CyberOptics Corporation
Q1 2020 Earnings Call Transcript

Published: 24 Apr 2020

[Operator:]

Good day, ladies and gentlemen and welcome to today’s CyberOptics’ First Quarter 2020 Earnings Call. As a reminder today’s conference is being recorded. And at this time, I’d 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’ First Quarter 2020 Earnings Conference Call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results in some detail following my overview of our recent performance. We will then 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, 2018, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.We today reported sales of $16.4 million for the first quarter of 2020 ended March 31, an increase of 10% from $15.0 million in the first quarter of 2019. CyberOptics’ first quarter sales were at the high end of our previously-issued guidance for this period.Net income for this period was $844,000 or $0.11 per diluted share, up significantly from $495,000 or $0.07 per diluted share in the year-earlier quarter.Our performance was generated by robust sales of 3D MRS enabled SQ3000 MultiFunction automated optical inspection systems and 3D MRS sensors. We also recognized revenue from sales of both 2D and 3D MX memory module inspection systems.Having ended the first quarter with a record backlog $24.8 million, we believe the second quarter of 2020 should be another strong period for CyberOptics. I want to add that the COVID-19 pandemic has had a minimal impact on our business thus far, despite the resulting difficulties with global travel and shipping. We are closely monitoring this situation and its impact on our business in coming months.As an update, we are encouraged to report that we currently have six customers for our MRS-based sensors, including our NanoResolution sensor, for advanced packaging inspection applications. These customers are at various stages of integrating our sensors into their inspection systems. Some have started demonstrating their systems to end-customers, making us believe these relationships will contribute to revenue in a more significant way in 2021 and beyond.Interest among additional potential customers also remains strong. We believe our 3D NanoResolution sensor has positioned CyberOptics to capitalize upon numerous, extremely promising growth opportunities.Turning now to our first quarter performance. Sales of sensors and inspection and metrology systems based on 3D MRS technology increased 66% year-over-year to $7.2 million in the first quarter of 2020.As of March 31, 2020, 150 customers have purchased our 3D MRS enabled sensor and system since their introduction. These MRS-based products, combined with semiconductor sensors, accounted for 68% of total revenue in the first quarter of 2020, compared to 57% in the year-earlier period.First quarter sales of inspection and metrology systems totaled $8.4 million, up 18% year-over-year from the first quarter of 2019. This increase was driven by sales of SQ3000 Multi-Function systems, which rose 34% year-over-year to $3.3 million in the first quarter of 2020.In addition, we recognized revenue of $1.4 million from the sale of memory module inspection systems, including the initial sale of our 3D MX3000 system to a new customer. Two of the world’s three largest memory manufacturers have now deployed CyberOptics, memory model inspection systems.Consistent with our belief that the market for memory module inspection systems represents an attractive, long-term opportunity, we received orders valued at $4.4 million for 2D MX600 systems in this year’s first quarter. These orders are scheduled to ship in the second half of 2020.Also during the first quarter, we received an order valued at $1.2 million for SQ3000 Multi-Function systems that will be used to scale-up production of micro LED-based technology, a market we views as a significant growth opportunity.This order is expected to revenue in this year’s second quarter. We anticipate additional orders related to the micro-LED market as progress through 2020. Demand for our SQ3000 Multi-Function systems is forecasted to continue at a robust level in this year’s second quarter.Sales of 3D and 2D sensors increased 10% year-over-year to $4.1 million in the first quarter of 2020. Within this category, sales of 3D MRS-enabled sensors totaled $3.1 million in the first quarter of 2020, up 76% year-over-year from the year-earlier quarter.Demand for our 3D sensors is forecasted to remain strong in the second quarter. Sales of semiconductor sensors in the first quarter of 2020 came to $3.9 million, down modestly on a year-over-year basis. The order backlog of semiconductor sensors remains strong, although a sequential sales decline is forecasted for the second quarter.Our March 31, order backlog of $24.8 million, was up significantly from $17.7 million at the end of the fourth quarter of 2019. Given the strength of our backlog we are forecasting sales of $15.5 million to $17.5 million for the second quarter of 2020 ending June 30.We remain confident that family of MRS enabled products and suite of semiconductor sensors will continue driving CyberOptics’ profitable growth over the long-term. Thank you. Now, Jeffrey Bertelsen will give you our first quarter numbers in greater detail.

[Jeffrey Bertelsen:]

Thanks, Subodh. Since our first quarter sales have been covered in some detail, I will provide information about other aspects of our performance for this period. Our gross margin percentage in the first quarter of 2020 was 44%, down from year earlier quarter when WaferSense represented a larger percentage of our overall total revenue. But up from 43% in the fourth quarter of 2019.The sequential quarterly improvement on our gross margin percentage was attributable to an improvement in our sales mix. Our gross margin percentage in the second quarter, 2020 is expected to be at or near the level in this year’s first quarter.Total operating expenses of $6.6 million for the first quarter of 2020 were down slightly from the fourth quarter of 2019 and up nominally from the level in the year earlier period. Our operating expense levels in the first quarter benefited from a reduction in travel costs from the cancellation of trades due to COVID-19.We are continuing to invest heavily in R&D to take maximum advantage of opportunities in our targeted markets with both our 3D MRS and WaferSense technologies.Our second quarter operating expense levels will benefit from an employee wage support program implemented by the government of Singapore to help businesses combat COVID-19 disruptions.Depreciation and amortization expense totaled $664,000 in the first quarter and stock compensation expense was $272,000. Total operating expenses in the second quarter of 2020 are expected to be roughly unchanged on a quarterly sequential basis. Our effective tax rate was 15% in the first quarter of 2020. And we now anticipate an effective tax rate in the 15% to 20% range as we move through the year.Cash and marketable securities of $28.8 million at March 31, 2020 were up from $26.3 million at the end of last year. No shares were repurchased in the first quarter of 2020 under our existing $3 million share repurchase authorization. That effective through June 30, 2020.Our capital resources are adequate for achieving our growth objectives given our available balances of cash and marketable securities. Thank you. We would now be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question will come from Jaeson Schmidt from Lake Street Capital Markets.

[Jaeson Schmidt:]

Yeah, thanks for taking my questions. I just want to make sure I heard correctly that you now have all three of the top memory customers.

[Subodh Kulkarni:]

And that’s not correct, Jaeson, this is Subodh here. We have two of the top three memory customers at this point. They have purchased either the 2D or 3D MX systems.

[Jaeson Schmidt:]

Okay, I guess relatively, you still anticipate to be able to add that third customer though?

[Subodh Kulkarni:]

Yes, we are actively pursuing the third customer at this time. They are a customer of ours for our SQ3000 AOI system and we are optimistic that we should be able to get them hopefully this calendar year.

[Jaeson Schmidt:]

Okay. And then obviously a very impressive guidance given the environment, just curious if you could share with us what sort of is implied in that outlook from a macro backdrop. Does it assume the current backdrop, really remains unchanged between now and then Q2 or are you baking in an incremental improvement in the overall backdrop? Any additional color would be helpful?

[Subodh Kulkarni:]

I was going to say, Jaeson, I mean it’s tough to comment on the general macro-economy and the impact of the COVID-19 virus on the general macro-economy. What we definitely look carefully at is the semiconductor and electronics market, which is where most of our products get sold. And as we mentioned in our press release, so far our markets have – at least our business has had minimal impact because of the virus. And as you may have seen some, some other companies in our market, particularly the semiconductor market, TSMC announced a fairly good report and gave good guidance for the current quarter, we’re seeing some of the memory manufacturers like Micron and Samsung.Electronics, it’s a little different but they are also reporting somewhat similar things. So despite the virus situation, our customers generally are still in the existing mode, memory is still doing well, high-end chips going into data centers and servers, 5G, those kinds of things are going well. We definitely see the impact in semiconductor customers who are in the auto or in the general industry area.But overall where we sell our products, most of them seem to be doing okay, and that’s what our guidance is predicated on. Jeff, you want add something?

[Jeffrey Bertelsen:]

Yes, the only thing I would add there is, our guidance also is supported by the big backlog we had at March 31, 2020. So of course, that’s another factor as well.

[Jaeson Schmidt:]

Okay. Now that’s helpful. And the last one from me and I’ll jump back into queue. How have order patterns been tracking kind of this first month of the quarter.

[Subodh Kulkarni:]

We haven’t yet seen any significant changes between February and March or April if that’s what you’re going to get at Jaeson, the virus clearly, the situation deteriorated externally as we all know, as February rolled into April. But we haven’t seen any significant changes. But do keep in mind that a lot of our business, more than 50% of our business comes from Asia and even though business that we report selling to OEMs in U.S. or Europe many of that product ends up in Asia because that is where a lot of factories are.And if you look at countries over the China, Taiwan, Korea, Singapore, they are generally doing better compared to the western world right now when it comes to the virus situation. So you haven’t really seen any noticeable deterioration or anything of that nature. Jeff you want to add.

[Subodh Kulkarni:]

I think that’s a good summary.

[Jaeson Schmidt:]

Okay, perfect. Thanks a lot guys.

[Subodh Kulkarni:]

Thanks Jaeson.

[Jeffrey Bertelsen:]

Thanks Jaeson.

[Operator:]

Now we have a question from the line of Dick Ryan with Dougherty.

[Dick Ryan:]

Thank you. Based of all your comments on the customer demand, it is kind of consistent with other companies we’re hearing out there. Can you talk about the supply side issues that maybe you’d seen to-date or how have you kind of focused on that to kind of make sure that you don’t see any problems there? I know most of your sensors come out of Minneapolis, but to talk a little bit on your supply chain.

[Subodh Kulkarni:]

If you don’t mind, I am going to defer that to Jeff since he is more closer to the supply side of the equation.

[Dick Ryan:]

Yes.

[Jeffrey Bertelsen:]

Yes, I’ll take that. So a couple of points. As you had indicated, our sensors do come out of our factory in Golden Valley, that factory is still up and running. Likewise, our factory in Singapore is still up and running. Both operations have been deemed essential by the respective governments.In terms of the supply side, we haven’t seen any significant disruptions yet. We did have one minor supply issue, but that has got been resolved and we have adequate inventories on hand and in the supply chain to be able to absorb that. So thankfully, so far, we haven’t experienced any significant COVID-related disruptions. I think a lot of the folks in our supply chain have been deemed either A, they’re in Asia where the virus situation isn’t as bad right now or they’re coming out of lockdowns or they’ve been deemed essential by their respective governments. So we’ve – it hasn’t been a serious impact for us so far.

[Dick Ryan:]

Okay. Jeff, how should we look at the backlog? How should that flow through the rest of the year?

[Jeffrey Bertelsen:]

Yes. I mean, a good – most of the backlog, virtually all the backlog will flow through by the end of the year. Definitely, over a half of it is applicable to the current quarter in Q2. We – part of that backlog are the memory module inspection systems, the 2D systems, where we have $4.4 million worth of orders. They will flow right now. It looks like they’ll flow mainly into the third quarter.And then absent that, there’s a few larger orders from our OEMs that will run out kind of spread throughout the year, Q2 to Q4. And then some of our product lines, the semiconductor sensors, that tends to be more of a book ship type business along with a few of the other things. So we got a pretty good chunk of backlog coming into Q2, and then we’ve got some stuff in Q3 and beyond.

[Dick Ryan:]

Okay. Just about the six customers on the nano sensor was kind of stagnant, I think, in Q4, looks like it may have come to life. Now is that still – are you marketing that in China? And can you give us a little more color? Is this pretty much all distributors? Or are there some end customers in that mix, Jeff?

[Subodh Kulkarni:]

So there’s a mix here, Dick, for the nano sensor. So we have some system integrators and some OEMs, it’s a little bit of mix. All of them at this point are in Asia, and that’s where a lot of activities of advanced packaging are going on. So the six are for advanced packaging, some are using our first-generation sensor, some are using do sensor, but they will mix – they will use different sensors depending on their specific applications. But the mix includes both larger companies that are OEMs as well as some system integrators that are specific to some fabs in Asia.

[Dick Ryan:]

Okay. Okay. Well, that’s good to hear. Micro LED, that’s something that looks like it could have some very nice potential especially with the Rohinni relationship. Can you give us a sense of how that pipeline of opportunity looks?

[Subodh Kulkarni:]

Certainly. So micro LED is an exciting new technology. It is – the scale-up has started, as you can see from our numbers and our announcements. The main value proposition of micro LED technology over conventional LCD or OLED technology is lower power and better quality images, brighter images. So it’s got the best of all the worlds. Historically, the challenge with micro LED was always the cost compared to LCD or OLED. And that’s where the Rohinni proprietary process comes in, where they have been able to reduce the cost by using conventional SMT processes. We have been working with them for a couple of – more than a couple of years now. So SQ is qualified at various different points of inspection steps in the manufacturing process.So usually when a line is built, we get opportunities for multiple SQs to be sold on that line. And so far, few lines have been installed worldwide and/or continue to be installed by the end of this year, we are definitely expecting larger numbers. Initial applications seem to be targeting the backlight applications, so the backlight of laptops or smartphone or watches kind of devices. And the next thing they would – they are going to target is the actual display itself. So it’s plenty of – I mean, the whole display industry is a huge industry. LCD, OLED and LED play a big role in that industry and micro LEDs poised to take a big chunk of that. So we’re pretty excited about how we can benefit from this micro LED explosive growth and specifically for us, SQ, and how that plays into that market.

[Dick Ryan:]

Okay. I guess just one other. How is the price point of your SQ in the micro LED process? Is it in line with competitors? Or what do you have to do with your ASP there?

[Subodh Kulkarni:]

Well, we have customized our SQ multifunction system specifically for the micro LED area, so it allows us a little better price point than our conventional SQ in the generic SMT market. But even within the generic SMT market, there are customers who want higher end – who have higher-end applications. And do want better higher-end grade computer, if you will, more offline workstation. So the price point for SQ ranges from $120,000 or $110,000, sometimes to $200,000, depending on the options and application and stuff like that. Micro LED, certainly we can it better than average price point, given the unique nature of the application.We have – one other company has been selling into the micro LED market for the less demanding applications, but for the more demanding ones, where the measurements come into play and the critical steps aren’t done. SQ so far seems to be unmatched and we haven’t seen any competitor compete in that area so far.

[Dick Ryan:]

Okay. Great. Thank you and congratulations on continued good execution.

[Subodh Kulkarni:]

Thanks, Dick.

[Jeffrey Bertelsen:]

Thanks, Dick.

[Operator:]

Next from Craig-Hallum, we have Greg Palm.

[Greg Palm:]

Yes, thanks. So Jeff, Subodh, nice quarter. It seems like the core business is performing well. I know you’ve got some of these more growth areas that are starting to accelerate. So nice job here.

[Subodh Kulkarni:]

Thank you.

[Jeffrey Bertelsen:]

Thank you.

[Greg Palm:]

I mean, given the backlog, where we are at quarter end and the expectation, at least specifically for increased contribution for MX in the second half versus the first half. Is it fair to assume that second half revenue could be greater than the first half? I know you don’t typically give full year guidance, but what would have to happen for you not to achieve revenues in the second half that weren’t in excess of the first half?

[Subodh Kulkarni:]

Well, Greg, certainly the whole virus situation and the impact on global economy and more specifically the impact on semiconductor and electronics market becomes very important before we can answer that question, what exactly is the effect going to be. So far based on TSMC, Micron, Intel, those companies have been announcing, they don’t foresee a drop-off of any nature in the second half, as I mentioned, because of data center, 5G and other areas. But at the same time, there are semiconductor companies like Texas Instruments and NXP and a few others, STMicro yesterday, they forecasted a significant drop-off in revenues because they do participate in the auto and industrial markets, which have significantly slowed down.So we are fortunate to be participating in the higher-end side with our customers. But certainly, what happens with the virus on the overall economy and specifically on semiconductor and electronics will matter for our overall results. Having said that, we generally are optimistic that we should continue our momentum here. Jeff, you want to add something?

[Jeffrey Bertelsen:]

I think – I mean, I think you summed it up well. I mean, I think we’ve been fortunate in that, we’re participating in the right markets right now. But I think a lot will depend on the virus situation and what does happen with the overall economy as we get – start moving ahead multiple months.

[Greg Palm:]

How would you characterize your visibility at this point? I mean, obviously, you’re pretty comfortable with what Q2 looks like. But how normal is based on where we are today? The second half, how uncertain is it at this point? Can you give any sort of qualitative commentary and then kind of how you’re seeing things or at least as we sit today?

[Subodh Kulkarni:]

One of the things that benefits us certainly this year is we have that large memory model orders, the $4.4 million order that most of it is going to get booked in Q3, we believe. So that helps – definitely helps the second half and certainly Q3. In general, as I said, the higher-end semiconductor companies that play in data center, 5G servers or memory, they all feel pretty good about the year despite the virus impact because of their confidence built into the field are pretty good too.So our visibility is, obviously, for Q2, is very good with the backlog and everything. Q3, we have some visibility, particularly because of the memory customers who tend to project more longer term. But certainly with the virus situation that changes by the day and we come and watch everything because things could change quite radically.

[Greg Palm:]

Okay. That’s helpful. What about the competitive landscape? Any notable developments given all the sell-through in place mandates on a global level? And you are obviously operating as an essential business, not sure if all your competitors are in the same boat, any notable changes there?

[Subodh Kulkarni:]

So let’s go through the two key areas for us, MRS and WaferSense. So in WaferSense there are no competitors because of the patent positions we have. So there, we don’t really worry about competitive landscape at all. We depend on the fabs and their investments and wafer starts to drive that business and we continue to increase the number of applications. So no competitive landscape to worry about on that side.On the MRS side, certainly, we have competitors to worry about, particularly when it comes to the AOI market, where we have more than 12 competitors, depending on the geography. We clearly standout because of our product performance, the multifunctionality, the image quality because of MRS technology, the speed, the accuracy. So we have multiple differentiating factors that enables us to keep gaining share in the area where we have most competition.As we are getting more into this advanced packaging and semiconductor area, our competition is changing. So what used to be historically our typical SMT-type companies we used to compete with now as we go forward in advanced packaging, the competitors are changing to companies like Camtek or Rudolph Technologies. So different types of competitors who are using different kinds of 3D technologies, but again, it gives us a huge advantage because of its speed and accuracy. So we are using our differentiated technology not only in SMT, but we are continuing to do it in the semiconductor, but our competition is changing as we go into newer more demanding applications. Does that answer question?

[Greg Palm:]

Got it. Yes. I mean, just as a follow-up, I mean, anything specific to highlight whether the competitors that aren’t in an essential business or whether they have their own supply chain disruptions. I’m just trying to get a sense for – it doesn’t sound like you’re seeing anything yourself. Do you have a central business? I don’t know if that allows you to take share in this environment, not all of your competitors are as fortunate.

[Subodh Kulkarni:]

Well, we continue to remain convinced that MRS is a superior technology because of its speed and accuracy, both at the same time. We have proved that in SMT, and we continue to gain share where we compete in AOI, and now we are planning on doing the same thing in the semiconductor advanced packaging area, and we feel pretty good that MRS allows us to get that kind of a share even though the competitors are larger and more established companies. So at the end of the day, technology, it’s a huge difference when it comes to customer decision.

[Greg Palm:]

Okay. That makes sense. Last one from me, maybe this one is for Jeff. Gross margins, looking back at 2017, even first half of 2018, you were running pretty consistently above 45%. What would it take to get to those levels? I mean, how much is volume dependent versus or mix or something else?

[Jeffrey Bertelsen:]

Well, good question. I mean, I think all of those things matter. So as we’ve said, our semiconductor sensors, those products have about a 70% gross margin. So those margins are better than even our MRS based products and some of our other products, just mainly due to the hardware content and some mix matters. I mean, volume, I think, certainly would help. I mean, there’s – we are heavily capital-intensive in our manufacturing operation, but there are some fixed costs there. So to the extent we can spread them out that would help. And then I think to the extent we can continue to migrate to some of these higher-end applications that will help as well.So I think it’s all of those things matter. I would note that, particularly for the 3D memory module systems, those products just because of the hardware content, the gross margins there do tend to be lower, very, very high end sales value and high gross margin contribution, but the percentage themselves tend to be lower. So I think mix going forward is going to play a part in this. I don’t know, would you add anything, Subodh?

[Subodh Kulkarni:]

No, it’s a good summary.

[Greg Palm:]

Okay. That’s it for me. Keep up the good work. Thanks.

[Subodh Kulkarni:]

Thanks, Greg.

[Jeffrey Bertelsen:]

Thanks, Greg.

[Operator:]

We have Orin Hirschman with AIGH Investment Partners.

[Orin Hirschman:]

Hi, how are you? Congratulations on the progress.

[Subodh Kulkarni:]

Thank you.

[Orin Hirschman:]

Can you just review with us – okay, sure. Just quickly, just in terms of some of the end applications that we should be looking for on the micro LED side, which will drive demand for you. What are some of those end applications? And then I have one follow-up question on the memory side.

[Subodh Kulkarni:]

Sure. So the end applications today for micro LED technology are laptop, PCs and smartphones and wearable devices, like the watch kind of devices. That’s the – so it is a consumer market, which is the end market that micro LED is getting scaled up for today.

[Orin Hirschman:]

And what’s important, though, for you, is it in the near-term? Is it just a ramp-up on backlighting, for example, which could drive multiple unit orders for you? What are the end products in the near-term that drive orders?

[Subodh Kulkarni:]

I sort of – I mean, the immediate products that micro LED is getting be scaled up for are the backlight applications, as I mentioned earlier, so the backlight for keyboards, backlight for wearable devices, those kinds of products. We have to be careful not give out specific customer names or which areas. And it’s fairly well-known if you go on Internet and see who are all the large consumer electronics companies who are planning on introducing micro LED based backlights. It’s pretty easy to find out from external reports. But there are fairly large reputable companies that are scaling up micro LED technology right now, and that’s the ecosystem we’re playing in.Certainly, given the benefits of micro LED or conventional LED or LCD or OLED and that is being higher power and better footlight, and all of us always try to get maximum battery life and battery life continues to be a big issue, whether it’s a laptop or it’s a smartphone or a watch. And certainly, this helps that improvement of battery life significantly because a lot of the battery life is consumed today by the backlight itself. So that is the driving force behind micro LED scale up right now. So we feel pretty good about why micro LED is getting scaled up by those consumer electronics companies, the value proposition. We don’t see any reason why they won’t continue that scale up rapidly.

[Orin Hirschman:]

Now is that scale up going to be like in more of a linear fashion? Or is it more like people have been testing, producing small quantities, have announced second half production. And at some point, you’re going to get a slew of orders, meaning the orders were still small this quarter. You did whatever, it was a couple of million last year. I mean, it’s obviously, it’s nice for a product that’s really not doing any huge commercial volume for the end product, yet. It’s actually incredible. But how do you see that type of ramp? Because there’s been a lot of announced stuff in the press, as you’ve said, and I would think that they’re going to need your equipment at some point in a much larger quantity unless you tell me they have enough right now to do the first leg of the journey. I’m not sure.

[Subodh Kulkarni:]

No, certainly, I mean, the current orders that we are fulfilling right now and what we are getting is all – they’re still very, very early in the scale-up cycle. I mean, if you take a big chunk of the display industry and say that will go to micro LED, which is what everyone is forecasting, there’s going to be a huge number of micro LED lines needed and certainly a lot of our 3D AOI type systems or SQ product needed. So we – this is still very early in the scale up, I would say. So I wouldn’t use the word linear or anything like that at this point. It’s still early. They are testing out right now, the technology first, then they will test out the consumer acceptance and the value proposition.So we are pretty sure a few ones from now some products, some of these products will enter the consumer market. And that’s where most of those consumer electronics companies are testing out and then they will turn on the volume or, if you will. So it’s hard to know exactly when all that stuff happens in the consumer landscape, particularly given what’s going on externally right now, but we certainly expect a lot of significant growth over the next few years.

[Orin Hirschman:]

Is there any significant difference? Again, obviously, it depends on the size of the panel for one. Assuming the same panel size, theoretically, it’s kind of silly. It’s not true in real life. But let’s – I guess, when you ask in the broad sense, contrasting, let’s say, a micro LED TV versus a laptop. What does that mean in terms of volume of production and test? And how does that filter down to you? And then one question again on the memory, I’m sorry.

[Subodh Kulkarni:]

So as I mentioned, so far, right now, the first application, micro LED, is going after is backlight kind of applications, which are relatively simple compared to the actual display itself. I know the consumer electronics companies like Samsung have shown in the CES show earlier this year and even last year, and Sony also as well, micro LED based televisions, those kinds of things, but those are not the products that are actually getting into the mainstream at this point. Just because it’s so hard to make an actual display with every individual LED die and compete with established technologies like LCD or OLED t this point. So the backlight application is relatively easy to go after right now, and it is a significant saver of battery life, and that’s where it’s going.So as far as we are concerned, I mean, our – the customers we sell our product to, they are the manufacturers of the actual micro LED panel itself. So they are buying LEDs from semiconductor companies that they’re using pick-and-place machines, basically SMT equipment and placing the LED dies on whatever substrate they want, sometimes it’s glass, sometimes it’s plastic or something like that. And maybe – so the sizes can vary from very small sizes to fairly large sizes, like 70x70 centimeter. So we service that – those manufacturers. I don’t know if answered your question or not?

[Orin Hirschman:]

Yes. That’s good. And just a similar question on the memory side. The trend in memory, let’s say, for stacked memory, if you go into just a drop more detail for a moment, we continue to really drive and make a big difference in the new 3D product, which again, is getting nice early orders on and have two out of the three biggies at this point.

[Subodh Kulkarni:]

So memory, where we play in the memory market is in the finished chips area. So this is where the chips are all built and they are putting them on a module and then they are steel plating the module, and then they want to do a – then they usually do an electrical check and then they want to do a final optical inspection check, non-contact, which is before packaging the memory and sent it out to their customers. So we have a key final step in the memory model build process.So we service both DRAM and other type memories, multi-layers or whatever. But the kind of defects we are looking for in memory model inspection system are tens of microns kind of defects. So we really don’t go into the stacked memory itself and look for defects at the transistor level. That’s where they use UV or other kinds of technologies, e-beam technologies. Where we come in is the final inspection of the finished DRAM or NAND module that they are shipping to their customer.

[Orin Hirschman:]

So again, just – if I may ask, what in particular is driving the demand for the new product right now for you?

[Subodh Kulkarni:]

So good question. So memory in market has been – historically, they have been using either manual inspection as a final inspection or many of them bought 2D memory module inspection systems from one of our Korean competitors who was in this business. And they were not happy with the system because of its performance. So we entered this market with one of the customers about four years ago, and they are getting very good ROI with the kind of technology we deployed. And that’s why we are getting traction with the next one now and we are working with the third one.So essentially, we are replacing either manual inspection or old 2D technology that they have deployed. So it’s a significant ROI for them and more than just cost savings one of the challenges they were having is for this high multi stacked memory chips and the modules that they’re building, smallest of the defects can lead to failure.Essentially, what they’re doing is that building the whole module, putting it – robot is picking the module and putting it in an IO check. And then during the check-in itself, the robot is jamming it into a socket and pulling it on out. You can imagine some of the chips actually get dislocated physically while the robot is doing that.And so even though IO check looked okay, while the robot is dislodging it from the IO system, some chips have been displaced or some passive components have been displaced. And they were getting field returns because of those issues before they started implementing MX-like products, and that’s really the value of our MX system is. It enables our customers to basically eliminate defects that they are shipping out. And on top of that, they can save on manual labor cost or the older 2D system that they’ve bought, which were getting high false call rates and that kind of stuff. So it’s a good ROI for our customers by using our MX system.

[Orin Hirschman:]

Okay. Thanks a lot.

[Subodh Kulkarni:]

Okay.

[Operator:]

Moving on from Tieton Capital, we have Bill Dezellem.

[Bill Dezellem:]

Thank you. Actually to ask a longer-term question, if I may. How are your products sold? And I recognize that you’re not sending out an e-mail in the past or cold calling, and a week later, you have a sale. So what I’m trying to get at is with the lockdown and the inability to travel, to what degree or at what point does that interfere with the sales cycle? And I recognize this is not a Q2 phenomenon, I don’t even know if it’s a 2021 phenomenon, but would you talk through that, please?

[Subodh Kulkarni:]

Sure. So fundamentally, we – most of our products we go through reps and independent reps and distributors that are local to that nature. So we have roughly, correct me if I’m wrong, Jeff, about 85 independent reps and distributors similar to this service, all our products in different regions.

[Jeffrey Bertelsen:]

Correct.

[Subodh Kulkarni:]

So our – we have direct sales staff and the primary role of that sales staff is to manage those independent reps and distributors. So in most countries in the world, where we have – we get traction, we have a rep or a distributor, who are fairly knowledgeable about the local customers. So that’s where most of the interaction is happening at the rep or distributor level and then our sales folks get involved. And we have engineers in most of the important geographies in the world to do the install and support those kinds of things.This virus and lack of travel is impacting our productivity. I mean, we are, in some cases struggling, where our engineer cannot go domestically anywhere, and we have to use all kinds of current tools. Thankfully, most of our systems are Ethernet-enabled and we can run them remote. So we don’t need to physically stand next to the system to run them. So we can even log in from remote location and demonstrate the whole system. So I guess there is some kind of connectivity area around there.So we can do a lot of things with the modern tools we have. But still, it is a opportunity ahead. But considering your question we are primarily relying on independent rep distributors and local engineers to do the sales. And that hasn’t been really been impacted that much just because we cannot travel. Jeff, you want add something.

[Jeffrey Bertelsen:]

I think that’s a good summary.

[Bill Dezellem:]

Thank you. And so to make sure – and to make sure that I am clear then so in China or in other Asian countries as long as there is not a complete lockdown your reps and distributors are in some cases able to physically visit the customer or prospective customer. And really, I’m thinking more about the prospective customer because the existing customer in theory would have some better idea of what you’re doing. And so what we’re experiencing in the U.S. is less relevant than what’s happening in each of the individual countries where the installation ultimately would take place. Is that the correct way to be thinking about it?

[Subodh Kulkarni:]

Yes. In general, yes. I mean, existing customers are already familiar with our sensor or system. Usually it’s just their capital cycle and how their ROI with our systems that enables the order. We don’t need to physically meet them again and again. We do introduce new features in our software periodically and that is important, periodic check with them and telling them what the new features are and so on. But it’s not as critical, your point is right, if this travel bans continue for a long time prospective customer shopping would be difficult and it will be harder to convince the new customer without meeting them in person or demonstrating a system to them.So, but hopefully, and the one thing, Asia for all practical purposes, people are moving around. So even though there are travel restrictions in Asia from country to country, within a country like Taiwan is pretty much normal right now. Even China, people can go around. So, some of our viewpoints right now about the virus are more U.S. centric, and we see the pain, we are all personally going through. But in Asia, when we talk to our people, many of them within the local geographies that they are in, they can move around and meet customers and so on.

[Bill Dezellem:]

Great. Thank you for the perspective.

[Subodh Kulkarni:]

Thanks man.

[Operator:]

Next question comes from still come from [Eric Slade] with [Acme Analytics].

[Unidentified Analyst:]

Nice quarter guys. On the third memory customer, obviously you’re talking with them, right?

[Subodh Kulkarni:]

Correct.

[Unidentified Analyst:]

When do you think we might see that? Hey, congratulations on getting number two. Number three, when do you envision that if he you could put any kind of like parameters, you think in the next year or two.

[Subodh Kulkarni:]

Well we are optimistic, that’s something they will accept out of our MX system sometime in this calendar year. But again it depends on their capital cycle and so on. But right not memory customers are in the investment mode. They are not backing-off because of the virus situation. So we are optimistic, we will pick the third customer this year.

[Unidentified Analyst:]

And then on the OEM side, I’ve talked to Jeff numerous times about that. How’s that starting out the year, have they come back from their hiatus?

[Subodh Kulkarni:]

Some have and some have not. Because you won’t have it come back much though, some have come back strong. As you can see from our numbers. MRS OEM business is growing very nicely right now. And legacy customers some haven’t come back strong but that is older technology as well.

[Unidentified Analyst:]

Now on a micro mini LED, I guess the growth rate is going to be 80% per year. I think Mackenzie, a couple of the outfits, talk about 80% per year unit 2025, so that is great compound growth. I got the impression that’s really sort of a race of the starting line to get the lines, I guess, throughout Asia in there. Is that fair to say?

[Subodh Kulkarni:]

I mean, there’s a lot of activities going on right now up, few have been already been installed as I mentioned to an earlier caller, we are still very early in the scheme of cycle. So we expect multiple lines to be installed by the end of the year, but it’s still early applications, early scale ups. So it’s really hard volume applications even in 2020. So this is still very early stuff going on.

[Unidentified Analyst:]

Now the number continue to increase.

[Subodh Kulkarni:]

I don’t know the growth rate, but number will continue to increase. No doubt about that.

[Unidentified Analyst:]

If you look at the first quarter – I don’t know if this is their first quarter, the last quarter of Kulicke and Soffa, KLIC. They – if I read it right, they’re expecting shipments of micro and mini LED, I guess, taken place for $30 million to $70 million. Are you aware of that?

[Subodh Kulkarni:]

Yes we have seen their earnings calls. They mentioned that number, yes.

[Unidentified Analyst:]

So here’s my question. Well, first of all, they have an exclusive with Rohinni, you guys don’t. Is that correct?

[Subodh Kulkarni:]

That is correct. Even the SQs the preferred and qualified product customer has a choice to try other AOI systems, so that is exclusive in that sense.

[Unidentified Analyst:]

That was probably a good thing because whoever wins out, I guess it – is in a lead right now over Samsung or who’s ever the competition?

[Subodh Kulkarni:]

Say that again, I didn’t hear your question.

[Unidentified Analyst:]

Is your feeling that Rohinni, the lead edge that will be the fast to market or they are in the best position right now compared to probably Samsung and – I think Apple is trying to get in there, but they haven’t been able to do that but is that your feeling, Rohinni is the leader.

[Subodh Kulkarni:]

Rohinni is technology development company. Rohinni’s plan is not to be the manufacturer themselves.

[Unidentified Analyst:]

No their royalties right.

[Subodh Kulkarni:]

Their plan is royalty basis. So they have scaled the technology. They have the technology package, and they are selling the package to different manufacturers, who in turn service the large consumer electronics companies. Rohinni I believe is already playing in the – with a number of consumer electronics companies. But clearly, we don’t have that much visibility beyond a certain point.

[Unidentified Analyst:]

I understand. So you guys are just – as the lines go out, it’s like any technology, I guess it will just keep building. Now here’s the other thing back to Kulicke and Soffa. If they’re modeling $30 million to $70 million for the second half of the year, do you know how much pick-and-place machines one, two or three that are on these lines that they’re installing?

[Subodh Kulkarni:]

We know but I don’t feel comfortable divulging that information that I believe that is confidential between Rohinni and Kulicke and Soffa. So we have a good feel for how many pick-and-place machines per line and how many – we know there are six inspection machines per line. But even within that, Eric, we have already seen some customers adapting to splitting the line at different points. So the number is going to change, how many we can place per line and how many inspection systems per line based on the individual customer and how they are going to consider the line.

[Unidentified Analyst:]

So it would sort of be impossible for an investor like myself to figure that out. Based on the information that’s public because KLIC, if they’re – obviously, if they’re doing one per line that’s, that’s the best thing in the world, right for you guys. If it’s three per line, it’s still good for you, but not as good. Am I reading that right? So…

[Subodh Kulkarni:]

Yes, I mean if they do it, then it is right. It depends on how many per line. And I know they’ve managed to quantify. All you hear is multiple numbers right now. So if you take the optimistic numbers, all the numbers become fairly large. If you take the pessimistic numbers, they are not that impressive. So, we really don’t have that good a feel for exactly how many lines will be scaled up in the second half of this year.

[Unidentified Analyst:]

And then you brought up the point a number of times. When we look at the chip space out there, you’re unique in the – that your high end, so that’s probably why you haven’t been as affected. Most people have pulled their guidance, even some of the big guys. About a month ago, is this virus picking up. But I guess you guys are so uniquely positioned with a lot of your product, that it’s really technology as opposed to capacity to a good degree. I guess, how much in the cycle is capacity-driven or new technology? Would you – do you have an estimate on that for you guys?

[Subodh Kulkarni:]

That is tough one for me to ballpark in that way. I mean, we, as Jeff added to the earlier caller, and Jeff you can chime in, our confidence for Q2 guidance comes primarily from our interactions with our customers and the backlog that we have on hand. That’s what gives us confidence to give Q2 guidance at this time. We haven’t given Q3 or Q4 guidance precisely for those reasons.Our customers, high-end chip manufacturers, particularly seem to be fairly optimistic, particularly TSMC who gave guidance for the whole year as mid-teens percent growth, and they know exactly what’s going on with the virus and everything. So I was pretty impressed that they gave a full annual guidance or, let’s say, 15% or so, which is pretty impressive.

[Unidentified Analyst:]

I would say 5.

[Subodh Kulkarni:]

They are soft.

[Unidentified Analyst:]

With data centers, cloud, 5G and, of course, micro and mini LED that’s good demand. I guess one question I had is, are you guys – I know you guys are probably affected down the food chain when it comes to automotive, which is really in the in a tough situation. Did that committee take a little bit off your revenues for the first too, the reason you can’t really equate that?

[Subodh Kulkarni:]

I mean we have some auto customers that have bought SQ systems. We have heard slowdown in some of them. But nothing – I mean, our exposure to the semiconductor side, the memory customers is far bigger than our exposure to industrial or auto customers at this point. So we clearly, the impact of virus if we are seeing that in some parts of our business, but the other side is healthy enough to offset and compensate for that. Jeff, do you want to add something?

[Jeffrey Bertelsen:]

Yes, I agree with that and I would add. I mean, we did have one auto customer in Q1 who did buy some SQ systems, so and at least in that particular case, that instance, I would say we haven’t seen an impact yet. We’ll see down the line.

[Unidentified Analyst:]

Okay, so if we look out, by the first of the year, will you say – or do you have any idea how many lines are on the micro, any way to tell that, I mean, how many lines are getting laid out throughout Asia?

[Subodh Kulkarni:]

Our customers give us good visibility for the next two or three months, and we know more lines are being built in that time period. They give us a general idea of what they think will happen in the next six months. And all the numbers are increasing. We hear that all the time. So we’re pretty confident micro LED will continue to grow, but trying to quantify like what KLIC has done that we don’t want to do. I mean it’s just too many variables right now in the equation to try to quantify, exactly how many SQs we will sell in micro LED.

[Unidentified Analyst:]

Fair enough. Once again from me, great quarter you guys.

[Subodh Kulkarni:]

Thanks Eric.

[Jeffrey Bertelsen:]

Thanks Eric.

[Operator:]

We will move on to the next question we have from Craig Frolich with First Allied.

[Craig Frolich:]

My question has been answered, I am good.

[Subodh Kulkarni:]

Thanks Craig.

[Operator:]

In that case we actually have no further questions remaining in the queue. Dr. Kulkarni, I’d like to turn the floor back to you for any additional and closing remarks, sir.

[Subodh Kulkarni:]

Okay, thanks. Thank you all for your interests and questions. We look forward to updating you at the end of Q2. Thank you again. Bye.

[Operator:]

Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.