Camtek Ltd.

You should have all now received the company's press release. If not, please view 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 able 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. And with that, I'd now like to hand the call over to Rafi. Rafi, please go ahead.

Thank you, Kenny. Good morning or good afternoon for everyone. As we announced a few weeks ago, we started 2022 with strong backlog and with impressive flow of orders. We continue with this momentum and 2022 looks like another year of growth. Revenue in Q1 was over $77 million. This represents a growth of 35% over the first quarter last year. Gross margin was 52% on a high end of our model and operating margin of 28.8% is in line with our mid-term target financial model. Furthermore, despite the ongoing negative global geopolitical environment, the company has received order of more than $150 million since the beginning of the year. The orders were received from a broad range of customers and will be used for various applications such as advanced interconnect packaging, including DRAM, compound semi, front end and CIS. This strengthen our expectation for another record year with year over year revenue growth of mid to high teams. The side effect of the COVID-19 continue to interrupt our business as delivery times for material and parts are still long. Prices of component and parts are more expensive Borders of some countries in Asia are still practically closed, and our field engineers cannot visit customers as often as they used to do in the past or travel for advanced training in Israel. In China, the situation is more complicated. Most of the semiconductor industry in China is in the Shanghai area. Thus, a lockdown in Shanghai affects the oil industry. Farbs are operating, but they do so at lower capacity than usual. All in all, the entire semiconductor manufacturing chain is disrupted due to the lockdown in Shanghai, including ports and airports in this area. The good news is the flow of incoming orders from China and from the rest of the world. We continue to receive order at a very impressive rate, to some extent even exceeding our expectations. We are taking into consideration that there might be delays in installing machines at certain Chinese sites, but there will be a catch-up. The semiconductor market forecast remained positive according to several sources. Our backlog is high and when taking into account our pipeline, we are at a better position than at the same time in 2021. Based on our current estimates, our guidance for Q2 is for continued growth in revenue to between 77 to 80 million dollars. The highlight of Q1, advanced interconnect packaging continue to be our largest segment with heterogeneous integration becoming a significant portion. We continue to expand our market share and sold 10 machines to new customer. Specifically, we are cementing our position in the front end and compound segment and shipping machines to existing and new customers. We ship several systems to new CIS customers and one order for RF filter from one of the largest RF filters manufacturers in the world. We ship several systems for DRAM applications and we predict additional system in the second quarter and second half of the year. We completed the development of new important modules and features that will open additional segments for us. This quarter, the US and Europe accounted for 21% of our sales versus 18% in the last quarter and 12% in Q1 of last year. These strengths highlight the strengthening of our position in the U.S. and Europe as a result of the major industry investment taking place there. Let's end my summary. I would like to hand over to Moshe for more detailed 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 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 $77.2 million, an increase of 35% compared with the first quarter of 2021 and 4% compared with the previous quarter. Revenue was mainly driven by advanced packaging, which accounted for about 50% of sales and approximately a 20% contribution of compound SEM. The geographic revenue split for the quarter was as follows. Asia, 79%, and US and Europe together, 21%. Gross profit for the quarter was $40.2 million. As we mentioned on our last call, Gross margin for the first quarter was relatively high with 52% versus 50.7% in the first quarter of last year and 50.9% last quarter. The higher gross margin was due to a more favorable product mix sold during this quarter. Operating expenses in the quarter were $18 million. This is compared with $13.5 million in the first quarter of last year and to the $16.8 million reported in the previous quarter. The increase from the previous quarter is mostly due to increasing R&D and sales-related activities. Operating profit in the quarter was $22.2 million or 28.8% margin. compared to the 15.6 million or 27.2% reported in the first quarter of last year. Net income for the first quarter of 2022 was $21 million or $0.44 per diluted share. This is compared to a net income of $14.6 million or $0.33 per share in the first quarter of last year. Total diluted number of shares as of the end of Q1 was 48.1 million. Turning to some high-level balance sheets and cash flow metrics. Inventory went up by $5 million from the end of December 2021. This is to support the current demand for our products and to ensure the availability of key components. The complicated geopolitical situation and the COVID-19 implications create supply chain challenges. We are increasing the inventory levels to improve the flexibility in our sales channel in order to overcome these challenges. We used $0.4 million in cash from operation. in the quarter due to timing of collection, which relates to the Chinese New Year. Also increasing inventory levels and the tax payment, including for the settlement we have discussed last quarter. Total cash and cash equivalents and deposits as of March 31st, 2022 is $428.3 million. similar to the level we have reported at the end of 2021. As Rafi stated before, the business looks healthy. We received approximately $150 million of orders since the beginning of the year. And we feel good about meeting our plan for 2022 of mid to high teens growth year over year. We expect revenues of between 77 to $80 million in the second quarter. And with that, Rafi, Rami, and myself will be open to take your questions. Kenny?

Okay, thank you, Moshe. If you have a question, please raise your hand on the platform. And we will take a poll for your questions now. So our first question is going to be from Brian Chin of Stifel. Brian, your line is open. You may go ahead and ask.

Hi there. Can you hear me okay? Great, great. Thanks so much for the call and good results. We have a couple of questions. Maybe to start with, based on your disclosures, it looks like bookings this quarter in 2Q is tracking maybe around 40 million-ish, kind of similar pace, I think, to last quarter. And so if trying to extrapolate this out, do you expect a similar book to bill well above one this quarter? And maybe more importantly, given the rising cost environment, Should we expect the profitability on these systems in backlog to be similar or maybe lower relative to your typical gross margin level?

With respect to the book to bill, you know, obviously the first, you know, or booking until today are higher than the revenue. So our book to bill is greater than one. But I'm not sure that this implies that our revenue is in line with with the bookings that we had until today. So basically, we expect some decline or some stabilization in booking in the coming quarters that will meet our annual revenue of mid to high teen growth. With respect to the profitability, we expect pretty much the same level of profitability in terms of gross margin in the coming quarter. So we don't expect any major impact of the cost to the profitability.

Okay. Got it. That's impressive then. And maybe just sort of calibrating growth for the year. Again, you're talking about mid to upper teens, overall revenue growth. What, To what degree does this range account for the risk of further disruption to your customer's manufacturing or even your own supply chain? And also that's kind of part A and part B would be, if you look at that growth rate for the overall business, how would you expect advanced packaging front end and specialty maybe to track relative to that overall growth?

So, Brian, this is Rami. Let me answer. Let me start with the supply chain. Definitely there are disruptions, but I think we have been able to learn how to manage and work in this environment. Moshe mentioned it, that we increased our inventories in order to be sure that we have enough inventory, even if we get a slightly different mix of orders. So from that point of view, we feel comfortable that we will be able to supply all the requirements from the marketplace. So this is from the supplier. From the advanced packaging point of view. So definitely we are running today and when we see at the at the booking, and when we see at the mix of the products, we're about 50% of our business continues to be in the advanced packaging. It is healthy, and we mentioned that we got the orders for the DRAM segment, but specifically the application is the high bandwidth memory. This definitely is an important segment. It supports the high-performance computing segment, so it is in line with the area of growth that we see in the industry. So from that point of view, we're definitely – We feel very comfortable with the current forecast and the influx of the orders and the customer's response. Now, compound semi is definitely strong. And I think we saw in the previous that we were about 19% of our revenues for the quarter was for compound semi. It's a little high. CMOS image sensor came at 10%. Front end was a little bit lower than the 25% we reported last year. But as we look at the focus, definitely it's going to be a healthy segment in this year. So overall, from the mixed point of view, we do not see any major changes. The areas that were strong continue to be healthy. And so from that point of view, we feel very comfortable.

Oh, okay. Thanks for that color. Appreciate it.

Okay. Thank you, Brian. Our next question is going to be from Thomas O'Malley from Barclays. Thomas, your line is open.

Hey, guys. Thanks for taking my question. Just the first one on gross margins. Obviously, in this supply environment, it seems like you guys are doing a good job of, one, keeping inventory and, two, being able to at least pass on some of these costs. Can you talk about any actions you might have taken with customers? Are you raising prices at all to keep these gross margins where they are? And then you made a comment just on the first question there that margins should stay at this level. Do you mean at like the 52 level or do you mean within the range that you kind of previously guided, which is 50.5 to 51.5? Thank you.

Hi, Tom. So first of all, I think, you know, it's a good question about gross margin. I wanted to correct myself when I said, you know, we will maintain gross margin. I meant, you know, we will maintain the current range of 50.5 to 52 percent. It depends on product mix. We feel more comfortable anywhere between this range. And specifically for the next couple of quarters, I would say gross margin will vary between 51% to 52%. Just to correct my previous statement. With respect to actions that we are taking, we are definitely looking for... more suppliers to make sure that we are not going to be dependent on one supplier. We are building higher inventory levels and we're buying more inventory parts, so we are getting some discounts on parts.

Let me add a couple of things. I think, Tom, what we were able to do is to find some sources in certain areas that actually reduced our cost. And in specific area of of the machine bill of material, we were able to bring in a significant cost that somewhat offsetted the rest of the, obviously there is an increase in the prices of the material we buy, but during to these changes, we were able to offset some of it. So all in all, there is an increase in the bill of material, but it is comparatively small. On the demand area, we are able to maintain a high ASP, we are in certain areas able to increase the prices, but overall we are maintaining a healthy level of prices to our customers. So from that point of view, we are confident that we will be able to maintain the current level of gross margins.

Helpful. The follow up is just kind of proforming some of the disclosures you gave the last couple quarters you gave advanced packaging compound semi front end and then others. And then this this quarter you gave CIS separately is the right way to kind of think about it I would assume you need to break out others into both front end and others so Is the correct way to think about it? Advanced packaging, 48%, compound semi, 19%, front end around 13%, and then other, which is CIS, around 10%. I know you mentioned front end was a little lower, but I just want to pro forma kind of the disclosure there from the prior quarter. Thank you.

I think in general, the numbers you mentioned are correct. I don't have in front of me the exact number of the front. And as I said, it was a little lower than usual, but we do expect it to rise to more or less the same levels that we experienced last year. So from that point of view, we don't see any weakness in this market segment, but your numbers are more or less accurate.

And then just let me sneak one more in here. You guys have kind of talked about for the entire year, you know, just being under 70 million or so in terms of OpEx. If you look and you signaled pretty clearly at the end of last year that you need to invest more in the business. Just given the higher revenue that you guys are now seeing, are you updating what you think you're going to need to spend this year? Should that OpEx move a little bit above that 70 million dollar range and by how much? Thank you.

No, Tom, you know, the current level of OPEX, which, you know, close to 70 million dollars for the year, you know, stay the same. We're not changing anything and we feel comfortable that this will be able to support the current level of business.

Thanks. Nice results, guys.

Thanks, Tom. Our next question is going to be from Charles Shi of Needham. Charles, you may go ahead and ask your question. Charles, you're on mute. Hello, can you hear me?

Yes, we can hear you, Charles.

Hello? Yes, we can hear you, Charles. Yeah, sorry, I may have a little bit of technical difficulty. So maybe my first question, I really want to go back to the question around China lockdown. I think some of the questions were asked around the supply chain side of it. I think you mentioned something around delivery because a good amount of your customers are in the Shanghai region. They may be subject to some of the impact due to the lockdowns. So my question is for your Q2 guidance. have you risk adjusted some of the delivery issues, potential delivery disruption of your tools into that particular area or maybe overall China? And can you quantify that for us? Thank you.

So thank you for the question, Charles. So first of all, based on our current estimates, and we went in very details when we made these estimates, And we've done a few things from delivery to really give a priority to the areas across the world globally that we have good access and we are sure that we can meet the deliveries. And this also includes really giving priority to customers that are not in the areas of the lockdown. So yes, we understand the issue, we sized it, we looked at it, and we are comfortable that our current guidance takes into consideration the current issues we are seeing in China.

Got it. So maybe I want to ask a little bit more on the order in front. I know this is not typically how you segment your end market. Any thoughts, I mean, puts and takes of the order intake between the subcontractors and IDMs? Because I understand you sell to both segments of the end customers.

So, you know, Charles, it's hard for me to just, you know, supply. I don't have the number just ready in front of me. But definitely, there is a significant number that goes to IDFs. That's number one. In general, you know, I have the names on. I will not say the names, but definitely significant portion goes to IDFs. But when you look at the influx of the orders, it matches. And when I look forward, I take all the orders that we got, they're very evenly spread along the different applications that we have. And I think what we are seeing here There are a number of things. First of all, there is a technological shift that this order takes. For example, the DRAM, the HBMs, the DRAM may not be very strong. It's a little bit weaker. However, there is a technological change moving to HBMs. Definitely, we see it in the orders. We see it in the shipments this quarter. We see it in the orders that we focused for the second quarter and for the second half, for the rest of the year. So that's One topic. The second thing we're seeing that most of our customers are talking about long-term plans to increase the capacity. So we see in both ways. So the overall demand, people making the strategic plans, we see it in the audience. There might be some small changes in it as we move along, but the overall business as we see it is very healthy. Did I answer your question, Charles?

Yes, thank you very much for the great callers. So maybe my last one. I think your annual guidance kind of implies second half being flat or maybe slightly up relative to the first half. Any I mean, for the second half to be, I mean, a lot higher than what you are currently guiding, what has to happen? I know this is probably a very tough question, but I want to really understand what can be the upside from what you are guiding and or you think this is a pretty kind of full kind of the outlook guidance here. Thank you.

I'll tell you what the good side charts of what we are seeing. And I think if we, and in our previous discussions, we were very hesitant from a backlog and pipeline looking at the second half. So the good news that the backlog and the pipeline for the second half of the year is filling up and overall it looks good. What will be the extent of the business today? It's a little hard to talk about Q3 and Q4. What will be the actual numbers? I can tell you that we're starting also to get orders for Q1 of 23. So there is, you can see a lot of confidence from our customers. about the forecast. I think at this stage, with all the volatility in the market, it's very hard to really say more than we expect this year to be a growth year in the mid to high teens. I think this is as much as we can say at this stage, but definitely we're encouraged by the level of the backlog and the pipeline for the second half and the first quarter of 2023.

Charles, does that answer your question? Okay, thank you for that. Our next question will be from Jamie Zaklick of Bank of America. Jamie, you may go ahead and ask.

Great, can you all hear me okay?

We can.

Great, thanks. So, and apologies if you guys maybe discuss this, I've been hopping back and forth between a few calls, but... At a higher level, were there any puts and takes in the quarter in terms of end market demand? I think there's some concern about weaker conditions and maybe smartphones or PCs for semis overall. And did you see any markets that maybe were weaker than expected and then others that were stronger than expected? Basically, what were the different puts and takes on the demand side?

So Jamie, this is Rami. So first of all, let's say the general statement that, yes, we hear about the weakness. We are aware of the weakness in the cell phone market, in the PC market, even though the automotive market is below its usual number. So definitely we hear it and we understand it. We have not seen any change in the behavior or in the focus of our customers that would indicate any issues related to it. But I think there are two reasons for it. On one side, you see, and I think I mentioned it, maybe you missed it, there is a technological shift. Good reason is what has happened in the DRAM area that is a significant portion in the advanced packaging area that the market is moving to the use of HBM, supporting the high-performance computing. This is definitely an area that we dominate and we're enjoying now, although the entire DRAM market may be not increasing at this stage, but the technology The technology change is bringing us business on one side. On the other side, the long-term plans of our customers, not just in China, across the world, the long-term are to invest. And we're shipping machines to customers that are making long-term investments and building capacity. And definitely the area of the advanced packaging is very strong. And this is not specifically, it's across all the regions. It's not just specific to one area, definitely not only in China. So the heterogeneous integration, as Rafi mentioned in the script, is taking, and this is again high performance computing, that's definitely becoming a very significant part of advanced packaging. So these areas are growing. We expect them to continue to grow. So from that respect, we do not fail at this stage. The weakness that people are talking about the end markets. We are aware of them. We don't feel them at this stage.

And I would like also to add the situation in China. Because, you know, China, the strategy of the government is to be more independence, let's depend on import component to China and expand their capacity and their ability to produce things in China. So right now, the amount of import is huge. I think it's more than 80%. All the components are imported to China. And if they really want to produce more made in China, they need to continue building more capacity. in other area. So I think this is also a very important element. It doesn't relate to the end market. This is a matter of strategy of China.

Got it. That's very helpful. And I actually had a follow-up on the China thing. Did you guys quantify your specific exposure to just the China region? How much or if any of your tools are manufactured in the U.S. and shipped to China?

No, we don't manufacture in the U.S. We manufacture all the equipment here in Israel. We are using two very large subcontractors, Flektronix and Jabil, to support us. So from that point of view, I think we feel very comfortable from the supply chain, the availability of parts, that we will be able to ship all the machines that are forecasted.

Got it. That's very helpful. And then my last question is... Is there any risk that customers are pulling in tools or ordering more tools than they really need for end demand just because of uncertainty about supply and about restrictions maybe in other regions that don't affect you guys but maybe affect other suppliers? So what are you guys doing to ensure that orders are really tied to true end demand?

So, you know, we've been monitoring this. And I can tell you that the customers that are ordering the machine, in most cases, are actually very upset if we are delayed. We are aware, at least to the best of our knowledge, that all of those machines are going into production. We're getting a lot of requests to support questions. So the machines are going into production. To tell you what is the actual utilization, obviously no one gives you these numbers. But we are very confident that those machines are not going just to fill a room in certain area of the world. They are going for reproduction. People are using them. And no, no, it's for real.

Thank you, guys.

Thank you. Thank you, Jamie. If there are any additional questions, please raise your hand on the platform and we will give a moment or two to see if there are any additional questions. It looks like there are no additional questions. So before I hand over to Rafi, I want to point out that in the coming hours, we will upload a recording of this call to the Camtech Investor Relations website. Beyond that, the link for the live call will also automatically turn to a recording in the coming hour. So I would like to thank everybody for joining this call. And I'd like to hand back to Rafi for your closing statement. Rafi, please go ahead. Thanks.

I would like to thank you. 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 continuing it. To our investor, I thank you for long-term support. I look forward to talking with you again next quarter. Thank you and goodbye.