CyberOptics Corporation (NASDAQ:CYBE) Q3 2020 Earnings Conference Call October 22, 2020 4:30 PM ET

Company Participants

Subodh Kulkarni – President and CEO

Jeff Bertelsen – CFO and COO

Conference Call Participants

Greg Palm – Craig-Hallum Capital Group

Jaeson Schmidt – Lake Street Capital

Richard Ryan – Colliers Securities

Orin Hirschman – AIGH Investment Partners

Operator

Good day, and welcome to the CyberOptics’ Third Quarter 2020 Earnings Call. Today’s call 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, sir.

Subodh Kulkarni

Thank you. Good afternoon, and thanks for participating in CyberOptics’ third quarter 2020 earnings conference call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results in some detail following my overview of our recent performance. We will then 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 31, 2019, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.

CyberOptics’ strong third quarter operating results were driven by our 3D MRS technology, which is enabling fiber optics to take advantage of numerous high growth opportunities, including inspection and metrology applications for the Micro LED and memory markets.

We believe the progress that we are making with this technology will continue over the long-term. We reported sales of $20.8 million in the third quarter of 2020, an increase of 68% from $12.4 million in the third quarter of 2019. Third quarter net income came to $1.8 million or $0.24 per diluted share, compared to the net loss of $353,000 or $0.05 per diluted share in the year-over-year period.

Sales of sensors and inspection and metrology systems based on 3D MRS technology increased 95% year-over-year to $8.9 million in the third quarter of 2020. MRS based products and semiconductor sensors accounted for 61% of total revenue in the third quarter of 2020, compared to 66% in the year-over-year period. This modest percentage decline was attributable largely to significantly higher sales of 2d MX memory module inspection systems in this year’s third quarter.

Turning now to a brief review of our product families. Sales of inspection and metrology systems increased 141% year-over-year to $13.3 million in the third quarter of 2020. Within this category, sales of SQ3000 multifunction systems increased 109% year-over-year to $6.9 million in the third quarter. Micro LED related SQ3000 sales totaled $2.2 million in the third quarter of 2020. Approximately $1.1 million of this total was attributable to the $2.5 million order that was received in the second quarter. Shipments of the remaining $1.4 million of SQ systems from this order are expected in this year’s fourth quarter.

Although we aren’t privy to the plans of our end customers for scale up of their micro LED related applications, it would appear as though there has been a temporary pause in their activities. Due to the pause, we have limited visibility into the outlook for new micro LED related SQ orders in this year’s fourth quarter. Accordingly, we have not included any potential new SQ orders for micro LED in our Q4 revenue guidance.

We do believe the pause is only temporary, and firmly believe micro LED related inspection and metrology applications represent a significant long-term growth opportunity for CyberOptics. As such, we anticipate receiving additional micro LED related SQ orders going forward. CyberOptics received customer acceptances for $3.3 million of 2D MX600 memory module inspection systems in the third quarter.

Customer acceptances for $1.6 million of MX600 systems are anticipated in the fourth quarter. Additional orders of 2D and 3D MX systems for memory module inspection are anticipated in the future.

Sales of the inspection and metrology systems are forecasted to decline year-over-year and sequentially in this year’s fourth quarter, due to normal quarter-to-quarter variation. Sales of 3D and 2D sensors increased 15% year-over-year to $3.6 million in the third quarter of 2020. This growth was driven by sales of 3D MRS enabled sensors, which rose 59% year-over-year to $2 million. Sensor sales are expected to decline on a year-over-year basis in this year’s fourth quarter.

During the third quarter CyberOptics garnered two new system integrated customers for its nano resolution sensors for wafer level and advanced packaging applications. Prospective customers are integrating these sensors into their inspection and metrology systems and are demonstrating these systems to their end users.

In addition, customer demonstrations of the recently introduced MRS enabled WX3000 metrology and inspection system that incorporates the nano resolution sensor commenced in the third quarter. Sales of both the nano resolution sensor and WX system are forecasted to build steadily in 2021. We believe these advanced products have positioned CyberOptics to capitalize upon significant growth opportunities, in the areas of wafer level and advanced packaging inspection and metrology.

Sales of semiconductor sensors in the third quarter of 2020 increased 4% year-over-year to $3.8 million. Fourth quarter sales of this yield and process improvement products are forecasted to grow by double digits on a year-over-year basis. CyberOptics ended the third quarter of 2020, with an order backlog of $17.7 million compared to the record backlog of $24.8 million at the end of Q2. As such, we are forecasting sales of $15.5 million to $17 million for the fourth quarter of 2020 ending December 31.

The proven competitive advantage of our MRS and semiconductor technologies have positioned CyberOptics to capitalize upon attractive growth opportunities in our markets. For this reason, we’re optimistic about CyberOptics’ future prospects.

Thank you. Now Jeff Bertelsen will review our third quarter performance in greater detail.

Jeff Bertelsen

Thanks, Subodh. Since our third quarter sales have been covered in some detail, I will cover several other aspects of our performance for this period.

Our gross margin percentage in the third quarter of 2020 was 42%, which was below our initial forecast for this period and compares to 46% in the second quarter of 2020, and 44% in the year earlier period. The decline in our gross margin percentage in this year’s third quarter was attributable to a variety of factors related to our sales mix, including higher sales of legacy products, and proportionately lower sales of MRS and wafer sense-based products.

In addition, there are more sales with inspection system products into the lower margin general purpose SMT market. We are working on cost reduction strategies for the SQ platform, which should start to benefit our gross margins after the first quarter of 2021. We are forecasting an improvement in our gross margin percentage in the fourth quarter of 2020.

Based on a change in product mix, we believe our gross margins in the fourth quarter of 2020 will be above 44%, which approximates our corporate average for 2019 in the first nine months of 2020. Total operating expenses in the third quarter of 2020, increased 4% year-over-year to $6.5 million, and were significantly above this year’s second quarter level of $5.8 million.

READ ALSO  Business rights or human rights? Swiss vote shines spotlight on companies

The sequential quarterly increase in R&D expense was due to the expected reduction in benefits under the job support program implemented by the government of Singapore. The sequential quarterly increase in SG&A expenses due to higher sales commissions, and incentive compensation due to the increase in third quarter sales and improved financial performance. Travel and trade show costs and professional fees were also higher in the third quarter on a sequential quarterly basis.

Depreciation and amortization expense totaled $595,000 in the third quarter of 2020, and stock compensation expense was $305,000. We are forecasting slightly lower operating expenses in the fourth quarter of 2020 on a sequential quarterly basis.

Interest income and other was slightly negative in the third quarter, due to foreign exchange losses, mainly on intercompany balances with our foreign subsidiaries. Our effective income tax rate in the third quarter of 2020 was 19%. We are forecasting a slightly lower tax rate in the fourth quarter due to excess tax benefits from the expected exercise of expiring stock options.

Cash and marketable securities of $27.9 million at the end of the third quarter were down from $29.1 million at June 30, 2020, but up from $26.3 million at the end of 2019. The quarterly sequential decline in cash and marketable securities was attributable to the increase in our accounts receivable, resulting from the significant increase in third quarter sales and an inventory build-up in preparation for additional Micro LED related SQ orders.

Given available balances of cash and marketable securities, we believe our capital resources are adequate for achieving our growth objectives.

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

Question-and-Answer Session

Operator

Well, thank you. [Operator Instructions] Our first question will come from Greg Palm with Craig- Hallum Capital Group.

Greg Palm

Yes. Thanks for taking the questions here. Let’s maybe start with Micro LED. I might have missed it. But did you say whether you received additional Micro LED orders in the quarter? Or was the revenue recognized was all of that from previously announced orders?

Jeff Bertelsen

Greg, we did receive about a little more than $500,000 of new Micro LED orders in the quarter. So there were some new orders received and revenue.

Greg Palm

Got it. And then the additional ones that are still in backlog were from the order that you announced in Q2 presumably. I guess, how confident are you with this pause and the scale of that that you talked about Subodh? I mean, how confident are you that it’s just timing related versus I don’t know something more serious like market share loss? I mean, can you talk about that at all?

Subodh Kulkarni

Sure. So, as far as we can tell, everything continues as planned. There seems to be some kind of a pause here based on whatever end customer is deciding. So a few SKUs are being scaled up, those are — that’s based on the systems we have already shipped and will ship in the next few weeks.

There are more SKUs been planned to go to Micro LED soon. We were frankly expecting that to happen already, but that hasn’t happened and we are not quite sure why. But as far as we know, technology is playing in some form, everything is working out. So it’s just a question of the end customer deciding when exactly they want two lines to be scaled up. So as we said, we believe it’s a temporary pause not any fundamental change of direction.

Greg Palm

Yes. And just to be clear, your orders to-date, they are for one large consumer electronics customer for multiple different applications? Or can you talk about exactly sort of how that that initial orders getting scaled up?

Subodh Kulkarni

So, so far, all those systems we have shipped out for one large consumer electronic company for a couple different SKUs. We can’t get into any more details than that. We definitely expect them to scale up more SKUs in the future. And we do expect other consumer electronics companies to get into Micro LED obviously long-term. But we can’t comment on what applications.

Greg Palm

I guess that was going to be my next question here. Based on this, you know, I don’t know, initial adoption rate by this first large customer, what can you say about the pipeline of opportunities? I mean, I’m assuming there’s more companies that are looking at the technology. I mean, is this a specific technology that really ramped up in calendar ’21? Or what’s your sense in terms of the timeline?

Subodh Kulkarni

Yes, I mean, as we have said in the past, we clearly are in very early innings of Micro LED. Fundamentally, the technologies are rock solid, because of its value proposition of better display quality, longer battery life, those kinds of things. So we do believe it is going to eventually displace other display technologies.

Right now, we have just starting with one large consumer electronics company couple SKUs, as I mentioned, clearly long-term. Over the next few years, you are going to see multiple consumer electronics companies, multiple products go to Micro LED. Ultimately consumers are going to decide price performance on price performance basis, how well the technology gets adopted compared to conventional LCD or conventional OLED technology right now in the marketplace.

But we do believe the technology has enough superior differentiating features, at the cost as it comes that if you again draw that option over to next few years.

Greg Palm

Okay, good. And then last one for me on the gross margin side of things. Any way that may be going a little bit more detail. I mean, was there a specific product line or segment that pressured the gross margin from a mix standpoint most? Or was it sort of across the board? Can you just give us a little bit more detail there?

Jeff Bertelsen

Yes. I mean, it was mainly in the inspection systems area, and that would be legacy inspection systems, but also some of the SQ products. We did have more sales there into the broader SMT market. And we have seen this in the past some of those price points are lower. And so that definitely impacted the margin some.

And then we did have, when you look at WaferSense and MRS based products, they were as a percent of revenue, they were lower than what we were expecting heading into the quarter. And then also, we did have the large SQ order for Micro LED, that we had in hand at the end of Q2 a chunk of that pushed out. So, it’s really a combination of those factors that that drove the gross margin that we saw.

Greg Palm

Yes. It makes sense. Okay. That’s it for me. Thanks.

Subodh Kulkarni

Thanks, Greg.

Operator

And our next question comes from Jaeson Schmidt with Lake Street.

Jaeson Schmidt

Hi, guys. Thanks for taking my questions. Just following up on Greg’s questions on the Micro LED. Subodh, I know you mentioned you’re not including any revenue from that product line into that Q4 guidance. But just curious, if you could quantify sort of the ballpark or up knew that you had assumed maybe coming in Q4 from that product line a few months ago?

Subodh Kulkarni

As I said in my remarks, we are including some revenues from existing orders in Q4 coming from Micro LED, but that’s really the existing current order. We are not including any new orders to come in and we will be able to book them in Q4. If any such things happen, that will be implemented to our guidance.

READ ALSO  Coronavirus latest: Airlines and airports call for rule change to stop empty flights

So, I think it’s fair, few months ago, we were expecting a larger size order at this point already in our hands that which hasn’t materialized yet. As we said we think it’s a temporary pause. Tough to know exactly how large net order has been, but typically as we have seen these orders come they are in the range of $2 million to $3 million at a time. So, we probably that’s what I would say, would have expected. Is that fair, Jeff to assume?

Jeff Bertelsen

Yes, I think that that’s fair. Certainly, if you go back, three months ago, there was more activity around micro LED, and we were expecting some incremental, large orders that haven’t materialized.

Jaeson Schmidt

Okay, that’s helpful. And then just excluding the micro LED product line. Just curious if you could provide some color on sort of what you’re seeing for your customers across the board, as far as are any guys sort of pulling back on their spending? Are you seeing purchasing decisions get pushed out to the right a bit more?

Subodh Kulkarni

I mean, they obviously depends on the customers at the high. So, we do classify our customers. There are basically two camps here. The high selling, or even high end SMT customers that we are dealing with. This seems to be doing generally fairly well, if you look at reports from companies like TSMC or Micron, or even the higher end SMT customers. They generally businesses are doing. And we see no change in their behavior of ordering. So, they continue to buy a SKU and then makes another products from us.

Then there is a more broader SMT market, things like auto or industry, where we have seen some push outs. I mean we do service a couple of MS type customers. And they were planning on ordering. They have held off, because business is generally soft, as you can imagine in the COVID situation. So, we have seen some hold offs. But the larger the more prominent customers we have they are more or less ordering, and that’s reflected in our numbers obviously if you look at it.

In Q3, we had a fairly healthy growth of 68% over the last year. So, clearly our main customers, the main big ones are ordering and continue to order. Anything to add Jeff?

Jeff Bertelsen

No, I think that’s a good summary, Subodh.

Jaeson Schmidt

Okay. And then just last one for me, and I’ll jump back into queue. I think previously, there was some hope to maybe add a third customer on the memory side. Any sort of change in that timeline, I think previously was to get that done by yearend? Is that still the goal?

Subodh Kulkarni

That is still the goal. I mean, we are having continuous discussions with them. We are optimistic that they will, at some point start buying an MX from us, but exactly when they will place order and when we will be able to book it, it’s hard too much. It is, given that we are already in mid-October, now it’s hard to see how we can — they may place an order, hopefully this year, but fulfilling it as sales this year is going to be difficult just because of the lead times MX the systems. But still, we continue to work at it. And I think long-term we believe they will start buying MX from us.

Jaeson Schmidt

Okay, that makes sense. Thanks a lot, guys.

Jeff Bertelsen

Thanks, Jaeson.

Subodh Kulkarni

Thanks, Jaeson.

Operator

And next will be Dick Ryan with Colliers.

Richard Ryan

Thank you. Jeff or Subodh, were there any cancellations in your backlog?

Jeff Bertelsen

No, there were no cancellations.

Richard Ryan

Okay. And how much of the business I got a couple related to kind of China. I mean, what percent of your business goes to China either direct or combine that with multinationals?

Subodh Kulkarni

We have said in the past about 10% of our business goes to China based customers, but it is very deceptive because some of our customers purchasing office inside base one large customer particularly on the OEM side. They are purchasing offices based in Hong Kong. But the product is actually shipped from Hong Kong to different various different countries. So it doesn’t end in Mainland China.

And then in some other cases, the product is being shipped to OEMs in Japan, for instance. And we do know that that’s actually China. So, we don’t know the exact final number of how many of our products in percent dollars end in China, but as booked roughly 10% to 15% of our business is in China.

Richard Ryan

Okay. So the issue is the large foundry over there. Chinese foundry over there may have within U.S. that’s kind of immaterial for you guys.

Subodh Kulkarni

Yes, I mean, if you’re referring to things that have been in the press recently with SMIC, we do sale small amount, but that’s not material for us.

Richard Ryan

Okay. Thank you. Anything with the Intel selling the memory unit to SK Hynix, is that good, bad, indifferent too early to tell? Or how would you handicap that?

Subodh Kulkarni

I think it’s a good question. It obviously is a big announcement in the memory industry. Clearly, it is going to consolidate memory industry further. Already the three big memory manufacturers Samsung, Hynix and Micron had 85% plus by manufacturing share. And this purchase of Intel’s NAND business by SK Hynix is just going to further strengthen the share of the top three players in obviously in favor of SK Hynix in this case.

So longer-term, I mean, everyone says that the consolidated memory industry sort of fragmented memory industry helps the memory industry in general in terms of capacity, expansions and price stabilities. And obviously, a healthy memory industry is good for vendors like us, since memory is such a big and important part of our revenue stream. So, we always look forward to more stable conditions in memory.

So, in indirection it is good for us, but it has no direct impact directly because of that transaction.

Richard Ryan

Yes. Okay. It doesn’t sound like your WX or your nano sensor, anything is slipping there. It’s still kind of 2021 story to expect any ramping?

Subodh Kulkarni

Yes. We have pretty much on track on that one. Things continue to come along. We are in final stages of development. We have an operational system right now in China, and we are building a second one as we speak for Taiwan. Because almost 40% to 50% of the market is in Taiwan for those types of products. So things are coming along. We definitely are getting customer interest because of our value proposition of high speed significantly higher than competitive alternatives right now.

So we feel pretty good about getting traction both with nano sensor to OEMs and integrators as well as WX to customers end users.

Richard Ryan

Okay, thank you.

READ ALSO  Spain’s BBVA and Sabadell scrap merger talks

Subodh Kulkarni

Thanks, Dick.

Operator

Thank you. [Operator Instructions] Our next question comes from Orin Hirschman with AIGH Investment Partners.

Orin Hirschman

Hi, how are you?

Subodh Kulkarni

Good. How are you?

Orin Hirschman

Good. Thanks. So just going back to the Micro LED part of the business. So I mean, is it possible that even though the sales haven’t been huge, but you’ve had a lot of successful months, 18 months. Is it possible that there’s overcapacity right now by that one customer, assuming let’s say the work is being done by an ODM OEM for them?

And I guess, it’s true with across multiple SKUs. But is it — can you tell if most of it is really being aimed at one single SKU?

Subodh Kulkarni

I mean, again, we don’t know all the details of exactly what end users launch plan. They keep it fairly secret, and don’t divulge it into their supply chain. So we don’t know exactly how many SKUs and when they will hit the market. We know how many lines and how many systems we have shipped, obviously. And we have quantified that already.

So we know production is happening as we speak, and a few products are going to hit the marketplace before the end of the year. Certainly, what the customer has told us — and again, this is just one large consider electronic company, there are many companies that are interested and looking at various products with Micro LED in the future.

So even this one existing large consumer electronics company has told us they want to do multiple product lines as soon, they haven’t quantified exactly when. And other companies are coming along.

So over the next five years, you are going to see we have more and more Micro LED adoption in the marketplace. And as the adoption increases, we certainly expect to sale more and more SKUs for that application.

Orin Hirschman

Any idea of how long it’s going to take to see a second customer? I know you’re working with multiple customers, just trying to get them into production mode.

Subodh Kulkarni

I think, just like many new technologies getting entry into the marketplace is always a big hurdle. Once that happens and consumers see the value of the technology then the other competitors are kind of compelled to look at that. I mean, clearly, the consumer electronics is extremely competitive marketplace, as we all know. And if one company has launched something with a better display and longer battery life, others will follow suit fairly quickly, unless they are blocked by IP or something like that.

And that’s not the case here as far as we can tell. So we definitely expect a few SQs, as I said before the end of this year and more SQs from different companies soon after that.

Orin Hirschman

And just if you look at, I don’t know if anybody’s ever asked this. How many customers approximately are really engaged with you in terms of testing it decides to lead customers actually in production? But how many others have actually played with the system physically?

Subodh Kulkarni

This display industry is a fairly complex supply chain system, so at each stage there is some consolidation. So there is the LED manufacturers obviously who are involved. Then there is a transfer of LED to substrates. There SQ and we people like us are involved. Then there is the display itself. There is significant consolidation in the display industry and the top three to five companies, they are involved in that. And then there’s a final consumer electronics companies and other companies that are involved that are selling the finished product. So it’s not a simple ecosystem that one company is controlling the whole ecosystem.

So right now, LEDs are being made, transfer is being made, different display companies are involved and one large consumer electronics company is clearly involved other consumer electronics companies are looking at the picture. So it’s a little more complex than just a simple product law. Certainly, we expect many, many more products coming along so with Micro LED.

Orin Hirschman

Okay. And just finally 3D memory test side. I didn’t catch the last question, I just didn’t catch the end of the answer in terms of how the consolidation might affect things. And has there been any change in the rollout schedule for the end customers where the 3D test becomes more critical to them?

Subodh Kulkarni

No, in general memory module inspection systems is a very important product for us, and it does serve the industry very well in terms of the return the customers are seeing, in terms of defect deduction and yield improvement for them. So as we have disclosed already we have two of the three large memory manufacturers that are using our MX systems right now. One of them has been purchasing MX systems for a few years now, like they are more or less saturated, they still have a few lines left that we hope to fulfill.

The other ones have started earlier this year, so they are ramping up as we speak. And then the third large customer we are talking to them, that was the answer that we are optimistic we will get them, but we don’t know exactly when.

Between the three large memory manufacturers, they already have more than 85% market share, and this recent transaction where Intel sold its NAND business to SK Hynix. SK Hynix is one of those three large manufacturers. It’s just going to shift more market share towards the three large companies. So as I mentioned it doesn’t have a direct impact on us, but indirectly consolidated memory industry and heavier memory industry is good for us. And we already have initiatives with the three large memory manufacturers, so that’s beneficial to us.

Orin Hirschman

Okay. And just one question on the expense side, if I may just to finish up. What you described in terms of the R&D reimbursement changing, is that going to be a permanent item? Should we be do think slightly higher ongoing OpEx number?

Jeff Bertelsen

Are you — it sounds like you’re maybe referring to this job support program that…

Orin Hirschman

Yes.

Jeff Bertelsen

Yes, I mean, I think we will get some benefit from that for the remainder of this year, but I think once you get into 2020, we should probably be modeling higher OpEx. The benefit this year or in the third quarter related to that program was about $50,000 on R&D expense. So, if we didn’t have that program, our R&D costs in Q3 would be about $50,000 higher.

Orin Hirschman

Okay. So we’re not talking about huge magnitudes here.

Jeff Bertelsen

Pardon me.

Orin Hirschman

We’re not talking about a very big magnitude here, in terms of…

Jeff Bertelsen

No, not relative to what our Q3 actual expense was. That’s correct.

Orin Hirschman

Okay, thanks very much.

Subodh Kulkarni

Thank you.

Operator

[Operator Instructions] There are no further questions at this time.

Subodh Kulkarni

Thank you for your interest and questions. We look forward to updating you at the end of our Q4 in early 2021. Thank you, again.

Operator

Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.



Via SeekingAlpha.com