CyberOptics Corporation
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Please standby, we're about to begin. Good day and welcome to the CyberOptics Fourth 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.

[Subodh Kulkarni:]

Thank you. Good afternoon and thanks for taking the time to participate in CyberOptics fourth quarter earnings conference call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our recent operating results, following my overview of our fourth 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, 2014, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of Risk Factors. We made significant progress in 2015 at implementing CyberOptics strategic transition to 3D technology as evidenced by our growing sales of 3D MRS enabled inspection systems and sensors. As a result, we are positioned to compete effectively in the rapidly growing 3D arena which is why we are optimistic about our future and forecasting strong sales growth and profitability in 2016. Turning now to our recent operating results. Fourth quarter revenues which benefited from solid sales of new 3D inspection systems and sensors totaled $11.4 million down slightly from $11.7 million in fourth quarter of 2014. We also reported breakeven operating results with a small net loss for the current period compared to net income of $85,000 posted in the year earlier quarter. It is worth noting that both sales and earnings were significantly improved from the levels reported in the third quarter. I would now like to briefly review some background on our technology transition to better frame a discussion about our recent 3D order activity. 3D inspection is a growth segment of the electronic assembly, semiconductor, and industrial markets. In response, we have developed the first generation of our Multi-Reflection Suppression or MRS 3D technology. This differentiated sensor technology has been successfully deployed in our new 3D SQ3000 Automated Optical Inspection or AOI system which is aimed at expanding CyberOptics presence in the smartphone and tablet markets as well as other high precision applications. If this area identify defects as highly critical due to smaller electronics packaging and increasing component density on circuit boards which are driving the need for precision 3D inspection. We also have developed 3D MRS enabled sensors that are being sold as subsystems to key OEM customers including KLA-Tencor. In all, we are now offering a range of differentiated 3D products and the initial results of our strategic technology transition are encouraging. Starting in the fourth quarter, and continuing thus far in 2016, we have received follow-on orders totaling approximately $4.7 million for our SQ3000 3D AOI inspection system from a key customer. This order activity makes us confident that CyberOptics is gaining share in the rapidly growing worldwide 3D AOI market. In addition, SQ3000 sales are accounting for an increasing percentage of our total AOI and solder paste inspection sales. We believe this positive trend should continue in 2016. During the same period, orders totaling approximately $2.5 million have been received for our MRS enabled sensors from OEM customers. Sensor sales under our long-term supply agreement with KLA-Tencor are continuing as KLA incorporates these sensors into a growing portion of its backend semiconductor packaging inspection systems. We also posted solid sales of 3D sensors under a previously reported supply agreement with a new OEM customer. We are pursuing additional OEM customers for our 3D technology both in the SMT and non-SMT markets. These initiatives are at varying stages including initial product trials. Though promising, this potential OEM supply agreement such as the ones with KLA typically involves an extended period of time until ramped up production. This potential relationships reinforce our belief that we are progressing towards our goal of becoming a world leading 3D sensor Technology Company. In another encouraging development beta testing commenced on the CyberGage 360 3D scanning system earlier in the first quarter and initial sales are anticipated later this year. As a general metrology scanning system based upon our 3D MRS technology, the advanced inspection capabilities of this system should make it ideally suited for a wide range of industrial applications where precision measurements are critical, reflecting solid levels of customer interest and the fact that no viable competitive product appears to exist at this time, we believe that CyberGage 360 could be a significant contributor to our future growth. We are also very pleased with the high level of customer interest in our new WaferSense and ReticleSense Auto Multi Sensors that combine leveling vibration and humidity measurements into an all in one wireless dual time device. Customers are finding numerous applications for this product due to its high value proposition making us optimistic about its potential. Looking ahead, we are forecasting strongly improved sales and profitable operations for the first quarter of 2016 ending March 31, reflecting growing demand and shipment schedules for SQ3000 systems and 3D MRS enabled sensors. We also are very optimistic about our full-year 2016 prospects. Our year ending backlog of $15 million included $3.4 million for MX600 memory module inspection systems. We expect to receive customer acceptance and recognize revenues for our MX backlog in the first half of 2016. The recent sizable orders for our 3D products clearly demonstrates they are gaining traction in the marketplace and we believe this sales momentum should continue during 2016. In addition to the positive outlook for CyberGage 360, we also expect to benefit from future growth of our WaferSense and ReticleSense product lines in the semiconductor arena. All in all, our strategic technology transition is off to a promising start, but CyberOptics is still a work in progress with much more to be accomplished. And speaking as a scientist, as well CyberOptics CEO, I hope we will always be a work in progress developing new generations of products and technologies aimed at meeting the changing needs of our markets. Thank you. Now, Jeff Bertelsen will review our fourth quarter results in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. I will lead off by briefly reviewing the fourth quarter performance of our product lines. Sales of inspection systems increased 13% year-over-year reflecting higher sales of 3D MRS enabled AOI systems which more than offset reduced sales of our legacy 2D AOI and SPI products. Sales of our new 3D MRS enabled AOI products are accounting for a growing percentage of our AOI and SPI sales and we believe this trend will continue in 2016. Our differentiated 3D MRS technology platform is enabling us to capture share in the rapidly growing 3D AOI market as evidenced by recent follow-on orders worth approximately $4.7 million. We did not receive customer acceptance for the MX600 memory module inspection systems in our backlog during the fourth quarter. However, we expect to receive acceptance and record revenues on our $3.4 million MX backlog in this year's first half. Total system sales are forecasted to increase significantly on a year-over-year basis in the first quarter of 2016. Sales of electronic assembly sensors declined 32% from last year's fourth quarter as growing sales of 3D MRS enabled sensor subsystems to KLA-Tencor and another OEM were more than offset by soft demand for our traditional alignment sensors from OEM customers selling into the Chinese markets. We believe total sensor sales should register robust year-over-year growth in the first quarter of 2016 reflecting strongly growing sales of 3D sensors to key OEM customers. Sales of semiconductor products, principally the WaferSense and ReticleSense product lines were virtually unchanged in comparison to last year's fourth quarter due to a general slowdown in the semiconductor capital equipment market. We are optimistic about the future of our semiconductor products and believe they will be a significant contributor to our consolidated sales going forward. Finally, fourth quarter LDI revenues rose 24% year-over-year reflecting sales of CT Systems coupled with the comprehensive offering of training, installation, and services. Moving down to P&L, CyberOptics fourth quarter gross margin of 42% was down from 47% in the year earlier period due mainly to product mix and ongoing pricing pressures on 2D AOI and SPI products. Total operating expenses were down 13% or about $687,000 from last year's fourth quarter due partly to lower R&D spending as projects were completed and reduced expenses related to our 2D AOI and SPI products. SG&A expenses also down due to selective reductions in system sales and marketing costs implemented in 2014 as well as lower compensation expense reflecting the absence of employee bonuses in 2015. Cash and marketable securities totaled $17.6 million at the end of the fourth quarter, up about $1 million from the level reported at the end of the third quarter. Our increase in cash come mainly from higher sales and improved collections of accounts receivable. I would also note that no shares of common stock were repurchased in the fourth quarter under our current share repurchase authorization. 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]. We will take our first question from Ross Strehlow with RBC Wealth Management.

[Ross Strehlow:]

Hey guys congrats on the quarter and especially the outlook?

[Subodh Kulkarni:]

Thanks Ross.

[Jeff Bertelsen:]

Thanks Ross.

[Ross Strehlow:]

Yes. So Jeff you got into it, but so you never did get that acceptance of the memory modules and you're still able to do that much in revenue?

[Jeff Bertelsen:]

That's correct, Ross. No, we --

[Ross Strehlow:]

Can you give a little bit?

[Jeff Bertelsen:]

Oh, I'm sorry. Go ahead.

[Ross Strehlow:]

Can you give a little bit more color about what's the hold up there and then talk a little bit more about that product line and what you expect that to do in the future?

[Subodh Kulkarni:]

Sure. May be I will give a little perspective. So this memory module inspection system MX600 is what we call it, is basically an automated way of inspecting memory modules whether they are DRAM modules or SSD modules and that is needed for all of the memory industry right now. The units have been shipped to one of the major four memory manufacturers in the world. They are being used in their production environment as we speak right now. However the reason we couldn't get acceptance before the end of the year is there are many types of memory modules they are called DIMMs, so things like CDIMM which is common DIMM or RDIMM and VLP DIMM and so on. There are various form factors of different kinds of memory modules and we were not quite ready to handle all the different form factors by the end of the year, which is what was needed for getting general acceptances. We feel very confident that units are doing very well. They are performing excellent in the manufacturing environment. So we are not concerned about acceptances, it just got delayed into this year compared to last year. Regarding your broader question, we have talked a little bit in the past about there are four, as I said earlier, there are four major memory manufacturers. Right now, we have started with one of the four. We certainly hope we get attraction with the other three. This also a second tier of memory integrators, if you will, these are not semiconductor manufacturers but they take the chips from the four major manufacturers and make them into modules. So we do have opportunities long-term with other players. As far as we can see right now there is only one competitor in that space, we have and our product is significantly outperforming the competitor's products in terms of its false call rates and throughput. So we feel very good about our product and where we could go in the long-term. Does that help answer your question?

[Ross Strehlow:]

Yes that's helpful, Subodh. What about -- so this a product area that you expect to continue to grow and I assume that you're having conversations with the other three players in the memory chip area. Do you have any color as far as how is that going?

[Subodh Kulkarni:]

Well, we obviously continue to talk to different customers. We certainly hope that product line will continue throughout this year and in the future. Having said that, it is a 2D inspection technology, we are leveraging our 2D AOI. The exciting growth potential that we're seeing in the 3D space, we're using the MRS technology, that's where obviously our focus. But we obviously don't want to let any low hanging fruits go by. So there are opportunities for MX600. We will obviously pursue it. But it's not focused as MRS and 3D products are right now. There were see significant growth opportunities.

[Ross Strehlow:]

But you're talking to those other three companies at various stages?

[Subodh Kulkarni:]

Yes, we are. Yes, we are.

[Ross Strehlow:]

Okay, now speaking of 2D obviously one of the things that hurts your revenues was kind of those older products, and your customers being GP and Assembly On. How is there business on and is there any light at the end of the tunnel in that product area?

[Subodh Kulkarni:]

Well, in general they -- those customers GP Assembly On-Tech though that are servicing the traditional electronics industry that has been a tough business last year particularly with the slowdown we saw in China and some other markets. Things are improving. I want to say they are stabilizing. I don't believe we will see the kind of declines we saw in 2015 in future. But at the same time it's not going to growth serious growth curve or something like that. These are older products, older technologies we definitely saw the industrial economy particularly in 2015 because of China and some other things. There things are improving I want to say but not in a significant growth manner. So yes, the answer is there is light at the end of the tunnel with those kinds of products and customers.

[Jeff Bertelsen:]

Yes, we are seeing some rebound there.

[Subodh Kulkarni:]

Yes.

[Jeff Bertelsen:]

Yes, for sure.

[Ross Strehlow:]

Okay, good. Now let's talk about the 3D sensors. Obviously the relationship with KLA-Tencor is going very, very well. Can you give a little bit more color as far as other customers the stages they are at, how many you're working with and the potential?

[Subodh Kulkarni:]

So as you mentioned yes the relationship with KLA-Tencor, well our first OEM customer for the MRS 3D sensor is going very well and we are very pleased with what we can do. KLA-Tencor is a significant market share per Gartner report their market share is well higher than 50% in the semiconductor backend inspection and I believe we might be enabling growth in their market share right now because of our sensor technology. That relationship is going very well. We have said that we have started selling to another OEM and we will be hopefully announcing soon more about that. That is also going very well and the volumes are picking up nicely on that front. In addition to that we are talking to a couple other OEMs and as we mentioned in our press release they are at different stages. But overall we feel very optimistic that this OEMs will sign up and will be significant contributors in the future. But as mentioned in the press release these things do take time. The KLA-Tencor agreement and real ramp up took almost many months may be close to a year and now some of these OEMs we have already started talking, we are well down that path, so we hope to see some purchases and ramp up curves in the next two months but they do take time. But longer-term we believe fundamentally MRS 3D sensor technology is really a -- we have invented a 3D microscope that can move at production speeds. And we feel really good about how many potential OEM opportunities or industries there are out there, there we could take this technology. Just about anywhere where there is human inspection being done to look at the final product or heights or X, Y, Z dimensions, we believe our technology can do that far faster and far better than any human being or any other sensor technology can do. So the opportunities are very significant, very large and in a number of areas. So we are just starting off, obviously we started commercially selling MRS only in 2015. So we feel really excited about where we could take the whole technology platform and which customers we could go after long-term.

[Ross Strehlow:]

Subodh, you have --

[Subodh Kulkarni:]

Go ahead.

[Ross Strehlow:]

Subodh, you have any sense of how big the potential market could be for these 3D sensors?

[Subodh Kulkarni:]

It's tough to quantify because there is no direct report out on 3D sensors per se. But in general I mean the closest example I would say is Cognex which is a very good 2D sensor, primarily most of their product portfolio is 2D sensors today. And you can get a feel for the size of the opportunities they play and they're about 300 plus million dollar annual sales company, very profitable. And that gives you a feel for what a specialized company in 2D sensor is doing today. I certainly hope 3D sensor has that or higher potential long-term. But it is just starting 3D sensors is certainly very new compared to 2D sensors. But it certainly seems to have the potential wherever we talk to and whatever customers we talk to they seem to have opportunities with 3D sensors long-term.

[Ross Strehlow:]

Well that's great. Okay so let's just move on to the SQ3000 the systems business, the 3D systems, how many customers do you actually have now?

[Subodh Kulkarni:]

I want to say about 15 to 20 rough numbers.

[Ross Strehlow:]

And how many of those are starting to order in volume?

[Subodh Kulkarni:]

May be three or four right, Jeff.

[Jeff Bertelsen:]

I mean they all tend to order more than one --

[Subodh Kulkarni:]

Yeah.

[Jeff Bertelsen:]

But we have probably three or four who are ordering in bigger volumes than the others.

[Ross Strehlow:]

Do you expect the some of the other ones to start ordering in volume in the future? Where are you there? Have they given any kind of indication?

[Subodh Kulkarni:]

Sure. They tell us their future plans and obviously it depends on their expansion plan and their capacity and all those things but we do have some of those 15 to 20 customers that we have sold only one or two units to, they certainly intent to purchase larger volumes in the future based on their capacity needs. So we certainly hope as the year goes on some of them or may be some and we continue to add obviously to that list of 15, 20, and hopefully that number will be double or triple by the end of this year. And hopefully some of those 15, 20, or the newer customers will order in volumes as we go along. That's typically the way it goes, they take the first unit or two or immediately check it out make sure everything is working okay, make sure they get comfortable with what is -- how they plan to use it and as their capital dollars are available and their capacity needs are dictating, they buy it in volumes which is typical in the prior years too, we have seen that.

[Ross Strehlow:]

Wow. So you think you can double that customer base over the next year?

[Subodh Kulkarni:]

Yes, I think the number of customers will double over the next year. The question obviously the important question is the volume customers and how many will they purchase? And they tell us this their general plan which is why we feel bullish about our outlook but obviously those things depend on the overall economy and their capacity needs.

[Ross Strehlow:]

Yes, and speaking of the economy, the one I remember in the past you're talking about how this 3D systems business, the industry is expected to have some pretty robust growth. Has the slowdown, the worldwide slowdown in the economy in the electronics field has that tapered that a bit?

[Subodh Kulkarni:]

That's a great question, Ross. And as far as we can tell 3D AOI continues to grow at a very robust rate. In the past, we had quantified that the market is about $80 million to $100 million growing at about 40% CAGR. No reason to believe that number has changed definitely the market seems to have gotten larger; the growth rate seems to be very robust. As the component gets smaller, everyone seems to realize that they do need the third dimension to know whether the circuit boards they are building are good or bad. So I don't think the global macro economy has slowed down the penetration of 3D AOI, it certainly has impacted SPI and 2D AOI. So the growth of 3D AOI is coming at the expense of SPI -- 2D AOI but it isn't the 3D AOI continues to grow very rapidly.

[Ross Strehlow:]

And 2D AOI will continue --

[Subodh Kulkarni:]

Yes.

[Ross Strehlow:]

Some form, yes?

[Subodh Kulkarni:]

There will be some applications that will stay always in 2D; they don't need the third dimension because they have planar structures, have planar features they are looking at.

[Ross Strehlow:]

Yes okay, great. That's great. Now moving onto WaferSense. I know this last module that you have we call the ReticleSense, that business is picking up. Can you give a little bit more color as far as what your customers are saying and what you expect there, I mean is this probably your most robust module, talk a little bit about that if you could?

[Subodh Kulkarni:]

Okay. I think you meant AMS not ReticleSense. AMS is the Auto Multi Sensor which has both, which has all leveling vibration and humidity built into one. We offer it both in wafer form factor which is called WaferSense, AMS and we also operate in reticle form factor which is called ReticleSense AMS. The new thing is in the wafer form factor, it is not only combining key measurements but it also has the humidity measurements which is the first time we are doing humidity measurements. The exciting part in the semiconductor industry as the industry has moved towards vertical structure, we call FinFET, F-I-N-F-E-T. There are many applications that need monitoring of humidity right now in the semiconductor fabrication process area. So lot of new applications that we are seeing our customers who never were interested in WaferSense or ReticleSense before suddenly see the desire, they see the need to measure humidity because that has an direct impact on their yield and productivity of the overall fab lines. So we certainly have opened a whole new, the range of customers that are interested in humidity measurement. So it's exciting we are seeing extremely good traction, we just started shipping the product towards the end of the year that's still early but the initial request and the demand we are seeing from the top semiconductor customers basically makes us feel very good about that product outlook and what we could sell this year and going beyond this year.

[Ross Strehlow:]

Well that's great.

[Subodh Kulkarni:]

Yes.

[Ross Strehlow:]

Hey, guys I've taken a lot of time. Thanks very much. I will let somebody else handle the -- tackle the CyberGage 360.

[Subodh Kulkarni:]

Thanks, Ross.

[Jeff Bertelsen:]

Thanks, Ross.

[Operator:]

Thank you. [Operator Instructions]. We'll go next to Miles Jennings, a Private Investor.

[Miles Jennings:]

Tell me I realize this is an unfair question but I thought ask it anyway, you have this elegant new MRS sensor. Now with most products there tend to be new versions, smaller versions more defined versions and so on. Is it your opinion that you will in the long run have additional versions of this basic MRS sensors?

[Subodh Kulkarni:]

That's a great question, Miles. Fundamentally if you and I think we've gone our website was into a lot more detail but MRS which stands for Multi-Reflection Suppression fundamentally is a different way of treating optical projection profilometry optical projections and patterns fringes that we project on any surface and then we are looking at distortions in the fringes and in putting the height and the dimensions from the distortion in the fringes. Optical projection profilometry itself has been around for many years, we were doing it for a while our competitors have been doing it too. So that's nothing new in optical projection profilometry itself. Where the invention of MRS came in and there it clearly differentiates itself, is how we interpret the mathematics of the light, and what we have specifically done in the algorithms to make it much faster. So effectively the end user benefit is higher accuracy and higher speeds compared to any other alternate technology including what we used to do before. So that MRS is really a different mathematical way of treating projection profilometry. So now that we are in MRS, to your question, yes, the current products that we are launching right now whether it's SQ3000, 3D AOI system that is in the market right now are what we are selling to OEMs including KLA-Tencor. We generally refer to it as the first version of our MRS technology. In our lab we are actually working on the next version and that is making things better and faster than what the version one is, but and we will be rolling it out in due course of time. But it's not going to give us a step change benefit compared to what conventional projection profilometry versus MRS gave us. But it will continue to get better, it will continue to get faster, it will be able to handle more reflective surfaces and smaller surfaces in future version. But the step change we got and that's what giving us a traction in the marketplace right now in gaining share and everything is because of the first version of MRS where we fundamentally started treating light in a very different way mathematically. Hope that has answered your question.

[Miles Jennings:]

Oh, that's excellent. It's the difference between invention and improvement.

[Subodh Kulkarni:]

Yes that's a great way to look at it. The MRS Version 1 is a disruptive innovation or invention if you will. MRS Version 2 will be a natural evolution of MRS Version 1 but it’s not going to be a disruptor over MRS Version 1.

[Miles Jennings:]

Excellent. My second question is it may not be very important but I'm just curious how many beta receptors are there working on your new CyberGage 360 product?

[Subodh Kulkarni:]

Starting with three beta sites right now we have started and we plan to definitely add some more including right now they are all in the U.S., we definitely plan to add some more both in the U.S. and outside U.S. So hopefully within the next month or two we will have more than three. But it's important how we collect the data and incorporate it quickly. So the objective was not just to get more betas out there. The objective was to get high quality beta that can give us very valuable critical feedback. Since we are really creating a new category of the CyberGage, I mean CyberGage is entering a broad 3D scanner space which is a large growing market multibillion dollar growing market. But in a way we are creating a new category which is easy to use, fast, accurate a 3D scanner and it's the first time somebody is doing it and it's critical as we collect the input on what exactly customers like and don't like and incorporate that input right now before we do a broad global launch. So it's not the number of betas as much as the quality from the --

[Miles Jennings:]

Oh, I see.

[Subodh Kulkarni:]

Customers and the emphasis we're getting.

[Miles Jennings:]

I understand that distinction and it's a way to approach it. And you worked with probably these customers in other areas and you know that the good reviewers and the ones we like to have review your products?

[Subodh Kulkarni:]

Exactly, yes exactly.

[Miles Jennings:]

I did notice that Laser Design released two new sensors, products just the sensors last year. Is that the reason for the growth and sales?

[Subodh Kulkarni:]

I mean we release two new products one in Laser Design, this is before not CyberGage but we released a new sensor we called XLP sensor which is a laser-based sensor.

[Miles Jennings:]

Yes, that's right, that's what I was referring to.

[Subodh Kulkarni:]

Yes and that's the reason we released it is again a little faster than our previous sensor, it also can handle the most important part of our XLP versus the previous version was its ability to handle more reflective surfaces certainly giving us benefit traction. Another product we released last year is the CT scanner which is actually an X-ray scanner and that can basically look inside the product not just optically. And that really is, as Jeff mentioned in his commentary, that has been a significant contributor to laser design success in 2015 and we believe it will be a significant contributor in 2016 and beyond. We seem to have a very fairly unique value proposition with that product where we are significantly better than competitors in CT scanning and much more affordable and better both at the same time and that is definitely getting a lot of traction right now in the marketplace, and has contributed to the growth that you have seen in the LDI numbers in 2015.

[Operator:]

And there are no other questions at this time.

[Subodh Kulkarni:]

Well thank you for your interest and questions. In conclusion, we are very optimistic about our future and are forecasting strong sales growth and profitability in 2016. We look forward to updating you about our progress at the end of first quarter. Thank you.

[Operator:]

Thank you everyone. That does conclude today's conference. We thank you for your participation.