Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third Quarter 2020 Results Conference Call. All participants are present in a 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 Camtek's Investor Relations team at GK Investor and public relations at 1-646-688-3559 or view it in the news section of the Company's website, www.camtek.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations.

Mr.

Green, would you like to begin please?.

Thank you. Good day to all of you. I would like to welcome all of you to Camtek's third quarter 2020 results conference call, and I would also like to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's CEO, Mr. Moshe Eisenberg Camtek's CFO and Mr. Ramy Langer, Camtek's COO.

Rafi will provide an overview of Camtek's results and discuss market trends in the third quarter of 2020. Moshe will then summarize the financial results for the quarter. We will then open the call to take your questions.

Before we begin, I'd like to remind our listeners 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 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, the effects of the COVID-19 crisis on global markets and on the markets in which we operate, including the risk of a continued disruption to our and our customers providers business partners and contractors business as a result of the outbreak and effects of the COVID-19 pandemic.

Risks related to the concentration of a significant portion of Camtek expected business in certain countries, particularly China from which Camtek 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 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 filings with the SEC.

Please note that the Safe Harbor statements and today's press release also covers the contents of this conference call. In addition, during this call, 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.

I'd now like that to hand the call over to Rafi, Camtek CEO. Rafi Please go ahead..

Good morning and thank you for joining our call today. In the third quarter, we continue the momentum of increasing sales to our existing customers as well as to new customers. Total sales in the third quarter were $14.1 million, close to 25% increase over Q3 '19, and the record quarterly revenue. Gross margin was 48.8% and operating margin was 19%.

Marking a continued improvement in profitability compared with the first half of 2020. The order we have received together with sales in pipeline indicates a strong sales forecast for Q4 as well as the first half of 2021. In the first quarter, we specifically facing a demand for customer to supply more systems then we had planned to ship.

So, we are making considerable effort to meet customer requirements to ship on time. We estimate sales in the first quarter to be between $42 million and $44 million.

Based upon order received in current pipeline, the Company believes this revenue in the first half of 2021 will be similar to the revenue level in the second half of 2020, representing approximately 25% growth over the first half of 2020.

Despite the high demands and uncertainty we face these days require careful assessment as we must consider there might be fluctuation in revenue between quarters. The distribution of cells between the various territories is very similar to the second quarter about 90% in Asia and 10% in Europe and the U.S.

It should be noted that our Asian revenue includes facilities of U.S. and European based companies. The main applications continue to lead the market are Advanced Packaging, CMOS Image Sensors and RF devices. We have also expanded our presence in frontend mainly for macro inspection applications.

Over the past few months, we have learned to operate our company alongside COVID-19 installation of the form by local team in each of our territories. When a special feature has been developed for a customer, guidance for installation is provided remotely by the R&D team at headquarters.

In Israel, most employees work from company's facility while some work from home. We take all necessary precautions to keep our employees healthy and safe. We continue to follow development in the global economy and our customer situation. Currently, we do not see signs of weakness in demand.

On the contrary, customers are continuing to order more systems and using our systems at normal utilization rates. Moreover, new packaging technologies will increase the need for our systems in customer's production line.

We continue to collaborate with the leading IDM customers to develop metrology and inspection solutions for the next generation of advanced packaging. As we say in the past, we expect these applications to become a meaningful to our business.

We reiterate to importance of cooperation with the leading IDMs because once they move from development stage to high volume production, we will be there ready to run production with our qualified systems. We believe that new inspection companies who are not involved in the development process of the next generation of Advanced Packaging.

We'll require considerable time to develop suitable solutions. Our growth drivers have not change. The main drivers in our market of Advanced Packaging, Memory, CMOS Image Sensor and RF devices for 5G smartphones. 5G is pushing demand for high-end smartphones sales.

Compared to previous generations, these 5G phones include more silicon, more advanced packaging and larger number of RF devices in each phone. As a result, we are experiencing demand for 5G related applications. We see adoption of new packaging technologies by our customers.

Adoption of new technologies requires extensive use of inspection and metrology systems. In addition, we are expanding our available market by penetrating to new segments in the frontend. To summarize 2020, 2020 is shaping up to be another record year for Camtek.

As for 2021, high demand for customer market drivers, the performance of our systems and increasing market presence and customer satisfaction give us a tailwind toward 2021, but it is important to stress that we are still seeing the COVID-19 pandemic effect causing risk and uncertainties.

We examine the market demand and business situation of our customers on ongoing basis. Before I hand over to Moshe for more details or the financial results, I would especially like to thank our employees for their dedicated work during this challenging time.

Moshe?.

Thank you, Rafi. In my financial summary ahead, I will provide the results on an ongoing basis. The reconciliation between the GAAP results and the non-GAAP results appear in the tables at the end of the press release issued earlier today.

As Rafi mentioned, third quarter 2020 revenues were a record $40.1 million an increase of 23% compared with the $32.5 million reported in the third quarter of 2019, and 8% increase versus the previous quarter. Asia accounted for more most of our revenues with 88% contribution. Revenues from Europe and U.S. accounted for 12%.

Gross profit for the quarter was $19.5 million. The gross margin for the quarter was 48.8% versus 47.1% in the third quarter of last year and 46.1% in the previous quarter. This was in line with our expectations for higher gross margin in the second half of this year. Operating expenses in the quarter were $11.9 million.

This is compared with $10.1 million in the third quarter of last year and to the $10.7 million reported in the previous quarter. The increase versus the second quarter is mainly due to the increased sales and marketing expenses on increased revenues and an increase in our R&D activities.

We expect additional increases in these expense items in the fourth quarter in order to support the forecasted growth in business volume in the coming quarters and the development of capabilities for the next generation advanced packaging requirements.

Operating profit in the quarter was $7.6 million, an improvement of 19.6% versus the $6.4 million in previous quarter. Operating margin was 19% compared to 17.2% in Q2, mainly as a result of the improved gross margin. Net income for the third quarter of 2020 was $7.3 million or $0.18 per diluted share.

This is compared to a net income of $5 million or $0.13 per share in the third quarter of last year, and $6.3 million or $0.16 per diluted share in the second quarter of 2020. Turning to some high level balance sheet and cash flow metrics, we generated $5 million in cash from operations in the quarter.

Net cash and cash equivalents and short-term deposits as of September 30, 2020, increased to $106 million compared with $101.5 million at the end of June 2020. With the current business momentum, we expect revenues of $42 million to $44 million in the fourth quarter. This means we expect our annual revenues to exceed $150 million for 2020.

And with the Rafi, Ramy and myself will be open to take your questions.

Operator?.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Craig Ellis from B. Riley FBR. Please go ahead..

I wanted to just start off by following up on an announcement that company had recently on front end macro inspection. I think that's been an area of recent strength.

Can you just give us a little bit more color on what you're seeing there from a demand standpoint? And how that factors into the visibility that you talked about for the first half of calendar '21?.

Ramy, do you want to answer the question..

Yes, I will take the question. And well I think we've said it a number of times, we are getting to more segments on the front end. And definitely this is part of the forecast that we are seeing into the fourth quarter and the first quarter of next year.

And we are getting traction from a quite a few customers and definitely this is becoming the segment that is meaningful to the Company..

That's helpful, Ramy.

Can you just help us understand where you are now relative to what you think a longer term opportunity is in front end macro inspection? So if we were to look out to say, calendar '23, where are we in late 2020, early 2021, relative to that longer term market penetration potential?.

Well, I think we're still in the first day. We are in a number of customers in different areas of the front end, as we said, it's the back end of the line, but definitely we are gaining more and more traction. Customers get to see our machines, they like it, they older more. Other companies, hear of us, it's the market presence.

It's the overall market and the technical capabilities that we are gaining as we enter more and more customers. So, definitely, we are in the first stage. I definitely believe that this is going to become a very meaningful part of our business, as we proceed over calendar time.

So, if you're talking '23, it will be definitely significantly more than it is currently today..

And then the next question, I'll go back to Rafi. Rafi, clearly it seems that issue exit calendar '20 and look into '21, there strengthen the business across front end macro inspection, advanced packaging, image sensor.

I assume high bandwidth memory comes back, but can you help us understand as you look at the business, which of those areas have the potential to be the most significant growth drivers for the Company next year?.

I would say in general, there are three countries that I think taking the major market share is Korea, Taiwan and China. If you look at the overall investment in CapEx in these three territories, you can see that they take most of the investment. So naturally when you invest a lot of money in the semiconductor, we will enjoy it..

And in those areas would you expect the growth in your key areas advanced packaging, panel processing and image sensor to be fairly equal next year? Or do you have visibility on whether one would be materially greater than the other at this point?.

It's not so easy to predict. But I would say, we can see and understand the advantages that this packaging technology can bring. In many aspects of low power, of better signal, many things and it's push the IDM and mainly the IDM to move towards this type of solutions.

And according to our experience, we can see the beginning of ramp up, of high volume ramp up, I would say from the beginning of the year, of the next year. It is not something in the long-term. This is going to be I think in the midterm as well..

Rafi, let me elaborate a little bit more. If you look at the at the opportunity level, no doubt that advanced packaging is the major opportunity. And from the volume point-of-view, the different markets that it serves the ramp, even without the memory, it is very significant.

So, definitely, we think that the advanced packaging is the largest opportunity then will come the CMOS image sensors, that is going to stay significant and then RF devices and then the general to which includes the front end. So, I hope that this colors or puts in the right proportions on your question..

I appreciate that. And I don't want to ignore Moshe. So, I'll ask two questions to you please, first on gross margin, very strong performance in the quarter from 48.8%.

Moshe, what are some of the puts and takes us we think about either mix or any of the COVID-related issues that the Company might be navigating as we look out over the next two to three quarters for gross margin?.

No, I think it's mainly has to do with the improved mix also the business volume helps with fixed expenses level, but it definitely relates to the deal mix and we are basically back on track to where the business model should be. The first half was a little bit unusually low. No COVID-19 major impact on our results this quarter.

There are some puts, ins and outs, we obviously we saved a lot of money on travel, but on the same time, people really didn't use much of their vacation because basically this was a look down here. So, our vacation expenses went up. So, I think overall, the COVID-19 impact is pretty insignificant this quarter..

Moshe, I would like to add, maybe a little bit technical data will help you to understand the term mix, mixed product. When we talk about mixed products and what really affect the price, I would say they are, let's talk about 2D and 3D, if customer has two different applications, the two different sets of 2D and 2D, this is one important issue.

The second is the defect size, if customers looking for very, very small defect size, and he must use a very high magnifications. The overall machine, the accuracy, the performance, the throughput become critical. In this case, the amount of player that can provide customer sub solution is just a few, not everyone can make all these together.

I mean, detect the small defect with very high volume was visible price all these together. So, this is the two major issues that really affect the ASP, and what we call later on as a mixed product..

And then lastly, before I hop back in the queue, Moshe, you mentioned a couple of things that would impact operating expense in the fourth quarter, expenses related to new product development, et cetera.

How do we think about the trajectory of OpEx beyond the calendar fourth quarter and into the first half of next year?.

I think we will see some increase in operating expense level due to the synthesis I've mentioned before. In the fourth quarter and probably also in the beginning of the year, I'm not sure how this would play out in the second half of 2021.

Some items will probably go down after we finish the certain developments and projects and investment in certain sales and marketing activities. So, I think that we will see some increase in the fourth quarter and probably in the first quarter as well..

The next question is from Quinn Bolton of Needham and Company..

I wanted to follow up on Craig's question on the macro inspection business. I believe that business is probably running today in the high single digit percentage of revenue.

Do you think it can get to 10% or more of revenue in calendar '21, given some of the traction you've seen, and then you mentioned out in calendar '23 would be a significantly larger percent of the business? Do you think it could get to something in the range of maybe 15% to 20% of sales out in that timeframe? And then I've got a couple of follow ups..

Absolutely, so the answer here is yes. We definitely -- there are lot of opportunities, the business is on track, it's growing. We are getting into new customers into existing customers. So definitely the numbers the ballpark is in the right way..

Fantastic. And then following up, obviously advanced packaging you've highlighted for several quarters is one of your biggest opportunities. I think last quarter and again on this call. You mentioned increasing traction with certain IDM's.

Just wondering when do you think that IDM business really starts to ramp for you? Is that included in the better pipeline for the fourth quarter and the first half of '21?.

Definitely, we're seeing already this business starting to happen, and we expected to start already in the fourth quarter and definitely be more significant next year..

And then lastly for Moshe, you'd given us a quarter ago sort of your outlook for improving gross margins in the second half of the year supported by the mix of business in the pipeline.

Wondering, if you might provide sort of your thoughts on gross margin into the first half of '21 since it sounds like you've got a pipeline that gives you pretty good visibility in the first half? Can it stay in the current range of sort of 48% to 49%? Do you see it trending higher or lower than that level? Any commentary would be helpful? Thank you..

Quinn, we believe the second half of 2020 will be big to like 48% to 50% gross margin level. Q3 is already within the range and we believe that Q4 will be similar. We think that, we have all the reasons to believe that, the first half actually of 2021 will be also within this range of 48 to 50..

The next question is from Shahar Cohen of More Investment House. Please go ahead..

Two questions, one is more operational, other big semi top companies mentioned their ability to remote support and put a lot of emphasis on their ability to use AI, to remote support declines.

To what extent, do you believe the COVID eliminate or hinder your ability to support the clarity, what extent do you use these kind of tools? And the second one is more technological question. I guess, you could, again, correct me if I'm wrong, I guess you're mostly in the CoWoS domain.

To what extent do you believe you can play more in the WoW or CoW events packaging area?.

This is Ramy. So from the remote support, this is something that we've been doing for years, using this technology. The only difference today, we just can't send people. So customers understand it. And they've put all the provisions point of view from cyber security, so we can do it online.

And the difference, the main difference here is that instead of having a person on site of the customer a person here just connects to the machine and have the ability to do all what he needs to do as if he's there onsite. That's the main difference, but it's a big difference.

And all-in-all, we are providing even faster support to our customers, so that I would say the difference. Regarding your second question, I didn't follow exactly, if you can repeat it and which part exactly of the advanced packaging you're referring to..

One of the larger client which also one of the largest foundries in the world, they claim to open to advanced packaging fabs next year. And I think they mentioned in one of the blogs that why currently they focus on the cost chip on wafer on substrat.

They are moving more to chip -- they're also introducing more chip on wafer and wafer on wafer technology.

So, my question is whether, to what extent do you play quality and chip on water on substrates? And to what extent should we expect you to play more in the chip on wafer and wafer on wafer technology?.

So first of all, what you are talking about the current technologies, we are one of the major supplier to these areas, specifically to the metrology and also to the inspection. And we play a major role. And we will continue to play a major role in the future all in the new techniques and technologies.

And I think Rafi mentioned, it didn't talk in specifics, but we're working with many of the major IDM's and companies and organizations that are involved in development of new technologies for the advanced packaging. So definitely we will provide answers or solutions to the areas that you have just mentioned..

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

Real quick on the front end macro opportunity.

Can you give a little color as to where you're seeing the demand, geographically memory versus foundry, and few process nodes? Whatever color you can give on, on sort of the customer concentration and where the interest lies?.

I would like, I'm very hesitant to talk about geographies and customers because this is very confidential and customers. Our customers don't like us to talk or mention them in public. So what I can say that first of all, we see it in IDMs and Foundry. So, we see it across, it's not just specific, just foundries or IDMs.

We see it in several areas that we are getting this business. It's not only in one geography and it's not only in one specific application. So, really, this is a variety of applications, different customers, it's also in different geographies across the frontend market.

And this is why I believe that as we said I mentioned before, we are in the high one digit number from our revenues point of view. We are very optimistic that we are going to grow this business significantly over the next few years.

Did I answer you, Gus?.

Yes. Maybe I'll just try one more time.

Is it 28 nanometer and above or are you getting into the more advanced notes?.

Mostly at this stage, it's the 20 and above, but definitely at certain customers we will go also to lower geometries..

And then on the advanced packaging, do have a sense of what your total available market is for advanced packaging at this point?.

250 million, I'm a little hesitant to throw in the number, it's -- we can definitely follow-up with you on the number. It's something that we can come up with fairly quickly..

Thank you. [Operator Instructions] There are no further questions at this time. Before I ask Mr. Amit to go ahead with his concluding statement, I would like to remind participants that a replay of this call will be available on Camtek's website www.camtek.com beginning tomorrow. Mr.

Amit, would you like to make your concluding statement?.

Okay, thanks. I would like to thank you all for your continued interest in our business. I would like to thank all of our employees and my management team for their solid performance so far in 2020, and we look forward to continuing it. To our interest I thank your long-term support.

We will be presenting at the number of virtual conference in the coming weeks and we hope to speak with many of you at these events. To the rest of you, I look forward to talking with you again in three months time for our full year 2021 result. Thank you and goodbye..

Thank you. This concludes the Camtek third quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect..