Ladies and gentlemen, thank you for standing by. Welcome to Comtech's 2nd Quarter 2019 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 Contacts 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 Mr. Kenny Green of GK Investor Relations. Mr.
Green, would you like to begin, please?
Thank you, and good day to all of you.
I'd like to welcome all
of you to Camtek's second quarter 2019 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. Raciani, Camtek's CEO, Mr. Moshe Eisenberg, Camtek's CFO and Mr. Rami Langer, Camtek's COO.
Rafi will provide the overview of Camtek's results and discuss the market trends. Moss, you will then summarize the financial results of the quarter. We will then open the call to take your questions. Before we begin, I would like to remind all our estimates that certain information provided on this call are internal company estimates unless otherwise specified. This call may also contain forward looking statements.
These statements are only predictions and may change as time passes, Statements on this call are made as of today, and the company undertakes no obligation to update any of the forward looking statements contained, whether as a result of new information, future events, changes in expectations or otherwise. The best is our reminder that actual events or results may differ materially from those projected, including as a result of change industry market trends reduced demand for services and products, the timely developments of new services and products and their adoption by the market, includes 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 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 events and evaluate the company's current performance.
Managing believes that the presentation of non GAAP financial measures is 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. And with that, I'd now like to hand the call over to Mr. Rafi Ahmed Camtek's CEO. Rafi, please go ahead.
Okay. Good morning and thank you for joining our call today. Cam's second quarter results reflect our strong track record of execution. The company showed record revenue of $34,300,000 in the second quarter, up 12% over Q2 of 2018, with $7,000,000 in operating profit presenting the margin of over 20%. In addition, the company generated $7,300,000 in cash from operations break our total cash position to over $85,000,000.
The healthy financial position allows the company to share the worth of our success with our shareholders by distributing 6.5 $1,000,000 in dividend. I would first like to stress a few events during the second quarter. We closed the Chroma transaction and received $16,000,000 and have begun the corporation. In addition, we received an earn out payment of $1,300,000 from the sales of the PCB division. Regarding our ongoing business.
The transition of the DRAM to advanced packaging is ongoing. The key examples was the major author we recently received and announced from a market leader in this space. We have started installation in the first quarter and during the third quarter. We will complete the installation of the machine. This order eventually amounted to approximately $1,000,000.
We continue our efforts to expand our presence in the Rx space. A major achievement this quarter was the penetration into a new RF customer. Where we installed system at two different locations and we have been qualified for production at both sides. This machine will support the top the 5G ramp up. In the Advanced Packaging segment, We installed multiple machines, a Tier 1 OSOS for fan out application with support a major global semiconductor company.
Another significant milestone we have achieved in the field of phase out is receiving an order for inspection machine for 24 by 24 each value. We expect to install it within the next few months. In the single team assessal space, The number of cameras in smartphone continue to increase and smaller exercise acquiring new capabilities and more inspection. Our CS business shows strength this year. We have received multiple orders for systems for this segment, which will be installed in Q3.
The Chinese market is continuing to increase capacity as we discussed in previous calls, and we expect a similar trend to continue in the second half of the year. Orders in China are coming from various segments, including advanced packaging, new customers for front end macro inspection, as well as new customers operating new facilities and purchasing a first tool with potential for further expansion. Overall, 2019 is shaping us to be a challenging year for the industry, driven by slower demand for end user growth. Although, the trade conflict between U. S.
And China between Japan and Korea contributes to the uncertainty in the global economy in general and specifically to our industry. This uncertainty means most of our customers are only ordering equipment for short term production needs and with shorter lead time. As a result for Q3 20 team, we expect solid level of revenue between $31,000,000 $33,000,000. In our industry, demand for equipment is driven not only by capacity, but also by introduction of new technologies, as shown by our impressive results in the first half of twenty nineteen. During this period, we achieved revenue of $68,300,000, 18% higher than the first half of twenty eighteen, which was a record year for Camtek and the semiconductor industry as well.
This performance demonstrates Captek's strong position in the market. In general, market drizzers supporting demand for our equipment has not changed. Our addressable market continues to grow as a result of the increased semiconductor devices for AI, 5g, Vistata, automotive, and others. I see a packaging design for the adult applications are more complex and has smaller geometries, which require inspection and metrology on inspection machines, with higher optical modification and higher scanning accuracy, translating to more tools for production. Furthermore, advanced packaging is key to the expansion of these applications and continues to be the fastest growing segment.
We are well positioned in this market diversified with approximately 100 active customers worldwide and an installed base of over 1000 systems. We are gaining market share and penetrating new market segments such as the front end. In summary, we have developed new capabilities and expected our penetration into key customers and are prepared for the demand that will come with the introduction of new products. Our position in the market is very strong and we are ready With that, I would like to hand over to Moshe for the more detailed financial discussion of the financial results. Moshe?
Thanks, Rafi. Camtek showed strong results in the quarter. In line with our guidance is revenue up 13% and operating margins up 42% year over year. This growth demonstrates the operating leverage inherent in our business model. 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.
2nd quarter revenues came at $34,300,000, up 13% year over year, and an impressive 18% growth for the first half of the year. The results were driven by strong demand across all our segment and applications, with 93% of sales from Asia. Gross margin for the quarter was 48.4% versus 49% in the second quarter of last year. The fluctuation in the gross margin is mainly a function of the product or sales mix delivered as well as the leverage we have in our financial model. I note that this quarter, the gross margin was on the lower end of the range.
We typically expect For the year, as a whole, we see the margin averaging around 50% level. In longer term, as we grow our revenues, we expect that our margins will continue to trend upwards. Operating expenses in the quarter were $9,600,000, which is below the $10,000,000 in the second quarter of last year. Operating profit in the quarter was $7,000,000, an increase of 42% over the $5,000,000 reported in the second quarter of last year. Operating margin was 20.5 percent, a strong improvement versus the 16.3% in the second quarter of last year.
Net income for the second quarter of 2019 was 1000000 or 18¢ per diluted share. This is compared to a net income of $4,600,000 or $0.13 per share in the second quarter of last year. With the completion of the Chroma transaction in mid June, the total number of shares has increased by $1,700,000 and will impact earning per share from the first quarter onward by about 2% to 3%. Turning to some high level balance sheet and cash flow metrics. We generated $7,300,000 in cash from operations.
Our quarter end cash balance was $85,300,000 versus $54,900,000 at the end of 2018. During the second quarter, we received $16,000,000 cash payment from Chroma and an additional $1,300,000 in earnout payments from our sale of the PCB business last year. In terms of guidance, we expect 3rd quarter revenues to be between $31,000,000 $33,000,000. And with that, Rafi, Rami, and myself, we'll be open to take your questions.
Thank if you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please standby while we pull for your questions. The first question is from Craig Ellis of B. Riley.
Please go ahead.
Thanks for taking the questions and gentlemen congratulations on good second quarter execution in this tough environment. The first couple inquiries were just clarifications on the quarter and that guidance. So in the quarter, Moshe, you were clear that the year on year variance in gross margins was mixed. If we looked at it on a quarter on quarter basis, Is it the same thing, or was there potentially anything that was more of a one off in, in the quarter, the, variance of 1Q to 2Q?
No, I mean, it was we definitely don't see the gross margin, a trend as a trend, but more as a sales mix that, took place in the quarter And it was just a mix of things that pushed the gross margin down versus last quarter.
Okay. That's helpful. And then with respect to the view for the third quarter with the midpoint at $32,000,000 Can you just help us understand some of the gives and takes, across the different areas of the business? Are are would you expect, the business to be down moderately across image sensors and high bandwidth memory means, etcetera, or are there some parts of the business that you'd expect to grow while others declined? Just some granularity on the underlying dynamics, Q to Q would be helpful.
Allow me, could you answer for me?
Yeah. I will answer that. I don't think that there is a major difference in the in the various segments that we address in the market. I think we also said it in the text, In general, we are selling, and so in this quarter and during this quarter, we have sold more links to the same applications, The question is, and I think last year's over rate is the what we have, looking forward is the visibility. And the lead times with customer are requesting.
So people are not just ordering what they need for the short term. And they are very hesitant about placing larger orders. They will wait until the last unit. And this will differ basically the next quarter from the 1st 2 quarters or the 1st or the last few quarters where customers were very confident of the business and order the share also anticipating the growth. This is the major difference.
From applications point of view, we are seeing more or less the same application, the same mix across the market. And I think Rafi mentioned the from the DRAM continues moving to Advanced Packaging We saw orders for fan out applications. The series images strong, which we got orders from the RF. So There isn't here a segment that we can say is different or we see different as we move along.
That's helpful, Rami. Thank you so much. And just to clarify that comment, is the lower visibility that you're getting from customers something that's changed very recently, for example, as a byproduct of, of the threat that the further increase in U. S. Import tariffs on China, or is that something that just started to emerge in the business through the month of July and has persisted in August?
You know, it's hard for me to say whether it's July or June, you know, but it's definitely, it's, it's very recent. That we saw the markets becoming so volatile. It wasn't like very simple. I can say that when we talked 3 months ago, it wasn't like that. And there's definitely more volatility now to explain what is exactly the reason whether it's the trade wars or other things that are wanting our customers, I think it's everything to get there.
Got it. Thank you. And then now to some forward looking questions that are more intermediate term. Ravi, you've mentioned on this call on previous calls that high bandwidth memory was an area of strength in the business and it's well exemplified by the $20,000,000 order that you mentioned. The question is as you look at the customer base and their intermediate to longer term plans in this area, what inning are we in with the strength that you're seeing in high bandwidth memory, are are we still early in adoption or are we moving into ladder stages or somewhere in between?
I'm not sure about taking out the hybrid memory by itself. Definitely, I would say we can see in general the trend. We are definitely understand the benefits and the advantage of all these new packaging technologies and we are very confident that all of them will ramp up very soon. It is going to be Q4, Q1, Q3 I don't know yet. But, but, you know, it is a must because it brings a lot of benefits and we and we face a lot of investment in the R and D to make this process stable with high yield.
So when it's moved to production, not easy for us to predict, we see a very limited NPLs of the overall decision. But definitely, we are very confident today.
Let me elaborate a little bit your question regarding the high bandwidth memory. Where are we in moving in memory, in DRAM, moving to advanced packaging? We're We're in the we're not at the beginning, but we are definitely not at the end. We're somewhere in the middle. So I don't know if the ratio is about 40% or 50% we are, but we are more or less in this range.
There is definitely in the view on space a lot more to go until this move from the wire bonding to advanced packaging will be completed.
And we also, by the way, we start to see the beginning for NAND to adapt some technology, not only 0. I don't know how the accelerated process, but definitely we see it also with demand.
Got it. And then moving on RF and your comments about a new customer there, for a 5 g application. Could you just, provide us some visibility into what you'd spec next year as as we move into the 1st wave of real, significant, smartphone rollouts for most manufacturers. I think a lot of the industry sources I've seen are are looking for something around 150,000,005 G units, but what can RF mean for Camtek next year if we're moving to that level of production, in smartphones?
Romy, could you
Yeah. We are definitely, this is going to be a major setting for us. And I see, from our predictions point of view, we expect that there are going to be multiple machines ordered from several customers. So definitely, this is something that we believe will contribute to the strength of 2020.
Thank you. And then lastly for me, just on cash, that company has done an excellent job, positioning itself for a stronger cash position. A couple of questions. 1, there was modest help from an earnout. Are there any other potential earnouts coming And then, there's a special dividend coming in the quarter.
But beyond that, how should we think about how the company plans to deploy it's $85,000,000 in cash. Thanks guys.
With respect to the earnout payment, which is the final earnout payment, this is actually a fee earn out payment adjusted, by the working capital ratio that we have agreed upon in the So we have enjoyed the full benefit of it. With respect to the dividend, the dividend will be paid early September. And at this point, you know, our priority in terms of the cash is to the to fold. One is to try to utilize, you know, for potential M and A. And the other one is, looking, considering dividend from time to time as we find it unnecessary or suitable for the shareholders.
Thank you.
Thanks, Matt.
The next question is from Quinn Bolton of Needham And Company. Please go ahead.
Hey, guys. Congratulations on the on the nice results. Wanted to just just follow-up on the image sensor business. Some of the DRAM guys, especially the Koreans have talked recently about potentially taking some of the older DRAM capacity converting it over to image sensors. Wondering if you see that in the near term order book or whether that's a tailwind for you, but a little bit further out.
And then I've got a couple of follow
Robbie, please.
Yes. Look, in general, we don't see the capacity. We're not aware whether the capacity was moved from DRAM to CMOS image sensors. Of course, we understand that some of those that some capacity can be moved from from one product to another. And we definitely see the increase in the capacity.
And we mentioned that our single image sensors is strong on a global basis. And so, yes, we see the increase in CMOS image sensors, whether it's coming from the deal on the old deal on capacity that was converted to CMS image. So that's something that we are not exposed to.
But if they're converting older DRAM, I assume that that's probably not DRAM going into high bandwidth memory applications.
So it takes that
they were doing that. That's probably a net positive because they would need the equipment on the CMOS image sensor side, right?
Of course, I mean, you're talking about totally different nodes. When you talk about simultaneous sensors, they do not need the nodes that are acquired on the DRAM, on the modern DRAM, the latest DRAMs that are going to be very extreme dynamic. So definitely that's, that's a different in the, in the signals, in the basic seamless process that is different I mean, Sinos image sensors and DRAM. The older DRAM with some modifications can be appropriate for the current simultaneous sensors. And that's something very technical.
Second question, just wanted to follow-up on Craig's question around the RF application for 5G. Can you give us a little bit more detail, is that for component level? Is that for module level of, assembly? And if it's module, are you just seeing a greater number of modules or advanced packages going into 5g phones, or is there a particular, driver as we can work from 4g to 5g?
From our point of view that we see, we are not we are talking about the device map. And what we see is a lot more rate for and devices going into the 5G compared with the 4G. Video, it sets an average age limit. It's many more filters that are required for the larger bandwidth. With this, we'd obviously go into more modules and safely.
But from our point of view, it would be the number of wafers that we are going to inspect is going to be significantly larger.
And those are more filters. The application is more filter rather than say PAs or switches or is it across all three of those component types?
If you cross all those 3 of them, but we were primarily referring in this call to photons.
Got it. Great. And then last question from what the other equipment vendors has noted. I know there's uncertainty in China with the trade situation, but some of the indigenous Chinese manufacturers have potentially accelerated some demand. Just wondering if you could talk about what seeing on the China front going forward, whether you've seen any sort of pull ins from China here into the second half of twenty nineteen?
You want to discuss it last year?
No, no, it's good to you.
Look, in
general, Let me see our Chinese business is very stable. It's very stable. It has shown global throughout the last few quarters and it's continuing to grow. I don't see a major change in the, in the China market. Or premium, it is stable.
We see a lot of new customers, a lot of new faces that are altering machines that will we expect we'll add a multiple machines as time goes by. Overall, the China, semiconductor market at this stage is healthy. The
next question is from Gus Richard of Northland Securities. Please go ahead.
Hi. Thanks for taking the questions. Could you talk a little bit about your manufacturing cycle time as your customers try to pull in short, shorter lead times in terms of equipment delivery and, sort of, you know, do you you know, do you configure the system right before it goes out the door? How, you know, how difficult is is that change gonna make, predicting revenue and shipments in the quarter?
Well, first of all, Gus, this is in general, our business is to provide machines at short time. And our production is built around the capability to be able to configure machines very quickly, up to a certain point. And the question is how short is the lead time? And in the past, we've been very successful to come up with these machines and provide all the alignments from our customers. What is happening today because of the short journey times that's limiting our visibility And of course, this is the reason for the forecast that we've been with, we've given for the next quarter.
In general, the ability and I would say the lead time is very, is in line with the complexity of the issue. If the machine is not very complex, obviously, we'll be able to provide them at very short lead times. If the complexity is higher, Obviously, this will require some additional time and this would make the differences. And I would say in general, This is the rules or how we manage our operation just in a few sentences.
Yeah. I will back in one more sentence about it. If you have to remember that In our arena, we face, it's a relatively many new technologies of packaging. And some of them already maturing us to start to move to production. Now when we talk about the new technologies, it also means we have to make sometimes special development for machine, or special feature or special optic parts or special mechanical parts, So, and we have to do it still with very short delivery time.
So it's not just to produce or to build a machine some time in parallel, we have to develop the solution for the customer. So this makes it more tough. And and this is the reason why, our visibility is not clear as in the past because we have to put Another factor to the question was to consider if we can complete the R and D on time and to ship it during the coming quarter. So this is also part of the difficulty we faced because the amount of new technologies
I I understand. And and then just sort of can you give a a reference to what your lead times are currently or or, you know, what what sort of demands customers are making? You know, is it, you know, 4 weeks, 8 weeks?
I would say in general, most of the customers talk between 6 to 8 weeks. This is the expectation today.
Okay. And then, on the high bandwidth memory, are you working with all the major DRAM manufacturers at this point?
Yes. We are. Okay.
And the OSAT that is doing that ordered some equipment for fan out. Is that also for a mobile processor, or is that another, another application? It's
well
I would be very hesitant to answer because we may disclose some information that we're not supposed to. So I prefer, you know, not to, not to answer the question.
Not specifically for our customers. In general, in general, we can see fan out moving I would say, more rapidly, 2 power devices because probably, you know, the complexity is not as if you go to different application, some other, for logic and more complex application, Not everyone can do it. And this is, made only by by a few customers that developed their own packaging. Technology. But if we talk about in general, most of the offset that they try to make fan out I would say that entry level is more for power devices, and then they will continue and develop it to more applications.
Got it. And then, are you seeing any demand for triplets at this point, triplet packaging?
What's what?
Are you seeing any demand for chiplets, you know, effectively some of the microprocessor guys are moving to a heterogeneous, processors with multiple dye, you know, on a on a silicon substrate
You're talking about what we call 2.5.
Yes.
2.5 BAC. Yes, definitely. That's a market that is growing and doing these applications. And it's definitely a market when you talk about advanced packaging that's going to be a big market.
Got it. Alright. Thanks. That's all for me.
Thank you. The next question is from Craig Ellis of B Riley. Please go ahead.
Thank you for taking the follow-up question and appreciate all the answers thus far. The question is on one of the areas of the business where there's been some expansion this year and it's on front end macro inspection. 1, can you just give us an update on how that's progressing And then to put some of the earlier comments around 5 g and customer expansion in the business next year in in better context, Can you help us understand as we look to 2020 what the incremental opportunity is in, in the RF customer expansion that you're seeing, versus what you've been accomplishing in front end macro. Thanks.
Rami, maybe you start. I would start. Yes.
So first of all, on the front end macroings section, we are, we have been able to, we discussed, I think, last year, We had the first big order and since then, we were able to penetrate into multiple new customers. And definitely, the macro inspection is continuing to grow. And we see this as a viable busy business moving in towards 2020. That's definitely a good news, our machine outperforming way, and we are able to maintain very nice market share obviously, it's only beginning, but I think we can still further grow in this business. Regarding the I think I, I, I mentioned, I'm going to be very careful Craig of putting an accurate number But definitely, the hours of filters is going to be, and as I said, it's going to be multiple machines for multiple customers.
And is that good enough or when you're trying, you would like me to quantify it more?
That's good enough. We'll follow-up on
it in 3 months as we get closer to 2020 and hopefully we can quantify it a little bit. More specifically. I'll ask one more question, and I wanted to go back to a prepared remark, with respect to the Chroma ATE transaction closing. One of the things that seemed appealing with that transaction was the opportunity for some incremental revenue streams either with licensing or non semi revenues. And I'm just hoping the team can give us an update on anything that you're seeing as you begin some work with Chroma ATE.
Thanks guys.
No, Raham. You, I think you have to start with it. To start with this trauma.
On on on the chroma, we have started the corporation, as we mentioned. Until we will see revenues from this agreement, I think it will take some time. And we've started the work. I would expect it at least to be in the latter part of 2020 where we will be able to assess this business. I would not, I don't think this is something in the, in the short term that we'll be able to really under send and give a really forecast for what we expected.
Yes, there is an opportunity, but it will take a little while.
Thanks, guys. There are no further questions at this time. Before I ask, Mr. Amit, To go ahead with his closing statement, I would like to remind participants that a replay of this call will be available on Comtech's website, www.comtech.com, beginning tomorrow. Mr.
Amit, Would you like to make your concluding statement?
Okay. I would like to thank you all for your continued interest in our business. Look forward to talking with you again next quarter. Thank you and goodbye.
Thank you. This concludes the Comtech Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.