CyberOptics Corporation
Q2 2020 Earnings Call Transcript

Published: 23 Jul 2020

[Operator:]

Good day. And welcome to the CyberOptics’ Second Quarter 2020 Earnings Call. Today’s conference is being recorded. 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’ second 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, 2019, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. We reported sales of $16 million for the second quarter of 2020 ended June 30, an increase of 6% from $15 million in the second quarter of 2019. Our net income for the second quarter of 2020 was $1.6 million or $0.22 per diluted share up from $464,000 or $0.06 per diluted share in the year earlier period. We are pleased with CyberOptics overall performance in this year second quarter, despite the impact of COVID-19 pandemic on our sales. Approximately $1.5 million of customer acceptance is for SQ3000 MultiFunction inspection systems were pushed out to this year’s third quarter as a result of travel restrictions and inability to gain access to customers’ factories due to quarantine measures. None of the affected orders were canceled and all are expected to be booked as revenue in the third quarter. If this orders have been accepted as scheduled, total second quarter sales would have been at the upper end of our previous issued guidance for this period. Sales of sensors and inspection and metrology systems based on 3D MRS technology increased 30% year-over-year to $7.7 million in the second quarter of 2020. This MRS based products combined with semiconductor sensors accounted for 71% of total revenue in the second quarter of 2020, compared to 60% of total revenue in the year earlier period. Turning now to a brief overview of our product families, sales of inspection and metrology systems declined 23% year-over-year to $7.7 million in the second quarter of 2020, due largely to the delayed customer acceptances resulting from the COVID-19 pandemic. Sales of SQL3000 MultiFunction systems increased modestly to $4.7 million from the level posted in the second -- last year’s second quarter. We believe CyberOptics has attained first more status in the high-growth micro LED inspection and metrology market, given previous SQ3000 MultiFunction systems orders for using this application. We received an additional $2.5 million SQ3000 order for micro LED applications just prior to the end of second quarter. Revenue recognition of this order is scheduled for the third quarter. Additional micro LED related orders are anticipated during the second half of 2020. Also during the second quarter, we received one order for 2D MX600 memory module inspection system. Consistent with delivery schedules, no MX sales were recorded in the second quarter, but approximately $4 million of MX systems are forecasted to ship in this year’s third quarter. Given the activity in the micro LED market and forecasted shipments of MX systems, sales of inspection and metrology systems are expected to grow strongly in the third quarter of 2020, both sequentially and on a year-over-year basis. In an important development, our new MRS enabled WX3000 metrology and inspection system for wafer level and advanced packaging applications was unveiled several days ago at the SEMICON West tradeshow. Incorporating our NanoResolution sensor, the WX3000 makes 2D and 3D inspections simultaneously, giving it industry leading inspection speeds by a considerable margin. This system offers an unparalleled combination of resolution, speed and accuracy for wafer level and advanced packaging applications. Customer demonstrations are expected to commence in the third quarter and initial sales are anticipated in 2021. We will also continue marketing a NanoResolution sensor to system integrators and OEMs. At this time, now a number of customers are integrating our sensor into their inspection systems and are demonstrating their systems to end users. Revenue from these customers is expected to ramp up in 2021. Sold either as a complete system or as a sensor, our NanoResolution sensor technology has positioned CyberOptics to capitalize upon significant growth opportunities in the areas of wafer level and advanced packaging applications. Moving on, sales of 3D and 2D sensors increased 137% year-over-year to $4.7 million in the second quarter of 2020, due partly to weak sense of self in the second quarter of 2019. Growth in the current quarter was driven by sales of 3D MRS enabled sensors, which rose 170% year-over-year to $3 million. Sales of 3D and 2D sensors are expected to decline modestly on a sequential basis in this year third quarter. Finally, sales of semiconductor sensors in the second quarter of 2020 increased 15% year-over-year to $3.6 million. Third quarter sales of this yield and process improvement products are forecasted to grow modestly on both a sequential and year-over-year basis. CyberOptics ended the second quarter of 2020 with an order backlog of $24.8 million, which includes micro LED related orders for SQ3000 systems and $4.9 million of 2D MX600 orders for delivery model inspection systems. Backlog was consistent with March 31, 2020 and up significantly from a year ago. We’re forecasting sales of $19.5 million to $21.5 million for the third quarter of 2020 ending September 30th. We believe our technologies have positioned CyberOptics to take maximum advantage of attractive opportunity in our served markets. For this reason, we are optimistic about CyberOptics future growth prospects. Thank you. Now, Jeff Bertelsen will review our second quarter numbers in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. Since our second quarter sales have been covered in some detail, I will cover several other aspects of our performance for this period. Our gross margin percentage in the second quarter of 2020 was 45.7%, up from 44.3% in the first quarter of 2020 and 43.8% in the year earlier period, and improvement in our sales mix was primarily responsible for the modest -- modestly higher gross margin percentage. Our gross margin percentage in the third quarter of 2020 is expected to be at or slightly below the level on this year’s second quarter due to the change in revenue mix. In addition to higher sales and a gross margin improvement, our second quarter earnings benefited from lower total operating expenses due to the COVID-19 pandemic, including $276,000 from a Job Support Program implemented by the Government of Singapore and from lower costs for travel, trade shows and other expenses. Total operating expenses of $5.8 million in the second quarter of 2020 were down significantly from $6.6 million in the first quarter of 2020 and down slightly from $6 million in the year earlier period. Depreciation and amortization expense totaled $40,000 in the second quarter of 2020 and stock compensation expense was $286,000. We anticipate that operating expenses in the third quarter of 2020 will increase and be comparable to the level in the first quarter of 2020. The increase will be due to phase out of the Job Support Program in Singapore and higher sales commissions and incentive compensation resulting from the significantly higher revenue that we are forecasting for the third quarter. We also anticipate that travel trade shows and other costs will return to more normal levels in the third quarter of 2020. Our second quarter earnings also included a $340,000 income tax benefit from excess tax deductions for employee stock option exercises. In the absence of these excess tax benefits and other discrete items our effective income tax rate would have been approximately 18%, which is what we would expect for the second half of 2020 assuming no additional excess tax benefits from option exercises. Cash and marketable securities of $29.1 million at June 30, 2020 were up from $26.3 million at the end of 2019. No shares were purchased in the second quarter of 2020 under the $3 million share repurchase authorization that expired June 30, 2020. Given our available balances of cash and marketable securities, we believe our capital resources are adequate for achieving our growth objectives. Thank you. We would now be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] We can now take our first question from Greg Palm from Craig-Hallum Capital Group. Please go ahead.

[Greg Palm:]

Yeah. Thanks. Good morning. Congrats on the good results. A lot of good things to unpack overall.

[Subodh Kulkarni:]

Thanks, Greg.

[Jeff Bertelsen:]

Thanks.

[Greg Palm:]

Maybe we can start off with micro LED. I don’t know, you mentioned the initial order here, I mean, I guess, a follow-on order, I don’t know if you would say this is more sort of for commercialization of the technology. But can you say, what type of customer or application the initial order is for or from? I would appreciate any additional color you can provide on that?

[Subodh Kulkarni:]

Sure. So, thanks for your question, Greg. So, micro LED, as you know, is a new technology being scaled up. The main advantage of micro LED over conventional LED technology is -- right now the application that our customers are going after is backlight for consumer electronic appliances. So the customer is a consumer electronics large company. They are switching over from LED backlight to a micro LED backlight. And the main advantage is -- are announces longer battery life or better display quality or some combination of the two. So exciting new technology. It is going to get launched before the end of the year. So you will see some consumer devices in the market with micro LED backlight technology. It’s still very early in the scale, so we got a relatively small order towards the end of last year that was used to do some pilot production lines, if you will, the order we just got before the end of this second quarter, which is about $2.5 million is essentially the first systems that are going for in production and that’s really to help scale up for this holiday season. We are expecting more orders as we have said as the second half goes on. And it’s still early, more products are getting planned and more companies are going to be making micro LED based displays and other things. So we are quite excited about the potential opportunity that micro LED allows us to -- with SQ systems. SQ is well integrated. There are -- as we have discussed before, there are multiple inspection steps in a micro LED application process, and SQ is qualified for all of them. At this point, our customers are using SQ for the most demanding steps and then they’re using some conventional inspection equipment for less demanding steps, but they can switch to SQ for all those inspection steps. Exciting opportunity we really look forward to servicing this area and we’ll update you as we get more orders and where it goes.

[Greg Palm:]

Got it. And to be clear the $2.5 million order in Q2, that was from a specific customer. Was that across multiple different customers?

[Subodh Kulkarni:]

No. That was just one customer for one specific consumer product that is getting scaled up.

[Greg Palm:]

Yeah. Okay.

[Subodh Kulkarni:]

There’ll be more of those kinds of orders, both from that customer, as well as from other customers.

[Greg Palm:]

Okay. I mean, presumably, you said that that we’ll start to see this in consumer electronics later this year. What’s the interest level, I mean, given now, what’s the interest level in the technology? Are you seeing a notable acceleration from other end customers now?

[Subodh Kulkarni:]

Yeah. Definitely. I mean, as we all know, one of the biggest pain points for many of our high end gadgets right now is battery life. So, certainly, any new technology that significantly improves battery life, the expectation is quite high that the traction will be good. So there’s a lot of excitement about micro LED technology and how much it can impact both the display quality, as well as battery life, but particularly the battery life. So definitely I expect more customers. Certainly, the large consumer electronics company has started that’s where we are getting orders right now. But they don’t have an IP lock on the technology. They -- the technology is available for other consumer electronic companies and we definitely see movement by other large consumer electronics companies to get into this area. So we are counting on multiple customers scaling of this technology and benefiting from that.

[Greg Palm:]

Okay. Right. And if you could, in a bullish or optimistic scenario help us understand how revenue contribution could scale from this opportunity over the next few years.

[Subodh Kulkarni:]

I mean, it’s tough to quantify numbers when it comes to a new technology. So we’ll be transparent and when we get large orders, we will disclose them as they come. Certainly, the potential is huge. I mean, if you look at the display market, it’s a sizable market, multi-hundred billion dollar market and a big chunk of that is potentially going to go to micro LED. Right now the application, as I said, is backlight, not actual display itself. But even the backlight for LCD, every LCD display has a backlight right now. So just the backlight for LCD is a huge market opportunity, and certainly, if we can get a big chunk of the market share of the inspection systems. Those numbers are quite large for a company of our size. So the opportunity is significant and -- but it’s hard to quantify exactly what it will be in 2020 and 2021 and 2022. But it is large opportunity. We are so excited.

[Greg Palm:]

Okay. Fair enough. I guess, last one, can you confirm whether the $1.5 million of push outs has been recognized already, and I guess, as you think about your guidance for Q3, have you built in any conservatism into that under the assumption that maybe a similar scenario could occur?

[Subodh Kulkarni:]

Jeff…

[Jeff Bertelsen:]

Yeah. Greg, regarding the $1.5 million, most of that has not revenued yet. Certainly, when we look at guidance, we try to build in conservative -- conservativism and certainly try to take an account, what may happen with the COVID pandemic and we also look at the orders that we have in backlog and which ones will require acceptance and which ones will just revenue on shipments. So we certainly have tried to look at it through that lens and given those factors we’re comfortable with the guidance we’ve put forth today.

[Greg Palm:]

Okay. Sounds good. I will leave it there. Thanks for the color and good luck going forward.

[Subodh Kulkarni:]

Thanks, Greg.

[Operator:]

Thank you. We can now take our next question from Jaeson Schmidt from Lake Street Capital. Please go ahead.

[Jaeson Schmidt:]

Hi, guys. Thanks for taking my questions. I just want to start with linearity of orders in the quarter. Is it fair to assume you followed that typical pattern that we’ve seen so far, bottoming in April, improvement in March and even better in June?

[Subodh Kulkarni:]

I don’t think…

[Jeff Bertelsen:]

Yeah.

[Subodh Kulkarni:]

… we can say anything that specific. Jeff you want to add anything?

[Jeff Bertelsen:]

I mean, I would say, yeah, I don’t know, I agree with Subodh. I don’t think it’s that specific. I mean, we do tend to early in the quarter, the first couple weeks, there does tend to be a little bit of slowness and we’ve tended to see that consistently. But after that the orders tend to come in fairly evenly throughout the quarter and some of our product categories like WaferSense, they really never pause, those orders just keep coming in. Our systems products, as you know, they tend to be pretty lumpy. But we do tend to have some visibility there regarding the ongoing discussions in the projects and when we expect those orders to get.

[Jaeson Schmidt:]

Okay. That’s helpful. And just curious how much of the momentum you’re seeing this year you think is being driven by share gains?

[Subodh Kulkarni:]

Repeat that question again, Jaeson?

[Jaeson Schmidt:]

Yeah. Just curious how much of the momentum you’re seeing this year you think is being driven by market share gains?

[Subodh Kulkarni:]

Oh! I see. Okay. So, certainly, it depends on the category of course. So in 3D AOI we believe the market is growing, but maybe not as growing as fast as what SQ is growing. So we believe we are gaining share in 3D AOI as we speak, particularly because of this micro LED type applications that we have enabled. At the end of the year, we will know exactly what our market share was. At the end of last year, our market share in 3D AOI was roughly 78% based on external reports that we purchased. So we’ll see what it will be by the end of this year. But we believe we will pick up in market share, particularly on the high end side, where more difficult, more demanding applications like micro LED. Our WaferSense, that whole category we really don’t have any competitors. So there is no market share to speak off and also in MX we don’t have any competition. So there is no market share to speak off.

[Jaeson Schmidt:]

Okay. And the last one for me and I’ll jump back into queue. Just curious how many customers are now sampling your NanoResolution sensor?

[Subodh Kulkarni:]

The total number of customers that are sampling the MRS sensor and that includes NanoResolution right now is six. So we have, some of them are looking at the high resolution sensor that we use in our SQ system. Some are looking at Nano and then they decide depending on the application which is more suitable for them, that kind of stuff. So right now it’s about half a dozen customers who are sampling our different types of MRS sensor including the Nano sensor.

[Jaeson Schmidt:]

Okay. Perfect. Thanks a lot, guys.

[Subodh Kulkarni:]

Thanks, Jaeson.

[Jeff Bertelsen:]

Thank you.

[Operator:]

Thank you. We can now go to our next question from Dick Ryan from Dougherty Securities [ph]. Please go ahead.

[Unidentified Analyst:]

Thank you. First about to stay on the Nano topic. It looks like you just introduced your box with the Nano sensor in it and you’re still out looking for interest for the Nano sensor itself that others may incorporate in their box. How is that going to develop over the next couple of years, your other 3D sensors are kind of exclusive with the major OEMs. How is this or is it still too early, how is this going to shake out as you get over the next couple of years? And can you talk about the competitive marketplace that you’re really going after with this technology?

[Subodh Kulkarni:]

Yeah. Sure. So the Nano sensor, as well as the WX3000system are positions for advanced packaging inspection. At a high level that’s about a $400 million market, growing at about 20% to 25% per year. Within that there is a 3D portion, which is about 20% of that mark -- 20% to 25% of the market and the rest is 2D. The 3D is growing faster, but the 2D part is also growing as well. The main competitors that dominate the market today, it’s a fragmented market, so nobody has more than a 15% market share or 20% market share from what we can see. But the leading players in that market today are Camtek, Israeli company, as well as Onto Technologies or Rudolph, the new name for Rudolph Technologies. But there’s several other system integrators and other companies that play in that market as well. So that’s the market we are going into. We have already sold our Nano sensor to some system integrators and OEMs. So they will be playing in that marketplace. You’re right, it is taking when we launch our own system that is potentially a competitor to our customers’ product. But one of the reasons we decided to do that and we have done that in 3D AOI, so we will able to get app model here in 3D AOI we sell our sensor to one of our competitors Nordstrom and we sell this directly to customers. But we go after different kinds of customers and Nordstrom was a pretty good customers, we go after different customers and we believe the same will apply here. There is probably 25 to 30 customers that mattered in advance packaging, inspection, some fabs and mostly OSATs. And in this case many OSATs and for that matter fabs have purchased our SQ system and they like our system, they like our sensor, they like our software, they use our interface, it’s a fairly slip product, very easy to use and it’s -- that’s why it’s gaining share quickly. And they -- our customers asked us to consider launching a system that wasn’t our original plan, as you may recall last year when we started getting into this area. But our customers asked us to consider getting into WX type system with a SQ like software, because they like the user interface, they like the ease with which we can program SQ. So we believe we have a very differentiated product to compete with the Camtek and Onto Technologies going forward. It’s going to take time. This is a new market area for us. Exciting, great growth, great margin market, but it will take time. We are not counting on immediate ramp up with WX, as we have said, sales will start only in 2021 and then we will ramp thereon. Five years, 10 years from now we expect WX to be a significant contributor, but it will take time. Does that answer your general question?

[Unidentified Analyst:]

Yeah. Yeah. Sure. It does. And on memory, I’m not sure I caught it. How much memory will ship in Q3 and is that the extent of the memory orders and backlog?

[Jeff Bertelsen:]

Yeah. So there -- total backlog for memory at June 30th is about $4.9 million. Didn’t book any memory in Q2 and we are -- as we said in the release, we’re expecting about $4 million in Q3 of that backlog to revenue.

[Unidentified Analyst:]

Is that 2D or is there any 3D app in the backlog?

[Jeff Bertelsen:]

That is 2D. It’s all 2D…

[Unidentified Analyst:]

Okay.

[Jeff Bertelsen:]

… right now.

[Unidentified Analyst:]

Okay. So the 3D was shipped. What was that Q1 or Q2?

[Jeff Bertelsen:]

Yeah. That was Q1.

[Unidentified Analyst:]

Q1.

[Jeff Bertelsen:]

So we revenued our first 3D memory module system in Q1.

[Unidentified Analyst:]

And what is the order pipeline look for some additional memory orders, either 2D or 3D for the rest of the year?

[Subodh Kulkarni:]

No. We definitely are expecting more 3D orders from existing customers going forward. But also we are still working with the third large memory manufacturer. So hopefully we’ll get them on to MX soon and most likely it will be a 3D MX that they will start with. So we definitely expect more 3D orders in the next few months here and it will continue to grow from there. There’s still more potential for 2D memory as well. Our current 2D memory customer has plans for expansion. Memory is it generally doing very well as you can see from all the three companies right now. And there are plans for expansion in all three of them. So existing 2D customer is putting more lines in the next few months and we are expecting more 2D MX order. So, we are definitely expecting more MX order both 2D, as well as 3D going forward.

[Unidentified Analyst:]

Okay. Great. Thank you.

[Subodh Kulkarni:]

Thanks, Dick.

[Operator:]

We can now take our next question from Eric Slade from Acme [ph]. Please go ahead.

[Unidentified Analyst:]

Yeah. Hey. Nice quarter, fellas.

[Subodh Kulkarni:]

Thanks, Eric.

[Jeff Bertelsen:]

Thanks, Eric.

[Unidentified Analyst:]

Okay. I want just a little housekeeping first. You have $29 million in cash. And what’s the breakdown of that cash, cash, treasury bills, whatever. What is the breakdown? I guess, Jeff, I’ll direct it to you?

[Jeff Bertelsen:]

Yeah. So most of the -- if you look at that the marketable securities that we have, roughlymore than half of it is or roughly half of it is treasuries and government agencies. There is some AAA highly rated AA rated corporate bonds, a few CD, that type of thing, everything is very secure and highly rated.

[Unidentified Analyst:]

Okay. The one thing and I pointed this out before and I don’t know, if you guys get a hold the Yahoo, on Yahoo Finance shows $13 million, it’s been there forever. I mean, the number has been way below what the cash flow is, just to point that out. The other question I have is, you guys are also on Yahoo Finance, Jeff explained to me one time but I’ve gotten a couple question from people, can you explain why it shows $4.5 million or so under debt, I think, its recognition mission of like, leases. Can you make a comment on it?

[Jeff Bertelsen:]

Sure. So the -- what -- basically what the FASB did was about a year ago, they made all companies book up a balance sheet lease obligation for any facilities that you rent. So we don’t own any facilities. We rent them under short-term operating leases. But like all companies, we are required to book up the lease liability. So that’s what that is. But we do not have any traditional bank debt, other types of debt. Other than trade payables and that type of thing.

[Unidentified Analyst:]

Yeah. And I think we’ve talked once in the past, no need to do a secondary even as this ramps up, even if the business really ramps up here over the next several years?

[Jeff Bertelsen:]

As of today, we feel like we have more than enough cash and marketable securities to fund our growth.

[Unidentified Analyst:]

Okay. Let’s move on to memory for a minute. I think we talked before that once you get the third one memory guy, which you anticipate, you’re looking at maybe $20 million, and as we transition to the 3D memory modules, between 2D and 3D, you’re looking maybe at $20 million per year for like a five-year period, $20 million each year for five years?

[Subodh Kulkarni:]

I mean, the total market for memory is probably about 130 to 140 systems, if you will, as of today and that number increases by 5% to 10% depending on the needs of memory out there. So, as of Today, we have shipped roughly about 20 to 25 MX systems. So we still have, if you want to think of it that way, we still have about a potential for 100 systems out there between 3D and 2D systems and that number will continue to grow every year. So it’s a sizeable opportunity left. The 2D systems typically are in the neighborhood of $0.5 million or so, the 3D systems are much more closer to $1 billion or so. That gives you a feel for the size opportunity, but it is a lumpy kind of thing, it’s not going to be steady every six months or every year. So when we get those orders there will be large lumpy orders when the individual company wants to scale up their factory for certain level.

[Unidentified Analyst:]

Okay. I’ll shoot another one probably your way here Subodh. I listened to Best or I read Best Buy’s transcripts and also I even seen HP, Hewlett-Packard come out. But Best Buy get a new high. The business side like was on fire and this is more legacy business, business that really we didn’t anticipate would -- wasn’t going away, but there is what really no growth. It was mature. And I’m talking about, computers, servers, because as we transition to mobile and also everything from the home. Can you comment on that, because obviously that’s great for the chip industry and more silicon. So really basically can you comment on what you’re seeing there?

[Subodh Kulkarni:]

I mean, certainly, the trends that others are reporting we see that in our business as well. I mean, we definitely have seen a shift from conventional SMT type customers to more semiconductor packaging type customers. Part of it is our technologies to, I mean, we choose to focus on high end technology, high end precision products typically on the higher price side. And customers who are doing more demanding applications like those kinds of products, conventional electronics manufacturers can buy a cheaper system using this -- those using inferior technology is not going to choose us, they will go for a lower price product out there. So definitely…

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

… we type -- we chose our investments correctly because the trend is towards higher end chips and more demanding application, that’s where inspection is becoming more critical. So we’re definitely benefiting from decisions we’ve made a few years ago to focus on higher end electronics and higher end applications.

[Unidentified Analyst:]

Okay. I’ll throw another one your way. I tried on Google this, I couldn’t find it, but, I guess, I understand that the Sony PlayStation is coming out with their first a new system and like, seven years, if I’m correct on that. Do you have any idea Subodh what percent of the chip market is gaming and how fast it’s growing?

[Subodh Kulkarni:]

I don’t have a good feel for the breakdown of the chip market in terms of that. I mean…

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

… huge market as you know. So I cannot…

[Unidentified Analyst:]

Yeah. Fair enough.

[Subodh Kulkarni:]

… comment on that.

[Unidentified Analyst:]

Okay. Let’s move on micro mini LED. Hold on one second here. Let’s say, okay. Can you hear me still?

[Subodh Kulkarni:]

Yeah. Yeah. We can hear you.

[Unidentified Analyst:]

I am quite now, let me get my question, sorry about that. Okay. Where are we currently in its evolution. I have read that cost unit could decline 95% in five years. Could you comment on that?

[Subodh Kulkarni:]

Yeah. Certainly, we are missing something. So it’s literally it’s the first lines that are scaling up micro LED being placed as we speak. So we are very much early in it scale up cycle. As I explained to one of the questions earlier, it’s very hard to predict things and you’re so early in the scale up of a new technology. So numbers will obviously increase as we go forward. But whether it will be 95% or something concrete, I -- it’s hard to know at this stage. All we can say…

[Unidentified Analyst:]

Fair enough.

[Subodh Kulkarni:]

… it’s very early, the potential is huge.

[Unidentified Analyst:]

Okay. Fair enough. Is there visibility of any products in the queue you could speak of in general?

[Subodh Kulkarni:]

In general, as I said, certainly, more and more consumer electronics products are battery life and display quality plays a big role, which is just about all your mobile products, but even laptops and other things, everyone wants longer battery, everyone wants better display quality. All of that is benefited by micro LED technology. So, in general, we definitely expect micro LED to do become the de facto technology every few years down the road for backlight, for sure, but also for the main display over time. It’s a powerful technology. It’s got all the reasons why it will succeed. But at the same time, existing technologies just don’t disappear, I mean, LCD is a very good technology and OLED is a very good technology. So there will be some applications where LCD will stay and some applications where OLED will stay, but micro LED will take a big chunk of the display market long-term. So it’s an exciting area.

[Unidentified Analyst:]

Yeah. My understanding, Samsung is still staying with the current LED, but Apple is the one. Apple is the big gorilla in the micro LED space. Can you comment on that or not really?

[Subodh Kulkarni:]

We cannot comment on any individual customer like that. We have legal agreements in place…

[Unidentified Analyst:]

Okay. I thought if we can…

[Subodh Kulkarni:]

…that we can not allowed to talk.

[Unidentified Analyst:]

I was just talking in general. All right. In general, how many production lines are currently up and running and what is your guess on an estimate of potential production lines in the future?

[Subodh Kulkarni:]

At this -- as of today, only a few lines are up and running for micro LED that we can tell you based on the number of systems we have sold as modes. So just a handful of lines that are running today. Number is rapidly increasing as we speak. That the order which is seen at the end of June, it is for enabling products to hit the market during our holiday season. So every week that goes by more lines will be placed here exactly where it will be, but at the end of the year.

[Unidentified Analyst:]

We had a call, me and my partner. I think you said there was 12 lines. This is maybe a quarter ago. And you could see looking down I’m not saying like year two, but this seems like - and I read the growth rates on mini micro LED was 80% per year for five years, and looking out. I think you said eventually there will be thousands of these lines, most of them in Asia probably, is that correct or did I get that wrong?

[Jeffrey Bertelsen:]

No. The numbers are generally in the right ballpark. There are numbers as of today right now probably are in the technical design that are operational today, and the number will rapidly increase. So whether the growth rate will be 80% every year for the next five years that’s a tough one for me to quantify.

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

And it really depends on the traction micro LED products get, I think we are far better answer would be starting to be available to all of us early next year when we look at the traction the consumer products that are using micro LED are getting. His customers choose them because of the longer battery life or better display quality obviously there is the higher motivation to move to micro LED faster.

[Unidentified Analyst:]

Okay, I guess after Jeff, Jeff and I have talked about this number of times. So really you’re a back end company, but with the entree in the mid-end sensors, now you’re in the mid-end. And do I understand correctly just at the mid-ends about three times the potential as the back end, or four times three times of it.

[Jeffrey Bertelsen:]

Yes, super one. I think I’ll defer that one to you. Why don’t you take that.

[Unidentified Analyst:]

Sure. So at a high level, it’s true within market is taught probably about three times the size of the back end market. It depends on the exact way you define mid-end and back-end how this membership, but many people have quoted that generally to be to that median market is about three times the size of the back-end market. And that’s what I said it’s right now it’s about a $400 billion to $500 billion market for advanced packaging inspection. That is back-end would be about $150 million to $200 million market which is basically moderates in you take case.

[Jeffrey Bertelsen:]

Okay, and I’ll throw another one year way. To my understanding the front-end is six times what the back-end is. And when I first started getting involved with your company in the fourth quarter of 2017 Jeff and I were talking and you anticipated that maybe within five to six years, which would put you out of 20 to 23 that you’ll start coming into the front-end just like you are right now with the mid-end.

[Jeffrey Bertelsen:]

It’s no wonder that abrupt transition like that happens more gradually because the technology gets developed. So we never completely say okay, you said suddenly now we are in front-end or suddenly. So we started moving towards mid-end if you will last year with some of our advanced applications. We started with our SQ system, so some of our customers are using SQ system by doing some bidding type applications. And now we are definitely getting into the beginning with the Nano sensor and WX3000 system, and will continue to improve the accuracy and resolution of the system. So you will see more announcements during the accuracy resolution the future size. So, let’s start getting engineers closer to the front-end. And some applications will come our way. I mean, we are using optical light. So we are using blue light excellent. It has a fixed wavelength of about 400 nanometers. And there are physics laws that do not allow us to go sub one micron measurement with 400 nanometer light. So, we have some limitations at about a micron or so, but that’s still plenty of room for us to grow and start taking some part of the front end. I’ll never say that visible light will allow you all the applications of front end there are some applications of certain [inaudible] stuff and we’ll never get the visible light that’s [inaudible], but there are still applications of front-end [inaudible] and other kinds of things. A micron is good enough resolution, and we should be able to get those in the next few years, but it’s going to be more gradual. It’s not going to be a sudden come off the cliff and suddenly be out in front-end or something like that.

[Unidentified Analyst:]

But, if I look at that five to seven years from here, you guys should be well entrenched in the front-end?

[Jeffrey Bertelsen:]

Yes. I mean, I would say will be servicing some applications in the front-end five years from now, that’s a fair statement, would be, it’s not like suddenly our business would be authentic at that time.

[Unidentified Analyst:]

Now my understanding you could clarify is 5G is coming on and talking to some - actually a fund manager he has been dead on the timing. He said that in ‘22, we’ll really start seeing the gadgets. But if it’s ‘22 is when we really start seeing gadgets, don’t the chip companies, and obviously the equipment companies ramp up in ‘21 for launching of all these so-called gadgets for internet of things and 5G and everything.

[Jeffrey Bertelsen:]

You know 5G is definitely coming on. [Inaudible] in multiple course. The best place to look for holding that ramp up is happening is look at reports from companies such as TSMC or Micron or Intel. They’re a lot more granular than about the timelines. And clearly some of these investments have already started a ramp is going to happen in the next few months, and ‘21 is expected to be the big ramp up here. So yes, expectation is that most of us as consumers will be getting 5G devices by the end of 2022. So certainly the investments have stock acknowledged and we compete with Apple over the next year or two years.

[Unidentified Analyst:]

So really big ramps in 5G and obviously mini micro. Would that be accurate?

[Jeffrey Bertelsen:]

There will a ramp in 5G. No doubt about that. It would be exactly how much you do replace it all to look at reports that are coming from the industry, send me just a shooter media report came out yesterday. So that gets into the details of what it means in terms of CapEx investment and so on. And it is all positive. It’s all good news. They are expecting on some growth in second half of this year and the growth to accelerate next year and in 2022. So exciting times for the whole and chip industry right now.

[Unidentified Analyst:]

Hold on one second here. Okay. Here, I just got a question from one of my partner. You have mentioned the past cyber has a competitive lead for the micro LED inspection. Could you describe the advantage that cyber has? Where are the competitors?

[Jeffrey Bertelsen:]

So sure. So SQ 3000 multifunction system work we have done to-date is enabler multiple applications in the same system. So they are using the same hardware, same song, but with the flip of a switch of a software, we can switch it from a [inaudible] to an automated optical inspection, more to coordinate measuring machine more, so we can run the same system in completely three different ways. And that’s extremely useful for a micro LED application. So when for instance, when we are missing their LED dyes [inaudible] know the precise location XY location of the dye, and feed that information rapidly to the pick and place machine, [inaudible] where everything is covered completely on that. So they like the multi-functionality part of SQ, the like -- the ability measure besides the - and then fundamentally the MRS technology is how we differentiate the speed accuracy both at the same time. And that’s, really where our advantage comes in because of the MRS technology we can measure rates very high accuracy. I could have submission rates that our competition doesn’t quite have a having said that there are parts of the micro LED process where the inspection on measurement is not that critical and a conventional off the shelf newer price AOI or SPI system can do its job for those areas. So we are not getting all the inspection steps of the micro LED today. And as the business move definitely increasing size and we didn’t get more competitors coming into the study now. Our plan obviously is to keep improving. So you will see more announcements on higher resolution, higher speed, excuse coming out, because the micro LED dye will keep getting smaller and smaller, the placements will get more tighter and tighter. Ultimately when they want to make a micro LED display itself, the resolution and accuracy has to be significantly better than where it is today. So we are going to be targeting the higher end part of micro LED, not the lower end part. Does that answer your question.

[Unidentified Analyst:]

Yes. Sure. It did. One more question from Craig. Both in there is six separate tools involved in process -- the process, can you quickly describe the six tool functions?

[Subodh Kulkarni:]

Yeah. Sure. So in the micro LED, you start with incoming substrate inspection, which is LED comes on compared to lower substrate here to inspected. Then you do a conventional solder printing of pads. So that’s conventional SPI. Then you do 3D flow. Automated optical inspection that’s after the placement of the dyes. Then you take it to the hardware and then you do a post inflow of automated optical inspection and that’s your fourth step. Then you do an epoxy layer, which is a protective layer, that’s -- and post epoxy we do inspected, that’s your fifth layer step. And then the final one is what because the light on instruction get to turn specifically on make sure everything is correct and that’s your sixth step.

[Unidentified Analyst:]

Okay. I think I got one more question for you guys. I think the automotive industry to my understanding sort of misunderstood I know it’s tough sledding right now. But the potential is huge to my understanding because, how many work ships those in these things than they did maybe five years, 10 years ago and then look out five years, 10 years, how much more context coming in and can you comment where you think, I listen to Marvels [ph] call, they made it, I guess, a strategic good acquisition of automotive and they’re pretty bullish on sort of maybe we’ve seen the bottom and they are pretty excited about their acquisition. So can you talk about automotive?

[Subodh Kulkarni:]

I mean, fundamentally semiconductor industry we believe will continue to grow and automotive is a big part of that, along with mobile and cloud and other areas, 5G included. Auto, clearly, as you can see, auto you buy today has a lot more chips than what it did a few years ago and that trend is not going to go backwards. As you go forward with autonomous driving coming, that’s going to be literally a box full of chips to do all the navigation and auto control and everything else. So we don’t see this going backward. We believe auto is going to be a big driver of semi chips going forward and more and more demand in semi chips, if you will. So another exciting potential growth area for us now.

[Unidentified Analyst:]

Okay. I think, you answered my questions. Great quarter and keep it going.

[Subodh Kulkarni:]

Thank you.

[Jeff Bertelsen:]

Thanks, Eric.

[Operator:]

There are no further questions at this time, I would now like to turn the call back to the host for any additional or closing remarks.

[Subodh Kulkarni:]

So thank you all for your interesting questions. We look forward to updating you with our results at the end of the third quarter. Thanks again.

[Jeff Bertelsen:]

Thank you.

[Operator:]

That concludes today’s conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.