Ladies and gentlemen, thank you for standing by. Welcome to Camtek's third quarter 2018 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Camtek's investor relations team at GK Investor & Public Relations at 1-646-688-3559, or view it in the news section of the company's website at 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, please?
Thank you, and good day to all of you. I would like to welcome all of you to Camtek's third 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, Camtek's CEO, Mr. Moshe Eisenberg, Camtek's CFO, and Mr. Ramy Langer, Camtek's COO. Rafi will provide the overview of Camtek's results and discuss market trends in the third quarter of 2018. Moshe will then summarize the financial results of the third quarter. We will then open the call to take 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 may contain forward-looking statements. These statements are only predictions and may change in time passes.
The 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 the actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand 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 content of this conference call. 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. I would now like to hand over the call to Rafi, Camtek's CEO. Rafi, go ahead, please.
Thank you all for joining our call today. Camtek delivered excellent results for the third quarter. The company showed strong revenue of $32.2 million, up 35% over Q3 of last year, and exceeded the top end of our guidance of $31 million-$32 million. We also demonstrated significant improvement in all the profitability metrics, with EPS of $0.16. In addition, our outlook ahead remains positive. Let us look at the specific market trends as far as this relates to Camtek. Our target market growth is driven both by introduction of new technology and by capacity expansion. The number of tools required for inspection and metrology depends on the number of wafers. The growing demand for 100% inspection and metrology instead of sampling, demands for much higher accuracies and smaller geometric results in significantly more machine time. This obviously translates to more tools required for production.
Our market segment is characterized by unique requirements driven by the end users, which result in new inspection and metrology steps. This is another factor in higher growth rates in our market compared with the general semiconductor market. Good example for such requirement is the Inner Crack Imaging, which we introduced earlier this year. Our main market segment is advanced packaging. This technology is increasingly being adapted instead of wire bonding, specifically in the memory space. While the general prices are undergoing some pressure, the transition into advanced packaging is nonetheless expected to continue, driven by technical requirements for higher bandwidth and lower power consumption. Other segments which we focus on, such as CMOS image sensor, MEMS and RF, are enjoying growth. Let me give you an example. The new smartphone which we are currently being introduced includes five high-resolution cameras.
This means that even without any increase in the number of phones, our business will grow as our customer will have more sensor with higher resolution to scan, which require more inspection tools. As testified by our strong 30%+ growth in 2018, it is clear that we are not only maintaining our leadership position in 3D metrology, but we are also gaining market share in the 2D inspection sector and expanding to new applications such as front-end macro inspection and compound semiconductors. Looking ahead, based on order in hand and discussion with customers, we see revenues continue to grow, reaching between $32.5 million-$33.5 million in the fourth quarter. We expect this to continue into the first quarter of 2019. A more specific Q1 guidance will be provided in the first quarter of next year, following the release of our Q4 results.
We will continue with the same strategy, which has been very successful in 2018, focusing on the fastest-growing segments of the semiconductor industry, where new production and packaging technologies need advanced inspection tools. I would like to take this opportunity to thank the management and the employees who have shown exceptional dedication to the company and greatly contributed to its success. I would like to hand over to Moshe for more detailed financial discussion of the financial results. Moshe?
Thanks, Rafi. Camtek showed very strong execution in the third quarter, ahead of our expectations, with results exceeding the top end of our guidance range. This performance filtered down our financial metrics to the bottom line. Our gross operating and net margins were all strong and at level we were very happy with, showing the operating leverage inherent in our business model. 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. As you may recall, we sold our PCB inspection business in the third quarter of 2017 and are considered a discontinued operation. In my summary, the results of the third quarter of last year will not include this.
Please note that starting from this quarter, we will upload to our website a presentation with Q3 financial highlights. Third quarter revenues were $32.3 million, ahead of the guidance and up 35% year-over-year. The results were driven by strong demand across all segments and applications. Asia continues to be our strongest region. During the quarter accounted for 84% of overall revenues. The remainder of revenues from the U.S. and Europe contributed 16%. Gross margin for the quarter was 50.4% versus 49.4% in the third quarter of last year. While gross margin this quarter was slightly higher than our typical level, as you know, the gross margin is a function of several factors, including volume and product mix sold. There is always some variability between quarters. In general, we expect the gross margin to vary around 50%.
Operating expenses in the quarter were $10.1 million or 31.2% of revenue, compared with $8.8 million or 36.9% of revenue in the third quarter of last year. The increase in the absolute amount was mainly due to increased SG&A expenses, specifically commissions we paid on our higher level of revenues. R&D spending accounted for just over a third of our operating expenses level. Given the many opportunities we see in our market, we aim to slightly increase our investment in R&D in the coming year so we can capture these opportunities, which will enable further growth ahead. Our strong growth in revenue, combined with a slightly improved gross margin as well as fairly stable expenses, enable us to more than double our operating profit in the quarter versus last year. We reported $6.2 million operating income versus the $2.9 million reported in the third quarter of last year.
This translates to an operating margin of 19.2% versus 12.3% in the third quarter of last year. Net income for the third quarter of 2018 was $5.7 million, up 100% versus $2.8 million in the third quarter of last year. I note that we recorded $500,000 tax expenses, mainly resulted from the utilization of carryforward losses, which is a non-cash item. In terms of earnings per share, we reported $0.16 per diluted share in Q3 versus $0.11 per diluted share in Q3 of last year and $0.13 last quarter. Turning to some high-level balance sheet and cash flow metrics. Net cash and cash equivalents as of September 30, 2018, increased to $48.3 million compared with $41.2 million at the end of the second quarter of 2018. We generated $7.1 million in cash from operations due to strong collection.
As Rafi mentioned earlier, revenue guidance for the fourth quarter of 2018 is between $32.5 million-$33.5 million. As you can see, this will lead to full year 2018 revenues of approximately $132 million or around 32% year-over-year growth, well in excess of the 18% year-over-year growth we demonstrated in 2017 versus 2016.
Representing Camtek's best year in its history. Beyond this, the steps we have taken in the past two years to streamline and focus our business have enabled us to demonstrate the operating leverage in our business model. Much of our revenue growth in 2018 has been captured on the bottom line, and our operating margin expanded from 11% in 2017 to 19% level in the quarter we just reported. With that, Rafi, Ramy, and myself 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. Please go ahead.
Thank you for taking the question, and congratulations on the very strong growth and margin execution, and a 50% margin level, I think for the first time. Good job, guys. The first question is just on the commentary for the fourth quarter revenue outlook and then continued growth in the first quarter. I'm hoping, Rafi, that you can just provide some incremental color on some of the specific things that are driving that growth. As we think about late this year and early next year, are there any headwinds that you're encountering, given some of the cross currents we've seen with some of the macro U.S., China trade issues and some of the other signs of inventory correction?
I think in general, I think I just discussed about it. I would say that in all our sector, if we talk about Q4, we see the growth in all our sectors. It doesn't come from one specific one. It comes from all of them. We still see it from [audio distortion], we see it from CMOS image sensor, we see it from other applications. We see some from macro inspection. I would say that in general, we see it all over. Regarding the next year, we don't know yet, but we believe that also Q1 is about the same. We're not depending on one customer or one segment of application. We continue to see equal applications to grow.
That's helpful. A longer-term question, it relates to 2019. It's not intended to seek guidance, but it is intended to seek more qualitative color just on what you see. This year, clearly a stellar year for your 2D product ramp, and yet you're still maintaining good momentum with 3D, and you've talked about macro inspection. As we look at some of the drivers to 2019, just qualitatively, can you speak to them, and are we at a point yet, or when do we get to the point where the law of large numbers starts to catch up with the growth in the 2D ramp that you've been seeing?
Look, expanding the 2D applications, we go from customer to customer. Each customer has its own requirement, and sometime we have to work together with customer and build for him the special solutions. This is the way how we take more and more 2D market, working together with customer work from Camtek. We pull our capability, and this goes step by step. The 2D definitely has a great potential for continued growing, but it takes time, and I think we do it properly. Regarding in general the 2019, most of our customer preparing their budget in November, December. I believe that we will know more in the next two months and feel more comfortable about their budget. In general, when we discuss with customer, we definitely can hear positive signal.
We don't listen or we don't hear, I would say anything that shows negative signal.
That's helpful. Moshe, not to leave you out of the Q&A here. Stellar gross margins in the quarter. From here, having achieved 50.4%, what are the tailwinds and headwinds to any further margin expansion as we go through the end of 2018 and look at the first half of 2019?
Generally speaking, I think the trend is to continue to improve the gross margin. The positive is that we have some fixed expenses within the gross level, and this will enable us to improve gross margin. On the same time, product mix has a lot of impacts on the gross margin levels. I think the gross margin in the next few quarters will vary around the 50%. Obviously, we hope to exceed the 50%, but we could expect in some quarters to come and maybe challenge the 50% mark.
Thank you very much, gentlemen.
Thank you.
The next question is from Gus Richard of Northland Securities. Please go ahead.
Yes, thanks for taking my question. Could you talk a little bit about the penetration of your crack detection? I was wondering how that was going.
Hi, Gus. This is Ramy. In general, it's going on track. We are working with a number of customers that some have already purchased this capability, some are in process of qualifying it. Definitely, the results are very positive, and it's an ongoing effort, as Rafi said before, it takes time for people to adapt this new technology. It's definitely on track, and I think as we discussed it with you last meet.
Got it. There's a number of positive things going on in your end markets, High Bandwidth Memory, CMOS image sensor capacity expansions, your new products, macro defects, et cetera. Could you give us a ranking of which ones you think are the most potent in terms of driving revenue growth over the next 12 months?
I think what is very interesting in our business is that all of these segments are growing in parallel. It could be that one quarter you see a certain segment that is stronger than the other. If I look at it on an annual basis, I think the product mix is similar. In respect to the only area in 2D where we are seeing the business growing over what we used to have 50%-50% metrology versus inspection. In the last few quarters, you can see that we are selling more to 2D than the 3D metrology. Going back to the segment, specific segment, I cannot say that one segment is dominant and the other is meaningless. No, they are all very strong. We see the strength also across regions.
Most of the regions are strong. We see healthy growth basically in all segments and in all regions.
Got it. In the just-reported quarter, gross margins were above what I was expecting. Obviously it's volume and mix. Could you handicap which drove the upside? Was it volume or mix?
Actually, this quarter it's a combination of volume and mix. It's a combination. I don't think that there is one parameter that dominates over the other.
Okay. All right. Thanks so much.
Thank you, Gus. Bye-bye.
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 pull for more questions. We have a follow-up question from Craig Ellis. Please go ahead.
Thanks for taking the follow-up. Gentlemen, given the strong financial performance in the quarter and the healthy outlook through the first quarter, can you talk about cash deployment and how you're currently thinking about the alternatives between some of the recent trends with special dividends versus saving for inorganic growth? Thank you.
I think we will consider dividends from time to time. We don't have any immediate specific needs for cash. On the same time, we do look on certain inorganic opportunities. We will be more careful before we take another step with the dividend. We'll see. At this point, we're not announcing any dividends.
Thanks, Moshe.
There are no further questions at this time. Before I ask Mr. Amit to go ahead for his closing statement, I would like to remind participants that a replay of this call will be available on Camtek's website at www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?
Okay. 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 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.