CyberOptics Corporation
Q1 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Good day, and welcome to the CyberOptics First Quarter 2019 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:]

Good afternoon, and thanks for taking the time to participate in CyberOptics' first quarter 2019 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. Turning now to CyberOptics' first quarter performance. Our operating results were consistent with our previously issued guidance for this period. Sales totaled almost $15 million for the first quarter of 2019 ended March 31, up 6% from $14.1 million in the first quarter of 2018. First quarter earnings were $495,000 or $0.07 per diluted share, compared to the net loss of $173,000 or $0.02 per share in last year's first quarter. Our improved first quarter results were generated by higher sales of 3D MRS-enabled SQ3000 automated optical inspection or AOI systems, MX600 sales and record quarterly sales of semiconductor sensors, primarily consisting of our WaferSense family of products. The performance of these products more than offset the anticipated reduction in sales of 3D and 2D OEM sensors due to near-term weakness in the SMT and semiconductor markets. Sales of sensors, inspection and metrology systems based on 3D MRS technology came to $4.3 million in the first quarter – in the year's first quarter, virtually unchanged from the year earlier period due to softness in OEM sensor sales. These products, in addition to our semiconductor sensors, accounted for 57% of total first quarter revenue, up from 53% in last year's first quarter. We are confident that our family of 3D MRS-enabled products and WaferSense sensors are providing CyberOptics with a significant competitive advantage and strong growth opportunities in our targeted markets. This suite of technologically advanced products is forecasted to drive our sales growth and profitability in 2019 and beyond. Now I'll briefly review our first quarter performance by product line. Bucking the trend of weak SMT and semiconductor market conditions, first quarter sales of 3D MRS-enabled SQ3000 AOI systems, including the SQ3000 CMM that incorporates AOI with metrology functionality, grew 12% year-over-year to $2.5 million. In aggregate, total sales of inspection and metrology systems increased 20% year-over-year to $7.1 million. The steadily growing acceptance of the SQ3000 is being generated by competitive advantages of our 3D MRS technology platform, which is enabling us to capitalize upon strong worldwide demand for high-precision inspection. Reflecting this progress, our SQ3000 systems are now being used by approximately 100 customers worldwide. We have previously forecasted $2.7 million of MX600 revenues in the first quarter from our backlog, but only received $1.6 million of customer acceptances. The delayed acceptances resulted from changes in the customer's installation schedule for the systems. Consistent with the customer's current schedule, another $1.1 million of MX600 sales are anticipated in the second quarter with the remaining MX600 backlog of about $550,000 slated for recognition in the third quarter. Given the proven capabilities of our technology, we are actively pursuing additional MX600 opportunities. Sales of inspection and metrology systems are forecasted to grow strongly in the second quarter paced by robust demand for 3D SQ3000 products and aforementioned MX600 sales. Sales of 3D and 2D sensors declined 26% year-over-year in the first quarter to $3.7 million with sales of 3D MRS-enabled sensors down 18% to $1.7 million. Consistent with our prior statements, OEM customers for 3D and 2D sensors have continued to reduce orders due to sluggish conditions in the global SMT and semiconductor markets. Weakness in 3D and 2D sensor sales is expected to persist, resulting in a significant year-over-year decline in sensor sales in the second quarter of 2019. However, our relationships with OEM customers continue to be strong and their positions in the market continue to be solid. Given that, sales of 3D and 2D sensors are expected to rebound during the second half of 2019 as SMT and semiconductor equipment markets begin to improve. Sales of semiconductor sensors, primarily the WaferSense product family, increased 31% year-over-year in the first quarter of 2019 to a new quarterly record of $4.1 million. This strong growth was driven by advanced Asian fabs commissioned in 2018 that have deployed WaferSense sensors to improve yields and productivity. Sales of semiconductor sensors are forecasted to be essentially flat on a year-over-year basis in the second quarter due to near-term softness in the semiconductor market. Additional WaferSense products are under development and we believe this suite of high margin products will be one of CyberOptics' growth and profitability drivers going forward. We are making excellent progress with our new MRS-enabled 3D sensors for semiconductor back-end, mid-end and advanced packaging inspection and metrology. Strong interest among many potential customers, including OEMs and system integrators is based upon the fact that this high-resolution sensors have inspection speeds that are two to three times faster than competing products currently available in the marketplace. Since the sales cycle for these sensors is lengthy, only nominal sales are anticipated during the second half of 2019. However, we believe sales will grow steadily in 2020 and beyond. We believe semiconductor back-end, mid-end and advanced packaging 3D inspection and metrology represent important long-term growth opportunities. CyberOptics ended the first quarter of 2019 with an order backlog of $11.6 million, down from $13.6 million at the end of last year's fourth quarter. We're forecasting sales of $15 million to $16.5 million for the second quarter of 2019 ending June 30. We believe that 2019 will be another year of sales and earnings growth for CyberOptics. Thank you. Now Jeff Bertelsen will review our first quarter operating results in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. I will start off by making a few general comments about our first quarter performance and second quarter outlook. Our first quarter results were consistent with our guidance for this period. Higher sales of SQ3000 3D AOI systems, MX600 system sales and record semiconductor sensors sales were attained in the first quarter of 2019 despite the general softness in the SMT and semiconductor markets. Sales growth in these areas more than offset the previously anticipated decline in sales of 3D and 2D OEM sensors. Our second quarter is expected to benefit from strong year-over-year sales growth for inspection and metrology systems, largely reflecting robust sales of SQ3000 systems that are expected to be up significantly on both the sequential quarterly and year-over-year basis. Expected MX600 sales totaling $1.1 million will also contribute to second quarter inspection and metrology systems revenue. Weakness in 3D and 2D OEM sensor sales is expected to persist, resulting in a significant year-over-year decline in sensor sales in the second quarter of 2019. We believe the SMT and semiconductor market equipment market should strengthen materially in the second half, resulting in improved sales for 3D and 2D sensors and WaferSense products during this period. In all, we see 2019 shaping up as another year of higher sales and earnings as our suite of 3D MRS-enabled sensors and systems and WaferSense products further penetrate their markets. Turning now to some detail about our first quarter performance, our gross margin percentage for this period climbed to 47% from 44% in the year earlier period. This increase was driven by our record sales of high-margin semiconductor sensors, primarily consisting of our WaferSense products and fewer lower-margin inspection system sales in the general purpose SMT market. We expect to report a lower gross margin percentage in the second quarter of 2019 when compared to the second quarter last year, principally due to our forecast for a significant decline in sales of 3D and 2D OEM sensors and the significant increase in sales of inspection and metrology systems, including more inspection system sales in the lower margin general purpose SMT market and an x-ray systems sale. Total operating expenses in the first quarter of 2019 were down slightly from last year's first quarter. Depreciation and amortization expense totaled $663,000 in the first quarter and stock compensation expense was $244,000. Total operating expenses in the second quarter of 2019 are expected to be up slightly on a year-over-year basis. Our tax rate was 21% in the first quarter, and we anticipate a full year tax rate at or near this level going forward depending on the level of tax benefits from stock option exercises. Cash and marketable securities of $25.7 million at March 31 were up slightly from the level at the end of 2018. Thank you. We would now be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Greg Palm of Craig-Hallum Capital Group.

[Greg Palm:]

Good afternoon. I guess, I wanted to start with maybe more of a macro outlook question in your visibility as I look at backlog down a little bit from Q4 yet Q2 guidance suggests that midpoint up a little bit. So just kind of curious what your visibility is into that kind of what your pipeline is looking at this point in the quarter and any other commentary on sort of the macro and outlook would be helpful.

[Subodh Kulkarni:]

In general, as we said, Greg, from a macro standpoint, clearly the SMT and semiconductor global markets are soft at this point as everyone that we talk to is expecting a robust second half of 2019 that is generally macro climate right now. Our visibility continues to be pretty good for the next quarter or so, then it starts getting fuzzier after that, but we do have some decent visibility getting into the second half right now. Obviously, once they become orders, then our confidence will quite effect but – anything to add, Jeff?

[Jeff Bertelsen:]

Yes. And then when you look at our backlog, as we go through that a larger percentage of that is expected to materialize into revenue for the second quarter compared to what – where we were at with the backlog in the fourth quarter. And then we've gotten good order flow on the SQ3000 product and interest in that product is very high rate now, and so we have some visibility there. And so that looks like it's going to do very well for us in the second quarter. The one area where we cannot to have great long-term visibility are the OEM sensors and as you know, in that category we tend to be a component supplier – we are a component supplier really. And so that's really when you look at our numbers where you're seeing some slowdown for sure. But as Subodh mentioned, the relationships with the customers are all good and their market positions remain very solid, and so we do expect those to rebound here as we move throughout the year.

[Greg Palm:]

Yes, it's helpful. And as it relates to the OEM sensors, do you get the sense that some of that is still inventory adjustment related? I think you made that comment last quarter, but just curious if anything changed there going forward?

[Jeff Bertelsen:]

Yes, I mean it, when you look at what we're starting to see I think on the equipment side, I mean, we're starting, as I mentioned starting to see some good order activity, part of that is, is SQ. And so I think, I would suspect that some of our OEMs are starting to see that too. So I do think that part of what we're seeing is still the inventory adjustments that we were seeing last we spoke in February. So I think that is definitely still has to be part of it because I think their positions in the market remain solid.

[Greg Palm:]

Okay. And I guess, just last one focusing back on the SQ. I mean you made a comment in the release, now in use by approximately 100 customers. I'm curious, I don't know if you have – if the mix between kind of new and existing customers for SQ, but just more broadly speaking – I mean, how is that tool enable that maybe crack into some brand new customers that present hopefully along that [indiscernible] with the company?

[Jeff Bertelsen:]

Yes. I would say – so we added – good question. So we added 10 new SQ customers in the quarter. All of those would have – are new SQ customers. So I think definitely that product is enabling us to get into new accounts where we weren't before with our SPI products or 2D AOI products. And definitely, I would say, some more demanding applications, customers requiring more precise inspection and metrology. So I think we're doing good job penetrating with those products.

[Subodh Kulkarni:]

Yes. I will just emphasize that and say that SQ's position in 2D AOI is the best CyberOptics has ever had in any of the inspection systems we've ever made. As Jeff mentioned, our SPI and 2D AOI, we ever – more or less relegated to EMS-type customers competing on pricing as many times, whereas with SQ we have opened up more demanding applications in the semi or advanced packaging area with direct Fortune 500 type companies and that does allow us to get better prices and margins. We feel very good about how SQ is positioned and how it's getting traction right now.

[Greg Palm:]

Great. I'll leave it there. Thanks for the time.

[Operator:]

[Operator Instructions] We'll take our next question from Dick Ryan of Dougherty.

[Dick Ryan:]

Thank you. So Subodh, you talked on me the WaferSense side at record levels in Q1, probably dipping back just a little bit for Q2. I think on last call you indicated that you still expect solid double-digit growth of WaferSense in 2019, is that still viable scenario?

[Subodh Kulkarni:]

Yes. Overall, we do expect both MRS and WaferSense to deliver double-digit growth in 2019. WaferSense obviously has started off with a bang with 31% growth in Q1 as we've discussed and you've pointed out in Q2 we are expecting flattish number compared to last year. But second half, again, everyone in semi is talking about barely robust recovery in second half. So we should – that's needs to be able to get some good growth year-over-year in second half with WaferSense. Both with the existing portfolio and as we mentioned in our press release, we continue to develop new applications. So some of that will start helping to contribute in the second half as well. So overall, yes, we feel very good both WaferSense and MRS delivering solid double-digits in 2019.

[Dick Ryan:]

Okay. Good. Your comment in the release talking about rebound in the second half for 3D and 2D sensors, are you talking sequentially or year-over-year?

[Jeff Bertelsen:]

Yes. I mean, I guess, it would be for shared sequentially. We'll see where we're add by the time, time we get to the end of the year, but we know – we saw low levels in Q1, we saw…

[Subodh Kulkarni:]

We're seeing low levels in Q2.

[Jeff Bertelsen:]

Yes, we're seeing low levels in Q2. For sure, sequentially, we'll see a significant uptick in the second half. How that will play out compared to the back half of last year, I guess we'll have to see on that.

[Dick Ryan:]

Yes, those were kind of mid $5 million in Q3 or little bit higher in Q4 or so. Okay. On the new sensors, what resolution capabilities are you currently at or showing customers or prospective customers?

[Subodh Kulkarni:]

When we will be shipping to customers this year, we will have a 3-micron resolution pixel size rather camera, both 3D as well as 2D that typically gets used for features that are 25 microns or larger. So actually cameras we are using, which are getting the resolution of the total system are 3-micron pixel.

[Dick Ryan:]

Okay. And how is the interest in the CMM product? I mean is that expanding? I'm not sure, if I caught if that was part of Jeff's comment about adding 10 in the quarter or CMM is separate from that?

[Jeff Bertelsen:]

No, that was – yes, that the 10 includes CMM customers and I'll let Subodh expand on the interest in that product.

[Subodh Kulkarni:]

Well, I would definitely say that one of the key reasons SQ as a product is successful right now when we are gaining share is because of the CMM functionality. Because we use an advanced MRS sensor that enables us some very high accuracy resolution and speed that allows us to do CMM that whether as our other competitors don't have that those kinds of images. And CMM definitely is getting traction. I mean, it clearly differentiates us, making more and more customers who are buying SQ are opting to add that option in the purchase, which is obviously good for us. It differentiates us, gets us a little higher prices and margins as well. So in general, I would say, CMM has become a nice differentiating feature for SQ product and it is getting good traction.

[Dick Ryan:]

Great. Thank you. That's it for me.

[Subodh Kulkarni:]

Thanks Dick.

[Jeff Bertelsen:]

Thanks Dick. Hello.

[Eric Slate:]

Who's in the floor?

[Jeff Bertelsen:]

Pardon me. Yes, this is the CyberOptics first quarter earnings call.

[Eric Slate:]

Okay. This is Eric Slate, I'm here, it's faded out.

[Jeff Bertelsen:]

Okay.

[Eric Slate:]

Okay. Can you hear me?

[Jeff Bertelsen:]

Yes, we can hear you.

[Eric Slate:]

Okay. So I guess my question is if you had $15 million in the first quarter and second quarter you will do – $15 million to $16 million it sounds like. So let's say, you are $30 million, $31 million. When you say growth over – growth for 2019 compared to last year, that means, you did $64.2 million last year, so that means growth over that $64.2 million, right?

[Jeff Bertelsen:]

Correct.

[Eric Slate:]

Okay. So basically then you must be thinking about a very strong second half because you will have to do roughly $20 million quarters to get to the numbers that you are – to get the growth over $64.2 million, let's say $68 million or so. Is that correct?

[Jeff Bertelsen:]

Yes, just to clarify, it was $64.7 million, but yes, what we're saying is growth over that number.

[Eric Slate:]

Okay. So really it sounds to me like what's hurt the first two quarters is the OEM stuff, right?

[Jeff Bertelsen:]

Correct. That's been down significantly.

[Eric Slate:]

So it sounds like – as I think you guys on last call you were expecting that to come back in the second quarter. So that looks like it could be quite large the second half of the year now it's the second quarter and sound like it's going to be a big uptick in the OEM, right?

[Jeff Bertelsen:]

Yes. So the OEM in the first quarter was $3.7 million. We're expecting a significant year-over-year reduction in OEM again in the second quarter. So there's no question OEM by far and away is one category that has hurt us here in Q1 and definitely looks like it will hurt us in Q2. It is fair to say we were thinking OEM would start to rebound in Q2. That looks like it's going to persist now. But again, for the reasons that we've outlined, given who the customers are and their positions in the markets, I mean we are expecting those numbers to come up certainly from the levels we think we're going to see in the first half 2019.

[Eric Slate:]

Well, the whole equipment sector – the front end of the equipment stuff is on fire, so we better have a good second quarter or second half for those guys because those stocks. So here is another question, the 10 new customers, you could say that's sort of at the beginning of a ramp right now the 10 new customers you got this quarter or first quarter.

[Jeff Bertelsen:]

I mean, we've been steadily growing the number of customers. So over the past year, the number has also doubled. And so we're definitely seeing a lot of interest in the product. We're expecting a very large increase in SQ sales in the second quarter. So we're looking for definitely higher SQ sales here as we go forward.

[Eric Slate:]

And on the memory front, you have one big guy of the three. It seems like you are hopefully getting closer to the other two or one this year, is that still in the cards?

[Subodh Kulkarni:]

Yes. We are talking to other two and we hope to get some business going with one of the other two soon and hopefully all three in the next couple of years.

[Eric Slate:]

Here's another question. I might have asked this before Jeff. Do you guys have any kind of buyback in place?

[Jeff Bertelsen:]

No, we do not.

[Eric Slate:]

Okay. And have you consider it if the stock stays sort of what I consider pretty darn cheap down here?

[Jeff Bertelsen:]

Well, we appreciate your input, Eric. And our Board – they regularly talk about the use of our cash, north of $25 million here at March 31. And so we'll share your input when that topic comes up and give them a chance to discuss and decide what they want to do. I mean it is…

[Eric Slate:]

No. I just thought if the stock stays at these prices out two years that's going to be a hell of a buy down here. The other question is we talk about the second half, we've talked about that, we've heard it all over and obviously the stocks paradigm, you name them, are acting exactly like we'll have a huge second half. Is that on the back of just everything coming together, AI, the cloud, then 5G or do you think 5G is really moving things?

[Subodh Kulkarni:]

There is a lot of factors that people are using to see that the second half is expected to be a strong second half both in electronics and semiconductor markets. Clearly, 5G is one of the factors, IoT is another factor. There are some upgrades – scheduled upgrades in the PC laptop operating systems. There are many factors that people are using to cite a stronger second half of 2019 for semi as well as SMT industries, but you touched a couple of them.

[Eric Slate:]

Yes. One thing on, I guess, the 5G, Subodh you can probably answer this. My understanding is that you're doing the initial infrastructure – I know about the initial, but that's I think you see some of these Cisco and the chip area so strong, but it seems to me that where you see a lot of new devices start hitting in probably especially 2021, does that make sense and does that where you really come into play when all these devices start going in another world to feed this infrastructure?

[Subodh Kulkarni:]

I don't think we can directly correlate those kind of things with our results, Eric. We are a relatively small company in a fairly large semi, SMT market space. So our results are more dominated by the traction we are getting, the market share we are getting because of the product features and stuff like that. Obviously, a rising tide is good for everyone and if market is robust, we will obviously enjoy that benefit. But I don't think we are necessarily dependent on some specific event in 5G or IoT or something to drive our results.

[Eric Slate:]

Right. It just adds to it. And I guess, the other question I have on as far as – we read about a lot of sluggishness in the auto industry that's like was a year ago. Do you see that or it's hard for you to tell because a lot of your stuff really it's hard to gauged, especially on the OEM side?

[Subodh Kulkarni:]

Again, the place of auto industry we participate in is chips and electronics. And as auto as a sector, if you think about what's going on with electric vehicles and everything, there's far more chips being shipped in the car today than last year and it will be more next year. So for us, auto is a good growth sector because there's more and more electronics and chips going inside every auto being shipped.

[Eric Slate:]

So if auto sales are off 5% or up 5%, the bottom line is we're seeing more and more silicone going into that stuff?

[Subodh Kulkarni:]

Exactly. So as long as it's more electronics and semi going in, we really are not that sensitive to the total number of auto vehicles being shipped or anything like that.

[Eric Slate:]

Got it. Okay. That does it for me. Thanks for taking my questions.

[Jeff Bertelsen:]

Thanks, Eric.

[Subodh Kulkarni:]

Hello? Hello?

[Miles Jennings:]

Can you hear me?

[Jeff Bertelsen:]

Yes.

[Miles Jennings:]

Jeff, this is Miles Jennings. I think the operator must have gone home for the day. Do you have any update on the CyberGage360?

[Subodh Kulkarni:]

We will continue to sell at a fairly slow but consistent rate, I would say. We seem to sell one or two systems every quarter right now. That seems to be the run rate, sometimes three. The list of customers is impressive when we look at actual names who have bought it and they seem to like it, these are all Fortune 500 type customers and they really like it for their metrology applications and the tunnels that they intend to spread it in their global locations. So it's all sounds very good, but as far as actual revenues are concerned it's been a slow mover when we compare SQ revenues to CyberGage numbers. But it still continues to be a good product and customers buy it and like it, it does exactly what we claim it does and it seems to meet some applications very well.

[Miles Jennings:]

Good. Thank you very much.

[Subodh Kulkarni:]

Thanks, Miles.

[Jeff Bertelsen:]

Thanks, Miles.

[Operator:]

Thank you. At this time, we have no further questions.

[Subodh Kulkarni:]

Thank you for your interest, and we look forward to updating you at the end of Q2. Thanks, again.

[Operator:]

Thank you, ladies and gentlemen. this concludes today's conference. You may now disconnect.