CyberOptics Corporation
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

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

[Subodh Kulkarni:]

Thank you. Good afternoon, 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 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, 2016 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. Sales for this period totaled $11.8 million, down from $15 million in third quarter of 2016. We also reported a net loss for the third quarter of 2017 of $72,000 or $0.01 per share compared with earnings of $1.2 million or $0.16 per share in the year earlier period. Sales of 3D MRS-enabled products increased during the third quarter of 2017 year-over-year, but the revenue gains were not large enough to offset declines from other products. Sales of SQ3000 3D AOI systems grew in the third quarter of 2017 by more than 240% on a year-over-year basis to $2.2 million. During the past year, we have expanded our base of SQ3000 customers as more manufacturers are recognizing the competitive advantages of this important product. This positive trend bodes well for the future of SQ3000, which is expected to drive the solidly higher inspection system sales that we are forecasting in for the fourth quarter on a sequential basis. SQ3000 sales growth though robust was unable to offset lower volumes of legacy systems products and the lack of sales of MX 600 memory model inspection systems, which totaled $2.8 million in the third quarter of 2016. In other inspection system developments, we have enabled SQ3000 with measurement capability, incorporating some of the functionality of CyberGage360 scanning system and traditional coordinate measuring machines while returning SQ3000's AOI capabilities. While the SQ3000 CMM, it is expected to open up additional sales opportunities not only with PCB manufacturers, but also in the general purpose metrology market. We also plan to unveil a 3D MRS-enabled inspection system at a major electronics trade show in Germany in November. This higher-performing system, which will be commercially introduced in 2018, is aimed at strengthening CyberOptics' position in solder paste inspection market. Regarding third quarter sales of 3D MRS sensors to KLA-Tencor and our principal OEM customers for these products increased more than 150% on a year-over-year basis. The fourth quarter outlook for MRS sensors is positive. These products are now standard on back-end semiconductor inspection systems utilizing 3D optical inspection. Our initiative to apply MRS-enabled sensor technology to mid-end and front-end semiconductor inspection is moving forward on plan. This technology is now available to inspect cracks and down to 30 microns in wafer dyes. Reflecting this progress, we are actively demonstrating our mid-end inspection capability to several semiconductor manufacturers. We believe initial sales are possible before the end of 2018. Our semiconductor inspection initiative could hold significant potential for CyberOptics in coming years. In response to input from semiconductor manufacturers, CyberOptics is developing additional WaferSense and ReticleSense product offerings for new obligations in the semiconductor fabs and flat panel display manufacturing. Solid future sales growth is anticipated for the WaferSense and ReticleSense portfolio in fourth quarter and beyond. We recorded only nominal sales of CyberGage360 3D scanning system in the third quarter. The selling cycle for this new product has proven to be longer than initially anticipated since CyberGage represents the first significant technological change in non-contact automated scanning inspection in many years. We believe our new SQ3000 CMM product will be an attractive option for many customers, requiring higher resolution for their applications. Although CyberGage and SQ3000 CMM sales are expected to remain slow in the fourth quarter, we continue to believe that general purpose metrology is an attractive market for products based on our differentiated MRS technology. Both CyberGage and the new SQ3000 CMM product should gradually help us this market potential. In the SMB and semiconductor markets, we believe that the performance characteristics of MRS are superior to other technologies offered by our competitors. We are very optimistic about the future prospects of our 3D MRS technology, particularly in the areas of inspection and metrology for semiconductor advanced packaging applications as well as complex mobile devices and automotive applications. The challenges resulting from shrinkage of transistor dimensions, advanced packaging is expected to grow rapidly in the next 5 to 10 years to enable stacking of chips in the third dimension. We believe our MRS technology is well suited for many of this application. In order to take full advantage of this opportunities, we intend to expand our sales capabilities by adding to our force of sales representatives and field engineers. We believe this initiative will position CyberOptics to better penetrate our targeted markets and significantly improved operating results over the long term. CyberOptics ended the third quarter of 2017 with an order backlog of $11.2 million, up from $7.3 million at the end of second quarter. As previously forecasted, we anticipate sales of $11.5 million to $30 million for the fourth quarter ending December 31, 2017. We remain overall very optimistic about CyberOptics future. Our optimism is based on the proven competitive advantage of our suite of MRS-enabled sensors and inspection systems, the potential for incremental revenue from mid-end semiconductor inspection and a steadily growing of acceptance of our WaferSense and ReticleSense products. Thank you. Now Jeff Bertelsen will review our third quarter operating results in greater detail.

[Jeffrey Bertelsen:]

Thanks Subodh. Higher sales of SQ3000 3D AOI systems in the third quarter of 2017 were unable to offset lower volumes of legacy system products in the lack of sales of MX600 memory module inspection systems. As a result, third quarter sales of inspection systems declined 46% from the year earlier period to $4.3 million. Sales of the MX600 in the third quarter of 2016 totaled $2.8 million. Third quarter sales of OEM sensors increased 19% year-over-year to $4 million, paced by higher sales of both 3D MRS-enabled sensors and legacy 2D products. Third quarter sales of semiconductor products, primarily the WaferSense and ReticleSense product lines, totaled $2.2 million, up minimally from the third quarter of 2016. Finally, third quarter sales of general purpose metrology products were down 14% year-over-year to $1.3 million. Sales of CyberGage360 were less than anticipated. Total MRS-related revenues, including MRS sensors, SQ3000 3D AOI systems and CyberGage sales, totaled approximately $3.6 million in the third quarter of 2017, up over 100% from the third quarter of 2016. Moving down the P&L. CyberOptics' third quarter gross margin rose to 47% from 44% last year's third quarter, reflecting the increased percentage of higher-margin products in our sales mix, including 3D MRS sensors, SQ3000 3D AOI systems and WaferSense products. We believe our gross margin percentage in the fourth quarter of 2017 will be at or up slightly from the third quarter level. Total operating expenses in the third quarter rose 5% year-over-year to almost $5.8 million, mainly due to higher expenses for sales and marketing initiatives and additional personnel. Stock compensation expense in the third quarter of 2017 totaled $240,000, and depreciation and amortization expense totaled $573,000. We believe fourth quarter operating expenses will be up very modestly from the third quarter level. Finally, cash and marketable securities totaled $21.2 million at September 30, 2017, compared to $22.7 million at the end of this year's second quarter. Cash has been used to purchase inventories for the larger sales of our newer products that were originally anticipated for this year's second half. Planned inventory purchases for the fourth quarter have been reduced, and we anticipate lower inventory balances by the end of the fourth quarter. As previously announced earlier this month, our Board of Directors has approved a $3 million share repurchase program over one year period through September 30, 2018. Shares will be acquired from time-to-time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission's rule 10B18. No shares have been repurchase thus far in the fourth quarter as we concluded it would be best to refrain from making any purchases until - after the release of our complete third quarter results. Thank you. I will now turn the call over to the conference call operator, who will poll you for any questions.

[Operator:]

[Operator Instructions] Our first question comes from Jaeson Schmidt with Lake Street Capital Markets. Your line is open.

[Jaeson Schmidt:]

Hey, guys. Thanks for taking my questions. I just want to start with CyberGage. Just to clarify. I know in the last call you mentioned, you had received an order for 2 systems in July. Is that the only revenue recognized in Q3?

[Subodh Kulkarni:]

Yes.

[Jaeson Schmidt:]

Okay. And then looking at KLA, when do you expect that relationship to be fully ramped? Is it more kind of first half '18, second half '18?

[Subodh Kulkarni:]

We definitely think we will be to more than 90% of their back-end inspection systems in the first half of 2018. I don't it will reach complete 100% for some reasons. They have a few customers, where make sense to have MRS, but I think it will approach 100% in the first half of 2018.

[Jaeson Schmidt:]

Okay. That's helpful. And then I know this year is set up more of a transition year for you guys, but have you guys noticed, have you guys think that you've lost significant market share in any of your product segments?

[Jeffrey Bertelsen:]

I don't believe so Jason. I mean, If we look at the declines we have seen from 2016 to 2017 were primarily related to this large projects wins we had in 2016, not necessarily the steady market share-based kind of products. If we look at the core business, without this large projects, I do believe the core business have actually grown in 2017 over 2016. It's just the absence of large projects it looks like we have declined. But intrinsically, we believe we continue to share with SQ3000 in the 3D AOI space. Our and 2D AOI market share are holding and in the scanner area, we really have a very small market share to be talking about market share because it's such a large market that. And hence, we've talked before in sensors and WaferSense/ReticleSense type products or semi sensor of product, there is more market share since we are designed in - into some OEM systems. And in the semi sensor area, there is really no competition to speak off. So overall, we don't think we have lost market share. It's just a lack of large projects that make it look like we have declined and may have lost market share.

[Jaeson Schmidt:]

Okay. That makes sense. And then the last one for me, and I'll jump back into the queue. I know at the time of preannouncement, you indicated backlog was 10.8 and it looked like now it's 11.2. Can you just talk about how visibility has changed since the time of the preannouncement if it has, or your confidence in our visibility going forward?

[Jeffrey Bertelsen:]

Yes. I mean, the slight change in the backlog, we just had one customer in order to one of our sales people, they had it in their e-mail box at September 30. So technically, it was backlog and then that's why the number changed a little bit. Regarding our visibility going forward, I think with respect to our current period guidance, I mean, in those numbers, we really don't have any large products.

[Subodh Kulkarni:]

Projects.

[Jeffrey Bertelsen:]

Projects included in our outlook. The biggest things in our outlook are couple of the large orders that we already are for. So I think our visibility remains pretty good for the current upcoming quarter gets a little fuzzier after that for the quarter beyond that. And in our current fourth quarter outlook, we really don't have any of these large projects revenues. And as they come in, we'll disclose them.

[Jaeson Schmidt:]

That's helpful. Thanks a lot guys.

[Subodh Kulkarni:]

Thanks, Jaeson.

[Operator:]

We'll take our next question from Greg Palm with Craig-Hallum Capital Group. Your line is open.

[Greg Palm:]

Good afternoon. Thanks for taking my questions.

[Subodh Kulkarni:]

Hey, Greg.

[Greg Palm:]

I guess let's start with kind of the large projects if we can. I know in the past you've disclosed kind of what your pipeline looks like in terms of being able to quantify how many customers are, but can you give us a son sort of sense with the pipeline is today, may be how it compares to where it was last quarter and maybe where it was a year ago as well?

[Subodh Kulkarni:]

Sure. So we had mentioned about 3 months ago that we were dealing with roughly 20-or-so large projects, and the value was roughly in the $30 million range. The - I mean, I know we have the project haven't materialized - none of the large projects have materialize. This year, some of the smaller projects have materialized, like the $1 million order we disclosed and part of that $4 million-or-so large project we were expecting - $3 million, sorry, we were expecting. So part of that got realized. But one of the larger projects have been realized to date. The good news if any is that, we haven't lost any of the large projects from what we can see from many of our competitors, and they seem to have all moved out from one reason or another. In some cases, they have changed the scope so like one large customer who wanted lot of SQ systems, they have decided that they would rather have 2D AOI for their application and that has changed the scope. Then the dollar goes down in those cases because of 2 existences for about lot lower than systems. So things have changed, but the number continues to be 20-plus for active large projects. Definitely, we track this up 5 to 6 very closely because those are the ones with significant potential. So we feel pretty good about the number of projects we have - large projects we have in the and how many of them being materialized in the next few months. Having said that, we intentionally difficult to know exactly when they will materialize. If they materialize and when they will materialize and exactly what the dollar value will be, which is why we have chosen to be conservative, if you will, and take them out of our Q4 guidance completely. And that's the way we will do it. Going forward, we will give - we'll tell you more about the base business. And this large projects, if and when they materialized, we'll be just transferred and disclose them right away.

[Greg Palm:]

Got it. That makes sense. I mean, in any way, the sort of help us at least categorize. I mean, if you kind of look back a year ago, with this kind of large project pipeline opportunity, what it would look similarly? And then I guess, in terms of the push outs. I mean, I'm just kind of curious, are these are projects that have gone through evals? And is there any way to sort of common denominator on why they are being pushed out?

[Subodh Kulkarni:]

Good question. In general, I would say in the last year or so, the number of projects continues to increase and the dollar value continues to increase. Okay? That's as I said, it's generally good news. The really get into - you have to take customer at a time and see what their rationale for push outs is. In some cases, it's just because their business was - is doing so well. They did not have time to take the line. In some cases as I mentioned, they decided ROI was better from 2D AOI instead of 3D AOI. So the reason seems to be varying quite a bit. But as far as we can tell, we haven't lost any of the large projects to competition, nor they have just decided not to purchase or something. But overall, the number of projects continues to increase, the dollar value continues to increase. So we feel pretty good about the next year or 2 years in terms of this large projects and where they are going to go.

[Greg Palm:]

Okay. Fair enough. Was curious as you think about the large projects. Is there any potential contribution from MX memory module inspection? And I know you've in the past talked about the potential for maybe additional orders, additional customer next year, but where is that opportunity currently right now?

[Subodh Kulkarni:]

Sure. So as we have disclosed before, we have one large memory manufacturer who has deployed a number of MX systems in their manufacturing today. That customer is planning on expansion in 2018 calendar year. And we definitely expect to pick a few MX system orders that will be meaningful contribution, and it will be classified in the large projects, if you will. It will be a multimillion dollar type opportunity for us. We are actively talking with another large memory manufacturer as well as Tier 2 memory manufacturers. And there - our visibility is lot less than the one customer we already have. But definitely, we expect some MX contribution in 2018 between the existing customer some - plus some potential other customers.

[Greg Palm:]

Okay. And I guess last one more broadly speaking, given kind of what's happened this year with some of the push outs, have you thought about ways to improve sort of the go-to-market strategy whether that be market investments? I think it sounded like you talked about adding some sales engineers, but anything else that you've considered to be maybe given what's happened this year?

[Subodh Kulkarni:]

Good question. And we wish we could answer it as to what exactly we are going to do to increase the probability of large projects materializing. But in - and we are a few sales people to increase our direct contact with the customers that's definitely give us more visibility and more touch points. Having said that, I don't believe the large projects didn't materialize in the first 3 quarters of this year because of lack of salespeople or lack of these are large companies. We have gone through evaluations almost all of these companies. They have liked our product. They have chosen as the winner. It was one other we have ahead of this year. I think it's more a timing thing than something lacking on our side. But we are - you touch on an important point, and we did say that in a press release that we are increasing the number of salespeople and the engineers to increase the touch points with customers. And we definitely through that good returns in the long term.

[Greg Palm:]

How should we think about maybe the associated P&L impact of that? I mean, is that I we just talking about a handful or some more significant?

[Jeffrey Bertelsen:]

Yes. I think we're - Greg, we're probably talking about 5 to 6 people. So I don't think it's a huge impact. A few of those would be in geographies, where the pay is - the market pay is a little bit less and what you see in the U.S. even so. I don't think it's a huge impact obviously, but there will be some incremental impact. But as you think about next year, it's probably not more than $0.5 million or something like that.

[Greg Palm:]

Got it. All right. Thanks for the color. Good luck going forward.

[Jeffrey Bertelsen:]

Thanks, Greg.

[Subodh Kulkarni:]

Thanks, Greg.

[Operator:]

Our next question comes from Dick Ryan with Dougherty. Your line is open.

[Dick Ryan:]

Thank you. Subodh, you talked about advanced packaging opportunities. Are you looking at things beyond your relationship with KLA? And what sort of opportunities are you looking at?

[Subodh Kulkarni:]

Okay. I mean, in general, what we disclosed in our press release this full advance packaging area, which is a new term that is getting more and more commonly used in the semiconductor industry these days is being created because of stacking of chips in the third dimension. And front-end getting squeezed slowing down are the good causes that is happening. But there is definitely of chips going on now in all the advanced electronics products that we are using today. And when they stack chips, there is in need to know what is going on in terms of optical measurements and dimensions and stuff like that. So we clearly - KLA is a major inspection systems in our semiconductor industry all the way from front-end to back end. And so - we have a great relationship with them in the back-end area. So obviously, we continue to talk to them very closely for opportunities in advance packaging, which can be generally classified as an area - in addition to back-end area. So there are obviously a potential good customer of ours. Since exclusivity with KLA, the mutual exclusivity we have MRS technology with KLA today for the back-end inspection area, we are talking to other customers from the mid-end/advanced packaging area as well. And some of them have are been known companies maybe not quite size of KLA-Tencor [ph], but companies like [indiscernible] Technologies and so on. So we are talking with other customers besides KLA in the mid-end and advance packaging area, but also fabs. As you can imagine, some of the fabs have already purchased our SQ3000 3D AOI product, and they see the value of MRS technology and what it can do in the PCB form. And the sensor is the same. So they clearly making advanced improvements in the feature by its measurement. And so we are talking to the semiconductor customers directly as well. Some of them are large enough that it makes sense for us to be engaged with them directly, both the mid-end and advanced packaging area. So, yes, the relationship going - summarizing the relationship in mid-end advance packaging area is going to be broader than just KLA-Tencor.

[Dick Ryan:]

So the mid-end capabilities, where you said your down 30-micron, that wouldn't crossover to any of the exclusivity that KLA has?

[Subodh Kulkarni:]

That is correct.

[Dick Ryan:]

Okay. Shifting to WaferSense. I think you mentioned, some new applications being introduced. Can you give us the time line on, and what those capabilities are?

[Subodh Kulkarni:]

Sure. So we have one application ready. It's really waiting for one of our large OEMs to decide when they want to launch that, they are doing the final data testing with their customers to make sure that, that's exactly the product they want to launch, so that should be - that is imminent. We actually thought it would have already launched by now, but obviously, it hasn't. But we definitely expect that to launch in the next few months here. We are working on - what we have disclosed in our Semicon [ph] tradeshows is that we are working on the third generation of our particle sensor APS3 and that we expect to launch towards the end of the year. That enables us to - that into their product, flat panel market, because what happens like now with our current APS are two product, its - the shape and the battery life frankly. In the flat panel industry, as you may be familiar, the lines are fairly long physically compared to a semiconductor tool. And so your - right now, we use a Bluetooth with our APS2 products. There is a distinct limitation and there is more importantly there is a battery limitation, the product last a couple of ours and more than that. Whereas in flat panel industry, they want several hours of rechargeable battery life and they want a longer distance, Bluetooth or Wi-Fi. So we are doing those things in our APS3 product and that should launch towards the end of this year. So two new applications coming in the next few months, APS3 for flat panel specifically and new application and OEMs sometimes in the next few months.

[Dick Ryan:]

Okay. And you've talked about the metrology kind of pausing as you get the new platform out the combo SKUs CyberGage. Is that causing any pause in the 3D AOI sector with these large projects, or what sort of - what is been the response that you've seen so far from those customers with a new platform?

[Subodh Kulkarni:]

I think it's really changing the dynamics of 3D AOI specifically. I mean, in the customers were in the market to look for a 3D AOI look at SQ3000 as offering that we have. And they usually evaluate it and compare it with competition. And those are evals we feel very good about. We are eval - winning majority of those evaluations right now and that's why SQ is growing so nicely. Regarding SQ CMM, it is an exciting product. It is kind of a unique hybrid CyberGage/3D AOI product. It certainly increased lot of customers to see the kind of resolutions and accuracies and particularly the speed that they can get the data with. I mean, with SQ CMM, we are generating - it is a one-sided scan unlike CyberGage, which is a dual complete 360 scan. But one-sided scan we can generate in less than 15 seconds with resolutions and accuracies that are actually better than CMM. Whereas in CyberGage, our accuracy is comparable to CMM, but the resolution is not quite as good as CMM. So there are pros and cons with CyberGage and SQ PMM, but overall, we feel pretty good about taking these two products for general purpose metrology market. Having said that, we send our press release these things do take time, and they are - this is - we are launching kind of disruptive technologies in an area, which has - which is not quite known for innovative things. I mean, the large big innovation that happen in general purpose metrology was probably 30 years ago. So it is taking time to get customers attention and valuations. But long-term, we feel pretty good about these two products and what we general-purpose metrology market.

[Dick Ryan:]

Okay. Thanks.

[Subodh Kulkarni:]

Okay. Thank you.

[Operator:]

[Operator Instructions] We'll take the next question from Myle Stanning [ph] private investor. Your line is open.

[Unidentified Analyst:]

Good afternoon.

[Subodh Kulkarni:]

Hey, Myle.

[Unidentified Analyst:]

Regarding the trend of miniaturization that you referenced in your release. Could you comment on whether you started to get some traction on your SQ3000 ultra? I think that that product has been - the attractive if a trend is significant?

[Subodh Kulkarni:]

Sure. So just for reference, SQ3000, the standard product we offer has a resolution of 9.9 microns. And SQ3000 ultra that you referred to, the ultra high-resolution has a resolution of 7 microns. It's a 30% improvement in resolution significant. We do sacrifice the speed a little bit in getting the resolution. So there is a trade-off going here to some extent. But despite that trade off, many customers like the high-resolution as the miniaturization increases. And some of the more recent evaluations and that we are getting, particularly in the higher end semiconductor kind of fab kind of players, they seem to grab it towards the ultra system rather than the standard system because their needs are - they are okay with slower speed of SQ3000 ultra. So we are definitely getting traction with SQ3000 ultra, but our major products the main revenues continued to be from that standard product.

[Unidentified Analyst:]

Okay. Thanks.

[Subodh Kulkarni:]

Thanks, Myles.

[Operator:]

[Operator Instructions] And there are no further questions.

[Subodh Kulkarni:]

Well, thank you for your interest and questions. We look forward to updating you with our Q3 progress at the end of Q4 progress at the end of Q4. Thanks, again.

[Operator:]

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