Ladies and gentlemen, thank you for standing by. Welcome to Camtek's first 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?
Yeah. 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. I would also like to thank Camtek's management for hosting this call. With us on the line today are Mr. Rafi Amit, the Camtek CEO, Mr. Moshe Eisenberg, Camtek CFO, and Mr. Ramy Langer, Camtek COO. Rafi will provide the overview of Camtek results and discuss market trends in the first quarter of 2018. Moshe will then summarize the financial results for the first quarter. We will 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 when time passes.
Statements on this call are made as of today, and the company undertakes no obligation to update any of these forward-looking statement content, whether as a result of new information, future events, changes in the 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 timely development of new services and products, and the adoption by the market. Increased competition in the industry and price reduction as well as due to other risks identified in companies 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 will be discussed.
These are used by management to make specific 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 earning release. I would now like to hand over the call to Rafi, Camtek's CEO. Rafi, go ahead, please.
Thanks, Ehud. 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 at $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%. 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 Camtek. 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.
In light of our cash position, the board of directors decided to distribute a dividend of $0.14 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 sheets. Our end markets are showing strong growth in all the segments. Moreover, we have expanded into new areas relating to front-end, such as macro inspection and 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 segments, and we are seeing an adoption 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 solutions. 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 cementing our position in the 2D inspection market with innovative solutions that provide Camtek with a significant competitive advantage. In the first quarter, more than half of our systems were shipped to support 2D various applications. In fact, a few weeks ago, we announced an order for multiple systems for front-end 2D macro inspection from a major Chinese manufacturer. This order is a 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 long-standing presence in the territory to benefit from the huge opportunity we see in the Chinese market. Earlier this week, we announced the development of a dedicated solution for sidewall cracks detection in post-dicing application. 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'm excited about is the selection of Camtek by Texas Instruments for their 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 TI high standards 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 ends my summary, I would like to hand over to Moshe for more details, 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 sealed our efforts to utilize the remaining inventory and equipment related to the FIT development and recorded a one-time write-off in the amount of half a million dollars, 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, a result of our specific efforts in these territories. First quarter gross profit was $13.2 million, representing a gross margin of 48.5%. This is compared with a gross profit of $10.3 million, representing a margin of 48.7% in the first quarter of last year. Our target is for gross margin to reach about 50%, which we expect in the coming quarter. Operating expenses in the quarter were $9 million. This is at similar levels to those of Q1 last year, which amounted to $8.8 million. This is 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 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 the first quarter of last year. Net cash and cash equivalents as of March 31st, 2018, were $47.2 million, compared with $43.7 million as of December 31st, 2017. During the first quarter, we increased our cash position by $3.5 million.
Overall, I'm very pleased with the balance sheet parameters with DSO at 79 days. As Rafi mentioned, the board approved the 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.
Thank you. Ladies and gentlemen, at this time, we will 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're 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. We will pull for your questions. First question is from Craig Ellis of B. Riley FBR. Please go ahead.
Yeah. Thanks for taking the question, and congratulations on the nice execution team and the record semi revenues. The 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 question? I think we also, Rafi mentioned it in his comments, we see strength in most of the segments. 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 and the U.S., are contributing very nicely to the business. 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. Memory is converging to advanced packaging, primarily the DRAM, and we see this trend, and we are participating in it. This quarter, we're already seeing more than 50% of the machines we ship are for 2D application. That's another positive trend in our business.
On the 2D, we are seeing a strength in all the segments that we are tracking. It's the CMOS image sensors, it's the MEMS, it's the power, it's the RF, and so forth. From that point of view, looking forward, we're not depending on a specific application or geography. We are seeing the whole market moving in a very healthy mode. That's, I would say, from us, is the positive outlook for Q2.
That's very helpful color. Then a follow-on question related to revenues, but extending the duration. There's always a lot of interest this time of year around company half-on-half views, and there was clearly a strong order environment in the first quarter. Can you help us understand the visibility that you have in the second half? 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 the 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 persists through the end of the year?
Rafi, would you like to take this?
Okay. Yeah. I'll take it. Let's say today we can feel comfortable, as we say, for the second quarter. Based on the backlog, we also feel very comfortable for the third quarter. It looks like we're doing, I would say, very similar to the runway as we see today. 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 discuss with customer. We feel very positive environment in the market, so we believe that we can 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, 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 at 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?
First of all, we have an inherent operating leverage in the model. As we grow the business, we will see an improvement in the gross margin as well. In addition, obviously, we put a lot of tight controls over the cost structure of the company, we believe that this will also lead in improvement on all the cost structure of the company, including gross margin. By the end of the day, it's mainly a product mix, it's a deal mix.
Some quarters, you see a more profitable deals, and in others are different mix. Overall, we see a clear path to a 50% gross margin mark.
That's helpful. The last question for me. I'm sure investors will appreciate the nice special dividend, and it's the second in the last few quarters. 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. Do you want to answer for this? Yeah, I would say that, look, we don't have any official dividend policy right now. Because with our business, you never know when we need, if we want to make any, if we consider any merging, M&A, something, you may need cash for that or whatever, or something happen in the industry. When we feel comfortable, when we see a very positive market trend, we feel that we can allocate some dividend for investors, share our success with investors. We have to do it, each quarter to consider the situation, the market trend, opportunities, and then we can decide. We don't have anything right now as a policy that we can share it, because we don't have something like that.
All right. Thanks, guys. Congratulations on the good quarter and outlook.
Thank you. Thank you.
The next question is from Edwin Mok of Needham & Company. Please go ahead.
Great, guys. Thanks for taking my question. First, kind of on the guidance, just to clarify, Moshe, are you targeting 50% for the second quarter for gross margin? Just want to make sure I was correct.
Typically, we don't provide any specific guidance on gross margin levels, 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. 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 leverage that we have, and the other one is really a product mix. We believe that over the next course of a few quarters, we will get to the 50% mark. We are very close to it as we are.
Okay. Just quickly on kind of service part of your business. Is that growing in line with your overall corporate growth? I mean, if I look at year-over-year, you're growing like 30% year-over-year, right? Is your service growing the same rate or is actually more product growing faster than service?
Yeah, 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 is an increase, but most of the growth is coming from the product side of the house.
Okay, great. Thanks for clarifying that then. Rafi, I heard on your prepared remarks that you guys are doing some work on the front-end macro inspection market. Is that correct, and where do you guys stand on that?
Yeah. As we mentioned, first of all, we believe that our capability, from the performance, from the capability, our machine definitely can serve the macro inspection market. As you know, you also have some process of qualification, penetration, and this takes time. 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 we developed for the front-end. I definitely feel very comfortable that we can see more and more market share in the front-end as well.
Is this a unique tool, or is this something that you guys can leverage your existing hardware and just make small change?
Look, in general, our tools meet the demand in the front-end, in the macro inspection. Definitely, the amount of special application we get from customer force us to develop many features. Could be sometime only software, sometime some mechanical and special optic together with algorithm and software. I would say more than 50% of our system are actually as a result of special development that our R&D make in very short time. Right now, what we mentioned about the front-end, I would say part is very standard application, and the other is very unique application that we developed.
Okay, great. Thanks for clarifying that. On your commentary about advanced packaging going to DRAM. Our understanding is that's still limited to very relatively low volume, although you're correct that there's some going into the DRAM. Just curious, is that the case or are we missing something? Are you seeing more broadening in just general DRAM device, or is it just more concentrated on some specialty DRAM applications?
Rafi, can you?
Yeah. Look, in general, obviously it's a trend and it's starting, and it's not all the DRAM worlds, but definitely, there is a shift of some of the DRAM applications, and I think it was initially started in the segment of gaming. It's moving to other applications, and definitely this market, in order to reduce the access time to the DRAMs themselves, with 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.
Okay, great. 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? What do you say on that?
Edwin, we are out of it.
Okay, great. That's all I have. Thank you.
You're welcome.
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. There are no further questions at this time. Hold on one moment. We have a further question. The next question is from David Kraus. Please go ahead.
How are you doing, Rafi? Terrific quarter you had. Congratulations.
Thanks.
I want to ask you a few little things I got here. Do you expect to get any more multi-year contracts in the year of 2018?
You mean multiple system contracts?
No, I mean like multi-contracts, like three, four, whatever you call them, like you got in the first quarter of 2018.
Yeah, we get, I would say, definitely 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, yeah.
You foresee something in the second quarter for the multiple systems of what you do?
Yes.
Okay.
I'm sorry?
Okay.
Yes, I said we saw it, we have it.
Are you saying the second quarter coming, in other words?
Ramy, could you?
Yes, definitely, David. The answer is yes. In general, we've announced the multiple equipment orders that we have received. We are definitely expecting more multiples throughout the year as we've seen throughout the quarters. We do get some of the business is in multiples.
Oh.
This is not something that is very rare.
I see. In other words, throughout the rest of 2018, right?
Definitely.
All right. That's a good answer, Rafi.
Thank you
Do you expect to get any more foreign business, and from where? Which countries do you get it from? Let's say predominantly from where you get most of your business from, foreign companies, foreign countries, right?
In general, I think we mentioned it was 72% of our business is coming from Asia, and then the rest is coming from the U.S. and Europe. In general, we see a very even distribution throughout the different regions. It's not that we're depending just on one region for our business. I would say that this is the current status.
I see. Actually all of Asia. You could say China, Malaysia, Singapore, stuff like that, the rest of Asia.
Absolutely. All of the different countries we sell to.
I see. 72. That's a big percentage, 72%. That's very big. Don't forget, Asia is a growing market, especially China. China is booming.
Absolutely.
Okay. Thank you for that answer, Rafi.
Okay.
Where do you Oh, I see. Okay. How's the general outlook, let's say for the rest of 2018?
We said it looks very positive right now. We have a nice backlog also for Q3. Right now it looks that we can continue very similar to our run rate right now. Q3 looks, I would say, promising. Q4 is a little bit hard to say, but we feel comfortable with it.
In other words, two and three feel like pretty comfortable, in other words, second and third quarters.
Is that what you mean, Rafi? The second and third quarters?
Yeah.
Okay, that's good. You don't get too much business from your own country in Israel, I see most of it's from foreign. From what I see from-
What is the potential in Israel? We don't have any more packaging in Israel here.
Packaging in Israel?
We don't. We have front end Intel, we have front end Tower. That's it. We don't have packaging industry. Our main target market is mainly, I would say, the packaging. That's packaging or everything related to packaging, and there are no packaging industry in Israel.
You're actually the only ones in Israel at this point. You actually have no competition in the packaging part of it.
Perfect.
In Israel, I see. Rafi, you mentioned the cash. I wasn't too sure. Was that $47 million that you have in cash, or $43 million? I got a little mixed up on the cash that you have right now.
Moshe. Yeah, Moshe will answer to you exactly.
Okay. Thank you, Rafi.
We have $47.2 million worth of cash as of the end of the first quarter.
Yeah. Last year to that same quarter, you had less. Last year for the first quarter, you had less, didn't you, Moshe?
I don't recall 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.
I see. Okay.
In the first quarter, we actually generated $3.5 million worth of cash.
Yeah. Like additional cash. That's the reason why you're giving the special dividend, because you have more cash, and you figured you need what you collect to run the business, in other words.
Yes.
That makes a lot of sense. I see. Okay. Thank you very much for answering my questions, and keep up the good work.
Thank you.
You too, Moshe. Be good then.
Thank you.
All right. Take care.
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 at www.camtek.com beginning tomorrow. Mr. Amit, would you like to make your concluding statement?
Yeah, I would like to thank you 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 first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.