CyberOptics Corporation
Q3 2015 Earnings Call Transcript

Published:

  • Operator:
    Good day. And welcome to the CyberOptics Third Quarter 2015 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, sir.
  • Subodh Kulkarni:
    Thank you. Good afternoon, and thank you for joining CyberOptics third 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 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 are subject to a number of risks that are discussed in our Form 10-K for the year ended December 31, 2014, 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. Revenues totaled $9.9 million in the recently completed third quarter to $11.7 million in third quarter of 2014. We reported a net loss of $514,000 or $0.08 per share in the third quarter versus a net loss of 448,000 or $0.07 per share in the year earlier period. While encouraged by growing sales of our products based on our new 3D Multi-Reflection Suppression or MRS inspection technology platform, including MRS sensors and SQ3000 3D AOI systems, these revenues were not sufficient to offset the sales decline of 2D AOI and solder paste inspection systems. The markets for 2D AOI and SPI systems have become highly competitive and a growing number of companies are transitioning from 2D AOI to 3D AOI to meet the increasingly demanding inspection requirements of the electronics and industrial market. For this reasons we believe sales of our new 3D MRS enabled AOI products will represent an increasing percentage of our AOI and SPI sales in the future. We believe our differentiated 3D MRS platform technology will provide us with a strong opportunity to capture meaningful market-share in the 3D AOI market due to the demonstrated competitive advantages our MRS technology and we believe our differentiated 3D MRS platform technology will be CyberOptics’ primary growth driver in coming years. CyberOptics’ third quarter was also affected by lower sales of electronic assembly sensors due to soft demand from OEM customers selling into the China market. In addition, sales of semiconductor products principally the WaferSense, ReticleSense product lines were down in the third quarter reflecting a general slowdown in the semiconductor capital equipment market. Semiconductor revenue also was affected by production delays for the new Auto Multi Sensor or AMS, an all-in-one wireless solution that combines levelling vibration and humidity measurements. As a result, a portion of anticipated AMS sales have been pushed into the fourth quarter. Finally, third quarter LDI rose 27% year-over-year reflecting a return to normal levels. Before continuing I also want to note that we received customer acceptance for our first MX600 memory module inspection system in the third quarter and the resulting revenue is included in our results for this period. The same customer one of the world’s largest memory module manufacturers placed an order for one additional system in the third quarter which kept our MX600 backlog at approximately $3.4 million at September 30th. If we receive customer acceptance for multiple MX systems that have already been shipped, a significant portion of this backlog would be converted into revenue in the fourth quarter. I would now like to add a bit of color to our initiatives including 3D MRS which constitute the technology platform to which CyberOptics has transitioned. We ended the third quarter with an order backlog of more than $2 million for our 3D MRS enabled AOI products which are steadily gaining traction in the marketplace. During the quarter, we sold additional SQ3000 systems which are designed to expand CyberOptics presence in the smartphone and tablet markets as well as other high procession applications. We also recorded further sales of 3D MRS sensors to KLA-Tencor under our long term supply agreement. Sales to KLA are expected to continue growing in 2016 since our sensors are being incorporated into a growing portion of KLA’s backend semiconductor packaging inspection systems. As previously reported, we have established a supply agreement with another OEM customer for 3D MRS sensors and have sold initial units for testing and demonstration purposes. This customer expects to introduce its MRS equipped inspection system in the fourth quarter making us believe this new relationship has solid potential. We are also pursuing additional OEM customers for our 3D technology in both SMT and non-SMT markets. These initiatives are at varying stages including initial product trials. We believe this potential relationships are promising but as was the case with KLA, OEM supply agreement involved an extended period from product launch to ramped up production. Our progress with these relationships makes us confident in our vision and strategy to be the leader in high precision 3D sensors. Although we have achieved our measurement accuracy targets for the MRS equipped CyberGage inspection system in the lab environment, further improvement in consistency is required before customer beta testing can be launched. As we have been saying, CyberGage is a complex product that has presented a number of technological challenges which has slowed our progress towards commercialization. We are overcoming these issues and presently anticipate initial CyberGage sales in the first half of next year. I will conclude with a few words about our outlook. Due to continued weakness in China’s manufacturing sector, our OEM customers are currently forecasting a decline in fourth quarters orders for electronic assembly sensors. However, fourth quarter sales are expected to benefit from our $10.5 million backlog on September 30, 2015 of which approximately $5.4 million represents orders for the new SQ3000 3D AOI system and MX600 system products. We believe customer acceptances will be received in the fourth quarter for a substantial portion of our SQ3000 and MX600 backlog. Assuming customer acceptance is received, revenue from these products would have a favorable impact on our results for the quarter. In addition, we are anticipating a solid rebound in fourth quarter semiconductor sales. The major shift in our strategic focus to establish CyberOptics as a leader in 3D high precision sensing technology has been challenging. However, I want to stress that our strategic initiatives are gaining meaningful traction making us genuinely optimistic about CyberOptics’ future as a high precision 3D sensor company offering differentiated solutions. At the same time we are confident our WaferSense and ReticleSense product lines will make further headway in the semiconductor industry and generate steadily growing contribution to our sales stream. For both reasons we feel very good about fiber optics future. Thank you. Now Jeff Bertelsen will review our third quarter operating 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 fell 25% year-over-year reflecting the continued sales decline of 2D AOI and SPI systems due to reduced demand for these products as many customers are transitioning to higher precision 3D inspection. We believe sales of our new 3D MRS enabled AOI products will represent an increasing percentage of our AOI and SPI sales in the future and we believe our differentiated 3D MRS platform technology will provide us with a strong opportunity to capture meaningful market share in the 3D AOI market. Third quarter systems revenues benefited from customer acceptance of our first MX600 memory module inspection system. Our customer placed an order for one additional system in the third quarter which kept our MX600 backlog at approximately 3.4 million at September 30. As Subodh noted, if we received customer acceptance for the multiple MX systems already shipped, a significant portion of this backlog would be converted into revenue in the fourth quarter. Sales of electronic assembly sensors declined 17% from last year’s third quarter due to soft demand from OEM customers selling into the Chinese market. As we said in this afternoon’s release, this weakness is expected to continue in the fourth quarter. We believe our KLA sales should increase in 2016 since our sensors are being incorporated into a growing proportion of KLA’s backend semiconductor packaging inspection systems. And as previously reported, we have established a supply agreement with another OEM for 3D MRS sensors and believe this customer has solid potential. Sales of semiconductor products principally the WaferSense and ReticleSense product line were down 17% from last year’s third quarter due to a general slowdown in the semiconductor capital equipment market as well as production delays for the new Auto Multi Sensor or AMS product. As a result, a portion of anticipated AMS sales has pushed into the fourth quarter. At this time we are anticipating a solid rebound in fourth quarter sales of our semiconductor products. We are optimistic about the future of our semiconductor business and believe it will be a significant contributor to our consolidated sales going forward. Finally, third quarter LDI revenues rose 27% year-over-year reflecting a returne to more normal sales levels when compared to the prior year. Moving down to P&L CyberOptics’ third quarter gross margin of 43% was down from 45% in the year earlier period due mainly to product mix and competitive market conditions for 2D AOI and SPI products. Total operating expenses were down 15% or about $850,000 from last year’s third quarter reflecting lower R&D spending as projects were completed and lower expenses related to our 2D AOI and SPI products driven by their reduced sales levels. Cash and marketable securities totaled 16.7 million at the end of the third quarter compared to 17.8 million at the end of the second quarter. This cash reduction was due impart to inventory related investments and supplier deposits required to support the MX600 and SQ3000 product launches. Our cash reserves are more than ample to support our growth initiatives. Finally, we did not repurchase any shares in the third quarter under our existing share repurchase authorization due to the rebound in our stock price during this period. Thank you. I will now turn the call over to the conference call operator who will pool you for any questions.
  • Operator:
    [Operator Instructions] We’ll go first to Ross Strehlow with RBC Wealth Management.
  • Ross Strehlow:
    Let's start first with the MX orders, are all the orders in the memory chip module area with just one customer?
  • Subodh Kulkarni:
    Yes that is correct.
  • Ross Strehlow:
    What kind of progress can you report on working with any other customers, Subodh in the memory area?
  • Subodh Kulkarni:
    Well the memory market is fairly consolidated as you know Ross and there is really three companies left in high volumes in the memory area right now for both DRAM and SSD. So then there is suppose second tier of memory integrators, if you will. We are dealing with one of the top players here. So this is their significant potential and that’s where all the orders are right now. We certainly expect and hope to get some more orders from either the other Tier 1 players or Tier 2 or Tier 3 players. But right now we frankly have enough, you can see that in our backlog, we have our hands full in getting the system shipped and getting them accepted that’s what we are focused on right now. But certainly we will expect to get some more in the future.
  • Ross Strehlow:
    So you are working with these other customers in that area and is it fair to say then that you are getting closer to getting some orders from them as well?
  • Subodh Kulkarni:
    I would say right now our focus is clearly to get the backlog cleared of for what we have right now. Certainly we are proposing the memory inspection system to other customers, but I have nothing to report in terms of orders. I will remind you that these are fairly customized system. So it does take some time even once we get the interest and stuff like that, so each one has to fit in their integration area and it is customized to their requirements. It takes a while to get it going, but once it's there we are kind of a locked in supplier for them for their -- all the memory expansions.
  • Ross Strehlow:
    Okay very good. Moving on to your regular sensor business, you said it’s down 17% this quarter and you expect it to be down again, is that down sequentially from what you just did?
  • Jeff Bertelsen:
    Yes, I mean -- what we’ve said is we’re forecasting a decline in fourth quarter orders for electronic assembly sensor. So that really would be down sequentially and year-over-year, we’ve got a real piece of China market effect of the relationships with the customers are still very solid, we’re continuing to work with them, we’re talking about new product development. So it is more of a short-term -- China impact than anything else.
  • Ross Strehlow:
    Do you have any kind of forecast or have they given you any kind of forecast when they expect a rebound in one of their -- in one of your kind of core areas being in these assembly sensors?
  • Subodh Kulkarni:
    Well certainly everyone is expecting going forward, for our business to return to more normal levels, they’re also trying to understand the impact of China where every day short-term [indiscernible] or every day more sustained long-term and it's not clear to them either, they are also monitoring the situation. But in general they don’t expect business to go to very low levels in the future. They are expecting some kind of a bounce back, it's just a question what is the rate of bounce back.
  • Ross Strehlow:
    It's been the common thing that we’ve been hearing with other companies too in that entire sector.
  • Subodh Kulkarni:
    Yes, certainly there is this Chinese manufacturing sector and certainly the electronics manufacturing sector we are hearing it consistently across the board that there’s certainly a slowdown, significant slowdown going on right now.
  • Ross Strehlow:
    Now your backlog Subodh at 10.5 million, what was it at the end of last quarter? I was looking through my notes and I can’t see it.
  • Subodh Kulkarni:
    At the end of last quarter it was 7.9.
  • Jeff Bertelsen:
    7.9, yes, 7.9 million.
  • Ross Strehlow:
    Okay. So that’s nice, you’ve got a significant increase.
  • Subodh Kulkarni:
    Yes.
  • Jeff Bertelsen:
    Yes.
  • Subodh Kulkarni:
    The backlog and the significant increase and as we said in our commentary a lot of it is attributed to the SQ3000. We are definitely gaining traction with that product right now and that is showing up in the backlog right now.
  • Ross Strehlow:
    So since you introduced the 3D AOI system, how many new customers have you won?
  • Subodh Kulkarni:
    We are in various evaluation stages right now.
  • Jeff Bertelsen:
    Yes, I would say actual wins, it’s about five new customers, but I think the exciting thing is just the -- there is a large number of evaluas [ph] going on with new customers.
  • Subodh Kulkarni:
    And some of them are very large in size.
  • Jeff Bertelsen:
    Right.
  • Subodh Kulkarni:
    And each one of them can be a big win in the long-term.
  • Jeff Bertelsen:
    Yes, and so there is a high level of interest in SQ3000. So it really looks positive.
  • Ross Strehlow:
    Now that’s great, that’s great.
  • Subodh Kulkarni:
    Yes, absolutely, SQ3000 gets us excited. It is a truly differentiated product. It shows very well when customers compare it to competitive products in 3D AOI and we are winning quite a lot of evaluas. So we are pretty excited about SQ3000 potential and where it could go.
  • Ross Strehlow:
    Yes, that’s gratifying and based upon your $2 million backlog thereto. So it’s definitely pricking up traction.
  • Subodh Kulkarni:
    Yes, it is.
  • Ross Strehlow:
    Now moving on to the semiconductor division. That was down 17% and you noted your new product that combines the three, you called that the AMS solution, is that right?
  • Subodh Kulkarni:
    That is correct.
  • Ross Strehlow:
    How much of your revenues down 17%, do you attribute to your -- the snag that you have that you mentioned in your production?
  • Jeff Bertelsen:
    First and foremost it would be the general slowdown in semi cap. But there was a production issue with AMS and that probably impacted our revenue 10% or so for the quarter.
  • Ross Strehlow:
    And has that -- okay, has that now been corrected?
  • Jeff Bertelsen:
    And let me just clarify, it would be 10% of semiconductor revenue not total revenue.
  • Ross Strehlow:
    Yes, right. I got it, right.
  • Jeff Bertelsen:
    Okay.
  • Subodh Kulkarni:
    Regarding your question, it is getting corrected. We feel pretty confident that we should be able to fulfill all those orders in the fourth quarter. That’s why indicated, we expect a solid bounce back this quarter.
  • Ross Strehlow:
    But it’s not corrected quite yet?
  • Subodh Kulkarni:
    Not today, I mean, we are in the final stages. It was relatively simple hitch. It was more of a supply issue, the choice of the sensor and the supply issue. No rocket science if you will, just minor stuff, but it did impact the Q3 numbers and it will show as a bounce back in Q4.
  • Ross Strehlow:
    Okay, very good. And then finally, talk some more about the CyberGage, I mean that has been a long delay now Subodh and you did talk about -- you’re more broad about your sales in the first half, you expect that sales to start in the first half. Last quarter you said the sales were going to start interest he fourth quarter, so --.
  • Subodh Kulkarni:
    Certainly.
  • Ross Strehlow:
    -- can you be -- let me finish, can you be more specific as far as -- talk a little bit about -- go into some more detail about what are some of the issues, when do you expect the beta test and can you give us some more detail on when you expect the sales? You said the first half, can you give a little bit more detail about exactly when?
  • Subodh Kulkarni:
    Okay, so the answer to your answer, I mean it’s a broad ended question. Certainly we have been delayed and as I mentioned in the commentary it is a technologically complex challenging problem and that has taken significant time to resolve and one area where we are still struggling and that’s why we didn’t quantify the exact dates, it’s the consistency. Last quarter I mentioned the key value proposition of CyberGage is, it's a 3D scanner that is very accurate, very fast and very easy to use. And that’s extremely appealing to customers and that’s why the interest is still high and everyone is eager to get even prototype version of that product because it does solve tremendous -- it has tremendous value proposition for many different customers in different segments. Having said that, we feel very good about speed and ease of use part. We have done that time and time again where we feel very good with our technology and getting speed. Last quarter we got the accuracy pretty good too and I mentioned in the call that we are well in the acceptable range for accuracy now in the sub 25 micron, 1 sigma which is very acceptable for a 3D fast scanner. The challenge we ran into which is what slowed us down is the consistency issue and consistency mainly being the -- everything looks good, we moved the system effectively from one location to another location essentially creating some kind of a perturbation in the sensor and accuracy moves drips along basically. And that is a very bothering part where we need to kneel down as to what in the sensor moved to create a change in accuracy. And that’s what’s slowing us down right now. We realized we could ship something it will look good, but we just don’t feel good about sending something out there which is not intrinsically robust in nature. So it's a consistency part that we are working right now, it is getting us into making the frame more rigid, making the sensor more rigid. So things don’t move and if they move how do we get it recalibrated on the fly. So those are the areas we are working on, Ross, right now. I realize it has been a significant delay compared to our original timeline estimate, but I still feel good that we will get this product done their soon and as soon as it's ready it's going to be a great product for us long-term.
  • Ross Strehlow:
    And so you can’t -- you don’t -- you cannot really give us a timeline in terms of when you expect to finally go into beta?
  • Subodh Kulkarni:
    Not today because of the consistency issue. I mean, honestly I did think six months ago that we would be there already, but this consistency -- plus it was the accuracy issue that took us a long time and I have mentioned that in the previous descriptions that it gets into very serious mathematical challenges of tele centric versus non-tele centric inspections. It took a long time to understand that and resolve that. We are over that hurdle. This consistency is a new thing that came along in the last couple of months and that’s what we are working on right now. But till we have all the data in our hands to make sure that it is consistent, I don’t feel good about giving a certain timeline.
  • Operator:
    [Operator Instructions] We’ll go next to [Miles Jennings], Private Investor.
  • Unidentified Analyst:
    You mentioned that you hope to gain in the 3D AOI market and could you give me a sense of what the annual sales in 3D AOI appear to be at this time?
  • Subodh Kulkarni:
    Sure, we had quantified the market size about six months ago, Miles as about $60 million globally, growing at about 40% compounded annual growth rate. We do believe that growth rate is very much is still there. The market we think is an $80 million to $100 million annual run rate as of today, but still continuing the rapid growth. We think the market will reach $250 million to $300 million in the next two to four years, it's hard to know exactly when the growth will slow down. But we don’t think the market is going to grow much more beyond $300 million, but it's certainly a sizeable $80 million to $100 million market today growing at 40% compounded annual growth rate.
  • Unidentified Analyst:
    As part of the question, you also used the word meaningful share of that market and although webster may have a definition for me, I would like to ask you, are you referring to a meaningful part of that market or a meaningful part of your business? And what do you mean by meaningful, is it 1% or the 2%?
  • Subodh Kulkarni:
    Meaningful share of that numbers I just went over, about $80 million growing to about $300 million. So a meaningful share in that market and certainly assuming we do that it would be a meaningful share of the company’s revenues.
  • Unidentified Analyst:
    And what would you consider a meaningful share of that market, 1% or 5%?
  • Subodh Kulkarni:
    We certainly want to get close to double-digit market-share. Using the differentiation that we see in SQ product and the initial traction at least that we see and the number of evaluations we are winning, even though we are not the first one in 3D AOI, we think we have a superior differentiator solution. So aspiring to anything less than a double-digit market-share would not be fair, I think we really do think that that product has the potential to gain us double-digit market-shares.
  • Unidentified Analyst:
    That’s really excellent and a very significant item in your revenue picture [multiple speakers]. Second question, I had is I notice that in your trade show in Minneapolis coming up next week, in the exhibitor list you have a picture of the CyberGage product and I assume that that will be there for display and I wonder will you be demonstrating this at the trade show?
  • Subodh Kulkarni:
    We haven’t thought -- decided exactly out, I mean the original plan obviously was to focus the whole thing on CyberGage assuming it was in beta, but clearly it's not in beta right now. Frankly, my inclination mind says if the technical team can demonstrate the consistency issue to me, I’ll be the champion and it will be in the show. But if the consistency is still an issue as of that day, I will hold that back and promote rest of these. LDA has a good portfolio of 3D scanner and that is doing pretty well right now. So as exciting as CyberGage is, I don’t want to lead customers to that product when we still have an intrinsic issue there with consistency.
  • Unidentified Analyst:
    That’s fair enough and again congratulations on the introduction of the SQ3000. This is primary product that you had envisioned in your AOI business and the fact that you were there during the transition from 2D to 3D with a product that’s leading the market. It’s just wonderful news and thanks for report.
  • Subodh Kulkarni:
    Thanks Miles. I mean if you remember our investor presentation and it’s still there. There are three areas of monetizing our MRS technology. One was the 3D AOI, the SQ3000 and it is showing traction right now and we are really excited about what we could do in that market. We went over it earlier. Second is the CyberGage and that’s what we talked about, the consistency issues still hampering us. And the third is the KLA-Tencor and backend semiconductor inspection area and that is also gaining nice traction. So we feel really good about MRS technology in general and what we are doing right now in all the three areas.
  • Operator:
    At this time, we have no further questions over the phone lines.
  • Subodh Kulkarni:
    Well, thank you for your participation and interest. We look forward to updating about our progress next quarter.
  • Operator:
    I do apologize. We have one more question from Ross Strehlow with RBC Wealth Management.
  • Ross Strehlow:
    Yes, hi guys. You know I think we should probably finish this up with -- if you can get to more -- give us some more color with your 3D sensors, I know the KLA-Tencor was the first relationship and now that seems like it’s really starting to gain traction. Talk some more about other -- how many other companies have you -- are you actually working on in the various stages if you could?
  • Subodh Kulkarni:
    Right now I mean there are various stages, but I would say three. One is clearly -- in addition to KLA-Tencor, one, as we have described in our press release, they have already started buying and they are integrating and we will give more and more information about them. We feel really good about the potential of that customer moving forward. And then a couple of more in the non-SMT spaces and these are again large companies with significant potential. Essentially, they see the value in MRS sensor technology as really revolutionary optical sensing technology that can enable some measurement and inspection that any other technology cannot handle today. So as we mentioned in our press release, we are at various stages, KLA-Tencor is ramping up nicely, the next one is the new OEM that should be ramping up here within the next few months and then the other three OEMs are at various stages.
  • Ross Strehlow:
    Okay. One thing I am not quite sure on Subodh about this is, is there a lots of different industry groups that have the potential for a 3D sensor or is it just restricted to a few. If you could give us a little bit of color on the potential market size for 3D sensors.
  • Subodh Kulkarni:
    That’s a great question Ross. Fundamentally the answer is, there are many industries that could use 3D optimal sensing technology such as MRS technology. Essentially what we have done in our lab here is invented a 3D microscope if you will with measurement capability in it, I mean this is a microscope that is moving extremely fast and can do XYZ measurements all at the same time. And there are many, many industries that you can go in, where you can see a 3D microscope as usual a human operator or operators at the end of the line that are inspecting part. And we are talking about medical device industries that are inspecting various parts that are coming down the line or food industry or telecom industry or defense, I can go down, there are -- just about every industry that is producing some physical widget, if you will, it needs some kind of an inspection at the end of the line and we think MRS could be a nice sensor to automating all of those inspections procedures. So we feel really good about the various different industries. We have started with SMT with our own SQ3000. We have started with semiconductor backend with KLA-Tencor. We have this new OEM we are working with right now and a couple other as we described earlier. But the list is quite long. I think it’s our ability to secure this longstanding relationships and each application take some fine tuning and work. And we don’t want to chase all of them, all at the same time because we will end up screwing many of them up otherwise. But fundamentally we have a solid proprietary foundation that is built, is getting validated as we speak and so I believe the applications are going to be many, many different industries, not just one or two.
  • Ross Strehlow:
    Have you considered partnering up with other -- with leaders in the various industries that could help market this?
  • Subodh Kulkarni:
    Absolutely, I mean in fact if you look at our agreement with KLA-Tencor, it is a mutually exclusive long-term strategic relationship and it made sense to us without them we would really have no access to the semiconductor backend inspection market. They have a very dominant market share position in that area, it made sense to partner with someone like them to access the semiconductor backend inspection market. We continue to look at those kinds of opportunities in other industries too, who would be the right players that we should partner with to access that industry. It’s not easy to find a 50 plus percent market share player in various industries. In semiconductor backend, KLA-Tencor has a very enviable position, but not every industry has such a powerful player. But we continue to look at other options, certainly we are by no means going to be able to commercialize all these applications on our own. So yes, partnership is a key ingredient of our long-term strategy here.
  • Operator:
    At this time we have no further questions in queue. So I turn the call back over to Subodh Kulkarni for any additional or closing remarks.
  • Subodh Kulkarni:
    Thank you again for your participation and we look forward to talking to you next quarter.
  • Operator:
    That does conclude today’s conference. We thank you for your participation.