Ladies and gentlemen, thank you for standing by. Welcome to Camtek's third quarter 2019 results conference call. All participants are present in the 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 & 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?
Yeah. 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. I would also like to thank Camtek 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. Moshe will then summarize the financial results of the quarter. We will open the call to your questions. Before we begin, I'd like to remind our listeners that certain information provided on this call are internal company estimates unless otherwise specified. This call also 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 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 demands for Camtek's services and products, the timely development of new services and products, and their adoption by the market, increased competition in the industry and price reductions, as well as risks and uncertainties identified from time to time in Camtek's annual report on a Form 20-F and Camtek's other filing with the SEC that represent 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 cooperation and prospects for the future. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release. Now I'd 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 results 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 others 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 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 micro 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 update regarding our Q3 quarter activity. In terms of market segment, 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 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 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 at 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 install multiple machines at tier 3 customer.
We are working closely with all key players on the development of future packaging technologies of Fan-Out and heterogeneous integration. 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 drivers supporting demand for our requirement have not changed. 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 that 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 wanted to make a small correction. In the advanced packaging segment, we installed multiple machines at 3 tier 1 customers and not in tier 3 customers. With that, I wanted to go to the financial part. Camtek showed strong 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, 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 segment 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 at similar level to those of the current quarter. This implies full-year revenues at around $133 million, up 8% year-over-year. With that, Rafi, Ramy and I will be open to take your questions. Operator?
Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Craig Ellis of B. Riley FBR. Please go ahead.
Thanks for taking the question, 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, as 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? 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 would say flat. The only area that is shining this quarter, as we mentioned, is the CMOS image sensors, where we shipped multiple machines and 9 machines to one customer. This area, no doubt, is strong and will continue to be strong. I think of the power, it is also strong, and we see strength, and we ship multiple machines to a single customer. China overall is very strong and will continue to be strong. When you look at the entire volume of the revenues, this is basically flat, at least for the next quarter. 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. As Rafi mentioned, we are optimistic about the 2020 forecast.
That's helpful, Roni, 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-$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 buys or other items that may have completed in 2019 that would be a headwind to growth? Just trying to get a sense for the magnitude of growth that you see next year and where that's coming from.
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. This is, I would say, one of the issues that is sort of dragging down the industry, and I see it across the board and the different announcements from all the players. I think the question is when the DRAM primarily, and then the NAND market, will start to ramp up. This will definitely affect the magnitude of 2020. If you take out the memory space and we focus on the other areas, definitely the CMOS image sensors is strong. The power is strong. We expect with the 5G to see comparatively big business in the RF area.
I'm going back to China, that China is no doubt is strong and will continue to be strong in the first quarter in next year. 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 see. This will basically dictate the overall results of how optimistic we can be about 2020.
That's helpful, Ramy. Thanks. 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. The 14 customers that we are talking, these are revenues this year. 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. This is for real. Even in the fourth quarter, we will see additional new customers. There will be several of them. Definitely this is very good news because I think this implies two things. First of all, they are customers that will buy additional machines over the next year or so. Secondly, I believe that we are also gaining market share.
Excellent. 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 their 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 of quarters, given the tough macro that we've got here?
I'm not sure that I have the real proportion between the different elements. I think that just to touch upon the few elements. The first one is no doubt that there was some pressure on pricing in the quarter or mix of deals in the quarter that put some pressure on average selling price. 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. All of that created an inefficiency environment for our operations. 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 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.
Thanks for that. Lastly for me before I get in the queue. It's been a couple of 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.
All in all, the agreement is on track. The relationship are very good, and we are in the process of executing the technology transfer, I think we discussed last quarter and before. This is on track, and this is happening. It's all on track. It's all going away. Of course, the outcome of this is still yet to be seen, and it will take some time.
Thanks, guys, and good luck.
Thank you.
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 and front-end investment a little bit. 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. 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 works. It's not so simple, I would say. From the big investment 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. There is another part of the DRAM move 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 DRAMs. 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. If you look, definitely in the first half of this year, we enjoyed the momentum of 2018.
We see some hesitance in 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 D1, it is true to the 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 sense, okay, now the ramp of the front end is coming, when exactly or what is the lag? Will it take one or two quarters? Definitely, we will eventually enjoy it. However, I think today it is more difficult than before to look at this front-end, back-end as one coming immediately afterwards. I think it is more complex, especially when you take in the China factor.
Last but not least, 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. We are enjoying it now, and we'll enjoy it also in the coming future.
Yes, you did. Thank you. What's China as a % of revenues these days?
It's about 30%.
Got it. 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. How much time do you need to make a customer decision? When does it start to become painful and cost you more money?
Usually, in regular times, our lead times are anywhere between eight to 12 weeks. When we do that, then we are all geared up, and there are the processes to meet the customer requirement in such a time frame. When it goes below eight weeks, this is the time that it's starting to become painful. Today, many of the machines that we are shipping out of their door are less than eight weeks. This is definitely painful this quarter. It will be painful in the coming quarter. 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 eight to 12 weeks. 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. 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.
Got it. The final one for me. You had some margin 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. Customers always want lower prices, and this is an ongoing, but I don't see that as something drastic this quarter. It's primarily the product mix here this quarter. As Moshe mentioned, we expect already the fourth quarter to be in a better position.
Got it. All right. That's it for me. Thank you so much.
Okay.
The next question is from Eitan Atzmon of Atzmon Portfolio Management. Please go ahead.
Yes. With regard to the dip in the profitability, I understand this is an aberration. I wanted to ask, do you expect it to rebound back to the levels of the first half, or do you expect it to stabilize somewhere in the middle, and how long do you think that might take?
I would say that in general, I would say the main factor is the general environment in the market. 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. Today, as we mentioned, we get a lot of one and two machines.
Some of them are for entry-level use and are not fully loaded, and definitely their selling price is lower than the normal one. If you take all of these, this is very specific to the third quarter, I think. Now, when customers feel more confidence to plan orders a few months ahead, definitely the price and the efficiency in 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.
Right. The recovery back to the 20% operating on GAAP, that's not going to be immediate.
The issue that 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 time when it happens. It happens the next quarter, two quarters ahead, but we believe that it's not something for a long term. It should be the midterm. 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.
Okay. Thank you very much.
Welcome.
The next question is from Quinn Bolton of Needham Co. Please go ahead.
Hey, guys. Quick question just on the 5G RF opportunity. If I listen to a 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 into the $200 million range. Wondering if you're seeing any acceleration in your outlook for the 5G. A related question, you talked about seeing orders, I think, from multiple customers on 5G RF. Wondering, is that mostly from the large, 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 that produce most of the volume, and this is where we are focusing. We've gained a new customer, a new main customer that we are starting to ship machines. This we mentioned in the call. We are going to ship additional machines to this customer. This is definitely where is our focus, and we understand from talking to these customers that they are all planning to ramp up production. Yes, we are seeing an increase. It's still, I would say, in the early stages, but I'm expecting to see this into fourth, 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 they have.
It will take some time until they really increase the capacity. 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. 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.
Thank you.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we poll for more questions. 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?
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 third quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.