Welcome to the inTEST Corporation's 2018 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today. A replay will be accessible at www.intest.com. I will now like to turn the call over to Laura Guerrant. Ma'am, you may proceed.

Thank you, Ian, and thank you for joining us for inTEST's 2018 Second Quarter Financial Results Conference Call. With us today are James Pelrin, inTEST's President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer. Jim will briefly review highlights from the second quarter as well as current business trends. Hugh will then review inTEST's detailed financial results and discuss guidance for the 2018 third quarter. We'll then have time for any questions. If you've not yet received a copy of today's release, a copy can be obtained on inTEST's website, www.intest.com. Before we begin the formal remarks, the company's attorneys advised that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not convey historical information but relate to predicted or potential future events that are based upon management's current expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in business conditions in the economy; changes in the demand for semiconductors; changes in the rates of and timing of capital expenditures by our customers; the success of our strategy to diversify our business by entering markets outside the semiconductor or ATE markets; progress of product development program; increases in raw materials and fabrication cost associated with our products; and other risk factors set forth from time to time in the company's SEC filings, including but not limited to, inTEST's periodic report on Form 10-K and Form 10-Q. The company undertakes no obligation to update the information on today's conference call to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated event. During today's call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP measures, including a reconciliation to the directly comparable GAAP measure in our press release, which is posted on the investor page of our website, www.intest.com. And lastly, we'll be attending the following investor conferences in the next few months: The Canaccord Genuity Conference in Boston next week on August 8, and The Dougherty Conference in Minneapolis on September 6. We look forward to seeing many of you. And with that, let me now turn the call over to James Pelrin. Please go ahead, Jim.

Thank you, Laura. I'd would like to welcome everyone to over 2018 second quarter conference call. We continue to make progress in broadening our presence within the markets we serve as we diversify the company into a global world-class provider of thermal solutions for industrial manufacturing and electronic test. Operating results for the quarter were exceptionally strong, driven by orders for our broad-based solutions across test and industrial manufacturing. The robust demand associated with the semiconductor industry, with automotive sensors, mobility, technologies and the Internet of Things continues to benefit our semiconductor test business, while non-semi business drivers included solid demand from automotive, industrial, and defense aerospace markets. Q2 consolidated bookings of $19.3 million declined 6%, sequentially, but increased 32% year-over-year. Excluding Ambrell, the year-over-year increase would have been 11%. While consolidated net revenues of $21.1 million exceeded our guidance increasing 12% sequentially and 33% year-over-year, and again, excluding Ambrell year-over-year, increase would have been 5%. Gross margin increased from 50% to 52% quarter-over-quarter and GAAP net earnings per share increased by $0.35 sequentially, with non-GAAP adjusted net earnings per share up by $0.12. Both exceeding guidance. 38% of Q2, 2018 revenues were derived from non-semi compared with 36% a year ago. Our Thermal segment is the combined business of inTEST Thermal Solutions or iTS and Ambrell. We have strategically diversified this segment resulting in new opportunities in industrial manufacturing, through both OEM and end-user applications. This diversification complements our wide penetration into the electronics test market, broadening inTEST's footprint as a provider of highly engineered thermal products for both test and industrial applications. Our Thermal segment bookings of $13.1 million were down 8% sequentially and up 51% year-over-year. Excluding Ambrell, the year-over-year increase would have been 18%. While net revenues of $14 million increased 6% sequentially, and 52% year-over-year.…

Thanks, Jim. Second quarter 2018 end-user net revenues were $18.2 million, or 86% of net revenues compared to $16.3 million or 87% of net revenues in the first quarter. Q2 OEM net revenues were $2.9 million or 14% of net revenues, up from $2.5 million or 13% for the first quarter. Net revenues for markets outside of the semiconductor market were $8.1 million or 38% of net revenues compared with $8.3 million or 44% of net revenues in the first quarter. The significant reduction in non-semi revenues in both the first and second quarters of 2018 was due to Ambrell having a large order from a customer in the semiconductor industry front end versus our usual back end. As noted earlier in the call, Ambrell's net revenues for the second quarter were $6.4 million. Excluding Ambrell, our net revenues from markets outside of the semiconductor market were $3.5 million or 24% of net revenues for Q2. So clearly, Ambrell continues to further diversify our served markets. Our second quarter gross margin was $10.9 million or 52% as compared with $9.4 million or 50% in the first quarter. The improvement in the gross margin was the result of decreases in our fixed manufacturing costs, both in absolute dollar terms, as well as, as a percentage of net revenues. This decrease was partially offset by an increase in our component material costs. Our fixed manufacturing cost declined by $76,000 or 3% sequentially, and they were more favorably absorbed in the second quarter due to the higher net revenues. As a result, these costs represented 13% of our net revenues in the second quarter as compared to 14% in the first quarter. The decrease in our second quarter fixed manufacturing costs was primarily the result of reduced facility costs for our Thermal segment…

[Operator Instructions]. Our first question is from the line of Theodore O'Neill from Litchfield Hills Research.

Yes, just a couple questions. So there -- a couple of your peers are talking about and one of them just reported as you did, are reporting, I think, a slowdown in sort of the mobile side of the business. And I was wondering if you are seeing anything along those lines?

We really haven't experienced anything like that, and we don't foresee, we think the business is going to continue pretty much on track as it is at the present, at least for the next quarter. We haven't really seen any indicators from our customers as we said in our remarks earlier, EMS might see some softness in bookings because their customers are frankly, having trouble getting other products needed for their test cell.

That's a supply chain issue you talked about there.

That's correct.

Yes. and are you, either Ambrell or on the EMS side of the business, seeing any impact of either hedging or preordering? They are related to the potential tariffs?

No, we're not. That's an interesting question, in fact, I think, we had that question sent into us. We have not really seen, felt anything from potential tariffs, we continue to monitor our customers. They tell us that it's business as usual for them. Of course, things could always change quickly, but so far, it has not touched us.

Okay. Finally, what are your customers at Tesla, says they are going to double their production volume through the Model 3 sometime next year? Does that have an impact on the needed equipment that you sell them? Or the existing equipment they have, it's sufficient to ramp to double where they are right now?

We believe they will need expanded capacity, but we are not inside Tesla, so we can't say that definitively, but we believe that they will need to increase their production capability, which would be favorable for Ambrell.

[Operator Instructions]. Our next question is from the line of Edgar Roesch from Sidoti & Company.

First question, just a follow-up on the EMS potential slowdown of orders in Q3. Is that right to think that that's on the OSAT side that you're seeing there?

No, it's actually on the IDM side.

And then in the iTS business, you mentioned pretty good demand from the semi space right now, could you just speak a little bit, Jim, about which products you're seeing that materializing?

That would be our ThermoStream product, which is used in the product development and qualification in the engineering labs. That business has been very brisk, very strong.

Okay. So not chambers, it's more of the directed [indiscernible].

No, the chambers are more for the non-semi side of the business, when we talk about things like satellite -- used for satellite, products for satellite application and that kind of thing.

Okay. And then I don't know how relevant this is to you, but on optical transceiver side, some of the producers of those components are talking about 25 gigabyte data centers coming online in China, since that is kind of older technology, should we assume that there's no real incremental demand for your thermal products related to that type of build out? Or is that...

Well, not necessarily. The typical evolution of an optical transceiver manufacturer. This may require a new optical transceiver manufacturers coming online and we've seen that in the past. And they always have to start with a high-end products. So they have full chest capability. And then as they grow and mature, then they allocate that our high-end solution to their product development and state-of-the-art faster products that they are developing, while they use a lesser thermal solution for the -- everyday production chest be more simple transceivers. So it depends, certainly people in the business that are thoroughly entrenched, it won't create a demand for us there, but other new companies do come on the scene as a result of these things.

Okay. Yes, that's helpful. And then on the 400 gigabyte side, that next generation, that's still development phase, is that right?

That's correct. That's a long way from hitting production, they've got a lot to do to reduce the package, and to reduce the heat generated by the package.

And then, one for Hugh. You seeing any increase in aluminum or steel prices, driving part of the component cost increase?

Clearly, inflation is back in the mix, but we haven't -- I'm not seeing anything that's pushing significantly at this point, but we do expect cost to be going up in the new year. So -- but what's really been driving the issue more recently has been more of a customer mix issue and product mix issue as opposed to increases due to inflation, but we expect that to pick up to be honest with you.

Okay. And then last one. You mentioned key energy partner that sort of come back into the mix more recently. And do you see that as benefiting both Q2 and Q3? Or can you kind of parse that a bit?

We believe that this energy partner has kind of woken up. They were a long-term Sigma customer with major orders every year, and when the price of oil drops, they just stop purchasing, they slow their expansion efforts down. And now they seem to have kind of rightsized themselves and come to grips with the new energy economy, and so they are beginning to reinvest.

And our next question is from the line of Dick Ryan from Dougherty.

So Jim, now with the Ambrell a year under your belt, what's the current pipeline of opportunities look like maybe even addressing new customers or just the actual level of business that you see out there?

Well, Ambrell has been strong, it continues to be strong. Ambrell worked very hard to acquire some OEMs, particularly in the semi space because it's a good fit for their products and they've actually acquired some OEMs and displaced some competition, and that's driven quite a bit of business to date this year, and we expected to continue strong going into the second half of the year. And again, it's driven by the semi cycle. But they've also identified OEMs and working with OEMs and other areas. Their key to growth to significant growth is through large OEMs and end-users, and that's what they're working on. They're also working in the integrator market, they've got their first order from a first-tier automotive engineer, automotive integrator, and they're about to get another order from a second first-tier automotive integrator. So we think that's very exciting, but that's how they are going to grow.

Okay. Great. Hugh, I think on Q1 you guided for full year to the low $70 million range, $70 million range. With Q2 and the guidance for Q3.

I would say, the low $70 million range, I would say the mid-$70 million range now, I'd say quite frankly. Yes, I think, mostly it's...

Hopefully, we won't see a big drop off in Q4 to stick with that?

No. We're hoping seasonality does not come back that strong to us. So we're expecting mid now potentially even upper 70s.

Good. And do you have a stock-based comp for the quarter?

Yes. stock-based for Q2 was -- stay with me, $172,000, up from $121,000 in Q1.

Okay. And one last housekeeping. You said tax rate 22% to 24%, did you say for the next two quarters? Or is that the year?

That's what we expect the range for the next 2 quarters, and you could say, on an adjusted basis for the full year. Unfortunately, the contingent consideration adjustment is really skewing it. As I mentioned, Q1 adjusted is 22%, Q2 is 23%, when you back out the contingent consideration adjustment and we expect that, again, ex that number, we'll be in that range.

[Operator Instructions]. And at this time, I'm showing that there is no further questions in queue. I'd like to turn it back to Mr. Jim Pelrin, sir?

Well, thank you for your interest in inTEST. We look forward to seeing you at the conferences Laura noted, and to updating you on our progress when we report our third quarter results. Operator, the call is concluded.

Ladies and gentlemen, this does conclude today's conference call. We thank you greatly for joining us today. You may now disconnect.