CyberOptics Corp (CYBE) CEO Subodh Kulkarni on Q2 2018 Results - Earnings Call Transcript

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About: CyberOptics Corporation (CYBE)
by: SA Transcripts

CyberOptics Corp (NASDAQ:CYBE) Q2 2018 Earnings Conference Call July 25, 2018 4:30 PM ET

Executives

Subodh Kulkarni - President, CEO & Director

Jeff Bertelsen - VP, Finance, CFO, COO & Secretary

Analysts

Jason Schmidt - Lake Street Capital Markets

Greg Palm - Craig Hallum Capital Group.

Operator

Good day, and welcome to the CyberOptics Second Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Doctor Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead sir.

Subodh Kulkarni

Good afternoon, and thank you for taking the time to participate in CyberOptics' second quarter Earnings Conference Call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results in some detail, following by overview of our recent performance. We 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, 2017, 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. Sales from the second quarter ended June 30, total $15.9 million, which exceeded the upper end of our previously issued guidance. We reported sales of $16.4 million in the second quarter of 2017. Second quarter earnings came to $740,000 or $0.10 per diluted share compared to earnings of $1.1 million or $0.15 per diluted share in the year-over-year period.

By way of an overview, our second quarter revenue was driven by record sales of WaferSense semiconductor product line, which is becoming one of our key growth engines. And although sales of inspection metrology systems there is lower year-over-year, our quarter ending backlog of 3D MRS-enabled SQ3000 AOI Systems makes us confident this important product should post stronger year-over-year sales growth in the third quarter of 2018.

I should also mention that development of our MRS-enabled mid-end semiconductor inspection capability is on track and we are expecting initial sales of the sensors later this year. But more on this in a few minutes.

Now I will provide some details on our second quarter performance by product category. Second quarter sales of semiconductor sensors, principally the WaferSense sales product line, rose 25% year-over-year to nearly $4 million. This marks a new quarterly record for this product family. Semiconductor fabs and other customers are increasingly recognizing the value of WaferSense sensor as important tools for improving yield and productivity.

A new sensor called manufacturers or flat panel displays has recently been launched and additional WaferSense applications are currently under development. For this reason, we anticipate continued strong growth for this product. Sales of inspection/metrology systems declined 13% year-over-year to $6.7 million, but were up 13% from this year’s first quarter. Reflecting normal variability in our quarterly sales, total sales of 3D MRS-enabled SQ3000 systems declined 6% year-over-year in the second quarter to $2.6 million, but rose modestly year-over-year in the first half of 2018.

The sales total includes our SQ3000 CMM system that combines automated optical inspection and metrology functionality. We sold two SQ3000 CMM systems in the second quarter to one of the world’s largest consumer electronics companies for non-SMT application. We also sold one CyberGage system in the second quarter to a new customer, a large global Fortune 50 company.

Total SQ3000 sales are forecasted to increase significantly in this year’s third quarter on a year-over-year basis given the strong second quarter ending backlog of this system. And during the quarter, we sold approximately $1 million of metrology related X-ray systems. As previously reported, a $1.6 million order was received in the second quarter for MX600 memory module inspection systems with revenues expected in the first quarter of 2019. We are pursuing other MX600 opportunities, but revenues from any orders receive this year most likely would be realized in 2019.

Total sensor sales declined 7% year-over-year to $5.3 million in the second quarter of 2018. Sales of 3D MRS-enabled sensors primarily to KLA-Tencor and Nordson declined modestly to $1.6 million in the second quarter, but were up 59% year-over-year in the first half of 2018. Multiple semiconductor manufacturers are evaluating working prototypes of our MRS-enabled mid-end semiconductor inspection sensors in our lab. With three micron pixel size, these prototypes can measure feature sizes down to 30 microns accurately and at very high speed. We are targeting one micron resolution at three sigma accuracy, at speeds that we’d expect more than 2,300 millimeter wafers per hour.

We believe nominal initial sensor sales will be realized later this year marketing and important strategic milestones in the development of what we believe to be a significant long-term opportunity. Sales of mid-end inspection sensors are expected to ramp up in 2019 and beyond. In addition to OEM opportunities with our mid-end sensor, we are pursuing new OEM relationships for our MRS-Technology in our key SMT, semiconductor and metrology markets.

In summary, total second quarter sales of all 3D MRS-enabled products including sensors, inspection systems and metrology products came to $4.3 million compared to $4.7 million in the year earlier period.

For the first six months of 2018, total MRS revenues grew 24% year-over-year to $8.6 million. Total sales of our 3D MRS-enabled products are expected to grow significantly on a year-over-year basis in the third quarter of 2018.

Looking ahead, we are forecasting sales of $14.75 million to $16.25 million for the third quarter ending September 30, 2018. We are encouraged by the progress that our 3D MRS sensor technology is making in our target end market as well as the outlook for our WaferSense products family.

CyberOptics is moving in the right direction and we are optimistic about our future. Thank you. Now Jeff Bertelsen will provide additional details regarding our outlook and second quarter performance.

Jeff Bertelsen

Thanks, Subodh. Since our second quarter sales already have been covered in some detail, I will provide a brief overview of what we are currently anticipating for the third quarter. Although third quarter sales of the WaferSense line of semiconductor products are forecasted to be down somewhat on a sequential quarterly basis, we anticipate strong double digit growth for WaferSense sales on a year over year basis in the third quarter of 2018.

We see WaferSense is one of our key growth drivers going forward as this product line continues gaining traction in the semiconductor market. Inspection and metrology systems also are forecasted to perform strongly in this year's third quarter with sales increasing at double digit rates on both the sequential quarterly and year-over-year basis. Within this category, total SQ3000 sales including the new SQ3000 CMM are forecasted to increase significantly in the third quarter on a year over year basis given our strong quarter ending backlog of these systems.

Finally, sensors are expected to report modestly higher third quarter sales on a year-over-year basis. Taken as a whole, total sales of 3D MRS-enabled inspection systems, sensors and metrology products are forecasted to grow significantly on a year-over-year basis in the third quarter of 2018.

Moving down the P&L, CyberOptics second quarter gross margin declined slightly to 46% from 47% in the year earlier period, due principally to our sales mix, including sales of $1 million of CT scanning systems in the quarter. In addition, as we mentioned on last quarter's earning call, we are experiencing some pricing pressures on our 2D and 3D inspection systems in the broader SMT market.

Our third quarter gross margin is expected to be down slightly on a sequential basis given that inspection and metrology systems are expected to account for a larger portion of our total revenue in the third quarter.

Total operating expenses in the second quarter of 2018 rose a modest 5% year-over-year, largely due to increased R&D spending on new MRS-based products including our MRS-enabled mid-end semiconductor inspection sensor and WaferSense devices as well as bonus accruals that were absent in the year earlier quarter.

Depreciation and amortization expenses totaled $666,000 in this year's second quarter and stock compensation expense was $225,000. We believe total operating expenses in the third quarter of 2018 will be down slightly when compared with the second quarter level, but up modestly year-over-year.

Our second quarter 2018 tax rate was 24%. We're forecasting our tax rate to be at or near this level going forward, excluding any excess tax benefits from stock-based compensation. Cash and marketable securities totaled $24.2 million at the end of the second quarter, up from -- totaled $24.2 million at the end of the second quarter, up from $22.9 million at the end of the first quarter of 2018.

CyberOptics ended the second quarter of 2018 with an order backlog of $13.8 million, including the $1.6 million order for the MX600 systems, up from $12.1 million at the end of this year’s first quarter. And as indicated in this afternoon’s release, we are forecasting sales of $14.75 million to $16.25 million for the third quarter of 2018.

Thank you. We would now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And we’ll take your first question from Jason Schmidt from Lake Street Capital Markets.

Jason Schmidt

One here really quickly, I apologize if I missed it. If you could go through the ancillary revenue numbers for your four segments?

Jeff Bertelsen

Sure. So OEM sensors were $5.3 million, WaferSense was $3.94 million, almost $4 million. And then inspection and metrology, as we had mentioned last time, we’re combining those categories. That was about $6.7 million in the second quarter.

Jason Schmidt

And then a really strong Q2, and I know at the midpoint for Q3, it will be a slight sequential decline. Do you think any orders got pulled into Q2? And could you just comment sort of on the linearity of the order patterns throughout Q2?

Jeff Bertelsen

Yes. I mean, I think the order patterns, I would say we’re fairly linear throughout the quarter. Obviously, we were happy with the second quarter came in a little ahead of what we had initially forecasted. I think we’re very optimistic about Q3 as well. I would note that, we are expecting a very strong systems quarter in Q3, and a lot of that, can depend on the timing of acceptances and so forth. But just given our backlog and the order flow, we think things are definitely moving in the right direction and we’re seeing a pretty steady flow of orders.

Jason Schmidt

Okay.

Subodh Kulkarni

The only thing I would add, Jason, to Jeff’s comments is, it is -- as you know, it is very difficult for us to predict revenues, particularly for the systems area, down to the exact, when the acceptances will happen. There is always going to be some moment of systems revenues between quarters.

Jason Schmidt

Okay. That makes sense. And you mentioned that you had a CyberGage order with a Fortune 50 customer. Is there an opportunity to expand further asset customer in the relative near term? Or do you think this is simply going to be a one end done type situation?

Subodh Kulkarni

No. I'm glad you asked that question. We are definitely seeing better traction to CyberGage now and that’s continuing into Q3 than what we were seeing a year ago of [Indiscernible] products. It just tells you how long it takes than you are launching a disruptive technology and getting customers interested and evaluating it and making sure they understand the pros and cons of new technology. This particular customer has a worldwide, they are obviously a very large company, they have worldwide metrology needs, they like the full concept of fast accurate easy to use scanner in metrology lab. So they have started with their headquarter, but they definitely are planning on implementing CyberGage technology, they're doing in their world manufacturing operations big time. So they are thinking in the long-term in a big way, we will see how it goes. And we continue to talk to other customers to and we are getting very interesting traction with CyberGage. Again, relatively small in the big scheme of things but strategically important, I believe.

Jason Schmidt

Okay, fantastic. I'll jump back into queue. Thank you.

Subodh Kulkarni

Thanks, Jason.

Jeff Bertelsen

Thanks, Jason.

Operator

[Operator instructions] And we'll take our next question from Greg Palm from Craig Hallum Capital Group.

Gregory Palm

Good afternoon. Thanks for taking my questions. Subodh, maybe hoping you can start off with some general macro commentary, just kind of curious. Any change in sentiment or behavior from your customer base compared to maybe last quarter? And what's -- where we are at in the pipeline, I guess compared to last quarter?

Subodh Kulkarni

Overall, we feel -- this additional comment, we feel fairly bullish going forward in the second half. Clearly the eight years where we participated, which is the semiconductor SMT and metrology areas. We see good economic conditions that may be some moment. Again, we have talked in the past about semiconductor and we are following the same news that you are some change in buying patterns, particularly from the memory size. But we haven’t really seen it at org level. We see that more in the external comments and other completed reports. But when it comes to WaferSense or other products that we are selling to the semiconductor sector, we haven’t seen any anything specific to comment about it. Overall, I would say all the three areas that we play in SMT, semiconductor and metrology, continue to look good economically, globally. So nothing negative from a macro environment standpoint as far as our visibility is concern.

Regarding the project, we continue to have a very healthy pipeline of what we call "large projects". Many of them as I mentioned in my last quarterly earnings call has started buying ones and twos, so not quite large enough orders. We justify putting out separate press releases for those kinds of orders, but I would say about five to six of those 20 plus projects has started ordering either SQ or something else, most of them were SQ related in small number. We obviously put out the press release for MX600. That was more than $1 million. That was about $1.6 million. And we will continue to do so if we get any large order more than the million dollars; we will just be transparent and makes it all. But overall, we feel pretty good about pipeline right now, the economic conditions, and how we are positioned for the second half of this year and frankly for the next three to five years.

Gregory Palm

So SQ backlog and associated commentary, is that represent a lot of those onesie and twosie orders that you guys just talked about, or is that a handful of metrics [Multiple Speakers] for Q3?

Subodh Kulkarni

There certainly, the backlog does consist of the ones and twos from those large project customers. There are some others too, it’s just not exclusive to those customers. But overall SQ has a very healthy backlog right now.

Gregory Palm

Nice to see margins bounce back here in Q2 compared to Q1 on a sequential basis. Just curious, the pricing pressure that you talked about last quarter. Should we assume that that’s maybe weighted off here a little bit, or is that still a potential concern going forward? And I don’t know if it’s helpful to talk about the margin profile, specifically of that SQ backlog that you talked about?

Jeff Bertelsen

Yes, I think in the broader SMT market, we’re certainly seeing some margin pressure, which could impact us a little bit possibly in the near-term. I’m not expecting a big swing there or anything. I think going forward with our sensor technology, we are focusing on more higher-end specific applications for customers that are more demanding that drive higher margins and higher margin profile. So to the extent and while some of our revenue tends to be concentrated at SMT, we’ll see a little bit of that margin pressure and some of it on our older legacy products, the 2D AOI products and so forth. Moving forward, we still I think have opportunity to hopefully retain or expand our margins.

Subodh Kulkarni

The other thing I would add, Greg, is clearly WaferSense is our highest margin category. And when WaferSense becomes a larger portion of the revenues, that does has all our margins and to some extent that had been happened in Q2, the WaferSense was almost $4 million of the total number and that did help bring the margins up a little bit. But overall, as Jeff said, we believe that between WaferSense and MRS, which are generally higher than our corporate average and as they become larger portion of our total revenues, we’ll continue to inch up despite the broader SMT market challenging us with margins.

Gregory Palm

Last one you mentioned, in addition to the CyberGage sale, I think you said something like to SQ CMMs to a large consumer electronics customer. Is this a new customer, is this an existing customer? And I don’t know what you what you can say. But can you give us any more details about application or what not?

Subodh Kulkarni

It is a large consumer electronics company as we said. They are an existing customer. They have bought other things from us in the past. We are really not allowed to disclose the specific application, because it gets into very sensitive areas that deeply in, so we can’t talk about what specific. But it is a non-SMT application. We are basically doing metrology type things for consumer electronic type products is all we can say.

Operator

We’ll take our next question from Bill [indiscernible] Capital Management.

Unidentified Analyst

What percentage of your revenues does the 2D business represent in this quarter?

Jeff Bertelsen

It was about $7.6 million out of the $15.9 million that we reported, so little less than half.

Unidentified Analyst

And that business is it essentially holding -- I guess before I ask that. Is that really representative of the trend, or is this quarter different than past quarters? I guess. I'm asking, is this representative, that's the way I should ask that.

Jeff Bertelsen

Yes, I think it's fairly representative. I think last year we did $28 million so I think we're right in the ballpark there.

Unidentified Analyst

And that business, does it continue to hold reasonably steady or is it trending upward or downward?

Jeff Bertelsen

No, I think as a whole, it will be fairly steady, that's our belief. In the second quarter, it was down 10% just raw numbers year-over-year, but we think it's a pretty flat. It's going to bounce up and down but we think it's in balance and in total it’s going to be fairly flat.

Unidentified Analyst

So if we have a quarter where it's up 10%, you would encourage us not to be too enthusiastic about that nor should we be too unhappy with it being down 10% this quarter?

Jeff Bertelsen

Correct.

Subodh Kulkarni

We, in general, expect it to be flattish. In our investor presentation, we openly say that the business, it will be between $25 million and $30 million going forward. So some quarter you may see a positive number, some quarter you may see negative number, but don’t take that too much into consideration. It should be a flattish business between $25 million and $30 million, moving forward.

Operator

[Operator instructions] [Indiscernible]

Unidentified Analyst

I just have a few shot questions. In terms of revenue for the second quarter, would you mind mentioning which were the top two WaferSense contributors?

Subodh Kulkarni

In general in WaferSense, our gapping sensor is the biggest contributor and the next one is the teaching sensor. Our gapping sensor generally has become almost a de facto standard for many CVD pieces of equipment. They find value of controlling the gap between the electrodes very high in controlling the uniformity. So many CVD process engineers are beginning to use the gapping sensors more or less as a standard. So that has become our biggest contributor. And the teaching one plays a good role in the ion implant area in centering the electrodes, that’s a pretty important part of their process recipe. So those are our two generally the highest ones. All the products contribute, but AGS and ATS are generally are high sellers.

Unidentified Analyst

I noticed on your Web site that you made the statement on hoping you would just expand on it a little bit. You said that we believe that SQ3000 CMM is world's first in line CMM that can measure any object and deliver hundreds of thousands of dimensions simultaneously in less than 10 seconds, and there’re lots of conditions in there. Could you expand on this and perhaps give us a sense of your newest competition?

Subodh Kulkarni

I mean, it’s a broad question. So what we mean by that segment is, if you look at CMM. CMM, first of all, stands for coordinate measuring machine. So typical CMMs are this large granite slabs with either touch probes or lasers that are doing the scanning. Typical operation takes several minutes, sometimes several hours with a manual operator fixing it, indexing it, calibrating it and so on. So it’s a manually intensive long operation to get the data you do, that is typical CMM. So in that case, SQ is the first time we believe anywhere in the world is attempting to do in line CMM type capabilities. As far as I know, there is nothing like that that exists in the world today where you can do 10 seconds or 15 seconds for full inspection and metrology and generate a full report at the end of it, like a CMM does. So in that sense, it may be the only inline CMM system out there, from a competition standpoint. Right now, we haven’t seen anyone from the CMM world get into that measurement just because they don’t have the technology to enable those speeds.

Some other AOI competitors arguably could do what we are doing and we may see that in the future, where they are going to do some in line type measurements. And we see some aspects of it. For instance Koh Young, if you go to their Web site, they are doing something with vertical machine optical inspection, MOI and that is -- even though they are generating inspection report and lot metrology report, clearly they have the mythology numbers before they generate the inspection report. So they could do something along those lines. Another AOI competitor, called TRI from Taiwan, they may be able to do something like that. And we have seen some of that but I don’t believe any of AOI competitors, and certainly no one from the CMM side, has attempted to do what we are doing with SQ CCM in the sense of truly in line full inspection and metrology report.

Unidentified Analyst

Just one further question, if I may. I think you’re moving laser design into your headquarters. Are you finished with that, or have you completed that?

Jeff Bertelsen

No, that will -- their lease expires at the end of the year. So they’ll be moving in right around the first of the year.

Operator

[Operator Instructions] There are no further questions.

Subodh Kulkarni

So thank you for your interest. Are there any other questions?

Operator

I do apologize. Eric, Private Investor.

Unidentified Analyst

Couple of things, nice you quarter guys. Question I have on your CyberGage. How many units do you have in the field now that you sold?

Subodh Kulkarni

I would say, about a dozen or so in the field that have been sold and about similar number that are in demo considerations worldwide…

Unidentified Analyst

I didn’t hear that. How many in demos?

Subodh Kulkarni

About a dozen, both sold and as well as in demos. If you look at it, we’ve been 20 to 25 and half of them have been sold, half of them are in demo consideration right now. So still…

Unidentified Analyst

And how many different companies is that that you’re working with, either in demo or you sold. I mean how many different entities?

Subodh Kulkarni

As far as demos, it’s hard to know because they move around quite a bit. So that number [Multiple Speakers]. As far as sold, only one customer has brought multiple CyberGage so far. So offhand I would say eight or nine customers so far.

Unidentified Analyst

And obviously, I mean it sounds like that’s made a lot of progress over the last year. I know it’s slower than we all would like, but it sounds like it’s -- you’re making some progress there?

Subodh Kulkarni

As I mentioned in my comments, it took a long time to get things going. And it is a disruptive technology, we knew that. We were going against well established industry giant in those CMM world and we are relatively known company in the CMM world with a very disruptive technology, and that does takes time to get going. And we are pleased -- as I mentioned, it’s all still very, very small numbers but I believe strategically we are making good inroads with high quality customers. So we see [Multiple Speakers] where the potential of the technology is.

Unidentified Analyst

So the conversations now compared to a year-ago, they would seem a lot more progressive now, or lot more -- is this the long cycle?

Subodh Kulkarni

It is a long cycle. And in fairness, we have made some subtle but important improvements as the year has gone by in terms of accuracy, resolution, ease of use, those kinds of things, nothing dramatically different than what we had a year ago, but enough to address some of the minor concerns that we were hearing a year ago. So whether it is the combination of just time and the small thing just we have done or not, we don’t know. But we certainly are seeing more traction today than what we were a few months and certainly a year ago.

Unidentified Analyst

Now the CyberGage product, the ones that you’ve sold to even demo-ed. Are those mostly outside of the semiconductor space and the core space, is that more industrial application?

Subodh Kulkarni

Absolutely, in fact, I am trying to recall and help me Jeff. I don’t believe we have sold any CyberGage to any semi-customer so far. It’s all the applications have been metrology applications.

Jeff Bertelsen

And industrial not inspecting a PCB or…

Subodh Kulkarni

Or a module or [Multiple Speakers]…

Unidentified Analyst

Now the other question I had and Jeff, I want you to answer this. What was your largest memory module order in the Company’s history? It seemed to me years ago when I was involved with your guys, it was like $10 million at one point you had a huge order. Am I right on that…

Jeff Bertelsen

Well, I think, yes. And I think what you're referring to and this goes back a long time, there was a large order to sell solder paste machines to a memory manufacturer. What our MX memory module system does now is it inspects the modules after they've been singulated, so a different application really [Multiple Speakers] for us memory manufacturers.

Unidentified Analyst

If you look at that area, the memory modules, you actually have one of the big three memory players. Right?

Jeff Bertelsen

Correct.

Unidentified Analyst

Which one is that -- just kidding. Now, the other two, are you -- they must be aware that you’re out there. So are you engaging any kind of -- I guess, that’s not the right question? But I would assume that you want to go get those two also. So you have three of the guys?

Subodh Kulkarni

Yes, absolutely. I mean we are talking to the other two. And even though three -- they are dominant in the memory industry. There is Tier 2 and there are smaller but important players in the Tier 2, including Toshiba and a few others. So it’s not like, it’s only dominated completely by -- it’s 100% owned by three. So we are definitely talking to the other two, as well as some of the Tier 2 player. We do also [Multiple Speakers]…

Unidentified Analyst

So if we look at the market that you’re in with those, what is the potential dollar amount that you can go after and that kind of -- I was never clear on that one on the memory module side?

Subodh Kulkarni

It is a little tricky to quantify the exact dollar of the total market size. I mean, roughly, our systems go for $0.5 million of piece, we can tell you that. But the exact throughput and how it get configured depends a lot on the individual consideration, it’s a fully automated system. So it depends on how the modules are coming down the conveyor, how we pick them up and automatically sort them. So there’s -- I hate to put a number just because every memory company seems to have their unique configuration of how they singulate and the conveyors move to various different trains. So we have to fit into ecosystem in a fully automated manner. So even though it may be the same machine, the throughput could be different depending on the customer is what I am saying, and that changes the size quite a bit but it’s a large market. One of three players, I mean clearly, the market out there for us is more than a factor of three than what we have sold so far and continue to sell.

Unidentified Analyst

And is that based on last year’s revenues on the module or this year. I guess I’m trying to figure out, in the next, two, three years, is it a $10 million, $15 million opportunity or $5 million? I guess, that’s the real question.

Subodh Kulkarni

I would say it’s in the orders of tens of millions of dollars. I mean, it is -- we sold $6 million in 2016. We sold nothing in 2017. As we mentioned in our comments, it’s very unlikely we’ll spend anything in 2018 even though we are collecting the orders right now they are all 2019 type orders. So that gives you a feel. So when the orders come, they are large orders. I don’t think, it’s single million dollars type of business, but I don’t think it’s $100 million either. So it’s in -- the business potential is in the tens of millions of dollars.

Unidentified Analyst

So $20 million, $30 million, maybe something along that line…

Subodh Kulkarni

Along that line, yes.

Operator

[Operator Instructions] And there are no questions.

Subodh Kulkarni

Thank you for your interest and questions. We look forward to updating you at the end of third quarter results. Thank you.