CyberOptics Corporation
Q3 2016 Earnings Call Transcript

Published: 26 Oct 2016

[Operator:]

Good day ladies and gentlemen. Welcome to the CyberOptics Third Quarter Earnings Conference Call. Today’s call is being recorded. At this time, I'd like to turn the conference over to Dr. Subodh Kulkarni, President and CEO. Please go ahead, sir.

[Subodh Kulkarni:]

Good afternoon and thanks for taking the time to participate in CyberOptics third quarter earnings conference call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results, following my overview of our third 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 strong year-over-year sales and earnings growth in the third quarter of 2016 ended September 30th. Third quarter sales increased 51% to $15 million from $9.9 million in the third quarter of 2015, and earnings totaled $1.2 million or $0.16 per diluted share, compared to the loss of $514,000 or $0.08 per share in the year earlier period. Our strong third quarter operating results, which were consistent with our previously issued forecast where generated by robust year-over-year fees of inspection systems, MRS enabled 3D sensors and semiconductor products. Our 3D MRS technology platform is giving us a clear competitive advantage in high end inspection applications, and is generating a growing number of opportunities that has significant potential in the SMT, semiconductor and 3D scanning market. We are also pleased to report the initial sale of our CyberGage360 3D Scanning System for the general purpose metrology market, and we are encouraged by the highly positive feedback we are receiving from customers' evaluation of this product. In addition, we have made significant progress with a research initiative in that applying our 3D MRS technology to front end semiconductor inspection, which could have a significant impact on our future performance. I will discuss this in greater detail later in my remarks. In all, we remain confident that our strategic repositioning in the 3D arena, together with continued progress in the semiconductor market, will make the fourth quarter of 2016, another period of profitability and strong year over year sales growth. Third quarter systems sales increased 168% year over year, reflecting increased demand for our entire portfolio of SMT inspection system products. This increase includes SQ3000, 3D MRS enabled automated optical inspection or AOI systems and customer expectances of MX 600 memory module inspection systems. The SQ3000 is making strong inroads in the consumer electronics market and is enabling CyberOptics to gain share in the rapidly growing global 3D AOI market. SQ3000 sales momentum is forecasted to continue in the fourth quarter and through 2017. In addition, customer acceptances were received for the remaining balance of our MX600 backlog, resulting in approximately $2.8 million of revenue in the third quarter of 2016. Approximately $2.9 million of MX revenues were recognized earlier this year. We believe that additional MX600 orders could be received in future period. Sensor revenues decline 10% in the third quarter on a year-over-year basis as solid sales of 3D MRS enabled sensors were more than offset by reduced volumes of legacy, 2D LaserAlign sensors through traditional OEM customers. A significant portion of second quarter order totally $800,000 for 3D MRS enabled sensors was recognized as revenue during the third quarter of 2016. Received from a new customer for a general propose metrology application, related to the inspection of finished goods, the balance of this order will ship in the fourth quarter. We believe this customer could be a significant contributor to our sales team going forward. 3D sensor sales were also generated under long term supply agreements with KLA-Tencor and Nordson YESTECH. Sales to KLA are expected to grow as the company incorporates CyberOptics 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. During the third quarter, we significantly advanced our MRS enabled 3D sensor technology. As a result of work completed thus far, features of 50 to 100 microns are now being measured in our research lab, including devices with mirror like finishes. This is an important milestone along the path to make MRS enabled 3D sensor technology applicable to frontend semiconductor inspection in the next two to four years. If this frontend semiconductor initiative proves to be commercially viable, the available market for fiber optics could be significant. However, I want to emphasize that this project will require much more work, before commercial feasibility can be determined. Third quarter sales of semiconductor products, primarily the WaferSense and the ReticleSense product line, rose 43% year-over-year. Our WaferSense/ReticleSense sales in the third quarter on a year over year basis were driven by strong sales to semiconductor capital, equipment companies and a large purchase by an important customer for one of its fabs. We are currently developing additional WaferSense and ReticleSense product offerings, and we anticipate strong future growth in the WaferSense and ReticleSense product families. Finally, sales of general purpose 3D scanning solutions and services declined 10% in the third quarter on a year-over-year basis, reflecting lower revenues on services. As I previously noted, CyberOptics posted initial sale of its general purpose metrology CyberGage360 3D Scanning System to a rapid prototyping company. Introduced late in the second quarter, this product is based on our 3D MRS technology. CyberGage360 was on display in September at the International Manufacturing Technology Show, where it received a strong reception for its ease of use, speed and accuracy. Approximately 120 sales leads were generated at this show. The CyberGage360 is currently being evaluated by about 20 potential customers in such diverse areas as aerospace, engines and parts, 3D printing, medical devices and cell phone components. Some of these evaluations are being conducted on site at the customer's facilities while other prospects are sending parts to us for inspection. Additional CyberGage360 are anticipated in the fourth quarter, but a more significant impact is forecasted for 2017. At this time, we believe the CyberGage360 could be a substantial contributor to our future growth. We ended the third quarter of 2016 with a backlog of $12.4 million. As stated previously, our quarterly results fluctuate somewhat on sequential basis reflecting the pace of new orders and acceptances for our 3D products. For the quarter ending December 31, 2016 we are forecasting sales of $13 million to $15 million, which would represent another period of solid profitability and robust year-over-year sales growth. And looking farther on the road, we see 2017 shaping up as another great year for CyberOptics, driven by the exciting portfolio of new products enabled with 3D MRS sensor technology. Thank you. Now Jeff Bertelsen will review our third 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 in the third quarter increased 168% year-over-year to $7.9 million, reflecting strong demand across our entire portfolio of SMT inspection system products, including SQ3000 3D MRS enabled AOI systems and customer acceptances for 2.8 million of MX600 memory module inspection systems. It is important to emphasis that our entire portfolio of SMT inspection system products posted robust year-over-year sales growth in the third quarter of 2016. This includes solder paste inspection systems, 2D AOI systems and MRS enabled SQ3000 3D AOI systems. In terms of overall trends, sales of our new 3D MRS enabled AOI products have been accounting for a growing percentage of our total AOI and solder paste inspection system sales. Equally important, the SQ3000 is enabling us to increase our share of the rapidly growing 3D AOI market. We believe both trends will continue going forward. Fourth quarter 2016 SMT system sales are forecast to increase significantly year-over-year due to ongoing robust demand for our entire portfolio of SMT inspection system products, including the SQ3000. The fourth quarter sales for open systems products is anticipated even though we will not have any benefit of MX600 revenue in the quarter. Sales of the electronic assembly sensors declined 10% in the third quarter on a year-over-year basis to $3.4 million. The solid sales of 3D MRS enabled sensors were more than offset by reduced volumes of the legacy 2D LaserAlign sensors to traditional OEM customers. Third quarter 2016 sensor sales included a significant portion of the second quarter order totaling $800,000 for 3D MRS enabled sensors. The balance of this order, which was received from a new customer for a general purpose metrology application related to the inspection of finished goods will ship in the fourth quarter. Fourth quarter 2016 sensor sales are forecasted to increase slightly on a year-over-year basis. Sales of semiconductor products, principally the WaferSense/ReticleSense product line increased 43% in the third quarter on a year-over-year basis to $2.2 million. Sales of semiconductor products are forecasted to pull strong year-over-year sales growth in the fourth quarter of 2016, as semi products are steadily gaining attraction in the semiconductor market and we are developing new generations of both WaferSense and ReticleSense products to drive future revenue growth. Finally, sales of general purpose 3D Scanning solutions and services totaled $1.5 million in the third quarter, declining slightly on a year-over-year basis. As noted in our release, we have received the first order for our CyberGage360 3D Scanning System, which is based upon our 3D MRS technology platform from a rapid prototyping company. We will recognize revenue from this order in the 2016 first quarter, and the additional fourth quarter CyberGage360 sales are anticipated. Moving down the P&L, CyberOptics third quarter gross margin of 44% was up slightly from 43% in the year earlier period, mainly due to product mix. We believe that our gross margin percentage in the fourth quarter 2016 will be at or slightly above the third quarter level. Total operating expenses rose 11% year-over-year in the third quarter of 2016 to $5.5 million, mainly due to additional sales commissions and other incentive compensation resulting from the 51% year-over-year increase in sales. We anticipate that fourth quarter 2016 operating expenses will approximate the third quarter level. Income tax expense was a nominal $21,000 in the third quarter of 2016, reflecting U.S. alternative minimum taxes, state and foreign income tax expense. We are now developing a track record of consistent profitability. This factor combined, with our expectations for ongoing future profits may result in the need to reverse all but portion of our valuation allowance for deferred tax assets in the near future. Such a reversal could result in a significant onetime non-cash income tax benefit potentially exceeding $5 million. The exact future period on when a reversal to the valuation allowance might be needed has not been determined. Once reversed, income tax expense in future periods will reflect a more normal effective income tax rate for GAAP reporting purposes. The reversal does not impact the timing of cash payments for taxes. Cash and marketable securities totaled $22.8 million at the end of the third quarter, a slight increase from $22.5 million at the end of the second quarter. I would note that no shares of common stock were repurchased in the third quarter under our existing share repurchase authorization. Thank you. I will now turn the call over to the conference call operator, who will pole you for any questions.

[Operator:]

Thank you. [Operator Instructions] We will go to Jaeson Schmidt with Lake Street Capital Markets.

[Jaeson Schmidt:]

I’m wondering, first on the CyberGage customer, this rapid prototyping customer, how should we think about the size of this opportunity? And then I guess, just thinking about these CyberGage customers in general, how should we think about potential order sizes going forward?

[Subodh Kulkarni:]

A good question Jason. Thanks for the question. CyberGage is an exciting product. The ease of use, the speed and accuracy clearly differentiates itself as a unique product. The first customer and few new other customers we are talking to right now certainly see the value proposition and that’s what they like about it. At least this particular graphic prototyping customer, they bought the first month. They clearly view this as an integral part of their quality assurance strategy, and we certainly expect them to buy more in the next few quarters. Assuming they deploy it across their entire set up, it would be significant number of units. Too early to quantify the exact number of units or timeline, but it could be substantial contributor in the next year or two years, just with this one customer. But more importantly, when you look at the broader type of customers that are evaluating the product, as we discussed earlier, the range is everything from aerospace to medical devices to 3D printing, to just general propose metrology kind of customers. And it’s nervous, these areas where have a tough time quantifying what the potential of this product is going to be in 2017 and 2018 and beyond, primarily because of 3D scanner is a fairly large category. We have quantified in the past, based on external reports that this is about a $3.5 billion category globally, growing at about 10% based on external reports. Now CyberGage has a few limitations in terms of size and reflectivity and accuracy. So not all of the market is available for CyberGage. But a significant portion of the market should be available for CyberGage, and given its unique value proposition, we think it should be able to make good inroads in that market. One thing I will point out is, typically we do see customers starting evaluations with [indiscernible] end of the parts or get the unit and it does seem to be a three to six month kind of cycle, where they want to go through, or justified to purchase internally. At the end of the day it is a capital equipment and they have to make sure they have budgets to buy it. So it is a three to six months' kind of a cycle, that we are seeing right now. That’s why we projected that even though we will send a few more units in this quarter, it really won't have a meaningful impact in the next year and beyond. Hope that answers your question.

[Jaeson Schmidt:]

Yes, that’s helpful and just curious, how long the time frame was between this customer just first starting to evaluate the CyberGage, and the time that they're now kind to go move forward with it?

[Subodh Kulkarni:]

I would say it's the three to six-month range. We started talking to them about three or four months ago, and that’s been -- they issued the first order. But really more important is how long it would take for them to deploy it through their entire manufacturing operation, and that’s going to take few quarters. It’s not one of those things that they recently turn on their quality assurance on the new type of technology.

[Jaeson Schmidt:]

Okay that makes sense. And then just looking at the OpEx line, do you anticipate meeting to make any significant investments there going forward, to address some of these opportunities, not only in Q4 but even looking out to 2017?

[Jeff Bertelsen:]

I think we will -- moving forward and what we have talked about as we will -- there will be some investments in sales and marketing and channel developments, so we can fully take advantage of the opportunities in front of us, with be MRS technology and the related products. But I think those would be incremental investments. So as we see revenue start to grow, we'll make investments in the channel and so forth. Along with, there will be some modest investments in R&D, but I think that will scale with revenue as we go.

[Jaeson Schmidt:]

Okay and then, the last one from me and I’ll jump back in the queue. Just curious, how you guys would characterize your current visibility? I know there were some comments in the prepared remarks about 2017? But has visibility remained somewhat stable compared to past years?

[Jeff Bertelsen:]

Yes, I think visibility has remained fairly constant. I think we've got pretty good visibility for one quarter out, and we're starting to get visibility for 180 days out. We're starting to hear about opportunities beyond the fourth quarter. So I think it's fairly consistent with what from -- compared to what we have seen in the past.

[Operator:]

[Operator Instruction] We will go to Dick Ryan with Dougherty.

[Dick Ryan:]

So Jeff, I'll start with maybe some housekeeping numbers. Can you give me depreciation, amortization and stock comp for the quarter?

[Jeff Bertelsen:]

Sure, stock compensation expense was $142,000 in the quarter and depreciation and amortization was $506,000.

[Dick Ryan:]

Okay. And would you by chance have the revenue buckets broken out? I think we'll be able to glean semiconductor sensors. So it was just $2.2 million, but I was wondering on the other bucket…

[Jeff Bertelsen:]

Sure, I -- yes I do have though. So semiconductor sensors, as you said were $2.2 million, 3D scanning solutions and services were $1.5 million, SMT inspection systems were $7.9 million and then the OEM sensor line was $3.4 million.

[Dick Ryan:]

Okay, so looking at guidance for Q4, similar to what you provided for Q3, '13 to '15, but you're not going to have any -- the MX600. So that $2.8 million delivery isn’t in there, and the bulk of the 800. So looks like this could be a pretty good performance broadly based for Q4 a without any big deliveries. Any areas that are going to pick up in Q4, that we didn’t see in Q3?

[Jeff Bertelsen:]

Yes, I think we're going to see some strength in WaferSense/ReticleSense product line that typically -- the fourth quarter is typically a strong quarter for us and so I think we're going to see strength in that area. I think we'll see continued strength in SMT inspection systems. Even without any MX600 contribution, I think we'll see some acceleration in the other product areas as well. And…

[Subodh Kulkarni:]

And the scanners and scanning services should have a better quarter in Q4 compared to Q3 because of the CyberGage contribution, even though it may be but just the overall portfolio is okay.

[Jeff Bertelsen:]

Correct.

[Dick Ryan:]

And just to clarify, the CyberGage360 that wasn’t revenued in Q3 right?

[Jeff Bertelsen:]

That is correct. That will happen here in Q4.

[Dick Ryan:]

So about maybe just to focus a little bit on semiconductor. The MX600, we're looking at a pretty decent memory space NAND, and it looks like DRAM is getting some momentum. Can you talk about either the existing customer you have there, the opportunity? Do you move into other memory players?

[Subodh Kulkarni:]

Sure. So as you mentioned, the existing customer we have, where we have sold all the MX systems to date, we have operated most of their production now. There's certainly a few more opportunities left and as they increase the capacity or change their capacity plan, that will obviously -- we will benefit from those additional orders, but they are not expected to be sizeable like what we had this year. But overall memory industry is now in a relatively healthier position now than what it was a few months or a few quarters ago. So now everyone is talking about investing in capacity for both DRAM, and as you mentioned, as well as NAND. So memory -- all the key memory players are doing well. So that obviously is a good backdrop. We will get a few more orders, but not the substantial ones as this existing customer. We are continuing to talk to the other potential customers, and hopefully we will get those orders. But as we have discussed in the past, these are very project oriented kind of orders. So when they come, they come in big volumes.

[Dick Ryan:]

Okay, and it sounded like you might be moving into inclusion in other tools from mem? Did I hear that correctly?

[Subodh Kulkarni:]

That continues. Right now we are in their backend inspection system, and if you go back on a few quarters, we started with one or two types of systems, and that number continues to increase as they find more and more value with their modern sensor technology. So that will continue to broaden and across their toolset and how they are using the sensor.

[Dick Ryan:]

How many tools there are you on now?

[Subodh Kulkarni:]

It gets difficult because they do get customized. So it's not a standard thing, but it is primarily in the iPhones [ph] lineup that they have in the backend inspection system. Pretty much all of their advance iPhones [ph] backend inspection systems now have MRS sensor technology. Sometimes it's only for the value side -- bottom inspection. Sometimes it's both for the bottom as well as top inspection and sometimes it's just for the top inspection. It really depends on each customer and that application, but the tools do get configured with the MRS sensor.

[Dick Ryan:]

Okay, one more for me on the semi side. WaferSense, can you talk about the split there, which you might see OEM and fab? It looks like you did have a pretty good sized fab customer in WaferSense. Can you talk about that split going forward?

[Subodh Kulkarni:]

In general, we don’t talk about the split. The majority -- this is roughly half and half, right OEM and fabs. And in this particular case it's a large existing customer of ours, that while scaling up their fab and they definitely a needed a lot of WaferSense products to bring up their tools and stuff like that. So we definitely did benefit. But overall that category as you have seen continuous to grow in solid double digit, some quarters better than others and as Jeff mentioned earlier, we expect that category to deliver another strong Q4 and 2017. We continue to increase the number of products we offer. This year we are offering the AMS product. Last year we started doing ReticleSense, and do expect us to launch more products in WaferSense and ReticleSense as we find the right applications. So we expect that category to continue to do really well for us in the future.

[Dick Ryan:]

Okay and regarding WaferSense going to market, is that direct? Are you getting outside reps to help you get sort penetration or what’s your marketing and sales effort there?

[Subodh Kulkarni:]

Sure. So for OEMs, like equipment markers, we do go direct, although sometimes we do use reps, depending on which part of the void. For fabs, it’s pretty much through the rep network. So we have reps in all the key regions of the world where there are fabs, and we are approaching them through the reps.

[Operator:]

Thank you. The next question comes from [indiscernible].

[Unidentified Analyst:]

I want to get a sense on the OEM sensors part of your business. What kind of market size opportunities you have over the next couple -- two to three years?

[Subodh Kulkarni:]

That’s difficult one to quantify, primarily because when we enable a certain OEM to use our sensor, it gets designed into their equipment and they use it for a long time after that. But typically, before they use our sensors, they are usually using some off the shelf technology on some internally developed technology. It's tough to say what is the total market opportunity for the OEM sensor category. We do know that with the new MRS sensor technology, that we have with the accuracies and the speeds we can get using optical technology, we see plenty of other new potential opportunities with MRS. So we don’t think it’s one of those cases of here is the market size and this is the market share we have and we are restricted by the market size. It’s more a question on finding one OEM at a time and they bring their applications, where they find value with another sensor and that’s how the market will continue to grow for us.

[Unidentified Analyst:]

How’s the OEM pipeline of customers today?

[Subodh Kulkarni:]

The current state of OEMs are doing fairly well, particularly on the MRS side. They continue to do really well and grow. And we certainly are talking to other potential OEM opportunities. So we feel very good about what we can do with the MRS sensor technology as far as the OEM area is concerned long term.

[Unidentified Analyst:]

For 2017, you talked about great growth. What parts of your business are most excited about for 2017?

[Subodh Kulkarni:]

We think 2017 will be an exciting year, and frankly on all the fronts. When we look at all the four areas that we look at our results, the OEM sensor area that we just touched on, the inspection system, the semiconductor products and the 3D scanners and scanning services; we expect all the areas to do fairly well for us, and I'll give you the key factors for it. On the OEM sensor side, we just touched on it. The MRS sensor technology is really valuable from an accuracy and speed stand point. So we certainly expect the current set of OEMs to grow. But also, new potential OEMs that we will be able to sign up in 2017. So MRS is a clear driver over there. On the SMT inspection systems, again the MRS enabled SQ3000 continues to do really well for us and that’s a fast-growing marketplace, the 3D AOI market. So between a rapidly growing market plus increasing market share, we expect significant growth coming from the inspection system made. The third area is the WaferSense/ReticleSense we’ve touched on earlier. That continues to do really well for us and we continue to increase the number of offerings we have, and there is no reason to expect that trend should to change. So we are expecting a pretty good year out of the WaferSense/ReticleSense. And last but not the least, the 3D scanning and scanning services category, that’s where the exciting CyberGage360 product is coming along, and we definitely expect, based on everything we have seen and heard from customers so far, we definitely expect that to be a sizable contributor to growing that -- not only that segment but the whole company for that matter. So there are enough growth drivers in each of the four areas. That’s what makes us excited about 2017 and frankly beyond 2017.

[Unidentified Analyst:]

I'm assuming that means at least 20% type growth for 2017?

[Jeff Bertelsen:]

Yes, we have not put a number on it, but we are definitely, with our portfolio new products and those based on the MRS technology, we are excited about the opportunities that we have.

[Operator:]

And we'll now take a follow up from Dick Ryan.

[Dick Ryan:]

Sure, Subodh on the resolution, getting it 150 nanometers, is this just a function of R&D spending and time, or do you need some additional technology to get it down to levels that really kind of open the front end of the semi process?

[Subodh Kulkarni:]

Dick, it's a little bit of both. Certainly, we have to improve what we do internally which is the -- as you know the MRS -- the guts of MRS technology is the algorithms that we have developed and the mathematical equation and how we solve them. And we certainly have to improve how we are solving the equations for these finer features. So we have our share to do. But in addition to that, we do need some external help in terms of -- we do need higher resolution cameras and higher resolution digital light projectors, and even for the matter higher computing power for the same price, because these are extremely computationally intensive equations we are solving, and each of our systems has to be practically shipped with a low-end server right now to solve this equation. So we do need better computing power, better sense, better detectors, CMOS detectors and better DLP projectors in addition to doing the math ourselves.

[Dick Ryan:]

Are you working with customers currently to help move this forward?

[Subodh Kulkarni:]

We are talking to the key OEMs as you can imagine on the front-end side, and what we need to do to get there. So definitely things will get there in a matter of time. So we are -- yes we are talking to potential customers and getting their feedback.

[Operator:]

Thank you. And with no additional questions, I would like to turn the floor back over to our speakers for any additional or closing remarks.

[Subodh Kulkarni:]

Thank you for your interesting questions. We look forward to updating you about our progress after Q4. Thanks again.

[Operator:]

Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again for your participation.