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Camtek Ltd  (NASDAQ:CAMT)
Q3 2019 Earnings Call
Nov. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Camtek's Third Quarter 2019 Results Conference Call. [Operator Instructions] 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 & 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. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Ehud Helft -- Investor Relations

Yes. Thank you, operator. Good day to all of you. I would 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 results and discuss market trends, and 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 prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs, expectations 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 earlier today.

These forward-looking statements are only predictions and may change as time passes. They are subject to risks and uncertainties that may cause actual results to differ materially, among them risks relating to changing industry and market trends, reduced demand for Camtek services and products, the timely development of new services and products and the reduction by the market, increased competition in the industry and price reductions, as well as 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 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 investor understanding and assessment of the Company's ongoing core operation 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'd like to hand over the call to Rafi, Camtek's CEO. Rafi, go ahead, please.

Rafi Amit -- Chief Executive Officer & Chairman

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 drivers require 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 became 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 back on track, the profitability will improve.

I would like to provide some updates regarding the -- 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 higher-resolution sensor in 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 have been qualified by major players for 5G devices. A 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 as a Tier 1 power device manufacturer. This segment is undergoing a 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 machines in 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 packaging is ongoing. And during the third quarter, we have completed the delivery to two major customers of orders we received earlier this year.

In the 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 received order from three new Front-End customers. In general, market driver supporting demand for our requirements have 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 that 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's employees for their ongoing huge efforts and dedication 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?

Moshe Eisenberg -- Chief Financial Officer

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

Camtek showed solid results 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 reconciliation 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, 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 [Phonetic] dividend payment.

In terms of guidance, we expect fourth quarter revenues to be at similar level to those of the current quarter. This implies full-year 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?

Questions and Answers:

Operator

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

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question, and team, congratulations on the continued outperformance to industry with your sales growth, nice track record through the year this year. I wanted to start with a clarification on the fourth quarter revenue guidance. Understandable that it would be similar. But within that, it should 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? Are all of those areas expected to be fairly flattish? Or would some be moving up and others moving down?

Ramy Langer -- Chief Operating Officer

I think in general, I think it is -- I would say flat. And 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. And I think on the power, it is also strong, and we see strength, and we shipped multiple machines to a single customer. China 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, there are lots 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.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful, Ramy, and I'll use the concluding remark there to segue into the next question. And it's 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 '20's 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 buys or other items that may have completed in 2019 that would be a 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.

Ramy Langer -- Chief Operating Officer

I think 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, the -- one of the issues that is sort of driving down the industry, and I see you see it across the Board and 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 memory space and we focus on the other areas, so definitely, the CMOS Image Sensors are strong. The power is strong. We expect with the 5G to see comparatively big business in the RF area.

And I'm going back to China. The China is, no doubt, is strong and will continuing to be strong in the first -- in next year, so we are 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.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful, Ramy. 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?

Ramy Langer -- Chief Operating Officer

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 is 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.

Craig Ellis -- B. Riley FBR -- Analyst

Excellent. And then switching over to Moshe. Moshe, clarifying the gross margin decline sequentially. Of the 130 basis points, it sounds like there are expedite and expedite-related issues that are impacting that but also segment mix. Can you just break out 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 which may be in the COGS line for a couple quarters given the tough macro that we've got here?

Moshe Eisenberg -- Chief Financial Officer

So I'm not sure that I have the real proportion between the different elements, but I think that, just to touch upon the few elements. The first one is, no doubt, that there was some pressure on prices in the quarter on mix of deals in the quarter that put some pressure on average selling price. So that was one element. The other element was the inefficiency in the operation process internally given the fact that we have to act in a 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 are still serving ones and twos, but the -- but as long as -- as far as the average selling price is going back up, and we will see an improvement in the gross margin in the fourth quarter.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for that. And then lastly for me before I get in the queue. It's been a couple quarters since the Chroma ATE deal has closed and 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.

Moshe Eisenberg -- Chief Financial Officer

So all in all, the agreement is on track. The relationships are very good, and 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. And of course, the outcome, this is still yet to be seen, and it will take some time.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks, guys, and good luck.

Ramy Langer -- Chief Operating Officer

Thank you.

Operator

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

Gus Richard -- Northland Securities -- Analyst

Yes, thanks for taking my question. Just thinking about this, it seems that perhaps you're lagging the cycle and front-end investment a little bit, so the memory guys put a bunch of capacity in, 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 the -- in memory spending on the front-end. When after that pickup, do you start to see the back-end pick up, your equipment?

Rafi Amit -- Chief Executive Officer & Chairman

Well, here, the lead lag, not always works, so it's not so simple, I would say. So from the big expense -- big investments that were made and we saw a big order that we talked about, that we installed the last machines, this happened and this was part of the big expansion. Now there is another part of the DRAM moved to advanced packaging that is not necessarily related to just the big investments that they are 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 hesitance on 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 CMOS Image Sensors, power RF, which we are expecting them to ramp. Coupled with China, we are positive about the future.

Now, it is very, very hard to answer your question in the sales. Okay. Now, the ramp of the front-end is coming, when exactly or what is the lag? Really, take one or two quarters, definitely, we will eventually enjoy it. And 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. And 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're enjoying it now, and we will enjoy it also in the coming future. Did I answer you?

Gus Richard -- Northland Securities -- Analyst

What's -- yes, you did. Thank you. What's China as a percentage of revenues these days?

Rafi Amit -- Chief Executive Officer & Chairman

It's about a 30%.

Gus Richard -- Northland Securities -- Analyst

Got it. And then, you mentioned customization as an impact as you try to ship units out the door. I'm sure you have a base configuration, and then there's some period of time that's required to customize the tool for a given customer. 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 becoming painful and cost you more money?

Rafi Amit -- Chief Executive Officer & Chairman

Usually, in regular times, our lead times are anywhere between eight to 12 weeks. And when we do that, then we are only geared up, and there are the processes to meet the customer requirements in such a time frame. When it goes below eight weeks, this is the time that it's starting to become painful. And today, many of the machines that we are 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 a more timely manner, and the lead times will come back to eight to 12 weeks. And we've seen that also in the past. I mean, 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.

Gus Richard -- Northland Securities -- Analyst

Got it. And then the final one for 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?

Ramy Langer -- Chief Operating Officer

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

Gus Richard -- Northland Securities -- Analyst

Got it .That's it from me .Thank you so much.

Ramy Langer -- Chief Operating Officer

Thank you.

Operator

Your next question is from Ethan Etzioni of Etzioni Portfolio Management. Please go ahead.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

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

Ramy Langer -- Chief Operating Officer

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 one and twos machines. And I would say some of them are for entry-level use and not fully loaded. And definitely, the average selling price is lower than the normal one. So if you take all of this, this is very specific to this, the third quarter, I think.

Now, when customers feel more confident to plan over a few months ahead, definitely the price and the efficiency of the production will bring us back to what we used to do, close to the 20% operational profit. And we feel comfortable with it. It's just a matter of the environment of the industry.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Right. So but the recovery back to the 20% operating non-GAAP is -- that's not going to be immediate? That's like...

Ramy Langer -- Chief Operating Officer

The issue is actually nobody can predict when the environment will change. You can see, it's not easy for us to predict it for long term. But when we see all the drivers all over, this is a matter of evolution. Nobody can stop it. It's just a matter of timing when its happened. It happened in the next quarter, two quarters ahead. But we believe that it's not something for long term. It should be in the mid-term, but we are a small player. We cannot predict it for the whole year. We believe that this will not take so long, and we will enjoy back the normal profit that we've performed in the past.

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Okay. Thank you very much.

Ramy Langer -- Chief Operating Officer

Welcome.

Operator

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

Quinn Bolton -- Needham & Company -- Analyst

Hey, guys. Quick question, just on the 5G RF opportunity. If I listened to the number of companies that have reported this earnings season, it sounds like 5G, especially on the handset, feels like it may be accelerating, and the number of 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 a 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 US 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.

Rafi Amit -- Chief Executive Officer & Chairman

In general, the business that we see in the RF that we referred to are the main players, the more established players and those that produce most of the volume, and this is where we are focusing. And we've gained a new customer, a new main customer that we're starting to ship machines, and this is 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 more to the middle of next year. It will take a little bit of time, and I think they have still enough capacity with what we have. It will take some time until we really increase the capacity. So this is at least from my understanding of these specific opportunities. No doubt that it is real. Yes, we are hearing about additional companies in Asia that are going to enter this market. 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.

Quinn Bolton -- Needham & Company -- Analyst

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Amit to go ahead with his closing statements, 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?

Rafi Amit -- Chief Executive Officer & Chairman

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.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Ehud Helft -- Investor Relations

Rafi Amit -- Chief Executive Officer & Chairman

Moshe Eisenberg -- Chief Financial Officer

Craig Ellis -- B. Riley FBR -- Analyst

Ramy Langer -- Chief Operating Officer

Gus Richard -- Northland Securities -- Analyst

Ethan Etzioni -- Etzioni Portfolio Management -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

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