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

Edwin Mok - Needham & Company Craig Ellis - B. Riley & Company.

Ladies and gentleman, thank you for standing by. Welcome to Camtek's Third 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 the call over to Mr. Ehud Helft of GK Investor Relations..

Thank you, operator, and good day to all of you. I would like to welcome all of you to Camtek's third quarter 2016 results conference call, and I would like to thank Camtek's management for hosting this. 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 strategy going forward and then Moshe will review the financial results. 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 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 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.

I would now like to hand over the call to 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 very pleased with the results of the quarter reporting one of the highest revenue levels in our history, with very solid profitability and as the guidance that we issued today indicate we expect this trend to continue in to the fourth quarter.

Our revenues reached $28.5 million, up 8% over Q3 of last year and 4% sequentially. We are also very pleased with our solid operating income, which came in at $2.7 million on a non-GAAP basis, which was almost at 10% of the revenues, the highest quarterly profitability in two years.

Excluding the litigation payment, we generated a positive $3 million in operating cash flow. Our results are based on our solid performance particularly from the semiconductor side of our business.

Semiconductor sales in Q3 grew by 12% over those of third quarter last year, and 6% over previous quarter, with a record number of system shipped during this quarter. Our strong growth continues and it is correlated directly to the market segment with advance packaging, MEMS and CMOS image sensor.

We remain in a leading position in providing 3D metrology solutions for the advanced packaging market and started gaining market share in 2D inspection. During the third quarter, we introduced our new model dedicated for the 2D market.

This model is designed for speed and maturity and is powered by an innovative detection engine, new high-end optic channel, special LED illumination and the cutting edge processing power unit.

About 40% of system shift this quarter will be used in the advanced packaging market, as this market segment remained strong; we continue our penetration in to the advanced packaging 2D inspection with new customer for final application adopting our unique inspection capabilities.

As we said last quarter, we are leveraging our extensive PCB experience by using our proprietary [CAMT] data reference in stand-out applications. The main segment was very strong this quarter. This is in line with market trends showing sensor as one of the largest growth segment through 2016.

To summarize, advanced packaging remains our strongest market segment and expected to be our growth engine in the future. As we stated earlier in this year, our semiconductor business will grow in a double digit growth rate this year over last year. In the PCB market, the AOI business remained steady and solid.

As a result of continuous trends for uncompromised demand for high quality in certain markets such as automotive, we recently started selling our new AVI product line for outgoing quality control, and we believe that it has a potential for $2 million to $3 million this year.

Regarding our digital printing activity, I would like to remind you that in August we announced a reorganization of this activity. We have moved the inkjet technology base in to a startup mode and have recalled a [series 14] default system we had at customer site.

We are in the process of developing a new system, taking in to account the experience we gained from the market. We expect that this sale will take about a year and a half and that we will be ready during 2018. This step would significantly reduce the related operating expenses going forward from 5.5 million OpEx annual run rate to about 2.5 million.

As several employees join the semiconductor division to support our strong growth, approximately $2 million annual savings will be reflected in Q4 and throughout 2017, resulting in an ongoing positive affect on our profitability.

And with this, I would like to hand it over to Moshe for a more detailed discussion of the financial results of the quarter.

Moshe?.

Thanks Rafi. As mentioned Rafi mentioned we are very happy with our high revenue and profit this quarter. Third quarter came at $38.5 million. Revenues were 8% above those of the third quarter of last year and 4% above those of the prior quarter.

Revenues from the sales and services to the semiconductor industry in the third quarter were $21 million, representing 74% of our total revenues. Third quarter revenue from sales and services to the PCB market was $7.5 million, representing 26% of our total revenues in the quarter.

The geographic revenue split for the quarter was as follows; China was the strongest region during the quarter, representing approximately 29% of overall revenue, Taiwan was 19%, Korea was 9%, rest of Asia 23%, European sales were 11% and US sales were 9%.

I will summarize the result on a non-GAAP basis and you can see the reconciliation between the GAAP and non-GAAP results in the table at the end of the press release issued earlier today. Before moving on let me discuss the one-time effects of the restructuring of our chip activities, which have been excluded on the GAAP results.

As part of the reorganization, we wrote off $5.6 million of inventory and fixed assets. In addition we recorded $300,000 of one-time expenses. At the same time, we recognized income of $5 million from a reversal of liability in the Chief Scientist office in Israel. The net impact of these effects on the operating line totaled $900,000 of expenses.

Gross profit for the quarter was $12.4 million, representing a gross margin of 43.6%, which is compared with a gross profit of $11.8 million, representing a margin of 44.9% in the third quarter of last year.

The (inaudible) in the gross margin is generally a function of the product mix sold in the quarter, which is expected to improve in the fourth quarter. Operating expenses in the quarter were $9.8 million. This is compared with $9.9 million in the third quarter of last year and $10.9 million in the last quarter.

Operating profit in the quarter was $2.7 million, an increase of 41% over the $1.9 million reported in the third quarter of last year. Operating margin was 9.3% versus 7.1% in the third quarter of last year. Net income increased by almost 100% over last year. For the third quarter of 2016, net income was $2.1 million or $0.06 per diluted share.

This is compared to a net income of $1.2 million or $0.03 per share in the third quarter of last year. Cash, cash equivalents, short and long term restricted deposit as of September 30, 2016 were $19.7 million, compared to $31.8 million as of June 30, 2016.

The lower level of cash reflects the payment we made to Rudolph of $14.6 million during the third quarter. Excluding the payment to Rudolph, the company reported a positive operating cash flow of $3 million during the quarter.

For the fourth quarter of 2016, we expect revenue of between 28.5 to 29.5 representing 10% year-over-year growth at the guidance midpoint. This implies full year 2016 revenues of around $109 million, which represents an all-time record year for Camtek. We will now open the call for question.

Operator?.

[Operator Instructions] The first question is from Edwin Mok of Needham & Company. Please go ahead..

First question on the semiconductor side of the business, so far you’re doing quite well.

Just curious how you think about your customer investment plan and vast packaging now? Obviously this year looks like it’s pretty strong, do you think that can continue in the fourth quarter and in to 2017?.

Yes, it looks like. Right now we see demands from all our customer are for segment..

And then I have a question on the 3D inspection. You mentioned that you’re making progress there with some share gain. Any kind of significant wins you can share with us, or what makes, what allows your 2D inspection product to gain share..

As we mentioned advanced packaging actually we see like 2D and 3D applications. Camtek had the past focus on the 3D metrology and we became the standard and the leader on this segment. And we believe that right now we are ready for taking more market share in 2D applications. I believe that during Q4 we finished most of some application.

We already benefitted to few [offset], important [offset] with 2G, and we believe that we can continue doing it during 2017..

Question on the growth, and I think first you guys talked about potentially finding strategic investor or even potentially selling the business. Any kind of update in that process? Last time we talked, you were suggesting that you were going for a process or talking to various investors. Just go on and give an update there..

Regarding the refund, we did a lot of; I would say during the last few months, we made a few changes. Number one, we took this project back to startup mode and we split it out of the PCB region.

So the PCB division right now focuses on selling AOI and [VI] system and they’re doing very well, and the Gryphon right now we are, as I mentioned, in startup mode. I would say that at this point, I’m not sure if it makes sense for us to try or if we can succeed finding somebody to invest.

I believe that we have to do a little bit more steps in developing before we are being more attractive and ready for investment in this field.

So right now we are working on building the next generation system, the new system, improving the ink and probably within few months I would be in a better position to look for investors or spinoff or any other activity like that..

Last question I have for you Moshe. What happened to the gross margin last quarter? I saw it down this last quarter and I think you confirmed that it’s expected to recover.

How do you think about gross margin in the fourth quarter?.

Just speaking this is a quarterly trend. It is directly related to product mix solely in the first quarter. With relatively low margins we expect to go back to higher gross margin in the fourth quarter. Just to remind you Q2 had a very high gross margin. So just a typical product mix at this quarter, nothing special.

And maybe one last comment, sorry for interrupting you, we don’t see that as a trend. We think it just happened to be this quarter, but we don’t see any trend of pressure on prices in the market place..

Anyways you can kind of point out what type of product, are you selling more 2D inspection or is it greater share of service or greater share of - I don’t see the PCB share change that much.

So any kind of color you can provide there?.

This is not something in particular in one segment versus the other, just happen to be this product mix, but it’s not in one segment or in one customer like we had in or presented in first quarter of this quarter. We had a lower gross margin due to a specific strategic account. So this is not the case this time.

The gross margin is a little bit low, it is definitely on the low end of the range, and again we expect it to come back to around 45%-46% next quarter..

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

This is [Peter] calling in for Craig Ellis. On the 2D systems quantitatively you guys provided a target of 20% of sales for 2017.

Could you just provide some color where are you guys at and how you track in to that target?.

We still believe that we can make it. It’s just the beginning now and we feel very comfortable with this..

And then looking ahead in to 2017, this year you provided double-digit semi growth.

Is this the similar growth rate you’re seeing in 2017 frame and what are the present (inaudible) for that?.

I believe we talk about capacity, we talk about 10%-15% from year-to-year, and based on what we see from customer application environment in the industry, we believe that we’re going to continue with this rate during 2017..

And on (inaudible) advanced packaging, is this mainly flip-chip driving these growths for the third and fourth quarter, and then also are you going to be seeing any capacity constraints?.

I would say that we can see it all over; you know the automotive industry is growing some MEMS applications and CMOS, advanced packaging, more 3D demand, memory, it’s all over. We can’t say that there are one segment the growth is much bigger than the other. We can see it actually in all segment this demand..

[Operator Instructions]. The next question is from David Kreinberg of Globis Capital Partner..

Good to see the operating income trending in the right direction of 9.3% on an [annual] basis.

Can you just repeat again, how much lower OpEx is going to be going forward because of the Gryphon steps that are being taken, and how should we look at operating margins going forward?.

We should be seeing additional $2 million annually. Most of it will be on the OpEx level, some in the COGs level, but most of it will be OpEx. So, you can assume that at least $2 million will flow all the way to the operating income line, and will contribute to the improved profitability..

So you would expect to see improving margin it sounds like?.

Yes..

There are no further questions at this time. Before I ask Mr. Amit to go over to his closing statement, I would like to remind the participants that a replay of this call will be available on Camtek’s website at www.camtek.co.io beginning tomorrow. Mr.

Amit, would you like to make concluding statement?.

I would like to thank you for you continued interest in our business. I look forward to chatting with you again next quarter. Thank you and good bye..

Thank you. This concludes the Camtek third quarter 2016 results conference call. Thank you for your participation, you may go ahead and disconnect..