CyberOptics Corporation
Q3 2018 Earnings Call Transcript

Published: 24 Oct 2018

[Operator:]

Ladies and gentlemen, good day and welcome to the CyberOptics Third Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doctor Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead sir.

[Subodh Kulkarni:]

Thank you. Good morning and thanks for taking the time to participate in CyberOptics' third quarter 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 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. 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, 2017, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to CyberOptics' third quarter performance. Revenue for this period increased 41% to $16.7 million from $11.8 million in the year earlier quarter. And third quarter net income totaled $1.1 million or $0.15 per diluted share compared to a net loss of $72,000 or $0.01 per share in the third quarter of 2017. Our improved third quarter operating results were driven by significantly higher sales of 3D multi-reflection suppression or MRS-enabled products as well as WaferSense sensors. Sales growth of all products based on 3D MRS technology accelerated in the third quarter increasing 79% year-over-year to a record $6.4 million. Sales of our WaferSense product family rose 55% year-over-year to $3.5 million. By comparison, third quarter sales of legacy 2D Sensors and Systems grew 13% year-over-year. In all, total sales of MRS-enabled products and WaferSense sensors accounted for 59% of CyberOptics totaled third quarter sales compared to 49% in the year earlier period. As evidenced by the robust year-over-year sales growth in the third quarter and first nine months of 2018, this advanced products are driving CyberOptics growth. Reflecting the growing utilization for complex inspection and measurement applications in the electronics and semiconductor markets demand for our suite of MRS-enabled product and WaferSense sensors, makes us optimistic about CyberOptics outlook for the fourth quarter of 2018 and beyond. Now I will briefly review our third quarter performance by product line. The 55% year-over-year sales growth are of WaferSense product family and this year's third quarter results reflects the growing acceptance of these sensors by semiconductor manufacturers and other customers as important tools for improving yield and productivity. In response to demand from semiconductor manufacturers, we are developing additional WaferSense product offerings for new applications in semiconductor fabs. We believe our family of high margin WaferSense products will account for a growing proportion of CyberOptics total sales over the next few years. Third quarter sales of Inspection and Metrology Systems increased 41% year-over-year to $7.8 million. This growth was paced by sales of 3D MRS-enabled SQ3000 automated optical inspection or AOI systems, which rose 92% year-over-year to $4.3 million. This robust growth included sales of our new SQ3000 CMM system that incorporates AOI with metrology functionality. The steadily growing acceptance of the SQ3000 is being generated by the competitive advantages of our disruptive 3D MRS technology platform, which is enabling us to capitalize upon strong worldwide demand for high precision inspection. As previously reported, a $2.8 million order was received in the third quarter for MX600 memory module inspection systems, which came on top of an earlier $1.6 million order from the same customer. Our MX600 backlog of $4.4 million at September 30 2018 is expected to revenue during the first half of 2019. Third quarter sales of OEM sensors increased 34% year-over-year to $5.4 million. This growth was driven by sales of 3D MRS-enabled sensors which rose 64% year-over-year to $1.8 million. Sales of 3D MRS sensors to KLA-Tencor for use in their backend inspect -- semiconductor inspection systems were particularly robust. Sales of MRS-enabled sensors to Nordson YESTECH for SMT applications also were solidly higher in the third quarter. Customers are showing significant interest in our MRS-enabled 3D optical sensors for semiconductor mid-end and advanced packaging inspection application. Sales of SQ3000 systems for these applications have started using our high resolution 7-micron pixel sensor. We are continuing to advance our MRS-enabled 3D optical sensor technology, and many customers are evaluating our next generation sensor for semiconductor mid-end and advanced packaging inspection applications. Our next generation ultra-high resolution 3-micron pixel sensor is accurately measuring feature sizes down to 13 microns at high speed. We are targeting one micron three sigma accuracy, at speeds that we’d expect more than 2,300 millimeter wafers per hour. Sales of MRS-enabled 3D optical sensors and systems for semiconductor mid-end and advanced packaging inspection applications are expected to ramp up in 2019 and beyond, given the belief these applications represent significant long-term growth opportunities for CyberOptics. We ended the third quarter of 2018 with an order backlog of $19.7 million, up from $13.8 million at the end of the second quarter. The current backlog includes orders of $4.4 million for MX600 systems. Looking ahead, we are forecasting sales of $16.25 to $17.25 million in the fourth quarter ending December 31, 2018. And at this time, we see 2019 shaping up as another year of sales and earnings growth. Thank you. Now Jeff Bertelsen will review our third quarter operating results and our outlook for Q4 in greater details.

[Jeff Bertelsen:]

Thanks, Subodh. Since our third quarter sales already have been covered in some detail, I will briefly review our sales outlook for this year's fourth quarter. As Subodh mentioned, we are forecasting sales of $16.25 million to $17.25 million for the fourth quarter ending December 31, 2018. Sales of OEM sensors are forecasted to register significant growth in this year's fourth quarter on a year-over-year basis, driven by strong sales of 3D MRS sensors. Fourth quarter sales of WaferSense sensors are forecasted to be flat to down somewhat on a year-over-year basis due to normal sales variations and also after considering a large 55% year-over-year sales growth experienced in the third quarter. We see WaferSense as one of our key growth drivers going forward as this product line continues gaining traction in the market. Inspection and Metrology systems sales are forecasted to post higher sales in this year's fourth quarter on a year-over-year basis. Within this category, total SQ3000 sales including the SQ3000 CMM are forecasted to pull strong sales in the fourth quarter on a year-over-year basis. We also have orders in hand for three X-ray systems that are expected to revenue in the fourth quarter. Total sales of 3D MRS-enabled products are forecasted to grow significantly on a year-over-year basis in the fourth quarter of 2018. Moving down the P&L, our third quarter gross margin declined modestly to about 45% from 47% in the year earlier period due principally to ongoing pricing pressures on our 2D and 3D inspection systems in the broader SMT market. In addition, our gross margin in last year's third quarter benefited from sales of SQ CMMs software upgrades. It should be noted that we are not experiencing pricing pressures on SQ3000 systems sold into the semiconductor market in which the inspection and metrology requirements tend to be more demanding in the -- and furthermore complicated SMT inspection applications. Moving forward, we are targeting sales from these more demanding applications, which drive better gross margins. Our fourth quarter gross margin is expected to be flat to down slightly on a sequential basis reflecting the lower gross margins from our anticipated sales mix in the fourth quarter. Total operating expenses in the third quarter of 2018 rose a modest 6% year-over-year due to increased R&D spending on new MRS-based products including our next generation ultra-high resolution MRS sensor, in addition to bonus accruals that were absent in the year earlier quarter. During this year's third quarter, our operating expenses benefited from a $200,000 reduction in our accounts receivable allowance resulting from our collection of receivable that had been previously reserved. Higher third-party [ph] sales rep commissions in the third quarter offset most of the benefits from the reduction in the receivable allowance. We expect lower third-party rep commissions in this year's fourth quarter on a sequential basis. Depreciation and amortization expense totaled $652,000 in this year's third quarter, and stock compensation expense was $217,000. Total operating expenses in the fourth quarter of 2018 are expected to be only slightly higher on a sequential quarterly basis. Our third quarter tax rate was 22% and we are forecasting a tax rate at or near 25% going forward, excluding any excess tax benefits from stock-based compensation. Cash and marketable securities totaled $23.8 million at the end of the third quarter, down slightly from $24.2 million at the end of the second quarter due to working capital fluctuations. As Subodh mentioned, we currently see 2019 shaping up as another year of sales and earnings growth paced by demand for our suite of MRS-enabled products and WaferSense sensors. Thank you. We would now be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Greg Palm with the Craig-Hallum Capital Group.

[Greg Palm:]

Yes. Good morning. Thanks for taking the questions and congrats on the results here.

[Subodh Kulkarni:]

Thanks, Greg.

[Greg Palm:]

I guess, Subodh, may be you can start on giving us kind of what your take on the macro is in terms of the environment, getting some mixed signals from some of the other companies that play in your space, what do you hear and what do you’ve seen?

[Subodh Kulkarni:]

We play in three business [ph] as you know, semiconductor, SMT market and industrial metrology markets. The semiconductor industry is getting a lot of attention lately and I assume your question is based more towards that as to what do we hear. Clearly it had a great couple of years. Some of the larger fabs and equipment makers started signaling some slowdown or some deferral of purchases about 6 months ago, that’s where you started hearing some negative sentiments about the semiconductor cycle going down. We hadn't really seen -- we haven't yet seen anything directly impacting us, but obviously we are a very small player in a very large industry. The WaferSense area, as Jeff said, in Q4 we are expecting a flattish order compared to last year to slightly down because that’s primarily related to the front-end fabs. But on the flipside SQ demand for semiconductor customers is very high right now. So clearly the backend and [indiscernible] sensors took a [indiscernible] for their backend inspection systems. So I would say the backend part of semiconductor seems pretty robust to us right now. The frontend may be there is some softness that we’re seeing like large fabs and some equipment makers have reported. But, overall, semiconductor market is expected to grow 8% or 9% and the semi-cap market is expected to grow 8% or 9% next year per the latest reports and we see nothing to dispute that. On the SMT side, things are looking fairly robust right now. We are not seeing any slowdown of any nature on the SMT side, now that -- we maybe [indiscernible] to it as because we’ve a terrific product, with a great technology SQ, so we maybe plowing through. But in general, we think SMT market and the 3D AOI market continues to grow very, very robustly and SQs doing a fantastic job in that high growth market right now. So we see really no challenges as far as growth is concerned on the SMT side. And the industrial and metrology market goes more by GDP. There's really no cyclicality that we have seen in the industrial and metrology side. So overall, I would say, semiconductor we watch it cautiously, but on the backend side of semiconductor we are not concerned at all. Frontend we are watching the market where it goes. SMT looks pretty solid right now. And industry and metrology goes by GDP and global economy continues to [indiscernible] pretty nicely, so we don't see any challenges on that front. Does that answer your question?

[Greg Palm:]

Yes. That’s helpful color. I mean, it seems like you’re somewhat insulated to some extent given some of these new products. I mean, as you look around kind of the quarter, the outlook, how much of that is a byproduct of market share gains as well.

[Subodh Kulkarni:]

Clearly, our technology and product line is helping us offset, if any flattishness or decline, if there is any. But as I said, even though the most recent reports of semiconductor I’ve seen still project, though industry to be growing 8% next year after a growth of 10% to 11% this year. So nobody is yet really talking decline percent [ph]. And as I said, SMT continues to look very good right now. So it may be our products and technology, but as far as we can see we cannot say that there's a decline that is imminent or anything of that nature at all.

[Greg Palm:]

Yes. It makes sense. I guess, specifically for SQ CMM, which, let's say, had a really, really big quarter. Any color around kind of customer adoption there in overall end market demand for that specific product line?

[Subodh Kulkarni:]

The two primary areas we are selling so far are clearly the SMT and semiconductor customers. Those are the ones who are buying SQ and SQ CMM today. We are getting some metrology type customers as well for SQ CMM, but those are relatively the small numbers compared to the semi and SMT markets. But clearly the product stands out as we’ve said before, it is truly the world's first inline metrology grade system. It does a great job in terms of speed, resolution, accuracy. It seems to made a lot of unmet applications of this. So we see really no shortages of opportunities with SQ CMM certainly in the semi and SMT, but even outside in the general metrology type area. So clearly a lot of our expectation for future growth are coming because of that CMM functionality that we have added to the SQ products right now.

[Greg Palm:]

Got it. All right. Last one for me is related to the guidance release commentary for 2019. I mean outside or exclusive of that big MX order that you expect to fulfill in the first half, I mean, how should we think about growth outside of that?

[Subodh Kulkarni:]

I mean, in general, I would say both MRS and -- I mean, clearly, for the first nine months of 2018, MRS and WaferSense both have had spectacular growth numbers, solid double-digit. We expect solid double-digit growth to continue for MRS for sure and WaferSense too, although that’s more predicated to the frontend spending, but we expect growth numbers -- certainly, the growth platforms to grow solid double-digits next year. The base business actually is going to get a benefit of that because of that MX contribution that gets covered in the base business, because it's a 2D system. So, overall, we expect 2019 to be a growth year as we said in our outlook. Regarding the exact growth rate, that’s a hard one given the kind of new technologies that we're dealing with. So we will do what we have been doing, which is give you guidance one quarter at a time rather than try to give color for the next whole year.

[Greg Palm:]

Very good. All right. Thanks for the color.

[Subodh Kulkarni:]

Thanks, Greg.

[Operator:]

Thank you. Our next question comes from Jason Schmidt with Lake Street Capital Market.

[Jason Schmidt:]

Hey, guys. Thanks for taking my questions. I just want to follow-up on Greg's question on sort of the macro backdrop. Curious, if you’ve seen any significant changes in lead times or your visibility over the past three months?

[Jeff Bertelsen:]

I don't think we've seen any significant changes in visibility from our customers. I would say within the supply chain, that has gotten tighter as the year has progressed. So procuring parts in order to meet customer demand and requirements, I mean, we’ve seen tightness there and -- so we’ve have to work really closely with suppliers to make sure we’ve adequate supply to meet customer demand. I think we've seen tightness from that perspective. But in terms of customers, I don't know that we’ve seen a significant change there in terms of visibility.

[Jason Schmidt:]

Okay. That’s helpful. And just to clarify your comment on the pricing pressure, I know you noted seeing it in the 2D business. Should we expect that to continue or will that started [ph] to alleviate here as we get into the backend of this year?

[Jeff Bertelsen:]

You know, I think we will start to see -- I mean, clearly in the broader SMT market there is some of this underlying pricing pressure for applications that aren't as demanding. We do have certainly the bulk of our 2D sales there, we even have some 3D sales there. I think as we move into 2019 and as we start to revenue some of these more demanding applications, advanced packaging applications, mid-end applications, semi-applications, in general, hopefully we will start to see the margins move up a little bit. So, I think hopefully that’s all in front of us here in the next couple quarters and then moving into 2019.

[Jason Schmidt:]

Okay. Understood. And any updates you guys can provide on the migration into the mid-end sort of -- what sort of goalposts we should be looking at as we look into 2019?

[Subodh Kulkarni:]

Sure. So, Jason, as I’ve said in my commentary, we have started selling -- today we offer SQ3000 with our high-resolution sensor which is a 7 micron pixel size sensor. So that can detect and measure features that are generally 70 micro and above, usually use a factor of 10 over the pixel size. So 7 micron pixels [indiscernible] 70 micron and above. That product is already getting used in some mid-end type applications. So we’ve sold a few of the SQ3000 with the high-resolution sensor in the mid-end that has already started. Going forward, that will continue to grow, we believe the high-resolution SQ3000 sales in the mid-end type applications, the advanced packaging applications. We are showing our 3 micron pixel sensor right now to a number of customers, and we are getting a lot of interest right now. So certainly we expect significant ramp up of sales from the mid-end and advanced packaging customers in 2019 using both the current high-resolution sensor that we offer in SQ3000 and the new sensor that we will offer going forward. So overall this is definitely a very strong growth category for us and we’ve already kind of started with the high-resolution sensor in SQ. Does that answer your question?

[Jason Schmidt:]

It does. Thank you. And that's all I had. Thanks a lot guys.

[Subodh Kulkarni:]

Thanks, Jason.

[Jeff Bertelsen:]

Thanks, Jason.

[Operator:]

Thank you. Our next question comes from Dick Ryan with Dougherty Financial Markets.

[Richard Ryan:]

Thank you. Subodh, with the macro backdrop for memory, I mean, you’ve got a good backlog for MX into next year. Have that conversation changed or is it still pretty solid with your delivery expectations into next year with the challenges that they’re facing?

[Subodh Kulkarni:]

In general, Dick, the conversation hasn't changed, I mean, the customers we service all the large customers in memory, the one particular one who has orders for the MX600 is one of the three larger ones and they haven't shown any indication of backing off. And if anything when we look at their earnings calls and what specifically they see, they’re actually increasing their CapEx for the next 12 months. And specifically they point out that more of that CapEx, more of the higher CapEx is going to be spent on the backend side of their operation, which is where MX600 goes, which is where SQ goes. So if anything they’re indicating that they’re going to be spending more in the next 12 months than in the past 12 months in that general area. So I know there is a general backdrop, I think more related to the frontend side than the backend side, frankly.

[Richard Ryan:]

Okay. How about expanding into other memory customers? Does this pause in their market segment, give them more opportunities to evaluate MX or what -- what’s your progress of expanding that customer base?

[Subodh Kulkarni:]

We are absolutely talking to the other two large ones as well as some of the Tier 2 ones. So we expect to make some progress as we go forward with our long lead items as you know. So hopefully in 2019 we will have sales from MX with some other large memory customer and Tier 2 customers. But we continue to talk to them, there is in general good interest in the product. We really have no competition for MX right now, because the one competitor that use to sell MX based systems have kind of backed off in the marketplace right now, given MX performance. So long-term, we are very bullish about MX and where it goes. We are also talking about -- to some customers about a 3D version of MX, so that will include the MRS module in the MX system. Right now MX600 is a 2D product, so we’re talking to the current customer as well as the new customers about a 3D version of MX. So over the next few years we continue to expect MX to make sizable contribution to our [indiscernible].

[Richard Ryan:]

Okay. When you look at WaferSense that also has a pretty competitive -- strong competitive mode around at all. Are you getting deeper into those key customers or are you seeing customer expansion there as well?

[Subodh Kulkarni:]

We certainly are in the top 10 fabs in the world, if you will. The opportunities to get deeper into the top 10 fabs as well as some -- there are some new fabs coming particularly in China, that we’re getting good opportunities. So we continue to increase the number of customers with the WaferSense primarily in China, I would say. Outside China, it is getting deeper into the existing accounts. So the top three continue to be TSMC, Samsung and Intel, so just getting more of their valid share, if you will, getting more of their process engineers and equipment engineers to accept WaferSense that is till the number one growth driver. But China and the new fabs that are coming over there are certainly contributing to the growth of WaferSense right now.

[Richard Ryan:]

Okay. Speaking about China, what was there -- what’s that level of revenue contribution for you guys and what the tariff talks that you’re seeing anything good bad or indifferent there?

[Jeff Bertelsen:]

Yes. So, relative to our sales into Mainland China, I mean they're really less than -- bit less than 10% of our revenue. So we don't directly ship a lot into the territory there. And when we were, we already were facing a pretty good level of tariff. On the supply side, we are starting to see a little bit of impact on the tariff on some of the electronic components that go on PCBs that our suppliers make for us, it's not a huge impact yet. So, clearly, something we will just need to continue to monitor as we move forward.

[Richard Ryan:]

Okay, good. Thank you. That's it for me. Congratulations.

[Subodh Kulkarni:]

Thanks, Dick.

[Jeff Bertelsen:]

Thanks, Dick.

[Operator:]

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

[Miles Jennings:]

Good morning. Thanks very much.

[Subodh Kulkarni:]

Good morning.

[Miles Jennings:]

I noticed on page 13 of your investor presentation, you list, your world-class customer base. And Samsung is there. I don't see Apple. And I suppose it's because they use subcontractors, but could you just give me a sense of Apple business indirect or direct at CyberOptics?

[Subodh Kulkarni:]

Sorry, Miles, we can't talk about Apple specifically or any one customer specifically. I mean, it takes tremendous efforts to get permission from some of these customers to even use their names. Certainly, we cannot talk. So I just can't comment, sorry.

[Miles Jennings:]

Yes, that’s fine. I understand that. My second question is, was there a buyback in the third quarter on the stock?

[Jeff Bertelsen:]

No, we did not repurchase any shares of stock in the third quarter.

[Miles Jennings:]

Okay. And the last is, I'm very encouraged by your CMM development. The idea of doing something in line which has been not in line at such speeds and such performance is sort of staggering. Is there an example that you might think of in having a sale of CMM where the customer gave you some feedback and you understand how significant it was to their operation?

[Subodh Kulkarni:]

Sure. So we don't give -- mentioning any names. One example would be CPU socket metrology where right now every CPU gets mounted inside your PC or laptop with a mechanical socket that has thousands of pins that make connection to the ball grid array and it's a mechanical clamping situation. So they need to inspect those thousands of pins today before the CPU comes in picture. And that is being done offline using a regular CMM kind of technology. So it's extremely long [indiscernible] because it's slow they do it sporadically on a sampling basis. So right now SQ CMM is being tested in that application. For 100% inline inspection hasn't happened yet. We’ve sold a few systems, we are in that final stages of evaluation. Some -- and they’re going inline, but clearly a regular CMM it was taking them 10 minutes to inspect a few pins and they were doing sampling with SQ CMM they’re doing 100% of the thousands of pins in less than 10 seconds right now. So the value proposition is [technical difficulty] for those customers, so we certainly expect CPU socket metrology type customers to adopt SQ CMM in large volumes in the future. But just one example, as I said, hasn’t really converted itself into full time sales here, but we’ve sold a few systems, so we can see the value proposition our customers are benefiting from. And we expect more examples like that in the future where extended complex parts that need inline metrology, but today it cannot be done because it is [indiscernible] in line CMM, and that's [indiscernible]. So really that is the opportunity we’re going after high-resolution, high accuracy, high speed requirement in this advanced packaging mid-end type areas.

[Miles Jennings:]

Thank you, Subodh. Congratulations.

[Subodh Kulkarni:]

Thanks, Miles.

[Operator:]

Thank you. Our next question comes from Bill Dezellem with Tieton Capital Management.

[William Dezellem:]

Thank you. Earlier in the call you made reference to an X-ray product. I am not familiar with that [indiscernible] hoping that you can shed some light on that. [Indiscernible] an old product, you don’t just spend much time at all on it.

[Jeff Bertelsen:]

Yes, it is a product that we actually resell. Some of our metrology customers for certain applications that they do need X-ray and in those instances we will provide them with an X-ray product, but it is one that we …

[Subodh Kulkarni:]

Resell it.

[Jeff Bertelsen:]

… that we resell.

[William Dezellem:]

And is there anything about that that you see as a growth engine or is it just a convenience for your customers and you do not expect much out of it?

[Subodh Kulkarni:]

Yes, I mean, we treated more as the latter. It is a one stop shop as, Jeff said. We are -- our main interest in metrology is obviously with products like SQ CMM type products as well as our own -- what we call XLP type laser based CMM products and CyberGage. This is [indiscernible]. Some customers they’ve applications that need in addition to optical, they need X-ray to see the inside of something that optical is just not suitable. So we’re a reseller. It's a good product. We’ve a good partnership with a small French company and the product meets nice value. It has got a good value proposition in terms of speed, resolution, accuracy, but we really don’t spend much time on that. I mean, when our customers needed, we are a solution provider and it makes decent margins, but that’s not the focus. So don’t expect that to generate significant growth in the future. But it is a good nice product in our lineup right now.

[William Dezellem:]

Great. Thank you, both.

[Subodh Kulkarni:]

Thanks, Bill.

[Operator:]

At this time, we’ve no other questioners in the queue.

[Subodh Kulkarni:]

Well, thank you for your interest and questions. We look forward to updating you at the end of Q4. Thanks again.

[Operator:]

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and thank you for joining us this morning.