CyberOptics Corporation
Q1 2021 Earnings Call Transcript
Published:
- Operator:
- Good day, everyone, and welcome to the CyberOptics First Quarter 2021 Earnings Call. Today's call is being recorded. And at this time, I would like to turn the conference over to Dr. Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead.
- Subodh Kulkarni:
- Thank you. Good afternoon, and thanks for participating in CyberOptics earnings conference call for the first quarter of 2021. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our results in some detail following my overview of our recent performance. We then will be pleased to answer your questions at the conclusion of our remarks. In keeping with Regulation FD, we have made forward-looking statements regarding our outlook in this afternoon's earnings release. These forward-looking statements reflect our outlook for future results, which is subject to a number of risks that are discussed in our Form 10-K for the year ended December 31, 2020, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.
- Jeff Bertelsen:
- Thanks, Subodh. As we stated in this afternoon's earnings release, net income in the first quarter of 2021 benefited from a significant improvement in our gross margin percentage, which rose to 47% from 44% in the first quarter of 2020. This improvement resulted from the increased proportion of high-margin products in our sales mix, particularly WaferSense semiconductor products as well as 3D MRS sensors. We believe our gross margin percentage in the second quarter of 2021 will decline by roughly 3 percentage points from the level posted in this year's first quarter given an increased proportion of lower-margin system products in our anticipated second quarter sales mix including 2.4 million of MX3000 memory module inspection systems. Our gross margin percentage for the balance of 2021 will be heavily dependent upon product mix, particularly sales volumes of high margin, WaferSense and 3D MRF sensors. The benefits from our cost reduction program for our SQ3000 product have been delayed until 2022. Our platform supplier unexpectedly informed us that they would not be able to meet our cost reduction targets resulting in the project delay. Total operating expenses in the first quarter of 2021 increased modestly by about 1% year-over-year to 6.6 million, depreciation and amortization expense totaled $636,000 in the first quarter of 2021. And stock compensation expense came to $334,000. Total operating expenses in the second quarter of 2021 will be significantly higher on a year-over-year basis in part due to the higher revenue levels being forecasted during this period. You may recall that we realized a significant benefit from a Singapore job support program that favorably affected our R&D expense in the second quarter of 2020/ The Singapore government is not offering these wage credits in 2021. In addition operating expenses were unusually low in the second quarter of 2020 due to travel bans, shelter in place mandates and other measures related to the COVID-19 pandemic.
- Operator:
- And we will go first to Greg Palm of Craig-Hallum Capital Group.
- Greg Palm:
- Yes. Congrats on the good results. Maybe just starting with the backlog, and just the overall commentary on the demand environment. I think it's a record backlog and maybe record orders, if my math is right, but outside of some of the MX orders that you've publicly announced, where are you seeing the most strength? Whether that's application or end market?
- Subodh Kulkarni:
- Thanks, Greg. So certainly, as you -- given what's going on in the semiconductor industry, the chip shortage, a lot of semi cap markets are growing right now. Fabs are investing. So you are seeing strength on the front end side in products like WaferSense. We are seeing strong orders in WaferSense certainly on the back end side memory model inspection systems, as you mentioned, but in addition to that, we are seeing very good demand for the sensors that we sell to OEMs for back-end semiconductor applications like KLA. But also in addition to that, SQ3000, our multifunction system, very much pleased in that back-end semiconductor area. So we are seeing strong demand for various MRS products and WaferSense products. It's a very healthy market for semi cap in general.
- Greg Palm:
- Okay. Good. And I think back in 2019, if we're thinking about 3D MRS sensors, there was an over inventory situation, if I recall. I'm curious, do you have visibility right now into whether these current order trends is real demand, if you want to call it that versus something like replenishment?
- Subodh Kulkarni:
- We certainly believe it's real demand. I mean the -- our customers are fairly open with us. They tell us who they are selling it to. And as you know, I mean, right now, there's a serious shortage of chips worldwide for various industries. And there's a real appetite to increase capacity, not only on the wafer side, but also on the back end side. And that's where all the sensors we are building are going right now. So there is real demand right now because of the shortage of chips, and we believe that will continue for the foreseeable future.
- Greg Palm:
- Yes, makes sense. Okay. Last one for me on the mini LED order you got, and obviously, a big announcement and validation recently out of the marketplace. What are your current thoughts on how that opportunity will evolve over time? And just maybe admitted on how you're well positioned to capitalize on that trend, if it becomes a big market opportunity?
- Subodh Kulkarni:
- Certainly, I mean, I comment on it. As we have discussed in the past, it's an accelerating new display technology that has just under, I mean later, the first large consumer electronic company announced their first product launch last week. And you can see the marketing that's going with it for the superior display quality. So a lot of excitement around this mini LED backlight for LCD technology. We certainly expect that consumer electronic company and other companies to bring more products out to the marketplace over the next few months and few quarters. We certainly have a very nice position, and our SQ3000 multifunction system is qualified for various inspection steps that are needed in manufacturing this circuit. Right now, we are being used in a few select locations where the application is complex for lower end applications within the mini LED manufacturing. Our competitors who are making lower-priced products are being used already. So we have competition. But needless to say, as the market will continue to grow, we continue to believe it's a very good growth opportunity for us. And we are already working with our customers on the next-gen micro LED technology where the dies are getting smaller, the spacing is getting smaller. So over the next few years, we believe this is going to be an exciting growth opportunity for our SQ3000 platform and MRS technology in general.
- Greg Palm:
- And would you characterize this $2.4 million order as the first of potentially several this year? Or do you think that this is sort of the 1 and only 1 for the year?
- Subodh Kulkarni:
- No, we believe there is more orders as the year goes along from the existing customer and other customers. I mean, we are still very much in the early innings meanings of mini LED. So these things will continue to evolve and/or more demand will appear, and we will get more orders. So we don't think this is the 1 and only order for the rest of 2021.
- Operator:
- Our next question will come from Jaeson Schmidt of Lake Street.
- Jaeson Schmidt:
- Just following up on Greg’s question on backlog. I know it's going to vary by customer and end market. But just big picture, how should we think about the time line for that backlog flowing to the P&L?
- Jeff Bertelsen:
- Yes. I mean, good question, Jason. I mean, a reasonable chunk of it is going to flow. But certainly, obviously, not all of it is going to flow into in the upcoming second quarter. So I would say roughly about 50% of it or so is going to flow into the second quarter. And then if you think of the rest of it, it's probably a quarter and a quarter for Q3 and Q4, something like that.
- Jaeson Schmidt:
- Okay. That's really helpful. And then I know Q1 is a bit difficult with Chinese New Year and then couple that with the current backdrop. But can you talk about linearity in the March quarter?
- Jeff Bertelsen:
- Yes. So in terms of linearity, I would say, certainly, we saw, particularly on the system side, orders pick up definitely after Chinese New Year in the March time frame. So we definitely experienced that. I would say, in terms of the sensor products, those order flows really were more linear and as Subodh comment, I mean, we've seen really strong orders for MRS sensors and WaferSense products. So those were more linear, definitely some lumpiness on the system side and definitely tilted more towards March for those products.
- Jaeson Schmidt:
- Okay. And then just the last 1 for me, and I'll jump back into queue. Did you see any constraints on the supply side at all in Q1?
- Jeff Bertelsen:
- We did not. I will say supply certainly is getting tight, parts are getting tight. And so that's something we're watching very carefully, and we are spending effort -- more effort on that right now, just making sure we have the parts to fill our customer orders. So I would comment that it's tight. Q2 will also be tight. We feel reasonably good about Q2 right now. And then we're really starting to look at the back half of the year in trying to secure parts so we're able to meet anticipated demands.
- Operator:
- We will now go to .
- Unidentified Analyst:
- Congratulations. I always knew you guys had it in you. Just we wanted it yesterday, but great quarter. Can you hear me?
- Subodh Kulkarni:
- Yes. We can hear you.
- Jeff Bertelsen:
- Yes.
- Unidentified Analyst:
- I was sure. Just driving to the beach, talking to you guys. But here's my question every quarter I ask this. On your third memory player, I know that could come any time. It was like the second one, it dropped in. Always seemed like it took longer, like these all you do, but what's the color on the third memory player now?
- Subodh Kulkarni:
- Well, certainly, we are -- right now, we are selling to 2 customers, as you know, out of the 3 large memory manufacturers. We are talking to a third one. We are still optimistic they will eventually choose our technology and our product over what they are using right now. But as of today, they haven't given us any orders yet, but we feel pretty good about eventually getting that business. But take time, as you said.
- Unidentified Analyst:
- Yes. And I think last time I talked to you, Jeff, you mentioned that like when you get an order from that third customer to be announced as a new customer. Is that correct?
- Jeff Bertelsen:
- Yes. We would make that clear. That's consistent with what we did with the second customer.
- Unidentified Analyst:
- So what was the bottom line breakeven for the first quarter. I know last quarter it was around $14 million. What about the first quarter?
- Jeff Bertelsen:
- Yes, Eric. So I mean if we -- just taking a look at our P&L, and we'll just use round numbers to keep it simple, our operating income was $1.7 million. So if we just sort of assume a 50% gross margin, which was a little high that would equate to $3.4 million. So if you strip $3.4 million off the $17.7 million that we did, you would get roughly
- Subodh Kulkarni:
- $14.5 million, yes.
- Jeff Bertelsen:
- $14.5 million.
- Unidentified Analyst:
- So you guys did $0.19. I think the estimate was 13% to 16%. So with you doing -- you're guiding $21 million to $23 million. So let's just take $22 million, right in the middle, even though you guys tend to hit your higher numbers. That, to me, looks like an incremental $4.3 million with, let's say, $0.05 to the bottom line, all the $14 million. So we'd be looking at a quarter up near $0.4 hypothetically, right?
- Jeff Bertelsen:
- Well, Eric, we don't give a -- really P&L guidance. We do give metrics, as I had commented on in my remarks, so you could go build the model. If you would like to do that
- Unidentified Analyst:
- That's what I just did. So yes, so I think it to be $0.38 to $0.40, which is crazy growth. So all right. Now the other question on the mini micro, did you get an order, as I say, I'm driving some of that with it. Did you get an order for $2.4 million on the mini micro side?
- Subodh Kulkarni:
- Yes, we did.
- Jeff Bertelsen:
- Yes. We just announced that this afternoon.
- Unidentified Analyst:
- Okay, beautiful. And more to come. All right. I think that does -- 1 last question, once again, driving. What was the cash on the balance sheet now?
- Jeff Bertelsen:
- Cash at the end of Q1 was $32.4 million.
- Unidentified Analyst:
- So that's about -- and you got $7.2 million?
- Jeff Bertelsen:
- Sorry, $32.3 million.
- Unidentified Analyst:
- And fully diluted what's your share count now?
- Jeff Bertelsen:
- Fully diluted shares were roughly $7.45 million.
- Unidentified Analyst:
- Okay. So you're looking at about foreign change on the cash per share now, something like that?
- Jeff Bertelsen:
- Correct. I've got like $4.4.
- Operator:
- And next, we will go to Dick Ryan of Colliers.
- Dick Ryan:
- Jeff, one housekeeping. What was the cash flow from ops in Q1?
- Jeff Bertelsen:
- Sure. Yes, the cash flow from operations in Q1 was $2.4 million.
- Dick Ryan:
- Okay. About, in your commentary on WaferSense, you indicated 2 new customers. Now is that existing customers of WaferSense and you're moving into new -- other fabs that they're operating? Or is this new chip manufacturers?
- Subodh Kulkarni:
- And a clarification take, we said 2 new fabs, not 2 new customers -- sorry, existing customers, but 2 new fabs that they are bringing it up as we speak. So that's -- anytime customers bring advanced fabs, it creates the opportunities for WaferSense because they are running to yield issues and productivity issues. So there's other 2 new fabs of existing customers that are driving the current demand.
- Dick Ryan:
- Well, that cross-selling has to be pretty good for your confidence about the ability to get deeper and dear these major chip manufacturers?
- Subodh Kulkarni:
- Yes. Certainly. I mean we feel we have a very good position right now with these products and technologies. So we continue to gain better and better traction with existing large semiconductor fabs.
- Dick Ryan:
- Okay. Now the memory side, you made a comment of the third player. I was more interested in the first player of the opportunity going from 2D to 3D because I think that customer has spent $15 million, $17 million some odd million in 2D equipment. What are the challenges to get that customer that they like the product and the capabilities? What are the challenges to get them to switch over to 2 -- or 3D?
- Subodh Kulkarni:
- Well, I mean, there are some logistical challenges in terms of the exact fitting into their automation, our 3D system, that happens to be our tack bit taller than our 2D systems because the sensor dimensions and all, but those are all solvable problems. So we are working with them right now as we speak on how do we configure our 3D MX system in their existing automation facility. Those will be solved in the next few months here. Then they have to worry about their CapEx budget and making sure that they have open time, if you will. Right now, everyone's running their fabs and production all out and getting free slots to on a line is not trivial right now. So they have to work out their time line and their schedules and their capital budgets. So I don't view any of these problems as insurmountable. We'll take tackle them. So I'm pretty sure, going forward, we should be receiving 3D MX orders from the first customer.
- Dick Ryan:
- Okay. Great. I think on the last call, you were talking that you had some -- you were concerned or had some potential concerns on supply chain and it wasn't giving you much or if any visibility into the second half of the year. Now that we're into the second quarter, can you give some qualitative sense the second half versus first half, what we should expect?
- Jeff Bertelsen:
- Yes. I mean in terms of...
- Subodh Kulkarni:
- Yes.
- Jeff Bertelsen:
- Sure. Yes, I'll take that, so. In terms of supply chain, Dick, I mean, it's been pretty tight here in the first Q1, it was, we're seeing the same in Q2. And just given the current environment, our expectation, it's going to remain tight in Q3 and Q4. But we're really proactively working with all of our suppliers to secure sources of supply. We are seeing lead times push out so we are -- we really are working on that. And thankfully, at least in the first half of 2021, we don't see it as being a constraint. And hopefully, we'll mitigate anything for the second half.
- Dick Ryan:
- Okay. So then for revenues, without guidance, do you get a -- we've had some industry commentary of the second half is setting up to be stronger than the first half. Can you give us a qualitative look as to what your expectations might be?
- Jeff Bertelsen:
- Sure. I mean I think we -- I'll comment and then Subodh, maybe you can jump in.
- Subodh Kulkarni:
- Yes.
- Jeff Bertelsen:
- I mean, we definitely think this is a robust environment right now. And just given the lumpiness and the nature of our business, it's hard to pinpoint exactly where things will land, but we think everything looks healthy and certainly expect it to continue. Subodh, do you want to add to that?
- Subodh Kulkarni:
- Dick, it's a tricky one because there's so many moving parts here. But overall, you are right. Many analysts have predicted that the second half is going to be better for semi cap and electronics in general. Assuming that, obviously, we will do better in second half ourselves. Right now, as you can clearly see from the backlog, it jumped quite a bit from December 31 to March 31. And even with a very good Q2 -- record Q2 sales, we expect a very healthy backlog to continue at the end of Q2 based on the orders that we have already disclosed, like the MX orders and mini LED order we've disclosed today. So we expect strong demand to continue because of chip shortages and many electronic part shortages. So what is the supply chain challenge is also benefiting as it time for when it comes to demand, and we definitely expect second half to be a strong second half. So overall it to be a very strong year for us.
- Operator:
- Now we'll take the question from private investor, Chris Lucchesi.
- Unidentified Analyst:
- Congratulations on great results. I wanted to ask kind of a more general long-term question. This -- you have good growth this quarter and projecting great growth next quarter. And you've talked a lot about the chip shortages and the resulting high capital investment. Would you say -- how much of your growth would you say is just based on just this high level of capital investment just for higher volumes of production? Or is there some growth resulting from your machines being used more in more processes and more steps as, I guess, the machine vision kind of permits more into the manufacturing process?
- Subodh Kulkarni:
- It's a good, very good question. Overall, when we look at our breakdown of sales, we definitely see a strong dependence to semi cap, which is the CapEx -- capital market in the semiconductor industry as well as in electronics manufacturing. We certainly are selling systems, particularly into the capital market, our OEM customers, and they are buying our sensors, they are selling into that capital market. So we are definitely dependent. But we do have sales from other areas as well, like the metrology kind of things that we have with SQCMA or some of the scanning services. So we are a little more diversified than a pure place any cap company, and that goes with the broader economy. So our guess is that based on what we have seen so far. Almost 70% of our sales are coming from the semiconductor customers and the rest comes from electronics, pure play electronics manufacturing and some other customers. So we do have some exposure to, as you mentioned, machine vision or AI-type -- in other areas, not semiconductor or electronics manufacturing, but it's much smaller compared to semi and electronics. Jeff, you want to add something?
- Jeff Bertelsen:
- Yes. I mean I would agree with that. And then I certainly if you look at last year and then also this year and into the future, I think we do have some of the exciting applications that we talked about today like 3D memory module and mini LED and so forth, and those will be key drivers for us.
- Unidentified Participant:
- And within the same cap manufacturing, is there any kind of like further penetration like maybe your machines being used for most steps in selling manufacturing in steps in packaging and so on?
- Subodh Kulkarni:
- No. I mean, there's certainly a general need for using automated optical inspection in other applications, not just pure high-speed manufacturing. But again, the volumes become fairly small once you get outside manufacturing and competition changes quite a bit. You start competing with metrology type companies like Nikon or Hexagon, those kinds of companies. So very different marketplace once you leave manufacturing and get into the one-off kind of equipment. But certainly, our AOI system plays in some of those markets. So we do see some customers from that but again, by and large, the volumes are driven by large semiconductor manufacturers or electronics manufacturers. Does that answer your question?
- Unidentified Participant:
- Yes. Yes, it does.
- Operator:
- And with that, it appears we had no other phone questions. I'd like to turn the call back to our presenters for any notional closing comments.
- Subodh Kulkarni:
- Thank you all for your interest in questions. We are excited about the upcoming quarter and look forward to updating you with our results at the end of Q2. Thanks again.
- Operator:
- And with that everyone that does conclude today's call. I'd like to thank you again for your participation. You may now disconnect.
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