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 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 by 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. Rathi 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 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 may also 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 statements 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 actual events or results to differ materially from those projected, including as a result of the effects of general economic conditions. Risks related to the concentration of a significant portion of Camtech's expected business in certain countries, particularly China, from which Camtech expects to generate a significant portion of its revenues for the foreseeable future, but also Taiwan and Korea, including the risks of deviations from our expectations regarding timing and size of of customers in these countries. Changing industry and market trends, reduced demand for services and products, timely developments 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 filings with the SEC. Please note that the Safe Harbour Statements and 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 press release. And now I'd like to hand the call over to Rafi, Camtek CEO. Rafi, please go ahead.

Hey, thanks, Kenny. Good morning or good afternoon, everyone. Camtek closed the first quarter with revenue of $72.5 million. The gross margin came in at 47.3%, affected mainly by product mix and cost increase of some of the components. Operating margin was 24%. Over 60% of our revenue came from advanced interconnect packaging applications. Front end and compound semisegments accounted for about 20% of our revenue. In the first quarter, we shipped multiple system orders to six tier one customers in the field of advanced packaging and heterogeneous integration. These orders accounted for over 40% of the quarterly revenue. Regarding the DRAM field, customers in the HBM segment account for over 10% of our revenue. of our revenue in Q1, which represent a significant increase over Q1 last year. We see expansion of our DRAM business in spite of the decline in the memory market. In the front end segment, we delivered system with a new hardware module for the first time. These systems were installed at two customers. This module will expand our inspection capability in the front-end segment, and we anticipate potential for growth at this customer and other in the coming quarters. We install two Golden Eagle systems for panel inspection at a new customer site for fan-out application. we plan to ship additional systems to this customer in Q2 and Q3. During the first quarter, we received an order for nine systems from a tier one customers for advanced packaging to be delivered in the second and third quarters of this year. Regarding the second quarter, we estimate the sales to be similar to Q1 23 which represent a decline of nine percent year over year as we have stated in our previous call we continue to believe that our leading position in specific segments broad and diversify customer base and long-term strategic relationships with customers will enable us to outperform the industry regarding the second half of 23. Based on our discussions with customers, there is a potential for a moderate improvement in the business situation of our customers. At this stage, and considering the lead times which are becoming shorter, it is hard to foresee when this potential translate into orders. At a time like this, when the world is experiencing an economic slowdown, we conduct our business with utmost care. We are monitoring our expenses carefully and adjusting them to the current situation rather than to the long-term forecast. The field in which we cannot afford to reduce expenses is R&D. because our customers continue to develop new technologies such as hybrid bonding and heterogeneous integration. They set a very aggressive roadmap with a very tough schedule, thus committing us to offer solutions on time. At the same time, we are aware of the fact that transition from slowdown to growth is swift in our segment. That is why we need to maintain a sufficient inventory that will allow us to meet the requirement for quick delivery of systems. Looking at the investment, an increasing capacity in the R&D roadmap that our major customers are making in relevant segments, we are optimistic about growth potential. The release of new products later this year will expand our portfolio, allowing us to penetrate new applications. In addition, we continue our efforts in the M&A, which will further increase our total available market. And now, Moshe will review the financial result. Moshe.

Thank you, Rafi. In my financial summary ahead, I will provide the results on a non-GAAP basis. The reconciliation between the GAAP results and the non-GAAP results appear in the table at the end of the press release issued earlier today. First quarter revenue came at $72.5 million, a decrease of 6% compared with the first quarter of 2022. The geographic revenue split for the quarter was as follows. Asia was 90%, and USA and Europe accounted for 10%. We expect to return to the 80-20 mix for the year as a whole. Gross profit for the quarter was $34.3 million. The gross margin for the quarter was 47.3% versus 52% in the first quarter of last year and 49% last quarter. This decline is a result of the seismics as well as continued inflationary pressures on raw materials and labor, which we cannot fully pass on to customers. As we mentioned last time, we have initiated a process focused on improving the gross margin through engineering and design changes, which in some cases require customer qualifications, as well as supply chain initiatives. We expect gradual improvement in the gross margin from the current level, but I note that it will take time until we see the full benefit of these steps. Operating expenses in the quarter were $16.2 million. This is compared with $18 million in the first quarter of last year and to the $17.4 million reported in the previous quarter. The current strength of the U.S. dollar versus the Israeli shekel is beneficial to our current operating expenses levels. Operating profit in the quarter was $17.4 million compared to $22.2 million in the first quarter of last year and $22.8 million reported in the previous quarter. Operating margin was 24% compared to 28.8% last year and 27.8% in the previous quarter. The decline is due to the decrease in business volume and gross profit. Financial income for the quarter was $5.1 million, compared with $3.8 million in Q4 and only $400,000 last year. The majority of the increase relates to the significantly higher interest rates on our deposits, on an increased cash balance, Net income for the first quarter of 2023 was $20.4 million, or 42 cents per diluted share. This is compared to a net income of $21 million, or 44 cents per share, in the first quarter of last year. Total diluted number of shares as of the end of Q1 was 48.4 million. Turning to some high-level balance sheet and cash flow metrics. Starting from cash, total cash, including cash, cash equivalents, short and long-term deposits, as of March 31st, 2023, was $493 million. During the first quarter, we had a positive cash flow and we generated $17.1 million in cash from operations. Account receivables decreased from $81 million at the end of last quarter to $66 million, primarily due to a strong collection within the quarter. Days outstanding for Q1 were 84 days, down from 90 days last quarter. Inventory level was at similar level as of last quarter. In terms of guidance, in Q2, we expect revenue at a similar level as achieved in Q1. And with that, Rafi, Rami and myself will be open to take your questions. Kenny?

Thank you, Moshe. At this time, we will open the call for the question and answer session. If you have a question, please raise your hand on the platform and I will take your questions. So we'll give a minute or so just to poll for questions. Our first question will be from Brian Chin of Stifel. Brian, please go ahead. Hi there.

Can you hear me okay? Yes, we can. Okay, great. Good afternoon. Thanks for letting us ask a few questions. Yeah, I guess maybe to start with, you've referenced some meaningful tier one customer activity. And I guess one, what kind of impact does this have typically on blended gross margins? And two, can you describe what you're seeing from also your broader customer base? Clearly wafer starts and utilization is lower as inventory corrections continue, but what are the specific areas where you do have some indications for some pickup in second half? And I'm thinking also about China specifically, thanks.

So let me start with the answer. So first of all, when we talk about the second half, we're talking about multiple territories. It's not related to a specific territory. Definitely, it's not just China. The main drivers, I would say, are the advanced packaging. No doubt, this segment is healthy, shows some strength. And you can see that our tier one customers are continuing to buy equipment. They're investing and they are still increasing the capacity for certain applications. The second area that is driving the growth or will drive the growth is the compound semi. Definitely the automotive market is strong. And this market will continue to be healthy, at least for the foreseeable future. So I would say these are the major opportunities in general. I would also like to specify here that we have POs on hand for some of these opportunities. Now, in general, the tier one customers, do not have a negative, but a positive effect on our gross margin. Where we see, and I think Moshe mentioned it in his notes, is that there are the mix here, apart from the issues of the, I would say, the increase in some of the cost side, there is definitely a mix issue or a mix, a product mix in this quarter that is not favorable. And two of these reasons are for the low gross margin. But I would say, I would state again, it's reiterated, it's important. Our tier one customers affect positively on the gross market.

Okay, that's a tough one. And then just for my follow-up, What was the significant advanced packaging order that's shipping in 2Q and 3Q? Is that memory related? And I guess whether or not it's high bandwidth memory related, can you also discuss how large that market opportunity is, your market share, and how process control intensity is maybe favorably impacted as more DAI are stacked together?

So first of all, the Nine machine orders are not related to memory. So that's, I would say, it's other advanced packaging applications. So now, going back to the memory and DRAM specifically, first of all, this is obviously a healthy segment because there is a transition to the use of high bandwidth memory. I think everybody's using it. This is very much tied with the heterogeneous integration segment. or for the high performance memory going into servers and gaming and other application, definitely that's an area that is going to grow and we're seeing there the business. So in general, we have a very strong market here and we serve all the major players. From the size of the business, I think we mentioned it in the notes, it was 10% of our revenues in this quarter. It's still too early to say what it will be in the next quarters, but it will be meaningful this year.

Okay, thanks for the answers.

Thank you.

Thank you, Brian. Our next question will be from Charles Shi from Needham.

Charles, you may go ahead and unmute. Thanks, Kenny. Thank you for letting me ask a question or two. Good afternoon, Rafi, Rami, Moshe. I think the first thing I want to clarify a little bit more is that nine machine order you said in the press release, it's a strategically important order. Can you expand a bit? I understand it's not in memory, it's in other advanced packaging, but why you consider it a strategically important order? Just need a little bit more color on that. Thank you.

Hi, Charles. The reason that we see this as a strategic order, this is first of all, a very important customer of ours. It's in the advanced packaging, and there is a potential for significant number of machines in the second half of this year and in 24. So definitely, the strategic nature is the potential quantity of machines that we will be selling to these specific customers in, I would say, the next 18 months.

Is there any, I mean, I understand the size of the business sounds, yeah, definitely sounds it's a strategic, it's important, but from technology or product perspective, any other thing noteworthy, these nine machine order, is it something like a more finer pitch, a higher bump density? I mean, something that basically requires a higher level of a capability from your machines. important for your technology roadmap or something else i just really want to understand uh why it is this strategically important i understand the business side but i also understand technology side yeah

From a technology point of view, no doubt, you know, this entire industry is tightening the dimensions of all of the applications. And we will see a similar trend on this customer as well. As we increase the number of bumps, we reduce the pitch. The RDLs for the fan-out applications are coming down. And also the defect size is becoming smaller and smaller. So I think from the application requirements point of view. And I would say the number of applications in this customer, first of all, there will be quite a few of them. And definitely from a technology point of view, it's definitely going to be tighter for this customer as well. And I think this is as much as I can disclose at this stage, Charles.

Yeah, Rami, no problem. I appreciate the color as always. So Moshe, I have a question on the financial side in terms of your forward financial planning here. I understand that you want to exercise more cost discipline going into the next few quarters. I think you said that you're going to respond to the near-term dynamics a little bit more. So wonder, what's your thought on the overall OPEX this year? Are you thinking about flat year on year? And based on what kind of market assumption, especially second half, are you making improvement on the second half in terms of the business for any of the OPEX budgeting you're thinking as of today? Thank you.

So in terms of the operating expenses, first of all, in general, you already see in the first quarter somewhat reduced operating expenses versus last year. And we will continue with this level pretty much throughout the year. As Rafi mentioned in his prepared notes, the focus would be on R&D, so you will see over the next few quarters an increase in the R&D level, and somewhat, if we want to keep the OPEX at the same level, you'll see on the other aspect, the SG&A, a reduced level of expenses.

Got it, got it. That's kind of based on stable business outlook, or do you expect some moderate improvement in second half in that assumption? I just really want to understand how you think about OPEX from here relative to the market environment. Thank you.

So just in general, we still don't have a clear view on the second half. On one hand, we do hear some positive feedback from customers, but we are not taking it to the bank yet and we don't have all the orders in hand to support growth. So at this point, we provided guidance for the second quarter, we gave some indication for the second half, it's too early to say whether the second half is going to be stronger. So my current assumption on the operating expenses is based on the current level of business.

I would like just to add one more thing, Charles, and I think I said it in the previous answer, but I want to reiterate it. I would say the positive signs that we see are coming from discussions with customers in multiple territories. It's just not related to one or two customers. So yes, we are hearing in multiple customers, from major customers, I would say some positive note. But as Moshe said, some of it isn't supported by POs, but still it is too early in the game to really say what will be the second half. I believe that in a few months, we'll be like, let's say, I would say in the third quarter, we'll be in a much better position to discuss it.

Thank you. Thank you, Charles. Thank you, Charles. Our next question will be from Craig Ellis from B Reilly. Craig, you may go ahead.

Yes, thanks for taking the question and congratulations on your revenue execution team. I wanted to start just by following up on one of the comments around high bandwidth memory and just clarifying the business's potential for this year. Is the view that the strength you're seeing in high bandwidth memory sufficient to drive year-on-year growth in 2023 versus 2021? 2022's levels, or was that more about the business's strength in the very near term, perhaps in either 2Q or 3Q?

So first of all, I'm expecting, let's say we are about 10% revenue of our revenues for this segment alone. And I would say that I'm expecting something similar, at least for the next quarter. I think throughout the year, this is an area that is picking up. Rameen Mohammadi, And you see all everybody's talking and you know it's not just related to one specific vendor people understand that this is a growth area. Rameen Mohammadi, So definitely, this is something that will be significantly larger that what we saw in 22 it would be meaningful, and I think it will help us to keep the numbers.

Daniel Rothenberg, that's really helpful brahmi Thank you, and then the second question is regarding. the compound semiconductor part of the business. And it's a longer term question. One of the things that investors have been concerned about over the last few months, given some of the pressures that have been seen in the global automotive market, is the ability for compound semiconductor to be an intermediate term growth driver. So without providing any guidance, can you just talk about your confidence that Compound Semi, after what looks like will be a strong this year, could be a business that could provide growth in 2024. What are the gives and takes to that being a sustainable growth driver?

First of all, we are continuing at a similar rate than we experienced last year, which is already a good note. Now, in this area, looking forward for this year, We are backed by POs from some of the customers. And definitely we are seeing, and with discussions with specific customers that are thinking of expanding or getting into this market, I'm getting the feeling that this market will continue to invest in increasing the capacity, at least throughout 23 and 24. So from that point of view, I would say we are looking at this market positively.

That's really helpful, Rami. Thank you. And then for my last question, I'll flip it over to Moshe. Moshe, can you just talk a little bit more about some of the things that are happening with gross margin? There were repeated references to mixed dynamics in the quarter. Was that mostly on a product line basis or with the end market serves, whether it was advanced packaging or high bandwidth memory, et cetera. And then you mentioned that there would be some improvement in gross margin. Can you provide a little bit more color on that timing with which you'd expect to see that? Thank you so much, guys.

Thank you, Craig. With respect to gross margin, first of all, obviously, this is an area of focus of us at this point, and we understand that we need to improve the gross margin. So on the product mix, I would say that it's across the board, and Rami mentioned before, the tier one customers which are driving relatively higher gross margin. So, you know, it's relatively the smaller customers that are driving the margin a little bit down. But that's not the whole story. Most of the issue is on the cost side. And here we are very much focused on reducing the bill of material of the product. through a few initiatives. First of all, and obviously we cannot pass on to the customer all these inflationary pressures. So what we do is, first of all, we are making some changes in the design of the system, but you have to take into account that in some cases we need to get customer qualifications for that. It's a long process. uh so it takes time until we will see the benefit of that the other aspect is obviously through supply chain initiatives uh negotiation with with customers and nowadays uh the market is a little bit softer so we believe that we will be able to uh achieve here some savings as well uh taking into account the fact that we are starting with certain level of inventory with the higher cost structure. So as I said, gradually we will see improvement, but it takes time until we see the full benefit of this activity. Thank you, Moshe.

Thank you, Craig. Our next question will be from Duxin Zhang of Bank of America. Duxin, you may go ahead.

Thank you so much for taking my question. Just to follow up on the margin front, I know you guys have a target model out that's for 52% gross margin target. Could you just remind us for what year that target is for and if you still think that is a reachable target?

Yeah, the target was not specific to a year, but more for a revenue level. And the target was for above $400 million business. Yet, we are still operating at this point below our target model, even for the $300 million revenue level. For the reasons that we've mentioned before, and yes, the answer is we are committed and we have a path. We know exactly what we need to do and we are executing based on this plan to return to the 50% gross margin level. But again, I would say that it's a gradual process and we will see the full benefit in a few quarters.

Understood. And then just one on China. So some of your front-end peers recently have received clarification from the US government. They believe they can ship incremental revenue to Chinese customers that they previously thought were restricted. I know you guys said you didn't have any direct impacts from this kind of restriction before, but are you seeing any sort of increased activities around this? Do you have any revenue potential from this new clarification?

I would say that definitely we can see from China a lot of efforts to come with a solution where they cannot get or imported the IEN component and they should find a different way to get a high performance. And I would say most of the efforts are focused on advanced packaging. This is the only way for them to try to get good performance and high performance. and this is a field that we are very strong and definitely we can benefit from that.

Understood, thank you.