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 to 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 1646 6883559, or view it in the new section of the company's website, www.camtek dotcom. 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'd like to welcome all of you CamTech'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 Ahmed Camtek's CEO, Mr.
Moshe Eisenberg, Camtek's CFO and Mr. Rami Langa, Cantex COO. Rafi will provide an overview of Camtek's results to discuss market trends in the third quarter 2020. Maisha will then summarize the financial results of 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 in 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 effect of the COVID-nineteen crisis from global market and on the markets in which we operate, including the risk of a continued disruption to our and our customers, provider 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 Cantex expected business in certain countries, particularly China, from which Cantech expects to generate a significant portion of its revenues for the foreseeable future, but also Thailand and Korea.
Including the risks of deviations from our expectations regarding timing and size of orders from customers in these countries, changing industry market trends, reduced demand for services and products, the 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 Harbor statement in 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 action 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 would now like that to hand the call over to Rafi, Camtek's CEO. Rafi, please go ahead.
Good morning, and thank you for joining our call today. In the third quarter, we continued the momentum of increasing sales to our existing customers as well as to new customers. Total sales in the third quarter were $40,100,000, close to 25% increase over Q3 2019 and the record quarterly revenue. Gross margin was 48.8% and operating margin of 19%, marking a continued improvement in profitability compared with the first half of twenty 2020. The order we have received together with sales and pipeline indicate a strong sales forecast for Q4 as well as the first half of twenty twenty one.
In the fourth quarter, we specifically facing a demand for customer to supply more systems then we have planned to ship. So we are making considerable effort to meet customer requirements to ship on time. We estimate sales in the fourth quarter to be between $42,000,000 $44,000,000. Based upon all the received and current pipeline, the company believes that revenue in the first half of twenty twenty one will be similar to the revenue level in the second half of twenty twenty. Representing approximately 25% growth over the first half of twenty twenty.
Despite the high demand and uncertainty we faced these days, require careful assessment as we must consider there might be fluctuation in revenue between quarters. The distribution of sales between the various territories is very similar to the second quarter. About 90% in Asia and 10% in euro and the It should be noted that our Asian revenue include facilities of US and European based companies. The main application that continue to lead the market of advanced packaging, CMOS image sensor and out of devices. We've also expanded our presence in front end, mainly for macro inspection applications.
Over the past few months, we have learned to operate our company alongside COVID 19. Installation are performed by local teams in each of our territories, where the special feature has been developed for a customer. Guidance for installation is provided remotely by the R and D team at 3rd quarter. In Israel, most employees work from company's facility, while somewhere 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 rate. Moreover, new packaging technologies will increase the need for our systems and customers' production lines. We continue to collaborate with the leading IDM customers to develop metrology and inspection solutions for the next generation of advanced packaging.
As we said in the past, we expect these applications to become meaningful to importance of cooperation with leading IDNs 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 packaging will require considerable time to develop suitable solutions. Our growth drivers have no change. The main drivers in our market are advanced packaging memory SimOS image sensor and RF devices for 5g smartphones. 5g is pushing demand for high end smartphone sets.
Compared to previous generations, these 5G forms include more silicon, more advanced packaging, and larger number of RF devices in each phone. As a result, we are experiencing demands of 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 summarize 2020 to summarize, I'm sorry. 2020 is shaping up to be another record year for company.
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 1. But it is important to stress that we are still seeing the COVID 19 pandemic effect causing risk and uncertainties. We examined the market demand and business situation of our customers on an ongoing basis. Before I hand over to Moshe for more details on 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 you results on a non GAAP 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 lastly mentioned, third quarter 2020 revenues were a record $40,100,000, an increase of 23% compared with the $32,500,000 reported in the third quarter of 2019, an 8% increase versus the previous quarter. Asia accounted for most of our revenues with 88% contribution, Revenues from Europe and US accounted for 12%.
Gross profit for the quarter was $19,500,000. The gross margin for the quarter was 48.8 percent 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 $11,900,000. This is compared with $10,100,000 in the third quarter of last year and to the $10,700,000 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 and D activities. We expect additional increases in this 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 $7,600,000, an improvement of 19.6% versus the $6,400,000 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 first quarter of 2020 was $7,300,000, $0.18 per diluted share.
This is compared to a net income of $5,000,000 or $0.13 per share in the first quarter of last year and $6,300,000 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 $5,000,000 in cash from operations in the quarter, Net cash and cash equivalents and short term deposits as of September 30, 2020, increased to $106,000,000,
compared with $105,000,000
at the end of June 2020. With the current business momentum, we expect revenues of $42,000,000 to $44,000,000 in the 4th quarter, This means we expect our annual revenues to exceed $150,000,000 for 2020. And with that, Rafi, Ramy, and myself, we'll be open to take your questions.
Thank you. If you wish to Your questions will be pulled in the order they are received. Please stand by while we pull for your The first question is from Craig Ellis from B. Riley FBR. Please go ahead.
Thanks for taking the question and good afternoon and congratulations on the very strong quarter and guide team. I wanted to just start off by following up on an announcement that company had up 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 disability that you talked about for the first half of calendar twenty one.
Ramesh, do you want to answer?
I will take the question. Well, I think we've studied a number of times. We are getting to more segments on the front end. And definitely, and this is part of the forecast that we are seeing into the 4th quarter the first quarter of next year. And we are getting traction from quite a few customers and definitely is becoming the segment that is linked to the customer through the company.
That's helpful, Bromi. Can you just help us understand where you are now relative to what you think the longer term opportunity is in front of 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 1st steps. We are in a number of customers indifferent areas of the front end, as we said, it's the back end of the line, but definitely, we are getting more neutral You know, customers get to see our machines. They like it. They order more. Other companies, huge of us.
It's the market presence. It's the it's the overall market and the technical capabilities that we're gaining as we enter more and more customers. So definitely, we are in the 1st stage. I definitely believe that this is going to become a very meaningful part of our business as we proceed over a current time. So if you are talking 23, it will be definitely significantly more than it is currently today.
That's helpful. And then, the next question, I'll go back to, Rafi. Rafi, clearly, it seems that if you exit calendar 2020 and looking to 2021, there's strength in the business across front end macro inspection advanced packaging, image sensor. I assume high bandwidth memory comes back that 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 3 countries that I think, taking the major market share is Korea, Taiwan, and China. If you look at the overall investment in Capitec CapEx in industry territories, you can see that they take most of the investment. So, you know, naturally, when you invest a lot of money in the semiconductor, women enjoy.
And in those areas, would you expect the growth in your key areas, advanced packaging panel processing and image sensors would 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 also easy to predict, but I won't say that we can we can see and understand the advantages that this tech this packaging technology can bring in many, many aspects of low power, of a better signal, many things, and it's push the IBM, mainly the IBM to move towards this type of solutions. And the according to our experience, we can see the beginning of, of wrap up, of high volume wrap up, I would say from the beginning of the year of the next year. So it is not something in the long term. This is going to be, I think, in the in the mid term as well.
Lastly, let me elaborate a little bit more. And if you look at the opportunity, there is no doubt that Advanced Packaging is the major opportunity. And from the volume point of view, to distant 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 we'll come to see this image sensors is going to stay significant. And then RS devices and then the general 2 d, which includes the front end.
So I hope that this, you know, colors or puts in in in the right proportion, you you have your question.
That does. 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 as we think about either mix or any of the COVID related issues that the company might be navigating as we've looked out over the next 2 to 3 quarters for gross margin.
I think it mainly has to do with the improved mix Also, the business volume helps with fixed expenses level. But, it definitely relates to the business. And then we are basically back on track to where the the the business model, should be. The first customer related are usually low. No COVID nineteen major impact on our results this quarter.
Some puts, you know, ins and outs, you know, we obviously, we saved a lot of money, on travel, but on the same time, people really didn't choose much of their vacation because basically this was a lockdown here. So, our vacation, expenses went up. So I think overall, the COVID 19 impacted in, pretty insignificant this quarter.
I will try to to add, you know, maybe a little bit technical data will help you to our spend the term mix product. When we talk about mix product, it got really, you know, affect the price I would say they are let's talk about 2 deals, really. If customer has 2 different applications, So 2 different sensor for 2 d, 2 d. This is one important issue. The second is the defect size.
His customer looking for very, very small defect size, and he must use a very high magnifications the overall machine, the accuracy, the performance, the throughput becomes critical. In this case, the amount of players that can provide customer solution is just a few. Not everyone can make all these together. I mean, detect the smoking effect with very high volume with residual price policies together. So this is the 2 major issue that really affects the ASP and what we call later on as a mix product.
That's very helpful color. I appreciate that. And then lastly, before I hop back in the Q Moshe, you mentioned a couple of things that would impact operating expense in the fourth quarter. Expenses related to new product development, etcetera. 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 see some increase
in operating expense levels, due to the, things that I've mentioned before in the 4th quarter and probably also in the beginning of I'm not sure how this would play out in the second half of twenty twenty one. 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. Please go ahead.
Hey, guys. Let me, come by. Congratulations as well. Wanted to follow-up on Craig 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 2021 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 time frame. And then I've got a couple of follow ups.
Absolutely. So the answer here is yes. We definitely, there are lots of opportunities, the businesses on track, it's growing. We are getting into new customers and to 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 as one of your biggest opportunities, I think last quarter. And again, on this call, You mentioned increasing traction with certain IDMs. 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 twenty twenty one?
Definitely, we are seeing already this business starting to happen in weeks expect it to start already in the fourth quarter and definitely be more significant next year.
Great. And then lastly for Moshe, You had 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 twenty twenty one 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.
Right. So, like we, we believe that second half of, 2020 will be, back to like 48% to 50% gross margin level. Q3 is already within the range and we believe the Q4 will be similar. We think that,
you know, we have all the reasons,
to believe that Q, the first half, actually, of 2021, will be also within this range of 48 to 60.
Great. Thank you very much.
Thank you.
The next question is from shakar Cohen of Moore Investment Health. Please go ahead.
Two, two questions. 1 is more operational. Are there good for me, but the company has mentioned their ability to remote support and put a lot of emphasis on their ability to use AR to remote support the client. To what extent do you believe the, because of the eliminate or hinder your ability to support the client is what is gonna be used. This kind of schools, and the the second one is no you know, no.
If you're not just a follow-up question, I
guess you could, again, correct me
if I'm wrong, I guess you're mostly in the c o w o s domain. To what extent do you believe you can play more in the, WOW or the COW events packaging area?
Hi, Shahar. And this is Rami. So from the remote support. This is something that we'll be doing for years using this technology. The only difference today or just can't send people.
So customers understand it and they put all the provisions point of view for cybersecurity so we can do it online. And the difference, the main difference here is that instead of having a person on-site with the customer, a person here just connect to the machine and have the ability to do all what he needs to do as if he is there on track. 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 the, and if you can repeat it in which part exactly of the advanced packaging in your own field?
One of the, one of the largest clients, which was also one of the largest founders in the world, you know, they are, they, you know, they plan to open to advanced packaging, fabs next year. And I think they mentioned in one of the blog that why currently they they focus on the a car was cheap on wafer on substrate. They are moving more to, cheap on or they're also introducing more cheap on wafer and wafer on wafer technology. So My question is whether the, you know, to what extent do you play currently in chief commercial on substrates and to what extent should we ask you to play more in the chip on Metro and Metro on Metro Technologies.
Okay. So now I understand. So first of all, what we 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 need to clinics and technologies. And I think lastly mentioned, we didn't talk in specifics, but we're working with many of the major IDNs and companies and organizations that are involved in developing 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.
Yes, thanks for taking the questions. Real quick Furname macro opportunity. Can you give a little color, as to where you're seeing the demand geographically, memory versus foundry, process node, whatever color you can give on on sort of the customer concentration and and and where, the interest lies.
I would like to know, 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 when it's in public. So what I can say that first of all, we see it in IDS and foundry. So we see, I think, across, it's not just specific, you know, just foundry or IDNs, 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 different geographies, across the front end market. And this is why I believe that as we said, you mentioned before, We are in the high end digit number from our revenues coming to period. We are very optimistic that we are going to grow this business. Significantly over the next few years.
Could I answer you, Russ?
Yes. Just maybe I'll just try one more time. Is it, 28 nanometer and above, or are you getting into the more advanced nodes?
And mostly at this stage, it's the 20 above, but definitely, certain customers, we will go also to lower geometries.
Got it. That's helpful. And then, on the Advanced Packaging, can you do you have a sense of what your total available market is for Advanced packaging at this point?
I, you know, a little hesitant to throw in the numbers. We can definitely follow-up with you in the number. It's something that we can come up with very quickly.
Okay. That'd be very helpful. Yeah. Thank you. That's it for me.
Alright. Thank you.
There are no further questions at this time. Before I ask Mister Ami, 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 investor, I thank you long term support. We will be presenting at another of virtual conference in the coming weeks. And we hope speak with many of you at these events. To the rest of you, I look forward to talking with you again in 3 months time for our 4th year 2020 results. Thank you and goodbye.
Thank you. This concludes the Cantech Third Quarter 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.