Camtek Ltd.

Ladies and gentlemen, thank you for.

Team at Camtech. All participants other than the presenters are currently muted. Following the formal presentation, I will provide instructions on how to participate in the live question and answer session. I would 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. If not, please view it on the company's website. With me on the call today, we have Mr. Raki Amit, Camtech CEO, Mr. Moshe Eisenberg, Camtech CFO, and Mr. Rami Langer, 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. This call may also contain forward-looking statements. These statements are only predictions and may change as time passes. Statements on this score 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 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 that differ materially from those projected, including as a result of the effects of general economic conditions, the effect of the COVID-19 crisis on global markets and on the markets in which we operate, including the risk of a continued destruction of global markets. to our and our customers, providers, business partners and contractors' businesses as a result of the outbreak and effects of the COVID-19 pandemic. risks related to the concentration of a significant portion of cantex expected business in certain countries particularly china from which we expect to generate a significant portion of our revenues for the foreseeable future but also taiwan and korea including the risks of deviations from our expectations regarding timing and 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, as well as due to risks identified in the company's documents filed 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 events, and evaluate the company's current performance. We believe that the presentation of non-GAAP financial measures are useful to investors' understanding and assessments for the company's ongoing cooperations and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings press release. And now, I'd like to hand the call over to Rafi Ali, Camtech CEO. Rafi, please go ahead.

Thanks, Kenny. Good morning and thank you for joining our call today. We continue the momentum of growth from quarter to quarter. In Q3, we demonstrated another record financial performance. We ended the third quarter with $70.7 million revenue, over 50% gross margin, with 30.6% operating margin, and we generated over $16 million in cash. The strong profitability is due to several factors. An increasing revenue, attractive product mix, the leverage that we have in our financial model, and the fact that the increase in expenses doesn't keep pace with a rapid growth in sales. We are in a process of gradual increase in R&D investment and marketing channels to respond to market and customer demands. I will further discuss it later. We estimate that we will continue to see a moderate revenue increase for the next quarter, and we see positive signs for the first half of 2022. Our revenue guidance for the first quarter is $72 to $73 million. The reasons for the increase in demand of semiconductor, as we mentioned in previous calls, have not changed. we expect ComTech to continue benefiting from all these trends in the next few years. In the third quarter, approximately 50% of our sales were for inspecting advanced packaging wafers, especially for fan-out application supporting mainly mobile phones. 20% of our revenue were for inspecting compound semi-wafers. This way they are used for power devices and RF devices, which will go into mobile phones and for automotive industry, especially for electronic cars. About 15% of our sales were for front-end applications, which continue to grow and will account for about 15% of our business this year. A few words about the potential of the compound semi market. A major segment of compound semi is silicon carbide used for power device market and has been driven by power supply applications. The automotive industry is becoming the major market for silicon carbide applications following notable adoption by Tesla in 2018. Since then, more Tier 1 OEM components and car makers have made announcements on their adoption of silicon carbide technology in some of their products. In the prospering silicon-carbide power device market, the automotive segment is the foremost driver, and as such will hold more than 50% of total device market share in 2025. Other applications include LiDAR and face recognition. The compound semiconductors, and especially silicon carbide manufacturing process, is unique and requires dedicated solution for inspection and metrology. In Q3, sales to Europe and the U.S. accounted for about 18% of the total sales, and I expect continued growth from these territories. China continues to be our largest territory this quarter. We are aware of the energy problem that exists in China and may affect our customers, but we also understand the importance and strategic role of the semiconductor industry to China. From our discussion with several customers, we believe that the semiconductor industry will get the priority in energy allocation. We are monitoring the China situation closely. Lately, we have won a major evaluation at the global tier one player and received an order for our latest Eagle model. We expect additional order in 2022 from this customer. This month, we are celebrating the shipment of 1,000 ecosystem since we introduced this model in late 2014. Our Eagle platform was originally designed with modular concept. Since the production of the Eagle, we have developed three new generations of the same basic platform and have recently started to ship the fourth generation. This modular design has enabled us to maintain our leadership position and to ramp our business while meeting our customer requirements in a very efficient manner. In addition, we are in the process of developing new products based on new technologies that we intend to introduce in 2022 and beyond. We will continue to invest in R&D and adjust the level of investment to the technological challenges we see in the coming year. R&D capabilities is a key factor to continue maintaining our leadership position and meet our customers' roadmap. To summarize, high demand for semiconductor components have been leading to an increased demand for inspection and metrology systems. ComTech is strongly positioned in the market, and we expect the fourth quarter to close an exceptional record year in sales, growth, and profitability. I would like to hand over to Moshe, for more detailed financial discussion of the financial result. Moshe. Bye.

They can't hear you. Start again. Want to start again? Yeah, yeah. They can't hear you. Start again. Okay.

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 tables at the end of the press release issued earlier today. Third quarter revenues came at a record $70.7 million. an increase of 76% compared with the third quarter of 2020, and 5% compared with the previous quarter. The geographic revenue split for the quarter was as follows. Asia, 82%, and the rest of the world, 18%. I would note that this represents a significant increase in revenue from U.S. and Europe. Gross profit for the quarter was $36 million. The gross margin for the quarter was 50.9%, versus 48.8% in the third quarter of last year, and 52.1% in the previous quarter. This is the third quarter in a row of gross margin of about 50%, a result of a significant increase in the business volume. The change in the gross margin from the previous quarter was due to the slightly different mix of products. Operating expenses in the quarter were $14.3 million. This is compared with $11.9 million in the third quarter of last year and to the $16.7 million reported in the previous quarter. Quarterly operating expenses are mainly influenced by the sales channel mix and the level of R&D expenses. In Q3, we enjoyed relatively favorable sales channel mix. Both R&D and sales expenses are expected to increase in Q4. As Rafi mentioned, we plan to continue to invest in R&D. Operating profit in the quarter was $21.7 million. compared to the $7.6 million reported in the third quarter of last year and $18.5 million in Q2. Operating margin was 30.6% compared to 19% and 27.4% in previous quarter. The high operating profit is a result of the factors I've just mentioned. Net income for the third quarter of 2021 was $20 million or $0.45 per diluted share. This is compared to a net income of $7.3 million or $0.18 per share in the third quarter of last year. Total diluted number of shares at the end of the third quarter was $44.7 million. Turning to some high-level balance sheet and cash flow metrics, Inventory level was $61.8 million, and it went up by $2.8 million over the quarter. This is to support the current demand for our products and to ensure the availability of key components. We monitor the supply chain concerns on an ongoing basis. At this point, we do not foresee any issue with it. We generated $16.5 million in cash from operations in the quarter. Net cash and cash equivalents and short-term deposits together with $10 million cash that we have in long-term deposits as of September 30, 2021, is $215 million. Since the beginning of October, we have received orders for over $26 million, which definitely gives us confidence in our business momentum. We expect revenues of $72 to $73 million in the fourth quarter. With that, Rafi, Rami and myself will be open to take your questions.

Kenny? Thank you, Moshe. This time we will start the question and answer session. If you have a question, you can raise your hand on the Zoom platform. We will take a moment or two to wait for the questions to come in. Our first question is going to be from Craig Ellis of B Reilly. Craig, you may go ahead.

Yeah, thanks for taking the question and congratulations on the strong revenues and the robust margin performance team. Moshe, I'll start just following up the comment that you and Ravi made about quarter-to-date orders, I was hoping you could provide some insight on the composition from an end-use standpoint, whether those were predominantly advanced packaging, high bandwidth power, or whether you were seeing continued strong momentum out of compound semi, which was very strong in 3Q. Thank you.

Hi Craig, this is Randy. First of all, what is interesting about these batch of orders, they are from multiple tier one customers, mostly IDMs, and from application point of view, It really follows the applications that we are seeing that Rafi mentioned. It's the 50% advanced packaging. It's the compound semi that is coming very strong, and also front-end applications. So it really is across the entire application range that we have been experiencing lately. And also what is interesting about this batch, it's from all the territories. It's not related to a specific territory.

That's really helpful, Color Barami. Thank you for that. My next question is related to the comments on the compound semi-market. So, one, I was hoping the team could just provide some context on that market size, say, a year ago, because certainly at 20% of sales in the third quarter, it looks like it's growing quite dramatically. And is it the company's view that – that this is a level of revenue that could be sustainable going forward, and is this something that is completely SAM expansive, or is this cannibalizing some of the power management market in the IGBT area that we might have thought that the company could have had some exposure to?

No, no, this is not compromising any other applications. I mean, this is definitely a segment that has been growing, I would say it's surprising growing a little faster than we thought. It's very hard at this stage to tell you whether this is sustainable at the level of percentage from our overall business. But it's definitely building up to be a sizable business. And I believe within a few quarters we'll be able to size it better from the opportunity point of view. What is interesting about this specific market that we said both the front-end portion and also the back, the end of the process until post-dicing. So really there are a few steps that we are doing. It's for a few applicants. I would say it's from different customers and different territories. So definitely the opportunity is there. And as I said, we will size it over time more accurately.

Well, congratulations on that important progress in a fast-growing application area. My last question before I hop back in the queue, I'll direct to Moshe. Moshe, OPEX came in much better than I expected in the calendar third quarter. Were there any timing issues or one-time items there? And you mentioned that OpEx would be up in the fourth quarter. Can you provide some qualitative or quantitative color on that and then just help us with the trajectory of OpEx from there, given the expected investment in R&D and sales and marketing? Thank you.

Yeah. Thanks, Greg. So the issue with the OpEx is, as I mentioned in my preferred remark, remarks there beforehand is that it's influenced mainly by two factors, the level of R&D spending and sales and marketing. And R&D, Rafi mentioned, we are in a process of gradual increase of the R&D, level of R&D expenses, and we see some increase over the course of the next few quarters, and that's definitely in the plans. With respect to the other item, it's mainly sales channel mix. In some territories we work directly and other territories we use reps and agents to support the sales activity. This quarter, indeed, it came a little bit lighter or lower than we anticipated. Our plans for the fourth quarter is that it will come back to a more sustainable level. So, we will see some increase on the sales and marketing level of expenses in the fourth quarter.

Thanks, Moshe, and congratulations again, team. Thank you, Craig. Thanks, Craig. Our next question is from Charles Shi from Needham. Charles, you may go ahead.

Thank you. Also, my congratulations on the strong result. I didn't notice Q3 sales is almost close to the 2016 semiconductor sales for the full year, and very few companies can achieve that kind of level of sustained growth. Congratulations. So I want to follow up that the orders you recently received since October, you mentioned a little bit about that application space, what kind of customers, what's your expected delivery date for those batch of orders? Can you give more color on that?

Some of these orders will be shipped in the fourth quarter, very few, but mostly are for the first half of next year.

Thank you. So my second question is on the DRAM side. I noticed that, unless I missed it, you didn't make a comment in the prepared remarks. Obviously, you were expecting DRAM to come back, but in recent months, there has been lots of cross-currents. In this part of the market, so are those orders, are you seeing those are still firm or you're seeing any changes?

No, we don't see any changes. We are expecting to ship multiple machines to more than one customer for DRAM applications in the first half of next year.

Got it, got it. Thank you. So my last question is around CMOS emissions. I want to look a little bit ahead into 2022. Obviously, this has been a little bit, the investment level has been coming under a little bit in 2021. Do you sort of expect that things will come pick up again? I know that has been your stance, but I just want to understand what you see in that part of the market and how much upside it can drive for 2022 sales. Thank you.

So just I do expect, yes, 21 is a little bit lower or slower in the investment side compared to the previous year, but still it's going to be a sizable number this year. And we expect to maintain the double digits next year as well. It's definitely a significant market for us. We're speaking with our customers. There is a lot of activities there. So it might go up a little bit, you know, but all in all, we're talking about double digits for the CMOS sensors market.

Thank you.

Thank you, Charles. Thank you, Charles. Our next question is a dial-in question. Please identify yourself as we only have your number here.

Hey, guys. Hey, guys. This is Tom O'Malley from Barclays. Thanks for taking the question. My first one's related to the major evaluation at a global tier one player that you mentioned in the preamble. You said you expected additional orders in 2022 from this customer. Could you just size for us what that opportunity looks like in terms of total revenue over the next couple of years?

Well, I would say that definitely, obviously, we kind of go into details and names as we are under NDAs, but it's definitely in the area of advanced packaging. This is a very important customer and also a big influence in the industry. It's multiple machines over the next couple of years.

All right. That's helpful. And then I just wanted to ask a question on the geography split. This quarter, it looks like you're seeing some increased, you know, exposure for the rest of the world, and you specifically called up the U.S. and Europe. Could you talk about what trends are going on there that's making, you know, those regions be a bit better and call out the particular area where you're seeing the success there?

Well, what I can say about the Europe and the U.S., sense that it's mainly tier one IDMs that where we do most of the business and what we are seeing expansion in these tier one IDMs. And this is the reason for the increase in the business. Now, what I can add a little bit more, and these are IDNs that we have penetrated in the last several years. And I think this is the reason for the upside in the business that we are currently seeing.

Thank you. Thanks a lot, Tom. We will poll again for questions. If anybody wants to ask, please let us know. And we have a follow-on question from Craig Ellis of B. Riley. Craig, your line is open.

Yeah, thanks for taking the follow-up questions, team. I wanted to just ask a longer-term question, really, and I'm not looking for specific items. I know the company doesn't provide that out for the next year. But I wanted to get a sense qualitatively of some of the things that that you were seeing on the growth horizon as we look at calendar 22. And I wanted to get your perspective on that in a way that I don't typically ask because typically I would be focused on things like advanced packaging or compound semi or RF, et cetera. But given some of the big fab projects that we're seeing being built, I'm wondering if – if that has an impact in next year's growth. So if you could just help us understand what you're seeing as you look ahead to calendar 22 with some of your key growth drivers, that would be helpful.

Let me try. I'll give you an answer, and if I'm not clear enough, you know, you can just ask further. But first of all, the $26 million that we just received is definitely an indication of the kind of business momentum we're starting to see for next year. So this is a strong indication. Now, we're looking at our backlog for next year. We're looking at the pipeline. We're having a lot of discussions with our customers. And also the DRAM specifically, as I said, we're expecting to ship chains in the first half. So if you hold all of this together, this gives us a very, I would say, positive feeling moving into 2022. So now, you asked specifically, and so I'm very hesitant to answer about specific FABs because this would indicate some custom, you know, some delicate customer information that we are very sensitive about. But definitely I can say that the tailwind from building all these FABs, we are feeling it. And it's definitely business that eventually from these expansions, we will see additional business.

That's really helpful, Rami. Thanks for providing that color. The second thing I wanted to follow up on is really a clarification. Moshe, from your comments, I inferred that there wasn't a material negative impact in the third quarter from supply chain issues, either to revenue or gross margin. Was that right, or was there just not a material sequential impact? And You know, to what extent are things like higher shipping costs and other things impacting the gross margins that we're now seeing?

It was a very, very minimal impact. Obviously, shipping expenses are going up, that's for sure. And we see some components, prices are going up. But overall, the impact of these are very limited and minimal. to the results in the third quarter and also on the fourth quarter.

Got it. Okay. Thank you very much, Tim. Appreciate the help. Thank you. Thank you.

We have questions over the chat, which I'll read out. Can you discuss whether any of the big orders are from new fat bills as opposed to capacity increases?

The new order, the 26 million that we mentioned. I'm looking at the list, it's in front of me, and it's mostly at this stage I can say that there is one specific order that comes from a new facility. The Rs are mostly expansions of existing facilities.

Okay, we have a follow-up to that. How much of the new business appears to be due to new technology nodes requiring new inspection techniques such as what we see with the new stacked DRAM requirements?

So there is some business that is related, it's a, it's very hard for me to quantify it on this call. But definitely some of the business going to a technological changes. And but as I said, I would say the, the bulk of the business is his expansion. But there is significant would say it's in double digits of this order, definitely going to technological changes.

Okay, thank you for that. If anyone has any additional questions, you may raise your hands. Looks like there's no additional questions. So before I move back to Rafi, this call will be available from Camtech's website in the coming hours. Thank you, everybody, for joining. And now back to you, Rafi.

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