Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third Quarter 2019 Results Conference Call. All participants are present in a 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 1-646-688-3559 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. Ehud Helft of GK Investor Relations. Mr.

Helft, would you like to begin?.

Thank you, operator, and good day to all of you. I'd like to welcome all of you to Camtek’s third 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 market trends. Moshe will then summarize the financial results of the quarter. We will then open the call to 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 also contains statements concerning Camtek’s future prospect that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Camtek forward-looking statements are based on the current beliefs, expectation and assumptions of Camtek’s management.

For example of forward-looking statements please refer to the forward-looking statements paragraph in the press release that we published area today. These forward-looking statements are only predictions and may change as time passes.

They are subject to subject to risk and uncertainty that may cause actual results to differ materially among them risk relating to changing industry and market trends, reduce demand for Camtek services and products, a timely development of new services and products, and a reduction by the market, increased competition in the industry and price reductions, as well as the risks and uncertainties identified from time to time in Camtek’s Annual Report on Form 20-F and Camtek’s other filing with the SEC that represents Camtek’s view only as of the date they are made and should not be relied upon as representing our views as of any subsequent date.

Camtek does not assume any obligation to update any of forward-looking statements. In addition, during this call certain non-GAAP financial measures will be discussed. These are used by management to make strategic decisions, forecast future results 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 is included in today’s earnings release.

And now, I would like to hand over the call to Rafi, Camtek’s CEO. Rafi, go ahead please..

Thank you. Good morning and thank you for joining our call today. The company showed revenue of $32.5 million in the third quarter slightly above the third quarter last year with $5.2 million in operating profit representing a margin of 16.2%.

We expect Q4 revenue to be similar to those of Q3 bringing our total 2019 result to a new record with revenue of about $133 million. Our gross margin this quarter came in below our previous quarter. This is mainly due to a less favorable product mix. Coming into the fourth quarter, we expect that our gross margin will improve.

This period has been characterized by the continued uncertainty in the business environment, which delays decision making by our customers. Orders are placed for immediate production needs at very short lead time.

At the same time, a large number of drivers such as 5G, automotive, big data and other are emerging and will soon move to higher volume production, which will require customers to increase their production capacity. New advanced packaging technologies supporting the market driver requires specific developments.

As a result we have been increasing our R&D expenses to address these opportunities. The Chinese market is continuing to increase capacity as we have discussed in previous calls. China has become our largest territory this year, and we expect this trend to continue into next year as well.

Orders in China are coming from various applications including advanced packaging, new customers for Front-End Macro Inspection, as well as new customers opening new facilities and purchasing a first tool with potential for further expansion. Since the beginning of this year, we have gained 14 new customers, most of them in China.

In order to meet this growth, we are expanding our sales and support in China. Regarding our profitability, in the short-term with market environment and current level of revenue, we assume that our operating profit will fluctuate between the current level and 18%. Once the market is best on trick, the profitability will improve.

I would like to provide some updates regarding our Q3 quarter activity. In terms of market segments, the CMOS Image sensor was the largest this quarter including the shipment of nine machines to one customer. Our customers in this segment are expected to continue increasing their capacity due to the growing number of cameras in smartphones.

In addition, the IR higher resolution sensor and cameras result in longer inspection time and more advanced capabilities, which will require new and up-to-date inspection tools.

We continue our efforts to extend our presence in the RF space and has been qualified by major players for 5G devices, and major achievement this quarter was repeat order from the new RF customer, we announced last quarter for an additional facility. These machines will support the 5G ramp up.

In Q3, we installed multiple machines at a Tier 1 power device manufacturer. This segment is undergoing and major transition to silicon carbide wafer. The use of this material for high voltage applications improves switching speed and efficiency.

We have developed special capabilities in our Eagle machine for this segment to address the specific requirements. We expect to ship additional machines to this segment in the coming quarters. In the Advanced Packaging segment, we installed multiple machine as Tier 3 customer.

In addition, we are working closely with all key players on the development of future packaging technologies of Fan-Out and heterogeneous integrations. The transition of the DRAM to Advanced Packing is ongoing, and during the third quarter, we have completed the delivery to two major customers of orders we received earlier this year.

In front end space, we continue to expand our presence to new applications and additional customers in China and other territories. During the third quarter, we receive order from three new front end customers. In general, market driver supporting demand for our requirements has not changed.

Furthermore, Advanced Packaging is key to the expansion of these applications and continues to be the fastest growing segment. We are proud that in such challenging year, at a time these customers are hesitant to invest or make long-term commitments. We have been able to increase our annual revenues to a new record.

I would like to take the opportunity to thank Camtek employees for the ongoing huge efforts and detection in supporting the company growth. I am confident that once the market atmosphere improves, our customers will move to higher volume production and resume their longer term investments.

Based on this and the recent announcements by major players, I am optimistic about our 2020 outlook. With that, I would like to hand over to Moshe for a more detailed financial discussion of the financial results.

Moshe?.

Thank you, Rafi. Just before I turn to my financial summary, I just want to make a small correction. In the Advanced Packaging segment, we installed multiple machines at three Tier 1 customers and not in Tier 3 customers. So and with that, I wanted to go to the financial part.

Camtek showed solid result in the quarter with revenue in the upper limit of our guidance. In my financial summary ahead, I will provide the results on a non-GAAP basis. The consideration between the GAAP results and the non-GAAP results appear in the tables at the end of the press release issued earlier today.

Third quarter revenues came at $32.5 million at around the same level as that reported in the third quarter of last year. 76% of sales were from Asia. Gross Margin for the quarter was 47.1% versus 50.4% in the third quarter of last year.

As Rafi explained earlier, the fluctuation in the gross margin is mainly a function of the product and sales mix delivered. In addition, the delays in decision making and demand for a quick turnaround by our customers also impacted the production efficiency. We expect the gross margin to improve in the coming quarter.

Operating expenses in the quarter were $10 million. This is at around the same level that we reported in the third quarter of last year and $400,000 more than in the previous quarter. This is due to the increase in the R&D expenses as mentioned before by Rafi.

Operating profit in the quarter was $5.3 million, compared with the $6.2 million as reported in the third quarter of last year. Operating margin was 16.2% versus 19.2% in the third quarter of last year. Net income for the third quarter of 2019 was $5 million or $0.13 per diluted share.

This is compared to a net income of $5.7 million or $0.16 per diluted share in the third quarter of last year. Our quarter end cash balance and short-term deposit was $83 million versus $85.3 million at the end of last quarter. We generated $3.8 million in cash from operations. Also during the quarter we made a $5.8 million dividend payment.

In terms of guidance, we expect fourth quarter revenues to be similar level to those of the current quarter. This implies fully revenues at around $133 million, up 8% year-over-year. And with that, Rafi, Ramy, and I will be open to take your questions.

Operator?.

[Operator Instructions] The first question is from Craig Ellis of B. Riley FBR. Please go ahead..

Thanks for taking the question and team congratulations on the continued outperformance to industry with your sales growth, nice track record through the year to show. I wanted to start with a clarification on the fourth quarter revenue guidance.

Understandable that it would be similar, but within that if you look at - the way the dynamics are playing out across Advanced Packaging, image sensors, high bandwidth memory.

Can you give us some color on what some of the puts and takes are all of those areas expected to be fairly flattish or would some be moving up and others moving down?.

I think in general, I think it is, I would say flat. I don't - the only area that is shining this quarter as we mentioned is the CMOS image sensors where we shipped multiple machines and nine machines to one customer. So this area no doubt is strong and will continue to be strong.

I think on the power it is also strong and we see strength and we ship multiple machines to a single customer. Chine overall is very strong and will continue to be strong.

However, when you look at the entire volume of the revenues, this is basically flat, at least for the next quarter, but as we mentioned a lot of activities and overall we see a lot of opportunities as we move a little bit further than the fourth quarter and as Rafi mentioned we're optimistic about the 2020 forecast..

And I'll use the concluding remark there to segue into the next question. As the team looks at 2020 and against the backdrop of sales, which have been much better than industry over the last six quarters in a $32 million to $34 million range quarterly.

How do you look at the calendar 20s prospects, both the tailwinds for growth and any headwinds, for example across the different end market areas. Where do you see the best prospects for growth and are there any big capacity bias or other items that may have completed in 2019 that would be headwind to growth.

So just trying to get a sense for the magnitude of growth that you see next year and where that’s coming from?.

I think that one thing that is different at this time versus 2018 and the first half of this year is no doubt the memory situation. And this is I would say one the issues that is sort of dragging down the industry. And I see you see it across the board in the in the different announcements from all the players.

And I think the question is when the DRAM primarily and then the LAN market will start to ramp up, this will definitely affect the magnitude of 2020.

So if you take out the deal the memory space, and we focus on the other areas, so definitely the CMOS Image - Sensor is strong, the power is strong, we expect with the five key to see comparatively big business in the RS area. And I'm going back to China, but China no doubt is stronger will continue to be stronger in the first quarter in next year.

So we're optimistic overall, the magnitude will depend on the memory and how fast this come out of the recession or the downturn that the memory industry is seeing. And this will basically dictate the overall results of how optimistic we can be about 2020..

And then just on the 14 new customers year-to-date that were mentioned how many of those are actually shipping for revenue now versus in a position to ship for revenue in 2020?.

No, no the 14 customers that we are talking these are revenues this year and they will also produce revenues on these machines. These are real customers that are producing products nobody's buying machines just for the fun of it.

So this is for real and we will in the fourth quarter we will see additional new customers and there will be several of them. So definitely this is very good news because I think this implies two things. First of all, there are customers still will buy additional machines over the next year or so.

And secondly I believe that we are also gaining market share..

Excellent and then switching over to Moshe, Moshe clarifying the gross margin declined sequentially of the 130 basis points it sounds like they will expedite and expedite related issues that are impacting that but also segment mix.

Can you just breakout what the various factors are that are contributing to that 130 basis points and the relative size and which of those do you feel confident may go away as we look to the fourth quarter and in which maybe in the COGS line for a couple quarters given the tough macro that we've got here?.

So I'm not sure that I have you know the real proportion between the different elements but I think that you know just to touch upon the few elements. The first one is no doubt that there was some pressure on prices in the quarter of mix of deals in the quarter that put some pressure on selling price.

So that was one element the other element was the inefficiency in the operation process internally, given the fact that we had to activate the quick delivery mode, as well as serving many ones and twos types orders all of them with some customization.

So all of that created an inefficiency environment for our operations so I think that these are the two key factors going into the fourth quarter I think that the second element does not go away. We're still serving ones and twos.

But as long - as far as the average selling price, it's going back up, and we will see an improvement in the gross margin in the fourth quarter..

And lastly from me before I get in the queue, it's been a couple quarters since the Chroma ATE deal has closed and I'm just wondering if you can give us an update on how the interaction and engagement is going there and the potential for intermediate to long-term revenue synergies from that agreement?.

So only know the agreement is on track and the relationships are very good. We are in process of executing the technology transfer. I think we discussed last quarter and before so this is on track and this is happening. So, it's all on track. It's all going well. Of course the outcome this is still a yet to be seen and it will take some time..

The next question is from Gus Richard of Northland Securities. Please go ahead..

Yes, thanks for taking my question. Just thinking about this, it seems that perhaps you're lagging the cycle in front end investment a little bit. So the memory guys put a bunch of SDN takes a while to ramp and then you guys benefit on back end inspection a little bit later on.

And so, I was wondering if you could talk about sort of the lead lag in memory spending on the front end.

When after that picks up, do you start to see the back end pick up - your equipment?.

Well here the lead lag not always where say it's not so simple I would say. So from the big spend or the big investments that were made and we saw a big order that we talked about, it will install the last machines. This happened and this was part of the big expansion.

Now, there is another part of the DRAM a move to advance packaging that is not necessarily related to just the big investments that they're making on the fabs and the new fabs for the advanced deals. So overall, I don't see the lag as I see this entire industry entire memory industry holding back. I think this is the main situation now.

And if you look definitely we enjoyed in the first half of this year, we enjoyed the momentum of 2018. And so, there is we see some hesitant of our customers, how much to invest and when to invest and this is exactly what we are seeing today.

On the other side, we are serving the fastest growing segments and this is true not only to the DRAM it is true to the image sensor, power RF which we are expecting them to run coupled with China, we are positive about the future.

Now it is very, very hard to answer your question in the sense okay now the run of the front end is coming when exactly or what is the lab will take one or two quarters, definitely we will eventually enjoy it. However, I think today it is more difficult than before to look at these front and back end as one coming immediately afterwards.

I think it is more complex, especially when you take in the China factor. Least but not last Gus don't forget that we have also sales to the front end primarily in China. This is not a small business, it's not a huge business but definitely it is part of our growth. And this is ongoing and we are going to enjoy it.

We are enjoying now we will enjoy it also in the coming future. I hope I answered your question..

Yes you did thank you.

And what’s China as a percentage of revenues these days?.

It's about a 30%..

And then you mentioned customization as an impact as you tried to ship units out the door. I'm sure you have a base configuration and then there is some period of time that's required to customize the tool for a given customer. It's sort of when do you sort of have to make how much time do you need to make a customer decision.

And when does it start to become painful and cost you more money?.

Usually you know in regular times our lead times are anywhere between 8 to 12 weeks. And when we do that, then we are all geared up and there are the processes to meet the customer requirements in such a timeframe. When it goes below eight weeks, this is the time that it started to become painful.

And today, many of the machines that were shipping out of the door are less than eight weeks. So this is definitely painful. This quarter, it will be painful in the coming quarter and this we hope that once the industry is less uncertain, people will make decisions in more-timely manner and the lead times will come back to 8 to 12 weeks.

And we've seen that also in the past. This is not something new in more times that people don't have the visibility immediately they cut down on the lead time. So we've seen that in the past and I'm sure that in a couple of quarters, the lead times will start to become longer in more the manner that we're used to working..

And then the, final one from me. You had some market pressure in the quarter. Some of it was mix.

Was that just a richer mix of higher volume customers that wanted lower prices because of the volume or was that a product mix issue?.

I think it's a product mix issue, primarily a product mix issue. It is a - customers always want lower prices and this is an ongoing, but I don't see that as a something drastic this quarter. And it is primarily the product mix spur this quarter and Moshe mentioned we expect already in the fourth quarter to be in a better position..

Your next question is from [indiscernible] Portfolio Management. Please go ahead..

Yes with regarding to the dip in the profitability, I want to get better sense of I understand this is an aberration and I wanted to ask, do you expect it to rebound back the levels of the first half or do you expect it to stabilize somewhere in the middle or and how long do you think that that might take?.

I would say that in general, I would say the main factor is the - in general the environment in the market because if in normal time, usually we get a lot of multiple order machines, Tier 1 customer order machine with 2D and 3D, and usually this machine the price is higher and the margin is higher.

So today as we mentioned we get a lot of ones and twos machines and I would say some of them are for entry level used and not fully loaded and definitely - the selling price is lower than the normal one. So if you take all of these, this is very specific to this the third quarter I think.

Now when customer feels more confidence to claim order a few months ahead definitely the price and the efficiency the production will bring us back to what we used to do close to 20% operational profit and we feel comfortable with it. It’s just a matter of the environment of the industry..

Right so - but the recovery back to the 20% operating non GAAP that's not going to be immediate, that's like a long?.

The issue that actually nobody can predict when the environment will change, you can see that it's not easy for us to predict it for long-term. But when we see all the drivers are all over, this is the matter evolution nobody can stop it.

It's just a matter of timing when it happened, it happened in the next quarter, two quarters ahead, but we believe that this is not something for a long-term. It should be the mid-term, but we are a small player, we cannot predict it for the whole year.

We believe that it will not take so long and we will enjoy back the normal profit that we performed in the past..

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

Quick question just on the 5G RF opportunity if I listened to a number of companies that reported this earnings season, it sounds like 5G especially on the handset. Feels like it may be accelerating and the number on handsets next year could reach in the $200 million range.

Wondering if you're seeing any acceleration in your outlook for the 5G and then related question you talked about seeing orders, I think for multiple customers on 5G RF. Wondering is that mostly from the large sort of established U.S.

module vendors or are you starting to see additional suppliers coming online in Asia to support some of the growth in the China handset market? Thank you..

In general, the business that we see in the RF that we refer to are the main players, the more established players and those will produce most of the volume and this is where we are focusing.

And we've gained a new customer, new main customer that we're starting to ship machines and this we mentioned in the call and we are going to ship additional machines to this customer. So this is definitely where is our focus and we understand from talking to these customers, that they are all planning to ramp up production.

So yes, we are seeing an increase. It's still I would say in the early stages, but I'm expecting to see this in full force a more to the middle of next year. It will take a little bit of time and I think they have seen enough capacity with what they have it will take some time until they really increase the capacity.

So this is at least from my understanding of this specific opportunities, no doubt that it is real. Yes, we are hearing about additional companies in Asia that are going to enter this market and still I don't think that the volumes are there yet.

I think the volumes are more from the big companies that you know that are still serving the most of the market..

[Operator Instructions] 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’s website, www.camtek.co.il beginning tomorrow. Mr. Amit, would you like to make your concluding statement..

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

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