Ladies and gentlemen, thank you for standing by. Welcome to Camtek’s Second Quarter 2019 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 and Public Relations at 1646-688-3559 or view it in the News section of the company’s website www.camtek.com. I would now like to hand over the call to Mr. 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. Rafi Amit, Camtek’s CEO; Mr. Moshe Eisenberg, Camtek’s CFO; and Mr. Ramy Langer, Camtek’s COO.

Rafi will provide the overview of Camtek’s results and discuss the market trends. Moshe 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 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 the forward-looking statements contained, whether as a result of new information, future events, changes in expectations or otherwise.

Investors are reminded that the 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 timing and developments 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 filing with the SEC.

Please note that the Safe Harbor statement in 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.

Management 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 would now like to hand the call over to Mr. Rafi Amit, Camtek’s CEO. Rafi, please go ahead..

Okay. Good morning, and thank you for joining our call today. Camtek’s second quarter results reflect our strong track record of execution. The company showed record revenue of $34.3 million in the second quarter, up 12% over Q2 of 2018, with $7 million in operating profit, presenting margin of over 20%.

In addition, the company generated $7.3 million in cash from operations, bringing our total cash position to over $85 million. The healthy financial position allows the company to share their work over success with our shareholders by distributing $6.5 million in dividend. I would first like to stress few events during the second quarter.

We closed the Chroma transaction and received $16 million and has begun the operation. In addition, we received an earn-out payment of $1.3 million from the sales of the PCB division. Regarding our ongoing business. The transition of the DRAM to advanced packaging is ongoing.

A key example was the major order we recently received and announced from the market leader in this space. We’ve 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 $20 million.

We continue our efforts to extend our presence in the RF 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 sites. These machines will support the top – the 5G ramp up.

In the Advanced Packaging segment, we installed multiple machines, a Tier 1 offer for Fan-Out application, which supports a major global semiconductor company. Another significant milestone we have achieved in the field of Fan-Out is receiving an order for inspection machine for 24 by 24-inch panels We expect to install it within the next few months.

In the CMOS Image Sensors space, the number of cameras in smartphone continue to increase and follow pixel size acquiring new capabilities than more inspection. Our CIS 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 opening new facilities and purchasing the first tool with potential for further expansion.

Overall, 2019 is shaping out to be a challenging year for the industry, driven by slower demand for end user products. Also, the trade conflict between U.S. and China and between Japan and Korea contribute to the uncertainty in the global economy in general, and specifically to our industry.

This uncertainty means most of our customer are only ordering equipment for short-term production needs and with shorter lead time. As a result for Q3 2019, we expect solid level of revenue between $31 million and $33 million.

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 2019.

During this period, we achieved revenue of $68.3 million, 18% higher than the first-half of 2018, which was a record year for Camtek and the semiconductor industry as a whole. This performance demonstrates Camtek’s strong position in the market. In general, market drivers supporting demand for our equipment does not change.

Our addressable market continues to grow as a result of the increased semiconductor devices for AI, 5G, Big Data, automotive and others.

IC and packaging designs for the above applications are more complex and have smaller geometry, which require inspection and methodology on inspection machines with higher optical magnification and higher scaling 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 at an installed base of over 1,000 systems.

We are gaining the market share and penetrating new market segment, such as the front-end. In summary, we have developed new capabilities and expanded our penetration into key customers and are prepared for the demand that will come or the introduction of new products.

Our position in the market is very strong, and we are ready to lead the market and continue to grow rapidly as the market ramps up. With this, I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

Moshe?.

Thanks, Rafi. Camtek shows strong results in the quarter in line with our guidance with 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. Second quarter revenues came at $34.3 million, up 13% year-over-year, an impressive 18% growth for the first-half of the year.

The results were driven by strong demand across all our segments 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 would typically expect. For the year as a whole, we see the margin averaging around the 50% level. Longer-term, as we grow our revenues, we expect that our margins will continue to trend upwards. Operating expenses in the quarter were $9.6 million.

This is below the $10 million in the second quarter of last year. Operating profit in the quarter was $7 million, an increase of 42% over the $5 million reported in the second quarter of last year. Operating margin was 20.5%, a strong improvement versus the 16.3% in the second quarter of last year.

Net income for the second quarter of 2019 was $6.7 million, or $0.18 per diluted share. This is compared to a net income of $4.6 million, 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 have increased by 1.7 million, and will impact earning per share from the third quarter onward by about 2% to 3%. Turning to some high-level balance sheet and cash flow metrics. We generated $7.3 million in cash from operations.

Our quarter-end cash balance was $85.3 million versus $54.9 million at the end of 2018. During the second quarter, we received $16 million cash payment from Chroma and an additional $1.3 million in earn-out payments from our sale of the PCB business last year.

In terms of guidance, we expect third quarter revenues to be between $31 million and $33 million. And with that, Rafi, Ramy and myself will be opened to take your questions.

Operator?.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] 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, it’s a tough environment. The first couple inquiries for just clarifications on the quarter and the guidance. So in the quarter, Moshe, you were clear that the year-on-year variance from gross margins was mixed.

If we look 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 the quarterly variance of 1Q, 2Q?.

No, I mean, it was – we definitely don’t see the gross margin trends 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 of $32 million.

Can you just help us understand some of the gives and takes across the different areas of the business? Are – would you expect the business to be down moderately across Image Sensors and High-Bandwidth Memory, MEMS, et cetera, or there are some parts of the business that you’d expect to grow while others decline? Just some granularity on the underlying dynamics Q-to-Q would be helpful?.

Ramy, could you answer for that?.

Yes, I will answer that. I don’t think that there is a major difference in the various segments that we address in the market. I think we also said it in the text, in general, we are selling – we saw in this quarter and during this quarter, we have sold more or less to the same applications.

The question is, and I think Rafi went over it, is the – what we have looking forward is the visibility and the lead time that customer are requested. 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 minute.

And this would be first, basically the next quarter from the first two quarters or the first or the last few quarters, where customers were very confident of the business and ordered machine 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, it continues moving to Advanced Packaging. We saw orders for Fan-Out applications, the the CMOS Image is strong, with regard 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, Ramy. 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 the threat of a 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 is persisted in August?.

Hey, it’s hard for me to say whether it’s July or June, but it’s definitely it’s very recent that we saw the markets becoming so volatile. It wasn’t like this, if I can say, when we talked three months ago, it wasn’t like that….

That’s fair..

…and that was definitely more volatility. Now to explain what is exactly the reason whether it’s the trade wars or other things that are worrying our customers, I think, it’s everything together..

Got it. Thank you. And then now to some forward-looking questions that are more intermediate term. Rafi, you’ve mentioned on this call and previous calls that High-Bandwidth Memory was an area of strength in the business and it’s well exemplified by the $20 million 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 we still early in adoption, or are we moving into latter stages or somewhere in between?.

Okay. I’m not sure about the High-Bandwidth Memory by sales. Definitely – I would say, we can see in general, the trend. We will definitely understand the benefit and the advantage of all these new packaging technologies. And we are very confident that all of them will ramp up very soon. Is it going to be Q4, Q1 or Q2? I don’t know yet.

But But it is a must, because it brings a lot of benefit and we faced a lot of investment in the R&D to make this process stable with high yield. So very smooth to production, not easy for us to predict, we see very limited angles of the overall decision. But definitely, we feel very confident with it..

That’s helpful. Thanks..

Let me elaborate a little bit to your question regarding the High-Bandwidth Memory. We are – in moving – in memory and DRAM moving to Advanced Packaging. We’re not at the beginning, but we’re definitely not at the end. We’re somewhere in the middle. So I don’t know if the penetration is about 40% or 50%. We are – but we’re more or less in this range.

There is a definitely in the DRAM space, a lot more to go until this move from wire bonding to Advanced Packaging will be completed..

Yes. And we also, by the way, we’ll start to see the beginning for NAND to adapt that technologies, not on a zero. I don’t know how they accelerated this process, but definitely, we see it also in the NAND..

Got it. And then moving on to RF and your comments about a new customer there for a 5G application.

Can you just provide us some visibility into what you’d expect next year as we move into the first wave of real significant smartphone roll outs for most manufacturers? I think a lot of the industry sources I’ve seen are looking for something around $150 million 5G units.

But what can RF mean for Camtek next year, if we’re moving to that level of production in smartphones?.

Ramy, could you….

Yes. We are definitely – this is going to be a major segment for us. And I see from our predictions point of view, we expect that there are going to be multiple machines order 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, the company has done an excellent job positioning itself for a stronger cash position. A couple of questions. One, there was modest help from an earn-out. Are there any other potential earn-outs 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 its $85 million in cash? Thanks, guys..

With respect to the earn-out payment, this is the final earn-out payment. This is actually a full earn-out payment adjusted by the working capital ratio that we have agreed upon in the deal. So we have enjoyed the full benefit of it. With respect to the dividend, the dividend will be paid early September.

At this point, our priority in terms of the cash is to the twofold. One is to try to utilize it for potential M&A, and the other one is looking, considering dividend from time-to-time as we find it necessary or suitable for the shareholders. Thank you..

Thanks, Moshe..

The next question is from Quinn Bolton of Needham & Company. Please go ahead..

Hey, guys, congratulations on the nice results. I wanted to 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.

I’m 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-ups..

Ramy, please..

Yes. Look, in general, we don’t see the capacity. We’re not aware of 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 one product to another. We definitely see the increase in the capacity.

And we mentioned that our CMOS Image Sensors is strong on a global basis. So yes, we see the increase in CMOS Image Sensors, whether it’s coming from the DRAM – the old DRAM capacity that was converted to CMOS Image Sensors. That’s something that we’re not exposed to..

But if they’re converting older DRAM, I assume that that’s probably not DRAM going into High-Bandwidth Memory applications….

Oh, correct..

…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. And when you talk about CMOS Image Sensors, they do not need the nodes that are required on the DRAM – on the modern DRAM, the latest DRAMs that are going to the very extreme nanometers level.

So definitely that’s a difference in the CMOS – in the basic CMOS process that is different from CMOS Image Sensors and DRAM. The older DRAM with some modifications can be appropriate for the current CMOS Image Sensors, and that’s something very technical..

Second question, I 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 components level? Is that for module level, assembly? And if it’s module, are you just seeing that – a greater number of modules for Advanced Packages going into 5G phones, or is there particular driver as we convert from 4G to 5G?.

From our point of view, what we see we’re not – we’re talking about the device level. And what we see is a lot more wafer and devices going into the 5G, compared with the 4G. And I would say, it’s a magnitude level. It’s many more filters that are required for the larger bandwidth. But this would obviously go into more modules and so forth.

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 that across all three of those component types?.

It’s across all those three of them, but we were primarily referring this call to filters..

Got it. Great. And then last question. Some of the other equipment vendors have noted, I know there’s uncertainty in China with a trade situation. But some of the indigenous Chinese manufacturers have potentially accelerated some demand.

Just wondering if you could talk about what you’re seeing on the China front going forward, whether you’ve seen any sort of pull-ins from China here into the second-half of 2019?.

You want to discuss this, Rafi?.

No, no, you can continue..

Look, in general, we see our our Chinese, our Chinese business is very stable. It’s very stable. It has shown growth throughout the last few quarters and it’s continuing to grow. I don’t see a major change in the China market or pull-ins that is stable.

We see a lot of new customers, a lot of new faces that are ordering machines that will – we expect will order multiple machines as time goes by. Overall, the China semiconductor market at this stage is healthy..

Great. Thank you..

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 – do you configure the system right before it goes out the door? How difficult is that change going to make predicting revenue and shipments in a quarter?.

Well, first of all, Gus, this is, in general, our business is to provide machines at shorter lead times. 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 requirements from our customers. What is happening today because of the shorter lead times, that’s limiting our visibility, and, of course, this is the reason for the forecast that we have 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 machine. If the machine is not very complex, obviously, we’ll be able to provide it at very short lead times. If the complexity is higher, obviously, this will require some additional time and this would make the differences.

That I would say in general, this is the rules or how we manage our operation just in a few sentences..

Yes. I would like to add one more sentence about it. You also remember that, in our arena, we faced relatively many new technologies of packaging. And some of them already mature enough to start to move to production.

Now, when we talk about new technologies, it also means we have to make sometime special development for machine with special feature or special optic part of special mechanical part. 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, tough time in parallel where to develop the solution for the customer. So this makes it more tough.

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, where have to consider if we can complete the R&D on time and to shape it during the current quarter. So this is also part of the difficulty we face because of the amount of newer technologies in our segment..

I understand.

And then just sort of, can you give a reference to what your lead times are currently, or what sort of demand customers are making? Is it four weeks, eight weeks?.

I will tell you in general, most of the customers told between six to eight 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 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 not to answer the question..

Fair enough..

But I think not specifically for our customer, in general, we can see Fan-Out moving, I would say as more rapidly to power devices, because probably the complexity does not add if you go to different applications.

Some other for logic and more complex application, not everyone can do it, and this is made only by few customers that develop their own packaging technologies.

But if we talk about in general, most of the OSAT that they try to make Fan-Out, I would say that the entry level is more for power devices, and then we continue and develop into more applications..

Got it.

And then, are you seeing any demand for triplets at this point, triplet packaging??.

What? What?.

Are you seeing any demand for triplets? Effectively, some of the microprocessor guys are moving to heterogeneous processes with multiple die on a silicon substrate?.

You’re talking about two port. We call 2.5..

Yes..

2.5D IC. Yes, definitely. That’s a market that is growing. We’re 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. All right. Thanks. That’s all for me..

Thank you..

Okay, thanks..

Thank you. [Operator Instructions] The next question is from Craig Ellis of B. Riley. Please go ahead..

Thank you for taking the follow-up question, and I 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 one.

Can you just give us an update on how that’s progressing? And then to put some of the earlier comments around 5G and customer expansion in the business next year in better content, can you help us understand as we look to 2020, what the incremental opportunity is in the RF customer expansion that you’re seeing versus what you’ve been accomplishing in front-end macro? Thanks..

Ramy, maybe you’ll start with it [Multiple Speakers].

Yes. I will take it. Yes. So first of all, on the front-end macro inspection, we are – we have been able to – we – when 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 business moving in towards 2020. That’s definitely good news. Our machines are performing well and we are able to maintain very nice market share. Obviously, it’s only the beginning. But I think, we can still further grow in this business. Regarding the RF, I think, I mentioned.

I’m going to be very careful, Craig, of putting an accurate number. But definitely, the RF filters is going to be, and as I said, it’s going to be multiple machines for multiple customers.

Is that good enough, or you’re trying – would like me to quantify it more?.

That’s good enough. We’ll follow-up on it in three 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..

Rafi, you want to elaborate on it?.

No, Ramy, I think you’ll start with it to start it with Chroma..

On the Chroma, we have started the cooperation as we mentioned. Until we will see revenues from this agreement, I think, it will take sometime. 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 short-term that we’ll be able to really understand and give a really forecast for what we expect there. 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 Camtek website www.camtek.com beginning tomorrow. Mr.

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

Okay. I would like to thank you all for your continued interest in our business. I look forward to talking with you again in next quarter. Thank you, and goodbye..

Thank you. This concludes the Camtek second quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect..