Camtek Ltd.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Kenny Green:]

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtek's Fourth Quarter and Full Year 2020 Results Zoom Webinar. My name is Kenny Green, I am part of the Investor Relations team at Camtek. This is the first time we're running our conference call at the live Zoom webinar, and I apologize in advance that any unforeseen technical issues we may face during the call. Our goal is to increase engagement with investors and analysts, and we hope this new type of quarterly call is a step in the right direction. All participants, other than presenters, are currently muted. Following our formal presentation, I'll provide some instructions for participating in the live question-and-answer session. At any time, during the call, you may also submit a question via the Q&A Chat and we will indebt to answer as many of those questions as possible.

[Rafi Amit:]

Okay, thank you, Kenny. Good morning. And thank you for joining our call today. I will start with some highlights from the fourth quarter, a few words on 2020 and continue with reviewing our current business. Total sales in the fourth quarter were $48.6 million close to a 50% increase over Q4'19, and record quarterly revenue. In the fourth quarter, we continued the momentum of increasing sales to our existing customer as well as to new customers. Gross margin was 48.2% and operating margin was 18.9%, marking an improvement in profitability compared with the first half of 2020. For all year, we achieved record revenue of $156 million, 16% growth over 2019 and record operating profit of $26.8 million. In the last two weeks, we have received multiple systems order from several customers totaling about $25 million. The impressive backlog we have on hand together will set in pipeline's point to a strong sales forecast for the first half of 2021. We are anticipating sales of over $110 million in the first half of 2021 implying approximately 65% growth over the first half of 2020. We also see continued momentum of orders into Q3, but it is too early to give accurate forecast. For the first quarter of 2021, we expect an impressive sales level of between $54 million to $56 million. The year 2020 was an exceptional year for us just as it was for the all-semiconductor industry. In the first quarter, we had concern about our ability to install system due to the COVID-19 restrictions on shipping system to certain countries. Yet in the fourth quarter, we faced a completely different situation. We had to adjust our production capacity and field support due to the high demand for our systems. Our flexible operational infrastructure and our global organizations allow us to successfully execute this growth and the requirement of our customers. In the first quarter of 2021, this trend has continued and even accelerated. Our strategy is to maximize growth in all segments in which we operate. The front end, mid end and back end mainly post-dicing. We continue increasing the number of new customers, penetrating new market segments and strengthening our presence in existing customers. By providing the highest level of service and support, we create a strong commitment between Camtek and its customers. A strategy of addressing a wide range of customers also include customers with entry level products that need only basic configuration of our systems, resulting in a lower ASP in the short term. Our experience show that in the future, many of these customers will purchase systems with more complex configurations capable of detecting smaller defects to meet their end customer requirements. In the second half of 2020, we saw an improved margin. We can already see this trend continuing in order we have received for the year 2021.

[Moshe Eisenberg:]

Thank you, Rafi. We are sorry for the technical glitch that we have and I will start now. Thank you, Rafi. We had record results in the fourth quarter, both in terms of revenue, which also came above our guidance, as well as in terms of our growth and net profit level. 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 appears in the tables at the end of the press release issued earlier today. Fourth quarter revenues came in at $48.6 million, 46% increase over the $33.2 million recorded in the fourth quarter of 2019. Full year revenues were a record $155.9 million, up 16% year-over-year. The results were driven by demand across all our geographies segment and application. The geographic revenue split for the quarter was as follows; Asia, 83% and the rest of the world 78%. The distribution of sales for the full year was 89%, Asia with Western Europe contributing 11%. Gross profit for the quarter was $23.4 million. The gross margin for the quarter was 48.2% versus 48% in the fourth quarter of last year. Gross profit for the year was $73.7 million, representing a gross margin of 47.3%. This is compared with the gross margin of 48.6% last year. After relatively lower gross margin in the first half of 2020, in the second half of the year, we saw an improved margin. We expect over $110 million in the first half of 2021. The combination of favorable order mix and the leverage we have in our operating model is expected to support the continued improvement in our gross margin, which will come above 50% in the first half of 2021. Operating expenses in the quarter were $14.2 million. This is compared with $10.5 million in the fourth quarter of last year and $11.9 million reported in the previous quarter. The increase over the previous quarter is mostly due to increased R&D and marketing activity to support the growth in revenue. Operating profit in the quarter was $9.2 million, compared to $5.4 million reported in the fourth quarter of last year. Operating margin was 18.9%, compared to 16.3%, mostly due to increased revenue. Operating profit for the year was $26.8 million, or 17.2% of revenue. This is compared to operating profit of $25 million in 2019, or 18.7% of revenue.

[A - Kenny Green:]

Thank you, Moshe. At this time, we will begin the question-and-answer session. Our first question will be from Patrick Ho from Stifel. Patrick, please go ahead.

[Rafi Amit:]

Patrick?

[Kenny Green:]

Patrick, you're mute.

[Patrick Ho:]

Hello?

[Kenny Green:]

Okay. Now you're open.

[Patrick Ho:]

Great. Thank you again and congratulations on the really nice quarter and the year. Maybe first off, given the rise in system orders over the next two quarters and given some of the space in the industry overall, how do you see your parts procurement and your ability to procure parts given the type supply environment that we're seeing today?

[Rafi Amit:]

Ramy, do you want to answer please?

[Ramy Langer:]

Yeah. Patrick can you hear me?

[Patrick Ho:]

Yes.

[Ramy Langer:]

Okay so I missed the first part of your question. And but, I will relate to the second part then if I miss anything then please ask me again. So, from a part procurement and overall our supply chain, we are well aligned than we have the inventory on hand that we need for the next quarter and we have not experienced any issues as related to procurement. Furthermore, we've increased the number of subcontractors. So, we don't see any issues. With that respect, we believe that we will be able to supply and install all the machines in time.

[Patrick Ho:]

Great. And maybe as my follow up question for Moshe, in terms of gross margins, really strong gross margins to end the year. And it continues to rise as we go into the first half of '21. What are the biggest influences is simply volume, or are your new products also going to contribute to the gross margin uptick that we're going to see in the first half of '21?

[Moshe Eisenberg:]

So, I would say that both volume as well as new products, and some new order that came in with the high gross margin will be contributing to be improved margin in the first half of 2021. Definitely, the new product that we are rolling out, will have a meaningful impact on the profitability.

[Patrick Ho:]

Great, thank you very much.

[Moshe Eisenberg:]

Thank you.

[Kenny Green:]

Our next question will be from Charles Shi from Needham. Charles, we'll unmute you. Please go ahead.

[Charles Shi:]

Hey, can you guys hear me?

[Rafi Amit:]

Sure.

[Moshe Eisenberg:]

Yeah.

[Charles Shi:]

Great. Thanks for taking my question. Congrats on the strong quarter and very bullish first half guidance. I have a few questions. So, first off, I noticed that your guidance for the first half the revenue run rate is already above your $200 million target model that you think you can achieve about the two years. I wonder whether the strong demand in the near term really changed your view when --about the timing of your $200 million target model there?

[Moshe Eisenberg:]

Well, first of all yes, we believe in the first half of 2021, we are already in a run rate of our target more than of around $200 million. It's still early for us to provide specific outlook for the second part of the year. Although, as Rafi mentioned, Q3 is also looking good to default. But we don't have a specific guidance for Q3. But as I mentioned, we are already in a run rate of close to our target model. And as a result, we managed to improve the gross margin and gross margin will be more than 50% as indicated in our target model.

[Charles Shi:]

Okay, so maybe this is a very good segue into my question about the gross margin. You mentioned a few of the favorable factors, including the more complex systems, higher ASPs, especially for your 2D inspection products. May I ask whether the other two factors I'm thinking are also contributing? First is, do you see a mix changing back to a little bit more 3D for your overall shipment in the first half '21 which essentially carries higher margin if I understand correctly? And second, whether the currency depreciating U.S. dollars also impact - has a positive impact on your gross margin?

[Moshe Eisenberg:]

Let's factor the first half of your question and we definitely see in the mix of the products that we're going to ship in the first half of '21 and definitely throughout '21, we see a mix with a lot more metrology equipment. This is definitely going to contribute positively to our gross margins and overall profitability. With respect to the devaluation of the U.S. dollar and its impact on the financial results, as I said, in general, the devaluation had a negative impact on our results. So, the gross margin, if at all will be impacted negatively. It can take into account if the dollar will stay pretty much at the current level, we forecast, gross margin of over 50% in the first half of the year.

[Charles Shi:]

Got it. Thank you. Maybe my next question, I would like to ask a little bit more about the CMOS Image Sensor, last year was unusually strong for you guys nearly 30% of the revenue and you've said that the overall contribution as a percentage to the revenue will go down. I wonder on a dollar term, are you seeing a growth year for CMOS Image Sensor revenue or do you see like a more relatively flat? Any color would be great.

[Moshe Eisenberg:]

So, let me relate to that. First of all, the CMOS Image Sensors and I think there's a lot that indicated it was very strong this year. And it was mainly from two reasons, first of all, very strong demand across from most of our customers. And I think specifically, we are also we can say that we gained market share at least the two major accounts. So, this accounted I would say to a very strong year compared with our previous percentage of the business. We still see this segment strong, but it will be range of double-digit, I would say 10% to 15%. Next year, it will not reach the kind of percentage it has reached this year.

[Charles Shi:]

Got it. Thank you very much. I'll go back to the queue. Thanks.

[Moshe Eisenberg:]

Thank you, Charles.

[Kenny Green:]

Thank you. Next question will be from Craig Ellis from B. Riley. Craig, please go ahead. Craig, you need to unmute yourself. Okay, in the meantime…

[Moshe Eisenberg:]

Craig, you'll need to unmute yourself. I hope that -

[Kenny Green:]

Okay, we'll come back to Craig afterwards. Our next question will be from Irvin Krause . Irvin, please go ahead. Irvin? Okay. We'll also have to come back to Irvin in a sec. We also have a question from Shahar Cohen. Shahar?

[Shahar Cohen:]

Hey guys. Can you hear me?

[Kenny Green:]

Hi, Shahar.

[Shahar Cohen:]

Hi. Just wondering the role of memory within your first half forecast. I assume that is not including any memory? And if not, can you speak a little bit about your visibility into the memory in H2?

[Rafi Amit:]

Ramy?

[Ramy Langer:]

I think we mentioned this roughly discussed. In general, we see a lot of activities in the memory space. We expect this business to become - we expect to see orders in the second half of this year or beginning of the following year. There is no contribution to the business in the first half in the forecast that we talked about over $110 million in the first half does not include any memory business.

[Shahar Cohen:]

Okay. And my next question is can you speak about your IDM win? Is that mainly impacting H1? Or do you see this more prolonged impact on your business?

[Ramy Langer:]

You're talking about the IDM that we mentioned.

[Shahar Cohen:]

Yes. Exactly.

[Ramy Langer:]

This is definitely a very significant in the long-term. However, and I think we mentioned that we already have received, I would say multiple orders for several global sites that have all those machines partly have been installed and others will be installed in the first quarter. So definitely it's a meaningful business in the first half of next year - of this year '21. And it will definitely be in the long-term a very significant one. Rafi do you want to add anything?

[Rafi Amit:]

Yeah, I will tell you in general, when we mentioned the key IDM worldwide, there is good reason. There are not too many what we call the key IDM. And when we talk about new packaging technology, new advanced packaging technology, then usually, these specific IDMs they actually develop these technologies. And probably they will be the first to move to high volume. And we believe that this process, maybe will start next year and it will accelerate in the next coming years. So, we see a huge potential of inspection in metrology to this type of new packaging technologies.

[Shahar Cohen:]

Got it. Thanks.

[Kenny Green:]

Okay, Shahar, that answers your questions. We'll now move over to Irvin Krause. Irvin, please go ahead.

[Unidentified Analyst:]

Yes. Do you hear me?

[Kenny Green:]

Yes, we do.

[Unidentified Analyst:]

Okay. In 2017, 2018 and 2019, you provided dividends to your investors. Is there any reason why there were no dividends given to investors in 2020?

[Rafi Amit:]

We haven't decided yet.

[Unidentified Analyst:]

You haven't decided? Okay, another question. Do you expect to do - to increase your business in China and Taiwan in view of the world situation there?

[Rafi Amit:]

Well, why you put together China and Taiwan, by the way?

[Unidentified Analyst:]

Why do I put it together? I thought there was some sort of connection because of the difficulties that are going on there.

[Rafi Amit:]

Yeah, but I don't think that Taiwan I think, okay the way how we look it, if you talk about the conflict between U.S. and China, if you look at the overall Asia, I would say Southeast Asia, Taiwan, Korea, Japan, they are out of this conflict. So, in general, I think that it's not under one package, it's totally different situation. And we don't see any limitation in Taiwan. And probably there are some different environment in China, because of the conflict with the U.S. So, it is not the same.

[Unidentified Analyst:]

So, you expect - so there wouldn't be a conflict as far as increasing business for both countries. Is that right?

[Rafi Amit:]

Correct.

[Unidentified Analyst:]

Okay, and as well as those two countries, do you also expect to increase your business in Europe and the United States?

[Rafi Amit:]

Look, in general, I think that - if you look on the last few years, we can see that most of our system are close to Asia, about almost 90%. In the first quarter, it was we see more from U.S. and Europe. But if we talk about yearly overview, I would say that the trend of over 90% goes to Asia is more reasonable.

[Unidentified Analyst:]

I see. You expect to increase more business in Israel and then the friendly Arab countries in the Middle East?

[Rafi Amit:]

Look, our business is where the semiconductor builds fab. So, in Israel, actually we have today Intel is a pure front end fab. We don't do any packaging in Israel. So, we don't see any potential selling machine in Israel. And as well as most of the Arab country, we don't see any packaging industry in these countries.

[Unidentified Analyst:]

I see.

[Kenny Green:]

Okay. Thank you, Irvin . We will now move on to Craig Ellis from B. Riley. Craig, I hope you can...

[Moshe Eisenberg:]

No, no we had his questions.

[Kenny Green:]

Okay. Let's see Craig's on the line. Craig, are you there?

[Moshe Eisenberg:]

Okay, I guess we have a technical problem with hearing you Craig. But we got a list of questions and we will address them. So, let's start with the first one and with the profile of the $25 million business that we mentioned in the industry. So, I would - Craig I want to give a profile, about 60% of this business is from several customers in the events basically area for several applications. So, it's not a specific application, but the whole breadth of applications that we address in the advanced packaging and I would say about close to 20% is similar in the potentials , and the rest, I would say are general view. And looking forward, this is more or less the trend of the business already, I would say the percentage of the business that we see looking forward also into the first quarter. And the CMOS Image Sensors definitely would be less in dollar volume next year, compared to just the year that we completed. And I would say that the main growth would come in the advanced packaging. We would see that coming over the 50% so, this year it would be more in the range of 60 plus percent of the business. So, looking forward, this is really the area where we see the major growth.

[Kenny Green:]

So, our next question from Craig is, while CIS revenue mix is declining with revenue dollars…

[Moshe Eisenberg:]

That's what I answered.

[Kenny Green:]

M&A funnel?

[Moshe Eisenberg:]

M&A funnel. Yeah, there was a question about our M&A activity and as we said in the beginning of the call, we are very active in this front. We are working and trying to put together a funnel and walk through this funnel. Having said that, it is not something immediate and I would say that we will provide an update on each call on the progress. But at this point, there is no, nothing to report other than the fact that we are starting the process, so we have started the process.

[Rafi Amit:]

I would like add, Moshe, I would like to add that people should remember that we still suffer of the COVID-19. We cannot travel. In many countries, the borders are closed. Even from Israel you cannot fly today. So, all the activity of M&A is very limited. We can make survey, we can evaluate, but eventually we have to meet, we have to find, we have to drill down. So, this cannot be done without visiting the potential companies.

[Moshe Eisenberg:]

One last question, Craig that we received from you was related to the OpEx level next year. So overall, we expect the G&A to stay pretty stable next year. Most of the growth, the increase in the operating expenses level will come from the sales and marketing, where we use in certain places of the world, third-parties to like agents to help us in the sales channel. And as a function of the growth in the revenue, we will use more agents, so this is the area that we expect an increase in. Also, we will be beef up somewhat the R&D activity next year in order to support the growth. And as Rafi mentioned, we're also planning to launch a new product, so this will require more R&D resources.

[Kenny Green:]

If anybody has any additional questions, please either raise your hands or you may also ask the question-and-answer box. So we have an additional question from Patrick Ho of Stifel. Patrick, please go ahead.

[Patrick Ho:]

Thank you very much for the follow-up question. You talked about advanced packaging being the growth driver for 2021, which makes a lot of sense. And we've seen a lot of fan-out applications, particularly for the 5G marketplace. What other applications or what other market growth areas do you see? Do you see high performance computing in some of the new techniques out there also gaining adoption in 2021 that will help your business?

[Rafi Amit:]

Ramy, do you want to answer?

[Ramy Langer:]

Yes. So, I would say that there are two additional areas, no doubt funnel is growing, will grow in the rate of about 30% annually, definitely, as the growth area. We see two more areas. The first one is, obviously what you call the high-performance computing or the heterogeneous integration, that's definitely an area that is picking up. You see the servers' market and all of these markets adopting these technologies, and it's definitely an area that we are seeing increased business. The other part, the overall, and this is where we see in the longer term, obviously, the high bank memory. So, this is also using the advanced packaging, this area is growing, and as we said, we expect there to see business in the latter part of the year or in the following year.

[Rafi Amit:]

And I would like to add one more comment about the wire bonding is still very common, is not this a period. And but we still see that more and core customers shift to what we call flip Jeeps - a flip chip - a flip chip BGA, more, higher density, and the pitch is becoming smaller, and they use copper pillar in order to make the connections. So, we can see even I would say, more flip chip demand for doing this. So, the advanced packaging actually is a wide range of applications.

[Patrick Ho:]

Great, thank you.

[Kenny Green:]

And we now have a follow up question from Charles Shi from Needham. Charles, please go ahead.

[Charles Shi:]

Hi. Thanks for taking my follow up. Just really following up on Patrick's question on advanced packaging. Definitely you guys still seeing technology upgrades or trans - transitions from wire bound to flip chip, copper pillar or fan out HBM? I wonder, in your very strong first half guidance for the especially for the advanced packaging part, how can - how do you quantify how much of that strength is driven by the technology upgrades of the advanced packaging? Or how much of that is really driven by the natural unit demand growth? We've seen news about automotive seeing shortages and ESC has been saying that they still see that the capacity are constrained through the year. I wonder if you can try to help us tell the differences here, what's really driving your demand.

[Rafi Amit:]

Ramy, do you want to answer?

[Ramy Langer:]

Yeah, I think what's driving the demand are the applications. And first of all, it's the 5G phones. I mean, you're talking about 500 million 5G phones. And those phones a demand roll are using a lot more advanced packaging than the 4G phones. So, that I would say the biggest application out today. Then I would say after that, as I mentioned before, you see the high-performance computing, which is utilizing a lot more advanced packaging than before. I think these are two major drivers. And then all the applications of the panel, what's making the fan out even stronger nowadays is the shortage in substrates. And as you know, fan out does not require any substrates and this further enhances the demand. So, I would say these three trends are the reason for seeing a lot more demand on the advanced packaging. Now furthermore, and Rafi mentioned the wire bond. Wire bonding is coming down. The advanced packaging in general is growing by about 8% year annual. And this means that I would say in general, you'll see less and less wire bond, it's a process. I think it would take a few years. But the reason that it's coming down is primarily the bandwidth and the power consumption. And in order to meet the requirements for mobile phones or the power requirements, there is no need - there is no other way, but just to move from wire bonding to advanced packaging. And I think we'll see this trend over the next five to 10 years for wire bonding with just I would say go down or finally disappear. But that's a trend that will take a few more years. That in parallel are the trends that are moving fast without primarily they produce integration, the high bandwidth memory and the fan out applications that are growing really fast. I would say this will give you a short explanation of the market characteristics.

[Charles Shi:]

Thank you.

[Moshe Eisenberg:]

Kenny?

[Kenny Green:]

Okay, thanks. Thanks, Charles. Our next question is a follow up question from Shahar Cohen. Shahar, please go ahead.

[Shahar Cohen:]

Yeah, thank you guys. One follow-up on the competition. We have seen one of your key competitor in the past announced rapid focus for the coming year. Can you speak about market share dynamics, where do you think you take market share in which kind of segments or customers and to what extent do you believe that will continue this year? Thank you.

[Rafi Amit:]

Now, actually there are few players and maybe most of you are not familiar with local player. There are the Japanese player, one U.S. company player, so there are more than one. And I cannot mention any specifically gaining market share from specific vendor. I assume that it - by the way, it's happened to us as well that some low-end application we prefer not compete, because maybe the lower ASP. So, we said okay, we are not there. And we try to select the most complex and the most high-end application as we can. The same I believe that some competitor prefer maybe to go and to put more focus on the front end rather than to go to other applications. So, the market is not stable yet, but we definitely can say that in some I would say high-end application eventually, customer prefer a leading company rather than a local company. So, it changed from territory to territory, from case to case.

[Shahar Cohen:]

Okay. Thanks.

[Kenny Green:]

Okay. That ends our question-and-answer session. Before I hand over to Rafi, I would like to let you all know that in the coming hours, we will upload the recording of this conference call to the Investor Relations section of Camtek's website at www.camtek.com. I will also like to thank all of you for joining the school and we would appreciate any feedback you have with regard to this new format. And now, I'd like to hand over to Rafi for his closing statement. Rafi, please go ahead.

[Rafi Amit:]

Okay, thank you, Kenny. I would like to thank you all for your continued interest in our business. Again, I would like to thank all of you, all of our employees and my management team for their tremendous performance in 2020. And we look forward to continuing it into 2021. To our investor, I thank you for long term support. I look forward to talking with you again next quarter. Thank you and goodbye.