CyberOptics Corporation
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good day and welcome to the CyberOptics Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead.

[Subodh Kulkarni:]

Thank you. Good afternoon and thanks for participating in CyberOptics earnings conference call for the second quarter of 2021. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our results in some detail following my overview of our recent performance. We then will be pleased to answer your questions at the conclusion of our remarks.

[Jeff Bertelsen:]

Thanks, Subodh. As mentioned in today's press release, our June 30 backlog stood at a record $45.3 million. Roughly 50% of our June 30 backlog is scheduled to ship in the third quarter of 2021. Slightly more than $10 million of our June 30 backlog relating to OEM customers is scheduled for periods after 2021. About $4 million of our March 31 backlog was for OEM shipments after 2021. In addition, we have started to receive MX orders for shipment in early 2022. Additional MX orders are expected as 2021 progresses. As usual, additional book ship orders for revenue are expected as Q3 progresses, making us confident in today's third quarter revenue guidance of $25 million to $28 million. Our gross margin percentage stood at 44% in this year's second quarter, which was down from 46% in the year-earlier period. The decrease was expected given the $2.4 million of MX3000 memory module systems in the second quarter sales mix. Our gross margin percentage for the third quarter is expected to be lower by about 1 to 2 percentage points on a sequential basis from this year's second quarter, again mainly due to higher MX3000 sales. At this time, we expect improvement in our gross margins in the fourth quarter of 2021, given that we aren't expecting any MX3000 revenues in the period. Our gross margin percentage for the balance of 2021 will be heavily dependent upon product mix, particularly sales volumes of higher margin WaferSense products and 3D MRS sensors. Total operating expenses for the second quarter of 2021 increased roughly 28% year-over-year to $7.4 million. It bears noting that operating expenses were unusually low in the second quarter of 2020 due to travel bans, shelter in place mandates and other measures related to the COVID pandemic. In addition, you may recall that we realized a significant benefit from a Singapore job support program that favorably affected our R&D expense in the second quarter of 2020. Operating expenses were up roughly 12% on a sequential basis in the second quarter, and more than our original expectation due to the 42% sequential growth in revenue and because we exceeded our revenue guidance for the period. Higher costs include increased sales commissions, mainly third-party channel commission, and other forms of incentive compensation due to our improved financial performance. Depreciation and amortization expense totaled $658,000 in the second quarter of 2021, and stock compensation expense came to $337,000. Total operating expenses in the third quarter of 2021 are forecasted to be at or near the level in this year's second quarter, mainly impacted by Q3 revenue levels.

[Operator:]

. And we will go first to Greg Palm of Craig-Hallum Capital Group.

[Greg Palm:]

Congrats on the really good quarter here. I guess maybe just starting off on growth. Maybe you could help us understand what you think end market growth is both for semi cap equipment and electronics manufacturing. I'm guessing it's not growing 58% year-over-year. So, my guess is the remaining growth is coming from some sort of share gains, new applications, et cetera. So, it'd be just helpful to get a little broader sense on really what's driving the growth here.

[Subodh Kulkarni:]

Greg, the semi cap numbers are well publicized because they keep coming from different sources and we track them fairly carefully. It looks like, in 2021, semi cap is expected to grow in the 20% to 30% range right now, depending on which analyst you look at. Electronic inspection is not as well tracked as semi cap markets. But based on some few differences we have seen, it looks like it's growing in the neighborhood of about 10% range. So, if you say that we are partly in semi cap and partly in electronics, our overall market we can say sort of will be growing at about 10% to 20% right now. So, clearly, market is not growing at 58%, as you correctly observed. The growth we are seeing is on gaining share in the areas where we compete, like in the 3D AOI market. With SQ, we are clearly gaining share. MX, we don't really compete. But we got the second big customer and we are getting more placements with them as we speak right now. WaferSense, again, we don't really compete, but we are getting better penetration. So, our market is very healthy, growing at a composite rate of 10% to 20%. And within that, we are gaining share, which is why you're seeing such superlative growth numbers right now.

[Greg Palm:]

The $7.9 million in orders for mini LED inspection, I think you mentioned that it was for both new and existing customer. So, I guess that implies that maybe there's additional application or at least additional customer that's now using the technology for inspection purposes. Is that right?

[Subodh Kulkarni:]

We have to be careful what we say about which customer and what applications since we are legally bound not to disclose what exact products are our systems going. But, yeah, there are multiple products being commercialized as we speak right now. And those products are using different subcontractors, EMS manufacturers in Asia. So, when we get orders from those EMS companies, they are different names, but we don't want to say anything about which end user or which products are driving those demands.

[Greg Palm:]

In terms of the MX product line, I think you also had mentioned that you're receiving additional orders, as we speak, I think for placement or rev rec in Q1 2022. I guess is that right? And I don't recall seeing any recent orders on the tape. So, maybe those aren't sizable. Maybe you can just give us a little bit more detail on what's going on there.

[Subodh Kulkarni:]

You heard it correct. We did say that we received the MX3000 order from the number one customer, if you will, who has been ordering MX600 systems so far. Number two customers started with MX3000. So, the number one customer who ordered MX3000, we have the order in hand. We will deliver and get accepted, we believe, in Q1 2022 time period. Going forward, they are committed to buying MX3000. So we have two customers effectively buying MX3000s.

[Greg Palm:]

Can you say how much of an additional order that is that you have in hand? Or is it not meaningful at this point?

[Subodh Kulkarni:]

We really want to be careful not to disclose that number because that gives the price of that system. And now that we have two customers, they can use that information. So we usually don't want to disclose the size of the order for that reason.

[Operator:]

And we'll hear next from Dick Ryan of Colliers.

[Richard Ryan:]

If I stay on that MX3000 orders, Subodh, the number one customer has ordered pretty significant amount of your 2D systems over the year. Now, is this just going to be let's take a look and evaluate the 3D or have they committed to converting to 3D for their applications going forward?

[Subodh Kulkarni:]

So, what's happening, Dick, is they are increasing the number of lines. Right now, memory is hot, as you can see from reports from Samsung, Hynix and Micron. There's a lot of demand for memory right now. And so, they are building new lines. So, the new lines is where our first MX3000 for our number one customer will go for. The existing 25 or so MX600 systems we have delivered already. They are fully operational. They are being used in manufacturing. Over time, the customer is committed to putting MX3000 under new lines and then upgrading MX600 to MX3000 in due course of time.

[Richard Ryan:]

When they upgrade the old 2D lines to 3D, is it just a configuration issue that you can put the new sensors in their old systems? Or do you have to – will they have to buy a whole new MX3000 system by itself?

[Subodh Kulkarni:]

We believe they will have to buy a whole new system. The fundamental architecture of MX600 and MX3000 is very different because of the inspection technology we use. In 2D, we use what we call scan on the fly technology. In 3D, we use stop and shoot architecture. So, the fundamental architectural differences make it very difficult to convert an existing MX600 to MX3000 by just swapping the sensor out. So, we believe they will have to purchase a whole new system to switch from 2D to 3D.

[Richard Ryan:]

Since the MX has been kind of a drag on gross margins with – and assuming this customer increases orders over time, will you be able to get gross margins ticking up on that product line with more volume coming through? Or are there other issues on the gross margin side?

[Subodh Kulkarni:]

Over time, we definitely believe we will be able to improve the margins. But right now, we are kind of handicapped by buying extremely expensive automation to meet all their needs. Time to market is, obviously, a big concern, too. They want assistance right away. So, the most efficient way for us to go about delivering MX systems is to buy existing automation vendor, off-the-shelf automation, which makes it expensive. Over time, we believe we will be able to take out the cost in automation and improve the margins in MX.

[Richard Ryan:]

A couple of housekeeping. Jeff, what was cash flow from operations? Either if you want to give it to us on a quarter or for the six months?

[Jeff Bertelsen:]

Yeah, for the cash flow from operations, just for the quarter, was about $240,000. And a lot of that was just working capital needs. So, with the big jump in sales receivables increase, so cash flow from operations was $240,000. CapEx just in the second quarter was $411,000. And depreciation and amortization was $658,000.

[Richard Ryan:]

And the combined – you give WaferSense and 3D MRS related as a percent of total revenue, just wanted to double check that number.

[Jeff Bertelsen:]

In the second quarter, it was a little more than 73%.

[Operator:]

. We will go next to our next question. And that is from Jaeson Schmidt of Lake Street.

[Jaeson Schmidt:]

Just curious what you're seeing from a supply chain or just overall constraint standpoint.

[Jeff Bertelsen:]

From a supply chain perspective, what we're seeing is – it really isn't any different than what a lot of other companies are seeing or what we hear in the news. The supply chain is tight right now. And there are some difficulties getting chips or detectors or some of the other things that go into our products. To date, we've been able to work our way through those and secure supply. It certainly is an area that we pay a lot of attention to and are putting a lot of effort into. Right now, we don't see that as causing any significant disruption in our ability to deliver in a timely manner to our customers, but things certainly are tight out there. And we continue to work on that, put a lot of effort into it, but so far we've been able to navigate our way through it.

[Jaeson Schmidt:]

Just following up on that. Have you seen any significant change in your guys' lead times?

[Jeff Bertelsen:]

I assume you're talking about in terms of our ability to deliver to our customers, Jaeson?

[Jaeson Schmidt:]

Correct.

[Jeff Bertelsen:]

It's gotten a little bit elongated at various points in time. I don't think there's been any significant delays in our ability to deliver. I think for the most part, we're kind of on par with where we've been. Or maybe a little bit longer by a week or two. But I don't think there's anything significant right now. But again, it all kind of gets back to the supply chain and the supply chain is tight right now.

[Operator:]

We will go next to Eric Slade of Acme Analytics .

[Unidentified Participant:]

Congratulations. That is a breakout quarter for you guys. There's always been the same three guys in the call, but keep hitting those numbers. And they'll have to be some people joining us, I would think. Here's a couple questions. On the memory side, did you get the third customer yet? I know it's going to happen any time. I thought you did when I first looked, read the release and then it looked like you just kind of have a second customer, number two, transitioning from 2D to 3D. Is that correct?

[Subodh Kulkarni:]

Correct. As of today, we don't have the third large memory manufacturer yet as our customer for MX. They continue to buy our SQ systems . Over time, we believe they will switch over to MX, but as I was saying, we don't have the third large memory manufacturer as our customer.

[Unidentified Participant:]

I don't think I've ever clarified. Is that third customer that you get, are they making a big transition 2D to 3D and that's the reason why it's still evaluating or is that the reason?

[Subodh Kulkarni:]

We're not quite sure what the reasons are or why they are holding up. As far as we know, we believe they will switch over to MX3000. It's just, in our opinion, it's a question of when, not if. But as of right now, we haven't received any orders yet.

[Unidentified Participant:]

It sounds like the fourth quarter – that you won't be getting memory orders in for that quarter. But it sounded like, what Jeff described, they're starting to stack up for another orders for 2022. Is that correct?

[Subodh Kulkarni:]

That is basically correct. Yeah, that's what we said. We are starting to see acceptances coming in Q1 of 2022. We are expecting more MX orders as 2021 goes along. But given the timeline involved in building a product, all those acceptances would be in the Q1, Q2 time period.

[Unidentified Participant:]

2022, right? Now, the other question I had is, how much mini micro exactly have you booked through – I believe it was $8.5 million, Jeff, up through the first half?

[Jeff Bertelsen:]

Are you asking about our revenue, Eric?

[Unidentified Participant:]

Yeah, that you've announced in bookings through the first half, I guess.

[Jeff Bertelsen:]

Yeah. It's $7.9 million of orders announced so far this year for mini micro.

[Unidentified Participant:]

Hey, a great quarter.

[Operator:]

And we'll go to our next question from Orin Hirschman of AIGH Investment Partners.

[Orin Hirschman:]

Two questions. You mentioned three customers now on the micro LED side. Can you kind of just give us a lay of the land what's going on from a 50,000 foot view on micro LED? And is that one additional customer? I'm not really sure on that, if you had had in production, more than one or two customers before? And what does the pipeline look like on micro LED side?

[Subodh Kulkarni:]

I'll answer at a very high level without getting into details because we are legally bound not to be disclosing all the details. Mini LED, micro LED is being used for backlight of LCD displays right now. It's a new technology. Just the first commercial products came in the market just earlier this quarter or last quarter, that is Q2. Public reception of those consumer products has been phenomenally good. So, the technology is getting accepted, deployed. And essentially, what we sold with SQ systems – SQ is being used as an inspection step for two out of the six steps right now. The remaining four, which are less demanding steps, are going to computation right now. But the most demanding steps, we are getting for SQ. SQ is capable of doing all six steps, but we are getting two out of six right now. We expect a lot of commercial products to be launched in the next year or two with mini micro LED, backlight. Essentially, it's the best of both worlds. If you look at an LCD display, there are some drawbacks. If you look at an OLED display, there are some drawbacks. Mini LED, micro LED backlight with LCD is the best of both worlds at a very good price point. So, we definitely expect most of LCD displays switch to a mini LED backlight display over the next two to three years. And clearly, we have a very good position with SQ right now. So, we are counting on significant growth from this whole area right now. It just started. As I said, the first products got launched in Q2 of 2021. So, we definitely expect more and more announcements from different consumer electronics companies with this technology. And no one has any IP lock on this area. So, definitely, more than one or two consumer electronics companies are going to jump into this space in the next year or two. We are quite excited about the growth. Hopefully, that addressed your question at a high level. The actual orders I mentioned earlier, we get it from different subcontractors from Asia. So, the number of customers we have received orders for mini micro LED is probably more like six or seven now. Maybe even more, Jeff.

[Jeff Bertelsen:]

Yeah, it's nine customers now.

[Subodh Kulkarni:]

Nine customers.

[Orin Hirschman:]

It's nine customers? Just one clarification there, it's nine customers. Just repeat that again. It's nine customers that are actually using it in product at this point.

[Subodh Kulkarni:]

Correct.

[Orin Hirschman:]

Just in terms of the pipeline of adding additional customers beyond those three, are you seeing that pipeline increase? And is it accelerating in terms of the interest?

[Subodh Kulkarni:]

Yeah. Definitely, the interest is growing. As I said, the technology just got launched. It is being received very well. So, more SKUs will be launched in the next few quarters with mini LED backlight. So, the interest is growing. We expect more consumer products to be launching. And this thing will continue over the next three to five years. So, yeah, interest is growing in this whole area.

[Orin Hirschman:]

In terms of your – whatever you can say here. In terms of the complete system – sensor-based system that you're hoping to sell where they're in beta test now with customers – I know that's going to be a whole new area for you for really for next year. But how are those betas going? Is there a lot more that has to be reworked in the product? What's the customer feedback like? So, potential customer feedback from the OSATs, what's that look like at this point? Tell us whatever you can.

[Subodh Kulkarni:]

I believe you are asking about our WX3000 wafer inspection system. Is that correct?

[Orin Hirschman:]

Yeah. Yeah.

[Subodh Kulkarni:]

As I mentioned in my remarks, things are going well We have shipped multiple NanoResolution MRS sensors to different customers in this space, advanced packaging video, as well as we are demonstrating our WX3000 systems to different customers in Asia as we speak. Good interest. These things do take a long time. We have been doing this for a few months now. And the interest is high. But anytime any of these fabs or OSATs, who are the typical customers for those systems, want to choose a new technology or a new vendor, they have to go through several layers of qualifications, which takes time. So, that's what we are going through right now. We hopefully expect to close some orders here in the next few quarters. But once – there's really 20, 25 customers who matter in this industry. After that, the market shrinks quite dramatically because there's been so much consolidation in the semiconductor industry. So, every win is a big win because you are getting a big chunk of the market. So, we hope to get one or two wins in the next few quarters here. And then, it will and continue to grow from there. But it does take time. I can say data looks very good. Feedback has been very good in general.

[Operator:]

And there are no other questions in the queue. At this time. I'll turn the call back to our presenters for any additional or closing comments.

[Subodh Kulkarni:]

Thank you for your interest and questions. We look forward to updating you after our Q3 earnings results. Thank you again.

[Operator:]

So, that does conclude the call. We would like to thank everyone for your participation. You may now disconnect.