Camtek Ltd.

Ladies and gentlemen, thank you for standing by. I would like to welcome all of you to Camtech's results Zoom webinar. My name is Kenny Green and I'm part of the investor relations team at Camtech. All participants other than the presenters are currently muted. Following the formal presentation, I'll provide some instructions for participating in the live Q&A 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 all receive by now 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, Camtech CEO, Mr. Moshe Eisenberg, Camtech CFO, and Mr. Rami Langa, Camtech 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'd like to remind everyone 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. Statements on this call are made as of today and the company undertakes no obligation to update any of the forward-looking information contained, whether as a result of new information, future events, changes and expectations or otherwise. Investors are reminded that these forward-looking statements are subject to risks and uncertainties that may cause factual results. to differ materially from those projected, including as a result of the effects of general economic conditions. Risk related to the concentration of a significant portion of Camtec's expected business in certain countries, particularly China, from which Camtec expects to generate a significant portion of its revenues in the foreseeable future, but also Taiwan and Korea, including risk 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, as well as due to other risks identified in the company's findings with the SEC. Please note that the Safe Harbour Statement in today's press release also covers the contents of this conference call. In addition, during this course, 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 are useful to investors' understanding and assessment of the company's ongoing core operations 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 the call over to Rathi, Camtech's CEO. Rathi, please go ahead. Okay, thanks, Kenny.

Good morning or good afternoon. Camtech ended another quarter of continued growth. Second quarter revenues were 79.6 million. Growth margin was 51% and 30% operating margin. We have diversified customer base. This quarter, we sold to over 40 different customers. Advanced interconnect packaging accounted for more than 50% of our revenue and continue to be our largest segment with heterogeneous integration accounting for 20% of this segment. We continue to expand our customer base and sold systems to 10 new customers in the first half of this year. Specifically, we are cementing our position in the front end and compound semi segments and shipping systems to existing and new customers. These two segments accounted for 23% of our revenues. CIS was about 10% of our business. This quarter, we see the same trend of transferring our position in the US and Europe due to major industry investments taking place there. US and Europe accounted for 21% of our sales versus 12% in Q2 of last year. In these days of economic uncertainty, I assume that our investors are interested in hearing what are we estimate for the coming quarters and how we view the semiconductor market. We are experiencing a challenging period. On one hand, there are concern of a slowdown in the semiconductor industry. And on the other hand, we see continued demand for our systems. The macroeconomic environment is not positive. High inflation, rising interest rate, high fuel prices, sharp rising prices of basic products, all of which lead to a decline in GDP and may lead to a slowdown in the semiconductor industry. There are several reasons for the ongoing demand for our systems. the main driver of our market is the transition to more digital products that heavily use semiconductor devices, such as computing and data storage, automotive in general, and the transition to electric cars, wireless communication, advancing to 5G, higher use of internet, and more. I believe there is a consensus among all analysts that all the above will continue to grow. The way ferro manufacture today and in the coming years are much more complex due to new technologies adopted by the industry. Leading countries realizing that the semiconductor industry has become a strategic industry and are heavily investing in building new fabs. And China, China's policy of replacing import of strategic end products and semiconductor devices for domestic productions means a continued expansion of a production capacity of a semiconductor industry, not necessarily related to a global economic situation. To summarize, these two opposing forces make long-term forecasting much more difficult than in the normal times. Anyway, at this stage, we do not identify a slowdown in the demand for our systems. The production utilization in the industry is high, and flow of the incoming order is also high, and the backlog is healthy. Moreover, we believe that the field of inspection and the segment in which we operate will be less affected in the event of slowdown. Our systems are used by customers for inspection and metrology of 100% of patterned wafer. The more the geometry density increases, the higher optical magnification needs to be used. As a result, our customers order more systems. Hence, during a downturn, whereby the number of wafer may decrease, pattern density still increases, and therefore the demand for our system is likely to be less impacted. Regarding our forecast for the second half, With our strong backlog, we see continued growth into the second half of the year and our forecast for the third quarter revenue is expected to be between 81 to $83 million. Let me give you some color on what we see in the second half of this year. The product means is expected to be similar with advanced interconnect packaging reaching more than 55% of our annual revenues. The US and Europe will continue to grow as a percentage of revenue. At this point, we don't see any potential disruption to our supply chain. As I have said, we do not see any signs of declining demand for our systems. Moreover, we believe that our market will continue to grow in the long term, even though there may be a few bumps along the way. However, regarding a possible slowdown in our industry, we are managing our headcount and balance sheet items. We are keeping a very watchful eye on overall expenses and the business situation of our customers. We also believe that the market condition, especially in the capital market, may generate M&A opportunities. We are actively looking for opportunities and ready to use our well-capitalized balance sheet in order to execute M&A transaction that will enhance our long-term growth potential. That ends my summary. I would like to end over to Moshe for more detailed discussion of the financial results. Moshe?

Thanks, Rafi. My financial summary ahead will provide the results on a non-GAAP basis. The reconciliation between GAAP results and non-GAAP results appears in the tables at the end of the press release issued earlier today. Second quarter revenues came at a record level of $79.6 million, an increase of 18% compared to the second quarter of 2021. The geographic revenue split for the quarter was as follows. Asia accounted for 79% and the rest of the world, 21%. Gross profit for the quarter was $40.5 million. The gross margin for the quarter was 50.9% versus 52.1% in the second quarter of last year. This is within the range of our gross margin of our model. And as in previous quarters, the deviations has to do mainly with the product mix and does not represent a trend. Operating expenses in the quarter were $16.7 million, similar to the level in the second quarter of last year, and lower than the $18 million reported in the previous quarter. The decrease from the previous quarter is mostly due to sales channel mix. Operating profit in the quarter increases to $23.8 million, compared to the $18.5 million reported in the second quarter of last year. Operating margin was 29.9% compared to 27.4%. Net income for the second quarter of 2022 was $22.2 million or $0.46 per diluted share. This is compared to a net income of $17.1 million or $0.38 per share in the second quarter of last year. Total diluted number of shares as of the end of Q2 was 48.1 million. Turning to some high-level balance sheet and cash flow metrics. Cash and cash equivalents, including short and long-term deposits, as of June 30, 2022, were $438 million. This compared with $428.3 million at the end of the first quarter. We generated... $13 million in cash from operations in the quarter. Inventory level went up by $5.9 million over the quarter. This is a result of a strategic decision to support the current demand for our products and to ensure against potential availability issues in key components. Account receivables were around the same level as in the previous quarter and represent approximately 80 days. As Rafi said before, we expect revenue of 81 to 83 million dollars in the third quarter. And with that, Rafi, Rami and myself will be open to take your questions. Kenny?

Thank you, Moshe. At this time, we'll begin the question and answer session. If you have a question, please raise your hand on the Zoom platform. I will introduce you and ask you to unmute, after which you will be able to ask your question. As we do have a lot of people on the call, I will take a few moments now to poll for your questions. Our first question will be from Charles Shee of Needham. Charles, please go ahead.

Thank you for taking my question. I just want to make sure, can you hear me OK? Yeah, we can. Thank you. Rafi, Rami, and Moshe, maybe on my first question, really going back to your 2022 growth by certain geography, looks like US and Europe seems to be contributing a good amount of incremental growth this year. However, I want to ask you about China. From other companies we follow, they seem to point to some sort of weakness of China spending, especially in the packaging space. I understand you have unique growth drivers like complexity growth, strategic investments. But I want to ask you, compared to last year, are you seeing some sort of slowdown in China and going into 23? If there were a slowdown in 22, do you see it's more like going, I mean, there's some stronger growth next year or flat, or what do you think? Or could that deteriorate into 23? Thank you.

Rami, do you want to comment on that, please? I will comment. Thank you. Charles, note, we do not see any weakness in China compared to last year. We see investments all around and very much like we are talking about the split. Over 50% of our business goes to advanced packaging. And the investments in China in this area are ongoing. Looking forward, still, as we said, we do not see any weakness moving forward. And specifically in China, it seems as if the investments are ongoing. The utilization, at least what we can see for our equipment, is high. And we do not see any change moving forward.

Got it. Got it. Thank you. I mean, maybe just a quick follow up to that. I understand that you, by you not seeing weakness, you probably mean the absolute dollar base is probably still very strong. But in terms of growth rate of your business in China, is there any deceleration or acceleration this year or next year? What's your view there in terms of the growth rate?

Well, it's hard for me at this stage to talk about growth rates. It's too early in the game. What I can tell you from what I see on the backlog and on the pipeline, looking into the first and second quarter, we see that the investments... Third and fourth quarter. third and fourth, and even looking what I see and start to get from early next year, we definitely see the ongoing investments across the board in all the different applications. So we definitely do not see any slowdown.

Got it, got it. My second question is, is around memory, that seems to be another weakness, at least something quite identifiable if we only look at the headlines. I understand probably earlier this year, you have a good amount of orders and shipment into DRAM application. I understand historically, this is the kind of slightly lumpier side of your business. What do you see for that part of your business? I know it's probably not as a big contributor as of today, but do you see slightly downtrend going from here maybe into next year? And do you think the rest of the business should offset any of the weakness coming from memory? Thank you.

Yeah, so if I look at the growth driver, the main growth driver for our business in the DRAM space, it's primarily the HBM that is ramping and the high performance computing segment is very healthy. I think the server market is going to show about growth of 17% this year. And that's exactly the area where these HBM components are going into. So from that point of view, this is a growth area and I expect this to continue into next year. And just to give you a feel of the number, it's about 5% of our revenues this year. So it's not a huge number, but it's not a negligible number. And definitely that's an area that I believe will continue to grow moving into 23.

Thank you. Maybe the last question I want to ask you about your strength in the front-end space. Obviously, you started from relatively low base a few years ago, and it has been growing at least in line with your very strong top-line growth. What's the outlook there? Do you see any additional incremental opportunities there for you to either gain more shares in the front end space or gain new applications with more slots? Thank you. That's my last question.

Okay. So definitely the front end is one of the areas that we see potential growth moving to next year. And I think I will, you know, couple it together with the compound semiconductors. So this area, I think, first of all, we are gaining some share. I think the other area that we are seeing incremental business is through a number of new applications. We are starting to take more and more new steps that we've not taken, we've not been used, our equipment was not used for in previous years. So definitely that's an area that will continue to grow along, and I expect this to become more and more significant in the forthcoming years.

Thank you, that's all from me. Thank you.

Okay, thank you. Our next question now will be Tom O'Malley from Barclays. Tom, you may go ahead and ask.

Good morning, guys. Thanks for taking my question. I just wanted to look into the June quarter from a segment perspective a little more closely. You gave a pie chart at the beginning of your presentation that showed compound semi and front end combined. Could you break out for us what the percentage of revenue was for both of those? I think last quarter you said compound semi was 19% and front end was like 23%, or at least you had it bucketed as other. Can you just break out what the exposure was between compound semi, front end, And then CMOS image for this quarter, please.

So I would say, look, first of all, this will vary from quarter to quarter. But the overall, I think the number for these two together is about 25%. It would be about half and half. And it depends. It depends per quarter, the product makes the customers. This quarter, specifically, the compound was a little higher then the front end portion, and definitely moving forward, this is more or less the portion of the entire business that I see this business moving on.

Helpful. Thank you. And then you guys talk about an environment in which you're not seeing a demand profile change. You talked about potentially some lumpiness, but really you're just not seeing any kind of change from customers at this point. Could you just talk about what you guys do in terms of conversations with your customers to kind of keep a check on both their demand profile and And also just to make sure that they aren't weakening. Just any kind of conversations or how you guys check in with those customers so that you would see weakness coming potentially.

So in general term, what we do. We have a bi-weekly every two weeks. We have a session with most of the main customers checking, understanding, understanding on the applications, on the issues they are seeing, talking on the forecast. We take the entire inputs from our customers and we see it with our sales team. and look forward and see exactly what is the forecast that they see in the next day. Usually we try to look four quarters ahead. Of course, the good visibility is two quarters ahead. Beyond that, it's more from discussion and understanding. So at least from all the accumulated discussions that we had over the last few months, and the latest was yesterday, we definitely, as Rafi said in the opening statement, do not see any weakness at this stage.

Thank you, guys. Thank you, Tom. Our next question will be from Craig Ellis of B Reilly. Craig, you may go ahead and talk.

Yeah, thanks for taking the question. And congratulations on the performance team. I wanted to start off just by following up on some of the prepared remarks that commented on the healthy backlog. Is it possible that you can quantify where backlog is? And as you look at the mix of backlog, give us further color on what you specifically see for orders that would relate to 2023 delivery and if you can provide any color on that, that would be helpful as well.

What I can tell you on the color of the backlog, and of course, I want to be very careful here. So let's talk about, first of all, the third and the fourth quarter, where the visibility is much higher. So I think that if I look at the entire business, no doubt the advanced packaging portion is very strong and will be very strong throughout this year. And we will probably reach very close to 60% of our business will be in the advanced packaging. No doubt this segment is very strong, not just in a specific area, but across the board. The compound and front end business continues to be healthy and will be in the range of about 25%, very similar to what we've seen this quarter. The CMOS image sensors will be a little weaker this year. I expect it will be just a little bit less than 10%, which is our average revenues from this segment. That small list, the color from geography's point of view, I think we said it in the opening statement, definitely we see the U.S., and Europe getting stronger. It's 21%. It will be even a little bit higher moving forward. Definitely, this is good news for us from the diversification point of view. One point that we mentioned, it also can share some color on the business that we are seeing new customers. And in the first half of this year, we had over 10 customers, which is relatively high. So that's also a very good sign of more new people still investing in equipment, opening new places. So that's definitely a good sign. Moshe, do you want to add anything? Craig, anything else?

That was good color, Rami. I wanted to follow up on the point you made on CMOS image sensors. So the business is still active this year, but not...

as strong from a mixed standpoint or a great standpoint is 2021. But you look at 2023, what's your expectation for how the image sensor demand intensity will shape up and what does that mean for potential mix?

So first of all, in the backlog that I look, some of the major players are planning to invest And we are talking with people also about investments even in 23. So definitely we will see investments in the CMOS image sensor. I don't think they will be above the 10%, the average 10%. I think they will stay in the range of around 10%. I don't expect anything beyond that. Now, taking account that the smartphone is relatively weak, so this affects this segment, but even though we're still seeing a significant business.

Got it. And then Moshe, I don't want to ignore you on that call. I wanted to follow up on gross margin and OPEX as it relates to the third quarter. So the items that you identified that caused some movement for both those line items makes total sense. I get the mixed gross margin dynamics and the channel mix. OPEX-related dynamics. The question is for the third quarter. Given that we would expect to see fairly similar end-demand composure relative to Q, should we expect flattish trends there? Are there any one-off items that would move either gross margin or OPEX materially north or south?

Thank you for not ignoring me, Craig. I appreciate it. I think that from a mixed perspective, we are going to see pretty much the same mix in the second half of the year as well. So from a gross margin perspective, I expect pretty much the same level, same margin profile. Operating expenses are expected to go up a little bit slightly. It mainly has to do with the R&D investment and some with sales channel mix. Not something dramatically, so I basically expect a healthy operating profitability next quarter as well.

That's great. And then I'll conclude with a more strategic question for Rafi. Rafi, one of the things that was mentioned is the potential for M&A, and clearly the company has an exceptionally robust cash balance. The question is this, as you look at potential areas of strategic interest, whether it's technology or finance, customer, geographic, et cetera. Can you just give us some color on things that might be interesting compliments to the Camtech business as we think about where M&A can create value for the business and for shareholders? Thank you.

Yeah, of course. If we're talking about having more value, so we have to look for a company that has a good synergy to Camtech. in terms of technology, in terms of expanding our market, et cetera. So this is our first priority to look for a company that can expand our portfolio. But we still have some similarity in technology so we can enjoy each other of sharing technology and it's helped to both sides. Another issue is also if we take a company, let's say, mid-small to mid-size, most of them cannot, I would say the sales channel are not so developed as ComTech did in the last, you know, maybe 10 years. So definitely we can accelerate revenue for company with the potential, good technology, good product, but missing good sales channels. And definitely we can promote the product much quicker. So this is roughly the portfolio that we are looking for. And this is our first priority. But sometimes, you know, we get information about the company, not exactly meeting this profile, but still we find, you know, other advantages. So definitely we can consider it.

Yep, that makes sense. Thanks, Rafi. Thanks, team. Thank you. Thank you.

Thank you. Our next question is from Dennis from Stifel. Dennis, you may go ahead and unmute yourself.

Oh, hi. Can you hear me?

Yeah, hi, Dennis. We can hear you.

Wonderful. Thank you for taking my question. This is Dennis on for Brian Chinn. I have a question related to a weakness in smartphones sell through in production. Do you get the sense there is any digestion of recent wafer level packaging capacity expansion occurring in the back half of the year? Like not necessarily your machines, but also other process equipment. And why do you believe your inspection systems may be less affected?

Okay. Rafa, you want to take it or should I answer? You can take it. Yeah, okay. So let me start, first of all, with the digestion of equipment. So first of all, you know, we are more exposed to our machines. So it's very hard for me to speak about other equipment. But specifically, we still do not see a digestion. In fact, the equipment that we have been selling is highly utilized, right? by our customer, this is something that we are checking continuously. The machines are all the time, they are immediately installed and used and going into production. So from that point of view, I still see why still we are experiencing the demand for equipment from our customers. Now, why we are less sensitive, there are a few reasons for that. The industry that we are serving, the wafers are becoming more and more complex. And as a result, they are used more heavily. They are used in more steps. And a lot of the times, they also require higher magnifications, which means that from number of machines that are used for those steps is higher. So I would say this is just briefly the main reasons why our machines are are needed all the time and are used more and more in compared to other equipment. Did I answer your question?

I want to add one more comment on that. You know, we have to take into consideration that there are today new packaging technology entered to the market. And then we find ourselves doing more steps compared with what we used to do in the past. So any new technology adapted by customer, it takes some time until the yield is high and everything is okay. So by that time, they need a lot of inspection, not randomly, they do, I would say almost 1% inspection and they try to make it in many steps to help them to stabilize the process and getting a nice yield. So all these together, definitely give us some, I would say, benefit as an inspection company.

Great, thank you. And then my next question is, how long do you think it is before heterogeneous integration becomes something like 15% to 20% of revenue? Do you see it reaching that level over the next several years?

First of all, in our opening statement, we said that 20% of the 50% of advanced packaging today is heterogeneous integration, which is roughly 10% of our revenues for the quarter. But definitely, heterogeneous integration is something that will continue to grow. And I expect it to be in the foreseeable future taking these kind of numbers of our revenues. That's no doubt the high performance computing is the, I would say the main driver today for heterogeneous integration. And as I mentioned before, you know, the server market is growing at 17% this year, and these are the range of growth that is expected in the foreseeable future. Definitely this segment is going to be very healthy.

Thank you. And then for my final question, so you've seen a recent shift in your geographic mix with the EU and the US growing as a part of that. Can you speak to which end markets within those geographies are driving this shift?

Well, we want to be very careful because we're very sensitive about customers' names. I think that if I will be trying to be very broad, I think it is very clear. First of all, in Europe, it's very automotive related as the business there is highly affected from this industry. I would say in the US, the business is more diversified and it would be from leading edge technologies through RF, some automotive, I think all across the board, we see customers that are using for these applications our machines.

Great. That's it for me. Thank you very much.

Thank you, Dennis. Thanks, Dennis. Our next question is from Roman Rimscher of Sphera Fund. Roman, you may go ahead and ask your questions. Roman, you there? Okay, Roman. Okay, we'll poll again for questions. If anybody has a question, please raise your hand. If not, we will move to the final statement. We'll give Roman another. Roman, you are unmuted, so you may ask your question. Our next question is from Alon Last. Alon, please go ahead and ask your question.

It's also on mute.

Alon, you may unmute yourself.

Can you hear me?

Yeah, we can hear you.

Thank you for taking my question. Two questions, please. One, you spoke about the strategic decision to increase inventories Could you speak about the levels that you see going forward? And second, you spoke about new customers, any original bias for those new customers?

Okay, I'll start with the inventory. And then Rami will address the other part of your question. With respect to inventory, we have raised the inventory in the last few quarters in order to make sure that we have enough inventory parts to address the demand. I think that what we are going to see is some stabilization in the next few quarters. So we don't intend to continue to increase the inventory levels, but it could...

very you know uh five million dollars plus minus uh in the next couple of quarters ahead alone i missed your question on the new customers the last word were not clear so what did you want to understand about the new customers from which which regions are they coming um they come from all around the geographies not necessarily a one country They come from Asia, Europe. I don't recall if we had any in the US, but definitely it's not just related to one region.

Thank you very much.

Thank you.

Okay, we'll try again, Roman. Roman Rimsha from Sphera, your line is open. Okay, I think Roman is unavailable. So I think that will end our Q&A session. Rafi, do you have any closing remarks?

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 investor, I thank you for long-term support. I look forward to talking with you again next quarter. Thank you and goodbye.

Thank you.

That ends our conference call.

You may all disconnect.