CyberOptics Corporation
Q1 2018 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Good day, and welcome to the CyberOptics Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host. Please go ahead.

[Subodh Kulkarni:]

Thank you. Good afternoon, and thanks for taking the time to participate in CyberOptics' First Quarter Earnings Conference Call. I'm Subodh Kulkarni. 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 available 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 morning's earnings release. This 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, 2017, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to our first quarter performance. First quarter sales, which exceeded the upper end of our previously reported guidance, totaled $14.1 million, an increase of 18% from $11.9 million in the year-earlier quarter. CyberOptics also reported a net loss of $173,000 or $0.02 per share in this year's first quarter compared to the net loss of $214,000 or $0.03 per share posted in the first quarter of 2017. The strong growth of our family of sensor products in the first quarter was paced by nearly 300% increase year-over-year of sales of 3D MRS-enabled sensors. Our principal OEM customers for this sensors are KLA-Tencor and Nordson YESTECH, and we anticipate continued strong demand from this customers, although, order rates will continue to vary on a quarterly basis over time. Our MRS sensor technology is now able to inspect cracks and other defects below 30 microns in wafer dies, making it directly applicable to mid-end semiconductor inspection. This has enabled us to develop a mid-end semiconductor inspection capability, that we believe, will be significantly faster than other sensing technologies currently available. We're demonstrating this inspection capability to several semiconductor manufacturers and expect initial sales of this sensors in the second half of 2018. In addition to OEM opportunities with our mid-end sensors, we are working on other OEM opportunities for MRS sensors across all 3 of our 3 vertical markets and look forward to formalizing some of this relationships in the coming months. First quarter sales of semiconductor sensors, principally the WaferSense product line, rose 36% year-over-year in the first quarter, reflecting the growing acceptance of this products as important productivity enhancement tools by semiconductor manufacturers. This high-margin real-time measurement devices have been adopted by world's major semiconductor manufacturers. WaferSense products are also starting to be adopted by manufacturers of flat panel displays. The addition of new WaferSense tools and applications, coupled with semiconductor growth and opportunities in flat panel display make us optimistic about the growth potential of this product family. Sales of inspection systems declined modestly in the first quarter as the 21% increase in sales of 3D MRS-enabled SQ3000 AOI systems was offset by reduced demand for legacy 2D AOI and solder paste inspection systems. Contributing to the solid SQ3000 sales growth was the addition of 6 new customers during the first quarter. We believe the growth of our customer base indicates that SQ3000 is steadily gaining traction in the marketplace. Finally, sales of our general purpose metrology products posted strong growth in the first quarter, driven by legacy scanning products and services. Potential metrology customers are showing interest in the recently launched SQ3000 3D CMM system, which incorporates the SQ3000's AOI inspection capabilities with metrology functionality. As the first true in-line coordinate measuring machine, we believe the SQ3000 3D CMM will help us penetrate the general purpose metrology market as well as metrology of far advanced chip packaging. In summary, first quarter sales of our 3D MRS-enabled products, including sensors and inspection systems increased 90% year-over-year to $4.3 million. We now have a cumulative of -- total of 65 customers who have purchased our 3D MRS-enabled products. Our 3D MRS technology is generating the intended results and we expect MRS-based sales to continue growing over time. Looking ahead, we are forecasting sales of $14 million to $15.5 million for the second quarter of 2018 ending June 30. We are encouraged by the progress that our 3D MRS sensor technology is making in our key SMT, semiconductor and metrology vertical markets due to its demonstrated competitive advantages. We are also excited about the future growth of our WaferSense product family. In all, our advanced technologies are moving us in the right direction and we are optimistic about CyberOptics future. Thank you. Now Jeff Bertelsen will go into greater detail about our first quarter performance.

[Jeffrey Bertelsen:]

Thanks, Subodh. As Subodh has indicated, our 2018 first quarter sales totaled $14.1 million, up 18% from the first quarter of 2017. This solid increase was paced by a 90% year-over-year increase in sales of 3D MRS-enabled products, including sensors, inspection systems and metrology products to $4.3 million. This strong sales growth indicates that our 3D MRS strategy is working as planned and we anticipate long-term sales growth for sensors and systems based upon this technology. In addition, sales of semiconductor products, principally the WaferSense product line rose 36% year-over-year in the first quarter of 2018 to $3.2 million. I want to mention that starting in the second quarter, we will begin reporting revenue for of our inspection systems and metrology products as a combined line item. We are making this change due to the growing market overlap resulting from our SQ3000 3D CMM system that can serve applications in all 3 of our key vertical markets of SMT, semiconductor and metrology. We believe this change will simplify our reporting and will result in greater clarity about the performance of our MRS-based system products going forward. Moving down the P&L, CyberOptics first quarter gross margin declined to 44% from 45% in the year-earlier period, largely as a result of pricing pressures on 2D and 3D inspection systems in the broader SMT market. We are targeting our SQ3000 at inspection and metrology applications that have very demanding requirements, and where we have no or limited competition due to the superior performance of our MRS sensor technology. These applications are typically found in manufacturing of advanced electronics, such as smartphones, semiconductor manufacturing and some automotive applications. Based upon a review of our backlog and sales funnel, we believe pricing pressures on our system will moderate somewhat in the second quarter, causing us to expect a very modest improvement in our second quarter gross margin. Total operating expenses in the first quarter of 2018 rose 10% year-over-year due to increased R&D spending on new MRS-based products and WaferSense devices, higher commissions on the quarter's improved sales, incremental spending aimed at strengthening our global sales and marketing and bonus accruals that were absent in the year-earlier quarter. Depreciation and amortization expense totaled $625,000 in this year's first quarter and stock compensation expense was $259,000. We believe operating expenses in the second quarter of 2018 will be at or near the first quarter level. Our first quarter 2018 tax rate benefited from excess tax benefits from stock option exercises, including any future tax -- excess tax benefits. We expect an approximate 20% tax rate going forward. Cash and marketable securities totaled $22.9 million at the end of the first quarter, up slightly from $22.7 million at December 31, 2017. Inventories increased very slightly in the first quarter. We will continue to work to reduce inventory balances as the year progresses. We made no share repurchases in the first quarter under our $3 million share buyback program that extends through September 30, 2018. CyberOptics ended the first quarter of 2018 with an order backlog of $12.1 million, up from $11.4 million at the end of the fourth quarter. And as indicated in this morning's release, we are forecasting sales of $14 million to $15.5 million for the second quarter of 2018 ending June 30. Thank you. We would now be happy to take any of your questions.

[Operator:]

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

[Gregory Palm:]

Subodh, maybe you can start off by talking about the pipeline, you've sort of given a number in quarter stats, but just sort of curious where we are, having seen any order hesitate per se, but obviously, the demand coming in above expectations maybe implies that, that you're seeing a little bit of that. So can you just maybe help us understand the demand profile out there?

[Subodh Kulkarni:]

Sure. So, Greg, what we had mentioned in the previous earnings report is that we have a pipeline of what we call large projects, roughly a little more than 20 large projects adding up to a little more than $14 million in the pipeline. Some of them have, as you correctly observed, some of them have started materializing. About five of them, they are not ordering in the large quantity at one time, but they are ordering 1 or 2 systems at a time. So they have started materializing, but not exactly in the large nature, and that maybe those customers may order -- they may order a few units at a time as the year goes on. So we feel very good about the pipeline. The fact that we continue to make good progress, the number continues to increase, both the number as well as the dollar number. And some of them have started materializing, just not exactly the way they told us earlier in one short. But overall, it is moving in the right direction.

[Gregory Palm:]

Yes. That's good to hear. Should we assume maybe a couple of units here and there sort of throughout the year and something that sort of builds? Or how should we sort of be thinking about kind of the cadence of that as some of those orders start to materialize?

[Subodh Kulkarni:]

I think the fact that they have already started materializing a couple of units here, there. Is it a good sign? So yes, you can assume that will continue. Certainly, if we get a large order from one customer, we would be transparent and disclose that right away. But short of that, assume that this large projects have started materializing to some small extent.

[Gregory Palm:]

Got it. Understood. In terms of pricing pressure, little bit of a surprise, although, I know that's been maybe a concern or a threat especially on the 2D legacy side of things. But how should we be thinking about that going forward? I know, Jeff, you talked about sort of the backlog and whatnot. But is that something that we should assume persist for the legacy stuff and maybe moderate over time as you continue to sort of focus on higher applications, more the premium type of opportunities on the SQ side of things?

[Jeffrey Bertelsen:]

Yes, I mean, we are going to see some quarter-to-quarter variation in our gross margins. And you know a lot of our legacy business and some of our legacy customers are focused in what we would call may be the more broader or traditional SMT market, where the applications aren't as demanding. And in those markets, we are seeing some pricing pressure on the -- that the system products. Our longer-term strategy for those products, and I think where they do have the potential to shine is in these higher, more demanding applications in the semiconductor applications. Their our sensor technology really does shine through and it tends to eliminate some of the competition and we do get higher price point. So I think, there's, going forward, there could be some variability from quarter-to-quarter in the margin profile. But certainly, moving forward, over the long haul, we hope to see the margins could creep up certainly from here.

[Gregory Palm:]

Okay. I guess, one last one and I'll leave the floor. On the mid-end, you sort of gave us a quick update there, but just wondering if you are demonstrating any capabilities there outside of the lab? And in terms of commercializing this product, you talked about initial sales in the second half. How are you expecting to sell at this point, is it exclusive like a KLA or do you plan to open it up really for anyone who wants it?

[Subodh Kulkarni:]

Good question, Greg. And as I mentioned in the call this -- in my comments this morning, we have -- we are making very good progress. So we have a working sensor -- couple of sensors actually now in our lab, that we can demonstrate to potential customers, where we are measuring features down to 30 microns or so. So that's what we certainly expect KLA-Tencor to show interest, as they are such an important customer for us in our back-end -- from the back-end inspection systems. We expect them to take interest in our mid-end sensor as well. But we are opening it up to other potential customers too. Right now, we are adapting to other semiconductor inspection systems manufacturers, as well as some end-users. I mean, we have relationships with some of the fabs and OSATs ourselves and we are talking to them. Along the mid-end comment, we have commercialized what we call a Ultra High-Resolution sensor in our SQ3000 product and our standard sensor is typically targeted for features that are more than 100 microns. Our Ultra High-Resolution sensor is actually quite capable of inspecting features down to 70 to 80 microns. So arguably, that's not quite -- middle of middle -- mid-end if you will, but it is measuring the higher side features of the mid-end market. So in a way, we are already starting to approach or be in the mid-end market with our Ultra High-Resolution on SQ, but certainly, the main effort is right now commercializing the 30 micron feature sized measurement sensor in the second half of this year and we expect to have a few customers.

[Gregory Palm:]

And I mean just in terms of how that, that ramps, any way you can talk about that as a comparison that sort of how your agreement with KLA has ramped over time? I mean what is sort of your expectations for that from like an adoption standpoint over the coming years?

[Subodh Kulkarni:]

So what we've said, Greg is, we have a long-term mutually exclusive agreement with KLA for their back-end inspection systems business. So anything feature size that are 100 microns or larger, essentially, we have 1 customer, KLA-Tencor, and they have 1 supplier in that area, that serves for the sensor. So it's a great working agreement, that's what is growing a lot right now. And we both feel we're doing a great job with that agreement. Longer term, obviously, as we get into mid-end, we want to serve this -- the mid-end market is much more fragmented than the back-end market. So we want to sell it to more than just KLA-Tencor and that's what we're doing right now. There is no agreement in place with any partner at this point.

[Gregory Palm:]

Okay. Understood. Good to see that pipeline starting to materialize.

[Operator:]

We will now take our next question from Dick Ryan of Dougherty Financial Marketing.

[Richard Ryan:]

Subodh, can you give us an update on the memory side of the market? Did you get any MXs out in the quarter and what's the outlook as we go forward into 2018?

[Subodh Kulkarni:]

Sure. So the first answer is, no, we did not book any revenues in Q1 from MX. We didn't book any revenues from MX in 2017 either. We do expect some MX revenues in the second half of this year, and partly because our existing customer who has purchased multiple MX systems in 2016, they tell us that they are running out of capacity and we see that they are running out of capacity and they are planning on installing more capacity. So we are expecting some MX revenues in the second half of this year, although, it's hard to know exactly how many. And again, when they tell us, we will be transparent and disclose that. We are talking to the other 2 large memory manufacturers as well. Really right now, there isn't much competition at all in the marketplace for MX. MX is a superior product compared to anything else out there. And 1 solo competitor we had from Korea, they seem to be backing off in that area. So the other 2 memory manufacturers also seem to be interested. But I don't -- given how long it takes to get more or less customized system for each configuration, we don't expect any revenues from the other 2 manufacturers in 2018 time period. That would be more 2019 and beyond. But the existing memory customer, we do expect some. But we'll be just transparent when we get the order and tell you.

[Richard Ryan:]

Sure. How about on the WaferSense side, I thought you were working with a -- an OEM to introduce the seventh application, where are we in that process and what is happening on the flat panel side of the business?

[Subodh Kulkarni:]

Sure. So let me take the flat panel side first, and then I'll go into the OEM. So flat panel, the market has, as we mentioned, the flat panel manufacturers are already using our, what we call, APS2, which is our particle sensor, the second-generation particle sensor that we launched last year. That can measure smaller particles and do bins of 5 bins basically, all the way from 0.5 micron to 30 micron. So they are using the existing WaferSense particle sensor. It's really not optimized for flat panel and it gets into long discussion about, hi, that is the case. But they can use it, but not in an optimal setting. But they are doing it right now. Now with the third version of particle sensor that we just launched in the WaferSense category, we are optimizing and we are launching a flat panel optimized version of APS3, so we call it, APS3 flat panel display. And that's just going out. I mean, I don't believe we have sold anything yet, but we are promoting it in trade shows and we will be booking some sales here fairly soon from that product. So but the bottom line, FPD manufacturers have started using APS2, but certainly, the real product that we have optimized for flat panel APS3 FPD is just getting started, okay? That's for flat panel side. Coming to the OEM for the seventh application, that's very much going on. They have restricted us from disclosing both what the application is as well as their name, primarily because they want to have a competitive advantage for some time period. It's a large equipment manufacturer. They have a fairly large market share in this particular application and we are in the final stages. We may book some small revenues in this quarter. So we are at the final stage. Once they give the green light, basically, they have a large existing installed base for this application and it will just -- they will be putting the product out through their channel. We've -- they have told us that they will allow us to disclose their name and application roughly 6 months to 12 months after we start selling to them. So we will be able to disclose to you in due course of time what we are talking about here.

[Richard Ryan:]

So that seventh application will be specific to this specific OEM?

[Subodh Kulkarni:]

It's starting for just as 1 customer, but they have like a 50% market share in this application. So they are a large equipment manufacturer, with a very dominant position. But for the remaining 50%, we are getting a -- they're getting a 1 year exclusivity. For the remaining 50%, we will be able to service that market 1 year after we start selling to this OEM, which should happen in this quarter.

[Richard Ryan:]

Okay. Great. So just on the guidance for Q2, can you kind of give directional comments, how you're looking at your various product units kicking in Q2?

[Jeffrey Bertelsen:]

Sure. So we started to think about where things landed. I think in terms of just directionally, guidance wise, I think, we're really looking we focus -- tend to focus more on the high-end side of our guidance. I mean where we're seeing strength is in the WaferSense area and the semiconductor area and some of the metrology product areas and that would include SQ CMM. So just sort of thinking about Q1 of '18 and then Q2 of '18, directionally, those would be areas where we may see more incremental strength, if you will.

[Operator:]

[Operator Instructions]. Now take our next question from Jaeson Schmidt of Lake Street Capital.

[Jaeson Schmidt:]

Just wondering if you could comment, if you've seen any significant changes in your lead times recently? And then along those lines, if visibility has vastly changed over the last three months?

[Jeffrey Bertelsen:]

I guess, taking the latter question, I don't know that visibility in and of itself, that, I don't think that's really changed from what it's been over the course of the last year. In terms of lead times, I mean, definitely, we're seeing strength in the WaferSense area right now and that is putting pressure on our supply chain in order to come up with the components to meet all the deliveries. But, I guess, other than that, we haven't seen any significant changes or differences.

[Jaeson Schmidt:]

Okay. And then looking at the shipments to KLA and Nordson, is that both those relationships expected to be fully ramped here in Q2?

[Subodh Kulkarni:]

I mean Nordson relationship is a little different than the KLA. Nordson is obviously growing their 3D AOI business using our sensor. And that, as we have disclosed before, is a large market and Nordson is continuing to gain share with our sensor technology to have a terrific channel, particularly, in Americas. So they are taking advantage of their existing channel and our sensor technology. So there's no limit to how much they can grow, given their channel's strength. And so that should continue to grow, I believe, with our sensor technology and their channel. KLA situation is a little different. They are a large market share player in the back-end inspection systems area, in the semiconductor area. Their market share, I believe, is little higher than 60% right now in that area. And they continue to gain share. So first, the back-end inspection systems business is one of the faster segments -- faster growth segments within the semiconductor area, more than the front-end area. And within that, KLA is, I believe, is gaining share in that space. And you're right, we are -- attach rate is increasing. And that, you may be right, we may approach the 80% or 90% attach rate in Q2. So it will saturate at that point. I doubt you will never get to complete 100%. So the attach rate may saturate in the Q2 2018 time period, however, back-end inspection systems continue to grow and KLA, I believe, continues to grow share in that space. So the overall business may continue to -- will continue to grow, I believe.

[Jaeson Schmidt:]

Okay. That's helpful. And then Subodh, just following up on a previous question on the mid-end, can you guys quantify how many customers you're currently engaged with or talking with on those sensors?

[Subodh Kulkarni:]

In broad terms, I mean, it is a consolidated market. So we are dealing with about 5 to 10 potential customers here in mid-end. It just not -- there are no more than 10 customers or 12 customers in that whole space. The market is a lot larger than the back-end inspection systems area. Roughly speaking, the back-end inspection systems market is about $200 million to $300 million and mid-end inspection system business is considered to be about $500 million to $600 million, so 2 to 3x the size of the back-end inspection systems area controlled by this roughly 5 to 10 players. So we are talking to most of them, I think, right now.

[Jaeson Schmidt:]

Okay. And then the last one from me and I'll jump back in the queue. I know you guys are really focusing on the SQ CMM product. And in the past, you've talked about it being complementary or separate from the CyberGage. But from a resource, investment, R&D standpoint, have you -- has there been any significant strategy shift when you guys look at those 2 product lines?

[Subodh Kulkarni:]

Yes, sure, good question, Jaeson. We view them as complementary as you stated. Both have very good value proposition. Clearly, from a business traction standpoint, SQ CMM is dominating our pipeline and the discussions. There's immediate value proposition because of its fast, speed, accuracy. The overall combination seems to appeal to customers a lot better than CyberGage. At the same time, we continue to get very interesting leads from CyberGage. And frankly, most of the pipeline, large opportunities, they start as CyberGage opportunities and ultimately become SQ CMM opportunities once the customer understands the pros and cons of the 2 products. We're continuing to get some very interesting leads with CyberGage, some of the -- just an example, I mean a -- one of the largest consumer companies in the world is very interested in deploying CyberGages across multiple locations. A large Japanese auto company is looking at CyberGage across multiple locations. So we continue to get good, interesting traction with CyberGage, but nothing to report from a P&L standpoint. SQ CMM clearly is starting to generate results, starting to dominate our pipeline. So we feel pretty good about what SQ CMM can do in 2018 and beyond. But CyberGage is a good complementary product that generates good leads overall.

[Operator:]

It appears there are no further questions at this time. [Operator Instructions].

[Subodh Kulkarni:]

Well, thank you for your interest in CyberOptics. We look forward to updating you at the end of our Q2 earnings. Thank you, again.

[Operator:]

That concludes today's call. Thank you for your participation. You may now disconnect.