Ladies and gentlemen, thank you for standing by. Welcome to Cantech's 2nd 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 contact Camtek's investor relations team at g k investor and public relations at 16466883559. 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 mister Ehud Health, of GK Investor Relations. Mr.
Helft, would you like to begin, please?
Yeah. Thank you, and good day to all of you. Would like to welcome all of you to contact 7th 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.
Raphael made Camtek's CEO Mr. Moshe Eisenberg, Camtek's CFO and Mr. Ram Dander Camtek COO. Rafael will provide an overview of contact results and discuss market trends in the second quarter of 2020, And 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 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. Stated 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 any information, future events, changes expectation or otherwise. Investor 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 for the effects of general economic conditions, the effects of the COVID-nineteen crisis on the global market on under in which we operate, including the risk of a continuing instructions to our and our customers' providers' business providers business partners and contractors business as a result of the outbreak and the effect of the COVID-nineteen pandemic.
Risk relating to the consideration of the strategic portion of Tantax expected in its Eastern countries, particularly China, from which we expect to generate significant portion of our revenues for the second half of twenty twenty, but also Taiwan, and Korea, including the risk of deviations from our expectation regarding timing and size of orders from customers in this country. Change industry market trends, reduced demand for services and products, the timing, driven of the new services and products and the adoption of 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 status in today's press release also cover the content of this conference call. In addition, during this after non GAAP financial measures will be discussed. These are used by management to make strategic decisions focused future results and evaluate the company's current performance.
Angel 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. And now, I'd like to hand over the call to Rafi. Cantec's CEO, Rafi. Go ahead, sir.
Hi, everyone. The 2nd quarter represents continued demand for our system primarily from Asia. Total sales in the 2nd quarter were $37,000,000, 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 3rd quarter as well.
The ongoing demand from our customers for various applications point to a strong 3rd quarter with encouraging backlog going into the fourth quarter. Our revenue guidance for the first quarter is $38,000,000 to $39,000,000 with persistent improvement in the profitability. This indicates strong performance in the second half of the year. We have significantly increased our market compet our market share into the inspection mainly because our system performance and competitiveness has been dramatically improved in all two d applications. A key element in our strategy is having in place local professional teams that can in this independently installed 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 efforts in providing appropriate technological solutions to our IBM Tier 1 customers who develop innovative packaging technologies in the field of the Fresenius integration. We have received a few initial orders and we believe we will soon receive multiple machines orders for production. We expect this segment to become meaningful to our business. Let me give you some highlights of the second quarter.
Taiwan in China continues to be the largest territory in the quarter. USA and Europe are starting to pick up. We have received multiple machine machine orders for over 30 system from 4 tier 1 costs. For 2 d applications, mainly for advanced packaging. Some of these machines will be installed in the second half of the year.
The 2 Golden Eagle inspection system for 600, the 600,000,000 extra panels that were installed and 2 Q1 customers in Q2 are running fan out panels in production. We expect to deliver additional packaging and panel, we continue to grow as this is the cost effective solution. So we will start planning our budget to work plan for year 2021. One of the most significant challenges faced in management during COVID 19 is to assess what will be the cost of business activity in 2021. Please base our strategy of achieving continuous growth on several drivers and trains.
The first is the increase in demand for semiconductor devices. The main drivers in our market are advanced packaging, memory, simultaneous sensor and RF filter for 5G smartphones. 5G is pushing demand for high end smartphone sales. Compared to previous generation, these 5G forms include more silicone, more advanced packaging and larger number of of RF chips in each form. As a result, we are experiencing demand for 5G related applications.
Regarding memory, new memory is fast are under construction in Korea and China, and we expect investments in capital equipment for memory packaging to increase in 2021. The second driver in the adoption of new package technology by our customers. In general, we see considerable efforts in Tier 1, in Tier 1 IVM and OSATs to adopt new packaging technologies and execute them to production. Aduction of new technologies require extensive use of inspection and metrology systems. For example, Logix's CPU and graphics CPU will shift to a tremendous integration package.
Continued transition of DRAM to wire bonding to 3dac advanced packaging. Or power devices shift to advanced packaging specifically panel. The third is penetrating to new segment in the front end. We have already penetrated the front end market in the past 2 years. And we continue to discover more segments that our system can provide suitable solutions for.
To summarize 2020, it's shaping us to be another solid growth year for Camtek. But it is important to stress that we are still seeing the coronavirus endemic effect. Which includes risks and uncertainties. Capitec 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 like to especially like to thank our employees for the dedicated world during this challenging time.
Moshe? Thanks, Arthur. 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 appearing the payment at the end of the press release issued earlier today. As Rafi mentioned, 2nd quarter 2020 revenues were EUR 37,000,000.
It's a record quarterly revenue level and an increase of 8% compared with the $34,300,000 reported in the second quarter of 2019 and 22% increase versus the previous quarter. Given the fact that U. S. And Europe were heavily affected during the second quarter, AGR accounted for most of our revenues with 9 further contributions. The rest of the world, therefore, on the accounted for faster bank, based on orders on hand, we expect U.
S. And Europe to pick up in the second half. Gross profit on the quarter was $17,000,000. Gross margins for the quarter was 46.1 percent 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 twenty twenty, we had received orders from multiple to the inspection machine, with basic configurations with relatively lower ASP, which will happen in your most markets.
We see a change in trend with order for 3rd quarter for machines with more base capabilities compared with the 1st 6 months. And as Rafael mentioned, we expect continued improvement in the gross margin in the second half of the year. Operating expenses in the quarter were $10,700,000. This is compared with $9,600,000 in the second quarter of last year, and to the $10,000,000 reported in the previous quarter. The index versus the first quarter is mainly due to increased R and 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 the quarter was $6,400,000, an improvement of over 70% versus the $3,700,000 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 operating margins in the coming quarters.
Net income for the second quarter of 2020 was $6,300,000 or $0.16 per diluted share. This is comprised to a net income of $6,700,000 or $0.18 per share in the second quarter of last year and $3,600,000 or $0.09 per share in the first quarter 2019. Turning to some high level balances and cash flow metrics, we generated 11 point $1,000,000 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 $101,500,000 compared with $90,600,000 at the end of March 2020.
With the current business momentum, we expect revenues of $38,000,000 to $39,000,000 in the first quarter. It is important to mention that the $37,000,000 reported in Q2 included approximately $3,000,000 as a result of the COVID 19 related delays from Q1 as discussed in our previous call. So practically, our guidance for Q3 represents significant increase of around 15% over Q2. And with that, Rafael, and myself, we'll be open to take your questions.
Ladies and gentlemen, at this time, we will begin please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers. The questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Quinn Bolton of Needham And 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 discussing some order delays. As a result of those common department actions. Just wondering if that had any impact on your business?
And then I've got a couple of follow ups.
Hi, this is Wami. Yes, I saw the discussion last night. We have not seen any disruption change from our answered customers, any other customers. And this specific discussion about Huawei, at this stage, it's not affected by our business.
Great. And then a second sort of business related question. You delivered 2 systems for panel level inspection in the 2nd quarter and expect more in the second half. Just wondering how meaningful can that panel level inspection business to come over the next couple of years?
And it's hard to say because it depends who you ask. Some people believe it was insignificant, Other people tend to say that it will be minimal. So I think we need to wait and see at this stage at least if I look only 12th, months ahead, I don't think it will be significant.
Okay. Great. And then for Moshe, you talked about it's meaningful increase in gross and operating margins, into the third quarter and I think beyond. Any chance you might be able to quantify what what you think, gross and operating margins may how they'll trend in the 3rd quarter and whether that trend will continue into the 4th quarter into 'twenty one?
Hi, Craig. Typically we don't provide specific gross margin guidance or operating margin guidance. Specifically, you know, 1st quarter 4th quarter that we are starting to take up is populated with, more, more favorable product mix with more and machines are coming with more capabilities. And 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 is probably we obviously will affect our operating margin as well.
Understood. And then 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 4th quarter maybe sort of flattish with the 3rd quarter? Or how should we interpret those backlog comments?
It's a bit too early for us to provide specific, guidance for the fourth quarter, but currently, the, it's looking good. I can't really quantify exactly how the fourth quarter is going to look like.
The next question is from Craig Ellis from B. Riley FBR. Please go ahead.
Yes. Thank taking the questions and 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-nineteen 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 4th quarter?
And to what extent are you seeing any abatement in any of those costs That would be the first question.
Hi, Craig. It's, there are some ins and outs 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 are higher level is there a higher level of expenses on this, mainly on the shipments, So all in all, we do see some savings and and this will take us all the way through the end of the year or until the the COVID 19 will be over.
Okay. And then another fine for a couple inquiries to Rafi. So there was a customer deposit in the quarter that helped, increase the cash balance above 100,000,000 Is that kind of, customer deposit something that we could we should expect in the future, or is this more of an unusual circumstance that we shouldn't expect to occur either in the back half of this year or next year?
Well, this is kind of a one time event, and this is why we obviously disclosed this typically, we don't get a significant amount of down payments in advance. So no, we should not expect, something like this, in the next few quarters.
Got it. And then, 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, 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 is a little quieter.
It sounds like RF is really picking up with 5g. Any color on what you're seeing bottoms up for the fourth quarter would be helpful.
Yes. I would say that in general, the mix application is very similar. We think about there are 3 major drivers, as we mentioned, is the advanced packaging, the CMOS image sensor and RS and RF related devices. This will almost take most of the capacity here.
Got it. And then as we look to calendar 21, you know, it seems like it should be just a real strong year for Camtek. Because in addition to what should be a doubling in 5 g smartphone units from 200+1000000 over 400 and the strong RF and CMOS image sensor demand that would imply. But it seems like we've seen a lot of indications more broadly, but high bandwidth memory on, on new memory capacity and new memory, products is going to see an increase. So if we were to look at calendar 21, how would you roughly 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 the level of support, our positioning, install base, all of this, we are in very good position. The only thing that we cannot predict is the market behavior. We definitely do not know what is this, all the corona virus effect to what keeps happening with the amount, the demand in the industry This is something that we cannot expect. But as I mentioned, we are very flexible, and we are ready for any any change, any trend.
And I think it's very important because if we believe that today, we are at a very large installed base. We are in very high position as tier 1 supplier for the industry. I think that this is a very important through growth. We are very in good position to take advantage of any, any demand. So in general, as I mentioned before, we talk about advanced packaging, the program is integration, memory, CMOS RF, All these continue to grow up definitely.
Got it. And then the last question for me, and it goes back to a clarification that I had to notate that with a different spin, very significant cash balance. So congratulations I think $100,000,000 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 is also in the past breast M and A interest. How do we think about the priorities and how quickly the company could act on those priorities?
Yes, I think definitely the first priority before we consider easy at the hand is to look for opportunities and M and A. But we don't want to go to any, you know, joint venture. We, you know, sometimes you make M and A and the management, invest all the efforts and attention. And it can affect in our potential to grow and to take advantage of the organic growth. So let's do it very carefully.
We are looking for mature companies companies, you don't have to, to do micromanaging land. Companies that, show stable profit This is okay for us. And also, of course, we would like to look for company in the semiconductor arena. We don't want to start this company that we have no clue about market, what they do. I think that we have no, we cannot contribute this.
Because a very strong organization and definitely we can take small meat sized companies and lever and, and give them a lot of tool to leverage their success. So right now, we are evaluating few companies But as I said, we do it very carefully and we don't intend to make any venture by looking for start out the company at the stage of investing and losing money. This is not the type of M and 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.
Yes. Thank 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, Gautam, this is Rami. If we look at 21, first of all, I think we talked about the name of the 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. And the rest of the industry, I think this is a major segment this year, and we'll continue to dominate our business in 2021. I think the area of the triplets or the Trogena 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. And we are, in it, we understand it, and we are going to be a major player on this, I think.
Got it. And is there, a higher intensity of inspection and metrology on the chiplet side of things, versus fan out and and HBM?
Yes. And there are additional stakes that we don't see on the HDNs and on the regular per month. So I would say there is another level of, of mutuality and inspection that doesn't currently exist. So yes, definitely, we think that this will be heavily involved in 2 steps of inspection and metrology, and that's no doubt in opportunity works. I will, I would like to add few comments.
There is no evidence integration. Actually, we take very expanded expensive component and put them together. So nobody wants to take any risks that such module will be rejected because some, something that it doesn't work properly. So this is why customer cannot skip any sampling inspection they must make even 200% inspection to be sure that this model works perfectly. Very expensive models talk about $200 cost per module.
So definitely, everyone needs to make, inspection. It's not an inspection. It's inspection of new technology. The main step, the proposal, the chip itself, the hybrid memory. So there are many steps in this package that inspection of mythology is a must.
So this is why we believe that when this trend is going up, we will see a lot of machines doing this job.
Got it. And then 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?
Now I said, in general, the panel level is something new for the industry. First of all, there's the beginning of this process, you know, the industry needs to wait for the equipment supplier to build the machine for this size of panels. Now the focus on materials, we talked about organic materials in most of the cases. And organic material is not silicon. You cannot make the same density.
The target is to make 1, 2 micro 9 space. Almost it is impossible right now to make it an organic material. So today, most of the line space is about 10 microns. The the claim to achieve 5, 8 microns soon, but not yet. So I think that the density is the key factor to increase the use of fund level.
And in textile, in sector 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 will create in the learning curve and they want to make a good yield and probably after that, the reverse step by step. So we don't expect to see, you know, dramatic needs for panel It's those step by step. And I I cannot even predict how long it takes.
I believe that in the next 2 years, we will see more and more use of this technology, but it is not like silicones. Silicones, you know, the industry know how to handle it very well. All the process, the the everything is is actually very curious. So we need to know how to do it. Talent is totally new, new equipment, new process, new materials, And by definition, it takes more time.
Got it. Got it. That was very helpful.
And 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 defect to metrology in the front end? What, what, what are you seeing there?
And, you know, obviously, I don't get into too many details, but the applications that we are focused we are focused in the area, what we call the back end of tenure. And in that, in that space, we is more and we get experience we uncover other applications that customers are doing. It's around the macro, what you call the macro and space inspection, but not only macro inspection, definitely there is room to go there. Thank you.
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 contact's website at www.camtech.com. Beginningtomorrow. Mr.
Amit, would you like to make your concluding statement?
Okay. I would like to thank you all for your interest in our business and 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. You're 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.