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Camtek (CAMT) Q2 2020 Earnings Call Transcript

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Camtek (NASDAQ: CAMT)
Q2 2020 Earnings Call
Aug 05, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's second-quarter 2020 results conference call. [Operator instructions] As a reminder, this conference is being recorded. You should have all received by now the company's press release.

If you have not received it, please contact Camtek's investor relations team at GK Investor and Public Relations at 1 (646) 688-3559 or view it in the news section of the company's website, www.camtek.com. I would now like to hand over the call to Mr. Ehud Helft of GK investor relations. Mr.

Helft, would you like to begin, please?

Ehud Helft -- Investor Relations

Yeah, thank you, and good day to all of you. I would like to welcome all of you to Camtek's second-quarter 2020 results conference call, and I would also like to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's CEO; Mr.

Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, Camtek's COO. Rafi will provide the overview of Camtek's results and discuss market trends in the second quarter of 2020, and Moshe will then summarize the financial results of the quarter. We will then open the call to take your questions.

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Before we begin, I'd like to remind our listeners that certain information provided on this call are internal company estimates, unless otherwise specified. This call also may contain forward-looking statements. These statements are only predictions and may change as time passes. Statement 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 expectation or otherwise.

Investors are reminded 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 effects of the COVID-19 crisis on the global market and on the market in which we operate, including the risk of a continued reduction to our and our customers' provider business, providers business partners and contractor business as a result of the outbreak and the effect of the COVID-19 pandemic; risks relating to the consideration of the significant portion of Camtek's expected business in certain countries, particularly China, from which we expect to generate significant portion of our revenues for the second half of 2020, but also Taiwan and Korea, including the risk of deviation from our expectation regarding timing and size of orders from customers in this country; changes to market trends; reduced demand for services and products; the timing and development of the new services and products and the adoption by the market; increased competition in the industry and price reduction; as well as due to other risks identified in the company's filing with the SEC. Please note that the safe harbor statement in today's press release also covers the content of this conference call. In addition, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results and evaluate the company's current performance.

Management believes that the presentation of non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. And now I'd like to hand over the call to Rafi, Camtek's CEO. Rafi, go ahead, please.

Rafi Amit -- Chief Executive Officer

Hi, everyone. The second quarter represents continued demand for our system, primarily from Asia. Total sales in the second quarter were $37 million, a record quarterly level. Gross margin was 46.1%, and operating margin was over 17%, marking a significant improvement in profitability compared with the first quarter.

We expect continued improvement in profitability in the third quarter as well. The ongoing demand from our customers for various applications point to a strong third quarter with encouraging backlog going into the fourth quarter. Our revenue guidance for the third quarter is $38 million to $39 million, with persistent improvement in the profitability. This indicates strong performance in the second half of the year.

We have significantly increased our market share in 2D inspection, mainly because our system performance and competitiveness has been dramatically improved in all 2D applications. A key element in our strategy is having in place local professional teams that can independently install and support machines in all our territories, hence, enabling us to continue growing our business even during the COVID-19 pandemic. We have also established a remote training and support infrastructure allowing us to remotely operate systems, upgrade machine with recently developed feature and train local team on a regular basis. We invest considerable development effort in providing appropriate technological solutions to our RDL and Tier 1 customers who develop innovative packaging technologies in the field of heterogeneous integration.

We have received a few initial orders, and we believe we will soon receive multiple machines orders for production. We expect this segment to become meaningful to our business. Let me give you some highlights of the second quarter. Taiwan and China continues to be the largest territory in the quarter.

U.S.A. and Europe are starting to pick up. We have received multiple machine orders for over 30 systems from four Tier 1 OSATs for 2D applications, mainly for advanced packaging. Some of these machines will be installed in the second half of the year.

The two Golden Eagle inspection system for 600 by 600 millimeter panels, this were installed at two Tier 1 customers in Q2, are running Fan-Out panels in production. We expect to deliver additional system later this year. Our customers believe that Fan-Out packaging on panel will continue to grow as this is the cost effective solution. Soon, we will start planning our budget and work plan for year 2021.

One of the most significant challenges facing management during COVID-19 is to assess what will be the scope of business activity in 2021. We base our strategy of achieving continuous growth on several drivers and trends. The first is the increase in demand for semiconductor devices. The main drivers in our markets are advanced packaging, memory, CMOS Image Sensor and RF filter for 5G smartphones.

5G is pushing demand for high-end smartphone sales. Compared to previous generation, these 5G phones include more silicon, more advanced packaging and larger number of RF chips in each phone. As a result, we are experiencing demand for 5G-related applications. Regarding memory, new memory cards are under construction in Korea and China, and we expect investment in capital equipment for memory packaging to increase in 2021.

The second driver is the adoption of new packaging technologies by our customers. In general, we see considerable efforts in Tier 1 in Q1 IDM and OSATs to adopt new packaging technologies and execute basic production. Adoption of new technologies require extensive use of inspection and metrology systems. For example, logic CPU and graphics CPU shifts to heterogeneous integration technique, continued transition of DRAM to wire bonding to 3D IC advanced packaging or power devices shift to advanced packaging, specifically Fan-Out.

The third is penetrating to new segment in the front end. We have already penetrated the front end market in the past two years. And we continue to discover most segment that our system can provide suitable solutions for. To summarize, 2020 is shaping up to be another solid growth year for Camtek.

But it is important to stretch that we are still seeing the coronavirus pandemic effect, which include risks and uncertainties. Camtek is a dynamic and flexible company that can adapt to any development in the market and to take advantages of the rapid changes in our industry. Before I hand over to Moshe for more details on the financial results, I would like especially like to thank our employees for their dedicated work during this challenging time. 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 table at the end of the press release issued earlier today. As Rafi mentioned, second-quarter 2020 revenues were $37 million.

It's a record quarterly revenue level and an increase of 8% compared with the $34.3 million reported in the second-quarter 2019 and 22% increase versus the previous quarter. Due to the fact that U.S. and Europe were heavily affected during the second quarter, Asia accounted for most of our revenues with 95% installations. The rest of the world, therefore, only accounted for 5%.

Based on orders on hand, we expect U.S. and Europe to pick up in the second half. Gross profit for the quarter was $17 million. The gross margin for the quarter was 46.1% versus 48.4% in the second quarter of last year and 45% in the previous quarter.

As we mentioned in our last call, in the first half of 2020 we have received orders for multiple 2D inspection machines with basic configurations, with relatively lower ASP, which resulted in lower gross margins. We see a change in trend with order for quarter for machines with more base capabilities compared with the first six months. And as Rafi mentioned, we expect continued improvement in the gross margin in the second half of the year. Operating expenses in the quarter were $10.7 million.

This is compared with $9.6 million in the second quarter of last year and to the $10 million reported in the previous quarter. The increase versus the first quarter is mainly due to increased R&D activity. The COVID-19 environment resulted in certain savings, mainly in travel expenses, which were partially offset by higher shipping expenses. Operating profit in the quarter was $6.4 million, an improvement of over 70% versus the $3.7 million in the previous quarter.

Operating margin was 17.2%, compared to 12.2% in Q1, mainly as a result of the increased volume. Overall, we expect a significant improvement in our gross and operating margin in the coming quarters. Net income for the second quarter of 2020 was $6.3 million or $0.16 per diluted share. This is compared to a net income of $6.7 million, or $0.18 per share, in the second quarter of last year and $3.6 million, or $0.09 per share, in the first-quarter 2020.

Turning to some high-level balance sheet and cash flow metrics. We generated $11.1 million in cash from operations in the quarter. This quarter, we have received a significant amount of down payment from one of our customers, which positively affected our cash flow. Net cash and cash equivalents and short-term deposits as of June 30, 2020, increased to $101.5 million compared with $90.6 million at the end of March 2020.

With the current business momentum, we expect revenues of $38 million to $39 million in the first quarter. It is important to mention that the $37 million reported in Q2 included approximately $3 million as a result of the COVID-19-related delays from Q1 as discussed in our previous call. So practically, our guidance for Q3 represents significant increase of around 15% over Q2. And with that, Rafi, Ramy, and myself will be open to take your questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] The first question is from Quinn Bolton of Needham & Company. Please go ahead.

Quinn Bolton -- Needham and Company -- Analyst

Hi, guys, congratulations on the nice results. Wanted to ask just in terms of the demand environment. Have you seen any disruptions from your OSAT customers from the Commerce Department actions against Huawei, one of your competitors, on to last evening discussing some order delays as a result of those Commerce Department actions? Just wondering if that's had any impact on your business. And then, I've got a couple of follow-ups.

Thanks.

Ramy Langer -- Chief Operating Officer

This is Ramy. Yes. I saw the discussion last night. We have not seen any disruptions from our OSAT customers, any other customers.

And this specific discussion about Huawei at this stage has not affected our business.

Quinn Bolton -- Needham and Company -- Analyst

Great. And then, a second sort of business-related question. You delivered two systems for panel level inspection in the second quarter and expect more in the second half. Just wondering how meaningful can that panel level inspection business become over the next couple of years?

Ramy Langer -- Chief Operating Officer

It's hard to say because it depends who you ask. Some people believe it will be significant. Other people tend to say that it will be minimal. So I think we need to wait and see at this stage, at least.

If I look only 12 months ahead, I don't think it will be significant.

Quinn Bolton -- Needham and Company -- Analyst

OK, great. Then for Moshe, you talked about some meaningful increase in gross and operating margins into the third quarter and I think beyond. Any chance you might be able to quantify what you think gross and operating margins may -- how they will trend in the third quarter and whether that trend will continue into the fourth quarter and into '21?

Moshe Eisenberg -- Chief Financial Officer

Hi, Quinn, typically, we don't provide specific gross margin guidance or operating margin guidance, specifically, third quarter and fourth quarter that we are starting to shape up is populated with more favorable product mix, with more machines are coming with more capabilities. And as a result, we see a better gross margin, coming back to the more normal gross margin that we have seen in previous quarters. This is probably, obviously, will affect our operating margin as well.

Quinn Bolton -- Needham and Company -- Analyst

Understood. And lastly, you talked about your backlog giving you some visibility into the December and being supportive of a pretty healthy December quarter. Should we interpret those comments that the fourth quarter may be sort of flattish with the third quarter? Or how should we interpret those backlog comments? Thank you.

Moshe Eisenberg -- Chief Financial Officer

It's a bit too early for us to provide specific guidance for the fourth quarter, but currently it's looking good. I can't really quantify exactly how the fourth quarter is going to look like.

Quinn Bolton -- Needham and Company -- Analyst

OK, understood. Thank you, guys.

Operator

The next question is from Craig Ellis from B. Riley FBR. Please go ahead.

Craig Ellis -- B.. Riley FBR -- Analyst

Yeah, thanks for taking the questions, and team, congratulations on the real nice second-quarter execution. The first question is a follow-up on the earlier gross margin inquiry. I think Camtek and most other companies were impacted by adjustments to COVID-19 with COGS costs and certainly freight costs have been higher. Moshe, can you just help us understand to what extent those costs are lingering in the business in the third quarter and the fourth quarter? And to what extent are you seeing any abatement in any of those costs? That would be the first question.

Moshe Eisenberg -- Chief Financial Officer

Hi, Craig, there are some ins and outs as you usually use the terms. The positive that we have certain savings related to travel expenses, entertainment, conferences and things like that. On the same time, there are higher -- there is a higher level of expenses, mainly on the shipments. So all in all, we do see some savings, and this will take us all the way through the end of the year until the COVID-19 will be over.

Craig Ellis -- B.. Riley FBR -- Analyst

OK. And then, another one to a couple of inquiries to Rafi. So there was a customer deposit in the quarter that helped increase the cash balance above $100 million. Is that kind of customer deposit something that we should expect in the future? Or is this more of an unusual circumstance that we shouldn't expect to recur either in the back half of this year or next year?

Rafi Amit -- Chief Executive Officer

No, it's kind of a onetime event. This is why we, obviously, disclose this. Typically, we don't get a significant amount of loan payments in advance. So no, we are not -- we should not expect something like this in the next few quarters.

Craig Ellis -- B.. Riley FBR -- Analyst

Got it. And then, turning to some of the product dynamics and end market dynamics. Rafi, you had mentioned the visibility for the fourth quarter. What I was hoping to understand is, how that is shaping up from an end use standpoint.

You've had a real strong CMOS Image Sensor business, year-to-date high-bandwidth memories sort of prior to that. It sounds like RF is really picking up with 5G. Any color on what you're seeing bottoms-up for the fourth quarter would be helpful.

Rafi Amit -- Chief Executive Officer

Yeah, I would say that, in general, the mix application is very similar. We think about -- there are three major drivers, as we mentioned, is that advanced packaging, CMOS Image Sensor and RF and RF-related devices. This will almost take most of the capacity here.

Craig Ellis -- B.. Riley FBR -- Analyst

Got it. And then, as we look to calendar '21, it seems like it should be just a real strong year for Camtek because in addition to what should be a doubling in 5G smartphone units from 200-plus million, over 400 million and the strong RF and CMOS Image Sensor demand that would imply. But it seems like we've seen a lot of indications more broadly that high-bandwidth memory on new memory capacity and new memory products is going to see an increase. So if we were to look at calendar '21, how would you, Rafi, rank the growth drivers in the business largest to less significant on a year-on-year basis from what you see today?

Rafi Amit -- Chief Executive Officer

Look, as I mentioned before, there are a few, I would say, elements or parameter that affects our growth. It's the technology, it's the level of support, our positioning, installed base. All of this, we are in very good position. The only thing that we cannot predict is the market behavior.

We definitely do not know what is this -- all the coronavirus effect, what the effect and even the amount -- the demand in the industry. This is something that we cannot expect. But as I mentioned, we are very flexible, and we are ready for any change, any trend. And I think it's very important because if we deliver today, we are at a very large installed base.

We are in very high position, a Tier 1 supplier to the industry. I think that this is very important to growth. We are in a very good position to take advantage of any demand. So in general, as I mentioned before, we talk about advanced packaging, heterogeneous integration, memory, CMOS, RF, all this continue to grow up definitely.

Craig Ellis -- B.. Riley FBR -- Analyst

Got it. And then, the last question for me, and it goes back to a clarification that I had to Moshe with a different spin. Very significant cash balance, so congratulations. I think the $100 million plus is easily a record for the company.

How should we think about the way the company will deploy that cash balance to create value for shareholders? I think in the past, there have been some special dividends. The company has also in the past expressed M&A interest. How do we think about the priorities and how quickly the company could act on those priorities? Thanks, team.

Rafi Amit -- Chief Executive Officer

Yeah, I think, definitely, the first priority before we consider dividend is to look for opportunities and M&A. But we don't want to go to any adventure. Sometime you make M&A and then all the management invest all the effort and attention, and it can affect in our potential to grow and to take advantage of the organic growth. So we have to do it very carefully.

We are looking for mature companies, companies who don't tend to do micro management, companies that show stable profit. This is OK for us. And also, of course, we would like to look for a company in the semiconductor arena. We don't want to start this company that we have no clue about market, what they do.

I think that we have no -- we cannot contribute this. It was a very strong organization. And definitely, we can take small, midsized companies and we give them a lot of tool to leverage their success. So right now, we are evaluating a few companies.

But as I said, we do it very carefully, and we don't intend to make any venture by looking for start up a company that targeted the stage of investing and losing money. This is not the type of M&A that we are considering.

Craig Ellis -- B.. Riley FBR -- Analyst

Helpful color. Good luck, guys.

Operator

Thank you. The next question is from Gus Richard of Northland Securities. Please go ahead.

Gus Richard -- Northland Securities -- Analyst

Yes. Thanks for taking the questions. I just wanted to dig into the advanced packaging opportunities, copackaging chiplets, CPU, GPU, high-bandwidth memory and Fan-Out. Could you sort of talk about where each of those are in terms of demand and sort of what you expect in 2021?

Ramy Langer -- Chief Operating Officer

Well, Gus, this is Ramy. If we look at '21, first of all, I think we talked about the memory that we believe there will be an opportunity in the memory space, in the bandwidth memory. And I think this will definitely be significant in '21. The rest of the industry -- this is a major segment this year and will continue to dominate our business in '21.

I think the area of chiplet or heterogeneous integration definitely is growing. People are getting into it. It's very hard to say at this stage how significant it will be, but it's definitely going to become significant over the next few years. And we are in it.

We understand it, and we are going to be a major player in this segment.

Gus Richard -- Northland Securities -- Analyst

Got it. And is there a higher intensity of inspection and metrology on the chiplet side of things versus Fan-Out and HBM?

Ramy Langer -- Chief Operating Officer

Yes, there are additional steps that we don't see on HBM and on the regular Fan-Out. So I would say there is another level of metrology and inspection that doesn't currently exist. Yes, definitely, we think that this will be heavily present in two steps of inspection and metrology. And that's no doubt an opportunity, Gus.

Rafi Amit -- Chief Executive Officer

Yeah, I would like to add a few comments. The heterogeneous integration actually you take very expensive component and put them together. So nobody wants to take any risk that such module will be rejected because something that doesn't work properly. So this is why customers cannot skip any sampling inspection.

They must make even 200% inspection to be sure that this model works perfectly. It's a very expensive model. Talk about a few hundred dollars cost per model. So definitely, everyone needs to make inspection.

It's not only inspection. It's inspection and metrology. There are many steps, the interposer, the chiplet sales, the hybrid memory. So there are many steps in this package that inspection and metrology is a must.

So this is why we believe that this trend is going up. We will see a lot of machines doing this job.

Gus Richard -- Northland Securities -- Analyst

Got it. And then, on the panel level inspection, you're sort of uncertain about the demand for that. Is that a function of channel level versus wafer level? Or is that a debate over the proliferation of Fan-Out?

Rafi Amit -- Chief Executive Officer

No, I'd say that, in general, the panel level is something new for the industry. First of all, the beginning of this process, the industry need to wait for the equipment supplier to build the machine for this size of panels. Now the focus on material, we talk about organic materials in most of the cases. And organic material is not silicon.

You cannot make the cell density. The target is to make one, two micron line space, although it is impossible right now to make it an organic material. So today, most of the line space is about 10 micron. They claim to achieve five, eight microns soon, but not yet.

So I think that the density is a key factor to increase the use of panel level. And in textile part of the industry, to know how to make it in high vein. This is why we don't see the acceleration in this process. Customers now, I would say, is in the learning curve, and they want to make a good yield.

And probably after that, they will go step by step. So we don't expect to see dramatic needs for panel. It goes step by step. And I cannot even predict how long it takes.

I believe in the next two years, we will see more and more use of this technology, but it is not like silicon. Silicon, the industry know how to handle it very well. All the process, everything is actually -- is a nice experience, so we just know how to do it. Panel is totally new, new equipment, new process, new materials and by definition it will take some more time.

Gus Richard -- Northland Securities -- Analyst

Got it That was very helpful. And then, you mentioned in the front end that you are starting to triple the new applications for your equipment. Can you give a little bit of color? Are you moving from macro-defect to metrology in the front end? What are you seeing there?

Rafi Amit -- Chief Executive Officer

Obviously, I don't want to get into too many details, but the applications where we are focused, we are focused in the area, what we call the back end of tenor. And in that space, as more we get experience, we uncover other applications that customers are doing. It's around the macro -- to your call, the macro inspection but not only macro inspection. Definitely, there is room to grow there.

Gus Richard -- Northland Securities -- Analyst

Got it. OK, that's it for me. Thanks so much.

Operator

Thank you. [Operator instructions] There are no further questions at this time. Before I ask Mr. Amit to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available on Camtek's website at www.camtek.com beginning tomorrow.

Mr. Amit, would you like to make your concluding statement?

Rafi Amit -- Chief Executive Officer

OK. I would like to thank you all for your interest in our business and to our investors. I thank your long-term support. Unfortunately, we are unable to meet face-to-face during this challenging period.

So we will continue to update you on our activities through virtual conferences. Thank you, and goodbye. Operator, concluding the call?

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Ehud Helft -- Investor Relations

Rafi Amit -- Chief Executive Officer

Moshe Eisenberg -- Chief Financial Officer

Quinn Bolton -- Needham and Company -- Analyst

Ramy Langer -- Chief Operating Officer

Craig Ellis -- B.. Riley FBR -- Analyst

Gus Richard -- Northland Securities -- Analyst

More CAMT analysis

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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