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Executives

Steven Case - Chairman

Kitty Iverson - President and CEO

Jeff Bertelsen - CFO

Analysts

Chuck Murphy - Sidoti & Company

Clinton Morrison - Feltl & Company

Alexander Paris - Barrington Research Associates

CyberOptics Corp, (CYBE) Q3 2008 Earnings Call Transcript October 22, 2008 4:30 PM ET

Operator

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the CyberOptics Corporation Third Quarter Earnings Call. During today's presentation, all participants' lines are muted. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, October 22, 2008.

I would now like to turn the conference over to Dr. Steven Case, Chairman. Go ahead, sir.

Steven Case

Thank you. This is Steve Case and we want to welcome you to our Third Quarter Earnings Conference Call. Following my introductory remarks, Kitty Iverson, our President and CEO, will review our recent operating results in some detail. Kitty, Jeff Bertelsen, our CFO, and I will then be available to answer your questions at the conclusions of our remarks.

In keeping with Regulation FD, which prohibits us from providing any forward-looking information unless we publicly release that information at the same time, we have made forward-looking statements and provided financial guidance for the fourth quarter of 2008 in this afternoon's earnings release. However, these forward-looking statements and guidance are no guarantee of actual results due to a number of risk factors which are discussed in our Form 10-K for the year ending December 31, 2007, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.

Finally, we do not intend to provide information on this conference call that is not contained in our release except by way of clarification.

Turning now to our third quarter performance, consolidated sales totaled $11.6 million, down from the $13.4 million in this year's second quarter and $16.2 million in the third quarter of 2007. Sales for the current quarter were consistent with our previously issued financial guidance for this period.

We reported a net loss of $772,000 or $0.11 per share which also was consistent with our third quarter guidance. Our third quarter loss included approximately $650,000 of pre-tax expense related to the ongoing transition of our inspection systems operations to Singapore and a $257,000 income tax benefit from an expiring statute of limitations on taxes.

We reported a net loss of $269,000 or $0.03 per share in this year's second quarter and net income of $1.5 million or $0.16 per diluted share in last year's third quarter.

Despite the continuing slowdown in the global electronics market, we again were encouraged by the sales of our solder paste and automated optical inspection or AOI systems which were virtually flat with our second quarter level, and up 23% from the year-earlier period.

This performance partly compensated for the sharply lower sales of electronic assembly sensors that we forecasted for this period, reflecting the slowing growth of new SMT production capacity worldwide.

The extreme miniaturization of electronic components used on SMT circuit boards is driving the growing need to inspect for product quality. This ongoing trend has made our systems business, unlike electronic assembly sensors, less reliant on expansions in SMT production capacity, since a substantial portion of our system sales involves retrofitting existing production lines with our solder paste or AOI systems or both.

As a result, we believe our systems business will continue to mitigate to some extent, the impact of weak conditions in the global electronics market.

Moving on, the establishment of our systems-related facility and R&D staffing in Singapore is scheduled for completion as planned by the end of the fourth quarter. We have maintained our Minneapolis-based systems R&D while establishing an R&D operation in Singapore, which has resulted in duplicated R&D costs throughout the past year.

Total R&D spending, which is expected to decrease starting at the end of the fourth quarter as the transition process nears completion. Sensor-related product development will remain in our Minneapolis headquarters. We previously anticipated that manufacturing of our next-generation solder paste inspection system would commence in Singapore during the fourth quarter. However, we are performing additional engineering work and testing on this new platform which will delay the introduction of this next-generation system until the second quarter of 2009.

In the meantime, we will start manufacturing our AOI systems in Singapore ahead of schedule in next year's first quarter. By the end of the first half of 2009, all systems manufacturing will be in Singapore, which is consistent with our initial transition plan.

The realignment of our systems business is forecasted to result in lower costs and more focused R&D effort. These benefits are expected to position CyberOptics for generating higher levels of profitable growth in the future.

Now I would like to discuss some of our product development initiatives. As we said in our second quarter earnings release and conference call, CyberOptics has been pursuing several promising growth opportunities for our inspection technology with OEM customers. We are encouraged to report that we have made solid progress in these initiatives in the third quarter.

During the quarter, we signed an OEM contract involving our embedded inspection technology. Additionally, two significant OEM projects are nearing the contract stage while a fourth has progressed to the engineering qualification phase. The R&D efforts related to these projects are creating new technology designed to lower the cost of inspection and provide faster production throughput speeds, better ease of use and improved resolution for inspecting progressively smaller electronic components.

We expect to realize the initial revenue from our first contract by late 2009. At the same time, the next-generation solder paste inspection system that will be manufactured in Singapore later this year incorporates a cost-reduced platform as well as enhanced performance. As a result, we believe that this system should relieve some of the margin pressure on our inspections business, while providing for continued revenue growth.

We believe the various production development initiatives currently underway will position CyberOptics for stronger operating results as the global electronics industry returns to a growth footing.

I'll conclude my remarks by commenting on the financial guidance contained in this afternoon's release. Reflecting continued weakness in the global electronics market, we are anticipating lower sales of electronic assembly sensors in the fourth quarter. Although we are also forecasting a larger sequential quarterly decline in sales of inspection systems, sales of solder paste and AOI systems are nevertheless expected to remain on a relatively solid level.

For the quarter ending December 31, 2008, we are forecasting sales of $9.5 to $8.5 million and a corresponding net loss of $0.16 to $0.21 per diluted share, which includes pre-tax Singapore transition costs of approximately $250,000 and a $250,000 benefit from the Federal R&D tax credit.

Our guidance also incorporates continued gross margin pressures due to the shift in our sales mix toward inspection systems, which carry a lower gross margin in addition to ongoing investments in higher performing and cost-reduced next-generation systems in inspection technologies.

At this point, we really cannot predict when the electronics market will begin to materially strengthen. However, we can say that CyberOptics is positioned to operate effectively in this challenging economic environment, due in part to our strong balance sheet that includes substantial cash reserves. Our cash is more than sufficient to support the various R&D initiatives that are currently underway.

In addition, the transition of our systems business to Singapore is positioning us to aggressively pursue a wide range of opportunities in the Asian market. For these and other reasons, we continue to believe that CyberOptic's future is promising.

Thank you, and now I will turn the conference over Kitty Iverson who will review some highlights from our third quarter performance. Kitty?

Kitty Iverson

Thank you, Steve. And I too would like to thank you all for joining us today. Turning now to our revenues in this year's third quarter, sales of SMT component placement sensors to OEMs of robotic pick-and-place equipment, declined 24% from this year's second quarter and by 55% from the third quarter of 2007, which was a high watermark.

Third quarter sensor sales were largely consistent with our forecast, which were based on our outlook for a slowdown in the growth rate of new SMT production capacity due to the sluggish global economic conditions.

As we said in this afternoon's release, we are anticipating a further decline in sensor sales in the fourth quarter, as the downturn in the global electronics market continues.

Sales of SMT inspection systems to electronics manufacturers were down only 5% from the second quarter level and were up 23% from last year's third quarter. Unlike our electronic assembly sensor operation, our systems business is not fully dependent upon expansions in SMT production capacity. A good portion of our systems business involves retrofitting existing SMT production lines with solder paste or AOI systems or both. We believe this explains why our systems business held up fairly well in the third quarter.

Due to continued weakness in the electronics market, we are forecasting a larger sequential decline in system sales in the fourth quarter. However, fourth quarter systems sales are nevertheless forecasted to be at a relatively healthy level in this weak market.

Supporting this belief is the fact that we added 11 new systems customers during the third quarter, in addition to receiving a significant order for 17 Flex Ultra HR AOI systems, which are expected to revenue in the fourth quarter of this year.

Finally, third quarter sales of semiconductor products including WaferSense, Wafer Mapping Sensors and Frame Grabber Products declined by 7% from the second quarter level and by 5% from the year-earlier period.

It is important to note that the sales of the Legacy products of this business were down in the third quarter, consistent with the slump in the semiconductor equipment market. But our new WaferSense product line is up 72% on a year-to-date basis, although the sales volumes are still relatively small.

Proceeding down the income statement, our third quarter gross margin of 43% was virtually unchanged from this year's second quarter and was down from 51% in last year's third quarter.

Our third quarter gross margin included $130,000 of inventory cancellation charges, reflecting the impact of the economic downturn on our business. Over the past year, our gross margin has been affected by the gradual shift in our sales mix towards systems which generally carry lower margins than those associated with sensors, and by margin pressure on systems sold into the Asian market. We believe our fourth quarter gross margin will remain consistent with the third quarter level.

Third quarter R&D expense of $2.8 million was up modestly from $2.6 million in the second quarter and $2.5 million in the third quarter of 2007. Our Singapore transition expense, a great majority of which was accounted for as R&D, peaked in the third quarter as we had reported previously.

Of the total $650,000 of third quarter pre-tax expense related to the Singapore transition, about $100,000 was related to severance and new employee recruitment in Singapore, while virtually all of the remaining $550,000 was included in R&D.

Throughout most of 2008, we have maintained our Minneapolis-based systems-related engineering staff, while building our new R&D operation in Singapore. At Steve stated in his remarks, we expect to complete the Singapore R&D staffing and facility build-out in this year's fourth quarter, on schedule.

As a result, Singapore transition expenses are expected to be significantly lower in the fourth quarter and we continue to expect full-year Singapore transition costs in the range of $1.6 million to $1.8 million, as previously reported.

The additional quality testing and related engineering on our next-generation solder paste inspection system that Steve mentioned earlier, will offset a portion of the fourth quarter savings from the lower Singapore transition expenses.

Reflecting these factors, R&D expense in this year's fourth quarter is expected to decline modestly from the third quarter level. Our new solder paste inspection system is introduced in the second quarter of 2009. We expect to realize the full positive impact of the Singapore transition on our R&D cost structure, as well as the cost benefit of moving all systems manufacturing to Singapore.

SG&A expense of $3.7 million was down slightly from $3.9 million in both the second quarter and the year-earlier period. Fourth quarter SG&A is forecast to be down slightly from the third quarter level.

We reported an income tax benefit and an effective rate of 46% in the third quarter, compared to 35% for all of 2007. When you exclude a previously reported $257,000 benefit from an expiring statute of limitations for taxes, we recorded a third quarter income tax benefit and an effective rate of 29%.

We presently expect our effective tax rate to be approximately 29% in the fourth quarter. In addition, we expect to recognize a discrete benefit of approximately $250,000 related to the recent passage of the Federal R&D tax credit for 2008.

Let's turn now to the balance sheet. We ended the third quarter of 2008 with cash and marketable securities of $29.2 million, compared to $45.7 million at the end of the second quarter and $52.6 million in the beginning of 2008. During the quarter, we used cash of approximately $15 million to repurchase 1.5 million CyberOptics shares under a modified Dutch auction tender offer.

For the first nine months of 2008, we used cash of $20.9 million to repurchase approximately 2.1 million common shares. No share repurchase authorizations are currently in effect.

All in all, our financial condition is very strong. In addition to our substantial cash reserves, we ended the quarter with working capital of $32.4 million and our balance sheet is virtually debt free. We have ample resources to support our various growth projects and to continue operating effectively in this challenging economic environment.

In addition, we intend to vigorously monitor and manage our cost structure, given the weak economic outlook and take all actions deemed appropriate.

In closing, I want to say that all of the strategic initiatives discussed today are designed to position CyberOptics as a stronger company well into the future. We are developing a series of next-generation OEM products that will be fully attuned to evolving market requirements in terms of price and performance. Our next-generation solder paste inspection system is expected to relieve margin pressure on the product line, since it will command improved pricing due to a significantly enhanced performance and at the same time it will be a cost-reduced platform for us.

We also believe this new system should enable us to capture a growing share of the solder paste inspection market. And our Singapore initiative will yield reduced R&D and manufacturing costs, as well as more highly focused R&D.

We are confident that CyberOptics is becoming a stronger company, positioned to prosper in our targeted markets over the long haul. Thank you, now. Thank you and now I'll turn the conference call back to the Operator who will poll you for any questions that you may have.

Question-and-Answer Session

Operator

Thank you, Ma'am. (Operator Instructions) And our first question comes from Chuck Murphy with Sidoti & Company. Go ahead, please.

Chuck Murphy - Sidoti & Company

Good afternoon, guys. Just wondering -- at the beginning of the quarter the guidance for EPS was a loss of $0.12 to $0.17. It came in at a loss of $0.11. Obviously, not much better than expected, but was there anything that was not as bad as expected or was it a cost issue why you came in a little bit ahead?

Jeff Bertelsen

Yes. I mean when we -- our $0.12 to $0.17 it didn't include that $257,000 tax benefit. So when you factor that in, we were kind of right in the range if you account for that item.

Chuck Murphy - Sidoti & Company

Okay. Alright, and can you give me the break down for sales between sensor, systems and semi?

Jeff Bertelsen

Sure. Sensors $4.5 million, systems $5.8 million and semi $1.3 million.

Chuck Murphy - Sidoti & Company

Okay. And last question, can you give a little bit more color on the contract that you signed for the embedded inspection technology?

Kitty Iverson

Sure, this is Kitty Iverson and then maybe Steve Case can --. We've been working on some new technologies for inspection. As you know, that is where our vision is and where we want to align our technology and product development. And so we have been working on some embedded inspection technologies. We had introduced some prototypes to the market last year that appear to be successful and so we have signed a contract to go to the next phase and take that product into production.

It is embedded inspection and it is a new technology that we have been working on for quite some time. I can't tell you the customer. But I can tell you that it is embedded inspection and it is the program that we have been working on for a number of years here at Cyber.

Chuck Murphy - Sidoti & Company

Okay. And so what part of the SMT process would it be for?

Steven Case

I think we probably don't want to go to exactly where it goes. That would lead to possible customer ideas. But it's in the electronic assembly space.

Kitty Iverson

And in the production equipment on the circuit card assembly line.

Chuck Murphy - Sidoti & Company

Okay. Alright, that's all I had. Thanks.

Jeff Bertelsen

Thank you, Chuck.

Operator

Thank you. And our next question comes from Clint Morrison with Feltl & Company. Go ahead, please.

Clinton Morrison - Feltl & Company

Good afternoon.

Kitty Iverson

Hey Clint.

Jeff Bertelsen

Hi Clint.

Clinton Morrison - Feltl & Company

I just wanted to clarify a little bit. You tossed some numbers. What really is sort of the R&D overlap for this quarter and next if we kind normalized and took out the double accounting. I'm not sure how much is sort of the double expense versus sort of one-time expense -- how you're breaking that down.

Jeff Bertelsen

Yes. I mean I think the way I'm looking at it I guess, I think the R&D overlap for this quarter is about $500,000. But I think what's happened with the delay in our solder paste inspection system is that we've been going through this training process with our Singapore team and they have gone through the process and most of the players have returned to Singapore and they will be engaged now, working on that new platform. And also, because of the delay, we continued to retain the contractors here. So that's really why you're seeing a reduction in what we're calling transition costs, because they aren't really training anymore. They're working on the machine, so we do get it out in the second quarter, as Kitty said.

Clinton Morrison - Feltl & Company

Okay, so the -- I think you referred to sort of $650,000 of pre-tax expense?

Jeff Bertelsen

Right.

Clinton Morrison - Feltl & Company

That was kind of an all-in number for this quarter?

Jeff Bertelsen

Right. And the R&D was about $500,000. The recruiting, as Kitty said, was about $100,000 and then there's just a little bit in SG&A. So that would be the balance of about $50,000.

Clinton Morrison - Feltl & Company

Okay. And we're going to start -- and that’s going to come down -- it's going to all be gone by the end of next quarter, but how much lower will that figure be in next quarter?

Jeff Bertelsen

In Q4, what we're calling transition cost is $250,000. But again, because of the delay in the new machine, we're keeping the resources here so we get that product out the door.

Clinton Morrison - Feltl & Company

Yes. Now the -- sort of the swap around that you've got where the solder paste is getting pushed out but the AOI is getting pulled in with regards to Singapore --

Jeff Bertelsen

Sure.

Clinton Morrison - Feltl & Company

Any sort of financial impact -- A, kind of tell me the answer of why you did that and is there any real financial implications --?

Jeff Bertelsen

I don't think there are really any financial implications of that. It was really -- our initial plan was to start building that new machine in Singapore in the fourth quarter but since that's been pushed out, we thought it made sense to move the AOI in just to get things done sooner. But I don't think there's really any financial ramification of that.

Kitty Iverson

Yes, I don't think there's any financial ramification other than because we've had that slight delay, we kept a few extra people on board here in Minneapolis to finish up the program. But we do want to get manufacturing moved on schedule and didn't want that to slip. So to get the AOI Flux machines manufacturing transferred sooner, that allows us to keep the whole manufacturing thing on schedule, even though we've had a couple month delay on the new solder paste platform.

So I think all in all, not a lot of financial impact, on schedule with plans with the exception of the short delay on the SE 500 and we're moving forward and everything is as planned, so I think that's good news across the board.

Clinton Morrison - Feltl & Company

Okay, and then just a final question, you talked about kind of your new opportunities and the contract you just signed, a couple more that are getting close and one that's out a little bit. Did you or can you kind of quantify those at all as to how significant they could be or might be?

Jeff Bertelsen

I think what we've said is they could in theory be at least 10% of our revenue.

Clinton Morrison - Feltl & Company

Are you talking about each one these has --

Jeff Bertelsen

No, in total. In total -- they could account for that, hopefully more.

Kitty Iverson

Yes. I mean at this point, it is new technology, new inspection technology. Some will be standard equipment, some will be an option that the customer can request. So to the best of our ability, we think it's 10% of revenue and hopefully more and that's what we're counting on.

Clinton Morrison - Feltl & Company

Okay, and the one you signed, I think you said kind of what -- end of '09 is when first revenue maybe?

Kitty Iverson

End of '09 first revenue, and we're on schedule to do that.

Clinton Morrison - Feltl & Company

Okay. Do we extrapolate that to the other ones that basically a sign and then it's a year off before you get revenue? I'm thinking for the two that are getting close --

Kitty Iverson

Yes. Although we're continuing to do a little work, but once we sign, it'll be somewhere between 12 and 15 months.

Clinton Morrison - Feltl & Company

Okay. So if all these things went, in sort of mid 2010 you could be seeing good revenue on this package of four?

Kitty Iverson

Absolutely.

Clinton Morrison - Feltl & Company

Okay. That's good for me. Thank you.

Jeff Bertelsen

Thank you, Clint.

Operator

Thank you. (Operator Instructions) And our next question comes from Alexander Paris with Barrington Research Associates. Go ahead, please.

Alexander Paris - Barrington Research Associates

Good afternoon.

Jeff Bertelsen

Good afternoon.

Alexander Paris - Barrington Research Associates

The embedded -- or contract that you signed, is that part of the move to make that kind of inspection available to smaller SMT manufacturers?

Steven Case

Not really. I'm looking at integrating more inspections into production processes so that makes it easier and cost effective for the small manufacturers.

Kitty Iverson

Yes. We've said that overall our stand-alone inspection systems reach about 50% of the market and there is more opportunity there. And some of the embedded technologies, the contract that we just signed, really is aimed at a different price point and a little different product and so it will be aimed at the 50% of those lines that are not using inspections.

Alexander Paris - Barrington Research Associates

This is the one that you thought was a big opportunity, the other 50%, and that's what this is aimed at?

Kitty Iverson

Yes. That is it's aimed at the smaller customers, heavier changeover lines, lines that don't use inspections, mostly lines that don't use inspection today, that's exactly where it's aimed, at a new market.

Alexander Paris - Barrington Research Associates

And the quality test that caused the delay in the solder paste inspection, was that additional tests required by the customer after seeing your initial product?

Kitty Iverson

No. You know, I can give you a little more color on that. There are three pieces to our new solder paste inspection system. There's a platform, of course. And there's a sensor technology and then there's the software. And our sensor is on schedule, our platform is on schedule and our software -- we decided that we wanted to do a better job of testing in terms of what the customer will see and we also had some slippage on the software side. And so right now we added some more time so that we can do a more comprehensive test plan.

And no, this would be before it gets to the customers. We hope to have some evaluations out there well before the start of the second quarter.

Alexander Paris - Barrington Research Associates

Okay. Going back, you broke out the sales for someone there for this year. Could you give us the year-ago quarter for those?

Jeff Bertelsen

Sure. So 3Q '07 sensors were $10.1 million, systems were $4.7 million and semi was $1.3 million.

Alexander Paris - Barrington Research Associates

Right. And this inventory that resulted from cancellations I think you said, is that inventory that's just become scrapped obsolete or is it back on the shelf or what?

Jeff Bertelsen

Really what it was is we -- due to the downturn that we're seeing, we cancelled some purchase orders and so we incurred some cancellation charges with our vendors.

Alexander Paris - Barrington Research Associates

Okay. And the tax rate is 29% for the year. Do you have a guess on your 2009 tax rate?

Jeff Bertelsen

You know, I think our -- I guess initially for 2009 I think our tax rate would be probably in the 30%, 32% to 33% range -- 34%, in that range.

Alexander Paris - Barrington Research Associates

Okay. And then what percentage of your business now roughly is Asia, say of this quarter -- predominantly?

Kitty Iverson

Yes. I think we're probably at -- in terms of where we shipped, we're probably at about 65%-60% Asia.

Jeff Bertelsen

I think relative to Asia that would be a good estimate.

Alexander Paris - Barrington Research Associates

Okay and this delay of the solder paste now that is getting -- the delay gets longer. Are you running the chance of having a lot lower first half of 2009 sales in the systems as people wait longer and longer or have been waiting longer and longer for this new technology?

Kitty Iverson

Well, we've been pretty careful not to talk about it with our customer base. So because the SE 300, that platform is six or seven years old now, but it's still fairly competitive in the market even at this point. So no, I think we're okay. There are new opportunities that I think we can go after with the SE 500 and we're probably delayed on some of those new opportunities. But I think for the most part, I think the delay won't hurt us from a revenue perspective. And will customers wait for the new technology? Maybe, but it'll take a while for it to catch on. So I don't see any financial ramification from the delay that we've got right now. The market is lower because of the electronic and the economic situation and so I think we'll be able to manage the transition.

Alexander Paris - Barrington Research Associates

Can you -- I know you've said and no one knows exactly when the electronic business industry is going to turn around, but do you have any wild guesses on 2009 just from what you see your customers' requirements are or the talk as it's going to be as good as -- 2008 is not going to be so great, but do you see it worse than that or better?

Kitty Iverson

What I can tell you is historically what it's looked like at one data point. Historically, our downturns have lasted on an average four to five quarters. And we saw the sensor downturn happening towards the end of the second quarter. So that might indicate that the back half of 2009 would strengthen, data point number one. Data point number two is you obviously get into the Christmas and the back-to-school season and that's seasonal for us, that's about quarter three next year.

So we're hoping that the business will build back toward the last half of next year. Third thing that I think is that may be a positive is laptop conversions to desktops is still happening. And you still have -- the other way -- sorry -- desktop conversions to laptops is still happening. And a good chunk of our systems business is on laptop lines. I think that's a positive. Although the other thing that would offset that is I wish I knew what was happening with the global economy and I don't. And that may weigh in.

But right now I would say on average we see four to six quarters of -- four to five quarters of low sensor business. So this would be our second full quarter.

Alexander Paris - Barrington Research Associates

So the third quarter was the second?

Kitty Iverson

Yes, sorry, third quarter. And so I could see a turnaround possibly in 2009, depending on the global economic situation at that point.

Alexander Paris - Barrington Research Associates

And then your systems business is more dependent upon your new product getting out on time, so that would make the second half look better than the first half?

Kitty Iverson

Absolutely, yes. When the new solder paste system comes out, that will definitely help as we go forward. And our systems business is a little less subject to the electronics slowdown because we can go into existing lines and we're still penetrating existing lines with systems. So it'll feel the impact, but not like our sensor business that is very, very cyclical and tends to drop off a cliff for possibly four quarters.

Alexander Paris - Barrington Research Associates

I guess you've been talking about the retrofit for a while, but for example, systems business $5.8 million, what part of that would you say would be retrofitting?

Kitty Iverson

We've been using a number and I can go back. We still have a fairly strong number of new customers. There were 11 new customers in there, so roughly 30% to 40% of our revenue is new customers. And then if you look at the split between retrofit and new capacity, we've used about 50%, 50% new capacity and 50% to outfitted lines, roughly. That'll change quarter over quarter. I don't have the exact number for last quarter.

Alexander Paris - Barrington Research Associates

I'm trying to remember 11 new customers. Maybe you mentioned them at the beginning -- they were already mentioned their coming when your last conference call was -- this wasn't on top of the 11or so --?

Kitty Iverson

This was on top of the last 11.

Alexander Paris - Barrington Research Associates

So you had 11 in the second quarter and 11 in the third quarter?

Kitty Iverson

Yes.

Jeff Bertelsen

Sure.

Kitty Iverson

We are continuing to add new customers. Again, there's a penetration and the inspection market is growing double-digits. More and more lines out there that don't use inspections are adding inspections, and so the market growth for that business is fairly positive. And yes, we are adding new customers and that would be a total of 22 new customers in the last couple quarters. And we're doing that with Flux, but we're also doing with the SE 300 which is an older platform.

Alexander Paris - Barrington Research Associates

Okay. Let's get a sight from your forecasting ability in 2009. Your margins, are they going to come into any more pressure because of -- was solder paste, I guess is you're talking another three or four quarters down for the sensor business and your solder paste is doing better than the sensors and then your margins just from the mix will continue to weaken in the early part of next year?

Kitty Iverson

Well, I don't think sensors is going to get a little weaker, but I think we've experienced the mix, now is the worst. And so point number one is we've got high systems and very, very low sensors so we're seeing the worst of the mix. It shouldn't get worse than that, number one.

Number two, the new solder paste platform that we're introducing is cost-reduced as well as it should command more price because of better performance and new technology. And so that will make a difference as well for us.

And some of the new OEM opportunities that Steve Case and the Company is working on, because it is brand new technology in inspections, those are very solid margins too.

Alexander Paris - Barrington Research Associates

I'm sorry, just one more question. The duplicated facilities, you said you were going to be done with the facilities by the end of the fourth quarter as far as Singapore is concerned. In the duplicated facilities, does that happen immediately or do you still have to sell some facilities and take a while? In other words, how fast do those duplicated costs disappear -- as you get into early 2009?

Jeff Bertelsen

I think -- and it's mainly what we're talking about is the R&D costs. And I think they will start to disappear fairly quickly, particularly once you hit the second quarter. We'll see those costs start to decline.

Alexander Paris - Barrington Research Associates

Okay.

Kitty Iverson

Manufacturing and R&D is in the headcount, Alex. We do have now a manufacturing center in Singapore as well as one here, but we're readjusting and moving and bringing that up to speed in Singapore.

Alexander Paris - Barrington Research Associates

Okay, thank you very much.

Kitty Iverson

Thank you, Alex.

Jeff Bertelsen

Thank you.

Steven Case

Thank you.

Operator

Okay, thank you. And we have no further audio questions at this time. I would now like to turn the conference back over to Dr. Case for any closing statements.

Steven Case

Alright, thank you very much for listening in on our conference call and asking some good questions. We look forward to coming back to you in three more months, or about four months I guess for the year-end report. We'll talk to you then.

Jeff Bertelsen

Thank you, good bye.

Kitty Iverson

Thank you all.

Operator

Ladies and gentlemen, this concludes the CyberOptics Corporation Third Quarter Earnings Call. This conference is available for replay. You may access the replay system at any time by dialing 303-590-3000 with the pass code 11120989. And thank you for your participation, and you may now disconnect.

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Source: CyberOptics Corp. Q3 2008 Earnings Call Transcript
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