Ladies and gentlemen, thank you for standing by. Welcome to Cantex Third Quarter 2019 Results Conference Call. All participants are present in a listen only mode. Following management 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 that please contact Camtek's Investor Relations team at Cheekay Investor And Public Relations at 1646 6883559 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. And there is two 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 Management for hosting this call. With us on the line today are Mr.
Rafael meet Camtek's CEO Mr. Mushe Eisenberg, Camtek's CFO and Mr. Rami Mandar, Camtek's COO. Rafi will provide the overview of contact 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'd like to remind all the scenario reserve information provided on this call, our 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 expectation and assumptions of contact management. For example, our forward looking statements, please refer to the forward looking statements filed in the 1st weeks of pre published earlier today. These forward looking statements are predictions and may change its 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 contract services and products, the timely development of new services and products and the adoption better market, increased competition in industry and price reductions as well as risks and uncertainties identified from time to time in Camtek's annual report on a Form 20F and complex other filings with the SEC that will present comfort with you only as of the date that 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. Managing the needs of the presentation of non GAAP financial measures is useful to investor understanding and assessment of the company's ongoing core as posted 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 Kunzek's CEO. Rafi, go ahead, please. Thank you. Good morning, and thank you for joining our call today. The company showed revenue of $32,500,000 in the third quarter, slightly above the third quarter last year was 5.2 $1,000,000 in operating profit, representing a margin of 16.2%.
We expect Q4 revenue to be similar to those of Q3, namely our total 2019 results to a new record with revenue of about $133,000,000. Our gross margin this quarter came in below our previous quarter. This is mainly due to a less several product mix. Coming into the 4th quarter, we expected our gross margin will improve. This period is being characterized by the continued uncertainty in the business environment which delayed decision making by our customers.
Orders are placed for immediate production needs at very short lease time. At the same time, a large number of the drivers such as 5G automotive big data and other our emerging and we 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 and D expenses to address these market disopportunities. 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. Others 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 based on trade, the profitability will improve. I would like to provide some update regarding the Qs our Q3 quarter activity. In terms of market segments, the CMOS image sensor was the largest this quarter including the shipment of 9 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 expand 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 capability in our internet 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 tier 3.
Customer, in addition, we are working closely with all key players on the development of future packaging technologies of senile and heterogeneous integration. The transition of the DRAM to advanced packaging is ongoing and during the third quarter, We have completed the delivery to 2 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 3 new front end customers. In general, market drivers supporting demand for our requirements have not changed.
Furthermore, best 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 hesitate 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 take complex employees for the ongoing huge efforts and detection in supporting the company's role. 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 more details financial discussion of the financial results. Moshe? Thank you, Rusty. Just before I turn to my financial summary, I wanted to make a small correction, in the advanced packaging segment, we installed multiple machines a 3 tier 1 customers and not even 3 tier 3 customers. So, and with that, I wanted to go to the financial thoughts.
Our Camtek showed solid results in the quarter with revenue in the upper limit of our guidance. In my financial summary, I had 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 issued earlier today. 3rd quarter revenues came at $32,500,000, around the same level as debt reported in the third quarter of last year. 76% of sales were from Asia.
Gross margin for the quarter was 47.1 percent versus 50.4% in the first 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 delay in decision making and demand for quick turnarounds 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 $10,000,000, this is at around the same level that we reported in the first quarter of last year and $400,000 more than in the previous quarter.
This is due to the increase in the R and D expenses as mentioned before by Rafi. Operating profit in the quarter was $5,300,000 compared with the $6,200,000 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 $5,000,000 or $0.13 per diluted share. This is compared to a net income of $5,700,000 or $0.16 per diluted share in the first quarter of last year.
Our quarter end cash balance and short term deposit was $83,000,000 versus $85,300,000 at the end of last quarter. We generated $3,800,000 in cash from operations, Also during the quarter, we made a $5,800,000 dividend payment. In terms of guidance, we expect 4th quarter revenues to be at similar level to those of the current quarter. This applies full year revenues at around $133,000,000, up 8% year over year. And with that, Rafael and I will be open to take your questions.
Thank you. Your question will be pulled in the order they are received. Please standby while we poll for your questions. 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 this year. I wanted to start with a clarification on the 4th order revenue guidance understandable, but it would
be similar. But within that,
it should look at, at the way the dynamics are playing out across advanced 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 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 finished image sensors where we shipped multiple machines and 9 machines to one customer. So this area, no doubt, is strong and will continue to be strong. And I think of the power, it is also strong in the sea strength and we ship multiple machines to a single customer.
China overall is very strong and will continue to be strong. And however, when you look at the entire volume of the, 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 Ravi mentioned, we are optimistic about the 2020 forecast.
That's helpful, Rami. 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 $32,000,000 to $34,000,000 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 we 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.
I think one thing that is different, at this time versus 20 18 in the first half of this year is no doubt the manual situation. And this is, I would say, one of the issues that is sort of driving down the the street. 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 land market will start to ramp up. This would definitely affect the magnitude of the, of 2020.
So if you take out the deal, the memory space, And we focused 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 nose out, is strong, and we're continuing to be strong in the first, the first quarter next year, saw your 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 in it. And this will basically dictate the overall results of how optimistic we can be about 2020.
That's helpful, Rami. Thanks. 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.
The 14 customers that we are talking, these are revenues this year, and they will also produce revenues in these machines. These are real customers that are producing products. Nobody is done initially just for the foundry. So this is for me. And even 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 2 things. First of all, there are customers delivering value additional machines over the next year or so. And secondly, I believe that we are also going to market share.
Excellent. And then switching over to Moshe, Moshe clarifying the gross margin declined sequentially. Of the 130 basis points, it sounds like there there are expedite and expedite related issues that are impacting that, but also, segment mix. Can you just break out what the what the various factors are 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 4th quarter and which may be in the COGS line for a couple of quarters given the tough macro that we've got here.
So I'm not sure that I, that I have, you know, the disproportionate 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 or mix of deals in the quarter that put some pressure on, average selling price. So that was one element. The element was the inefficiency in the operation process internally, given the fact that we have to to act in a quick delivery mode, as well as serving many ones includes tax orders. All of them is some customization.
So all of that created an inefficiency environment for our operations. So I think that these are the 2 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 far as the average selling price, it's going back up, and we would
see an
improvement in the gross margin in the 4th quarter.
Thanks for that. And then lastly for me before I get my cue, it's been a couple of quarters since the Chroma ATE deals has closed. And and just wondering if you can give us an update on how the interaction and man is going there and and the potential for intermediate to long term revenue synergies, from that agreement.
So, all in all, the agreement is, is on track. The relationship has very good. And we are in the process of executing the technology transfer. I think we discussed last quarter and before, so this is in fact, and this is happening. And so it's all on track.
It's all going away. And of course, the outcome, this has been yet to be seen. 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. 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 picks up, do you start to see the back end pick up?
Your equipment?
Well, here, the lead lab not only works it's not so simple, I would say. And so from the big or the big investments that we made, and we saw a big order that we talked about, that we installed the last machines, this happened in this new part of the big expansion. Now there is another part of the DRAM, a move to advanced packaging that is not necessarily related to just the big investments that they are making on the farms and the new fabs for the advanced adherence. So overall, I, I don't see the rank as I see this entire industry, entire memory industry holding back. I think this is the main, the main situation now.
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 team, image sensors, power, Rx, which we are expecting them to run, coupled with China, a are positive about the future. Now it is very, very hard to answer your question in the sales, Okay.
Now the one of the of the front end is coming when exactly or what is the last. We will take 1 or 2 quarters definitely, we will eventually enjoy it. And however, I think today, it is more difficult than before, to look at this front and back end as one coming immediately afterwards, I think it is more complex, especially when you take in the China, a factor. We have, but not last, just 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 are enjoying it now. We will enjoy it also in the coming future.
And what's yes, you did. Thank you. At what what's China as a percentage of revenues these days?
It's about a 30%.
Got it. And then you mentioned, customization, as an impact as you tried to ship units out the door. You 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 become painful and cost you more money
And usually, you know, in regular times or lead times are anywhere between 8 to 12 points. And when we do that, then we are only a build up and there are the processes to meet the customer requirements in such a time frame. When it goes below 8 weeks, this is the time that it's starting to be campaigning. And today, many of the machines that we are shipping out of the Delaware are left in 8 weeks. So this is definitely painful, this quarter.
It will be a 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 see that also in the past. I mean, this is not something new in more, you know, times that people don't have the visibility immediately they cut down in 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, it will become longer in more demanded that we're used to working.
Got
it. And then 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 It is, you know, customers always always want layer prices and this is an ongoing But, I don't, I don't see that as a, something, a drastic disclosure. And it's primarily the product mix per this quarter. And as Moshe mentioned, we expect already the 4th quarter to be in a better position. Okay. The
next question is from Ethan Attune of Attune Portfolio Management. Please go ahead.
Yes. With regarding the dip and the profitability, I wanted to get, better sense of, I I under 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 might take?
I would say that in general, I would say the main factor is the general environment in the market because if enrollment time, usually, we get a lot of multiple audio machines. Tier 1 cost on their older machine with 2 d and 3 d. And usually this machine, the price is higher. And the margin is higher. So today, as we mentioned, we get a lot of monitors machine machines.
And, I would say some of them are for for entry level used and not fully loaded. And definitely the average 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 customers feel more confident to, to plan 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 the 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 is that's not going to be immediate. That's like
The issue is actually, nobody can predict when this, this, when the environment which change. You can see that it's not easy for us to predict it for long term. But when we see all the drivers all over, this is the net of evolution. Nobody can stop it. It's just a net of timing when it happened.
It happened in the next quarter, two quarters ahead, but we believe that it's not something for a long term. It should be the interim, but, you know, we are a small player. We cannot predict it for for the whole year. We believe that this will not take so long and we will enjoy better than normal profit we performed in the past.
Okay. Thank you very much.
The next question is from Quinn Bolton of Needham And Co. Please go ahead.
Hey, guys. A quick question just on the 5G RF opportunity. If I listen to a number of companies that reported this rain season, sounds like 5G, especially on the handset, feels like it may be accelerating in the number of handsets next year could reach into the $200,000,000 range. Wondering if you're seeing any acceleration in your outlook for the 5G And then a related question you talked about it seeing orders, I think for multiple customers on, on 5 GRF. 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 IRS that we refer to are the main player, the more established players, and those who have produced most of the volume, and this is where we are focusing. And we gained a new customer, a new main customer that we're starting to ship machines in which we mentioned in the in the call. And we are going to ship additional machines to this customer. So this is definitely where 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. And, but I'm expecting to see, This includes, 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. So this is at least from my understanding of these sales specific opportunities, lays out that it is real.
And 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.
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 Cantech's website, www.camtech.co.ilbeginning tomorrow. Mr. Amrit, 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 good bye.
Thank you. This concludes the CapEx 3rd quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.