CyberOptics Corporation
Q4 2019 Earnings Call Transcript

Published: 20 Feb 2020

[Operator:]

Good day, and welcome to the CyberOptics Fourth 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.

[Subodh Kulkarni:]

Thank you. Good afternoon, and thanks for participating in CyberOptics' fourth quarter 2019 earnings conference call. Joining me is Jeff Bertlelsen, 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.CyberOptics' fourth quarter sales came in well ahead of our internal forecasts. Our strong implemented on quarterly sequential performance was driven by robust sales of 3D MRS enabled SQ3000 automated optical inspection, or AOI systems. The third quarter of 2019 likely marked the top of the downturn in surface mount technology and semiconductor capital equipment markets. As such, we believe the sequential quarterly improvement of our operating results is reflective of the market recovery that now is underway.CyberOptics reported sales of $16.9 million for the fourth quarter of 2019 and at December 31, down from $18.1 million in the fourth quarter of 2018. However, fourth quarter sales were up 36% from $12.4 million in the third quarter of 2019. Net income for the fourth quarter of 2019 was $168,000 or $0.02 per diluted share, compared to $1.2 million or $0.16 per diluted share in the year earlier quarter. Full-year 2019 sales totaled $59.3 million, down 8% from $64.7 million in 2018. We reported net income of $774,000 or $0.11 per diluted share in 2019, compared to earnings of $2.8 million, or $0.39 per diluted share in 2018.Sales of sensors and inspection and metrology systems based on our 3D MRS technology grows 48% to $9 million year-over-year in the fourth quarter of 2019, mainly driven by strong sales of the SQ300 3D AOI system. This MRS-based product, combined with semiconductor sensors, accounted for 72% of total revenue in fourth quarter of 2019, up from 51% in the year earlier period. Sales of legacy sensors and systems, excluding 2D MX600 sales, were 39% year-over-year in the fourth quarter of 2019. Our legacy 2D product sales will not go away anytime soon, but they are expected to account for the steadily declining proportion of our total revenue stream.Turning now to an overview of our product lines. Fourth quarter sales of inspection and metrology systems increased 83% to $10.2 million on quarterly sequential basis, and up 11% from the level reported in the fourth quarter of 2018. These increases were driven by sales of SQ3000 systems, which rose to $7.1 million in the fourth quarter of 2019, reflecting increases of over 100% on a quarterly sequential basis, and up 91% on a year-over-year basis. In another encouraging fourth quarter development, received our first purchase order for our new 3D MRS enabled MX3000 memory module inspection system. This order, which is expected to become revenue in the first quarter of 2020, was made to a new memory customer. As a result, two of the world's three largest memory manufacturers now use either our 2D MX600 or 3D MX3000 memory module inspection systems.We believe the potential market opportunity for the MX3000 system is significant. Sales of semiconductor sensors totaled $3 million in the fourth quarter of 2019, down 17% on a quarterly sequential basis, and virtually unchanged on the year-over-year basis. Orders for semiconductor sensors were strong in the fourth quarter, resulting in a quarter-ending backlog of $1.5 million, or double the level at the end of third quarter of 2019. As a result, we are forecasting strong sales of semiconductor sensors in the first quarter of 2020.To further strengthen its position in the semiconductor market, CyberOptics expanded its family of semiconductor sensors with two new product launches in the fourth quarter. The inline particle sensor detects particle contaminants in gas and vacuum lines in semiconductor process equipment. The ability to monitor particles in-line is particularly relevant for EUV lithography tools because particle detection can significantly improve yield and productivity. The WaferSense auto-resistant sensor enables real-line resistance measurements of leading cell contacts in semiconductor electro chemical deposition applications. Both products facilitate semiconductor tool setup and diagnostics.Finally, fourth quarter sales of 3D and 2D sensors totaled $3.7 million, up 15% on a quarterly sequential basis, but down 37% year-over-year. Sales of 3D MRS enabled sensors totaled $1.9 million in the fourth quarter of 2019, up 60% on a sequential basis, but down 19% on a year-over-year basis. We believe that demand for 3D sensors will continue to strengthen in 2020 as the year progresses.As an update, interest in our MRS based nano resolution center for semiconductor wafer levels and advanced packaging, inspection, and metrology applications remains very high. Quite a few potential OEM and system integrator customers are continuing to evaluate this product. As we have said previously, the same cycle for this product is lengthy but given the degree of interest shown by prospective customers, we are anticipating sales in coming quarters. The billing [ph] of nano resolution sensor will enable fiber optics to capitalize on some very promising long-term growth opportunities.CyberOptics ended the fourth quarter of 2019 with an order backlog of $17.7 million, up significantly from $14.4 million at the end of third quarter, and $13.6 million at the end of 2018. Our quarter-ending backlog at December 31, 2019 and September 30, 2019, includes a significant order for 3D MRS sensors from an existing OEM customer that are scheduled for delivery in the next 18 months. We are forecasting sales of $15 million to $16.5 million for the first quarter of 2020. We believe that our industry-leading 3D MRS and semiconductor sensor technologies have positioned CyberOptics to capitalize upon a full range of good opportunities. For this reason, we believe CyberOptics' future is very promising. Thank you.Now, Jeff Bertlelsenwill review our fourth quarter numbers in greater detail.

[Jeff Bertlelsen:]

Thanks, Subodh. Since Subodh has already covered our fourth quarter sales in some detail, I will provide information about other aspects of our performance for this period. Our gross margin percentage in the fourth quarter of 2019 was 43%, in line with the fourth quarter of 2018, but down from the third quarter of 2019, and below our internal expectations at the start of the fourth quarter. The lower than expected gross margin percentage was due to a change in sales mix. Sales of semiconductor sensors, primarily the WaferSense line of products, were lower than expected in the quarter. This factor, combined with higher than expected sales of legacy sensors and inspection systems products, resulted in the lower gross margin percentage.We expect our gross margin percentage in the first quarter of 2020 to improve on a sequential basis from the level in the fourth quarter of 2019, due mainly to an improvement in our sales mix. In particular, high growth margin semiconductor sensor should account for a higher percentage of our total revenue in the first quarter of 2020 when compared to the fourth quarter of 2019. Total operating expenses of approximately $6.6 million in the fourth quarter of 2019 increased 7% from the level in the year earlier period. We are continuing to invest heavily in R&D to take maximum advantage of opportunities in our target markets with our 3D MRS technology.Depreciation and amortization expense totaled $730,000 in the fourth quarter, and stock compensation expense was $254,000. Total operating expenses in the first quarter of 2020 are expected to increase modestly on both a year-over-year and quarterly sequential basis. Interest, income, and other was negative in the fourth quarter of 2019, due to foreign exchange losses, resulting from a weaker U.S. dollar. The dollar is subsequently strengthened, so we are expecting to post positive interest, income, and other in the first quarter of 2020.Our effective tax rate of 64% for the fourth quarter of 2019 reflects a small non-cash charge for a deferred tax valuation allowance related to tax credits that expire in 2020. We anticipate a recurring effective tax rate of approximately 25% in the first quarter of 2020. Cash and marketable securities of $26.3 million at December 31 were up from $25.3 million at the end of the third quarter. No shares were purchased in the fourth quarter of 2019 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 cash balances of cash and marketable securities.Thank you. We would now be happy to take your questions.

[Operator:]

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

[Greg Palm:]

Thanks, Subodh, Jeff. Good afternoon. Congrats on the good way to end the year here.

[Subodh Kulkarni:]

Thanks, Greg.

[Greg Palm:]

As relates to the upside to the quarterly guidance, curious if you would characterize that as broad based. Was it driven by a few big projects within SQ3000? And specifically, how was the activity in terms of new versus existing customers?

[Subodh Kulkarni:]

It was more broad-based, Greg. We could clearly see the market starting to turn around towards the end of the year, but it wasn't one or two customers that drove the demand. It was more broad based for SQ3000.

[Greg Palm:]

Okay, and in terms of, pipeline going into 2020, I mean, initial commentary sounds pretty positive. But anything to add there as we look into the year here?

[Subodh Kulkarni:]

So, as you saw, we quantified the backlog, which was very healthy at $17.7 billion, so this is pretty good amount, at least how we are starting the year. The 3D MX order, that's part of that backlog. It does open up a whole new market area for us, and we feel pretty good about holding a position. So we are ending the year with a fairly optimistic outlook right now. We don't give guidance for the full year, as you know, so we'll give one quarterly guidance at a time. But overall, assuming semi and FMT, the expectation is that these markets are going to grow in 2020, unlike 2019, with these markets declined roughly 20% to when you look at how we did about 8% decline in a 20% decline market, and this year, the market is expected to grow between 5% to 10%. Coronavirus effect not notwithstanding. None of us know how to quantify that yet. But overall, the whole year, I do believe the market for semi and FMT will grow. With that backdrop, we feel pretty good about how we are positioned for growth this year.

[Greg Palm:]

Good. And congrats on the 3D MX order here in the fourth quarter. I mean, is that is that a pilot order? Is that an initial order that is expected result in sort of more deployment in the future? I mean, how would you sort of characterize that order at this point?

[Subodh Kulkarni:]

It's a regular order for our full system. The system is already -- so this is number two of the three memory customers. The first memory customer that we are fulfilled, we have sold more than 20 systems, 2D systems, to that customer. Now, we are talking to this other memory customer with the 3D system. In the first one, it's not a pilot order. It certainly is a fully functional piece. It's already in their factory, doing generally well. That's why we feel confident to book it in Q1. They have already told us what they need for this year and long term. So, this will -- and we are talking to the third customer right now. We feel pretty good that we may be able to get a third customer in the not so distant future. So, between the existing customers, plus this new one, plus the potential for a third one, we do believe over the next three to five years, MX is going to be a solid contributor to our device.

[Greg Palm:]

Yes, that's great. And relative to the initial customer there in 2D, I mean, is the opportunity for the second customer comparable? Is it significantly less? I mean, how would you think about sort of the longer term opportunity here?

[Subodh Kulkarni:]

Good question, Greg. I mean, although there's roughly about 120 to 130 memory lines in the world today, majority of them are in the three large manufacturers, Samsung, SK Hynix, and Micron, but there's a few others in smaller places. That overall number is growing roughly about 10% on the -- given the demand in memory. Last year, it was flat. This year, there's some additional investments going on that goes into cyclicality of the semiconductor. As I said, we have fulfilled about 25 of that -- 120 to 130 number right now. The competition we have is either manual inspection or some older equipment that this customer supports 2D, and that company really is not pursuing that area that aggressively, and our 2D system is far superior than what they sold in the past. So overall in the next three to five years, we believe that the total market opportunity for us is more than 100 systems eventually, but it's difficult to quantify exactly what year and when these systems will come in.

[Greg Palm:]

Okay. Yes, seems like a big opportunity. I guess, last one, just in terms of the macro, and I guess specifically thinking about what's happening over in Asia with coronavirus, are you seeing any push outs of orders, any cancellations, anything of that nature, just given the environment over there? Or is it still sort of fluid and too early to know

[Subodh Kulkarni:]

I think it's more the latter. It's too early. I mean, clearly it is impacting travel, our engineers, customers, locations, also sometimes they are closed and stuff like that. We haven't seen any actual cancellation for orders because of that, but it is more how do we fulfill with the freight forwarders schedule compromised? And it just created another level of chaos that all of us are dealing with right now, I believe, in the industry. Just don't know how to quantify all those things yet.

[Greg Palm:]

Understood. All right. I'll hop back in the queue. Thanks so much.

[Subodh Kulkarni:]

Thanks, Greg.

[Operator:]

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

[Jaeson Schmidt:]

Thanks for taking my questions. Just following up on Greg's last question, I know you noted not seeing any impact from the coronavirus today. But did you take any sort of haircut to Q1 guidance to account for the uncertainty over there?

[Jeff Bertlelsen:]

No. I would say, Jason, as of today, we're certainly comfortable with our guidance. I don't know that -- or I would say we didn't really take any haircut to our guidance, and part of that is just due to the backlog that we had and the fulfillment of that. So as today, no, but it is a fluid situation, and one we're all continuing to monitor.

[Jaeson Schmidt:]

Okay, that's helpful. And sort of just following up on it, kind of taking the opposite side on the push out, just given the uncertainty of the situation, what are your thoughts on customers' inventory levels? Do you think there's been any sort of pull-ins here in Q1 as customers want to ensure they have adequate inventory?

[Subodh Kulkarni:]

We haven't seen anything materially in that sense either. I mean, again, most of our customers are dealing with uncertainties of their side. So, we are getting plans, evolving plans, and this -- but the total number that they are talking about are roughly comparable. Sometimes, the locations are moving about based on -- because many of our large customers have multiple locations. We are seeing some movement in sort of delivering the SQ system, in this location, do it in this location, that kind of stuff. But at a macro high level, we haven't seen anything on our customer side that we can say changes our numbers or our outlook. And again, whatever happens, I do think things will move around a little bit with this uncertainty. I don't think the macro picture changes. I do believe semi and FMT industries overall are well positioned to grow over the next three years to five years because of all the key drivers are all in deck. 5G deployment, clouds, and AI; and those things are not going to change because of the wider situation in China or even if it spreads a little bit outside. So, I don't think fundamentally anything changes, maybe a quarter or 2 things may get a little disruptive but nothing significant in the long run.

[Jaeson Schmidt:]

Okay. And then, last one for me and I'll pass it on. I know you said you expect off backs up here in Q1, continue to invest in R&D. But when we think about building out the sales team, should we expect SG&A to continue to turn higher throughout this year? Do you think the sales team is adequately built out at this time? How should we think about that?

[Subodh Kulkarni:]

Definitely increasing the headcount to support additional sales opportunities we see particularly applications engineering support in remote locations. But again, the number will be higher this year than last year, hopefully, at a percentage, we will try to keep it contained. Jeff, you want to add.

[Jeff Bertlelsen:]

I would just add, historically we tend to see more trade shows in the first quarter of the year which tends to add to our expense load a little bit in the first quarter and some of that does tend to taper off a little bit as the year progresses. So I would just add that as well.

[Jaeson Schmidt:]

Okay, thanks a lot, guys.

[Operator:]

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

[Unidentified Analyst:]

A nice way to follow-up the year, Subodh, Jeff. Before I get into it I just want to let you know it's about 70 degrees and sunny out here in Southern California. I don't know what's like in Minneapolis but I had this bad that. So I have some questions. First of all, did I understand that correctly? The industry on the semiconductor capital equipment industry contracted 20.5% and you guys were down 8% right?

[Subodh Kulkarni:]

That is generally correct. Yes. The semiconductor declined by about 20% in 2019 and we declined by about 8%.

[Unidentified Analyst:]

And of the 8% it was basically legacy product. Your new product was flat right?

[Subodh Kulkarni:]

Actually, the new products grew 13% in 2019.

[Jeff Bertlelsen:]

Right. Total MRS revenues in 2019 were up 13% over 2018 and WaferSense grew about 3% in 2019, versus 2018. It is our legacy products really that declined.

[Unidentified Analyst:]

Okay, so back in the memory for a second. So you got 2 out of the 3 going from the hat trick hopefully. Sounds like that could be imminently or within the year?

[Subodh Kulkarni:]

We certainly have delivered the first system as I mentioned earlier. That customer has told us they need a few more systems. Usually the way this will work is they will confirm the ROI calculations once the production is moving to our system. Assuming the ROI calculation is good, they will continue with their capital plan. So it's still uncertain that's why they haven't quantified exactly what the impact of MX is this year. It's tough to know because these are large orders and these are large customers. We're pretty confident over next 5 years we will get majority of this market, but it's impossible for us to know and it will kick in whether it's Q2, Q3 of this year or next year.

[Unidentified Analyst:]

Fair enough. Now, I think micron came out and I guess new 5G phones are 6 gig, is that right?

[Subodh Kulkarni:]

Yes, that's right.

[Unidentified Analyst:]

So I guess the question is, I think micron said you need 2x to 3x the memory for that, the 5G phones. Is that correct?

[Subodh Kulkarni:]

I don't know what specifically micron said but in general, that statement seems close to what we also believe. The newer phones do need more memory. So that is really correct. I don't know the exact number.

[Unidentified Analyst:]

And you get that really-- do you have to stacking for that to get that minute?

[Subodh Kulkarni:]

Most high-end electronics, including smartphones now are using stacked advanced packages now and advanced packages tacky music key component of advanced package. So most of the chips that already used in things like high-end smartphones and you are dealing with a multi-stack layer right now.

[Unidentified Analyst:]

Of course, I guess that would -- can I assume that that would create more opportunities for cyber optics?

[Subodh Kulkarni:]

In general, advanced packaging area is an exciting growth area for us and that's why we are so focused on that area right now. Because exactly the reason you brought up stacking, sign in, sign out, and many of those things, you do need to measure the third dimension. So the traditional 2 dimensional measurements and instructions are no longer applicable because you're bringing in the third dimension now. That's where our strength is with MRS technology. So that's really where we are focused on for the last few years in R&D and that's why we are so optimistic about our nano and modern sensor and hope that will play in the advanced packaging instruction arena.

[Unidentified Analyst:]

On your previous call or maybe talking to Jeff, when you go from the 2D to the 3D process, that's usually about 50% more as far as the cost of equipment.

[Subodh Kulkarni:]

Yes, I mean in general 3D equipment is whether it's a UI or MX or anything 3D is more expensive.

[Unidentified Analyst:]

Okay, now I have one more series of questions. I was sort of surprised we didn't see anything in the press release on the mini micro LEDs. You guys announced the order with Rohini back in October?

[Subodh Kulkarni:]

We didn't. We announced a partnership with Rohini and we separately announced another.

[Unidentified Analyst:]

Not a partnership, an order. That's what I meant.

[Subodh Kulkarni:]

We did an order from a customer for micro-LED application. That is correct for SQ Systems.

[Unidentified Analyst:]

Okay. Just what I could ascertain, basically, there appears to be a race to the starting line for this technology to commercialize it in the production of this because I did read KYC [ph], KYC clicking software's report, and they're expecting $30 million to $70 million of revenues. They publicly said the second half of the year. And I think they're also working. They're working with Rohini with an exclusive so that's one of my questions. You don't have an exclusive with anybody on the technology, right?

[Subodh Kulkarni:]

Yes, we are partnered on the technology side. Independently, Rohini has announced a partnership with KYC. As you said, independently with Rohini.

[Unidentified Analyst:]

My question was not partnership as much as is there exclusivity there. So everyone's out in this technology, Apple, Samsung, Rohini. It doesn't matter for you guys because you're doing the inspection. So whoever wins out, I think Rohini has the lead. You're going to be in the process. inspecting anyway, right?

[Subodh Kulkarni:]

Yes, correct and we haven't given any exclusivity to anyone for Micro-LED so we can go wherever-- whoever is interested in investing in micro-LED can buy our inspection systems.

[Unidentified Analyst:]

Now, these lines that are-- I would assume that it was a $500,000 price ticket for each of these pick and place machines by KYC. So my question to you is, do you have any idea how many of these pick and place machines whether it's 1 or 2 go with each line?

[Subodh Kulkarni:]

Well, it's really a question that should be asked to KYC but it is more than 2. I can tell you that. It's multiple pick and place machines. Fortunately or unfortunately for us, our rescue system goes lightning fast compared to a pick and place machine. So from $1 standpoint there is more dollars per line for pick and place because it's going slower than any multiple machines and SQ can go much faster than a pick and place machine can from our standpoint

[Unidentified Analyst:]

I think on each line you said you can go up to 16 machines which is roughly about $100,000 a ticket right a piece? Is that collect? Did I get that right?

[Subodh Kulkarni:]

The number 6 is correct. We have mentioned that before. The price point is a little more than $100,000. Our average price point for SQ is more than that and certainly, for the high end demanding applications the price point is a lot higher than $100,000.

[Unidentified Analyst:]

One question I had there's joint ventures. I think Apple is building out facilities in Taiwan, Play nitrate and Samsung, EPA star and of course, BLE and Rohini. So I guess my question is what applications or can you discuss the applications where you see the mini micro-LEDs being used?

[Subodh Kulkarni:]

The primary application and I believe Rohini has been fairly open in their presentations and public disclosures. The primary application they are going after with micro-LED right now is the backlight for LCD displays. Today the backlight is LED backlight. I you switch over to micro-LED, you get better power consumption and better light intensity. That's an obvious area for this technology to enter. The first application that Rohini and the micro-LED technology is going is not the actual display itself. The resolutions are still fairly close compared to the displays that you see in smartphones or televisions or laptops today. So first application is a backlight application. There's significant battery savings to be had. If the backlight is changed from LED or conventional lamp to a micro-LED. That's really the first scale-up is going on is for those applications. Over time, everyone's feels very confident that micro-LED resolutions will continue to improve. Five years or certainly 10 years from now, micro-LED will give LCD or all the displays of good competitive run for the actual display itself, but it is starting off in the backlight area. Does that answer your question?

[Unidentified Analyst:]

Yes, the one question I asked since Apple is so interested in this but I think Rohini is the lead. At least what I've read. Samsung obviously wants to get in there. If Apple is in there trying to do this when you anticipated if you to have guests out there that will start getting into the smartphones?

[Subodh Kulkarni:]

We cannot really comment on any specific customer or what exactly the range.

[Unidentified Analyst:]

No, not a specific customer. I mean, just in general.

[Subodh Kulkarni:]

I think in general, based on what we have said, Rohini has said, you already have read a KYC announcement, it's fair to say that multiple lines will be installed this year for micro-LED scale up. We definitely expect a benefit of that coming in rescue product line. They will sell multiple rescues per line they believe. So you will definitely see all of that getting captured. That's one of the factors not only factor but one often important factor is why we feel so good about growth in SQL demography, in general, is because micro-LED is a growth area and we definitely have the leading position for instruction in micro-LED right now for this particular technology.

[Unidentified Analyst:]

Now, I just speak with [indiscernible]; they said, probably 30 to 70. But they said next year should even be greater. So if these lines are coming on they said second half of the year. Does that mean that's when you expect a nice pick up for you in that area second half of the year?

[Subodh Kulkarni:]

We got the first order towards the end of last year that we publicly disclosed. We are continuing to talk to multiple partners that are scaling up right now. It's not just 1 or 2. So there's a lot of activities going on in micro-LED. Clearly 2020 is a year when scale-up is starting. We feel pretty good about that. Exactly how many exclusive will sell for this in 2020? I would have a tough time quantifying the quantified because of that. The number could be between 3 and 6. Lines could be multiple first half. KYC, I'm surprised that they went and qualified it to that level.

[Unidentified Analyst:]

I was too but it's right there on their first quarter release $30 million to $70 million second half of the year and then when we called them up they said they expect next year to be even very robust. That does it for me.

[Subodh Kulkarni:]

You know more than we do.

[Unidentified Analyst:]

Don't say that, that'd be really scary. But thanks again and I started out the needle on the weather.

[Operator:]

Thank you. We can take our next question from Josh Goldberg of Jeetu [ph]. Please go ahead.

[Unidentified Analyst:]

I just wanted to make sure I got these numbers right. So your SQ 3000 business was over $7 million in the quarter. Is that right?

[Jeff Bertlelsen:]

Correct.

[Unidentified Analyst:]

That was a 91% year-over-year?

[Jeff Bertlelsen:]

That is correct.

[Unidentified Analyst:]

That was your biggest product line. Seems like is by far your biggest quarter that product line.

[Jeff Bertlelsen:]

Yes, it was a great quarter for the SQ.

[Unidentified Analyst:]

Okay, can you talk a bit about applications that you're seeing it being used for now, the opportunity where that product especially on the I believe your product is called the laser gauge-- cyber gauge I'm sorry. When we talk about real big opportunity in in-line inspection, consumer electronics opportunities and stuff just give us a little sense now that the end of the year is where it is and you had a really good year on SQ 3000 what could we see in 2020 just in that product line, both semi cap and obviously all the other applications? Then I have a follow up.

[Subodh Kulkarni:]

It's a good question. SQ is a multifunctional system. We differentiate ourselves because the primary service the AI application automated optical inspection, but the same system goes for our solar-based inspection as well as the in-line CMM, coordinate measuring machine. So we set it as a multifunctional tool, same hardware, different software, customer against.

[Unidentified Analyst:]

What's roughly the ASP?

[Subodh Kulkarni:]

ASP is about $120,000 to $130,000 depending on options, sometimes it can be more depending on options.

[Unidentified Analyst:]

The point is that your revenue per hardware wasn't that much higher so you actually basically ship double as many systems in the December 2019 versus the December 2018 quarter. You were selling the higher price machine. Saying again, obviously, you're not having a big pricing increase to get the 91% growth.

[Jeff Bertlelsen:]

No, we're not.

[Subodh Kulkarni:]

If anything, there is ongoing price pressure in this marketplace because of our differentiation I believe our price erosion is less than some of our competitors who don't have that kind of differentiation. But if anything, there is price erosion every year. So clearly it was all volume-driven growth. So then regarding your question, invested presentation, they are quantified using external reports. So overall market for this 3D AOI existence is about a couple of hundred million dollars right now. And the market is projected to grow 35% to 40% over the next 5 years. That's the current external report statistics and that's the market very few primarily fits them. Now because we have this inline CMM and SPI, maybe the market size is a little bigger for us but I think AOI market dominates these numbers. So right now we are saying we are roughly at about 8% or 9% market share. And we have grown clearly in 2019 in market share. We expect to continue to grow that market share as 2020 goes and beyond. We do not-- there's many players in this marketplace. A lot of competitive dynamics going on. Because we are playing in the higher end, typically our customers are large companies that care about quality and are willing to pay a price for that quality. So typically, we don't play in the lower end. Chinese EMS price is a big factor. So majority of our customers are Fortune 500 type companies that have their own lines or contract them but they control the lines and are willing to pay for the quality. Our market share-- even though overall market share is 8% to 9%, I believe our market share in the top tier is much higher than 8% or 9%. Probably more like 30% or 40% in the top tier. We are virtually absent in the bottom tier enterprises. That's the market dynamics. Market is expected to grow and we expect to grow our market share in that growing market, again, trying to dominate the top tier and participating a little bit in the mid-tier but staying away from the bottom tier where prices are downwards. So over the next 5 years, we are…

[Unidentified Analyst:]

But it will be fair to say-- just so I'm making sure I understand. It's fair to say that you're exiting at around $7 million a quarter. You're obviously not projecting it to be $7 million every quarter. Maybe you are but if this segment is a 30% to 40% grower and you're seeing the semi cap equipment come back and some of your other projects that you've now won. Help me understand why you are not a 25%, 30% growth company in 2020.

[Subodh Kulkarni:]

I mean, clearly SQ is a big driver. And obviously, we will try to maximize our growth rate as much as possible using SQ as the drivers. We have other products too that are not growing as fast, and definitive legacy is smaller, but it's still flattish kind of a number that are -- represents -- which is growing again, but not at the rate at which SQ is projected to grow. So, we have other mitigating factors that won't get the full benefit of the 30% or 40% growth that's going on in AOI. Firstly, sort of external reports. It's hard to know exactly -- if the market truly grew 35%, 40%, yes, you may be right. It will be true in some fairly [indiscernible].

[Unidentified Analyst:]

Has there been any big new design wins that you won in SQ3000 in the last three to six months that you can alert investors about?

[Jeff Bertelsen:]

Yes, I mean, one that we're very, very positive on, and we talked about with the last quarter is Micro LED. I mean, there's significant growth potential with that particular application, so that would be just one, but there's others as well. So definitely 3D AOI. As components shrink, as packages become more complex, it's going to drive a need for 3D AOI, and particularly high-end 3D AOI, where we feel like we have a definite competitive advantage with our MRS sensing technology.

[Unidentified Analyst:]

Okay, and then just, Jeff, just obviously, the product mix hurt you. SQ was a big part of another -- or some other parts, but can you give us a little bit more granularity than just being up versus Q4? I mean, you'd average around 44% each in the last few years. Is it fair to say that's probably the right number?

[Jeff Bertelsen:]

Yes. In the fourth quarter, as I talked about -- and a lot of it is really due to the -- just the semi product line being down lower than what we had thought.

[Unidentified Analyst:]

The sensors.

[Jeff Bertelsen:]

And a lot of that is just due to timing, because as we said, our orders were pretty good. But I would think our margins certainly could be up back to the 45% level in that type of area, for sure. They definitely should improve.

[Unidentified Analyst:]

And I realize that people are saying that you're not seeing the impact yet of coronavirus, as your press release said. But can you tell us what would be -- why are you not that concerned right now? What would help you that makes it different than some of the other vendors that are highlighting damage as a reason for a first quarter that might not be as strong? Thanks so much.

[Subodh Kulkarni:]

So, the impact of coronavirus on the supply side, as you know, the -- most of our critical components are built right here in Minnesota. So, we do get some parts from overseas, including China, but majority of the stuff that we use to build our products are sourced not from China, but from local sources, or other sources, but not quite China. On the demand side, clearly, we do sell into China, particularly multinational corporations that have locations in China. Except for one or two Fabs in the Wuhan area, and they are relatively smaller plants. We haven't actually seen anyone physically shut down their facility for a prolonged period of time. They continue the orders that they have placed because they want us to continue to fulfill, so long as the freight forwarders and everyone's available. We haven't seen anything materially change on the demand side yet. The exception of maybe one or two plants in the Wuhan area, as I said. So if more things change, and we definitely hear of more cancellations or difficult, we will update everyone. But as of today, we feel pretty good about the current guidance we have given and the impact being minimal. Hopefully that answers your question.

[Unidentified Analyst:]

Yes, thanks so much.

[Subodh Kulkarni:]

Thanks, Josh.

[Operator:]

Thank you. We can take our next question from Bill Disalum [ph].of Tyson Capital.

[Unidentified Analyst:]

Thank you. Nice quarter. One of the paragraphs in your press release referenced particle sensing with litho. Would you please talk through that opportunity? I mean, those tools tend to be very expensive. Are your parts that could work -- or systems that could be tied with that also quite expensive, less expensive? Just talk through as much of the opportunity as you can, please.

[Subodh Kulkarni:]

Sure. So, as we -- we said in our press release this in-line particle sensor is basically leveraging our resources particle sensor that we call APS three, so it's the same particle sensor. So, it's a laser scattering device that we are essentially scattering light of the particles and using a photo detector. We count how many particles are there in a given unit volume as we quantify the exact number of particles and put them in different bins, and that helps the customer a lot in understanding what may be going on in the process. So, what in this -- normally, our WaferSense particle sensor goes in the tool and does the measurement, and people get the data in real time outside, using a wireless element. In this case, what we have done is still the same particle sensor, but we don't rely on battery. We put it in the pumping -- basically a fight, and we created a separate venturi kind of an effect, so we can still scatter light off particles even though it's in a vacuum. So, we increased the power of the laser, and we changed the flow a little bit to be able to measure the particles. It's the same physics and same concept, but different fluid mechanics, if you will.Anyway, so the product is ready. We are testing it on multiple EUV tools right now. The data looks very promising, ccustomer's seem to like the product, and that's why we announced it, and now we are making it available for broader customer set. The opportunity is fairly exciting, there is roughly 100 EUV tools right now worldwide, and that number continues to increase. And you just have to look at ASML's earnings report, they quantify that fairly accurately. Those are expensive tools, as you correctly mentioned. The H2 goes for like $110 million to $120 million dollars. And there's about 100 of them out there, and the number is growing by about 15% or so every year. Most of the tools are within three fans right now. But over time, that number is expected to increase.Our opportunity is essentially to have our IPS sensor in multiple pumping lines on the EUV tool, and measure the particles, and give that data to the customer, or the process engineer, who will look at any [indiscernible] report or particle concentration increasing, that would be an indication for them that the collector efficiency could be in jeopardy. And they will do some kind of a gas storage or flush. Today, they cannot do that. So, they are kind of guessing what may be the problem. And then based on their guess, they actually shut down the tool and do the purges. So they may be either overdoing it or under doing it, and it's a huge problem for them for human productivity. I mean, when they spend that much on the tool, productivity is a big issue, obviously. So, anything that helps them increase their yield and productivity is a big deal for EUV lithography. And that's really what IPS is targeted to address.We're pretty excited about the opportunity with the existing tools that are there, and certainly as the population continues to increase, to get more and more customers that way. Does that answer your question?

[Unidentified Analyst:]

It does. And a follow-up, if I may, please. So, how many of your sensors would you anticipate selling? Or I guess more to the point, what would you think of as the minimum and the maximum revenue potential per litho unit that you could be selling?

[Subodh Kulkarni:]

I mean, that's a tough one to quantify because we don't know exactly how many IPSs will each customer use. One site may choose multiple, one site may choose less than that. So, we don't know exactly how many they will use per tool; we hope it's multiple, and it's a high number, but it's really tough to say until we actually see how they put it in use and how much yield and productivity benefit they are getting. Just like any of our solutions, most of our customers try out our products, do an internal ROI calculation, and then decide how many they want, and this is going to be no different. So, we need a few more months here, Bill, to know what kind of ROI are our EUV customers getting with this product before we can say how many tools does that be. And when we know, obviously, the price point isn't separated of thousands of dollars, just like most of our resources products are. So, once we have a feel for the volume, we will be able to update you better. But at a higher level, I would say overall WaferSense continues to grow, and we view this as part of extension of the resources family. So, this should help the growth rate of WaferSense going forward. But kind of tough to say what is the minimum and maximum for EUV too at this point.

[Unidentified Analyst:]

Thank you for the prospectus, Subodh.

[Subodh Kulkarni:]

Thanks, Bill.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the conference back for any additional or closing remarks.

[Subodh Kulkarni:]

Thank you for your interest and questions. We look forward to updating you after our Q1 results. Thanks, again.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.