CyberOptics Corporation
Q3 2019 Earnings Call Transcript
Published:
- Operator:
- Good day and welcome to the CyberOptics Third Quarter 2019 Earnings Call. Today’s conference is being recorded. At this time, I’d 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 Third 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.This year’s third quarter was a difficult period for CyberOptics as we continued facing the headwinds of weak conditions in the surface mount technology and semiconductor capital equipment markets as well as the uncertainty of trade relations with China. Weighing our performance, our sharp declines in sales of legacy inspection systems and OEM sensors, despite near term headwinds we’re continuing to invest in research and development to further strengthen our ability to capitalize on strong growth opportunities for our 3D MRS enabled sensors inspection and metrology systems and semiconductor sensors.In all, our confidence in CyberOptics’ future is undiminished. CyberOptics reported sales of $12.4 million for the third quarter of 2019 ended September 30 down 26% from $16.7 million in the third quarter of 2018. We also reported a net loss of $353,000 or $0.05 per share in this year’s third quarter compared to earnings of $1.1 million or $0.15 per diluted share in the third quarter of 2018.Sales of sensors and inspection and metrology systems based on 3D MRS technology declined to $4.5 million in third quarter of 2019 from $6.9 million in the year earlier period. This MRS based products combined with semiconductor sensors accounted for 66% of total revenue in third quarter of 2019 up from 59% in the year earlier period. Sales of legacy sensors and systems excluding MX600 memory module inspection systems, fell 47% year-over-year in the third quarter of 2019.Turning now to an overview of our product lines, our family of semiconductor sensors bumped [ph] the prevailing market weakness by posting 6% year-over-year sales growth to $3.7 million in the third quarter of 2019 and increased by 18% on a sequential quarterly basis. This yield and productivity enhancing sensors are forecasted to post double-digit year-over-year growth in this year’s fourth quarter.Sales of inspection and metrology systems declined 29% year-over-year in the third quarter of 2019 to $5.5 million. Within this category, sales of 3D MRS enabled SQ3000 inspection systems fell 24% year-over-year to $3.3 million. However, reflecting the demonstrated competitive advantages of its 3D MRS technology. SQ3000 sales have increased 14% year-over-year for the first nine months of 2019 and given the outlook for robust fourth quarter sales. SQ3000 sales growth are forecasted to exceed 20% for all of 2019.In a promising development, during the third quarter we received an order for $1.3 million for shipment of SQ3000 CMM systems through the second quarter of 2020 which will be used in the production of micro LED displays. Micro LED displays consume less power, are brighter, thinner and lighter than LCDs or OLEDs and can be deployed in a range of markets including consumer electronics, automotive applications and outdoor signage.Recent research report from Your Development, estimates that Apple has spent $1.5 billion to $2 billion on this technology over the last five years while such panel makers are Samsung Display, LG Display, AUO and Innolux have also increased the research efforts in this area. All of this makes us believe that micro LED technology represents a significant potential growth opportunity for CyberOptics.During the third quarter, we also received $1.2 million order for 3D SQ3000 CMM systems for using manufacturing process for printer cartridges. The majority of this revenue will be recognized in the fourth quarter of 2019. Also during the third quarter, we received customer acceptance for our remaining backlog of MX600 memory module inspection systems. The same customer placed a new MX order during the third quarter with acceptance expected in the first quarter of 2020. In addition, customer evaluations of our new high precision 3D memory module inspection systems have started and we are cautiously optimistic that initial sales will occur in 2020.Sales of inspection and metrology systems are expected to post strong growth on a sequential basis in fourth quarter of 2019 given our forecast for solidly higher sales of SQ3000 systems during this period however the impact of lagging legacy sales will result in lower fourth quarter inspection and metrology system sales on a year-over-year basis.Finally, sales of OEM sensors were 41% year-over-year in the third quarter of 2019 to $3.2 million within this category sales of 3D MRS enabled sensors were down 30% year-over-year. Due to ongoing market weakness sensor sales are forecasted to decline in the fourth quarter both sequentially and on a year-over-year basis. With the new revenue from our 3D MRS based OEM customers will rebound nicely starting in early 2020. Recovery for legacy OEM customers may take longer given difficult conditions in the pick-and-place market although we do expect revenues from these customers to eventually improve as well.As an update, interest in our MRS based NanoResolution sensor for semiconductor, wafer level and advanced packaging inspection and metrology applications remains very high. We recently received a PO from a new OEM customer for NanoResolution sensor and have many other potential OEM and system integrators evaluating this product. Given this high degree of interest, we’re adding sales and fielding engineering resources to pursue opportunities for this important new product.We believe inspection and metrology for semiconductor wafer level and advanced packaging applications represent promising long-term growth opportunities. CyberOptics ended the third quarter of 2019 with an order backlog of $14.4 million compared to $13 million at the end of second quarter. Our quarter ending backlog includes a significant order for 3D MRS sensors from an existing OEM customer that are scheduled for delivery primarily in periods after 2019. We are forecasting sales of $13.5 million to $15 million for the fourth quarter ending December 31, 2019.Looking ahead, we believe the third quarter marked the bottom of the downturn for SMT and semiconductor capital equipment markets. Along with many industry observers, we believe conditions will strengthen as we progress through 2020. We believe that our industry leading 3D MRS and semiconductor sensor technologies have positioned CyberOptics to capitalize upon a full range of opportunities in our targeted markets. For this reason, we’re highly confident about CyberOptics future.Thank you. Now Jeff Bertelsen will review our third quarter numbers in greater details.
- Jeff Bertlelsen:
- Thanks Subodh. Since Subodh has already covered our sales results in some detail. I will provide additional information regarding other aspects of our third quarter performance. Our gross margin percentage in the third quarter of 2019 was 44.4% up from the second quarter of 2019 and roughly equal to the year earlier period. Our gross margin percentage in the third quarter was impacted by an obsolescence charge for a legacy OEM sensor product and incremental warranty expenses. These two factors combined to reduce our gross margin percentage in the third quarter of 2019 by over 1 percentage point.Looking ahead, we expect our gross margin percentage in the fourth quarter of 2019 to prove by about 1 percentage point on a sequential basis from the third quarter level. Total operating expenses of approximately $6.3 million in third quarter of 2019 were up modestly from the level in the year earlier period mainly due to increased R&D expense. Reflecting our confidence in CyberOptics future investment in R&D is continuing as we pursue significant growth opportunities for our 3D MRS and semiconductor technologies.Depreciation and amortization expense totaled $744,000 in the third quarter and stock compensation expenses $244,000. Total operating expenses in the fourth quarter of 2019 are expected to be virtually unchanged on both the year-over-year and quarterly sequential basis. Our effective tax rate of 40% for the third quarter of 2019 includes a non-cash benefit from a reduction in income tax reserves.We anticipate an effective tax rate of approximately 25% in the fourth quarter of 2019. Cash and marketable securities of $25.3 million at September 30, were down slightly from $25.8 million at the end of the second quarter. During the third quarter, we used cash of approximately $353,000 to acquire approximately 26,000 shares of CyberOptics stock under our existing $3 million share repurchase authorization that is effective through June 30, 2020.Our capital resources are adequate for achieving our growth objectives given our available balances of cash and marketable securities. Thank you, we will now be happy to take your questions.
- Operator:
- [Operator instructions] our first question will come from Jaeson Schmidt with Lake Street.
- Jaeson Schmidt:
- I just want to start with the order for the micro LED market, is that from a current customer or a new customer?
- Subodh Kulkarni:
- This is Subodh here, the order is a from a new customer. It actually is an effectively a contract manufacturer that is making the displays for a larger consumer electronic customer, so the order is from the contract manufacturer, so it’s a new customer.
- Jaeson Schmidt:
- Okay, that’s helpful. And then know your visibility doesn’t fully extend into 2020. But can you can discuss some of the commentary body language you’re getting from some of your customers in regards to how they’re viewing next year. I know some of your prepared remarks make it sound like, you believe you’ve seen the trough [ph] in some of our businesses here in Q3.
- Subodh Kulkarni:
- Yes, it’s a good question. We definitely believe that Q3 was the bottom, if you will in the semi and SMT capital markets right now. We are -- clearly based on our guidance we have provided in fourth quarter we are expecting sequential growth and all indications right now are 2020 should be decent year for semi and SMT markets, externals reports are saying that, semi cap market is expected to grow about 5% to 7% in 2020 compared to 2019 and those numbers may change. Right now, analyst are expecting 2021 to have significant growth in the semiconductor market almost on the order of 25% to 30% driven by 5G deployment, but then I assume you may have seen some [indiscernible] strong companies like TSMC last week, saying the deployment for 5G may happen sooner rather than later and if those kinds of movements happen, 2020 number could be better than what I just told for semi cap. So overall, we feel pretty good about semi cap and SMT markets in 2020, compared to 2019.
- Jaeson Schmidt:
- Okay and final one from one and I’ll jump back into queue. With you guys adding to address the NanoResolution market, is that really in anticipation of demand. Do you have the pipeline and visibility to a pipeline to really, is that really the driver behind wanting to build out the team today or is this really to drive future demand?
- Jeff Bertlelsen:
- It’s really to drive future demand. I mean, we’ve shown the sensor to quite a few customers. We’re getting a high level of interest and so the resources really are to flush those opportunities out and to make sure we continue to push them forward. So it’s really based on the interest and reception that we’ve seen but I would say mainly for the future.
- Jaeson Schmidt:
- Okay, thanks a lot guys.
- Operator:
- And moving our next question comes from Dick Ryan with Dougherty.
- Dick Ryan:
- Subodh, it looks like you delivered the last piece of the memory business in Q3, how much was in Q3 and then you talked about an additional order from the same customers. What was the size of that and is that 2D or 3D related?
- Jeff Bertlelsen:
- Yes, Dick. The amount of revenue from MX in the third quarter was roughly $600,000 and that was the final piece of the order that we had gotten last year. The new order was for one system that is from our current customer it is 2D, so that will be in the same ballpark range of roughly $600,000.
- Dick Ryan:
- That’s for Q4.
- Subodh Kulkarni:
- No, we said we’ll book it in Q1.
- Dick Ryan:
- Q1, okay.
- Jeff Bertlelsen:
- Yes for the new order in Q1.
- Dick Ryan:
- Okay and Subodh you mentioned you’re adding, field staff for the Nano. Can you give us a sense of kind of adds you’re looking at and what particular area is your staffing up in?
- Subodh Kulkarni:
- Right now it’s just a handful number of people take up and we’re adding key resources in Asia particularly in the engineering area where we need to do this demonstrations and we are looking at some additional sales people right now in California and also in Asia where most of these customers are located. So don’t expect a big number but it is more the key resources in those local regions.
- Dick Ryan:
- Okay and sorry I didn’t catch what your expectation was for WaferSense in Q4.
- Subodh Kulkarni:
- So we’ve guided WaferSense to a good sequential growth and good year-over-year growth as well.
- Jeff Bertlelsen:
- Yes, so we’re looking for to have 10% growth in WaferSense revenue.
- Subodh Kulkarni:
- Year-over-year.
- Jeff Bertlelsen:
- Year-over-year, correct.
- Dick Ryan:
- Now how does the customer count look here and are you adding, is that driven by new applications or haven’t you introduced anything yet on that front?
- Subodh Kulkarni:
- Well we’ve introduced some new applications in the beginning of the year, if you recall, with some more developments in the particle sensors and a couple other smaller things. But really the overall growth that we’re seeing in the WaferSense continues to be from the existing portfolio not necessarily driven by the new application. It is generally the same group of customers, the TSMC, Samsung’s, Intel’s, Lam Research continues to be a good customer, ASM and few others. But it’s -- overall portfolio is doing pretty well right now.
- Dick Ryan:
- Okay, great. Thank you.
- Operator:
- And next will be Greg Palm with Craig-Hallum.
- Danny Eggerichs:
- This is actually, Danny Eggerichs on for Greg Palm today, thanks for taking the questions. Just in general, I was wondering about your total visibility throughout 2020 at this point and over last few months, how is that changed?
- Subodh Kulkarni:
- As I mentioned earlier Danny, certainly 2020 looks like a growth year for the overall markets we play in which is primarily a SMT and semiconductor capital markets. Right now, when we start forecasting 5% to 7% growth for 2020 and 25% to 30% growth for 2021, this numbers are bound to change as we go further out and we’ll keep you updated. So given that backdrop, we feel it’s a very good healthy dynamic that we play in, plus we have a differentiated portfolio and we continue to gain market share in areas where we compete with our competitors like the 3D AOI [ph] market with our differentiated SQ3000 system. So overall, we feel fairly good about 2020 and 2021 at this time given the backdrop, does that answer your question?
- Danny Eggerichs:
- Yes, great and then going back to that MX, you said the new order was with the same customers and you have mentioned having conversations with those additional customers before, how are those additional customer conversations progressing?
- Subodh Kulkarni:
- Good, overall very good as we mentioned in our comments. The existing customer ordered one more so that kind of takes care of all their lines with 2D MX at this time and other two, there’s only three large memory customers left in the world, so the other two we’re talking to them. Their interest is more in the 3D version of the MX product, so it’s basically the same concept, but instead of using a 2D sensor, we’re using our 3D MRS sensor and they seem to like that concept that we’re demonstrating and we disclosed we’re cautiously optimistic we’ll start booking sales in 2020, with this other two customers.
- Danny Eggerichs:
- Great and then I guess just jumping over the auto end market. Obviously, a lot of companies have been highlighting weakness in this market and it’s not anything really new but, just kind of curious what you guys are seeing right now and how - what you think your exposure is and what the direct and indirect impacts of the weakness in auto you’re seeing?
- Subodh Kulkarni:
- We have some exposure but it’s fairly small, bigger exposure is more the pure play boundary semiconductor markets, which go more in the CPU, GPU space more than the auto, but obviously we have some exposure to auto, particularly we thought SPI and AOI type products. To be honest, we haven’t noticed any significant change in their buying patterns over the last few months, so we haven’t seen anything slowing down.Now again keep in mind, in general 3D AOI market is growing is auto because lot of the existing auto market is using 2D AOI inspection and they do need to move to 3D that’s where we play in, so we may be getting the benefit of transitioning technology in auto and we’re not directly exposed to the overall auto investment cycle. So overall the number is fairly small for us as far as auto exposure is concerned and from what we can see, we haven’t seen any significant differences between last year and this year, Jeff you want to add something.
- Jeff Bertlelsen:
- No I would agree, I mean I think the main driver there is a growth in 3D AOI which we’ve seen with the SQ product.
- Danny Eggerichs:
- All right, great, that’s all from me. Thanks guys.
- Operator:
- And next will be Eric Slade [ph] with Acme Analytics.
- Jeff Bertlelsen:
- Eric?
- Operator:
- Again your line is open go ahead, please. Again Eric Slade [ph] your line is open please go ahead with your questions. Okay, I hear no response on line. We’ll go to next question.
- Unidentified Participant:
- Can you hear me?
- Operator:
- We can now, go ahead sir.
- Unidentified Participant:
- Okay sorry, here we go. Okay, one question, Jeff what did you buy those shares back at, what was the average price of your buyback?
- Jeff Bertlelsen:
- The average price that we acquired them at was about $13.60.
- Unidentified Participant:
- So really as we wrap the year up, your guidance is 13.5 to 15?
- Jeff Bertlelsen:
- Correct.
- Unidentified Participant:
- So let’s say you come at 14, so what would that be for the year?
- Jeff Bertlelsen:
- For the first nine months, we were at 42.4, so that would get you to 56.4, if the number is 14.
- Unidentified Participant:
- And really the difference between this year and last year, whereas more your legacy product in OEM, it was not your WaferSense or MRS. Is that correct?
- Jeff Bertlelsen:
- Yes, I mean if you look at our key growth drivers but the WaferSense products which are semiconductor sensors there, they’re up through nine months and we’re projecting to have a really good fourth quarter there and then SQ products are up 14% through nine months and we’re projecting to have a really strong quarter there, so the main areas where we are soft this year, our legacy products and the OEM sensors.
- Unidentified Participant:
- Okay, so that question I have you might Jeff or Subodh. The capital equipment industry, not the stocks. It’s not the stock, but as far as just contraction. Did the semiconductor equipment at this place by the end of the year contract about what 15%, is that about right?
- Subodh Kulkarni:
- I think it’s closer to 20%, we’ll see as various companies announce, but don’t be surprised when the whole year is done or semi cap to show about 20% contraction from last year.
- Unidentified Participant:
- But your new products were flat, which is the ship goes to sail [ph].
- Subodh Kulkarni:
- Our new products are growing.
- Jeff Bertlelsen:
- Right, our SQ product as I’d said is growing, so that you know will be up for 2019 and WaferSense will be up for 2019, so it’s. Go ahead.
- Unidentified Participant:
- On the OEM side and also the I guess some of the legacy product. I mean the OEM they will come back at some point, right. I mean it always goes that way, they’re and they could very well come back in 2020 because they pretty much took the year off, right?
- Jeff Bertlelsen:
- Our expectation would be that, they will rebound.
- Unidentified Participant:
- Okay and now to those two wins you’ve got. The more I guess I’ll start with the one that looks like it’s obviously a lot bigger potential and that’s the situation with Rohini [ph].
- Subodh Kulkarni:
- Rohini [ph] is a technology developer and coming from sub contract manufacturers for large companies.
- Jeff Bertlelsen:
- I think you’re referring micro LED and as we had indicated there is really good growth potential for us assuming that technology gets adopted in a bigger way, it’s [indiscernible].
- Unidentified Participant:
- Right now, I’m aware of that. Now with Rohini [ph] who’s your competition today and do you have any?
- Subodh Kulkarni:
- Although Rohini [ph] process if you’re familiar with - it’s a unique proprietary process Rohini [ph] they’re taking existing micro LED dyes and placing them on different types of substrates using SMT processor, so that’s their core IP and they’re licensing the technology to various different large manufacturers right now and that’s where we’re getting alters from those manufacturers or their contract manufactures.
- Unidentified Participant:
- I guess my question is, you’re doing the end line inspection for these.
- Subodh Kulkarni:
- There are multiple in the Rohini [ph] process which need in line inspection like inspecting the dyes that are coming in, put looking at the solder pads where the dyes are going to be placed, then place the dyes, look at the position of the dyes with respect to the solder pads, take them through the oven to fix them, then do a post inspection. So effectively there are six places where in [indiscernible] process you need to do inspection and right now SQCM is qualified for all six steps.
- Unidentified Participant:
- Yes, so I guess my question is and that’s fantastic, I guess my question is, did you have competition to get design in this or they just saw you’re the only one that does this type of thing?
- Subodh Kulkarni:
- No there’s competition, there’s always competition. There are some applications where their SQCM is significantly superior, so they really haven’t bothered to look at any other competitor. There are some areas where the requirements are relatively less stringent and there is - we will see some competition. So it’s not like.
- Unidentified Participant:
- Basically the micro LED could go, I guess I mean as far as like displays on phones like Apple, they could go on scoreboards, we’ve seen that with electronics pretty much anything, big screen TVs.
- Subodh Kulkarni:
- Right now the demand, I mean the expected growth in micro LED is projected to be fairly high over the next decade or so. I mean there are many reports about micro LED and the benefits of micro LED. Now clearly, we have a good starting position with Rohini [ph] and their licensees and definitely tend to capitalize on that. Overtime clearly this is going to be a big area, we will have some competition, so we definitely have a first mover advantage if you will right now and we’re [indiscernible] that are needed, but overtime we expect this to be a significant contributor, but we will also get some competition.
- Unidentified Participant:
- And now the other one you got the in check, I would assume isn’t [indiscernible] one of the big companies in that area [indiscernible]?
- Subodh Kulkarni:
- We don’t have permission to comment on which customer.
- Unidentified Participant:
- I know that, but is that industry I’m thinking of, the HP or whoever.
- Unidentified Participant:
- Printer cartridge company and it is a large printer cartridge company and we are.
- Unidentified Participant:
- And now how?
- Subodh Kulkarni:
- Go ahead.
- Unidentified Participant:
- What kind of potentials in that market?
- Subodh Kulkarni:
- So again it shows, what they have started doing is, they make millions of cartridges a year. Right now they’re inspecting on a sampling basis using conventional technology like an optical measurement module, they want to go inline and inspect all of this millions of cartridges using SQ/CMM and that’s what we qualified the product for, so right now it’s just starting, its few units. That’s what the order is about and we’re placing it in their different locations worldwide assuming they get good ROI on those measurements, they will definitely scale up from there and of course we’re approaching their competitors and other customers who could use those kinds of measurements.
- Unidentified Participant:
- Okay, so I’m going to tie this together both these products. Now we know about MRS, SQ, WaferSense, the memory that’s been pretty articulated, you have busy already going on. These two wins that you’ve got. Maybe I just feel asleep, but I had no idea you were working on these two industries I guess; you know and also micro LED. Is it something you’ve been working on for how long?
- Subodh Kulkarni:
- Yes we launched SQ/CMM more than a year ago now and fundamentally as we have said before it is the world’s first inline CMM tool and it is a kind of a product a little ahead of it’s time to some extent and I think we have been talking to many customers and there are many interesting applications that we are pursuing right now because there is no in line CMM that exists in the world today till SQ/CMM came about. I mean we’re inspecting 100% of all dimensions in 10 seconds or less and world hasn’t seen anything like that before, so it is kind of creating some interesting opportunities for us and we’re working one application at a time, we’re a relatively small company as you know, so we have to be careful with our resources and how many opportunities we can pursue. So we try to evaluate the customer, the potential, the size of opportunity and work with those customers as we you have seen in Rohini [ph] and their customers’ cases with micro LED or this large printer company for their printer cartridges and we have a few other things like that in the hopper. We feel pretty good about SQ/CMM and in line CMM capability and what we could do in the next decade or so.
- Unidentified Participant:
- So we might see more of this stuff coming at us because of the well basically the technology, right.
- Subodh Kulkarni:
- Yes, exactly. It’s a very unique differentiated technology and it is opening very interesting opportunities for us that, but it does take time to.
- Unidentified Participant:
- Yes.
- Subodh Kulkarni:
- Position to customers.
- Unidentified Participant:
- That’s right. Well I think, that does it for me, thanks for answering all those questions.
- Operator:
- [Operator instructions] our next question comes from Ross Taylor [ph] with Private Investor.
- Unidentified Participant:
- I’m surprised that the OEM sensor business still remains so soft. Is it your customer sales softness or did they just get too much inventory?
- Subodh Kulkarni:
- Well we’re not completely sure, what - how much of it was inventory that they purchased towards the end of last year that they’re trying to clear and how much is overall softness, clearly there’s components of both. The industry did soften as we entered the end of last year and they may not have anticipated, so they may have purchased some and then backed off quite a bit. Within the OEMs there are two types of OEMs, one of the legacy sensor OEM and there the softness is much more than the MRS OEMs. And the MRS OEMs we expect them to start picking up relatively soon because the industry is turning the corner, we clearly see that.The legacy OEMs are going to take a little longer, we suspect because of the China trade war going on intrinsically the pick-and-place market seems to be soft right now and little bit of that is because of all the excitement we are seeing with our Nano sensor in the advanced packaging area. So advanced packaging is essentially stacking multiple chips, passive components all of that stuff together in the package and that’s why they need the Nano MRS sensor to do the inspection. But if you think about what that is replacing, to some extent it is replacing conventional PCB and that’s where our legacy OEMs do play in that market, so I think advanced packaging is causing a little bit of hurt in the conventional PCB area and our legacy OEMs are definitely seeing the pinch over there. Does that help, answer your question?
- Unidentified Participant:
- Yes, little bit Subodh. I was referring to the 3D OEM sensor business. When you look at your back end at the semiconductor industry customer, that is the dominant player. I mean how much are their sales down for this year, any idea?
- Subodh Kulkarni:
- Quite a bit, I mean we cannot disclose because that would be giving away some valuable information them. But they are down quite a bit. They definitely are telling us that they expect them to pick up as this current quarter continues and next year, they’re feeling pretty bullish right now. So we expect both of our MRS OEMs to pick up nicely in 2020.
- Unidentified Participant:
- Okay, that’s great. You and I talked about this earlier and I’m just surprised it still remains soft, but that’s the way cycles go and with the overall industry. Okay, that’s great. The other - when you’re talking about your new sensor business, how many new customer engagements are you guys involved with right now?
- Subodh Kulkarni:
- We’re dealing with about 10 new customers OEMs or system integrators both with our current generation MRS sensors as well as the new Nano MRS sensor and we’re getting.
- Unidentified Participant:
- How many?
- Subodh Kulkarni:
- About 10 potential customers.
- Unidentified Participant:
- How many of those are on the new OEM side?
- Subodh Kulkarni:
- About half of them are new OEM, the new for Nano and about half are for the current generation, roughly 5-inch.
- Unidentified Participant:
- Okay, good. So based upon those conversations when do you expect to have some revenues really start to ramp with that new sensor.
- Subodh Kulkarni:
- Well we definitely expect revenues to start ramping in 2020, it will be still. I mean they will be buying one and two because many of this people, are OEMs are system integrators. So typically they buy one or two sensors from us, build equipment which takes a couple three months, then they’re showing their equipment to their customers and usually that’s another two to three months cycle. So we’re expecting that once somebody buys from us, it typically we expect to see real feedback from them about the potential roughly six months after we have sold out first sensor to them. So we expect second half of 2020 to be a good indicator of what happens with the customers we’re selling the Nano sensor today too.
- Unidentified Participant:
- Okay, so how many of those five new OEMs and the new Nano sensor, Subodh. How many of those have actually purchased one or two so far to give it that test?
- Subodh Kulkarni:
- We’ve sold Nano to two so far and we just received another order from third one, so we’ll ship them the third sensor here soon in the next couple weeks. So far, we have three customers for Nano, we expect to get another few out of that group of five or so we’re talking to. So we will probably have four to six Nano customers in the next few months and then it will reflect on how successful they are with their customers.
- Unidentified Participant:
- That’s great, that’s really good. Okay and then my final question.
- Subodh Kulkarni:
- Yes.
- Unidentified Participant:
- Yes, I was talking about Nano, right. And then my final question is, when you look at this older 2D systems, what you call your legacy business. What do you think that overall market on a multi-year basis is doing? It sounds like the growth is actually negative, am I right about that? And if that’s or what do you think, how much is it, is it negative and by about how much?
- Subodh Kulkarni:
- Well clearly this year has been a negative year for the legacy both the sensor as well as the inspection system business. Assuming the overall semi SMT market grows 5% to 7% next year, we expect that legacy business to be flattish. I don’t think it’s going to continue at a negative run rate like this year. This year the market did decline by a solid 20% and we definitely saw that in the legacy business, but next year assuming the overall market is decent it would be flattish, I don’t know, Jeff do you want to add something?
- Jeff Bertlelsen:
- Yes, I mean it’s - I think it’s going to recover, but obviously it’s not going to be a growth for us, so that’s fair, but definitely it’s down pretty good this year.
- Subodh Kulkarni:
- But the legacy business has become only a third of your business right now.
- Unidentified Participant:
- No, I understand just trying to get a good feel for everything, so okay so that’s - so that was obviously down this year and you’re expecting it to be improve, but would you say that overall, I mean over the next few years, is that business slowly decreasing. Or do you think that market is going to stay relatively flat over the years?
- Subodh Kulkarni:
- I think there will be some small decline. I think it would be fair to say, there’s going to be some small decline coming in that market overall and our legacy business will see some small decline. But regarding the question of how much decline, I don’t think we’re talking double-digit decline to be honest here in that legacy business. I mean this are pick-and-place machines, you know the kinds of customers we have are Juki [ph], ASM Pacific Technology, [indiscernible] some industrial solid companies have been around for a long time and I don’t expect them to change their product portfolio or disappear by any means. So until then the SPI and 2D AOI business, there’s some decline in the 2D AOI business, maybe some decline in the SPI business but again nothing significant and then we also include our conventional scanners and scanning services in the legacy and that’s actually relatively healthy business that’s staying kind of flattish. So overtime our internal models at least we’re projecting a flattish business over the next five to 10 years, maybe a small decline but nothing significant.
- Unidentified Participant:
- Yes, okay that’s great. That’s all from me guys. Thanks very much.
- Operator:
- And next will be Bill Dizelin [ph] with Titan Capital.
- Unidentified Participant:
- Okay I have a couple of questions here and I will try to let you answer them before I ask my next one. My first one is, in response to an earlier question you’ve referenced that there are six steps that are involved in micro LED market. How many of those steps did you say that you were involved in?
- Subodh Kulkarni:
- All of them.
- Unidentified Participant:
- Any more insight that you would like to share beyond that?
- Subodh Kulkarni:
- Basically SQ/CMM has been qualified for all the steps that are involved in micro LED inspection, some of them are very demand where as far as SQ/CMM is only qualified inspection two at this time, some are less demanding where there is some competition and that may enter that area. But SQ/CMM can pretty much do the job for all the inspection steps, all the inspection that is needed in micro LED assembly.
- Unidentified Participant:
- And off those six steps about how many would end up in the category of more demanding, that only SQM would be qualified for and how many would be less demanding than other may have an opportunity to address.
- Subodh Kulkarni:
- That really depends on the applications, so there are some applications in micro LED that are relatively less demanding for instance backlight that is replacing a regular LED, but then there are some areas where the application is more demanding like a direct display in an auto area. So depending on what exactly the customer is making the six steps and requirement changes quite a bit. As I said, we are well suited for all of them. Our competition - if there’s any, we’ll have some challenges to overcome. So ideally, we obviously want micro LED to go after the most demanding applications out there, where we are the only qualified tool that will be an ultimate victory for us, but clearly, we’re going to get some competition in some steps for less demanding applications.
- Unidentified Participant:
- And for the applications that you announced in the release today, how many of those six steps would be more demanding and how many will be less demanding?
- Subodh Kulkarni:
- Again there are multiple customers that are involved at this point, so in some cases all the steps are demanding in some cases about half of them are demanding.
- Unidentified Participant:
- I’m sorry, I misread the press release. I thought the order was for one specific contract manufacture that was selling to one consumer electronics company.
- Subodh Kulkarni:
- That is correct, that is just the one order that we disclosed. But we’re talking to multiple customers are this point.
- Unidentified Participant:
- Fair enough and that one customer that you disclosed, the contract manufacturer, the consumer electronics company or end customer that they’re selling to, is that a new or an existing customer?
- Subodh Kulkarni:
- The contract manufacturer is a new customer for us, the consumer electronics customer is an existing customer for us.
- Unidentified Participant:
- Great and then I’m going to expose my ignorance here, the legacy business the dramatic decline that you saw there, is that a function of just the general uncertainty that the trade environment has created, is it because of capacity that these end markets have or is it a switch to a new technology are you able to broadly address, now what’s behind that decline?
- Jeff Bertlelsen:
- I think there’s a couple things going on, so the capital equipment markets as we’ve said, they’ve clearly been in a downturn and now when you look at our legacy products, a greater percentage of that revenue bucket tends to be OEM type customers, so there you also have this inventory interplay, where they have a need to rebalance their inventories. So those are couple the reasons, why that bucket gets hit harder and then with our newer products like SQ that has the MRS technology which gives us competitive differentiation and then also the 3D AOI market in general is a growth market even in a tough overall global environment.
- Unidentified Participant:
- Thank you both.
- Operator:
- And next will be Eric Slade [ph] with Acme Analytics.
- Unidentified Participant:
- Yes, one more question. To your knowledge, Samsung and on the I would imagine they would be on the micro LED side as Samsung player.
- Subodh Kulkarni:
- Eric [ph] we really cannot comment on the specific customers who are signing up there and their individual plans.
- Unidentified Participant:
- Not your customer, just in general as Samsung approaching. Are they in, not with you guys generally?
- Subodh Kulkarni:
- In general if you look at micro LED as a category, clearly Samsung has heavily invested in that. In fact in the recent Consumer Electronics Show in Las Vegas, they displayed the biggest display made with our micro LED technology and you know Samsung is very much interested in micro LED and has significant plans in this area.
- Unidentified Participant:
- Yes, I figured that’s one [indiscernible]. Okay that does it for me, thanks a lot again.
- Operator:
- And moving on to Miles Jennings, a Private Investor.
- Miles Jennings:
- I was just curious, if you could give me the depreciation accrual for the third quarter. I see that your after tax loss was $353,000 and I seemed to remember they seemed to be about the same amount as your depreciation accrual, but I just can’t see that yet in your reports.
- Jeff Bertlelsen:
- Our depreciation and amortization expense in the third quarter was $744,000.
- Miles Jennings:
- So you were cash flow positive in the third quarter as I defined it, of just a simple net income, net loss plus depreciation accrual.
- Jeff Bertlelsen:
- I guess if your calculation is to take net income and add back depreciation and amortization, that would yield a positive number, that’s the way the math would work.
- Miles Jennings:
- About $400,000 to the positive side, right?
- Jeff Bertlelsen:
- Yes, 353 negative plus 744 would get you a positive 400.
- Miles Jennings:
- Good.
- Jeff Bertlelsen:
- Yes.
- Miles Jennings:
- Well, this quarter was difficult for a lot of companies and it’s good to see that you’re cash flow positive in a simple way. Thank you.
- Operator:
- And that does conclude the question-and-answer session. I’ll now turn the conference back over to you for any additional remarks.
- Subodh Kulkarni:
- Well thank you for your interest and questions. We’ll look forward to updating you at the end of the year. Thanks again.
- Operator:
- Well thank you and that does conclude today’s conference. We do thank you for your participation. Have a wonderful day.
Other CyberOptics Corporation earnings call transcripts:
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- Q1 (2022) CYBE earnings call transcript
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