CyberOptics Corporation
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Please stand by. Good day and welcome to the CyberOptics Fourth 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, sir.

[Subodh Kulkarni:]

Thank you. Good afternoon and thanks for participating in CyberOptics earnings conference call for the fourth quarter of 2020. 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.

[Jeff Bertelsen:]

Thanks, Subodh. As we stated in this afternoon's earnings release, net income in the fourth quarter of 2020 benefited from a significant improvement in our gross margins. Our gross margin percentage in the fourth quarter of 2020 rose to 47% from 42% in the third quarter and 43% in the fourth quarter of 2019. This improvement resulted from an increase in the proportion of high-margin products in our sales mix, including 3D MRS sensors and WaferSense semiconductor products. Our gross margin also benefited from an increase in the average selling price for our SQ3000 Multi-Function systems in the fourth quarter of 2020, reflecting more sales for higher-end applications in the SMT and semiconductor markets. We believe our gross margin percentage in the first quarter of 2021 will decline slightly by roughly 1 percentage point or so from the level in the fourth quarter of 2020. Total operating expenses in the fourth quarter of 2020 declined by about 4% year-over-year to $6.3 million from $6.6 million in the fourth quarter of 2019. Fourth quarter operating expenses were also down slightly from $6.5 million in the third quarter of 2020. The year-over-year decline resulted principally from limited travel and the absence of trade shows, both due to the COVID-19 pandemic and lower professional fees.

[Operator:]

Thank you. And our first question comes from Greg Palm with Craig-Hallum Capital Group.

[Greg Palm:]

Great. Thanks for taking the questions here. Subodh, I think you talked about 2021 as being another good year. I think that's the way you described it. And I'm curious if that means double-digit growth in your opinion. I know you don't usually give annual guidance, but it will be helpful to get some thoughts on how you're thinking about the cadence of the year.

[Subodh Kulkarni:]

Thanks, Greg for the question. Yes, we do expect 2021 to be a good year for CyberOptics. It's -- as you correctly said, we don't give annual guidance. We do look at the numbers of semi-cap market particularly and the numbers get updated every month. I'm sure you're familiar with what's going on right now with shortage of chips going around. So lot of demand for semiconductor chips and we clearly see that in the products that we sell directly to fabs or OSATs, such as WaferSense or the MRS sensors we sell to KLA, for instance, which are all used in direct manufacture of the chips itself. So clearly, we see benefit of our increased CapEx, good healthy market in semiconductors. We also sell SQ to some semiconductor fabs and OSAT-type companies. On the flip side, we do service the electronics manufacturing area too. That is a significant part of our company. And the shortage of chips can be a problem for many auto players, for instance. Right now there's a severe shortage in auto and lines are going idle. And that does have some more of a negative impact. So it's hard for us to quantify on the plus and minus. Clearly, in the semiconductor side it's a big plus. And SMT side, it's a minus, but it's a relatively small number right now for us compared to semi. So, overall, we think it's a positive year, we expect to post good growth, but I would hate to quantify at this point, not -- knowing there are so many moving parts right now. Hope that answers your question Greg.

[Greg Palm:]

Yes, no, that's helpful. What about the visibility into potential orders for sort of micro LED inspection? I think you said we expect to see it as the year progresses. I mean what's your confidence level; do you think that the contribution this year can be in excess of the contribution last year, what are your thoughts?

[Subodh Kulkarni:]

That's a good question, Greg. I mean what -- we clearly see that the customers who are scaling up micro LED are committed and products will be launching in the market any time now. So that's all positive. We're talking to them; they are talking about more orders in the first half of 2021. As you know, Chinese New Year just ended and so many people are just coming back in Asia right now. So a lot of activities started now for 2021. And so we are counting on some micro LED orders in the foreseeable future. We expect it to grow as a whole category, SQ, for micro LED. We expect it to grow, but it's hard for us to quantify the growth rate when we are still so early. I mean, so far, only one customer is driving micro LED demand as far as we are concerned. One end-user, consumer electronic company is driving the demand, but more companies are showing interest. So we expect more consumer electronics companies to join the micro LED area, and we definitely expect SQ to grow. It's hard to sit here in February and quantify what kind of growth should we expect from SQ in the micro LED area.

[Greg Palm:]

Yes, okay. And then, Jeff, last one, maybe help us understand the potential margin impact, if any, in Q2 and Q3 when a sizable 3D MX orders get recognized. How should we be thinking about that for modeling purposes?

[Subodh Kulkarni:]

Yes, I mean we had -- Greg, I think as you know, we had previously said on an annualized basis the MX3000 product would impact our margins, given our current revenue and gross margin dollars by about 1% to 2%. We think those sales will be spread evenly between Q2 and Q3. So there will be an impact. Really the ultimate impact in terms of points when you get to Q2 and Q3 is -- will depend on what our revenue levels are going to be in those particular quarters, but I would expect to see some gross margin decline in those quarters. Probably a couple of points, anyways. Some of it will depend on the sales mix of our other products. And then as we get more into the third quarter, we had talked -- mentioned previously on the last call about some potential cost reductions for the SQ product and that will impact as well. But I do think we'll see some decline in Q2 and Q3 from the MX.

[Greg Palm:]

Got it, makes sense. All right, that's it for me. Best of luck going forward. Thanks.

[Subodh Kulkarni:]

Thank you.

[Operator:]

And our next question comes from Dick Ryan with Colliers.

[Dick Ryan:]

Thank you. Say, Jeff, what was your micro LED-related sales for all of 2020?

[Subodh Kulkarni:]

So, for all of 2020, micro LED sales were $4.6 million.

[Dick Ryan:]

Okay. Was there much, if anything, in 2019?

[Subodh Kulkarni:]

2019, it was $2.2 million.

[Dick Ryan:]

Okay, thanks for that. Hey, Subodh, I wasn't sure if I caught it, but you're talking about the Nano sensors or something. And you mentioned both wafer and substrate inspection. I wasn't aware of substrate inspection opportunity. So is the -- or are the opportunities there expanding?

[Subodh Kulkarni:]

Yes. We believe so, Dick. Thanks for that question. So we launched -- we got into NanoResolution MRS sensor and the WX system product sometime in middle of 2020. We have been showing it to select customers and clearly, there is a lot of interest among wafer inspection community for bumps and pillars because of the speed of the sensor compared to competition. We're 2 to 3 X faster than any competitor out there right now and that's the main attraction. At the same time, we got introduced to folks who are making substrates for the wafers right now, and historically substrates were fairly benign kind of services with very low number of features. But this advanced packages, the heterogeneous packages that are getting launched as we speak, they are putting a lot of features of the substrates too, and those features are of -- on the dimensions of 50 or 100 microns now and they would like to inspect those features. So that whole area of substrate inspection is kind of amenable to us right now, and we have been talking to a few customers in that area and they really like what we have done with the Nano sensor and the WX product. The only difference for substrate inspection is, instead of handling a wafer, we have to handle a substrate, which frankly is a lot easier than the wafer. So the front end will look a little different for the substrate inspection system than a wafer inspection system, but inside everything is identical; same sensor, same software and similar handling kind of mechanisms and so on. So, we are looking -- talking to both wafer and substrate inspection players right now. So, yes, at a high level, we believe the TAM, if you will, for a NanoResolution sensor and the systems based on NanoResolution sensors are bigger than what we initially thought. So we are quite excited about these opportunities as we go further this year.

[Dick Ryan:]

Now the competition on the wafer side is, I think, imagine the players kind of Camtek and Onto, but who would you be competing with on the substrate side, same or different?

[Subodh Kulkarni:]

No, it's a very interesting market. Yes, you're right, on the wafer side we complete primarily with Camtek, Rudolph, now a subsidiary of Onto, and a few other players like that. On the substrate inspection, substrates historically have come from Japan and the market seems to be dominated right now by a couple of Japanese players. Takaoka is one, and Idea 3D is another one. We haven't seen those companies play in wafer inspection and we haven't seen the traditional wafer inspection companies play in substrate inspections, primarily because there are different types of technologies that get used. Automotive technology is kind of unique in a way because we are doing pattern projection as opposed to a dot laser, like Rudolph is using or a line -- white line CLIP technology that Camtek is using. And Takaoka and Idea 3D are really using old triangulation sensing technology. So we believe we have an intrinsic -- intrinsically big advantage with our MRS technology in tackling both wafer as well as substrate inspection that allows us to participate using the same sensor, same software, just different handling mechanisms. So we feel pretty good about both of these opportunities.

[Dick Ryan:]

Okay, great. See, on the memory side, memory guys are adding capacity pretty actively now. I know you did announce orders in January, but did they get distracted with just trying to add capacity to keep up with what the demand they see to maybe not look at your inspection systems as kind of a new way of doing things, or don't you think that that's an obstacle to overcome you being more established now than maybe you were a year or so ago?

[Subodh Kulkarni:]

It's a little bit of both. I mean, as you know, right now we are servicing two of the three large memory manufacturers. One is what has primarily bought 2D MX from us in the past. One is buying 3D MX. The 2D MX customer is planning to switch to 3D in the future too. So going forward, most of the sales to both of those customers are going to be 3D MX. Part of it is their line expansion. Memory in general is in great demand right now and they are adding lines as we speak. So we are getting the benefit. Every additional line generates demand for one more MX system for us. So they are adding lines. The part of it is also the second customer we added, and we just added them in 2020, they have a number of volumes where they are using some older technology or manual inspection right now. So there's a number of lines we have to populate in the second customer right now with our 3D MX solution. So, even with the two existing large customers we feel MX is a sizable opportunity in 2021 and beyond. We certainly are talking to the third one, too, but so far the two customers are keeping us pretty busy.

[Dick Ryan:]

Okay, great. Thank you.

[Subodh Kulkarni:]

Thanks, Dick.

[Operator:]

Thank you. And our next question comes from Jaeson Schmidt with Lake Street.

[Jaeson Schmidt:]

Hey guys, thanks for taking my questions. Just curious if you saw any sort of supply constraint in Q4 and if you're seeing any -- you're anticipating any potential impact in Q1.

[Jeff Bertelsen:]

Jaeson, I think generally what we're hearing from our suppliers is that the market for some of the components certainly is starting to get tighter, that's for sure. When it comes to Q1, we don't think we're going to be impacted by any supply constraints. Certainly we're -- right now we're actively looking at Q2 and Q3. And as of today, don't believe that we will be impacted in those quarters, but I think the markets for components certainly is getting tighter out there and that's something we're keeping a close eye on.

[Jaeson Schmidt:]

Okay. No, that's helpful. And I guess, relatedly, I mean I think there is a general assumption that it's going to be a pretty strong year from a growth perspective across the industry, but just given the supply constraint variables, I mean as you sit here today, I am not looking for specific guidance, but do you think the year is shaping up to be more first-half weighted or second-half weighted?

[Subodh Kulkarni:]

It's a tough one to answer, Jaeson. I mean, as you know, our numbers depend more on these projects that our customers do when they add specific CapEx and capacity. So -- and MX and the SQ both go with that, and -- if any of this large customer decides to add capacity, I mean for -- certainly because of the MX backlog that we have already disclosed, we expect better quarters from a top line standpoint in Q2 and Q3 just because of the backlog already. Exactly where Q4 will be, it's very hard to see right now. But, overall, we do see good demand right now for semiconductor-type products and demand for SMT is increasing but still relatively soft compared to semi products. Jeff, you want to add anything regarding seasonality?

[Jeff Bertelsen:]

No, I think that's right. I mean I think the -- and as you had touched on in your remarks, Subodh, I mean I think that the overall environment is healthy right now, which is a good thing. And I think we're well-positioned. And as you pointed out, we do have the MX orders in the backlog for Q2 and Q3 and we see other opportunities as the year progresses. So I think it's a good market right now.

[Jaeson Schmidt:]

Okay. No, that's helpful color. And then just the last one from me. How should we think about OpEx trending this year? I know it's -- I think you guided for about 6.5, 6.6 here in Q1, but anything out of the ordinary from an expense side that we should be aware of as we progress?

[Jeff Bertelsen:]

No, I don't -- Jaeson, I don't think there's anything out of the ordinary. I think one thing we'll maybe just need to keep an eye on in for the back half of the year is if travel and trade shows start to loosen up as people get vaccinated, do we see life returning to normal. We could see some -- potentially see some more travel costs and some of those types of things in the back half of the year. That's something that we'll keep an eye on and comment on in the April earnings call and then in the July call. But that would really be the only thing that would come to mind from an OpEx perspective. We are still of course investing in R&D, and so there will be a few investments there, but really nothing out of the ordinary or no massive large upticks in OpEx or anything like that.

[Jaeson Schmidt:]

Okay, thanks a lot guys.

[Subodh Kulkarni:]

Thanks, Jaeson.

[Operator:]

Thank you. And our next question will come from Eric Slade with Acne Analytics .

[Unidentified Analyst:]

from here. I was -- I had some questions. You guys -- okay, so $0.20 a share, Jeff, that was a clean number, nothing extraordinary in there, right?

[Jeff Bertelsen:]

I would say the one thing that I would -- in that number that I would point to, Eric, really is a 9% tax rate, and that's where we get -- yes, we get extra benefits there from people exercising stock options and so forth. So that rate is a little bit lower than what you would see in -- going forward in the future. Assuming no stock option exercises, we will get some of those in the future.

[Unidentified Analyst:]

Okay. Well, if you back that out, what would have been -- instead of $0.20, what would have been on a net basis, approximately, I don't need that…

[Jeff Bertelsen:]

Yes. I mean, so, if we -- we set our effective rates at 9%. So, if we sort of double our tax provision that would be about another $150,000, which is roughly -- that would be roughly a couple of cents a share.

[Unidentified Analyst:]

So you're still looking at $0.18 for a good clean number then without the options?

[Jeff Bertelsen:]

I believe so.

[Unidentified Analyst:]

So, that leads me to -- I know you guys don't forecast, but I think the three analysts who follow you in your backyard, have you doing somewhere around $76 million, is that correct, for the year -- for the calendar year of 2021?

[Jeff Bertelsen:]

Yes. I believe that's correct, Eric, if you take an average of the three.

[Unidentified Analyst:]

Okay. So that leads me to think that -- okay, so you have to do 16 -- excuse me, let's take the mid-range, $17 million for the first quarter, approximately. That means the last three quarters, to hit those numbers you'd have to do -- you'd have to average $20 million a quarter. And I would assume that might ramp. So $20 million with the kind of margins you guys are doing, I would say -- so we'll take the $0.18 and of the additional $3 million if you got to $20 million, we're looking at -- I mean you can see, you are looking at $0.30 quarters then, right, at $20 million approximately?

[Jeff Bertelsen:]

Yes, I mean, Eric, I'm not going to get into trying to forecast or project the year, but I think you've got the metrics, right, in terms of our margins and our tax rates and so forth. So you could put a model together to come up with your own projection.

[Unidentified Analyst:]

I think I'm closing with that and I've talked enough about that. Now on the memory side, you guys are still very much looking at the third memory manufacturer. It seems like the second took a long time and now we're in the third. Any color on it, could we see it this calendar year or you just don't want to go there as far as like it's when they order it, they sign up, they sign up?

[Subodh Kulkarni:]

I mean, we have been talking to them for a while now and they are a customer for our SQ product. So they know us pretty well and they know our technology pretty well. And so we believe it's a matter of time. But so far we don't have the orders. And frankly, at least for 2021, the existing two customers have plenty of expansion plans. So we are pretty busy right now with the existing customers. We certainly hope to get the third one, but we are not counting on that to grow in 2021.

[Unidentified Analyst:]

Well, that's a nice situation to be in where you're going to sort of -- just either -- if it comes -- then when it comes in, because you got enough business. Now the other question I had for you, Jeff, is back to the balance sheet. What was your cash at the end of the third quarter? I think it was -- end of the third quarter I think it was $28 million, is that correct?

[Jeff Bertelsen:]

Yes, it was.

[Unidentified Analyst:]

And you're at 30 and change now, right?

[Jeff Bertelsen:]

Yes. 30.6, yes.

[Unidentified Analyst:]

So where did that cash come from? Some of them was stock options, right? How much was ?

[Jeff Bertelsen:]

It really came, first and foremost, from earnings. And then it's working capital. So that -- those are the two big drivers. We didn't generate -- exercise the stock options, just because of the strike price of the options wasn't a big cash generator. So it's really profitability and then working capital management, Eric, collection of receivables, reduction in inventory balances, those types of things.

[Unidentified Analyst:]

Yes. So now I think that does it for me except on the mini/micro side. So, if I understand this correctly, you have no competition on WaferSense or the memory product and didn't sound like there's any real competition there. On the mini/micro, I know it's hard to figure out, it's new technology, but you're pretty comfortable in your position. You don't see any competition out there -- major competition on those three parts of the six on the line for the mini/micro. Does that make sense?

[Subodh Kulkarni:]

I mean, there is competition there, as we have said. And SQ is a superior product. But we have to complete with lower-cost competitors for all of mini/micro LED inspection steps. So far we get used for the most critical steps, which is three of the six, but there always going to be competition in that space.

[Unidentified Analyst:]

Right, got you. And we know -- like, on the call, I think it was -- yes, the third quarter call, the -- what you anticipated hadn't come in because of -- whatever the reason is, is the speculation amongst you guys as far as that, they can't make this -- the production like can't make this efficiently or fast enough and that's why you guys didn't get the orders that you were counting on second half of the year?

[Subodh Kulkarni:]

I mean, we really don't know what exactly caused the delay in orders. The -- I mean we suspected it had something to do outside of our influence. I mean, the company launches products with multiple changes at the same time and one of them was micro/mini LED, but there were other changes that were being made to the product line. So we believe it's other things that were impacting the product launches, not our area. But we really don't have that good a visibility to what exactly caused a delay, but clearly going forward we are expecting more orders. So that's good news, it's coming.

[Unidentified Analyst:]

Yes. Okay, I think that does it for me. Great quarter on the earnings per share, that was a very pleasant surprise. I thought you guys might do -- I think your forecast was $0.09 or $0.11. Just shows you that model, Jeff, you've talked about that once the revenues really start kicking in, you guys will have all kinds of money. So...

[Jeff Bertelsen:]

Thanks, Eric.

[Unidentified Analyst:]

Yes, okay.

[Operator:]

Thank you. Our next question comes from Miles Jennings , a Private Investor.

[Unidentified Analyst:]

Good afternoon.

[Subodh Kulkarni:]

Hey, Miles.

[Unidentified Analyst:]

I know this micro LED potential is fairly significant from what you said, and in fact you've received I think $6 million so far in the first couple of years of their development. And what I would like to know is that $6 million, is it represented by one customer or several customers?

[Subodh Kulkarni:]

Well, it is one consumer electronics end-user that is driving the demand so far, but the actual number of orders we got are from, I believe, eight customers. Jeff, is that right?

[Jeff Bertelsen:]

Yes. I mean, there is eight customers in total, a large percentage of that is being driven by one end customer, but there's a few others scattered in there too, but mainly one customer is driving most of those -- most of that revenue.

[Unidentified Analyst:]

Good. And this may be a little premature, but I'm trying to just get a sense of what a ballpark price might be for the NanoResolution sensor. I know you can configure it all sorts of different ways and everything, but I remember in the early days when you first had MRS, you gave us a sense of what a unit might cost. This was for the SQ3000 I believe, and I just wondered if you could give us a wide ballpark range, because I know you don't want to be too precise on that.

[Subodh Kulkarni:]

No, I understand. I mean, a typical NanoResolution sensor, and it really goes with options and what exactly is the customer looking for, because when we MRS, it is really a combination of number of digital projectors, number of digital cameras, some specialized optics and some specialized computing power with it. So depending on what exactly the customer chooses, the prices can vary quite a bit, but in general the NanoResolution sensor, depending on the exact configuration and all is in the $100,000 to $120,000 price point range.

[Unidentified Analyst:]

That's lower than what I had thought, because I would think that with its extreme measuring and inspection capabilities that we would have seen a higher price of that over the SQ3000.

[Subodh Kulkarni:]

Yes, absolutely. I mean this is a sensor, it definitely goes for a lot more than the SQ sensor does. I mean it is generating 75 million 3D data points every second. So it is a phenomenal sensor when it comes to speed of data collection and high generation -- high map generation, and it does commend that kind of price.

[Unidentified Analyst:]

One time you gave us a ratio of what the potential business for CyberOptics would be in the front end versus the mid-end, and this is just a sort of rough number. It seems, though, you said something like three or four times larger than what your historic market has been over the last few years, that is in the front end. Could you give us any further perspective on that?

[Subodh Kulkarni:]

Yes. I mean we can be a little -- we have tried to quantify the market size, both for the NanoResolution sensor as well as the inspection systems that use NanoResolution sensor in our investor presentation. And what we have said is the sensor market is roughly $50 million to $60 million right now, growing at about 20% to 25%, and the systems market is roughly $400 million to $500 million growing at the same percent. So the systems market is roughly 10 times the size of the sensor market, but -- and the growth rates are obviously similar. So that is still our best indication of what is the size of this opportunity for Nano sensor and WX-type inspection systems. We plan to participate both in the sensor and the system, so we'll get a little bit from the sensor side and also obviously from the system side.

[Unidentified Analyst:]

Thank you very much and congratulations on the quarter, especially nudging over the $30 million cash balance.

[Subodh Kulkarni:]

Thanks, Miles.

[Jeff Bertelsen:]

Thanks, Miles.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. And at this time there are no further questions. I'll now turn the conference back over to you for any additional remarks.

[Subodh Kulkarni:]

Well, thank you all for your interest and questions. We look forward to updating you after our Q1 results in April. Thank you.

[Operator:]

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.