CyberOptics Corporation
Q4 2014 Earnings Call Transcript

Published:

  • Operator:
    Good day, and welcome to the CyberOptics Fourth Quarter 2014 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Dr. Subodh Kulkarni, President and Chief Executive Officer. Please go ahead.
  • Subodh Kulkarni:
    Thank you. Good afternoon, and thanks for joining CyberOptics fourth quarter earnings conference call. With me today is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our recent operating results following my brief overview of our fourth quarter and 2014 performance. Jeff and I 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, 2013, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of these factors. Turning now to our recent performance. The fourth quarter was a very good period for CyberOptics as we attained profitability on double-digit sales growth. This performance enabled us to achieve our long-term period goal double-digit organic sales growth and a significantly reduced net loss for 2014. And due to the positive impact of our ongoing growth initiatives and promising new products, we are forecasting at least 10% growth in sales and breakeven operating results for all of 2015. Achieving this goal will be driven in part by two important recent developments that have validated technologies we have been developing. I am referring to our recently announced supply agreement with KLA-Tencor for our 3D MRS sensors and the $1 million order from one of the world’s top four memory manufacturers for our new post singulation memory module inspection system. I will discuss this developments in a few minutes. But first I would like to briefly review our recent operating results. We reported fourth quarter earnings of $85,000 or $0.01 per share, compared to the net loss of $2 million or $0.31 per share in the fourth quarter of 2013. Our earnings were achieved on revenues of $11.7 million, up 37% from $8.6 million in the fourth quarter of 2013. The acquisition of Laser Design, Incorporated or LDI, a Minneapolis-based 3D metrology company that was completed in mid-March 2014, contributed $1.8 million to CyberOptics consolidated fourth quarter revenues. On an organic basis, our fourth quarter revenues increased 16% from the year earlier level, including record sales contribution from WaferSense which grew 15% from the earlier year. For full year 2014, revenues totaled $46.5 million, an increase of 40% from $33.3 million in 2013. Excluding the $5.3 million impact of LDI, revenues on an organic basis rose 24% in 2014. We also posted a significantly narrower net loss of $1.5 million or $0.23 per share in 2014, compared to the loss of $6.2 million or $0.91 per share in 2013. Clearly, CyberOptics made significant progress in 2014 reporting double-digit growth and reduced loss. Regarding our growth initiatives for the future, first on semiconductor sensor products. We continue to invest in our WaferSense & ReticleSense product family and we recently introduced ReticleSense in a Quartz form factor with all the necessary alignment marks and bar codes for ASML, Nikon and Canon scanners. We look for continued solid growth with WaferSense & ReticleSense in 2015. Now on to two significant developments, our announcement with KLA-Tencor and Memory Inspection developments that I mentioned earlier. Regarding memory inspection, we received an order of approximately $1 million from one of the worlds leading memory manufacturers earlier this month for our newly developed MX600 System that will inspect memory modules after singulation. A 2D system, the MX600 leverages our proprietary Strobed Inspection Module or SIM technology and autonomous image recognition software. This customer concluded that CyberOptics solution was superior in terms of speed, accuracy and overall performance. Systems under this order are forecasted to ship in the second quarter with recognition of revenue in the second half of 2015, while revenues from our previously announced order from this customer for a post MX600 system will be realized in this years first quarter. Regarding 3D Multi-Reflection Suppression or MRS Sensor Technology, in January, CyberOptics entered into a long-term mutually exclusive agreement to supply a modest sensors for KLS backend semiconductor package inspection systems. KLA evaluated several inspection technologies before selecting our new MRS sensor solution given its ability to improve KLS time to market and other benefits. Orders based on this supply agreement are forecasted to ramp up during the coming year. We believe that we have developed a best in class 3D inspection technology that can be deployed in a range of markets and that winning an leader like KLA as a first customer for our MRS sensors validates that belief. Identifying defects is critical due to smaller electronics packaging and increasing component density on circuit boards, which has made precision 3D inspection the high growth segment of the electronic assembly semiconductor and industrial markets. To further capitalize upon 3D inspection opportunities in a broad range of markets, we are deploying our breakthrough MRS 3D sensor technology in our next generation AOI system, the SQ3000. The SQ3000 is designed to expand CyberOptics presence in the smartphone and tablet markets, as well as other high precision applications. We have shipped SQ3000 systems to several customers and are receiving very positive feedback. We anticipate our post revenues from SQ3000 in late Q1 or early Q2 and anticipate accelerating sales of this product throughout 2015. We are also incorporating our breakthrough 3D technology into LDI's new Cyber Gage Scanning System, which will be used in a wide range of general metrology applications. By significantly strengthening its inspection capabilities, the 3D MRS equip cyber gage is expected to broaden the appeal and applications of this product in a diverse range of markets. Introduction of the cyber gage product is now planned for this years second quarter. We believe that MRS technology is a breakthrough 3D sensor technology for optical inspection. For our existing markets in SMT and semiconductor inspection, we are introducing new products based on this technology now and over the next few quarters and we expect MRS to facilitate expansion of our markets in future. This products does not significantly impact first quarter sales which are expected to be comparable to last years first quarter. For the full year however, we believe this products present a significant opportunity for growth and currently anticipate at least 10% growth in sales and breakeven operating results for 2015. We realized that much more remains before is, but we are confident that CyberOptics is moving in the right direction and we are excited about the significant opportunities we have in future. Thank you. Now, Jeffrey Bertelsen will review our fourth quarter operating results in some detail.
  • Jeffrey Bertelsen:
    Thanks, Subodh. CyberOptics posted sales growth across all product lines in the fourth quarter of 2014. Sales of SMT sensors increased 27% from last year's fourth quarter, reflecting solid demand from OEM customers. Sensor sales for this period included a relatively small initial contribution from the supply agreement with KLA-Tencor for our 3D MRS sensors. Sales of inspection systems rose 8% year-over-year in the fourth quarter due to higher sales of solder paste inspection systems. Finally, sales of semiconductor products, principally the WaferSense product line, were up a strong 12% from last year's fourth quarter. Our high margin WaferSense products are gaining traction in the marketplace as customers are finding that WaferSense is able to significantly improve manufacturing processes and yields. We believe the WaferSense family of products will become an increasingly important component of our sales mix going forward. Moving down the P&L, CyberOptics fourth quarter gross margin of 47% was up from 42% in the year earlier period. The gain in gross margin percentage was primarily driven by increase sales of higher value inspection systems in Europe and improved sensor sales mix and increase sales with a better mix of WaferSense products which carry strong margins. Total operating expenses fell 4% from the fourth quarter of 2013 when we incurred a $952,000 restructuring charge. R&D and SG&A expense increased in this years fourth quarter due largely to the addition of LDI's operating cost and the continuation of the technology and product development initiatives that are central to CyberOptics' strategic repositioning and future growth opportunity. These cost increases were offset in part by savings from last years restructuring. We reported operating income of $34,000 in this years fourth quarter, compared to the loss of $2million in the fourth quarter of 2013, which is another indication of the progress that we have made over the past year. Cash and marketable securities rose to $20.3 million at the end of this years fourth quarter from $17.9 million at the end of this year's third quarter. The $2.4 million increase in cash was generated in large part by improved receivable collections, which reflect better day sales outstandings, as well as effective inventory management. Our cash reserves are more than ample to support our continued growth. Thank you. I will now turn the call over to the conference operator who will poll you for any questions.
  • Operator:
    Thank you. [Operator Instructions] And we will take our first question from Ross Strehlow with RBC Capital Markets. Please go ahead.
  • Ross Strehlow:
    Yes. Hi, Subodh and Jeff.
  • Subodh Kulkarni:
    Hey, Ross.
  • Jeffrey Bertelsen:
    Hey, Ross.
  • Ross Strehlow:
    Yes, nice quarter that you guys had for sure.
  • Jeffrey Bertelsen:
    Thanks.
  • Subodh Kulkarni:
    Thank you.
  • Ross Strehlow:
    I want to get into a few things about the coming year based upon what your guidance is with all these new products. But let me ask you first of all on the AOI, you said that you have shift a few several order, or you shift to several customers, about how many have you done?
  • Subodh Kulkarni:
    About half dozen.
  • Ross Strehlow:
    And so are these in beta test?
  • Subodh Kulkarni:
    Some our beta test, some are going through acceptance testing kind of period.
  • Ross Strehlow:
    Okay.
  • Subodh Kulkarni:
    So they are being evaluated.
  • Ross Strehlow:
    And so, these – do you have any kind of an official launch date then guys for the product?
  • Subodh Kulkarni:
    No, we don’t. I mean, we don’t have a general availability date per se. We are formally launching it next week at our – at APEX show in San Diego. That’s the biggest tradeshow called SMT electronics manufacturing in the US. So we are formally making the product available at that time. We don’t have general availability date that we disclose.
  • Ross Strehlow:
    Okay.
  • Subodh Kulkarni:
    But from here on it will basically be getting customer orders. We are accepting orders now, we are shipping product now. It goes through certain acceptance testing period, then we'll start registering revenues here pretty soon.
  • Ross Strehlow:
    Okay. So that’s got to be pretty exciting development in terms of your business?
  • Subodh Kulkarni:
    Absolutely, we are really excited with SQ3000. The feedback we are getting from customers have been incredibly positive. The images that they see, the speed that they see. It clearly demonstrates the breakthrough value of our sensor technology and it is showing up in the product in terms of speed and image quality. We are really excited about launching this product and ramping it up for the rest of the year.
  • Ross Strehlow:
    So Subodh, can you quantify that how much faster and how much more accurate it is than competitive products?
  • Subodh Kulkarni:
    Well, the closest competitor for SQ3000 and somewhat we can see right now is a Korean company called Koh Young and they claimed their speeds are up to 23 or 24 centimeters square per second and we claimed our speed is up to 40 centimeter square per second. But in real life this is like the max speed of a car kind of theme [ph] So in real life from what we can see, our competitive system is not being really run at that 23 centimeters square per second speed. And we don’t know exactly what customers will return to our system at. The real key point here Ross is, our system can go inline for most lines in the world. So we don’t – we won't slowdown customers assembling lines. As far as we can tell, all the other 3D AOI systems out there very few of them can claim the same thing. So we really think this is a big differentiator where we can – with the speeds we have, we can go inline, whereas our competitive product has a tough time going inline for most customer applications.
  • Ross Strehlow:
    Okay. That’s great. Now how big – so tell me, how big is this AOI market and how much in revenue did you guys have in that – in the AOI area in the past year?
  • Subodh Kulkarni:
    Of course, roughly we have, in our Investor Presentation we have said the SPI and AOI combine market is about $0.5 billion, within that the 3D AOI segment is still quite small, but growing very rapidly from what we can tell and historically CyberOptics has never participated in the 3D AOI market. So it’s our first entry into the 3D AOI space. As I said, it’s still relatively small, but growing very fast. It’s hard to know the exact numbers, but we think it maybe on the range of $40 million to $50 million right now growing at 35% to 40% CAGR [ph].
  • Jeffrey Bertelsen:
    And this relative to our AOI business in 2014 that of course was all 2D AOI and we did roughly about $9 million in 2D AOI business in 2014.
  • Ross Strehlow:
    Okay. So, there is obviously, you're on the verge of some interesting growth prospects, now that this product is available and there is got to be a lot of customer, potential customer awareness out in the marketplace I would think, correct?
  • Subodh Kulkarni:
    Yes, that is correct.
  • Ross Strehlow:
    Okay. Great.
  • Subodh Kulkarni:
    We are definitely getting a lot of customer interest and traction and lot of enquiries about our product right now. Yeah, go ahead.
  • Ross Strehlow:
    Okay. That’s great. Now let's go to the solder paste inspection product area. Let's see your growth there – you had a pretty good fourth quarter in that area? What do you – go ahead Jeff.
  • Jeffrey Bertelsen:
    No, I was going to say, yes, in the fourth quarter the SPI machines accounted for the majority of our 8% year-over-year systems growth.
  • Ross Strehlow:
    So what are you looking for in that area for 2015 in terms of growth versus what you just did?
  • Subodh Kulkarni:
    In the overall market for instance, the solder paste inspection market is not growing as fast as the 3D AOI market that I mentioned earlier. We believe it is growing in the 5% to 10% kind of range. Our high end product in that area is the SE600 that we launched late 2013 and we continue to gain some traction with that product. So we hope we can grow at or slightly above market rate by gaining share, but intrinsically it is a mature market not growing that fast. The exciting part of the whole inspection system market is clearly the 3D AOI market right now, growing very fast.
  • Ross Strehlow:
    Yes, absolutely. But in terms of the – your 3D MRS technology, that doesn’t really have any applications in solder paste, does it?
  • Subodh Kulkarni:
    In the long-term it does, it absolutely does. It is an optical inspection technology. So we are definitely going to be leveraging our MRS sensor technology in the solder paste inspection area in future. We haven’t disclosed exactly dates or anything yet. That’s definitely in the development pipeline right now. But long-term MRS technology will definitely impact solder paste inspections, the same way it is impacting 3D AOI right now.
  • Ross Strehlow:
    Okay. So once you improved your product, I think that was late 2013, have you seen some market share gains?
  • Subodh Kulkarni:
    We saw good growth in our overall inspection system business in 2014 versus 2013 and do realize that in 2014 we did not have the 3D AOI product to sell. So we believe we – the growth of roughly 20% also that we saw in 2014 or 2013 was primarily due to market share gain.
  • Jeffrey Bertelsen:
    Yes.
  • Subodh Kulkarni:
    In SPI and 2D AOI.
  • Jeffrey Bertelsen:
    Right.
  • Ross Strehlow:
    Okay. I am just trying to get a hand on all these businesses one-by-one. So now let's go to your – the wafer sensor, what type of growth do you expect in WaferSense, now I know that you've put a pretty good marketing effort into that area and developed some new products. So what type of growth are you looking for in 2015 versus 2014?
  • Subodh Kulkarni:
    As I mentioned in my remarks and Jeff also touched on it, WaferSense which is a majority component of our semiconductor sensors business grew 15% year-over-year in Q4 and our semiconductor capital business is not growing that fast. It is growing in mid single digits right now and that’s the projection for 2015. We hope we can continue the solid double-digit growth and with the right product – products we have today and some of the stuff that we are developing right now, we feel pretty good about growing WaferSense by – in solid double-digits in 2015 and beyond.
  • Ross Strehlow:
    Okay. Have you – I know some of your original customers were the large – were the three big companies. Have you – how many different customers do you have now in the WaferSense line?
  • Subodh Kulkarni:
    I mean, we definitely – the top three continue to be the top three and those are the large semiconductor manufacturers, Intel, Samsung and TSMC. We have penetrated more customers such as GLOBALFOUNDRIES and we also started getting some orders in Q3 and Q4 last year from flat panel display…
  • Jeffrey Bertelsen:
    Right.
  • Subodh Kulkarni:
    Industry and LED industry. So we are diversifying beyond the core semiconductor manufacturing. So I don’t know the – I don’t have off hand exact number of customers we have today. But it is in 30 to 40 kind of range. But the top three still dominate the numbers.
  • Ross Strehlow:
    And Subodh, do you think the top three customers are – you can still grow, is there still opportunities out there for them to buy more of your WaferSense products for some of their other lines in the upcoming year?
  • Subodh Kulkarni:
    Absolutely, we still think WaferSense is limited, by awareness factors we are still a small company and it’s still a small business. So improving awareness, marketing, improving the product portfolio, updating, refreshing, all are critical elements to enable the growth. That’s what we have done for the last year or so and you see that in the results and we will continue to do that, updating our portfolio or making them better, so it can detect smaller particles, more sensitive sensors and so on and that’s what I am counting on for the double-digit growth in WaferSense.
  • Ross Strehlow:
    Okay. Very good. Now getting geared to the sensors, talk a little bit about if you could, some of the applications that are out there now with this MRS technology, outside of your other area, if you can talk about some of these applications and what type of growth prospects are actually out there over the next couple of years, two or three year period in terms of growth in that – with the sensor area?
  • Subodh Kulkarni:
    Its – yes, I mean, the three areas that we participated in Ross, the semiconductor, SMT, and general purpose metrology, frankly are all large area. So we feel very good about the potential opportunities for MRS sensor and the 3D optical sensing technology that we have developed and what we could do in those three areas. Beyond that, there certainly are other verticals as you were referring to, whether you want to think about it as medical or telecom or defense and stuff like that. We really don’t have good visibility to start quantifying those areas and what the opportunities are. But fundamentally what we have developed is a solid technology foundation platform with good IP around it and we are starting with the three verticals that we are in today and we certainly hope those are going to provide ample growth opportunities for us in the next two to three years. But we'll continue to explore other areas and how to participate in those. But it will take some more time in those areas.
  • Ross Strehlow:
    Okay. I guess, that’s it for me. Thanks, guys.
  • Subodh Kulkarni:
    Thanks, Ross.
  • Jeffrey Bertelsen:
    Thank you, Ross.
  • Operator:
    [Operator Instructions] We go next to Miles Jennings, who is a Private Investor. Please go ahead.
  • Unidentified Analyst:
    Good afternoon. Thanks very much for your report and congratulations on the quarter.
  • Subodh Kulkarni:
    Thanks, Miles.
  • Jeffrey Bertelsen:
    Thanks, Miles.
  • Unidentified Analyst:
    I just had a few questions, I'll start with the sensitive one, and I understand if you can't provide too much detail on this. For someone outside your field, I am quite curious about the pricing for the SQ300. Now I realize the configuration can be different for various customers. I realize that due to end customer need and I assume that their quantity discount issues and many other things. But if I were asking General Motors, what the price of the Cadillac was, they probably would say, $60,000 to $200,000. I just like to, I'd like to ask you if I may, a rough sense of what you view as maybe the middle point SQ3000 application and what if a full version would, a range perhaps that the full version might run?
  • Subodh Kulkarni:
    Yes, I mean, we don’t want to be too specific. But in general it depend, and as you said, it depends on the exact number of options and configurations and so on, put in that caveat, the price ranges somewhere, are expected to be in the $125,000 to $150,000 range, but in some cases it will be a little lower depending on the configuration and in some cases it could be a little higher. But that gives you rough feel for we are beating the price slowly.
  • Unidentified Analyst:
    Yes. Thank you. On the KLA agreement, this is a sensor supply agreement using MRS, and I just wondered does KLA have different requirements as far as the capability of each sensor or do you have one MRS sensor and that is the only one that you will deliver to them or do you have many that could in theory be delivered based on their own internal requirements?
  • Subodh Kulkarni:
    That’s a great question Miles. MRS is a technology platform as you have figured out quite well. So it has DLP projection system, it has multiple cameras, multi grade cameras, coax [ph] cameras and stuff like that. So in a way it is a modular platform and you can pick and choose different kinds of digital projections schemes, different kinds of cameras, resolutions and stuff like that. The number of cameras can vary. So it really depends on the application. We are working with KLA-Tencor in multiple application, so its not just one particular application. We are looking at basically KLA-Tencor's optical inspection needs. So anywhere where high end optical inspection is needed is where MRS will be the solution. The individual configuration will change depending on the application that is being addressed. Does that help?
  • Unidentified Analyst:
    Good. Yes, it is. I would think it’s a very complicated discussion as to exactly what is the best sensor for the application.
  • Subodh Kulkarni:
    I wouldn’t say its complicated discussion, it is a very technically intensive discussion, but we love that kind of stuff.
  • Unidentified Analyst:
    Yes, okay. It may not be for you, but it would be for me. I would like to just add one more question if I may, on the ASPRQ, and this new wireless sensing device is actually I think being introduced into a Greenfield environment where this has not been available to the scanners, the Nikon, Canon and ASML before. So it would seem to me that even delivering WaferSense to regular customers for long time and you shipped many of them. I would think that we – that market is a very attractive one for you, and is there somewhere you can give us a sense of what sort of market you are approaching in this quartz version of ASPR?
  • Subodh Kulkarni:
    I think you meant APSRQ, not ASPR.
  • Unidentified Analyst:
    APSR, yes.
  • Subodh Kulkarni:
    So it’s a ReticleSense, its fog – its shaped as a reticle as you can imagine and it is in the Quartz Housing that’s where the Q comes from, and just to give you a rough feel, there are roughly about 700 fabs worldwide today and each fab, I am just giving you a ballpark average number, has about 25 to 30 lithographic stations, so that gives you a feel for roughly there are 2000 of so lithographic areas where we could potentially sell APSRQ into. And now some areas maybe more than one, some maybe fine with one, but that’s what – we think as you said, it is a Greenfield area. There is no other product that has the capability that APSRQ can do. And so we feel very good about what we have developed and again the initial feedback we are getting from those three scanner companies, as well as end users of those scanner companies has been very positive. We are very excited about getting that product out there and enabling our customers to measure particle count and improve their use and productivity.
  • Unidentified Analyst:
    Wonderful. By the way, the reason why I transposed the ASMT [ph] I was thinking of ASML…
  • Subodh Kulkarni:
    I understand that.
  • Unidentified Analyst:
    When I said that. So I do know its APSRQ. Now just the last part of the question, perhaps you could give us a rough sense of pricing on that quartz products?
  • Subodh Kulkarni:
    Yes. It’s of the higher end side, considering its going into lithographic stations. Again, we do realize the lithographic pieces of equipment are in 10% of your dollar range. So we are pricing the product commensurate to what benefit we are giving the customers. So the rough price point for that again depending on exactly what they order and volumes and all that is going to be in the $50,000 to $70,000 type of range.
  • Unidentified Analyst:
    I see. I though image of one of those scanners and is by heavy SML and I don’t know, the cost were $50 million or $60 million stabilities machine…
  • Subodh Kulkarni:
    Yes, the high end EUV system that ASML is shipping right now, they are going for about $120 million each, so these are…
  • Unidentified Analyst:
    Indeed I won. Yes, but I made a great achievement apparently by using this…
  • Subodh Kulkarni:
    Yes, and really our product goes into those systems okay, so that’s where APSRQ fits in. So you can understand how sensitive the customers are about the particle counts and making sure…
  • Unidentified Analyst:
    Yes.
  • Subodh Kulkarni:
    Returned and all, so that’s where we fit, we think our product fits in.
  • Unidentified Analyst:
    Wonderful. Well, thank you very much. And congratulations again.
  • Subodh Kulkarni:
    Thanks, Miles.
  • Jeffrey Bertelsen:
    Thanks.
  • Operator:
    [Operator Instructions] And at this time there are no further questions.
  • Subodh Kulkarni:
    Thank you. In summary, we are very pleased with our progress and what we have accomplished in 2014 and are excited about our future. We look forward to updating you with our progress. Thank you.
  • Operator:
    Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation.