CyberOptics Corporation
Q3 2021 Earnings Call Transcript

Published: 27 Oct 2021

[Operator:]

Good day ladies and gentlemen and welcome to the CyberOptics Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time I'd 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 third 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. 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 31st, 2020 and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to our recent performance. CyberOptics reported record sales and earnings in this year's third quarter ended September 30. Our operating results were driven by the strong performances of each of our product lines. Record quarterly WaferSense sales were key driver behind our profitability. Our lineup of 3D MRS-based sensing and inspection products and semiconductor sensors have positioned CyberOptics to report record sales and operating earnings for the full year 2021. These products have enabled us to gain traction in our targeted SMT and semiconductor capital equipment markets. We believe these trends will persist for some time making us optimistic about CyberOptics' fourth quarter performance and outlook for 2022. We reported record sales of $27.8 million for the third quarter of 2021 ended September 30th, an increase of 33% from $20.8 million in the third quarter of 2020. Net income for the third quarter came to a record $4.8 million or $0.63 per diluted share, up significantly from earnings of $1.8 million or $0.24 per diluted share in the year earlier quarter. Sales of 3D and 2D sensors increased 50% year-over-year to $5.5 million in the third quarter of 2021. This strong growth was driven by sales of 3D MRS sensors which rose 81% year-over-year to $3.6 million. Demand from OEM customers and system integrators involved with high-end electronics and semiconductor inspection and metrology applications is continuing to drive the sales growth of our 3D MRS sensors. 3D and 2D sensor sales are forecasted to post strong year-over-year growth in the fourth quarter of 2021. Sales of semiconductor sensors, principally our WaferSense line of products increased 93% year-over-year to a record $7.4 million in the third quarter of 2021. Ongoing demand for semiconductor capital equipment is driving the sales growth of this yield and process improvement sensors. Sales of semiconductor sensors are forecasted to record strong year-over-year growth in the fourth quarter of 2021. Sales of inspection and metrology systems rose 12% year-over-year to $14.9 million in the third quarter of 2021. Within this product category sales of SQ3000 Multi-Function inspection systems increased 9% year-over-year to $7.4 million. Of this total $4.5 million was derived from sales of SQ systems for mini-LED inspection and metrology. Additional mini and micro LED orders are anticipated going forward making us believe the long-term growth outlook for mini and micro LED inspection and metrology applications remains very promising. Third quarter system sales also benefited from customer acceptances of $4.9 million of 3D MX3000 memory module inspection systems. Although no MX sales are forecasted in the fourth quarter due to normal sales variability, we see our MX line as one of CyberOptics' key long-term growth drivers. Sales of inspection and metrology systems are forecasted to post strong year-over-year growth in the fourth quarter of 2021. We received a new order for the MX3000 in October raising our current backlog of MX3000 systems to $3.2 million. These orders are expected to be recognized as revenue in the first half of 2022. During this year's third quarter, we received our first purchase order for the WX3000 metrology and inspection system from large integrated device manufacturer. Incorporating our 3D NanoResolution MRS sensor, the WX3000 was selected by this particular IDM due to its ability to perform 100% 3D inspection two to three times faster than alternative solutions. Delivery of the WX system revenues are scheduled for the first quarter of 2022. I should add that customer demonstrations are continuing for both the WX system and NanoResolution sensor for wafer and advanced packaging applications. We believe both products are positioning CyberOptics to capitalize upon significant longer-term growth opportunities. CyberOptics backlog at September 30, 2021 totaled $44.2 million compared to $45.3 million at the end of this year's second quarter and $17.7 million at the end of third quarter of 2020. We are forecasting sales of $19 million to $23 million for the fourth quarter of 2021 ending December 31, reflecting strong year-over-year sales growth. Shipments of some SQ3000 systems will be deferred to the first quarter of 2022 due to customer delays in obtaining needed equipment from other suppliers for a complete full-line solution. We expect to start 2022 with a strong first quarter performance based on the outlook for the continuation of favorable market conditions in our targeted SMT and semiconductor capital equipment markets as well as our backlog of orders for SQ3000 and MX3000 systems. Thank you. Now, Jeff Bertelsen will review our third quarter performance in greater detail.

[Jeff Bertelsen:]

Thanks, Subodh. Our gross margin percentage in this year's third quarter was almost 46%, up from 42% in the year-earlier period and better than our original forecast at the start of the quarter. The improvement in gross margin percentage over the prior year and our forecast at the start of the quarter was mainly due to a more favorable sales mix. Record sales of high gross margin semiconductor sensors were a key driver behind the improvement in our gross margin percentage. Sales of semiconductor sensors represented a larger percentage of our revenue in the third quarter of 2021 on a year-over-year basis and were better than our forecast at the start of the quarter. Gross margins on SQ system products were also better than expected due to a more favorable mix of sales for demand in higher-end applications. Gross margins for other inspection and metrology system sales also exceeded our expectations. Our gross margin percentage in the fourth quarter of 2021 is expected to be flat to up about one percentage point from the level in the third quarter of 2021, given that we are not expecting any sales of lower gross margin MX3000 systems in the quarter. Although, we have largely avoided issues due to part shortages, limited availability of cargo space and delays in ocean freight, have made it more difficult to move equipment around the globe. Limitations resulting from the global freight situation have been factored into our Q4 revenue guidance. Total operating expenses for the third quarter of 2021 increased 17% year-over-year to $7.6 million. The increase was due to higher third-party channel commissions, resulting from the significant year-over-year increase in sales higher accruals for incentive compensation given our improved financial performance, and higher compensation costs for new and existing employees. Depreciation and amortization expense totaled $603,000 in the third quarter of 2021 and stock compensation came to $328,000. Total operating expenses in this year's fourth quarter are expected to be about $300,000 lower on a sequential quarterly basis when compared to the third quarter of 2021, due to reduced channel commissions and incentive compensation accruals. Our effective income tax rate for the third quarter of 2021 was 10%, which included about $400,000 of excess tax benefits from stock option exercises and vesting of restricted shares. We are forecasting an effective income tax rate of about 15% for the fourth quarter of 2021. Cash and marketable securities totaled $33.5 million at the end of this year's third quarter up from $32 million at the end of the second quarter and $30.6 million at the end of 2020. We believe our capital resources are adequate for achieving our growth objectives. Thank you. We would now be happy to take your questions.

[Operator:]

We'll take our first question from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

[Greg Palm:]

All right. Thanks. Congrats on the good results here. I guess, maybe just starting off on the commentary around Q4, the impact of the SQ deferrals into Q1. Are you able to quantify how much that is? And just to be clear this is a result of some other equipment from a different supplier correct? This has nothing to do with you?

[Jeff Bertelsen:]

That is correct, Greg, and the amount is about $2.5 million. It is due to other suppliers.

[Greg Palm:]

So given that and some MX, and it sounds like a little even WX recognition in Q1. Do you want to even go out a limb and tell us what you're sort of expecting? I'm guessing at the very least probably sequentially up versus Q4 but it sounds like you're going to at least start off fiscal 2022 on a pretty high note?

[Jeff Bertelsen:]

Yeah. I mean, we feel good about how – about fiscal 2022 and particularly how the first quarter is going to start out. And certainly, a good chunk reason for that is due to the backlog that, we have with as you pointed out the MX, WX, SX or SQ rather and also some good sensor backlog. So we do feel very positive about the first quarter right now and we do think we will see strong year-over-year growth in the first quarter.

[Greg Palm:]

That's great. And then on gross margin, obviously it's great to see that that mix was a positive driver there but it just kind of feels like looking back in the last three or four quarters, you've sort of kind of hit a new level it seems like. And I'm not sure how much of that is just due to mix versus obviously a higher top line but just it feels like that gross margin level has sort of crept up here. And I'm not sure what you're viewing sort of as the new level on a more normalized mix but just curious how you're viewing that as we go into fiscal 2022 as well?

[Jeff Bertelsen:]

Yes. Certainly I think we've done well on the gross margin front. Certainly, WaferSense has had a terrific year. That's up about 58% year-over-year. So that is certainly a big part of it. Even within the SQ category I think when you look at some of those applications those are the more favorable applications from a gross margin perspective. And that – certainly as we look at 2022, there is a good opportunity for that trend to continue. So I think from a gross margin perspective, things certainly have been clicking along. And it is from a quarter-to-quarter perspective always going to be dependent heavily on revenue mix. But yes, I think just given the mix that we're seeing this year, we feel pretty good about it and where we're going.

[Greg Palm:]

Makes sense. I've got tons of others but I guess I'll ask just one more and then I'll cede the floor. Can you give us maybe a little bit of an update on what you're seeing from an acceptance and adoption level of mini LEDs? And I think the commentary was you expect to see additional orders going forward. I don't know if you meant additional orders this year or just in the go-forward period. But just kind of curious to see how you're looking at that opportunity.

[Subodh Kulkarni:]

Sure. So Greg I mean we certainly have benefited from mini LED scale-up that has already happened and continues to happen at a very rapid pace. One consumer product got launched three, four months ago. Another one is going to get launched soon. Certainly that's where most of the things that have happened to date have gone. But certainly, I mean consumer electronics is a huge area. The mini LED display technology is a really truly differentiated technology that has superior performance at a comparable price point. So – and the initial traction the technology is getting has been terrific. So no reason to believe that more and more consumer products won't go on the mini LED route. And so we feel pretty good about the overall opportunity and our position in it. We certainly have the first-mover advantage in that area. SQ system is the only system as far as inspection system that has been qualified for all the inspection steps that are needed and we are benefiting from it. So over the next five to 10 years, we believe this is a great growth opportunity for us. And certainly we are seeing orders as we speak right now every -- just about every quarter. And that will continue in my opinion given how different products are planning to get scaled up with mini LED right now.

[Greg Palm:]

That’s great to hear. I’ll leave it there. Thanks for all color.

[Subodh Kulkarni:]

Thanks, Greg.

[Operator:]

We'll go next to Dick Ryan with Colliers. Please go ahead.

[Dick Ryan:]

Thank you. Just continuing on the LED. You did $4.5 million in sales in Q3. Jeff, just refresh me what's been your year-to-date mini LED sales? And are there systems still in backlog?

[Jeff Bertelsen:]

Yes. So year-to-date the mini LED revenue has been $6.9 million and there is $2.1 million in backlog at September 30.

[Dick Ryan:]

Obviously, WaferSense was pretty significant contributor. You talk about year-over-year. Any sequential color you can provide us on WaferSense alone?

[Jeff Bertelsen:]

Yes I can comment on that. And just we had – obviously, had a terrific WaferSense quarter in Q3. We do expect strong year-over-year growth in Q4 but it will be down sequentially WaferSense will be.

[Dick Ryan:]

Okay. And on the new order for the metrology system WX3000 was that a competitive situation? Can you provide us some detail behind that order?

[Subodh Kulkarni:]

Sure. So it's a large integrated device manufacturer one of the top 10 in the world. They did their thorough evaluation as usual looked at competitive systems really chose WX because of its speed. It's two to 3 times faster than the closest competitor and that was a huge value to them. I mean any time you gain even 10% or 20% in speed that is a significant differentiation then you start talking about two to 3x in speed that essentially slashes capital that the IDMs need to spend by a factor of two to 3. So it is really a big deal for them to gain a two to three speed advantage. And all the other critical metrics are comparable to competitive systems so they overall liked the performance. So we are new in this area. We have never sold any wafer-level inspection system. So we feel pretty good that one of the top 10 IDMs in the world chose us over competitive systems and has decided to go with WX in the long-term.

[Dick Ryan:]

Do you have a sense whether this is going to be sort of an evaluation situation, or do you think there's opportunities for follow-ons or as we get into the second half of next year?

[Subodh Kulkarni:]

Certainly, there will be a lot more opportunities with this current customer, who has given us the order for WX. They will certainly keep buying more WX we hope. As we have discussed in the past, this whole area there's only 25 to 30 customers that matter. After that it really becomes very small in the market. So getting -- this customer we won definitely is in the top 10 as I said. So every customer win is a huge win in the long-term in this area. We certainly are working with many others. We are doing demos and events. We are getting consistently the feedback that our speed is significantly better. Obviously, we are new in this area. So everyone has to think through on whether they want to rely on a new company and new technology. But our credibility is fairly good in the SMT space and even in the semiconductor space our credibility has been fairly well established because of our partnership with KLA for a few years now. So those factors are helping us. We are getting traction. Overall, we feel pretty good about the whole category with WX system Along with it we are also selling our nano sensor to some select system integrators particularly in Asia where it is difficult to sell a system in local languages and stuff like that. And so that also is gaining good traction right now. So overall, we feel pretty good about our growth opportunity in wafer level and advanced packaging inspection areas.

[Dick Ryan:]

Good to hear and congratulations on the gone execution. Thank you.

[Subodh Kulkarni:]

Thanks Dick.

[Operator:]

We'll take our next question from Jaeson Schmidt with Lake Street. Please go ahead.

[Jaeson Schmidt:]

Hey guys. Thanks for taking my questions. I just want to clarify if the supply chain constraints caused in your revenue to be pushed out of Q3?

[Jeff Bertelsen:]

Nothing of real significance Jaeson. I mean there were a few sensor sales that got pushed out. But largely we've avoided any big push out due to our own supply issues. So there really wasn't anything of consequence.

[Jaeson Schmidt:]

Okay. And then just understanding how tight the supply chain is out there. Have you seen any significant change in your lead times?

[Jeff Bertelsen:]

Yes. I mean there are certainly lead times have gotten pushed out for certain types of components. There's no question about that. So things are tight. We're spending a lot of time on it. We're constantly dialoguing with our suppliers and lead times have gotten longer for some components. Fortunately, we've managed through that pretty well right now without any significant issues from a parts perspective, but it is tight out there no doubt.

[Jaeson Schmidt:]

Okay. And then just the last one for me and I'll jump back into queue. Can you just update us on how we should think about the potential third memory customer coming online? If there's been any change in your thought process in regards to the timetable there?

[Subodh Kulkarni:]

No certainly we continue to talk to them. They continue to buy our SQ systems for other applications. But so far, we haven't received any orders for MX otherwise we would have disclosed it. But we believe long term they will – given, the great ROI the existing two memory customers seem to be getting out of MX systems, we don't -- and given how commodities of memory market is where they all look at each other very carefully what their yields and productivities are because it's such a competitive area. We do think long term we will get the number 3 customer, but so far it hasn't happened. But we are optimistic it will happen soon.

[Jaeson Schmidt:]

Okay. Thanks a lot guys.

[Jeff Bertelsen:]

Thanks Jaeson.

[Operator:]

We'll take our next question from Eric Slade with . Please go ahead.

[Unidentified Analyst:]

Subodh, Jeff nice quarter. I like it under promise and over deliver that's the game right? So here's my question. When we look at $19 million to $23 million for the fourth quarter. If you had the issue with the cargo ships getting the stuff over what would that have looked like 21% to 25% does that make sense?

[Jeff Bertelsen:]

Well, I think certainly we've identified $2 million $2.5 million worth of pushouts essentially. So you can adjust the range for that I guess given the nature of your question.

[Unidentified Analyst:]

Got it. And on the memory side, I think, Jeff we talked about this. This isn't really capacity additions -- this capacity, this is more replacing existing equipment, the memory you're selling into. Is that correct?

[Jeff Bertelsen:]

Yes. I mean, a lot of it is. We're either replacing manual inspection, or there's other type of equipment that doesn't work as well that we're replacing. So it's a combination of both. And then some customers are adding new capacity so there's some of that too.

[Unidentified Analyst:]

Okay. Now on the mini micro, have you added any new customers? And what are your total customers in the mini micro now?

[Jeff Bertelsen:]

Yes. We have not added any new customers or not in the past quarter. So the total customer count stands at nine.

[Unidentified Analyst:]

Nine, okay. And can you disclose of the nine, how many are, I guess, are elephants?

[Jeff Bertelsen:]

Well, most of the…

[Unidentified Analyst:]

Big companies.

[Jeff Bertelsen:]

Well, yes, most of the customers are sub-cons of a larger consumer electronics company. So, I guess, that's what I can tell you here.

[Unidentified Analyst:]

Okay. All right. Well, congrats again. The weather is gorgeous here, about 75 degrees. Good waves. I’m going to doing my second session and thanks for the great quarter.

[Jeff Bertelsen:]

Okay. Thanks, Eric.

[Subodh Kulkarni:]

Thank you.

[Unidentified Analyst:]

Don’t want to rub it now. I’ll talk to you.

[Operator:]

It appears that we have no further questions at this time. I would like to turn the conference back to your presenters for any additional or closing remarks.

[Subodh Kulkarni:]

Thank you. Thank you for your interest and questions. We look forward to updating you at the end of Q4 in January or February. Thanks again. Bye.

[Operator:]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect