Ehud Helft - Investor Relations-GK Rafi Amit - Chief Executive Officer Moshe Eisenberg - Chief Financial Officer Ramy Langer - Chief Operating Officer

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

Thank you, and good day to all of you. I would like to welcome all of you to Camtek's first quarter 2018 results conference call, and I'd also like to thank Camtek's management for hosting this call.

With us on the line today are Mr. Rafi Amit, the Camtek's CEO; Mr.

Moshe Eisenberg, Camtek's CFO; and Mr. Ramy Langer, COO.

Rafi will provide an overview of Camtek's results and discuss market trends in the first quarter of 2018. Moshe will then summarize the financial results for the first quarter.

We'll then open the call to take your questions. Before we begin, I would like to remind our listeners that certain information provided on this call are internal company estimates, unless otherwise specified.

This call 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 the 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 demands for services and products, the timing and 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 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 would 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 operations and prospects for the future.

A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. And I would now like to hand over the call to Rafi, Camtek's CEO.

Rafi, go ahead, please.

Excellent. Good afternoon, and thank you for joining us on our call today.

We are very pleased with our performance in the first quarter of 2018. We presented our highest ever level of semiconductor revenue of $27.3 million, ahead of our guidance range.

This represents growth of 29% over the first quarter of last year. I am also very encouraged with the strong profitability we showed this quarter with our non-GAAP operating margin and net margin at over 15%.

And not less important, we see strong order momentum that has continued into the second quarter which makes us optimistic that we are heading into another strong year for company. Our expectation for continued growth is reflected in our Q2 guidance of $29 million to $30 million, which represent around 30% growth over Q2 of last year.

We continue to generate strong level of cash and in light of our cash position, the board of directors decided to distribute a dividend of 14% per share, which translate into approximately $5 million to shareholders. This is a reflection of our success and dedication in creating shareholders' value.

As you can see, the strategic decision we took last year to focus on the semiconductor business has resulted in substantial improvement in our profitability and our balance sheet. Our end markets are showing strong growth in all the segments.

Moreover, we have expanded into new areas relating to frontend such as Macro Inspection, a new customized 2D application developed for customers of which we plan to ship multiple systems to several customers through 2018. The Advanced Packaging market continues to be one of our major segment and we are seeing a production of this technology in the memory world.

As we announced earlier this year, we have already received order for 17 tools of our next-generation 3D metrology solution. Since then, we have received additional orders from several customers and we expect to maintain our leadership in this segment.

In line with our strategy to focus and penetrate the 2D segments, we have been commenting -- cementing our position in the 2D inspection market with innovative solutions that provides Camtek with a significant competitive advantage. In the first quarter, more than half of our systems were shifted to support 2D based applications.

In fact, a few weeks ago we announced an order for multiple systems for frontend 2D Macro Inspection from a major Chinese manufacturer. This order is the result of long term relationships of trust with Chinese customers as well as testament to our strong 2D detection capabilities, combined with high productivity.

As we move through 2018 and beyond, we believe that our excellent performance in 2D inspection will open many additional business opportunities for us in the future. China itself has become a dominant part of our semiconductor business.

We intend to leverage our longstanding presence in the territories to benefit from the huge opportunity we see in the Chinese market. Earlier this week, we announced the development of a dedicated solution for side wall cracks detection in post dicing applications.

Further to this announcement, we see a lot of interest in this unique solution and have already delivered systems equipped with this new development. Another achievement, I am excited about, is the selection of Camtek by Texas Instruments for the Supplier Excellence Award.

Camtek is one of 10 companies selected from among thousands of suppliers. The annual award honors companies whose dedication and commitment in supplying products and service meet the high standard for excellence.

This recognition reflects our responsiveness and best-in-class support we provide our customers to improve their performance and meet their business goals. This end my summary and I would like to hand over to Moshe for more detailed financial discussion of the financial results.

Moshe?

Thank you, Rafi. Unless I state otherwise, I will summarize the results on a non-GAAP basis.

The reconciliation between the GAAP results and the non-GAAP results appear in the table at the end of the press release issued earlier today. In addition, at the end of the first quarter of 2018, we ceased our efforts to utilize the remaining inventory and equipment related to FIT development and recorded a one-time write off in the amount of $0.5 million, which is included in the GAAP results.

By that we completed the shift of the business focus to semiconductors. We do not expect any further expenses related to FIT activity going forward.

First quarter revenues came in at $27.3 million, which is a record for semiconductors revenue, up 29% year-over-year. The geographic revenue split for the quarter was as follows.

Asia was the strongest region during the quarter, representing approximately 72% of overall revenues. U.S.

and Europe contributed 28%. This is higher than previous quarters and result of our specific efforts in these territories.

First quarter gross profit was at $13.2 million, representing a gross margin of 48.5%. This is confirmed with the gross profit of $10.3 million, representing a margin of 48.7% in this first quarter of last year.

Our target is for gross margin to reach above 50%, which we expect in the coming quarters. Operating expenses in the quarter were $9 million, this is at similar levels to those of Q1 last year which amounted of $8.8 million, this despite of our growth of 30% in revenues.

This operating leverage allowed us to increase the operating profit in the quarter to $4.2 million, an increase of 174% over the $1.5 million reported in the first quarter of last year. Operating margin was 15.4%, a strong improvement versus 7.3% in the first quarter of last year.

Net income for the first quarter of 2018 was $4.2 million or $0.12 per diluted share. This is compared to a net income of $1.5 million or $0.04 per share in first quarter of last year.

Net cash and cash equivalent as of March 31, 2018, were $47.2 million compared with $43.7 million as of this December 31, 2017. During the first quarter, we increased our position by $3.5 million.

Overall, I am very pleased with the balance Power Metals with DSO at 79 days. As Rafi mentioned, the board approved a dividend to shareholders amounting to $5 million or $0.14 per share.

The dividend will be paid on May 29, 2018 to all shareholders of record at close of the market on May 16, 2018. Guidance for the second quarter of 2018 is for revenues between $29 million and $30 million, representing year-over-year growth of approximately 30%.

We will now open the call for questions, operator?

So first question, Moshe, the second quarter guidance is very robust at $29.5 million. Can you just help us understand some of the underlying positives and negatives as you look at Advanced Packaging, CMOS, MEMS and other trends in the business on a sequential basis?

Rafi, you want to take the couple of questions? And if you want to -- when we -- I think we also -- Rafi mentioned in his comments, we see strength in most of the segments and I would look at it from two different aspects.

First of all geographically all the territories -- and you see even the results coming from Europe, the U.S are contributing very nicely to the business. So we are not here depending on a specific geography.

On the other side from the applications point of view, so the 3D, the Advanced Packaging is strong, emory is a converging to Advanced Packaging, primary the DRAM and we see this strength and we're participating in it. This quarter we're already seeing a more than 50% of the machines we shipped off for 2D application and that's a very -- it's different -- it's another positive trend in our business.

And on the 3D, we're seeing a strength in all the segments that we are already tracking. It's the CMOS Image Sensors, its MEMS, it's the power, it's the RF and so forth.

So from that point of view, looking forward, we are not depending on a specific application or geography, we are seeing the whole market moving in a healthy mode, so that's I would say from us is the positive outlook for Q2.

And then a follow on related to revenues, but extending the duration. There is always a lot of interest this time of year around company, half on half views and there is -- clearly a strong order environment in the first quarter.

Can you help us understand the visibility that you have in the second half? And I think historically the company -- or at least a quarter ago the company was looking for mid-teens year-on-year growth.

I think the mention on this call was double digit, the second quarter guidance, I think would have business tracking above mid-teens. How do you look at the second half and is there -- from the backlog that you have, potential that second quarter strength persist through the end of the year?

Rafi, would you like to take this?

Okay. Yes, yes, I will take it.

Let's say today we could feel comfortable as we say for the second quarter and based on the backlog we also feel very comfortable for the third quarter. And it looks like we are doing, I would say, a very similar to run rate that we see today.

So this is very positive right now. Q4 is a little bit far away from us and we don't have any strong indication, but definitely the backlog that we experience right now is the highest ever.

And we've discussed with customer, we feel very positive environment in the market. So we believe that we could continue at this rate for the second half of the year.

Thanks Rafi. Moshe, I don't want you to think I'm ignoring you, so I will ask a gross margin question.

You mentioned that you'd expect gross margin to close in on that 50% target in the next few quarters. Can you just help us understand between the level just reported of 48.5% and 50%, the 150 basis points, how do we close that gap?

Is it mix of product? Is it company specific initiatives?

What are the levers that you have in your toolkit to narrow that gap?

So first of all we haven't inherit operating leverage in the model. So as we grow the business, we would see improvements in the gross margin as well.

In addition we -- obviously, we put a lot of a tight controls over the cost structure of the company and then we believe that this will also yield an improvement on all cost structure of the company, including gross margin. And it's -- by the end of the day, it's mainly a product mix but there is deal mix.

Some quarters you will see a higher -- more profitable deals and any other -- different mix. But overall we see a clear pass to a 50% gross margin mark.

I'm sure investors will appreciate the nice special dividend and it's the second in the last few quarters. So the question is, as you look at the potential to share cash generation with investors and the potential to either do a special dividend or maybe institute a regular quarterly dividend, can you help us understand what the criteria are that you're looking at that determine whether you pay a special dividend and what would it take to turn that special dividend into a recurring regular quarterly dividend?

Okay. Maybe you will answer for this.

I would say that -- look, we don't have any official dividend policy right now, because in our businesses we do never know when will be -- if we want to make any -- if we consider any merging, M&A, something, you may need cash for that or whatever or something happening in the industry. So when we feel comfortable, when we see very positive market trend so we feel that we can allocate some dividend for investors -- share our successful with investors.

But we have to do it -- which quarter to consider the situation, the market trend, opportunities and then we can decide. So we don't have anything right now as a policy that we can share it because we don't have something like that.

First, I guess on the guidance. Just to clarify, Moshe, do you -- are you targeting 50% for the second quarter for gross margins, just wanted to know are we correct?

So typically we don't provide any specific guidance on gross margin levers and we're not going to change it this time. We do have a good visibility into the second quarter order mix and revenue, but not to the extent that we can yet get to the gross margin level.

But I said before, we have a clear path. We know what we have to do in order to get to the 50% mark.

The one thing is the business volume and the levers that we have. And the other one is really a product mix and we believe that over the next course of a few quarters, we will get to the 50% mark.

We are very, very close to it as we are.

And then just quickly on kind of the service part of your business. Is that growing in line with your overall corporate growth?

I mean, develop year-over-year, you are growing like 30% year-over-year, right? Is your service growing in the same rate or it's actually more actually more product growing faster than service?

Yes, it's more products related -- the growth rate. Service is growing.

If you look at the service level versus the first quarter of last year, there was an increase. But most of the growth is coming from the product side of the house.

Rafi, I heard on your prepared remarks that you guys were doing some work on the frontend Macro Inspection market, is that correct and where are you guys stand on that?

Yes, as we mentioned -- first of all, we believe that our capability -- I mean, from performance, from the capability, our machine definitely can serve the Macro Inspection market. But as you know, you also have some process of qualification, penetration and this takes time.

So we believe that after we get a nice order from one big customers, we continue to see more penetration to this application. We have more dedicated application that we developed for the frontend.

So I definitely feel very comfortable that we can see more and more market share in the frontend as well.

Is this a unique tool? Or is this something that you guys [developed] existing hardware and just make more small change?

Look, in general our tools meet the demand in the frontend in the Macro Inspection. But, definitely, the amount of our special application we get from customer force us to develop many features.

It could be some time only software, sometime some mechanical and special optic together with algorithm and software. So I would say more than 50% of our systems are actually as a result of special development that our R&D make in very short time.

So right now what we mentioned about the frontend, I would say, part is very standard application and other is very unique application that we developed.

And then on your commentary about Advanced Packaging going to DRAM. So our understanding is that still limit in the very low volume -- relatively low volume, although you corrected there is some going into the DRAM.

Just curious, is that the case or are we missing something? Are you seeing more broadening into just general DRAM device or is it just more concentration from specialty DRAM applications?

Rafi, can you?

Yes, yes. Look, in general, obviously, it's a trend and its starting and it's not only the DRAM volumes.

But definitely there is a shift of some of the DRAM applications. I think it was initially started in the segment of gaming, it's moving to other application and definitely this market in order to reduce the access time to the DRAM in sales, the new Wide I/O interface and the reduction in the power consumption, this is a trend that is starting to be more significant.

But obviously it's a trend that will take some time.

Last question I have on the functional inkjet, are you guys completely out of that business now or are you still maybe looking to sell that technology to someone? Where do you stand on that?

Edwin, we are out of it.

I want to ask you a few more things, I guess. Do you expect to get any more multi-year contracts in the year of 2018?

You mean multiple system contracts?

I mean like multi contracts, like three, four, whatever you call them, like you got in the first quarter of 2018.

Yes, we get -- I would say definitely we can see that -- we can see that for the second quarter some order coming as a multiple system order.

Do you see something in the second quarter?

In second quarter, definitely we see, yes.

Are you seeing something in the second quarter for the multiple systems, what you do?

Yes, I said. I am sorry.

Yes, I said we see -- we saw, we have it.

Are you seeing it in a second quarter coming in other words?

Rafi, could you?

Yes, definitely, David. The answer is yes.

In general, we have announced the multiple equipment orders that we received, we announced. We are definitely expecting more multiples throughout the year as we've seen throughout the quarters and it's not something that is -- we do get some of the businesses in multiples.

So this is not something that is not something that is very rare.

I see, in other words throughout the rest of 2018 -- in other words, right?

Definitely, definitely.

Now also do you expect to get any more foreign business and from where -- like which countries do you get it from? Let's say predominantly from where you get most of your business from foreign companies, foreign countries?

So in general, I think, we mentioned it, near about 72% of our business is coming from Asia and then the rest is coming from the U.S. and Europe.

And in general, we see a very even distribution throughout the different region. So it's not that we are depending just on one region for our business.

So I would that this is the current status.

And actually all of Asia, so you could say China, Malaysia, Singapore and stuff like, the rest of Asia?

Absolutely, all of the different countries we sell to.

72, that's a big percentage, 72%, that's very big. Again, Asia is a growing market, especially China.

China is booming -- China -- especially China.

Absolutely.

So how is the general outlook, let's say, for the rest of 2018?

Yes, I would say that it look very positive right now. We have a nice backlog also for Q3.

So right now it look that we can continue very similar to the -- our run rate right now. But Q3 look, I would say, promising, Q4 is a little bit far to say, but we feel comfortable with it.

In other words two and three feels like pretty comfortable, in other words, second and third quarters. Is that what you mean, Rafi, the second, third quarter.

Yes.

Now you don't get too much business from your own country, in Israel. I see most of it from foreign.

From what I see from what...

What is the potential in Israel. We don't do any packaging in Israel.

Packaging in Israel?

We don't have. Maybe we have frontend.

In there you have frontend tower. Let's see, we don't have packaging industry.

So our main target market is mainly I would say the packaging, advanced packaging or everything related to packaging and there are no packaging industry in Israel.

You are the actually only ones in Israel at this point. You actually have no competition in the packaging part of it in Israel, I see?

Rafi, you mentioned the cash. I wasn't too sure, was that $47 million you have in cash or $43 million.

I know it's little mixed up on the cash that you have right now.

Moshe -- yes, Moshe will answer to it exactly.

We have $47.2 million worth of cash as of the end of the first quarter.

Yes. And last year to that same quarter you had less -- last year for the first quarter, you had less in general, Moshe?

I don't recall the number -- the exact number that we had in the first quarter, but at the end of the year we had $43.7 million worth of cash. So in the first quarter we actually generated $3.5 million worth of cash.

Like additional cash, that's the reason why you've given this special dividend, because you have more cash than you figured you need what you would like to run the business in other words.

Yes.

Yes. I would like to thank you for your continued interest in our business.

I look forward talking with you again in next quarter. Thank you and good bye.