Camtek Ltd.

Gentlemen, thank you for standing by. I would like to welcome all of you to Camtech's first quarter 2021 results Zoom webinar. My name is Kenny Green and I'm part of the investor relations team at Camtech. All other than the presenters are currently muted. Following the formal presentation, I will 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 Camtech's website from tomorrow. You should have all received by now the company's press release, and if not, you can review it on the company's website. With me today on the call, we have Mr. Rafi Amit, Camtex CEO, Mr. Moshe Eisenberg, Camtex CFO, and Mr. Rami Langa, Camtex COO. Rafi will open by providing an overview of Camtex 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 would like to remind everyone that certain information provided on this call are internal company estimates unless otherwise 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 information contained. whether as a result of new information, future events, changes in expectations or otherwise. Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause actual events or results to differ materially from those projected, including as a result of the effects of general economic conditions, the effect of the COVID-19 crisis on the global markets and on the markets in which we operate, including the risk of a continued disruption to our and our customers, providers, business partners, and contractors' business as a result of the outbreak and effects of the pandemic. Risk related to the concentration of a significant portion of Camtex's expected business in certain countries, particularly China, from which we expect to generate significant portions of our revenue for the foreseeable future, but also Taiwan and Korea, including the risks of deviations from expectations regarding timing, size of orders from customers in these countries, Changing industry and market trends, reduced demand for services and products, the timely development of new services and products and their adoption by the market, increased competition in the industry and price reductions, and as well as due to risks and uncertainties identifying the company's filings with the SEC. Please note that the safe harbor statement in today's press release also covers the contents of this conference call. Furthermore, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results, and evaluate the company's future performance. We believe that the presentation of non-GAAP financial measures are useful to investors' understanding and assessment of the company's ongoing corporations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release. And with that, I'd now like to hand over the call to Rafi Amit, Camtech CEO. Rafi, please go ahead.

Thanks, Kenny. Good morning and thank you for joining our call today. I demand in our markets excellent performance of our systems and the strong position that ComTech has gained in the market allow us to continue demonstrating record financial performance quarter after quarter. We ended the first quarter of 2021 with $57.4 million revenue, 51% gross margin, and 27% operating margin. The impressive profitability is a result of a rapid increase in sales and favorable product mix. Before I review the first quarter, I would like to give a brief overview of the market's environment. We are experiencing demand from all territories and especially from Asia. We expect to continue showing an increase in sales in the next two quarters. Our revenue guidance for the second quarter is $63 million to $65 million. There are several market trends driving the demands for semiconductor components and for our systems. The demand for products such as laptops and tablets that had been stabilized before COVID-19 has increased due to working from home. Working from home has also led to heavy investment in data center, cloud, and communications infrastructures. The massive amount of data that is sent and stored in the cloud is driving demand for advanced memory, AI devices, and high-performance computing technologies. 5G cellular communications has been adopted by the market earlier than expected, resulting in high demand for electronic components. 5G cellular phones contain more RF devices, cameras, and advanced packaging compared with the previous generations, thus requiring more inspection and metrology of all components. The automotive industry is also undergoing major changes with the shifting to electric cars and advanced driver assistance systems technologies, resulting in demand for extensive electronic components. These components must meet zero defect policy requiring 100% inspection of all components in cars. We see adoption of high-end advanced packaging in new devices as the industry is driving smaller geometric and using heterogeneous integration to deliver products with higher performance and lower power consumption. We are a major player in this space and we expect to expand our business as the industry is implementing new applications with IN advanced packaging. Regarding Q1 highlights, 88% of our sales came from Asia, with China being the largest territory. 50% of our installed system are for advanced packaging applications. which is expected to continue growing in the coming quarters. Other applications in which we pay a major role are compound semi, MEMS, CIS, RF, and macro defect inspection in the front end. During the quarter, we delivered multiple systems order to several tier one customers, as well as single system order to over 20 customers. We continue to execute well under the COVID-19 circumstances. Most of our employees in Israel are vaccinated and return to work from office, which will no doubt improve our overall efficiency. To summarize, high demands for semiconductor components have been leading to an increasing demand for inspection systems. ComTech can provide its customers with reliable, high-performance systems tailored to their special requirements. ComTech is strongly positioned in the market, and as things stand today, we expect 2021 to be an exceptional record year in sales, growth, and profitability. I would like to hand over to Moshe for a more detailed financial 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 the 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 the record $57.4 million, an increase of 90% compared with the first quarter of 2020 and 18% compared with the previous quarter. Assuming the mid range of our Q2 guidance, we expect the revenue in the first half of 2021 to be 80% higher than the same period last year. Gross profit for the quarter was $29.1 million. The gross margin for the quarter was 50.7% versus 45.2% in the first quarter of last year and 48.2% last quarter. The improvement in the gross margin was due to the significant growth in revenues as well as more profitable product and sales mix this quarter. Operating expenses in the quarter were $13.5 million. This is compared with $10 million in the first quarter of last year and to the $14.2 million reported in the previous quarter. The decrease from the previous quarter is mostly due to a more favorable sales channel mix. Operating profit in the quarter was $15.6 million. compared to the $3.7 million reported in the first quarter of last year. Operating margin was 27.2% compared to 12.2% in the first quarter of last year and 18.9% last quarter. The rapid growth in revenue, while we are still in the process of adjusting our expense structure to support this increased business volume, contributed to the high operating margin. Yet, I expect that our operating profitability will be ahead of our model. Net income for the first quarter of 2021 was $14.6 million or $0.33 per diluted share. This is compared to a net income of $3.6 million or $0.09 per share in the first quarter of last year. Total diluted number of shares as of the end of Q1 was 44.5 million shares. Turning to some high-level balance sheet and cash flow metrics, inventory level went up by $5 million to support the continuing growth expected in the coming quarters. Account receivables went up by $13.5 million due to the increased sales and timing of collections. We generated $2.7 million in cash from operations in the quarter. This quarter's cash flow was affected by the above-mentioned working capital requirements. Net cash and cash equivalents and short-term deposits as of March 31st, 2021, were $169.9 million. And together with the $10 million that we have in long-term deposits, the total cash and deposits amounted to $180 million. This compared with $177.8 million at the end of 2020. With the current business momentum, we expect revenues of 63 to $65 million in the second quarter. And with that, Rafi, Rami and myself will be open to take your questions. Kenny.

Thank you, Moshe. At this time, We will begin the question and answer session. If you have a question, please raise your hand by the Zoom platform. I will introduce you, ask you to unmute, after which you may ask a question. If you are dialed in and we open your line, you'll have to introduce yourself. And I will give a few moments for people to poll, since we have a lot of people on the line. Our first question will be from Craig Ellis of B Riley.

Craig, please unmute yourself and go ahead. Yeah, thanks for taking the question and congratulations on the very strong first quarter results and second quarter outlook team. I'll start with a clarification just on two income statement items. Moshe, for operating expense, you talked about expanding to support growth in the business. How quickly can operating expense dollars expand? And then secondly, related to the income statement, very nice gross margin improvement. And with the increase in the second quarter, should we expect the volume part of the gross margin drivers to mean that gross margin could even expand further into QP?

Okay. Thank you, Greg. So I'll start with the second question. With respect to the gross margin, overall, indeed, the business volume contributed to the improved gross margin. Also, the product mix was very favorable this quarter. We believe that the company can operate within this magnitude in the next few quarters. So we are talking between 50 to 52% gross margin in the coming quarters. With respect to our operating expenses, obviously with the increased volume, we will increase operating expenses to support it. The main item that will be increased is R&D, obviously, as well as sales and marketing, which has direct relationship to the business volume. And sales channel, whether we are working direct or indirect, has a major impact on the operating expenses. So it will go up, but not significantly in the coming quarters. such that we expect operating profitability to remain high this year.

That makes sense. And then the first real question is for Rafi. Rafi, I think I heard in your prepared remarks an expectation for the third quarter's revenues to increase sequentially. So The question is really twofold. One, given that the trailing five-quarter average sequential revenue gains have been around six or seven million, is that a reasonable expectation for the third quarter? And where do you have comparatively higher visibility in your business for the third quarter and the back half of the year across CMOS image sensors, front and back inspection, or high bandwidth memory? Thank you.

Now, I can tell you in general, as we said, we can see continue growing in the second quarter and also in the third quarter. I believe we can see a few million, you know, each quarter growth rate. Regarding the type of applications, as we said before, in general, the advanced packaging, is the major one. But all of them, as we mentioned before, we can see compound semis, semisensor, RF, MEMS, all of them continue about in the same level.

That's helpful. And then finally, for me, the company has a very substantial cash balance of 180 million, including 10 million of securities. So the question is, how are you thinking about redeploying that to create value? I know in a in a COVID world, it's hard to get out and do the things that are needed that are often precedent actions to M&A, but can you just express how you're looking at activating that cash for creating further value for shareholders? Thanks, Tim.

Okay, look, we invest a lot of efforts of searching for available companies for M&A. I would say that assuming we eventually find a good company, hopefully we can visit, we can make due diligence, and we can come to a decision. This is something that is unclear at this point. It's depending where. Some territory you can fly, you can visit. Some of them you cannot do it. So... We don't know yet. We have few potential company that we consider and definitely this is one of our strategy to do it. And we invest a lot of efforts, but it's too early to say something. I would say when we find a company, when we start the process, we will share it with the public.

That's helpful. Thanks team. I'll get back in the queue. Thank you.

Thank you, Craig. Um, Okay, our next question will be from Charles Shi of Needham. Charles, your line is open. Go ahead.

Thanks for taking my question. Can you hear me? Yeah, we can. Great, thanks. So I want to ask a slightly longer-term question, so a little bit looking beyond 2021 into 2022. So first, let me start with your memory business. One of your largest memory customer, SK Hynix, yesterday announced that they are pulling in 2022 CapEx into 2021. And the decision was kind of made near the end of last month. And I know you've been expecting your memory revenue, which has been quite muted since last year, could pick up. as early as the end of this year or first half 22, do you see any of the pull-ins, I mean, maybe not specifically from this customer, but that overall DRAM or memory in general into the second half this year?

Hey, Rami, would you like to answer, please?

Yeah, I will answer. Look, Charles, in general, we see a lot of activities in this space. And we're working very closely with our customers. And I expect that there will be business. I still believe it will only happen starting early next year. If there will be any pooling, of course, we will be able to accommodate it. But I'm not sure we will see it in the second half. I believe it will be, if any, it will be very late this year, early next year.

Okay. Thanks, Rami. So it looks like there's, at least for now, there's no change in terms of the outlook for your memory side of the business. No change. Great, great. Thanks. So maybe let me move on to the other major segment, market segment for you guys, CMOS image sensor. I heard you, Rocky, you did say you expect the revenue will maintain at about the same level throughout this year, very steady, stable, and continue the strength. I wonder whether you're seeing any signal for 2022, whether the investment level for CMOS image sensor can go up again next year. I think one thing we did here, one of your largest CIS customers, Sony, last night that did a it update on their long-term, mid to long-term capex and think they are raising their capex up by 25% for the next three years relative to the previous three-year period. I wonder, is it the right expectation for us to see your CIS revenue to go back to the 2020 level or close to that level next year? and which means year over year growth from this year's level.

So, Charles, first of all, this year level is not low. We will see about 10% of our revenues and it's significantly increased compared to last year. So 10% of the business this year will go to seamless image sensors. It's very hard to say at this stage whether we will see the increase or what is the magnitude of the increase. And in general, we're speaking with several customers. They are all talking about adding capacity in the foreseeable future, meaning late this year, beginning of next year. So I do expect the 22 will be a positive year for the seamless image sensors, whether it will reach last year It's hard to say, but definitely it will be a positive year for this segment.

Great. Maybe my last question, we know we'll talk about potential upside for memory, potential upside for CMOS image sensor. On your advanced packaging side of your business, definitely this year is very, very strong. And I think some of the concern, I mean, more of the pessimistic people would think maybe your business on that side of advanced packaging site could be peaking. Obviously, you have a very well diversified business. You have posted seven consecutive year of growth because of your business. diversified exposure to different end markets. However, specifically on advanced packaging, I wonder what your early view about 2022 is like at this point of time.

Well, if we look from what we talk with our customers and what we look at understanding the trends, definitely we believe that the advanced packaging will continue to grow in the foreseeable future, meaning in the next few years. Now, one of the major additions is the heterogeneous integration, which is primarily today for high-performance computing. But definitely, this is a trend. Rafi mentioned it in the script. And so we believe that this market continues to grow. There are a lot of new devices that are adapting advanced packaging for all the good reasons. So if today most of the business is fan-in or wafer-level, cheap-scale packaging and fan-out, and I would say the heterogeneous integration is something in the range of about 10% of the business, this last 10% will definitely continue to grow and become far more significant in the next few years. So if we look from the market point where we understand the trends and where our customers are going, definitely the advanced packaging will continue to be a major portion of our business and will continue to grow.

Thank you. Thanks. Congrats on the nice results. I'll go back to the queue. Thanks.

Thank you.

Thanks, Charles. Our next questions will be from Gus Richard of Northland. Just as a reminder to anyone who wants to ask a question, please raise your hand on the platform and we'll open you afterwards. Gus, you may go ahead and ask. Yeah, you have to unmute yourself, Gus. Gus?

There we go. Can you hear me? Yeah, I can. Scott, sorry. I just want to cut your business a little bit differently and think about just the applications in terms of 2D, 3D, and other applications that are driving your inspection tools. If you give us a little color around that and sort of where you're winning when you think about it in that dimension.

Rami, please. I'm trying to think where we are winning to try and answer you, but let's see broadly, if we take about 3D and 2D. So, you know, on the, there is on the advanced packaging, I would say 50% is what we call 3D or the metrology portion and 2D is the other 50% of the business. And this is definitely a business that is a, we started to gain only, I would say, two or three years ago. So that's definitely an area that we are starting to dominate in the last few years. So I would say this is from the advanced packaging that these two businesses will continue to grow. Now, if we look at the other businesses, so if you take, for example, 5G. So 5G is driving very strongly our seamless images and sensors. And it's driving the overall demand in the semiconductor that we see. If you look at the automotive business, this is coming, we see there the compound semi and the power applications. We see a drive, very strong drive there. And again, the overall to do business is growing and we are very well in trade, I would say in several major providers for this segment. continue and move along and we look at the cloud, definitely there, it's the memory business, high performance computing with the heterogeneous integration that will take a big share. Again, there, we are very well positioned. And if we talk about the, I would say the overall business like laptops, tablets, all of the above, then the overall semi-consumption affects us very positively. We'll see the demands coming from the OSATs and the IDMs that we are serving. And again, there, we see the high performance computing, especially for the high-end portion like the gaming application. So there we gain twice on the memory and also from the heterogeneous integration. So overall, when you look at the different segments of the end product, and the different applications that we are supporting. So I think we're well positioned in all of the above. Did I answer your guess?

That's very helpful. And let me try to cut it yet another way. Semiconductor unit growth is roughly 15% this year. It's kind of what people are saying. You're growing 80% in the first half, clearly outperformance relative to unit growth. when you think about, you know, the applications you address and the growth of those applications versus and new applications versus market share gains, can you attribute your outperformance on a relative basis to those two metrics? You know, again, market share gains and, you know, outperformance of the applications you address.

So I would say, First of all, I understand the question. It's very hard to give you a very quick answer, but definitely we are gaining market share. And I think in the areas that we are strong in the advanced packaging, definitely we are gaining market share. And I know there are specific customers that switched from the competition to us. So that's definitely to give you whether how many percent of the growth it is, it is very hard Definitely significant. I think where we are growing the business and taking market share is the overall inspection business that we didn't participate in the past. If we talk about the compound semi and power area, we never participated there. If you talk about the front end, which is roughly, I would say, 10% of our business, definitely it's a new business and we are growing, definitely taking market share. I think we took some market share in the CMOS image sensors last year. I'm expecting this to attribute to some of the growth that we'll see this year as well. So it's definitely a mix between these two areas, but it's very hard for me to tell you that, you know, 40% will come from there, 40% will come from others. And also we will end up the year and we will see where the growth is coming from. I think there is one more aspect that we need to keep in mind. A lot of the applications that we are talking require 100% inspection. So the growth of the inspection and the metrology is much higher than the growth of the business or the actual number that we see, the 20% that you see in the equipment. I think Rafi related to it a number of times during the his discussions, and I think this really plays very well to the actual segment that we are serving. If you take, for example, heterogeneous integration, this kind of process requires, because it's a new process, because it is very complex, it requires a lot of inspection and metrology steps, which play very much into our play, into our growth. I think it is more complex, but I hope I was able to put enough color into your question.

I would like to add one more comment about this. Because when you talk about 15% growth in the semiconductor, I assume you talk about, let's say, number of wafer of equivalent to 12-inch wafers. but actually we inspect the not the amount of wafer but sometimes we inspect the complexity of the wafers assuming that we can see a trend moving from wire bonding to wafer level package it's totally different in wire bonding maybe nobody make an inspection or make sampling when you move to wafer level package you do 100 inspection so Technology change definitely changed the demand for inspection machines. You have to consider it. The same is the DRAM. When we talk about DRAM, again, moving from wire bonding to 3DIC. All this shifting changed the demand for equipment, inspection equipment.

The 15% was referring to unit growth, just to be clear. But thank you. That all was very helpful.

Okay. Thank you, Gus. We'll now move over to Patrick Ho of Speedfarm. Patrick, your line is open. Go ahead.

Thank you very much, and congrats on a nice quarter. I'm not surprised to see the inventory levels increase given the strong demand environment. But maybe Moshe, if you can give a little color whether you're building any inventory given some of the supply chain shortages that are in the ecosystem overall. Is the inventory bill just specifically on the near-term demand, or are you trying to build a little bit of buffer to ensure that the momentum that you've built over the last few quarters can continue?

So, hi, Patrick. Yes, obviously, most of the inventory is for immediate use in the next couple of quarters, but given the shortage and in order to be well prepared for the growth beyond that, we are also building inventory of certain inventory pieces that we feel that might be in shortage. So there are some elements in the inventory which relates to the shortage.

Great, that's helpful. And maybe as my follow-up question for Rami, you gave a lot of good color in terms of the heterogeneous integration and some of the applications there that are driving demand as we look into next year. Can you talk about qualitatively the development work you're doing with a lot of potential customers, because, uh, not only just for heterogeneous integration, but a lot of new processes, a lot of new stacking techniques are emerging. And how long does it take, uh, you know, in these type of development works to turn it from, uh, the engineering side over to high volume buys, uh, for the customer?

Well, you know, uh, From the customer's point of view, I think you know that these kind of technologies have been developed for quite a few years. The concepts have been on the drawing development stage for quite a while. I think today we're in the stage where these technologies are ramping to production. I believe that within two to three years, they will be very common in the industry and as we talked about high performance computing will be based on heterogeneous integration. Today you already see graphics cards from certain vendors already using these technologies. The high bandwidth memory is definitely a portion of the heterogeneous integration. It's used along the CPUs today very commonly by quite a few vendors. So definitely, this is something that is already happening and is starting to move along. From our point of view, definitely, there is a lot of development. What we have been doing here, it's a lot of hard work. It's just working with our customers, and there are a few customers. working with them on the application. And this is something that is ongoing as part of our business. So this is, I would say, one portion. And alongside, we have a roadmap, understanding exactly what our customers will need in, I would say, two to three years. and we are developing products and technologies that meet their requirements. So I believe that we are well positioned to respond to the market needs in the specific applications that we are a major player in.

Great, thank you.

Thank you, Patrick. Just as a reminder to everyone, if you have a question, please raise your hand on the platform. Also, if you have a follow-on question, we'll be happy to take them. And we will give a few moments to see if there are any additional questions. Okay. We have a follow-on question from Charles Shee of Needham. Charles, your line is open.

Thanks for taking additional question from me. Just want to go back to some of the comments. So you said the 55% of the systems installed are coming from advanced packaging applications. I assume because of a slightly higher 3D metrology, in the mix for advanced packaging applications, the revenue contributions probably slightly higher than that. I wonder for the full year, given that your total revenue is probably a little bit above your original expectation, whether advanced packaging contribution this year is above the 60% number you sort of indicated three months ago, or is it more approaching 70% for this year? And another one, maybe I'll just ask it together. Any update on your macro front end inspection side of the business? Is it still expecting to grow in line with the corporate growth this year, or do you expect a slightly out performance given the sheer gain momentum you're making?

So I think if we look at, Charles, let me, I'll start with the advanced packaging. So we started and we said we were about just about 50% this year. And I think this portion will probably grow a little as we move along in the year. I think it will strengthen and it has the potential this year to reach even close to 60%. This segment is very, very strong this year. So I think we will be anywhere between the 55 to 60% this year, definitely a little bit above our expectation. And no doubt with the heterogeneous integration and all the fan out and fan in activities, definitely there is a lot of growth in this part of the industry. Regarding the front end and what we call the macro inspection portion, Don't know if we'll outperform this year. Definitely, we're continuing to grow with this business. We're getting to new customers. We are broadening our presence. I'm not sure at this stage if we're going to outperform what we have done in previous year. It will definitely be in the double-digit numbers this year.

Got it. Thank you.

Thank you, Charles. We now have a question from Raymond Runt of Shaker Investments. Raymond, your line is open.

Thank you very much. I was wondering if you could just give us the quarters breakdown in revenue by application. If you gave that earlier, I'm sorry, but I didn't hear it.

Hi, Raymond. We don't provide specific details of the breakdown of the applications, but as we've mentioned before, on a very high level, we said that we are around 55% in advanced packaging, and we said around 10% on the CMOS image sensors, and the rest is all other applications that we support.

Thank you. That satisfies the need.

Thank you.

Thank you, Raymond. I believe that ends our Q&A session. Before I hand over back to Rafi for his closing statement, I want to let you all know that in the coming hours, we will upload a recording of this conference call to the investor relations section of Camtech's website at www.camtech.com. I would also like to thank Rafi, Moshe and Rami for hosting this call with investors. I also want to thank all of you for joining this call and we would appreciate any feedback you have with regard to our new format. And with that, Rafi, I would like to hand over to you for your closing statement. Please go ahead.

Okay, 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 continue it. To our investor, I thank your long-term support. I look forward to talking with you again next quarter. Thank you and goodbye.