Camtek Ltd.

Ladies and gentlemen, thank you for standing by. Welcome to Camtech's third quarter 2022 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Camtech's investor relations team at ekglobalinvestorrelations at 1- 212-378-8040, or view it in the news section of the company's website at www.camtech.com. I would now like to hand over the call to Mr. Ehud Helf of EK Global Investor Relations. Mr. Helf, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Camtech's third quarter 2022 results conference call. Let me remind you that everyone at this conference call is being recorded, and the recording will be available on ComTech's website within a few hours of the call. With us today on the call we have Mr. Rafi Ahmed, the ComTech CEO, Mr. Moshe Eisenberg, ComTech CFO, and Mr. Rami Langer, the ComTech COO. Rafi will open by providing an overview of the ComTech 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 in this call are internal company estimates, unless otherwise specified. This call may also contain forward-looking statements, and I'll refer you to our safe harbor statement that you can read in our press release. Furthermore, during this call, certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, focus future results, and evaluate the company's current performance We believe that the presentation of non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. And now I would like to hand over the call to Rafi Amit, Camtex CEO. Rafi, go ahead, please.

Thanks, Ehud. Good morning or good afternoon, everyone. ComTech ended another quarter of continued revenue growth. Third quarter revenues were a record of $82 million. A 16% increase year over year. Gross margin came in at 49% and operating margin at 28.3%. Close to 60% of our revenues came from advanced interconnect packaging applications. Heterogeneous integration and HBN account for over 30% of this segment. We continue to expand our customer base. We sold the system to 42 new customers in the first nine months of this year. Specifically, we are cementing our position in the front end and compound semi segments. These two segments accounted for approximately a quarter of our revenues. As widely reported, consumer demand for PC and mobiles is down. As a result, the contribution of CMOS image sensor related system to this year's revenue will be slightly below 10%. This quarter, we continued to strengthen our position in the U.S. and Europe due to major industry investment made there. U.S. and Europe accounted for 27% of our sales. versus 21% last quarter and 12% in Q3 of last year. Q4 revenues are expected to be similar to those of Q3, translating into record annual revenue of around $320 million for 2022. The company diversifies exposure to multiple customers secular trends and territories contributed to our success. Last month, the U.S. Commerce Department announced new regulations restricting the sales and support of semiconductor equipment for advanced nodes in China in both memory and logic. Our customers in China are mainly OSOT, in the advanced packaging segment or manufacturers of trading edge silicon wafers. We continue to evaluate the impact of such restrictions on ComTech, but based on our initial assessment, we believe that the direct revenue impact will be marginal, if any. The global economy is projected to decline 2023 and expected to affect both wafer fab equipment in general and even more so in the memory segment. 2023 is expected to be a challenging year for the industry with customers being more cautious. We believe that although ComTech's business model is not immune, it is however more resilient. I will point a few reasons. One, we support a technology change in the industry of transition to advanced packaging and integration. 60% of our business is related to these segments. This trend is expected to continue.

Ladies and gentlemen, thank you for standing by. Mr. Rami Langer, would you like to continue, please?

Thank you, and I apologize. We have a technical issue, and I will continue on Rafi's behalf, and I will pick up where he stopped. And as we said, we believe that Camtech's business model is not immune. It is, however, more resilient, and let me give you the reasons for it. First is we support a technology change in the industry of transition to advanced packaging and heterogeneous integration. 60% of our business is related to these segments. This trend is expected to continue in the next few years. Furthermore, the sales to the memory segment are limited to DRAM only, which historically accounted for less than 5% of our total business. This segment we mainly support the transition of the high bandwidth memory, which is growing. Based on orders we have on hand and in the pipeline, we expect increased sales in this space next year. Also, the increasing complexity of wafers being manufactured today means that manufacturers require ever more advanced inspection systems in their facilities. We believe that the field of inspection and the segments in which we operate will be less affected in the event of a slowdown. Moreover, ComTech has a wide and diversified customer base. This quarter alone, we sold systems to more than 40 different customers and added eight new customers. Altogether, we have over 250 active customers. Despite the positive factors that I have outlined, we are progressing cautiously into the new year. We are carefully monitoring our balance sheet items, such as inventory levels and account receivables, as well as our headcount. However, we continue to invest in R&D and plan to introduce new products and capabilities next year, securing our long-term growth path. I would like to conclude by stating that semiconductor is a strategic industry and all leading countries are heavily invested in it. We expect that in 2023, the semiconductor industry will likely decline. ComTech is also not immune. but we believe our leading position, wide customer base, and longer-term strategic relationship with customers will enable our business to be more resilient than the overall semiconductor industry. I would like to hand over to Moshe for a more detailed discussion of the financial results. Moshe. Thank you, Rami.

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 appears in the tables at the end of the press release issued earlier today. Third quarter revenues came at a record $82 million, an increase of 16% compared with the third quarter of 2021. The geographic revenue split for the quarter was as follows. Asia accounted for 73% and US and Europe for 27%. Gross profit for the quarter was $40.2 million. The gross margin for the quarter was 49% versus 50.9% in the third quarter of last year. Indeed, this is below the typical range of our gross margin model. In this quarter, it was mainly driven by a less favorable product mix resulting from a few large orders and it does not represent a meaningful trend we expect some improvement in our gross margin in the fourth quarter operating expenses in the quarter were 17 million dollars an increase of 2.7 million dollars compared to the third quarter of last year and 300 000 compared to the previous quarter the increase from last year is mostly due to the increase in R&D expenses and sales-related activities to support the increased revenue. Operating profit in the quarter was $23.2 million compared to the $21.7 million reported in the third quarter of last year and $23.2 million in the previous quarter. Operating margin was 28.3% compared to 30.6% last year and 29.9% in the previous quarter. Net income for the third quarter of 2022 was $23.3 million or $0.48 per diluted share. This is compared to a net income of $20 million or $0.45 per share in the third quarter of last year. Total diluted number of shares as of the end of the third quarter was $48.3 million. Turning to some high-level balance sheet and cash flow metrics, cash and cash equivalents, including short and long-term deposits as of September 30, 2022, were $460.3 million. This compared with $438 million at the end of the second quarter. We generated $25.3 million in cash flow operations in the quarter. Inventory level remained flat compared to the end of the previous quarter. In the last few quarters, we increased the inventory to overcome potential supply chain issues. With the stabilization trends of the supply chain, we plan to reduce the inventory level. Accounts receivables went down by $9.7 million as we had good and strong collection in the quarter. This represents approximately 71 days outstanding. I would like to note that the company management is closely monitoring the different scenarios of market demand and customer investment plans for 2023 and is ready to respond accordingly. Regarding guidance, as Rafi mentioned before, we expect fourth quarter revenues to be around the same level as of the third quarter. And with that, Rafi, Rami, and I will be open to take your questions.

Eld? Operator. Rafi, are you with us? Yeah, I'm with you. I continue with the sweep all the way, no problem. Okay.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Brian Chin of Stiefel. Please go ahead.

Hi there, good afternoon, and thanks for letting us ask a few questions. Maybe kind of, Rafi, first, following the recent U.S. export restrictions into China, I'm just curious, what is your sense on the new investments or how the new investments in fab and advanced packaging capacity might be directed and prioritized moving forward? And also, how big of a benefit do you see this for Camtec next year based on increased activity in China in areas like advanced packaging or specialty power, etc.?

Yeah, you know, the situation in China, I think, remember just four weeks ago, the Commerce Department made all these restrictions and the announcement, and I think it's too early to evaluate the effect on the semiconductor industry in China. But at this point, when we discuss with customer in China, it looks like business as usual and utilization is okay and the PO, everything look like normal. So I believe it's still too early to understand if this restriction, it will affect the whole industry or specific area. We don't know yet, but as I said, for at this point, it looked like business as usual.

Okay. Um, and kind of moving beyond the geopolitical, but is it fair to characterize, um, the environment you're seeing and sort of the, you know, your order book and the backlog and those patterns, is it fair to characterize, um, your advanced packaging customers and maybe even more broadly as, as being in a digestion mode? And based on your order book, can you provide any sense on the revenue trajectory in the Q1 or first half next year?

Look, first of all, as we mentioned, you know, most of our customers are not in the high notes and we are mainly support the OSAP. So they're not under this restriction. Second, about the backlog and pipeline, I would say that if we just look, you know, a year ago, definitely all the supply chain interruption caused too many customers to place order ahead of time to secure delivery. Now when, you know, delivery back to normal and people feel more comfortable and even some, you know, think about even probability of slowdown, definitely customers are not so hurry to place order. So we can see, you know, that the amount of pipeline is much bigger than backlog. So we discuss with customer, we see leads, but we can't see today forecast as we saw a year ago because the customer looking, you know, the place order when they really need it and they don't feel they need to secure delivery, you know, a few quarter ahead. So as I said, if we talk together, the backlog and the pipeline, it's look, I would say, pretty normal. But I would say to see when the pipeline will be converted to backlog, this can take time and probably as before, we will know more before we start the new quarter, we get a better picture.

Okay, got it. Yeah, I mean, this might not be based on a huge sample size, but I've noticed or observed that sometimes Q1, kind of maybe it's seasonal, tends to be sequentially up in terms of revenue. But maybe listening to what you're saying, Rafi, maybe you could take a step down a little bit given sort of you don't have as much backlog, defined backlog, moving into next year.

Let me try and be a little bit, you know, definitely our visibility at this stage looking into 23 is limited. Now, the backlog is healthy and we have a very strong pipeline. And I think as Rafi said, it is too early to assess how quickly this pipeline will turn into orders. And this is a little bit different than where we were, let's say, a year ago, but definitely at this stage, it's too early. We'll need to wait for another few weeks until we'll be able to really give a better assessment on the first half of 23.

Okay, fair enough. I'll hop out to move the line along. Thanks a lot. Bye.

The next question is from Tom O'Malley of Barclays. Please go ahead.

Hey, thanks for taking my question, guys. I just had a question on the December quarter. So clearly visibility isn't as strong as it was before, but you guys are guiding to a flat business. Could you just talk about how much of the December quarter is actually booked today already and how much is in flux as the quarter goes along?

Now, the current quarter is fully booked, and it really now is a question of executing the shipments, and that's it. We don't expect any surprises this quarter.

Okay. And then if I look at the mix of business, clearly CMOS image sensing is a little weaker. I think you said in the prepared remarks that that's coming in below 10%. It's already kind of tracking well below that, so that makes sense. But in the quarter for September, you saw a pretty big decline in what you've called the other or general business. What contributed to that decline sequentially, and will that go down again in December? Yeah.

Is it a decline? You know, Tom, I'm not sure about which decline. I mean, we are seeing, and I think we said it in the prepared remarks, our business for the advanced packaging is around 60%. It has been in the last few quarters, and it's a very similar rate. The front end and the compound semi is about 25%. So overall, I would say that 85% of the business is very, very stable. Now, the rest, CMOS image sensor historically was above 10%. This year it will be a little bit less. And this will be compensated by what we call general 2D inspection applications, things like MEMS and other applications which are smaller in the volume. But from the business point of view, there aren't any differences or declines. The only change I would say is the CMOS image sensors, and this is strongly related to mobile phone sales.

Got it. Got it. And then just one more on the coverage. So totally understandable that you're seeing limited visibility. I think broadly markets are just getting weaker in general. And you're kind of talking about a semiconductor market that's down next year. Have you thought about what your business can grow in a scenario where wafer fab equipment's down 20% plus and You know, I'm just trying to understand, you guys have clearly outgrown the market for the past several years. In a market that's down, say, 10 or 20%, how much growth do you think you see off of a market that's a little weaker next year? Thank you.

Yeah. So, Tom, I think it is much too early to say today what will be, with our current feasibility, to really say, to give a good indication of the 23 businesses. what we believe that will do better than industry. And at this stage, how much better than the industry, it is really too early to say. And I believe that within a quarter or so, we'll be in a much better position to give more accurate statements. Thank you. Thank you.

The next question is from Charles Shi of Needham & Company. Please go ahead.

Thank you for taking my question. I have a first, a little bit longer term question, not specific to 2023. I think one of the underappreciated part of your business is that you have a very broad customer base, 250 active. I mean, assuming each one of them just by one or two systems, that's enough to support you to 300 million annual run rate. And I believe it was a big part of your story over the past few years that you keep adding customers, either in the greenfield customers or in a competitive displacement. However, I do want to ask you this question from this point and forward. How much of the incremental additions of new customers do you think it's going to be? Could there be a slowdown of the number of customers you can add going forward from here? And specifically, I want to ask you about wafer manufacturers. I don't recall you talk about that particular set of customers. And is that some competitive displacement there? Thank you.

You know, I didn't think about it before, but you know, first of all, I believe it will continue to add new customers. And the broad addition of customers is in general, it's not related to one specific territory. I think as we grow the business, we're getting into new segments. And therefore, yes, we'll continue to add customers. Whether it will be in the range of this year that we've already added 42 customers, I'm not sure whether it will be or it will be in a different magnitude. But definitely, if we look also historically into previous years, we've been adding a significant number of customers every year. Now, specifically wafer manufacturers. Yes, we are adding new wafer manufacturers to our portfolio and will continue to add. And when I look at the target market for 2023, I believe that we'll have new customers in this segment as well. Did I answer your question?

Yes, yes. So the other question I have is, well, first of all, we appreciate you from time to time provide new press releases about the latest orders you receive from your customers. But your last update was in early September. So between September to now, over the last two months, how do you see the ordering rate going? And I may have another follow-up after this. Thank you.

So I think Rafi mentioned it in the previous remark that he talked about. Yes, we've been adding orders. I think currently we see customers are waiting to make sure that they are getting the business before they'll turn the pipeline into POs. But when we look today at our backlog and add the pipeline, the business is healthy. They're really the big question, and this is why we have a limited visibility, is the rate of the customers turning potential POs from the pipeline into real POs. They are taking more time, and the lead times are shorter. So I think we'll have a better assessment, and we'll be able to give better numbers and more accurate numbers within a couple of months.

Yeah, but I would like to add one more comment. Usually when we make an announcement of order, it should be, you know, over what we call multiple system orders. We don't, you know, make announcements for one or two systems per customer. That's the big difference. And if we look on our portfolio, it definitely, you know, contains a lot of what we call one and two units per customer. So definitely we don't make any announcements of each order

Got it. So maybe my last follow-up is in your backlog. Based on your backlog, what's your visibility into first half 23? Can you see something shipment scheduled? What's the latest? Is it the second quarter 23 or is it still first quarter 23? Thank you.

Well, looking into the backlog, we have backlog today that is already including machine shipments in the first and the second quarter. However, we still need, in order to complete shipments for both quarters, we will need to converge some of the pipeline into POs, and that's exactly what we're doing today.

Thank you.

The next question is from Craig Ellis of B. Reilly Securities. Please go ahead.

Team, thanks for taking the question and congratulations on the execution in the third quarter. A lot of discussion around backlog and orders and visibility into calendar 23, so I wanted to pivot to gross margin. Moshe, you talked about some large customer dynamics that impacted gross margin in the quarter. Can you just identify if there were any other factors that impacted gross margin and what should be expected with gross margin beyond the calendar fourth quarter? Would they get back to that 51% level or their input cost or other large customer items that would have them maybe sub 50 or right around 50%?

So, the main impact of the relatively lower gross margin for the third quarter was indeed a few large orders that we have delivered in the quarter and we will continue, we will complete the delivery of them over the course of the fourth quarter. So, you will see some improvement in the fourth quarter, but not to the full extent. We should go above the 50% mark next year. I'm not sure to the full 52, the upper limit, but we should be able to go back to above the 50% level.

Got it. That's helpful. And then the second question just relates to operating expense. And I acknowledge we're dealing with an unusually uncertain environment, but the question is this, if If order trends and other dynamics meant that we weren't seeing the backlog conversion to firm orders, as you look at operating expense, do you feel like you have any flexibility to reduce operating expense tactically? Or given the significant increase in customer engagement, do you really have pressure on R&D to scale that up so that you can do the work that you need to do to serve all these new customers?

So, you know, the two key elements in our operating expense structure is the R&D and sales and marketing. G&A stays pretty much flat. We believe that our business model is pretty, you know, agile, you know, so we can change, you know, some of the expense mix between, you know, direct and indirect. On the R&D front, I think Raffi mentioned in his prepared remarks that we want to continue to invest. We have plans to introduce new products and new capabilities, so this is definitely an area that we don't want to affect. But within the sales and marketing, there are certain activities that can be changed based on activity level.

Yep, that makes sense. And then for my final question, a real strong cash performance in the quarter. Here we are with $460 million in cash and equivalents. Robbie, can you just give us an update on how you're thinking about M&A? I know you've talked about it in the past, and one of the things that precluded significant progress was that we had a COVID environment that really made it hard to get out and meet potential targets in person. But But what should investor expectations be as we exit 22 and look into 23 on potential there? Thank you.

Yeah, regarding M&A, definitely now we invest a lot of efforts. And the fact that I'm not participating in the meeting in Israel, because it also, I'm investing on this issue. So we really believe that We can do something in the next few months, definitely. But, you know, it's a long process. Even if you find something you want to make today, especially good, you know, to check everything, to be sure that this is the right marriage and not to make any mistakes. So we do it cautiously. But definitely we invest a lot of effort to execute, I would say, in the next six months something.

And can you talk a little bit about what your priorities are, whether it's increased geographic and market exposure, a particular technology capability that might be attractive?

You're talking about M&A, priority in M&A? Look, I would say that since we take a major market share, we're not looking for a company similar to Comtech or doing something like Comtech. This uh this is not so i don't think it's bringing any effort any advantage for us we focus more on some you know in one hand should be in the same market segment but on the other end in different technology or different product line and then we can still use our you know infrastructure of sales and and marketing and support and enjoy this infrastructure to promote another product line and this is the roughly the the way this is the priority that we are giving and there are some area you know there are metrology there are some process the other thing that's still you know targeting the same segment as we and we really believe that we can bring some results very soon.

That makes sense. Scale, not so much scalar, but really technology extension, product line extension. Thanks, guys. Thank you. Thank you.

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

Yes, thanks for taking my question. Just on the front end side, you mentioned you've got pretty good demand from compound semis. And I was just wondering, is that silicon carbide, gallium arsenide, you know, indium phosphide, you know, gallium nitride? Which compound semiconductor is driving that part of your business?

I think today what's dominant in the business in the last, I would say, couple of quarters, it's definitely the silicon carbide portion.

And how much of your front-end business is compound?

I would say, you know, a difference from quarter to quarter, it is roughly, I would say, close to 10%. But, you know, it's one quarter more, one quarter less, roughly 10% of the business.

Got it. That's very helpful. And then just one last attempt on visibility. You know, 90 days ago, we were slotting out, I think, into Q1. You know, today, if somebody came in and wanted... a tool as soon as possible, when could you accommodate that customer?

You know, this is a difficult question, Gus, because it really depends on the kind of tool that he wants. So certain tools will be able to give him in less than two quarters. How much less, it depends. But I would say it is the soonest we can give is roughly four to six months. This is the soonest we can give somebody a tool.

Got it. And what does that, you know, in normal times, if we ever get back to that, what would that lead time be?

That's the lead time. I mean, you're talking about 16 to 20 months, 20 weeks. And if you go back, let's say, six months or a year ago, I think those lead times extended up to two quarters. So definitely lead times are shorter today. by roughly, I would say they have shortened by roughly, if you want to get a number, anywhere around a month and a half to two months. And that's exactly the difficulty that we have been describing now, because having said that, people understand that we can provide machines at around four months, and therefore they are less quick to secure the slots. They understand that there are slots in our manufacturing, and therefore this limits our visibility to the first half of next year.

Got it. Got it. Super helpful. And do you have any supply constraints at this point, or have the supply chain issues been alleviated?

I believe they have been alleviated. There are some issues here and there. There is a missing component here and there. we are able to get the material that we need. I don't think that supply chain issues today will create any shortages or lack of the ability to ship any machines. So I think this is not the main issue today that we have. Overall, we can get the parts. I think the supply chain in general is getting to, I would say, a more reasonable situation.

Okay, and then the last one for me, you know, today, you know, roughly what is your, you know, quarterly revenue capacity?

No, I think that we're not, I think we discussed this in previous calls. We have made a significant investment in the clean room capacity, and today the capacity is, it's not a limitation anymore. We've increased our capacity by about 50%. We are today able from our facility to ship about half a billion dollars of revenues or in machines. So this is not a limitation anymore.

Okay, great. Thank you so much for taking my questions.

Thank you, Gus.

Okay.

If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we poll for more questions. There are no further questions at this time. Before I ask Mr. Amit to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on CAMTAC's website. www.camtech.co.il, beginning tomorrow. Mr. Amit, would you like to make your concluding statement?

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

Thank you. This concludes the Camp Tech third quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.