Ehud Helft - IR Rafi Amit - Chairman & CEO Moshe Eisenberg - CFO.

Edwin Mok - Needham Craig Ellis - B. Riley Gregory Weaver - Invicta Capital Management.

Ladies and gentleman, thank you for standing by. Welcome to Camtek's First Quarter 2016 Results Conference Call. All participants are at 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 Relations or view it in the news section of the company's website, www.camtek.co.il. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, please begin..

Thank you, operator and good day to all of you. I would like to welcome all of you to Camtek's first quarter 2016 results conference call and I would like also to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, Camtek's Chairman and CEO; and Mr. Moshe Eisenberg, Camtek's CFO.

Rafi will provide an overview of Camtek's performance and strategy and Moshe will discuss the financial results of the quarter. We will then open the call to take your questions. Before we begin, I would like to remind our listeners 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 this forward-looking statements contained whether as a result of new information, future events, changes in expectation or otherwise.

Investors are reminded that actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for services and products, the timely development of new services and products and their adoption by the market, increased competition in the industry and price reductions, as well as due to other risks identified in the company's filings with the SEC.

Please note that the Safe Harbor statement 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 specific 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. I would like to hand over the call to Mr.

Rafi Amit, Camtek's Chairman and CEO. Rafi, go ahead, please..

Thank you, Ehud. Hello to everyone and thank you for joining us today. We are pleased with our top-line performance in the first quarter, which is typically the weakest quarter of the year. Our revenue grew 12% over Q1 last year and this strong year were yield growth combined with our expected sequential improvement in the second quarter.

Gross margin in this quarter was lower than Camtek's usual range due to specific turnkey project for the PCB strategic customer involving third-party automation equipment with lower profitability. We expect the gross margin to return to the typical range already in the second quarter.

Overall, looking further in 2016, we expect continued double digit gross from our semiconductor business, combined with a strong and stable PCB business. Our semiconductor inspection and metrology business since in Q1 remained robust, growing by 19% over those of the first quarter last year.

We expect this business to exhibit strong annual double digits growth and we believe it will be the main growth driver for Camtek's business in 2016. This is in spite of the generally flat and a volatile spending environment by the semiconductor markets and all, and the first quarter which typically is the weakest one of the year.

The volatile environment is causing our customer to delay their buying decisions resulting in shorter delivery time and we have organized our manufacturer infrastructure to respond to this challenge. However, growth continue to be evident in the major market segments from which we focus the advance packaging, CMOS image sensor and MEMS.

We are continuing to dominate the 3D metrology segment in the advanced packaging market and in parallel, our new 2D inspection capabilities which we introduced at Semicon China only two months ago have already contributed to our revenue.

The new Eagle version for 2D applications that is utilizing new technology is expected to enable us to take significant market share, especially in the 2D advanced packaging market segment. We are very active in the fun-out market segment which is one of the gloss edging of the advanced packaging.

We have developed special capabilities for this application – some of which we are leveraging our PCB inspection core competence. We are expecting to shift multiple systems to our customer at the rant production in 2016 and beyond.

The CMOS image sensor and the MEMS market are presenting exciting opportunities to Camtek and the demand is continuing to grow. We are getting repeat orders from our customers that are expanding their capacity and we expect this strength to continue in the next few quarters.

We continue to increase our market share in Asia, especially in OSAT which was historically one of our weak points and today we are doing business with all the major OSATs and foundries.

While Cap expanding glanced at some of the major industry player is mostly flat versus last year, the market segment we focus on are less sensitive to overall Cap expended trend.

In the specific segment for which we are a major player, in particular the advanced packaging segment, we expect our market share to grow as well as the overall market to expect. We therefore expect our semiconductor segment to continue to grow and we expect to see continued double digit growth over last year.

In the PCB market, the AOI business showed good performance in Q1 despite the Chinese New Year which typically almost in spending for a few weeks in the quarter. We also took advantage of strategic opportunities to entrench our position as a leading supplier in this segment. In general and specifically in the IC substrate segment.

Our high end customer are investing a lot of efforts in new technologies for advanced IC carrier and embedded IC. We are supporting the R&D efforts with 2D and 3D integrated AOI and new features.

With regard to the Gryphon as I mention, we continue to take feedback from our four customers and make improvement and adjustment to our product, enabling Gryphon to fit most of the customer's requirements more effectively. We are focusing our resources to meet these particular customer's demands and their end-user requirement.

At the same time, we are looking for a strategic partner to help us advance this business. And with that, I would like to hand over to Moshe for more detailed discussion of the financial result of the quarter.

Moshe?.

having Q4 2015, Taiwan were the strongest region during the quarter representing approximately 35% of overall revenues. China was 28%, Japan was 8%, Korea was 7%, rest of Asia 15%. European sales we're 5% and U.S. sales were 2%. Gross profit for the quarter was $10.3 million representing a gross margin of 42.3%.

This is compared with the gross profit of $9.8 million representing margin of 45.2% in the first quarter of last year. The decrease in the gross margin is related to a turnkey project to a strategic PCB customer at a relatively low margin. Operating expenses in the quarter were $9.9 million.

This is compared with $8.6 million in the first quarter of last year. Operating expenses were the same level as those of the prior two quarters and reflect our R&D efforts to take advantage of some of the strong opportunities we are currently seeing in our target market, which will be reflected in further increase in R&D expenses in Q2.

Operating profit in the quarter was $451,000, a decrease of 62.3% over the $1.2 million reported in the first quarter of last year, which as I mentioned before, it is driven by the lower gross margin. Operating margin was 1.8% versus 5.5% in the first quarter last year.

We know that approximately $1.5 million in quarterly operating expenses are attributed to our digital printing and affecting our overall profitability. Net income for the first quarter of 2016 was $193,000 or $0.01 per diluted share. This is compared to a net income of $334,000 or $0.01 per diluted share in the first quarter of last year.

Cash equivalent short and long term for restricted deposits as of March 31, 2016 were $33.7 million. Out of which, $7.9 million are restricted deposit. This compared with $38.7 million as of December 31, 2015. The company generated a negative operating cash flow of $4.5 million during the quarter principally due to a timing of collection.

We expect a strong collection during Q2. Up until now, we have collected $11.3 million. Due to a local tax issue, the $14.6 million judgment payment to Rudolph Technologies has not been paid yet and is expected to be paid once the court will provide its final guidance.

For the second quarter of 2016, we expect revenues of between $25 million to $27 million, representing 6% year-over-year growth as the guidance midpoint. We will now open the call for questions.

Operator?.

Thank you. [Operator instructions] Your first question is from Edwin Mok of Needham. Please go ahead..

Good job on the top-line growth, guys. First question I have is on the gross margin. I think you mentioned, or Rafi, you mentioned there is a third party turnkey project that impacted gross margin.

Any way you can quantify that and maybe give a little more color to what actually happened there and then how do we – any range you can provide for the second quarter in terms of gross margin will be recovered in the second quarter?.

Okay. I mentioned, this is something, a unique case that sometimes you're other strategy customer – when I mean the turn key project, it means it's not just delivery AOI to customer. It could include automation, and system, and software, and many things together that include the project.

If it's so, that is customer sometime to penetrate this customer, you mix on efforts in this or another way. So if we look on the total deal in this specific case -- the gross margin. But as I mentioned, this doesn't happen every day, it happens once for two years.

So we don't see anything like that in the next few quarters, so it's seem comfortable to keep on only one time event..

I see.

So this is actually a new customer that you guys were trying to penetrate? Is that what drove the low gross margin then?.

No. As I mentioned, it's not everything. They're Camtek. Camtek use outsourcing and in other third party to discuss then the total solutions.

But the customer want to get form Camtek the full responsibility on everything so in this case, if we talk together, the old project, the cost and the selling point and the selling demands, the gross margin is a little bit low with respect to this specific water [ph]..

I see. Okay, great, that's helpful color.

Any guidance you can give for the second quarter? Are we going back to 44% or 40%? I think it's at 44% to 45% range?.

We are generally speaking looking into our Q2 activity and projects. We will return to the 44% to 46% gross margin range..

Great. That's helpful.

And then Moshe mentioned on a call that you expect R&D expense to increase this quarter? Can you give some color in terms of where those are at least spent on and how much sure of increase are we looking at?.

I could provide some color. All of this increase is attributed to the semiconductor business. Looking further into the rest of the year, we see more activity and increasing volume and we are also walking on new versions of the machine, so R&D as a result will be higher in the next few quarters..

I see. Okay.

And then on the launch of a new 2D product that you mentioned, Rafi, can you give us a rough idea in terms of how much is the sales now coming from this product as of right now? Actually through the year, how much do you think that would drive your growth? Does that growth come from that new product? Or is your 3D metrology product still drive you some growth as well?.

In few segment, we are a dominant player as we mentioned. So metrology, I think we are the leading supplier in the famous [ph]. And now, we started with the 2D and I believe that we are just in the beginning of the process and it would take a few months before we go with all qualification process.

Still, I believe that most of the revenue in 2016, I would say most of it come about in the same mix that we used to perform last year in metrology, about circuit, CMOS, in MEMS and some other application.

But we can see the beginning of 2D inspections and I believe that at the end of the year we will see more and more order for this special application. So maybe by the end of the year, we'll see a mix and more 2D application later compare with the beginning of the year..

Okay. That's helpful. Last question I have – what are you seeing in terms of customers' plan? We have seen obviously the large foundry in Taiwan, the capital of fan-out capacity and we've heard always looking into it and doing some work on it, but it doesn't seem like there's a law coming at a plan to ram renewable capacity.

Do you have any kind of color you can provide in terms of how the pace stand out because of the roll out this year?.

You're talking about the fan-out?.

Yes, I'm talking about the fan-out. Yes. In terms of how that is going on in the….

I can give you a general view about to what we could see from the customers. I would say that the concept of fan-out, I think it comes – I would say that most of our major OSAT today, looking for fan-out technology. They believe that sooner or later, this concept will be the major concept in the industry.

It's at assembly, it's at substrate, it will give you better performance and one big foundry prove that it can make it in the high yield and I assume that all the other OSAT understand that if they want to continue glowing, they have to go to this. So I believe that almost every major OSAT today is developed and put efforts on this segment.

Now, none of them is on high volume yet except I mentioned one foundry. All the other OSAT is still under development, qualification by customer and I assume that we can see the fan-out glowing the rumbling by probably the beginning of 2017.

In this yield, I see more qualification, pulling of technology – I don't think that any of them intend or plan to make high volume of fan-out this year..

Great. That's a good color. Thank you..

The next question is from Craig Ellis with B. Riley. Please go ahead..

Yes. Thanks for taking the question and congratulations on the revenue performance. Rafi, I wanted to start just with a follow up to Edwin's question on 2D and 3D mix, but maybe taking a longer term approach to the question.

Clearly, it's something that gets marketed by the team this year and for which you see an increasing number of orders by the end of the year.

As you look out to 2017, what do you think a reasonable benchmark would be for a successful product? Would it be in the 10% to 20% range of total sales? Or would it be higher than that or lower than that? What would be a level that you would be satisfied with as you look to next year?.

First, I'd like to describe the current situation. Our Eagle can make it in the same inspection cycle metrology and also 2D. What we see that most of the customers, they use our tool only for metrology and they don't enjoy the capability of 2D because 2D, they qualify Rudolph as their standard 2D inspection.

Actually they have double load, unload and make it more complicated for them to use two different platform – one for 2D one for 3D. So in general, I believe that [indiscernible] platform you can make both, you give them a lot of benefit in general. But in order to do it, they have to get qualification by the end-user.

Every OSAT has its own customers and you need to get qualification by the end-user. We started this process. We already qualified few major customers and I believe that more qualification, we will see our machine and more intensive use for 2D and 3D at the same time.

So to tell you what I believe that – if we talk about all the segment that we have noted because there are some segments, in 2D but we are there, but if we talk about segment that we are not there until now, I would say that for 2017, to be 20%-30% in a fair willing and we can make it..

Thanks for that. The next question is just a follow up on the comments last quarter on the Gryphon strategic review process.

Can you give us an update on activities there and is it still reasonable to think that the company is on track to have some kind of strategic move made by the end of the year?.

Yes. I think we continue with the same effort. As I mentioned before, we use the Asian Banker investment banking that already there to many potential investors and sought who are the potential [ph] that can see this project interesting for them, and we are now in the middle of this process.

I believe that it will be in one month, would be in two months, we know more about the possibility to make such a deal and to bring in an investor..

And then my last question is for Moshe. Moshe, you mentioned the status of the IP dispute payment and that it's currently being impacted by a ruling by the local courts.

Can you give us some sense for when there may be a ruling form those courts and is there any potential that that would be disputed or would that be the final decision that would catalyze a payment to the other party?.

Unfortunately, I don't have a specific date for the final ruling. It has nothing to do with Camtek within the quarter at this point and I believe that once the court will provide its guidance and decision, we will follow. There is a specific tax issue with respect to where the tax will be paid in Israel or in the U.S.

which is outside of the dispute between the two parties. It has more to do between the governments, the tax authorities and once the U.S. court provides its decision, we will follow..

Thank you, gentlemen..

Thank you..

Your next question is from Greg Weaver with Invicta Capital Management. Please go ahead..

Hi.

Do you expect any Gryphon revenue recognition this year?.

We might have it but we don't know yet because I would say today, we focus – let's put it in this way. Let's say that maybe few of our current customer would like to buy the system. Now, we have to decipher if we are going to continue supporting it and we have a partner that together we are going for long term to support this technology.

If we cannot commit it, I'm not sure if I want to record any revenue on the system. Every customer is also AOI customer and we don't want system that we cannot support it for long term.

So we have first to see what is our option to bring investors and how much effort we need in order to support system and based on that, we can accelerate the selling and more installation. So I believe that in any case, the first half, we plan to put all our efforts for getting more information about the possibility to bring an investor.

And if we see that it's not so easy and nobody is interested to respond no matter what is driven, then we have to decide, “What next?” But we're not there yet. Right now we are – as I mentioned before – we're in the middle of this process..

Okay. Thanks, Rafi. How about could you talk a little bit about your positioning for panel-based fan-out? I've seen a little more news about that recently. ASE license some technology recently.

What's your position there to perform inspection and metrology?.

I would say that in general, we are involved almost in every fan out project right now and some of them – and everyone show different direction. One use a glass substrate, one use plastic substrate, one use silicon substrate and we are involved in every inch of all these projects and we support it with 3D and 2D inspection.

Together with customer, we [indiscernible] develop special features, special capabilities. You mentioned ASE. We did a lot of project for this fan-out technology to fit the requirements. So we are involved in almost every fan-out project. And I believe also they understand that all these project plan to get the execution – a minimum is a year from now.

None of them believe it can start high volume from this point. But it's interesting. I believe it's going to be -- for inspection and for us as well. But I think it's a little bit early to plan for this year to see multiple order for production.

We see more for R&D, and more for testing, and more for qualification of -- to customer, but not yet high volume..

Okay. That's helpful. So just [ph] orders.

But I guess just on that note, maybe Moshe, did you quantify how much R&D was going up with all this activity going on?.

I did not quantify, but it's between $300,000 to $400,000 this quarter..

Sequentially?.

Yes..

Right. Okay. Thank you very much..

By the way, I want to add one comment on the R&D expenses. As we always mention, almost every order we get, R&D is involved. There are nothing like standard order. On top of the fan-in and fan-out and metrology, almost every order, we need support of R&D.

Now when delivery time becomes six weeks, eight weeks, customer expecting to get solutions also from R&D in this time frame. So in order to go with our R&D and also to support the sales activity, definitely the result is a little bit more expensive..

Understood. Thank you..

[Operator instructions] We don't have a question at this time. Before I ask Mr. Amit to go ahead with the concluding statement, I would like to remind our participants that a replay of this call would be available on Camtek's website, www.camtek.co.il beginning tomorrow. Mr.

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

Okay. I would like to thank you for your continued interest in our business. I intend to be on the road meeting with you in the coming weeks and I look forward to talking with you again next quarter. Thank you and good bye..

Thank you. This concludes the Camtek's first quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect..