CyberOptics Corporation
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the CyberOptics' Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Bertelsen, CyberOptics Chief Financial Officer. Please go ahead, sir.

[Jeff Bertelsen:]

Good afternoon, and thanks for taking the time to participate in CyberOptics' fourth quarter 2017 earnings conference call. We are doing things a bit differently today. I will lead off this call with a brief review of our fourth quarter operating results, and then Subodh Kulkarni, CyberOptics’ President and CEO will discuss some of the promising opportunities we are now pursuing with our 3D MRS and WaferSense technologies. We will 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. Now turning to our results. Fourth quarter sales which modestly exceeded our guidance for this period totaled $13.2 million. We also reported net income of $503,000 or $0.07 per share. Sales of all three [ph] 3D MRS-based products increased 59% year-over-year to $3.8 million in the fourth quarter of 2017 from $2.4 million in the year ago period. Sales of 2D and 3D sensors primarily to OEM customers increased 25% year-over-year to $3.5 million in the fourth quarter paced by higher volumes of 3D MRS-enabled sensors and legacy 2D products. Fourth quarter sales of 3D MRS sensors to KLA-Tencor and Nordson YESTECH, our principal OEM customers for these products, increased by approximately 100% year-over-year. Sales of inspection systems declined 31% year-over-year to $4.6 million in the fourth quarter of 2017 from $6.7 million in the year ago period. Reduced demand for legacy 2D products more than offset solidly higher sales of SQ3000 3D AOI systems which increased nearly 70% year-over-year to $2.7 million in the fourth quarter. For the year, 24 new SQ3000 customers were added nearly double the number of new customers in 2016, as more manufacturers are recognizing the competitive advantages of this important inspection technology. Sales of semiconductor products principally the WaferSense product line increased 29% year-over-year to $3.4 million in the fourth quarter, reflecting favorable industry conditions and the steadily growing traction these productivity enhancement tools are gaining in the semiconductor industry. Sales of general purpose metrology products increased 26% year-over-year to $1.7 million in the fourth quarter, driven by legacy scanning products and services. One CyberGage360 system was sold in the quarter. As we stated in this afternoon’s earnings release, prospective metrology customers are showing interest in the recently introduced SQ3000 3D CMM system which incorporates metrology and AOI functionality in a single system. Moving down the P&L, CyberOptics fourth quarter gross margin declined slightly to 46% from 47% in the year earlier period due principally to the quarter’s sales mix. For full year 2017, our gross margin rose to 46% from 44% in 2016 reflecting the higher proportion of MRS-based sensor and system products and WaferSense products in our sales mix. We anticipate that our gross margin percentage in the first quarter of 2018 will be consistent with the fourth quarter level. Total operating expenses in the fourth quarter of 2017 rose 5% year-over-year due to increased R&D spending on new MRS-based sensors and systems as well as additional WaferSense products. In the fourth quarter depreciation and amortization expense was $626,000 and stock compensation expense was $255,000. We believe operating expenses in the first quarter of 2018 will be modestly above the fourth quarter level. We recorded a $414,000 non-cash income tax benefit in the fourth quarter due to the changes enacted in the recent federal income tax legislation. The benefit from elimination of the previously recorded deferred tax liability for the unremitted earnings of our foreign subsidiary in Singapore more than offset the write-down in our deferred tax assets resulting from the reduction in the federal income tax rate. As of December 31, 2017, we have $8.9 million of gross federal net operating loss carry forwards and $3.9 million of federal R&D tax credit carry forwards. Going forward we are forecasting an effective income tax rate of above 20%. Cash and marketable securities totaled $22.7 million at December 31, 2017 up from $21.2 million at the end of the third quarter. As previously forecasted, inventories declined in the fourth quarter and we will work to further reduce inventory balances in 2018. During the fourth quarter, we used cash of $240,000 to repurchase 15,000 CyberOptics shares under our previously announced $3 million share buyback program that extends through September 30, 2018. Finally as indicated in our fourth quarter release, we are currently forecasting sales of $12.5 million to $13.5 million in the first quarter of 2018. Thank you. I will now turn the call over to our CEO, Dr. Subodh Kulkarni, who will review some of our major initiatives.

[Subodh Kulkarni:]

Thanks Jeff. We have promising growth opportunities in each of our third markets, SMT semiconductor and metrology. Driving this opportunities is our 3D MRS technology. This unique proprietary 3D optical sensing technology enables significant differentiation in the market and we believe there is significant growth potential in all three verticals. This advanced technology is exceptionally well suited for inspecting complex microelectronics for mobile devices, automotive, and advanced application with stringent requirements. MRS sensors are also being utilized in back-end semiconductors and we believe we are poised to penetrate mid and semiconductor inspection and advanced packaging metrology applications, where our technology is very relevant. MRS technology provides a unique combination of attributes. Fundamentally, it’s faster and more accurate than other 3D optical sensing technologies. The secret sauce of MRS is really the algorithms. We believe the competitive advantages of MRS make it truly compelling in the overall inspection marketplace. As a result, CyberOptics is making strong headway in the 3D AOI inspection arena, rapidly growing market with projected 30% compounded annual growth rate through 2022. This is evident in strong sales growth recorded by our SQ3000 AOI system in 2017 and the significant year-over-year growth in the number of new SQ customers. In addition, we have enabled SQ3000 with metrology capabilities. In metrology, CMM is often used for accurate measurements of any object. CMM stands for coordinate measuring machine; these machines are typically large with granite slabs and touch probe or optical probes to measure dimensions of any objects. The 3D MRS-based SQ3000 3D CMM or SQ CMM in chart incorporates SQ3000’s AOI inspection capabilities with a comprehensive suite of CMM capabilities. We believe the SQ CMM will not only help us penetrate the general purpose metrology market, but politically metrology for advanced packaging. Coordinate measurements can be taken with SQ CMM in seconds versus hours for traditional CMMs. We believe SQ CMM is the first true in line coordinate measurement machine. We have a strong pipeline of large SQ and SQ CMM projects and believe some of these projects could come to provision in 2018. As previously discussed, we will not disclose the size or timelines of any of these potential projects or include them in our financial guidance until we receive further models. Our 3D MRS-based sensors are also performing well in their targeted markets. KLA-Tencor the market leader in semiconductor inspection and metrology is using MRS sensors in their back-end semiconductor package inspection systems where KLA as a market share leadership position. Our MRS sensor technology is now able to inspect cracks and other defects below 30 microns in wafer dices which is relevant to for mid-end semiconductor inspection. We anticipate adding OEMs in some customers to our initiative to apply MRS-based sensor technology to mid-end semiconductor inspection, where we believe our technology will be significantly faster than other sensing technologies currently available in the market. We are demonstrating our mid-end inspection capability to several semiconductor manufacturers and believe initial sales of these sensors are possible during the second half of 2018. The inspection in metrology for advanced packaging is another emerging opportunity for our MRS technology. Integrated circuit chip packaging technology has been advancing at a rapid pace with smart mobile devices driving miniaturization and cloud computing driving our performance requirements such as processing speed to meet increasingly demanding miniaturization and performance requirements more components have to be placed on limited circuit board real estate. Packaging components vertically in 3D allows for greater amount of functionality to be factored into chip without having to increase its size which is a huge benefit. A memory chip incased in this type of advanced packaging can also result in faster processing speed and significant power savings. Adoption of advanced packaging technology is now at the early stage, but is expected to grow rapidly. Market research firm you will estimate that advanced packaging will account for over 40% of chip production by 2020. We believe our MRS technology is well suited for many inspection and metrology applications in this area, since conventional inspection technologies tend to be too slow or too united at. In all, we see exciting growth potential in advanced packaging inspection and metrology. Finally, I will turn to our WaferSense and ReticleSense product line for semiconductor manufacturers. This portfolio currently encompasses six wireless measurement devices designed to improve yields and tool up time in the semiconductor fabrication process. This high margin wireless devices are used for measuring leveling, vibration, humidity, teaching, gapping and airborne particles that can cause contamination. And even thinner and lighter airborne particle sensor to maximize tool compatibility was lost in January. All of the major semiconductor manufacturers worldwide have adopted this wafer or reticle shaped real time measurement devices. There are about 170 active fabs worldwide today, on average each fab has about 500 tools and each tool can be outfitted with six WaferSense products priced at about $20,000 each. Assuming CyberOptics attains only 10% of the available slots, out total market would be 50,000 units or very large in relation to our cumulative historical unit sales from this product, where we have sold about 3,000 units so far. While all of these potential markets may not be available to us due to tool sharing or because some older fabs may not need our yield and productivity improvement tools, our long-term WaferSense opportunities nonetheless large and growing and we anticipate robust demand for this product line in the years ahead. Adding new WaferSense applications combined this have growth increases our potential available market. These devices are also starting to be adopted by manufacturers of flat panel displays. We are very optimistic about CyberOptics future given the proven competitive advantages of our suite of proprietary MRS-enables sensors and inspection systems. The revenue potential of mid-end semiconductor inspection and advanced packaging metrology and the steadily growing acceptance of our WaferSense products. Thank you. Now Jeff and I will be pleased to take any questions.

[Operator:]

Thank you. [Operator Instructions] And first we’ll go to Greg Palm with Craig-Hallum Capital Group.

[Greg Palm:]

Good afternoon, thanks for taking my questions. Can you guys hear me all right?

[Subodh Kulkarni:]

Yes.

[Jeff Bertelsen:]

Yes.

[Greg Palm:]

I wanted to start with the guidance, I think we and the investors can appreciate the conservatism there, the exclusion of any major pipeline orders, but wanted to dig in and so maybe your expectations a little bit more on the base business, I mean you did 53 and change million in 2017 without any major pipeline orders, what’s your sort of expectation on that base business for this year?

[Jeff Bertelsen:]

I mean if you, if we kind of think of our businesses -- is our older kind of 2D legacy type products, we think that is basically flat in terms of our future. We’re not looking for any significant growth there or any significant declines, and that is in the high $20 million. And then we have our MRS-based products which as we reported today have been growing significantly and also the WaferSense products that have been growing significantly. We think Greg, long-term that we have, terrific opportunities there, and we think over the long-haul we have the ability to grow those platforms significantly. I think in terms of guidance, we’re trying to be conservative and to stick to just guiding for the current quarter out and, but definitely we expect good growth from those products moving forward both of our growth categories MRS and WaferSense.

[Greg Palm:]

That’s good color. Maybe on that, Subodh in the past you’ve given some numbers around the pipeline and for major orders in terms of customer count value et cetera. Can you maybe give us an update there?

[Subodh Kulkarni:]

Sure Greg. The number of large projects which typically we define large projects as a single order that is more than $1 million. So, we have about more than 20 right now in the pipeline, and the dollar value is well north of $40 million. Some of them do, because these are Fortune 100 companies, very large companies and the numbers that they give us are fairly substantial. So, we don’t necessarily take that entire number they give us, so giving some practical haircut to their numbers, still takes us to well high of $40 million. So, these are substantially large projects for a company of our size. We do expect as we said in our press release to have some this year, but we haven’t included them in the guidance for Q1.

[Greg Palm:]

Got it. And then you mentioned potential for mid-end semi inspection revenue in the second half potentially, which I guess to me would imply you are pretty far down the road with either partners or customers. So, curious if you are expecting to make some sort of announcement at some point, and I guess we assume that mid-end will follow some sort of exclusivity relationship similar to the back-end or not necessarily?

[Subodh Kulkarni:]

First on the technology side. So, we are definitely making very good progress in mid-end sensor development right now. So, in our lab we have working sensors that are capable of measuring 30 microns or above feature size which definitely gets us into mid-end. So we feel confident that we will have a commercial product sometime in the second half of this year. We are talking to multiple customers right now, some fab customers who are interested in having some kind of a direct relationship and as well as some OEMs. The value proportion with MRS and mid-end is quite solid. We are significantly faster by at least factor of 2x or 3x than the best available technology right now, which is significant in any industry and certainly in the semiconductor industry. So, we are getting a lot of interest from both fabs as well as OEMs, unlike the back-end area, where we have a mutual exclusivity with KLA, we will prefer obviously not to have anything like that in the mid-end, partly because it’s a much larger market, but also because it’s a much more fragmented market than the back-end market where KLA has a very strong position. So, we would love to service more than one customer or two customers in this area, and as I said some of them will be fab customers who are interested in dealing with us directly.

[Greg Palm:]

Great. It does perfect. And Jeff, two quick house keepings, I think you mentioned G&A and then it sounds like you bought back some stock in the quarter, can you just repeat what you said around those two items please?

[Jeff Bertelsen:]

Yes, so we bought back 15,000 shares in the quarter and spent $240,000 doing so.

[Greg Palm:]

And then D&A?

[Jeff Bertelsen:]

I think maybe the - Yes that was $626,000.

[Greg Palm:]

Perfect. All right, I’ll hop back in the queue. Thanks guys.

[Jeff Bertelsen:]

Thanks. Thanks Greg.

[Subodh Kulkarni:]

Thanks Greg.

[Operator:]

And moving on, we’ll go to Jaeson Schmidt with Lake Street Research.

[Jaeson Schmidt:]

Hi guys, thanks for taking my questions. Just a follow-up on some of the previous questions. Can you talk about how your current visibility for the year is and if you’ve seen any improvement in that visibility over the past three months?

[Jeff Bertelsen:]

I think, generally our visibility is good for the next quarter out, so like for example for the first quarter, we feel very comfortable with the guidance confident, with the guidance that we gave today. I mean in particularly in this case since we are about halfway through the quarter, I think our visibility is, I think it’s improving somewhat Jaeson, I think, when we -- the pipeline that Subodh talked about and that we’ve been talking about for the last few quarters, and where we certainly saw some push outs last year, I think, in general our visibility regarding those projects is better and I think it’s starting to firm up a little bit in some of the instances. So, I think, from that perspective, it’s getting better and I also think, if we look at some of our OEM customers, where we’re seeing attach rates start to pick up and smooth out. I think our visibility is getting, better there as well. So, I would say it’s a little bit better than what it has been in the past, but generally we’re pretty good for the next quarter out.

[Subodh Kulkarni:]

To add color to that Jaeson, even though we haven’t announced any large project win per se. Some of those large customers have ordered either their SQ or the SQ CMM product. So it has been coupled units kind of orders that we didn’t disclose for obvious reasons that is not large enough to announce. But the fact that they have ordered a couple of units gives us a solid indication that they are moving ahead, they are testing the final part and before they issuing the large order. So, we feel good about this year and the visibility we have right now.

[Jaeson Schmidt:]

Okay that’s helpful. And then just looking at Q1, can you help us with some of the puts and takes to that guidance at least direction way by segment?

[Jeff Bertelsen:]

Sure. So, I think if we sort of look at the, guidance, I would say, if we base it up, where we’re having Q4, I’ll start with the OEMs, with the OEM center category. I think we’re looking for our, little bit stronger quarter sequentially in Q1 versus Q4. If I look at the SMT systems, inspection systems category and the metrology category I would say, all in those two categories will be roughly consistent with 4Q. And then if I look at the semiconductor category, I would just call that roughly consistent with 4Q as well. So, I think probably where we’ll see, and again given the range at $12.5 million to $13.5 million, I mean I think, and kind of focusing on the midpoint there. I think we’re roughly consistent with maybe upside and OEM sensors.

[Jaeson Schmidt:]

Okay, great. I really appreciate that. And then the last one from me and I’ll jump back in the queue. I know you talked up the SQ 3D product quite a bit, just we interrupt those comments that there has been any sort of shift or shift of focus away from the CyberGage or can you help us kind of figure out what the CyberGage pipeline, customer engagements look like at this point?

[Subodh Kulkarni:]

Sure Jaeson and that’s a good question. So, what we are doing right now for metrology customers, we are taking both products to the market, CyberGage as well as SQ CMM. And both products have very unique logic propositions. CyberGage hence may recall is it’s fast, accurate, easy to use, a full 3D scan. But it has some limitations on the physical size, but more importantly a limitation on the resolution. The high resolution limitation of 50 micron with CyberGage. SQ CMM also has some very good value proposition in terms of fast, very accurate, very high resolution, easy to use. But it’s not a full 3D scan, we are doing one-sided scan and the volumes are a little different for SQ CMM and CyberGage. There are pros and cons with both products, when our sales team is taking both products together it certainly seems to be getting better traction than just trying it with CyberGage where we were not meeting the resolution capabilities in some cases. The volume, the large project pipeline definitely seems to be getting dominated with SQ CMM than with CyberGage and that we believe is happening because SQ CMM as we discussed in our call immediately gets viewed as an in line product. Basically SQ CMM can generate full scan in about 15 seconds where as CyberGage even though its significantly faster than CMM tools it takes about 3 minutes. So that 15 seconds versus 3 minutes does seem to make an immediate difference in terms of our customers perception of what is true in line versus not. And the resolution of the SQ CMM is higher resolution, higher accuracy than CMM when a CyberGage is not quite there with respect to CMM. So, that hopefully explains to you what’s going on, but CyberGage continues to be a very interesting product, it continues to get a lot of attention. We have a good pipeline going right now. But clearly the opportunities are getting dominated by SQ CMM in the metrology space right now.

[Jaeson Schmidt:]

Okay thanks a lot.

[Subodh Kulkarni:]

Did that answer your question?

[Jaeson Schmidt:]

It does, thank you.

[Subodh Kulkarni:]

Thanks.

[Operator:]

[Operator Instructions] Moving on, we’ll go to Ross Strehlow with RBC Wealth Management.

[Ross Strehlow:]

Yes, hi Jeff and Subodh.

[Subodh Kulkarni:]

Hey Ross.

[Jeff Bertelsen:]

Hi Ross.

[Ross Strehlow:]

So, let’s talk about, let’s go back and talk about the sales of the SMT inspection systems down 31% year-over-year. Are you guys losing market share?

[Subodh Kulkarni:]

No we definitely don’t think we are losing market share certainly in 3D AOI the category of interest which is SQ where you see that kind of significant growth year-over-year. The number did get dominated by 2D AOI product line where we definitely saw a decline from fourth quarter of 2016 to fourth quarter of 2017. But I don’t think it was as much because of a loss of market share, we had some good solid orders in the fourth quarter of 2016 from couple of large Korean electronics manufacturers who were deploying a number of the QX systems in their sub-cons in Korea and Vietnam and it was a, to 2016 in general it was a very good year for our QX product line and that just we didn’t get those repeat type orders in 2017. So most of the decline you saw in SMT was because that QX product line, but SQ continued to grow rapidly even in fourth quarter. It just couldn’t grow enough to offset the decline of the QX product category. So I don’t think…

[Ross Strehlow:]

Yes, I get that Subodh that the, the MRS is and the SQ product line is doing well, I’m just wondering if you guys are losing market share, because you don’t have the resources to really market that product, in your older stuff. And then part of that is what you expect in that product line and where are you from a marketing standing point with that older technology?

[Subodh Kulkarni:]

As we have said before, we continue to add to our sales and marketing team for SMT as well as metrology products. We clearly did decline QX, the revenues in 2017 with respect to 2016 as I mentioned earlier, because of couple of large customers having given a lot of volumes in 2016. But I don’t think it’s fair to take that decline and associate that with general market share decline; couple of customers can drive our numbers because of the size of these large customers. But overall we don’t think our SPI or 2D AOI categories are going to decline this year, which is why we saw our traditional business should be flattish this year, we are not expecting any growth, but we are not expecting any decline in either SPI or 2D AOI. Certainly, we expect the growth to continue in 3D AOI which is SQ product.

[Ross Strehlow:]

So you figure that the SMT area is just declined last year and is going to stay flat this year in general and that and you guys are right along with the market is that your that’s kind of what you are saying, correct?

[Subodh Kulkarni:]

Yes, in general SPI and 2D AOI are flattish markets and even though we declined in 2017 compared to 2016 as I said they were driven by a few customers with large mixed orders in 2016, we don’t think we are losing fundamental share. So, we expected to be flattish in 2018 compared to 2017 for SPI and 2D AOI.

[Jeff Bertelsen:]

Right, exactly. Yes, we would be those as flat and of course the SQ growing. So…

[Ross Strehlow:]

Yes, I got it, yes we get that. Okay and then on the WaferSense area, I know you didn’t have a great year, last year on the WaferSense what do you expect your growth rate to be this year?

[Subodh Kulkarni:]

Good question Ross, I mean we definitely saw a nice pick up in the fourth quarter in WaferSense where we grew close to 30%. And we as you know the semi cap industry as done very well in all of 2017 and continues to do well in 2018. And we in the first half of 2017 we were concerned why we are not seeing the growth rate in WaferSense that the semi cap industry in general were seeing. And it seems that when the fabs are buying new equipment we don’t get the benefit as much, but once they turn the fabs on and start running into yield and productivity issues, which seems to typically happen in the about a few months after the fabs have been turned on. We definitely are seeing a pickup in demand. We can go literally take a look at customer-by-customer and when they turned the fab on and when we are getting the larger orders and we can see that delta, when their fab got turned on and when we are seeing the orders. So, we are definitely expecting the benefit that the semi cap industry saw, in all of 2017 to reflecting our 2018 numbers don’t know exactly what the overall growth rate is, but we grew overall, overall we grew about 10% last year we certainly hope to do better than that this year given what the semi cap industry saw in all of 2017.

[Ross Strehlow:]

Okay that’s great. And then, you have six modules right now on the WaferSense, did you say that you are going add more modules this year and then how many do you think you are going to add, how many more?

[Subodh Kulkarni:]

We have, you are right, we have six right now we plan to add to one, hopefully soon in conjunction with an OEM. We and we are adding a flat panel version of our particle sensors that is kind of opening up a new customer base and flat panel industries are very large industry. So, we are starting to take our WaferSense and leverage it in a whole new customer base. But in addition we are adding a seventh application if you will in the WaferSense category. We will be hopefully announcing that soon. But it depends on our OEM who we have partnered with that in that area.

[Ross Strehlow:]

So when you add a module, do you have a tendency for existing customers that already have the WaferSense, do they, are they able to add that module where you pick up some incremental revenue or how does that work?

[Subodh Kulkarni:]

Yes, usually I mean, I don’t want to use the word module, I mean we use the word application in this case, so when we add a new sensing application which is the case here, we obviously have the benefit of going to our existing customers who have purchased one other, some other application of WaferSense. They are obviously in our database, we contact them we let them know and that’s usually where we get our first few orders. In this particular case, however, we are partnered with an OEM partner, a large equipment company and they plan to launch it with their customer base and they have the reach into all their customers and they have a significant market share. So it should be going primarily to their channels rather than through our WaferSense channels.

[Ross Strehlow:]

Okay very good. And then did I read this right that your OEM sensor, not your systems, but your sensor sales on the OEM basis were up 100%?

[Subodh Kulkarni:]

So that’s basically KLA-Tencor and Nordson sales were 100% year-over-year in Q4.

[Ross Strehlow:]

Yes that’s what I meant. What type of growth, that’s awesome, what type of growth do you expect this year in that area?

[Subodh Kulkarni:]

I don’t think it would be 100%, it will be more than that. But, we definitely expect, so let’s talk about fundamentals of why that growth is so high. So KLA-Tencor as mentioned earlier we have a mutual exclusive agreement with them for back-end inspection. And what’s going on is, the attached rate of our sensors to their back-end inspection is increasing. So through all of 2017, we were probably attached to roughly half of the equipment that day sold in the back-end. This year we won’t be close to 100%, but we will be closer to 85% or 90%. So that’s where the big increase you see in the growth rate. So even though KLA’s business is not growing anywhere close to 100%, we are definitely enjoying the benefit of a higher attached rate to their existing business. And in addition Nordson who has a terrific channel primarily in the U.S. but all over the world, they are getting the benefit of our differentiated sensor technology in the SMT market and that is benefiting us. So the combination of the two, we definitely expect faster growth this year, I don’t think Q4 is 100% is going to be quite there, we definitely expect very good growth in 2018 from those two customers. And we will add some more OEM customers as the year goes on as we discussed with Greg earlier, we definitely planned to add some OEM customers in the mid-end space and even with the dollar value may not be significant in 2018 strategically they become very important, because they will be the ones that could help us for serious growth in 2019 and beyond time period.

[Ross Strehlow:]

Yes, I would submit that that would be a very nice thing for CyberOptics, because once you land those customers, the sales cycle is done and you just reap the benefits.

[Subodh Kulkarni:]

Yes, I mean usually those agreements, you’re right those agreements usually go for 10 years or longer. So they are very, very good agreements for both partners actually.

[Ross Strehlow:]

Yes that’s very good news. You haven’t talked anything about the memory chip module inspection systems. What’s happening there Subodh?

[Subodh Kulkarni:]

Sure. So as we have discussed before one of the three large semiconductor manufacturing companies has installed our MX which is a 2D memory module inspection system and we have populated most of their lines with MX product. They are expanding and we are talking to them about more MX products right now. They are also interested in upgrading the MX systems that they purchased from 2D to 3D so incorporating MRS technology. Since all kinds of active conversations going on with that particular customer to either upgrade their existing MX to 3D or add more MXs. So that's one of the large projects we are dealing with right now. In addition, we are talking to the other two -- memory -- large memory manufacturers as well as the Tier 2 memory manufacturers. The TL2s frankly the volumes are just not high enough. This industry seems to be dominated by three large memory manufacturers. We hope one of the other two is going to pickup MX or some variant of MX for their use. But again, it's in active discussion. We don't have any concrete data point on when exactly -- if they will order and then exactly they will order and what the volumes will be. These are obviously large companies, so the volumes can be substantial if they decide to deploy it. But, we are pursuing and makes our MX [indiscernible] opportunities and hopefully we'll be able to report some of them as the year goes on.

[Ross Strehlow:]

Okay, great. And then, finally for me, let's just talk about your metrology area a little bit. You really didn't break out any kind of revenues that I saw on those metrology products in addition to the CyberGage. What is happening with that division that you acquired?

[Subodh Kulkarni:]

Well, we did break out --

[Jeff Bertelsen:]

Yes. So like and maybe what you are referring to Ross was the CyberGage360 in particular but our metrology revenues were $1.7 dollars in the quarter up 26% year-over-year. We sold one CyberGage system in the quarter.

[Ross Strehlow:]

Okay. So that's part of that I'm sorry.

[Subodh Kulkarni:]

If you go to your general question, I mean we acquired LDI more than three years ago now. When we acquired them, they were about $5 million to $6 million business. We had a great year in 2016 where we did close to $8.8 million essentially. And then, last year it came down a little bit because we had some big onetime wins with their CT scanner the product that we resell, which we didn't repeat in 2017. So, it came down a little bit but still I mean as you see in Q4, we did grow in Q4. And we definitely expect to grow this year in the metrology products area driven primarily by the SQ CMM but also CyberGage. I mean CyberGage will grow just as we don't see the explosive potential in CyberGage that we seen it as QCMM right now. But the combination of the two, we definitely believe is going to help us grow the overall metrology products quite a bit this year and beyond.

[Ross Strehlow:]

Honestly, when you step back a couple of years ago the CyberGage was started by you and us as a real breakthrough product and that has been honestly very disappointing. Do you think it's -- you think the biggest factor is the resolution, if not what it needs to be or is it -- that it's got the size limitation for parts that it can measure.

[Subodh Kulkarni:]

I think there are three factors here, Ross, and you're right. I mean we definitely just like you, we are disappointed in the actual [use] [ph] of CyberGage. Having said that, if you come with us to any trade show or look at customers taking a look at the product it generates a lot of enthusiasm, a lot of people want to find out what exactly we have done. So it does have the potential but they are reluctant to buy it. And as we have discussed in the past, I think there are three factors here. One is resolution, we touched on that. If resolution is worse than CMM and most customers use that as a benchmark in this area. Second is the volume. We have a cheesecake size limitation and most metrology customers are used to using a granite slab and they don't have any volume limitation. And last, but not least, it is a totally disruptive technology in a very mature kind of industry and it takes time. I mean you just use multibillion dollar, it's dominated by big name companies like [indiscernible]. Frankly, there hasn't been no innovative product in this industry for the last 25 or 30 years since CyberGage came along. And you are dealing with quality assurance engineers or quality departments in general. And we are trying to sell the product to a quality assurance engineer who clearly sees that if they deploy the product their job may be at risk here because we are making the whole process automated. So we do run into that basic human dynamics of two newer technology and it might take my job away, how am I going to push it kind of discussion. But we ever said, we continue to get good leads and we think it will continue to grow it just does not have that explosive potential that all of us are hoping for.

[Ross Strehlow:]

Yes. I get it. And the question is, do you have any specific plans. What are your plans to make that product or do you think it's not worthwhile really pursuing to make that product work. I mean really work well where it can have some dynamite sales.

[Subodh Kulkarni:]

Well, I think if you see what we have effectively done. We took a couple of the limitations that CyberGage has particularly the resolution limitation, but also the volume limitation. And really that's how we came up with the SQCMM. SQCMM is a better resolution and accuracy than the regular CMM. So they took care of it that way. And the volume of SQCMM is different. I mean in CyberGage we can handle 20 centimeter diameter by 10 centimeter high cheesecake. In SQCMM, we can handle 65 centimeter, and then 65 centimeter width but three centimeter height. The height is not as large as CyberGage but for many electronics oriented customers who deal with typically flat objects whether it's your tablets or PCs or keyboards or that kind of stuff. It all fits into that SQCMM window. So we really have taken CyberGage and some of the hesitation customers had and addressed them most of them anyway to SQCMM. We continue to make improvements in CyberGage. We recently introduced a dual fringe thing just to improve the data quality even better. And we continue to make some speed improvements and we will continue to do that. We are not going to give up on CyberGage by any means because it does have serious potential long-term. But SQCMM at least in the next three to five years we see it as a much more exclusive potential of CyberGage right now. They go very well together in trade shows and when we talk to customers. They see the natural value of each product when they are together.

[Ross Strehlow:]

Yes. I get that and that's probably that combination product sounds like it's really going to be your work horse going forward. How much of your large 20-plus projects that you're working on is that combination product.

[Subodh Kulkarni:]

SQCMM is in roughly half of those large projects right now. So it is beginning to dominate the large project pipeline right now.

[Ross Strehlow:]

Okay, guys. Thank you very much. That's all for me.

[Subodh Kulkarni:]

Thanks Ross.

[Jeff Bertelsen:]

Thanks Ross.

[Operator:]

And moving on we will go to [Eric Slade] [ph], Private Investor.

[Unidentified Analyst:]

Hey, Jeff. How you're doing?

[Jeff Bertelsen:]

Hi, Eric.

[Unidentified Analyst:]

Can you hear me? Okay.

[Jeff Bertelsen:]

Yes.

[Unidentified Analyst:]

Actually most of my questions were answered. I guess one was I didn't come back to the story until last fall actually. So I read the transcripts from a year ago 2017. And if I recall, there seem to be a lot of promise I guess centered around the CyberGage. And I think it was new but it was the CEO who talked about how promising and -- so promising that the first half of the year -- this last year we would see a ramp. And then, that didn't happen. And then, in the second half, I guess my question is you guys said you were talking to the couple of CEOs, you said you're talking with the customers. Did they go away? Do they have the same interest? Or is it just one of these things that long sales cycle, new technology. I mean these guys still pretty hiding in the boat type of thing. I mean, the idea from your last -- I think it was Ross who asked the last question that CyberGage seems now like it's being not forgotten about but sort of pushed out because it's not that realistic that it would be a big thing in the short-term, I guess that's the way to put it.

[Subodh Kulkarni:]

Hi, Eric. This is Subodth here. I will answer the question. Since, I'm the one who has made this comments. Clearly, as I have discussed with Ross, the previous caller, we are disappointed in CyberGage sales in 2017, no debates about that. When we entered 2017, we had just launched CyberGage initial -- based on the initial feedback and reaction. We were definitely counting on bigger sales from CyberGage than what actually transpired. Having said that, I don't think that indicates lack of interest on customers, customers continue to be interested. They continue to admire the technology and the innovativeness of the product and all those attributes but they are reluctant to give us a feel. And it does come down to those three factors I discussed with Ross, resolution limitation, the size limitation, but most probably -- most important it is a new disruptive technology mature stagnant kind of a market and that does create a challenge for a small company like us trying to displace a large giant like [indiscernible] in the metrology lab with the new technology.

[Unidentified Analyst:]

How does that, you have been in technology for years. How does that come up about, I can understand the growth market, some is growing at some ridiculous rate or a good rate. You get your opportunities. When you are -- I guess to understand this product, if you get into these big sort of mature market, once you get in there because of the size of your company obviously that's huge for you. How do you correct that if you are battling purchasing agents, who are going to call them whose job is somewhat at risk because of this product and also because they have so sat in their ways, they are getting by with today's -- yesterday's technology which is doing them fine in their mind right now. How do you correct something like that just for my?

[Subodh Kulkarni:]

Good question. I mean it's not easy obviously any time, if you look at any of the -- many textbooks and business case studies are done on disruptive innovation and how difficult it is. And then, you go through the threshold point when things take off and it's always a challenge for any company that is trying to do disruptive innovation in the existing market. And we are typically going through those pain points if you all -- or [indiscernible] if you will, with a new technology, invariably it ends up coming down to the customer. If the customer need, grow to the point where they are experiencing some pain with existing current technology than they are willing to look at new innovative solutions. If the pain point that they're experiencing is relatively low right now then they are reluctant to try something new and that's really what we're finding with CyberGage, some large companies who are having some issues with conventional CMM technology are open and they are willing to talk and those are the areas where we are going to grow. But it is taking time clearly. We have taken and now look at a lot of different case studies. And even if you go back to -- I hate to go back that far but in 1967 Shockley invented a transistor and it took time and their labs almost 5 years to make the first commercial transaction with the transistor. And now with hindsight, we all look back and say, I mean vacuum tubes are succeeding, when transistors were available for almost five years. But it just shows you how long it takes for a disruptive technology to overcome existing giants of conventional technologies.

[Unidentified Analyst:]

But, now without -- regardless of that hopefully that it happens, but you have plenty on your plate without that right?

[Subodh Kulkarni:]

As I say, some of the things that we have done very cleverly in my opinion is taking the disadvantages or whatever the consents that customers are expressing at CyberGage and making them into a positive with the SQCMM and that definitely getting traction. So I think learning from what customers are saying is obviously very important in business. We are learning as we are testing CyberGage and whatever issues they are coming up. We are trying to address that with this SQCMM. So as this year goes on hopefully we will be able to report some large events of this SQCMM. But many of those opportunities is getting initiated by CyberGage. So let's not forget the value of having a disruptive innovative product in the portfolio.

[Unidentified Analyst:]

Right. Okay. I guess this would be my last question. You've actually traded your stock out in the 90s. I took a long hiatus for reasons. But here is the question, when I was like trading stocks, you hardly had -- Jeff, probably to address this one. You are getting the short position and then I started to get buy the stock, a month or two ago whatever. And I noticed that and I checked with you Jeff, you have a short position like last I saw was like a million share short and like 6.9 million float, is that correct?

[Jeff Bertelsen:]

Yes. I think it's more like a 1.2 million and we have just about 7 million shares out.

[Unidentified Analyst:]

Okay. So, here is my question. It's a little scary being an investor with that short positions, so either of these guys have someone hanging out at the back of your garage so to speak knowing what orders to get shipped and don't, are they clairvoyant or they are completely oblivious to what could happen to them being short that type of a flow -- on some explosive or they studied your technology and then they said these guys just don't have it. Of course, you probably have no idea why they are short that stock, I would assume.

[Jeff Bertelsen:]

No. I mean we don't -- who will rely and our job is just to grow the business. So that's what we are focused on doing.

[Unidentified Analyst:]

No. I figure that that's the case. I just found it very odd to have that much shares short. But, the good news for you guys, you guys performed and that's short is going to run this stock right up the flag pole, I have seen it before. So, just get those shorts to cover. That's all we want.

[Subodh Kulkarni:]

We are focused on the business and growing the business, we can't worry about why the shorts are doing, what they are doing.

[Unidentified Analyst:]

No, no. Exactly. If you guys grow the business at a good rate and you can some of the lumpiness out, will have a nice long-term growth trend with everything, the shorts will perhaps take care of themselves so. But, I guess, that's it from me. I appreciate that.

[Subodh Kulkarni:]

Thanks Eric.

[Jeff Bertelsen:]

Thanks Eric.

[Operator:]

And next we will go to [Myles Jennings] [ph], Private Investor.

[Unidentified Analyst:]

Good afternoon, Subodh and Jeff.

[Subodh Kulkarni:]

Hey, Myles.

[Jeff Bertelsen:]

Hi, Myles.

[Unidentified Analyst:]

Hey, I just have two areas I'm curious about in light that even discussing the CyberGage. I think I heard in one of these calls that you were planning to release sort of a mini gage that would address the very small scanning requirements in the marketplace. Can you give us sort of a comment on that?

[Subodh Kulkarni:]

Sure, Myles. This probably goes back a couple of quarters ago where we were getting the input that resolution, limitation of CyberGage had to be dealt with in some applications. But really we answered that through the launch of SQCMM.

[Unidentified Analyst:]

Okay.

[Subodh Kulkarni:]

So we will take care of that. So we are not going -- we are not planning on putting out another version of CyberGage with improved resolution that is what we call SQCMM effectively.

[Unidentified Analyst:]

Yes, excellent. The second area of interest is, I saw somewhere on your Web site that you have a system universe of over 3000 solder paste sort of legacy machine. At the same time, when I look at the SE3000 your new solder paste release, which I think was in the mid-quarter, so we probably don't have too much information on that. But in any case your excellence is of twice or the ratios of performance about twice what the old machines were and since you have this huge base of solder paste customers already. I think you must have some sense of the introduction effect and whether that seems to be a good opportunity. Perhaps you could just make a comment on the SE3000.

[Subodh Kulkarni:]

Sure. So first a little bit about solder paste inspection in general that market is – roughly global market is – roughly about $150 million and we see multiple reports out there. Some reports say it's flattish, some report says it’s growing 5% to 10% a year, but it's somewhere in that range. So let's say $150 million globally somewhere between 0% to 10% is what the external dynamics are. Today's market share, we are a relatively small player in that market with about 3% to 4% market share. The market is dominated by Korean company Koh Young with about 35% to 40% market share. And we have a good current product line, we sell two products in that market, right now, SE500 Ultra and SE600. SE600 is a high performance system till SE3000 came along and SE500 Ultra is the higher speed but lower accuracies and those kinds of things. But we took our MRS technology and launched SE3000 in that market for high-end customers who really wanted higher performance than SE600 and frankly were willing to pay us a higher price. Right now, SE600 is competitive with Koh Young [indiscernible]. So we believe SE3000 is definitely the best performing solder paste inspection system out there. Having said that not many customers in solder paste inspections are interested in a very high performance high price system. Some obviously are which is why we launched a product, but it’s not like we can go back to all of our installed base of solder paste inspection system and they would be immediately attracted to SE3000 because frankly we don’t want to give the low price with 50,000 that’s what they are used to expecting in the solder paste inspection area. So, we feel good about growing our market share in SPI taking advantage of the MRS based SE3000 system. But certainly it’s not kind of growth that we are expecting from 3D AY and the market is growing 30% and is larger than SPI. So overall in the inspection system definitely expecting significant growth when it’s primarily still going to be driven by SQ and 3D AY space. But, SPI will be a contributor over the next few years with SE3000 and existing portfolio. Does that help you with that background?

[Unidentified Analyst:]

That is helpful. And I’m still reminded that internally you had to have made a decision to release the 3000 -- SQ3000 AOI first. And that decision was certainly an excellent one. And this SE3000, I'm sure we'll gain a pretty good share in that area, but the SQ3000 has turned out to be really a whopper product. And I hope there will be other MRS applications in the future. Thanks very much guys.

[Subodh Kulkarni:]

Yes. And certainly customers value having two products that are very similar in their user interface and functionalities and programing and everything. So we are already getting good opportunities that high-end customers who don’t mind a higher price or higher performance are wanting both SQ as well as the SE3000 systems in the same line. So, definitely there is value in having two high-end products and approaching the customers.

[Unidentified Analyst:]

By the way, just to finish, I think you Web site discussion of your applications, it was really very helpful, you go through the automotive and various aspects of how the SQ3000 has been employed successfully. And I think it helped a lot as far as looking at those markets and it seems as though each one of those markets could also me a vertical market because of the size of these medical and automotive industries.

[Subodh Kulkarni:]

Well, thanks for the feedback. Appreciate it. We definitely that’s why we are excited about the product offering and the growth potential that CyberOptics in general, each of those markets are relatively large for a company of our size. We definitely expecting to grow quite a bit in the foreseeable future.

[Operator:]

And next we will hear from Dick Ryan with Dougherty.

[Dick Ryan:]

Great. Thank you. Subodh you mentioned you're demonstrating your mid-end inspection capabilities to some semiconductor manufacturers. Is that inspecting micro cracks at ICs or is that some other applications that you're working with them on?

[Subodh Kulkarni:]

Yes and yes, Dick. They are inspecting things like micro cracks. But, they are also inspecting a micro bump copper pillars anything which is basically smaller than 100 micron but not quite smaller than 10 microns. So somewhere in that 10 to 100 microns there are all kind of features. And they are interested in MRS for those – because of the speed. They already do the inspection with confocal microscopy or some other kind of microscopy. So they know exactly what they are looking for and what can be used with some kind of microscopy right now.

[Dick Ryan:]

Okay. Go ahead sorry.

[Subodh Kulkarni:]

With micro bumps cracks that kind of stuff.

[Dick Ryan:]

Okay. To commercialize this for sales in the second half of the year, you mentioned is at 30 Micron and now you are doing that just in the lab or actually on a customer site?

[Subodh Kulkarni:]

Right now all of the mid-end sensors are still in our lab. We haven't shipped anything to customer sites.

[Dick Ryan:]

Okay.

[Subodh Kulkarni:]

Now we do have a higher version -- higher resolution version of SQ3000 system right now in the marketplace that we call [ESX325] [ph] sensor if you through our literature and that has a seven micron resolution camera on it. And typically you use factor of tens, so with a seven micron resolution camera if you are measuring 70 micron objects you do get accurate -- very good accuracy. So you can argue that -- or you can at least say that our 325 sensor SQ is capable of starting to get into the mid-end area and we have already sold a few SQs with 325 sensors to this high-end semi-type users right now. So in a way you can say that we are already starting to touch the mid-end market using SQ platform with the high resolution sensor. But, clearly when we say mid-end sensor that's the different -- next iteration of the 325 sensor with even better resolution than 325 and similar kind of speed.

[Dick Ryan:]

Okay, great. Thank you.

[Subodh Kulkarni:]

Thanks Dick.

[Jeff Bertelsen:]

Thanks Dick.

[Operator:]

And gentlemen there are no further questions at this time. I will turn the conference back to you for any additional or closing comments.

[Subodh Kulkarni:]

Well, thank you for your interest and questions. We look forward to updating you with our progress at the end of Q1. Thanks again.

[Operator:]

And that does conclude today's conference. We would like to thank everyone for their participation. You may now disconnect.