Ladies and gentlemen, thank you for standing by. Welcome to Camtek's second quarter 2020 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 Camtek's investor relations team at GK Investor & 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. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?
Yeah, thank you, and good day to all of you. I would like to welcome all of you to Camtek's second 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 the overview of Camtek's results and discuss market trends in the second quarter of 2020. Moshe will then summarize the financial results of the quarter. We will then open the call to take some 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 expectation, or otherwise. Investors are reminded 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 the global market and on the market 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 the effect of the COVID-19 pandemic.
Risks relating to the concentration of a significant portion of Camtek's expected business in certain countries, particularly China, from which we expect to generate a significant portion of our revenue for the second half of 2020, but also Taiwan and Korea, including the risk of deviation from our expectation regarding timing and size of orders from customers in these countries. Changing industry market trends, reduced demand for services and products, the timing, development of the new services and products, and the adoption by the market, increased competition in the industry and price reduction, as well as due to other risks identified in the company's filing with the SEC. Please note that the safe harbor statements in today's press release also cover the content 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, focus future results, and evaluate the company's current performance. Management believes that the presentation of non-GAAP financial measures is useful to investor 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. Now, I'd like to hand over the call to Rafi, Camtek's CEO. Rafi, go ahead please.
Hi, everyone. The second quarter represents continued demand for our system, primarily from Asia. Total sales in the second quarter were $37 million, a record quarterly level. Gross margin was 46.1% and operating margin was over 17%, marking a significant improvement in profitability compared with the first quarter. We expect continued improvement in profitability in the third quarter as well. The ongoing demand from our customers for various applications point to a strong third quarter with encouraging backlog going into the fourth quarter. Our revenue guidance for the third quarter is $38 million-$39 million, with persistent improvement in the profitability. This indicates strong performance in the second half of the year. We have significantly increased our market share in 2D inspection, mainly because our system performance and competitiveness have been dramatically improved in all 2D applications.
A key element in our strategy is having in place local professional teams that can independently install and support machines in all our territories and enabling us to continue growing our business even during the COVID-19 pandemic. We have also established a remote training and support infrastructure allowing us to remotely operate systems, upgrade machine with recently developed feature, and train local team on a regular basis. We invest considerable development effort in providing appropriate technological solutions to our IDM tier 1 customers who develop innovative packaging technologies in the field of heterogeneous integration. We have received a few initial orders, we believe we will soon receive multiple machine orders for production. We expect this segment to become meaningful to our business. Let me give you some highlights of the second quarter. Taiwan and China continues to be the largest territory in the quarter.
USA and Europe are starting to pick up. We have received multiple machine orders for over 30 systems from four tier 1 OSATs for 2D applications, mainly for advanced packaging. Some of these machines will be installed in the second half of the year. The two Golden Eagle inspection systems for 600 by 600 mm panels that were installed at two tier 1 customers in Q2 are running fan-out panels in production. We expect to deliver additional systems later this year. Our customers believe that fan-out packaging on panels will continue to grow, as this is the cost-effective solution. Soon we will start planning our budget and work plan for year 2021. One of the most significant challenges facing management during COVID-19 is to assess what will be the scope of business activity in 2021. We base our strategy of achieving continuous growth on several drivers and trends.
The first is the increase in demand for semiconductor devices. The main drivers in our market are advanced packaging, memory, sensor, and RF filter for 5G smartphones. 5G is pushing demand for high-end smartphone sales. Compared to previous generations, these 5G phones include more silicon, more advanced packaging, and larger number of RF chips in each phone. As a result, we are experiencing demand for 5G related applications. Regarding memory, new memory fabs are under construction in Korea and China, and we expect investment in capital equipment for memory packaging to increase in 2021. The second driver is the adoption of new packaging technologies by our customers. In general, we see considerable efforts in tier 1 IDM and OSATs to adopt new packaging technologies and execute them to production. Adoption of new technologies require extensive use of inspection and metrology systems.
For example, logic CPU and graphics CPU shift to heterogeneous integration packaging. Continued transition of DRAM to wire bonding to 3D IC advanced packaging. Power devices shift to advanced packaging, specifically fan-out. The third is penetrating to new segment in the front end. We have already penetrated the front-end market in the past two years, and we continue to discover more segments that our system can provide suitable solutions for. To summarize, 2020 is shaping up to be another solid growth year for Camtek. It is important to stress that we are still seeing the coronavirus pandemic effect, which includes risks and uncertainties. Camtek is a dynamic and flexible company that can adapt to any development in the market, and to take advantages of the rapid changes in our industry.
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?
Thanks, 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 tables at the end of the press release issued earlier today. As Rafi mentioned, second quarter 2020 revenues were $37 million. It's a record quarterly revenue level, and an increase of 8% compared with the $34.3 million reported in the second quarter 2019, and 22% increase versus the previous quarter. Due to the fact that U.S. and Europe were heavily affected during the second quarter, Asia accounted for most of our revenues with 95% contribution. The rest of the world, therefore, only accounted for 5%. Based on orders on hand, we expect U.S. and Europe to pick up in the second half. Gross profit for the quarter was $17 million.
The gross margin for the quarter was 46.1%, versus 48.4% in the second quarter of last year, and 45% in the previous quarter. As we mentioned in our last call, in the first half of 2020, we have received orders for multiple 2D inspection machines with basic configurations with relatively lower ASP, which resulted in lower gross margins. We see a change in trend with orders for third quarter for machines with more advanced capabilities compared with the first six months. As Rafi mentioned, we expect continued improvement in the gross margin in the second half of the year. Operating expenses in the quarter were $10.7 million. This is compared with $9.6 million in the second quarter of last year and to the $10 million reported in the previous quarter. The increase versus the first quarter is mainly due to increased R&D activities.
The COVID-19 environment resulted in certain savings, mainly in travel expenses, which were partially offset by higher shipping expenses. Operating profit in this quarter was $6.4 million, an improvement of over 70% versus the $3.7 million in the previous quarter. Operating margin was 17.2% compared to 12.2% in Q1, mainly as a result of the increased volume. Overall, we expect a significant improvement in our gross and operating margin in the coming quarters. Net income for the second quarter of 2020 was $6.3 million or $0.16 per diluted share. This is compared to a net income of $6.7 million or $0.18 per share in the second quarter of last year and $3.6 million or $0.09 per share in the first quarter 2020. Turning to some high-level balance sheet and cash flow metrics, we generated $11.1 million in cash from operations in the quarter.
This quarter, we have received a significant amount of down payment from one of our customers, which positively affected our cash flow. Net cash and cash equivalents and short-term deposits as of June 30, 2020 increased to $101.5 million compared with $90.6 million at the end of March 2020. With the current business momentum, we expect revenues of $38 million-$39 million in the third quarter. It is important to mention that the $37 million reported in Q2 included approximately $3 million as a result of the COVID-19 related delays from Q1, as discussed in our previous call. Practically, our guidance for Q3 represents significant increase of around 15% over Q2. With that, 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. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Quinn Bolton of Needham & Company. Please go ahead.
Hi, guys. Congratulations on the nice results. Wanted to ask, just in terms of the demand environment, have you seen any disruptions from your OSAT customers from the Commerce Department actions against Huawei? One of your competitors onto last evening discussed seeing some order delays as a result of those Commerce Department actions. Just wondering if that's had any impact on your business, and then I've got a couple of follow-ups. Thanks.
Hi, this is Ramy. Yes, I saw the discussion last night. We have not seen any disruptions from our OSAT customers, any other customers. This specific discussion about Huawei, at this stage, has not affected our business.
Great. A second business-related question. You delivered two systems for panel-level inspection in the second quarter and expect more in the second half. Just wondering how meaningful can that panel-level inspection business become over the next couple of years?
It's hard to say because it depends who you ask. Some people believe it will be significant. Other people tend to think that it will be minimal. I think we need to wait and see at this stage, at least. If I look only 12 months ahead, I don't think it will be significant.
Okay. Great. For Moshe, you talked about some meaningful increase in gross and operating margins into the third quarter and I think beyond. Any chance you might be able to quantify what you think gross and operating margins, how they'll trend in the third quarter, and whether that trend will continue into the fourth quarter and into 2021?
I can. Typically, we don't provide specific gross margin guidance or operating margin guidance. Specifically, third quarter and fourth quarter that we are starting to shape up is populated with more favorable product mix and machines are coming with more capabilities. As a result, we see a better gross margin. Coming back to the more normal gross margin that we have seen in previous quarters. This obviously will affect our operating margin as well.
Understood. Lastly, you talked about your backlog giving you some visibility into the December and being supportive of a pretty healthy December quarter. Should we interpret those comments that the fourth quarter may be sort of flattish with the third quarter? How should we interpret those backlog comments? Thank you.
It's a bit too early for us to provide specific guidance for the fourth quarter. Currently it's looking good. I can't really quantify exactly how the fourth quarter is going to look like.
Okay. Understood. Thank you, guys.
The next question is from Craig Ellis from B. Riley FBR. Please go ahead.
Yeah, thanks for taking the questions. Team, congratulations on the real nice second quarter execution. The first question is a follow-up on the earlier gross margin inquiry. I think Camtek and most other companies were impacted by adjustments to COVID-19 with COGS costs, and certainly freight costs have been higher. Moshe, can you just help us understand to what extent those costs are lingering in the business in the third quarter and the fourth quarter, and to what extent are you seeing any abatement in any of those costs? That would be the first question.
Hi, Craig. There are some ifs and ands as you usually use the terms. The positive is that we have certain savings related to travel expenses, entertainment, conferences, and things like that. On the same time, there is a higher level of expenses mainly on the shipments. All in all, we do see some savings, and this will take us all the way through the end of the year or until the COVID-19 will be over.
Okay. Another final for a couple inquiries to Rafi. There was a customer deposit in the quarter that helped increase the cash balance above $100 million. Is that kind of customer deposit something that we should expect in the future, or is this more of an unusual circumstance that we shouldn't expect to recur either in the back half of this year or next year?
No, this is kind of a one-time event. This is why we obviously disclose this. Typically, we don't get a significant amount of down payments in advance. No, you should not expect something like this in the next few quarters.
Got it. Turning to some of the product dynamics and market dynamics, Rafi, you had mentioned the visibility for the fourth quarter. What I was hoping to understand is how that is shaping up from an end-use standpoint. You've had a real strong CMOS image sensor business year to date, High Bandwidth Memory's a little quieter. It sounds like RF is really picking up with 5G. Any color on what you're seeing bottom up for the fourth quarter would be helpful.
Yeah, I would say that in general, the mix application very similar. We see it about there are three major drivers we mentioned, is the advanced packaging, the CMOS image sensor, and the RF and RF related devices. This will almost take most of the capacity here.
Got it. As we look to calendar 2021, it seems like it should be just a real strong year for Camtek. In addition to what should be a doubling in 5G smartphone units from $200+ million, over $400 million, and the strong RF and CMOS image sensor demand that would imply. It seems like we've seen a lot of indications more broadly that High Bandwidth Memory on new memory capacity and new memory products is going to see an increase. If we were to look at calendar 2021, how would you, Rafi, rank the growth drivers in the business largest to less significant on a year-on-year basis from what you see today?
Look, as I mentioned before, there are a few, I would say, elements of parameter that affect our growth. It's the technology, it's the level of support, our positioning, install base. All of these, we are in very good position. The only thing that we cannot predict is the market behaviour. We definitely do not know what is this, all the coronavirus effect, what it happened with the demand in the industry. This is something that we cannot expect. As I mentioned, we are very flexible, and we are ready for any change, any trend. I think it's very important because if we believe that today we have a very large install base.
We are in very high position as tier 1 supplier to the industry. I think that this is a very important to grow. We are in very good position to take advantage of any demand. In general, as I mentioned before, we talk about advanced packaging, heterogeneous integration, memory, CMOS, RF. All this continue to grow up, definitely.
Got it. Then the last question from me, and it goes back to a clarification that I had to Moshe, but with a different spin. Very significant cash balance, congratulations. I think the $100 million plus is easily a record for the company. How should we think about the way the company will deploy that cash balance to create value for shareholders? I think in the past there have been some special dividends. The company's also in the past expressed M&A interest. How do we think about the priorities and how quickly the company could act on those priorities? Thanks, team.
Yeah, I think definitely the first priority before we consider dividend is to look for opportunities in the M&A. We don't want to go to any venture. Sometimes you make M&A, all the management invest all the effort and attention, and it can affect our potential to grow and to take advantage of the organic growth. We have to do it very carefully. We are looking for mature companies we don't have to do micromanagement, companies that show stable profit. This is okay for us. Also, of course, we would like to look for company in the semiconductor arena. We don't want to start with company that we have no clue about market, what they do, or things that we cannot contribute this.
We're very strong organization, and definitely we can take small, mid-size companies and give them a lot of tool to leverage their success. Right now, we are evaluating few companies. As I said, we do it very carefully, and we don't intend to make any venture by looking for startup or company that's at the stage of investing and losing money. This is not the type of M&A that we are considering.
Helpful color. Good luck, guys.
Thank you.
The next question is from Gus Richard of Northland Securities. Please go ahead.
Thanks for taking the questions. I just wanted to dig into the advanced packaging opportunities. Co-packaging, chiplets, CPU, GPU, High Bandwidth Memory, and fan-out. Could you sort of talk about where each of those are in terms of demand and sort of what you expect in 2021?
Well, Gus, this is Ramy. If we look at 2021, first of all, I think we talked about the memory that we believe there will be an opportunity in the memory space, in the bandwidth memory, and I think this will definitely be significant in 2021. The rest of the industry, this is a major segment this year, and will continue to dominate our business in 2021. I think the area of the chiplet or heterogeneous integration definitely is growing. People are getting into it. It's very hard to say at this stage how significant it will be, but it's definitely going to become significant over the next few years. We are in it, we understand it, and we are going to be a major player in this, I think.
Got it. Is there a higher intensity of inspection and metrology on the chiplet side of things versus fan-out and HBM?
Yes. There are additional steps that we don't see on HBMs and on the regular fan-out. I would say there is another level of metrology and inspection that doesn't currently exist. Yes, definitely, we think that this will be heavily involved in few steps of inspection and metrology, and that's no doubt an opportunity for us.
I would like to add a few comment. The heterogeneous integration, actually, you take very expensive component and put them together. Nobody want to take any risk that such module will be rejected because something that it doesn't work properly. This is why customer cannot skip any sampling inspection. They must make even 200% inspection to be sure that this module work perfectly. It's very expensive module. Talk about few hundred dollars cost per module. Definitely everyone needs to make inspection. It's not only inspection, it's inspection, it's metrology. There are many steps. The interposer, the chip itself, the HBM. There are many steps in this package that inspection and metrology is a must. This is why we believe that when this trend will going up, we will see a lot of machines doing this job.
Got it. On the panel-level inspection, you're sort of uncertain about the demand for that. Is that a function of panel-level versus wafer-level, or is that a debate over the proliferation of fan-out?
I tell you, in general, the panel level is something new for the industry. First of all, the beginning of this process, the industry need to wait for the equipment supplier to build the machine for this size of panels. Now, they focus on material. We talk about organic materials in most of the cases, organic material is not silicon. You cannot make the same density. The target is to make one, two micron line space. Almost it is impossible right now to make it an organic material. Today, most of the line space is about 10 micron. They claim to achieve five, eight micron soon, not yet. I think that the density is the key factor to increase the use of panel level. It takes time for the industry to know how to make it in high yield.
This is why we don't see the acceleration in this process. Customer now, I would say, in the learning curve, and they want to make a good yield, and probably after that they will go step by step. We don't expect to see dramatic needs for panel. It goes step by step, and I cannot even predict how long it takes. I believe that in the next few years, we will see more and more use of this technology, but it is not like silicon. Silicon, the industry know how to handle it very well. All the process, everything is actually is very experienced. Industry know how to do it. Panel is totally new. New equipment, new process, new material, and by definition, it will take more time.
Got it. That was very helpful. Then you mentioned in the front end that you were starting to trip over new applications for your equipment. Can you give a little bit of color? Are you moving from macro inspection to metrology in the front end? What are you seeing there?
Obviously, I don't want to get into too many details, but the applications where we are focused, we are focused in the area what we call the back end of the line. In that space, we get experience. We uncover other applications that customers are doing. It's around the macro, what you call the macro inspection, but not only macro inspection. Definitely, there is room to grow there.
Got it. Okay. That's it for me. Thanks so much.
Thank you.
Thank you. If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. 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 concluding statement, I would like to remind participants that a replay of this call will be available on Camtek's website at www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?
Okay. I would like to thank you all for your interest in our business. To our investors, I thank your long-term support. Unfortunately, we are unable to meet face-to-face during this challenging period, so we will continue to update you on our activities through virtual conferences. Thank you and goodbye. Any questions, operator? Concluding the call?
Thank you. This concludes the Camtek second quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.