CyberOptics Corporation
Q4 2018 Earnings Call Transcript

Published: 20 Feb 2019

[Operator:]

Good day and welcome to the CyberOptics Fourth Quarter 2018 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Dr. Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead sir.

[Subodh Kulkarni:]

Thank you. Good afternoon and thanks for taking the time to participate in CyberOptics’ fourth quarter 2018 earnings conference call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results in some detail, following my overview of our recent performance. We will then be pleased to answer your questions at the conclusion of our remarks. In keeping with Regulation FD, we have made forward-looking statements regarding our outlook in this afternoon’s earnings release. These forward-looking statements reflect our outlook for future results, which is subject to a number of risks that are discussed in our Form 10-K for the year ended December 31, 2017, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to CyberOptics’ fourth quarter performance. Sales for this period increased 37% to $18.1 million, up from $13.2 million in the fourth quarter of 2017. As mentioned in this afternoon’s earnings release, systems revenue in the fourth quarter benefited from customer acceptances for $1.1 million of MX600 memory module inspection systems that were initially expected to be accepted in early 2019. Fourth quarter earnings were $1.2 million or $0.16 per diluted share, up substantially from $503,000 or $0.07 per diluted share in the fourth quarter of 2017. And for full year 2018, sales totaled $64.7 million, an increase of 21% from $53.3 million in 2017. Earnings in 2018 came to $2.8 million or $0.39 per diluted share on more than double the earnings of $1.3 million or $0.19 per diluted share in 2017. CyberOptics improved fourth quarter and full year operating results were driven in large part by significantly higher sales of 3D MultiReflection Suppression or MRS enabled sensors and system products. Total sales of sensors and inspection systems based on 3D MRS technology increased 61% year-over-year in the fourth quarter of 2018 to $6.1 million and increased by 47% year-over-year to $21.1 million for all of 2018. Although WaferSense sales declined in the fourth quarter due to overall softness in the semiconductor capital equipment market, sales for WaferSense sensors increased by 23% year-over-year to $13.6 million for all of 2018. Given the growth in MRS and WaferSense sales in 2018, we believe it is clear these technologically advanced products have given CyberOptics a true competitive advantage in our targeted markets. And it is an important milestone, initial purchase orders have been received for MRS enabled 3D sensors and subsystems for mid-end semiconductor inspection application. Many potential customers including OEMs and system integrators are actively evaluating our mid-end sensor given its high resolution and inspection times that are two to three times faster than competing sensors now on the market, sensors and subsystems are expected to ramp up gradually in 2019 and gain steadily increasing momentum in 2020 and beyond. We believe semiconductor mid-end and advanced packaging inspection applications represent important long-term growth opportunities for CyberOptics. Now, I’ll briefly review our fourth quarter performance by product line. Sales of OEM sensors rose 66% year-over-year in the fourth quarter to $5.8 million. This increase was paced by sales of 3D MRS-enabled sensors, which grew 151% year-over-year to $2.3 million. OEM sensor sales are forecasted to decline in the first quarter of 2019 on a year-over-year basis, due to sluggish near-term conditions in the global electronics and semiconductor markets. Fourth quarter sales of inspection and metrology systems increased 46% year-over-year to $9.2 million. Within this category, sales of 3D MRS-enabled SQ3000 automated optical inspection or AOI systems, including the SQ3000 CMM that incorporates AOI with metrology functionality, rose 40% year-over-year to $3.7 million. The steadily growing acceptance of the SQ3000 is being generated by competitive advantage of our disruptive 3D MRS technology platform, which is enabling us to capitalize upon strong worldwide demand for high precision inspection. System revenues also benefited from several sales of X-ray inspection machines during the fourth quarter as well as sales of MX600 memory module systems that I referenced earlier. The expected recognized revenue of $2.7 million of our MX600 backlog in the first quarter of 2019. We also anticipate solid year-over-year sales growth for the SQ3000 system products in the first of 2019. Sales of the WaferSense product line decline 9% year-over-year in the fourth quarter due to normal fluctuations in quarterly sales flows. WaferSense sales are forecasted to be bounced strongly in the first quarter of 2019 given strong order activity early in the quarter. Additional WaferSense applications are in the development and we believe our family of high margin WaferSense products will figure prominently in CyberOptics’ growth and profitability going forward. We ended the fourth quarter of 2018 with an order backlog of $13.6 million, compared to $19.7 million at the end of third quarter. The current backlog was affected by the sluggish market conditions that emerged late in the fourth quarter of 2018. Our backlog exiting 2018 and our fourth quarter outlook were also impacted by fourth quarter acceptances for $1.1 million of MX600 systems that were initially expected to be accepted in early 2019. As a result, we are forecasting sales of $14 million to $15.25 million for the first quarter of 2019 ending March 31. We believe 2019 should be another year of sales and earnings growth for CyberOptics. Thank you. Now, Jeff Bertelsen will review our fourth quarter operating results in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. I will start off by making a few general comments about our fourth quarter performance and first quarter outlook. The fourth quarter of 2018 was a strong period for CyberOptics driven by robust demand for our 3D MRS-enabled sensors and inspection systems. Our fourth quarter sales benefited from $1.1 million of acceptances for MX600 memory module inspection systems that were initially expected to be accepted in early 2019. Sluggish market conditions started to emerge late in the fourth quarter impacting our backlog and causing us to forecast weak sales of OEM sensors in the first quarter of 2019. However, we are forecasting strong year-over-year sales growth for the WaferSense product line in the first quarter of 2019 given strong order activity early in the quarter. We’re also forecasting strong year-over-year sales growth for our SQ3000 products in the first quarter of 2019. Turning now to other operating metrics. CyberOptics’ fourth quarter gross margin declined to 43% from 46% in the year earlier period. Largely, the result of product mix, the decreased them from increased sales of lower margin X-ray systems and dual lane SQ3000 systems for the broader SMT market, which carry lower gross margins than SQ systems sold into the semiconductor market. Lower sales of high margin WaferSense products also contributed to the decline in gross margin percentage. Our gross margin percentage is expected to rebound in the first quarter of 2019 given strong sales of WaferSense products and also given that no sales of X-ray systems are expected in the first quarter of 2019. Total operating expenses in the fourth quarter of 2018 rose a modest 4% year-over-year and 37% year-over-year sales growth in the fourth quarter of 2018. These results reflect the type of operating leverage we hope to see in the future as our sales continue to scale up. Depreciation and amortization expense totaled $623,000 in this year’s fourth quarter and stock compensation expense was $235,000. Total operating expenses in the first quarter of 2018 are expected to be modestly higher on a quarterly sequential basis as trade show expenses are typically higher in the first quarter. In addition, other costs also tend to go up in the first quarter every year. Our full year 2018 tax rate was 21% and for 2019, we are forecasting a tax rate in the range of 20% to 25% depending upon the level of tax benefits from stock option exercises. Cash and marketable securities rose $1.5 million to $25.3 million at December 31, 2018, up from $23.8 million at the end of the third quarter. Thank you. We would now be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Greg Palm with Craig-Hallum Capital Group.

[Greg Palm:]

Good afternoon. Thanks for taking the questions.

[Subodh Kulkarni:]

Hey, Greg.

[Jeff Bertelsen:]

Hey, Greg.

[Greg Palm:]

So, I guess let’s start with the macro outlook, which will probably be top of mind. Just kind of curious what sort of end markets verticals that maybe they’re seeing most of the slowdown here?

[Subodh Kulkarni:]

As we mentioned in our press release, we are seeing sluggish market conditions both in the semiconductor as well as electronics market that emerged towards the end of 2018, and we definitely see that impacting mostly our OEM revenues. As we said, both SQ3000 and WaferSense are continued to grow solid in Q1 and in the first half. but definitely, we see those sluggish market conditions reflected in our OEM demand right now. As you know, overall – everyone is expecting the second half of this year to be much stronger than the first half in the macro environment semiconductor as well as electronics, but our number says – our OEM numbers seem to agree with that general statement, but SQ3000 and WaferSense continue to grow despite the macro dynamics.

[Greg Palm:]

And I guess that was going to be my next question is, what’s your visibility while in the commentary of 2019 being another year of sales and earnings growth, it implies that sales will rebound or recover from these Q1 levels at some point this year. So, maybe just if you could explain a little bit what your thoughts are there?

[Jeff Bertelsen:]

Yes. I mean I think when you – when we look at Q1 and last year, we posted $14.1 million. So, that’s the midpoint of our guidance. We would be starting the year off with growth. We did see and are seeing good growth in WaferSense and SQ. We do have some sluggishness in the OEMs, and I think may be just adjusting inventories, but when we look at our key growth drivers being the MRS products, also WaferSense products and then as we get into the back end of the year, a little bit more contribution even from the mid-end sensor, it won’t be huge, but that’ll kick in. We feel like there are multiple vectors there that will help drive our growth in 2019.

[Greg Palm:]

Great, okay. And I guess last one in terms of gross margin, you alluded a little bit to mix with the x-ray product in there as being a cause of the weakness. Maybe, you can just update us what you’re seeing on the pricing landscape. I know that’s impacted you in the past, but any issues on the pricing as things have slowed down a little bit here in recent past?

[Jeff Bertelsen:]

Yes. I mean I think we’re really, when it comes to the 3D AOI products, we’re really seeing a stratification in the market if you will. For higher-end applications where there’s unique and demanding features on a printed circuit board or for some of these semiconductor applications. And that’s really where our MRS sensor technology shines. We’re able to get decent prices and those prices are hanging in, I think there – where there is more of a general-type PCB without demanding features as we had said in some of the prior quarters. We’ve seen some price pressure in that segment of the market and that I think continues. This particular quarter, we sold so many dual lane SQ system and those just because of the hardware configuration tend to have a little bit lower growth margin. So, I don’t think in overall – from an overall perspective, it really hasn’t changed from what we have reported in the last couple of quarters.

[Greg Palm:]

Okay. Thanks for all the color. I’ll hop back in the queue.

[Subodh Kulkarni:]

Thanks, Craig.

[Operator:]

[Operator Instructions]. And our next question comes from Dick Ryan with Dougherty Financial Markets.

[Dick Ryan:]

Great. Thanks for taking my questions. You talked about a pretty strong rebound in WaferSense in Q1. Generally speaking, you don’t really see any unit volume wiggles to the upside till after Chinese New Years or so. So what are you seeing different from maybe the wafer starts story? Are you getting new customers or getting deeper into some other – some of your key customers there?

[Subodh Kulkarni:]

Yes, a little bit of both, Dick. One of our larger existing fab customers, the commission and new fab towards the end of last year, and didn’t need WaferSense to improve their yield and productivity. So, we definitely are getting some benefit from an existing large customer of WaferSense. We are also getting some new customers, particularly, in China right now. And that is also benefiting the strong growth that we are seeing in Q1 right now. So, it’s a little bit of both.

[Dick Ryan:]

And what level is China our total revenue roughly?

[Subodh Kulkarni:]

As the whole company we still are in, I think, the 10% range.

[Jeff Bertelsen:]

Yes. I would say a little higher. It might be around the 20% range. One of our – one of the features we have is – we have an OEM, where they build some products there, but then it gets shipped elsewhere. So, we don’t have visibility for that.

[Dick Ryan:]

Yes, yes, yes. How about the applications that you’ve introduced newer applications for WaferSense. Are they gaining traction?

[Subodh Kulkarni:]

Yes. The one application we launched last year was – what we called the APS3 with the flat panel that is one area, where the China factor is contributing the display customers, some of the new ones that we are adding. Although I would say that that’s not the big driver. The big driver are still the regular WaferSense, the gapping sensor, teaching center existing large customer and new Chinese customers, but still buying the older products of gapping sensor and teach-in sensor, but new applications are contributing. We definitely will be seeing growth from the new applications this year.

[Dick Ryan:]

So would you expect the WaferSense to kind of be in that double-digit growth year-over-year for 2019?

[Subodh Kulkarni:]

I mean if you look at the last five years, Dick on an average WaferSense have grown 20%, 21% compounded annual growth rate for five years now. And that includes one downturn in semiconductor industry and right now there is softness again going on in the semiconductor industry as you will know and we seem to be having not much of an issue. We saw little decline in Q4 year-over-year. You saw that. But we are coming back strongly rebounding in Q1. So overall these two things going forward, 2019 should be a solid double digit growth year for WaferSense.

[Dick Ryan:]

Okay. One last one. You mentioned – you kind of put a plural in the initial purchase orders for your mid-end sensor. Can you give us a little more color as to kind of the dynamic behind that if it’s more than one customer or kind of what’s the volume?

[Subodh Kulkarni:]

Sure. We won’t give you the price or anything like that. But yes, it is more than one customer. So the plural, I’m glad you noticed it, and we are getting a lot of good traction with multiple customers right now in addition to the ones that have placed the purchase orders, it is we are really excited to get the sensor going. We have working prototypes in our lab. We are getting orders. The big differentiator obviously is the high resolution and accuracy that the industry needs, but really it’s the speed we are going to bit faster, significantly faster than anything out there in the marketplace. And of all the areas in the semiconductor industry despite the sluggishness in the overall semiconductor market, the one area that seems to be growing very fast right now is the mid-end and advanced packaging area. Companies that purely play in that space. If you notice, they are posting fairly robust numbers right now, and we definitely feel good about entering that area with a differentiated technology. So overall, we are counting on, as Jeff mentioned, some contributions from the mid-end sensor and subsystems using mid-end sensor in the second half of 2019 and the damping off from there on.

[Dick Ryan:]

Great. Thank you.

[Subodh Kulkarni:]

Thanks, Dick.

[Jeff Bertelsen:]

Thanks, Dick.

[Operator:]

[Operator Instructions]. And our next question comes from Miles Jennings [Private Investor].

[Miles Jennings:]

Hello. You mentioned the mid-end and the speed increasing two to three times, and you also mentioned that the accuracy is increasing. In the same sense as you speak to the speed increase, can you give us some idea of how much higher accuracy there is or is it about the same or less because of the higher speed?

[Subodh Kulkarni:]

Good question, Miles. So what we are trying to do is match the accuracy and resolution that the existing technologies have, but give significantly higher speed. If we drop the speed, we will be able to go higher resolution and accuracy. But I think what the industry wants right now is comparable resolution and accuracies to the current systems, but higher speed, because right now, they want 100% inspection, volumes are increasing in this area, because of stacking and other advanced packaging applications. So, speed is a critical factor right now.

[Miles Jennings:]

Excellent. There’s one issue, which you discussed. I think it was in a conference that you had on your website. I think it may have been the Needham Conference. But you made a comment saying that, in the future, CyberOptics will not have such a high emphasis on the refrigerators. The large 2000 pound boxes you’ll be focusing more on the sensors. And that struck me as being a fairly significant statement. And I just wondered if you could go into that a little bit for our better understanding of what CyberOptics looks like two or three years from now?

[Subodh Kulkarni:]

Sure. I mean what I meant and at least the gist of it and it’s clearly stated in our strategy statement as we focus on sensor technology as the differentiator. So, the box if you will, it’s not that you won’t be selling boxes, we will be selling boxes, if you will several years from now, but if your differentiating part comes in the sensing technology that we use, our box is more or less comparable to other boxes that you can find in the marketplace from our competitors. We all use similar kinds of gantries and motions and basics of the hardware but where we differentiate is our sensing technology, which is the brains of the inspection system.

[Miles Jennings:]

Good. That makes sense. The possibility of large increases in those mechanical aspects of the boxes are not what you’re focusing on, but on that sensors.

[Subodh Kulkarni:]

Yes. That’s exactly what we meant.

[Miles Jennings:]

Okay, good. Thank you.

[Subodh Kulkarni:]

Thanks, Miles.

[Operator:]

And our next question comes from Eric Slate with Acme.

[Eric Slate:]

Hey, how are you? Question, I’m a little confused on the memory orders. So, it was $4.4 million total, right on the memory.

[Jeff Bertelsen:]

Yes.

[Eric Slate:]

Okay. So you guys booked $1.1 million in?

[Jeff Bertelsen:]

Correct.

[Eric Slate:]

And then the other $3.3 million comes in the first quarter or is that spread over the first – the next two quarters?

[Jeff Bertelsen:]

No. Yes. We said there would be $2.7 million in the first quarter with the balance really in the second, $2.7 million of the $3 million in the first quarter and then the balance in the second.

[Eric Slate:]

So much with the balance statement…

[Jeff Bertelsen:]

Roughly 0.6…

[Subodh Kulkarni:]

0.6, yes.

[Jeff Bertelsen:]

$600.

[Eric Slate:]

Now, what I ascertain and reading everything about the memory stuff, you have 200 potential memory players, size of one you describe. How’s that going?

[Subodh Kulkarni:]

We have been talking to the other two, large memory fabs as well as Tier 2. I mean the Tier 2s even though the large three dominant memory market, Tier 2s combined together, still have 10% to 20% of the memory market. So, we are talking to the other two and the Tier 2 players. The existing set long time and it has taken a long time. But we do expect to get more customers in this area and these are such large impactful events that when we get them, we will be open and transparent and disclose that we have received a PO from these customers. But we are definitely talking to them, we are getting good traction. We expect to get some of these customers soon.

[Eric Slate:]

As far as soon means, I mean maybe, the first half of the year.

[Subodh Kulkarni:]

I would rather not get into that exact time then, because it seems do take time. These are long-term decisions. Once they have chosen us, usually like you can see with our current existing large customer, the deployment happens over a two or three-year time period to populate all their lines and everything. Go ahead.

[Eric Slate:]

Right. Are you confident maybe at the first half [Technical Difficulty]

[Subodh Kulkarni:]

You’re breaking up here, Eric. Can you repeat the question?

[Eric Slate:]

Yes. Can you hear me now?

[Subodh Kulkarni:]

There we, but go ahead.

[Eric Slate:]

Let me try something, let me take you off this line, sorry about that.

[Jeff Bertelsen:]

That’s better.

[Subodh Kulkarni:]

Yes. This is better.

[Jeff Bertelsen:]

Much better.

[Eric Slate:]

Okay, okay. So, I don’t get the exact timing, but you think we might see an advance this year in 2019 about the memory plate or a couple?

[Subodh Kulkarni:]

We will certainly try obviously; we are trying hard to get some things with the other customer hopefully this year. But we cannot pinpoint the timing.

[Jeff Bertelsen:]

Yes.

[Eric Slate:]

Right. The other thing is you guys came in at 64.7, I think three analysts out there have you around 73 for 2019, but from the slowness and I guess you saw late in the fourth quarter. Do you think 73 is doable, because I know this year was – 2018 was just sort of ramped up throughout the year? I think the first quarter was the weakest quarter in 2018. Is that correct?

[Jeff Bertelsen:]

Yes. I guess that we’re not going to quantify a full-year outlook. I think we feel good with the growth factors that we’ve got and the products that we got WaferSense, SQ and the MRS sensors, which is why we believe 2019 will be another of growth or profitability, but we’re not going to quantify full-year outlook.

[Eric Slate:]

Right. That’s…

[Jeff Bertelsen:]

But we have a lot of good growth drivers and feel good about where we’re going.

[Eric Slate:]

The softness in the fourth quarter, when did you start seeing that? What was the timeline?

[Jeff Bertelsen:]

It was very late in the fourth quarter. I would say throughout and this is really on the OEM sensor category that you’re talking about. I would say throughout virtually all of the fourth quarter, we were getting pushed for product deliveries and then very late in the quarter, really in the December timeframe, even the latter part of this December, we started to see the sluggish sort of kick in, and if you recall back at that time, there’s a lot of uncertainty about what was going to happen with the trade war and tariffs. And that may have just created some general uncertainty amongst the customers and their capital spending plans.

[Eric Slate:]

Got you. Now, I think actually, you saw some pushouts towards the end or pushouts to deliveries or something…

[Jeff Bertelsen:]

Yes. And I would say more in the – again, when we’re looking at our OEM customers, I think they’re more, given the slug in it – sluggishness they’re seeing with their customers, they’re more, I would say, maybe adjusting their inventory levels here in the first quarter, which is why we’re seeing slow or soft OEM sales in the first quarter of this year.

[Eric Slate:]

Fine, got it. Now, things didn’t slow down for you, like the quarter of December what have you – what do you think first quarter revenues roughly could have been if you didn’t go, some stuff didn’t look like it got pushed out. That had been another couple of million.

[Jeff Bertelsen:]

Yes. I think that’s really something we can’t really quantify other than obviously relative to the MX600 that got pulled in. I mean it really had been our thinking all along that, that $1.1 million would be a first quarter of that, that got pulled in. Trying to – we don’t have really good visibility to our OEMs, inventory levels and…

[Subodh Kulkarni:]

Their demand like…

[Jeff Bertelsen:]

Yes, I mean we’re really a components supplier. So, it gets difficult from that perspective.

[Eric Slate:]

Right. Now do you see anything – any signs and things, I mean the group, I mean, no one’s really reported outstanding numbers, slower numbers, but the stocks actually reacted quite good. Like you’re anticipating things in the second half or later in the year get better. Do you see that at all or not really, you don’t see it from your end?

[Jeff Bertelsen:]

Well, I mean, if we look at what we’re saying for Q1, I mean we’re seeing good growth for SQ3000, which is one of our key growth drivers, good growth for WaferSense, which is a key growth driver for us. Memory is that’s an important product for us now. So, we’re going to get good revenue from memory. It’s just really this one product area, where we’re seeing some slowness and obviously, we would expect that to rebound as the year progresses.

[Eric Slate:]

All right. Thanks. So really, just the OEM stock that was a disappointment, everything else is pretty much on frac.

[Subodh Kulkarni:]

That’s a good summary. Yes.

[Eric Slate:]

Okay. I guess, I’m trying to think if I have any other questions. No, I think that – did you sell any CyberGage for the quarter?

[Jeff Bertelsen:]

We did not sell any CyberGage in Q4. We are expecting to sell a couple of units in Q1 though. I would add that.

[Eric Slate:]

Okay. How many do you have on field there on the CyberGage?

[Subodh Kulkarni:]

Probably, 15-ish or something like that right now.

[Eric Slate:]

15.

[Subodh Kulkarni:]

We recall the exact number. Yes, about 15 units in the field. It’s about 15...

[Eric Slate:]

Where you get critical mass is when you get how many?

[Subodh Kulkarni:]

What’s the question?

[Jeff Bertelsen:]

Yes. I think what Eric is asking is, at what point do you get a critical mass in terms of the install base? And I would say at a minimum of 50, 50 to 100 would be our estimate there, Eric.

[Eric Slate:]

Okay. And then of course, the SQ, right now what you’re selling is quite a low hanging fruit, right?

[Jeff Bertelsen:]

Yes. I’m not sure what do you mean by low hanging fruit. I mean, we think there’s a lot of opportunities with the SQ3000, it’s clearly, I think, a differentiated product, differentiated technology that we think will play very well in a couple of high growth markets, 3D AOI, and then definitely has applicability in – when we look at semiconductor, back-end, mid-end and advanced packaging. I mean the MRS sensor is well suited for those markets and those are our high growth markets, certainly something MRS, I think we feel like we’re pretty well situated.

[Eric Slate:]

And now on this OEM has been slowed down, can they come back and ramp up to where it gets a lot stronger within a quarter or so or do you think just, it’s hard to say.

[Jeff Bertelsen:]

Sure. Yes. And they can order fairly quickly, so yes.

[Eric Slate:]

And I guess, the other question. I was asking to use about on China, it is 10% or 20%? But what was it for the year, how much of your business came from China?

[Jeff Bertelsen:]

Yes. Actually, after that question came through, I looked and you can kind of split the difference between me and Subodh, It looks like we'll get all 15%, is what we’re going to report for China. So…

[Eric Slate:]

Yes. But you saw no hesitation there or you didn’t have to like discount product, because of tariff or anything like that again?

[Jeff Bertelsen:]

No, no. I don’t think that’s not an issue for us. I don’t think we’re seeing that.

[Eric Slate:]

Okay. Well that should do it for me. Thanks a lot.

[Jeff Bertelsen:]

Thanks, Eric.

[Eric Slate:]

Okay. Thanks.

[Operator:]

And our next question comes from Jason Schmidt with Lake Capital partners.

[Jason Schmidt:]

Hey guys, thanks for taking my question.

[Jeff Bertelsen:]

Hey Jason.

[Jason Schmidt:]

Hey, just want to drill down sort on the pricing environment. Are you guys seeing anything out of the ordinary across any of your product lines given the macro backdrop?

[Jeff Bertelsen:]

No, I don’t think so. No. I don’t know.

[Subodh Kulkarni:]

No. As Jeff mentioned, it really comes down to applications, Jason more than anything in macro. I mean if application is demanding as is the case in semiconductor, advanced packaging or even high-end SMT, prices continue to be healthy, margins continue to be healthy and if the application is a generic PCB inspection for mass SMT, prices are under pressure and margins are under pressure. That continues, so nothing has changed, because of the macro conditions and WaferSense continues to generate a healthy margins. We haven’t seen any pressure on that trend.

[Jason Schmidt:]

Okay. That’s helpful. And looking at the CyberGage product line, have you seen any significant change in the length of customer evaluation or is it – is the evaluation period still pretty lengthy at this point.

[Subodh Kulkarni:]

In general, I would say all of our products tend to go through long evaluation cycles just because its inspection technology is demanding areas. So, they want to make sure that all the data is accurate. But specifically, with respect to CyberGage, I mean lately, frankly, our attention is much more towards SQCMM, which is doing far better in the marketplace than CyberGage is in terms of volumes. And that’s really where we are focused on. But evaluations continued to be lengthy, sometimes you wonder why it takes that long, but they do take several weeks to several months and sometimes even longer and surprisingly so. But certainly, our focus has shifted more to SQCMM and then CyberGage.

[Jason Schmidt:]

Okay. And the last one from me and I’ll jump back in the queue. I apologize if I missed it, but how should we think about the tax rate in 2019?

[Subodh Kulkarni:]

Yes. So, in 2019, we think the tax rate will be in the 20% to 25% range. It depends on what type of benefits we see from a stock option exercises. for full year 2018, it was 21%.

[Jason Schmidt:]

Okay. Thanks a lot guys.

[Subodh Kulkarni:]

Thank you.

[Jeff Bertelsen:]

Thanks Jason.

[Operator:]

And our next question comes from Ross Strehlow [ph] with Private Investors.

[Unidentified Analyst:]

Hey guys, how are you doing?

[Subodh Kulkarni:]

Hey, Ross. How are you?

[Unidentified Analyst:]

Good. Congrats on the nice quarter.

[Subodh Kulkarni:]

Thanks.

[Jeff Bertelsen:]

Thanks, Ross.

[Unidentified Analyst:]

So, you said your backlog at the end of the year was a little over $13 million, right?

[Subodh Kulkarni:]

Correct.

[Unidentified Analyst:]

What is it now?

[Jeff Bertelsen:]

I guess, Ross, in terms of backlog today, I don’t know that we want to get into specifics of where our backlog is here at in the middle of a quarter. I would say, again, in terms of – if you look at our product categories, I think are SQ3000 orders have continued to come in strong and WaferSense, you’ll have really healthy orders, earlier in the quarter. it’s really the OEM category, where we’ve seen some softness. So, really everything is a clicking along nicely. But go on and get into – given a backlog number or an update as of today. In a lot of times that, it can get into, particularly for our OEMs look quarter, they’re going to take deliveries in and customer acceptances and there’s just so many variables that go into it.

[Unidentified Analyst:]

Yes, no problem. I’m just trying to get a sense of how your activity level is and if things have gotten better. Can you make this comment? Has your backlog gone up a little bit or down a little bit or above flat? Can you at least give us some kind of a context?

[Jeff Bertelsen:]

Yes. I would say our backlogs probably got up a little bit, Ross. And again, just to give you a flavor for it, I would say, following the completion of Chinese New Year, we saw some good order activity on the inspection system side, on the SQ3000 side. We had commented on the WaferSense order activity. So, I think backlog certainly has probably gone up a little bit. But those orders are factored into the guidance that we gave today. If they’re going to revenue in Q1, some of them required acceptance and they would land in Q2.

[Unidentified Analyst:]

Okay. That’s great, Jeff. And I think that’s really kind of helpful for everybody to have a sense of what’s going on. And then one further comment, if you guys can, I think it’d be helpful a little bit too to get, kind of a sense in terms of the pipeline of deals that you see out there. I mean is that looking positive et cetera, so can you make a little comment on that for us?

[Subodh Kulkarni:]

In general, Ross, as clearly we stated, we feel very good about both MRS and WaferSense including the pipeline of what in the past we have described as large projects. Some of them are materializing obviously the MX order from the large memory customer was part of that pipeline that we are executing as we speak; the same customer is ordering other things including SQ in some of those things too, but same with many other customers. So, overall this seems pretty good about MRS and WaferSense, specifically SQ and WaferSense this year and we will get some – we are already landing some of those larger customers and that’s why we are confident this year should be a good sales growth and operating income growth year.

[Unidentified Analyst:]

That’s great, Subodh. Hey, thanks so much guys. have a great day and good luck for the rest of the year.

[Subodh Kulkarni:]

Thanks, Ross. Appreciate it.

[Jeff Bertelsen:]

Thanks, Ross.

[Operator:]

And our next question we have a followup from Miles Jennings [ph].

[Unidentified Analyst:]

Sorry to keep talking about this mid-end, so I remember one time you described – Subodh, I remember you’re discussing what you thought the mid-end was and the front-end and the back-end as far as the level of accuracy that the environment requires. And as I remember you said that you hope to sort of get in the back-end of the mid-end, just started in the mid-end and what I’m trying to get from you is if you could just review the – let’s say the micron environment degree of a size in the three areas and then regarding this order that you received in the mid-end and where you said it two or three times the speed. I’m just wondering if you achieve that two or three times level of speed at a fairly high, very small, I think you says cracks or you can’t even see the size, but could you give us a sense of where this achievement was made? Was it made closer to the front-end? Was it made closer to the back-end and just give us a little context of this achievement, because it’s exciting.

[Subodh Kulkarni:]

Thanks, Miles. And it is the whole idea is exciting right now. And if you go through the details of mid-end, there are a lot of applications that are kind of falling in mid-end right now. I mean you look at reports that are coming out and the various processes that are generally in comparison just mid-end/advanced packaging area. There’s a plethora of activities going on right now between wire bondings, stacking, TSVs, pillars, bumps. I mean, all of these activities are part of this “mid-end or advanced packaging” and different companies have used different definitions. There is no standardized definition. I wish there was, but as of today, there is no external report that we can point to which – specifically calls out for mid-end inspection system report. Having said that, what we have said in the past and I’ll stick with those definitions, we said features that are larger than 100 microns. We typically see them in the back-end area. Features that are sub one micron. We typically see them in the front-end area and everything in the middle is generally referred to as the broad, vague, mid-end area and where our current sensor that we have received multiple orders for right now in the mid-end inspections area, we use a 3-micron pixel 2D as well as 3D and typically, you keep a factor of 10 to 1, Miles. So, if we are using a 3-micron pixel detector, you usually say that is good to give you solid accuracy and resolution for features that are 30 micron or above.

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

So that’s really what that sensor is targeted for is anything larger than 30 micron, we feel very confident. We can measure it and inspect it very accurately, anything under 30, you still get good data, just that the accuracy and reputability starts becoming a little loser. So, we can still see 25 micron, anyone 20 micron features. But at some point, your accuracy and resolution and repeatability is just not worth it collect that data. So that’s what we are launching right now. That’s what we are getting orders for right now and we have – we think there are plenty of applications that need a sensor like that, the 2-micron pixels. going forward, we’ll obviously continue to improve the pixel size that are various knobs we can go after the camera, the CMOS detector itself that we are using as well as optics that we design and this is where the whole MRS algorithms come in and then how we get an effectively better accuracy and resolution with MRS proprietary algorithms than conventional techniques. So, we have multiple knobs to go after. So, we’ll obviously continue to advance. So if you think about it in 2015 when we launched MRS for the first time in the SQ product. Our pixel was 18 microns. Okay. So from 18 micron now we have come down to three microns and we will continue to – so you can get a feel for it. In four years roughly we went by a factor of six. and I don’t know if we would go another factor of six in the next four years, but we’ll obviously give it a good shot of keep bringing it lower. I’m sure it goes lower. So, at some point when we come sub-1 micron resolution and features chose that are sub-5 microns, we start approaching the front-end area, but there’s no hard and fast barrier. A lot of applications keeps increasing.

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

Does that make sense?

[Unidentified Analyst:]

That’s very helpful. It sounds like a great accomplishment, because I thought that you were just sort of starting lab work. I wasn’t aware that you actually had advanced to accepting orders in that area. So…

[Subodh Kulkarni:]

Absolutely, yes. Yes. Go ahead.

[Unidentified Analyst:]

There’s no product information on that mid-end product line. is there?

[Subodh Kulkarni:]

So, we do give product specifications once a customer, a potential customer has signed a nondisclosure agreement. We are being very careful not to disclose it to the general public at this point.

[Unidentified Analyst:]

Good. I’m happy you are. And thanks again.

[Subodh Kulkarni:]

Thanks, Miles.

[Operator:]

[Operator Instructions]. I am currently showing no questioners in the queue.

[Subodh Kulkarni:]

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

[Operator:]

Thank you, ladies and gentlemen. this concludes today’s teleconference. You may now disconnect.