CyberOptics Corporation
Q2 2016 Earnings Call Transcript

Published: 1 Aug 2016

[Operator:]

Good day ladies and gentlemen. Welcome to CyberOptics Second Quarter Earnings Conference Call. Today’s conference call 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, sir.

[Subodh Kulkarni:]

Good afternoon and thanks for taking the time to participate in CyberOptics second quarter earnings conference call. Joining me is Jeff Bertelsen, our CFO and COO, who will review our operating results, following my overview of our second quarter 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, 2015, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of Risk Factors. Turning now to our recent operating results; we continue to post outstanding year-over-year sales and earnings in the second quarter of 2016. Sales increased 82% to $18.6 million from $10.3 million in the second quarter of 2015. Earnings totaled $2 million or $0.29 per diluted share, compared to a loss of $761,000 or $0.11 per share in the year earlier period. These operating results were broadly based generated by strong performances across all of our product lines. We are particularly encouraged by the growing adoption of our 3D MRS technology platform which is enabling us to win major new customers. An expanding portion of our business is being driven by complex applications in the manufacturing of smartphone and other high-end electronics markets where our 3D MRS technology gives clearly gives us a competitive advantage. Our 3D MRS technology platform also has resulted in a growing pipeline of opportunities that have significant potential in both the SMT and semiconductor markets. CyberOptics has been posting the positive results that we intended at the outset of our strategic repositioning in the 3D arena, and we are confident of reporting profitability and strong year-over-year sales growth in the third quarter. Turning now to a more detailed overview of our second quarter results; Sensor revenues rose 81% on a year-over-year basis, benefiting from sales of 2D LaserAlign sensors to traditional OEM customers. 3D MRS sensor sales were generated under long-term supply agreements with KLA-Tencor and Nordson YESTECH. Sales to KLA are expected to grow as the company incorporates our 3D sensors into an increasing portion of its backend semiconductor packaging inspection systems. The Nordson supply agreement also should be a positive contributor to future sales growth. In addition, one of the sensor opportunities in our pipeline came to fruition in the second quarter. We have been integrating our 3D MRS sensors into a customer self-design platform for inspecting the final assembly of its own products. As a result of this initiative, we previously announced $800,000 order in May for 3D MRS sensors from this new customer. This order is forecasted to revenue in the third quarter, and we believe this customer could generate significant sales going forward. System sales increased 67% in the second quarter versus the year earlier period reflecting demand for SQ3000 3D MRS-enabled automated optical inspection or AOI systems and MX600 memory module inspection systems. During the quarter, we recognized MX600 revenues of $500,000 with the balance of about $2.9 million MX backlog expected to revenue in the third quarter. We recognized $2.5 million of MX revenue in the first quarter. We do see additional MX600 revenue opportunities in future. The SQ3000 AOI system is making strong inroads in the consumer electronics and semiconductor arena, enabling CyberOptics to gain share in the rapidly growing 3D AOI market. Our 3D MRS-enabled systems also are accounting for a steadily growing percentage of CyberOptics total AOI and solder paste inspection sales. This sales momentum is forecasted to continue during the second half of 2016. Second quarter sales of semiconductor products, primarily the WaferSense and the ReticleSense product line, rose 69% year-over-year to a quarterly record of $3.1 million. Our new WaferSense/ReticleSense Auto-Multi Sensor or AMS made a strong contribution to the second quarter semiconductor sales. Customers are finding numerous applications for this product which combines leveling, vibration and humidity measurements into a wireless, real-time device. Given its high value proposition, our line of AMS sensors should continue having a positive impact on semiconductor sales going forward. Before continuing, I want to emphasize that we are actively pursuing additional OEM customers for our 3D technology in both the SMT and non-SMT markets. In addition, research is underway to determine if our 3D MRS technology is applicable to frontend semiconductor manufacturing. If so, this application could have a significant impact on our future performance. Finally, sales of general purpose 3D scanning solutions and services increased 126% in the second quarter on a year-over-year basis, reflecting strong sales of X-ray systems to a single customer. And as recently announced, the CyberGage360 3D Scanning System was commercially launched at the end of second quarter. CyberGage360 is currently being evaluated by multiple potentially large customers and initial feedback is very promising. Customers are delighted with the speed, accuracy and the ease of use enabling significant time and cost savings for them. Initial CyberGage360 sales are anticipated in this year second half but a more significant impact is forecasted for 2017 and beyond. As a general purpose metrology scanning system based upon our 3D MRS technology, the CyberGage360 is potentially useful to customers for various different applications; from medical products where orthopedic joints that need to be scanned before getting implanted to industrial metrology of incoming parts to rapid prototyping of consumer electronics accessories. We anticipate CyberGage360 to be a substantial contributor to our future growth. CyberOptics ended the second quarter with a backlog of $14.7 million. As stated previously, our quarterly results will fluctuate somewhat on a sequential basis, reflecting the pace of new orders for our 3D products and customer acceptances of our MX600 backlog. For the third quarter ending September 30, we are forecasting sales of $13 million to $15 million, which represents another growth period of profitability and robust year-over-year sales growth. We also are forecasting strongly improved year-over-year sales and earnings for the fourth quarter. While we’re very encouraged by our first half performance, I want to stress yet again that we have much more work to accomplish particularly as regards to our pipeline of opportunities based on our 3D MRS technology platform. In effect, we are striving to develop new generations of products and technologies that can expand our customer base in the SMT, semiconductor and general purpose metrology markets. By keeping CyberOptics on the leading edge of 3D technology, we can help assure a successful future for your company and continue generating value for our shareholders. Thank you. Now Jeff Bertelsen will review our second quarter results in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. I will lead off by briefly reviewing the third quarter performance of our product lines. Sales of inspection systems increased 67% year-over-year reflecting strong demand for SQ3000 3D MRS enabled AOI systems and customer acceptances for $500,000 of MX600 memory module inspection systems. It is important to note that in the first quarter of 2016, revenue from MX600 system sales totaled almost $2.5 million. We were able to deliver robust year-over-year revenue growth in the second quarter even with the reduction at MX600 system sales. Sales of our new 3D MRS enabled AOI products are accounting for a growing percentage of our total AOI and solder paste inspection sales and we believe this welcome trend will continue in the future. Our MX600 backlog stood at $2.9 million at the end of the second quarter and is expected to revenue in the third quarter. Third quarter system sales are forecasted to increase significantly year-over-year due principally to growing demand for SQ3000 3D AOI systems and customer acceptance of our MX backlog. Sales of electronic assembly sensors rose 81% year-over-year reflecting a rebound in sales of 2D laser aligned sensors to traditional OEM customers. As Subodh noted, a new customer placed an $800,000 order for 3D MRS-enabled sensors in the second quarter and this order is scheduled to revenue in the third quarter. Third quarter sensor sales are forecasted to decline slightly on a year-over-year basis as the sensor sales -- as the higher sales that we are forecasting for 3D MRS sensors will be offset by reduced sales of legacy 2D sensors. Sales of semiconductor products principally the WaferSense and ReticleSense product line increased 69% year-over-year to a quarterly record of $3.1 million in the second quarter. Our new WaferSense/ReticleSense Auto-Multi Sensor, AMS, which combines leveling, vibration and humidity measurements into a wireless, real-time device, made a strong contribution to second quarter semiconductor sales. Sales of semiconductor products are forecasted to increase strongly year-over-year in the third quarter. We also expect to introduce the humidity only version of WaferSense in the third quarter which will contribute to our future growth in this product category. Finally sales of general purpose 3D scanning solutions and services through our LDI unit increased 126% in the second quarter on a year-over-year basis reflecting strong sales of X-ray systems mainly to a single customer. LDI sales are forecasted to return to more normal levels in the third quarter. Moving down to P&L, CyberOptics second quarter gross margin of 44% was down slightly from 45% in the year earlier period mainly due to product mix. Total operating expenses are forecasted to decline sequentially by at least $500,000 in this year’s third quarter from the second quarter level. This reduction will reflect the absence of expense related to annual stock compensation that was payable to board members in the second quarter as well as lower incentive compensation accruals given our current forecast for third quarter sales. Cash and marketable securities totaled $22.5 million at the end of the second quarter, an increase of approximately $5 million from the level at the end of the first quarter. This increase reflected our ongoing profitability and ability to manage working capital. I would also note that no shares of common stock were repurchased in the second quarter. Our cash reserves are more than ample to support our growth initiatives. Thank you. I will now turn the call over to the conference call operator who will poll you for any questions.

[Operator:]

Thank you [Operator Instructions]. And we’ll go to George Mariama [ph], Private Investor.

[Unidentified Analyst:]

Hello good afternoon.

[Subodh Kulkarni:]

Hello.

[Unidentified Analyst:]

Couple of questions, could you tell us a little bit more about where you are in the R&D process to – you mentioned in your comments about taking a look at these applications in the front end. Could you tell us a little bit more about that where you are in that?

[Subodh Kulkarni:]

Sure. Basically, the 3D MRS technology that we have invented, so far we have commercialized it in three areas; the backend semiconductor inspection KLA, inspection of PCBs through the 3D automated optical inspection systems the SQ3000 and the same technology we are leveraging for the 3D scanning products CyberGage360. So what we are doing is taking that technology platform, so that is effective if you think of it as the generation one technology product launches. So we are pushing the resolution on the technology if you look at things that are much smaller in size. So today the technology essentially we can measure and inspect any object which is bigger than 100 micron roughly speaking, and we want to push that number down as much as possible. We believe with the advancements we are doing on our side plus also advancements that are happening outside with better quality cameras and projectors, we should be able to get down the resolution quite a bit. And the smaller the number and more the applications on the frontend of semiconductor side, it’s obviously an exciting area for us because the frontend of semiconductor is our job originating power for us. So the research is as I’ve said, the research is underway and we continue to push the technology envelop if you will, and we will update you as the results are available and as we make success on that front.

[Unidentified Analyst:]

If you have success in that, could that be folded into a product set in 2017?

[Subodh Kulkarni:]

It depends on the data obviously and how successful we are, but certainly, our goal would be to commercialize it through some kind of a product. The frontend semiconductor is a very large business obviously and dominated by fairly large players. So more than likely the first outlet from a commercial standpoint would be some kind of a OEM type agreement rather than us launching a product by itself that pose as an inspection product. That’s my feeling though, although once the result is available, we will decide how good it is and what we do with it.

[Unidentified Analyst:]

Is the R&D process, are you doing that with some of your customer partners right now?

[Subodh Kulkarni:]

We certainly are talking to some of our customer partners right now, yes.

[Unidentified Analyst:]

And on the CyberGage product portfolio, you’ve commercialized it now and introduced it. Could you give us a little feedback about what you’re hearing in the market and what sort of the pipeline looks like?

[Subodh Kulkarni:]

Okay, it’s still a little early to give you a complete detailed view, we launch – we made the product available towards the end of second quarter. We started beta testing little earlier than that. The feedback so far so just as a general background, this is - 3D scanners itself is a very large market more than $3 billion our market, but obviously it is dominated by large companies like Nikon and [indiscernible] and so on. CyberGage is a unique product, there is nothing like that that exists today in that 3D scanning space and it’s finally, we call it CyberGage can scan from both the sides in a very fast manner. So it’s a fast, accurate and very easy to use. Easy to use because you can scan it from both sides and the images get auto-stitched. So you literally have to do nothing except place a product and push a button and you get a full scan. So because of its unique abilities, the initial interest from the customers is very good. They love the notion that you don’t need to look over the product and stitch it in software and spend an hour or two trying to get the data aligned and so on. So the whole process takes less than three minutes and that part is extremely appealing to customers we have talked to so far. It’s still early so we have scanned the parts from few customers so far and we are talking to more obviously as we speak. All the initial data and feedback is very encouraging and we are pretty confident we’ll be able to generate some sales starting second half of this year. At the same time, we mentioned in order to lease that, it really is expected to make meaningful impact from a financial standpoint starting 2017 and beyond. We do expect it to be a big contributor in our future success but it’s not going to be a significant contributor in the second half of this year, primarily because it takes time to get the product out and convince the customers who tried and used it. Does that answer your question?

[Unidentified Analyst:]

Yeah, in terms of meaningful for 2017, does the word meaningful mean about 10% of revenue to you or…

[Jeff Bertelsen:]

We haven’t quantified that and we’ll have more data and color on that as we move through 2016 and we start to customer feedback and see what our sales pipeline look like. But the feedback we have got from customers is positive.

[Unidentified Analyst:]

Okay. Then on Q3, you’ve obviously guided down sequentially although up nicely year-on-year, these sequential declines is it -- what sort of visibility do you have quarter-to-quarter in terms of your high velocity sales? I know you had some things, you have good visibility but how much of your business is sort of more quick turn, high velocity that you don’t really see until it comes? Could you give us a little more insight into your visibility for Q3?

[Jeff Bertelsen:]

There is certainly some of that, so there is certainly, - we don’t have all Q3 in the backlog today but we do for our – some of the current products that we have, we do have sales models and prospects and certainly there is business that comes through all the quarter fairly quickly that we don’t have visibility today. I think one thing that we’re seeing and Subodh can comment on that, what we are seeing is there is a number of large projects and opportunities out there. And so the business does tend to have a little bit of this lumpy aspect to it.

[Subodh Kulkarni:]

That’s a good point, as Jeff mentioned, we are dealing with a few large project opportunities and depending on our customers and when they decide to execute their capital plan, when these orders come and you saw that earlier part of this year in the first half when they come, they are large orders, exactly when they revenue, those will have a meaningful impact on which quarter and what the growth rate will be.

[Unidentified Analyst:]

So then do you anticipate a reacceleration in Q4 sequentially?

[Jeff Bertelsen:]

Well yeah, I mean we haven’t I guess quantified our Q4 outlook, so we probably shouldn’t comment on it here. But we certainly are looking for a very strong fourth quarter and look for the year to wrap up nicely. But we have not quantified…

[Unidentified Analyst:]

Yeah, I understand, sort of look at it from a broad direction. And then on your pipeline for 3D MRS, could you give us a little more color on what you see that’s more than near-term for 2016, what that looks like?

[Subodh Kulkarni:]

As mentioned earlier, we are dealing with a few large projects that do need a number of 3D AOI systems. So depending on exactly when the customers decide to execute their capital plan, we may see lumpy SQ3000 orders coming in either Q3 or Q4.

[Unidentified Analyst:]

These are existing customers or new customers you’re talking about?

[Subodh Kulkarni:]

Both varieties, there are some existing customers that are thinking about next year. So a lot of it is moving these days because of the smartphone cycle and typically new smartphones get launched in the September-October time period right now, the main market share players. And so, the capital plan that many of this contract manufacturers that are serving those smartphone companies, they seem to start in the December through March time period. So somewhere in that is when the major purchase is seem to be happening neatly. And so we certainly expect to see benefit from the next generation of investments from smartphone manufacturing and other high end electronic stores that also go cyclical.

[Unidentified Analyst:]

Okay. And then for 2017 as a full year, what sort of plans do you have product wise and how are you setting up the company for 2017?

[Subodh Kulkarni:]

At a high level obviously the current product that is doing very well for us and gaining share as SQ3000 our 3D [indiscernible] along with other semiconductor products and other portfolio. Those are the primary drivers. We certainly expect CyberGage to start kicking in the second half and then next year to accelerate. So we certainly long-term we are expecting this to be a nice growth company because it’s SQ right now, then it’s SQ and CyberGage next year and obviously we’ve talked a little bit about the frontend semiconductor and that will take some time to kick in. But long-term that’s sure to kick in, at a high level, we expect this to be a solid growth company long-term.

[Unidentified Analyst:]

And I have one last one then I’ll get off the line here, on last conference call you mentioned that some of your key OEM customers, you’re sort of in the early innings on of adoption. Do you see them – are they planning to incorporate into more of their products in the coming quarters?

[Subodh Kulkarni:]

Yeah, we definitely got indication that they like the technology and as time goes along, we actually see that they are incorporating the sensors into more and more of their products. So we definitely expect growth from our new OEM customers that we see right now.

[Unidentified Analyst:]

Okay. Great second quarter guys. Thank you.

[Jeff Bertelsen:]

Thanks.

[Subodh Kulkarni:]

Thank you.

[Operator:]

[Operator Instructions] And we’ll go to Craig Frolic with [indiscernible]

[Unidentified Analyst:]

Hi guys. Congratulations on a great quarter.

[Subodh Kulkarni:]

Thanks, Craig.

[Unidentified Analyst:]

First half it was I think – all these soldiers lining up and ready to go, - CyberGage, so it’s all pretty exciting going forward. Just a few questions, on the – balance on this one comment you mentioned either last quarter or previous quarter was you got may be that [indiscernible] aerosols – are you getting any feedback on that?

[Jeff Bertelsen:]

I’m not quite sure…

[Unidentified Analyst:]

You mentioned that it may enable – of that technology…

[Jeff Bertelsen:]

Well I think may be what we had indicated was that our – the relationship we have with KLA may be helping RFQ sales, but not that we’re really enabling KLA sales.

[Unidentified Analyst:]

Okay, I’ll leave that one alone. And on the MX600 on that memory module, I mean you were working with one customer I think you mentioned that is potentially the large one. Has there been any progress in those other three?

[Subodh Kulkarni:]

We are talking to more than one customer right now. All the orders so far and the current backlog is from that one large customer, but we are talking to other customers right now and as I mentioned in my comments, we do expect future MX opportunities, both from the current large customers but also from the other customers.

[Unidentified Analyst:]

Great. And then WaferSense, you didn’t really go in much detail on that and I know that is basically a new product coming through… can you give me a little bit of color on that and just any other additional input?

[Jeff Bertelsen:]

Yeah, in the current quarter, we did about $3.1 million in WaferSense which was a record for us, was up quite a bit year-over-year and it did set a quarterly record and certainly, our latest product that we’ve launched in that family is the auto multi-sensor was a nice contributor to the product line and we certainly see that trend continuing and we’ll put out another new product in the family and as we continue to develop multiple different types of products, we tend to get good adoption and so we look for those revenues to keep increasing it.

[Unidentified Analyst:]

And if I’m not mistaken you mentioned that you have a multi-sensor, even if that is not considered your sensor – we’re buying it [indiscernible] is that correct?

[Subodh Kulkarni:]

In general, yes. I mean we just call it auto multi-sensor because it is detecting humidity for the first time. Customers who have not looked at us in the past but have lead for humidity are gravitating towards auto multi-sensor and it gives us an opportunity to not only sell the AMS product to them but also the rest of the portfolio, the leveling, vibration particle and so on.

[Unidentified Analyst:]

Is there anyone else who can sense humidity?

[Subodh Kulkarni:]

No, as far as we know there are product variation, where the humidity sensor in a – factor of a Wafer or Reticle and that has Bluetooth connectivity device built into it. So no it is a unique product that’s where our IP is. Obviously there are humidity sensors all over the place in the semiconductor line, those are usually big humidity sensing boxes that are recording. So you don’t know exactly what the humidity is inside their tools where a wafer or reticle is traveling.

[Unidentified Analyst:]

Okay. And then I missed first part of the conference call I believe you were talking about the plans that you may be working on that, do you have a strategy or local – on the frontend or how are you – into that technology [indiscernible]

[Subodh Kulkarni:]

Fundamentally the 3D MRS technology is what we classify as a type of projection profliometry technology and intrinsically projection profliometry technology enables you faster speed than laser scan type approaches. So as we push the resolutions further with the 3D MRS technology there will be many applications from the frontend of the semiconductor manufacturing process that we will be able to do at a much faster speed than what they are doing today.

[Unidentified Analyst:]

So you are doing all of this in-house?

[Subodh Kulkarni:]

Today the technology is all in-house, yes. As I mentioned to the earlier caller, once the technology as proven itself up to a certain point, we will certainly engage our OEM customers and partners that we deal with today and some more.

[Unidentified Analyst:]

So part of the prospects that they are describing for us with the resolution…

[Subodh Kulkarni:]

Yeah, that’s the key. As I mentioned, today we say 3D MRS that we have today is capable of inspecting anything 100 micron or above and that’s great for the applications we serve today, we want that number to go down as much as we can push it with projection profilometry because it just levels more and more applications and smaller the number, the bigger the opportunity.

[Unidentified Analyst:]

Do you have any idea of how small you could get?

[Subodh Kulkarni:]

Certainly there are well known limits of optical technology and we know that at one micron also optical – but there’s plenty of room because between 100 and 1 micron. So we’ll continue to push the 100 micron down and that will enable more and more applications.

[Unidentified Analyst:]

Got it. Got it. Okay. Let’s see, I think that’s all my questions, the MRS has been quite in transition in terms of - technology that’s [indiscernible] and I appreciate your time and great quarter guys.

[Jeff Bertelsen:]

Thanks, Craig.

[Subodh Kulkarni:]

Thanks, again.

[Unidentified Analyst:]

Take care.

[Operator:]

Thank you. And we have a follow up from George Marima[ph]

[Unidentified Analyst:]

Hi, again. I wanted to get a little bit of less optic and kind of go out the ways and understand a little bit better your three to five years strategy and where you see CyberOptics in terms of strategic positioning, in terms of – revenue size company, what are you looking to do in three to five years from now?

[Subodh Kulkarni:]

As we had mentioned in our investor presentation, our strategy is to be a technology leader in 3D sensors and that’s where MRS comes in, the multi-reflection sensor, we have commercialized the first generation of MRS and that’s what – made most of our growth right now, pretty exciting what we are going through. As mentioned and discussed earlier, we are now pushing the technology further and we will enable smaller dimension measurements and that enables more and more applications. But we are in a great position as a technology leader right now with projection – trivia clearly getting very good traction with our products and customers. Obviously we want to continue this momentum and keep going more and more aggressively. Frankly we think the opportunities for a advanced 3D sensing optical technology like MRS our many applications and we don’t anticipate too many problems finding new growth opportunities so long as we continue to advance the technology and maintain the lead. IP is a critical element of this strategy. We want to make sure that whatever we are developing and inventing, we protect it with IP because that’s what enables the margins. So our long term strategy obviously is the significant growth and profitability from where we are right now. We haven’t really quantified that far out just because it’s so difficult to know how many applications are – take CyberGage the markets are large obviously for 3D scanners and we are certainly going to get some part of that market, but exactly how big of a slice can we carve out of a $3 billion plus market and then how would the players react once you start getting traction, those are very difficult to project on a three to five year time basis. So we haven’t really quantified where we will be in three years or five years but clearly we will be – our goal is to be significantly larger and profitable than where we are right now.

[Unidentified Analyst:]

I’ve been very impressed to watch you to take your initial strategy of 3D and now you’re expanded into metrology now you’re talking about expanding in possibly frontend, if you see – there and I was just sort of curious what other areas of expansion exist? And it sounds like you’re taking CyberOptics from historically a very niche player into a very kind of heavy hitting big company it sounds like?

[Subodh Kulkarni:]

Yeah we certainly started with that and we are obviously getting good traction right now. We are definitely were SMT oriented niche as you said players of line sensors to a few OEMs. From that, we have come a long ways to where we are in dealing with advanced technology right now, servicing not just SMT but also semiconductor and general purpose metrology. So we’ve increased the customer base, we have increased the total available market for us and that’s what trying to use delivering the growth right now. Given the three markets we are in as of today, SMT, semiconductor and metrology, we feel we have plenty of growth opportunities right in where we are but we certainly continue to look at other areas. And whole frontend is a significantly larger opportunity than the backend area we are playing with right now today with KLA-Tencor. So we are quite excited with what we have and where we will be going which is hard to quantify all these things on a three year or five year time period.

[Unidentified Analyst:]

I understand. Well I love what you’re doing with the company and thank you for your time doctor.

[Subodh Kulkarni:]

Thank you.

[Jeff Bertelsen:]

Thanks.

[Operator:]

And with no additional questions in the queue, I’d turn things back over to the presenters.

[Subodh Kulkarni:]

Well, thank you for your interest and questions. We appreciate it. We look forward to updating you at the end of Q3. Thank you.