we discussed so basically we don't see a major change in the application mix I think they are going to stay around the numbers that we mentioned.
Great Congrats on the nice results guys.
And thank you. Thank you Toms.
As a reminder, if you other question please raise your hand and the platforms.
We will give a few moments for people to raise.
The raise their hands.
Our next question will be a follow up from Craig Ellis from B Riley.
Craig. Please go ahead.
Thank you for taking the follow up question.
And just a very strong performance on numerous facets of the business, including <unk>.
Converting strong.
And operating performance and to cash and with the cash and investments balance up to 200 million and to get opportunity to check in and see what the company is saying.
On the on the potential acquisition front I know thats part of the strategy I know that the COVID-19 restrictions make it hard to do some of the front and execution.
So along with that but can you give us an update on how youre thinking about M&A in this environment team. Thank you.
Yeah, Greg Yes, Indeed, we are very focused on on the M&A fronts. We set of this is our number 1 priority for cash use.
We and actually the team that is involved and this process is the Rusty Rami and my sense. So we are really investing a lot of effort and time on debt I think we are making progress we have.
A list of targets and and we are very active.
Nothing that will be immediate but we hope the.
We will have something to report.
Some points, we are working hard on debt and.
And the opportunities and hopefully something will come out of the process.
Russia, I don't know if its possible but.
Can you elaborate a little bit on areas of technology interest geographic interest or maybe of customer acquisition interest that might be at play is as you and brought the and Rami worked through different options and think about how you use M&A to position <unk> for another leg of.
Growth.
Yeah.
And there are the hero the way how always select the what.
Potential companies the.
First of all base of let's say CRISPR priority to find the company that we can see a good synergy between us and there is number 1 priority.
Other priority of course is always to be in the same market that we are active.
And we try to select the.
Accretable company and we don't globally, we don't want to look for startup.
And the annuity per refined some potential companies. The fact that we cannot travel.
We cannot the business we cannot you know.
The accelerate this process this is definitely.
It is obstacle and a total of abuse of for us to manage it only by remote controller. So so definitely this type of M&A right now and this time.
It is going the.
Slower than we expected.
But definitely we try to find good companies with potential debt could.
The image come through very well.
And indeed assume works great for an earnings call, maybe not as great for the early part of and M&A engagement.
Great. Thanks, so much for that color. Thanks, Tim. Thank you, Thanks, Craig and.
Next question will be from Patrick Ho from Stifel. Patrick. Please go ahead.
Thank you very much and congrats for the nice quarter and maybe a question for Moshe It first in terms of the supply chain you addressed it in your prepared remarks and <unk>.
But I was just wondering from an inventory building perspective.
Do you believe the 3 Q is probably the peak in terms of trying to get.
Additional parts.
The buffer yourself or is this something that could also carry into Q4 as well.
We are we are in the process of building up inventory further to.
And to support the growth and we are taking a commitment also for 2020.2 now given the strengths and the.
The improved visibility into the beginning of 2020.2 so no its not the peak we are continued to build up inventory.
We continue to increase revenue levels.
Yep.
Great that's helpful and maybe just as the bigger picture.
All of you Brian.
You mentioned the heterogeneous integration several times on the call and Thats, obviously, a key growth market in the advanced packaging segment.
From I guess the types of the device that you are seeing the greatest interest 1 of them is high performance computing, but what are the areas.
So you're seeing the interest of the especially on the heterogeneous integration of upfront.
I think it's primarily today high performance computing. This is I would say the main the application.
Great. Thank you very much.
And thank you thank you Pat and Ray Patrick.
And that concludes the question and answer session.
Before I hand over back to wrap day I'd like to remind everyone that in the coming out of what you will upload the recording of this call to the Investor Relations section of Capex website.
And I, thank everybody for joining this call and.
Again would appreciate any feedback you have with regards to this new format.
And with that I'd like to hand back to to Rami for the <unk>.
<unk> statement and we'd like to thank you all for your continued interest in our business game I would like to thank all of our employees and the management team for the tremendous performance and we look forward to continue and get.
To our investors. Thank you.
Long term for support and I look forward to talking with you again next quarter, Thank you and goodbye.
Yes.
That ends the conference call you May go ahead and disconnect. Thank you very much.
Goodbye.