CyberOptics Corporation

Good day, ladies and gentlemen. Welcome to the CyberOptics Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I turn the conference over to Dr. Subodhi Kulkarni, President and CEO of CyberOptics. Please go ahead.

Thank you. Good afternoon, and thanks for participating in CyberOptics Earnings Conference Call for the third quarter of 2021. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer who will review our results in some detail following my overview of our recent performance. We then will be pleased to answer your questions at the conclusion of our remarks. In keeping with Regulation FD, we have made forward-looking statements regarding our outlook in this afternoon's earnings release. These forward-looking statements reflect our outlook for future results, which is subject to a number of risks that are discussed in our Form 10-K for the year ended December 31st, 2020, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors. Turning now to our recent performance, CyberOptics reported record sales and earnings in this year's third quarter ended September 30th. Our operating results were driven by the strong performances of each of our product lines. Record quarterly wafer sales were a key driver behind our profitability. Our lineup of 3D MRS-based sensing and inspection products and semiconductor sensors have positioned CyberOptics to report record sales and operating earnings for the full year 2021. These products have enabled us to gain traction in our targeted SMT and semiconductor capital equipment markets. We believe this trend will persist for some time, making us optimistic about CyberOptics' fourth quarter performance and outlook for 2022. We reported record sales of $27.8 million for the third quarter of 2021 ended September 30th, an increase of 33% from $20.8 million in the third quarter of 2020. Net income for the third quarter came to a record $4.8 million, or $0.63 per diluted share, up significantly from earnings of $1.8 million, or $0.24 per diluted share in the year earlier quarter. Sales of 3D and 2D sensors increased 50% year-over-year to $5.5 million in the third quarter of 2021. This strong growth was driven by sales of 3D MRS sensors, which rose 81% year-over-year to $3.6 million. Demand from OEM customers and system integrators involved with high-end electronics and semiconductor inspection and metrology applications is continuing to drive the sales growth of our 3D MRS sensors. 3D and 2D sensor sales are forecasted to post strong year-over-year growth in the fourth quarter of 2021. Sales of semiconductor sensors, principally our WaferSense line of products, increased 93% year-over-year to a record $7.4 million in the third quarter of 2021. Ongoing demand for semiconductor capital equipment is driving the sales growth of this yield and process improvement sensors. Sales of semiconductor sensors are forecasted to record strong year-over-year growth in the fourth quarter of 2021. Sales of inspection and metrology systems rose 12% year-over-year to $14.9 million in the third quarter of 2021. Within this product category, sales of SQ3000 multifunction inspection systems increased 9% year-over-year to $7.4 million. Of this total, $4.5 million was derived from sales of SQ systems for mini-LED inspection and metrology. Additional mini- and micro-LED orders are anticipated going forward, making us believe the long-term growth outlook for mini- and micro-LED inspection and metrology applications remains very promising. Third quarter system sales also benefited from customer acceptances of $4.9 million of 3D MX3000 memory module inspection systems. Although no MX sales are forecasted in the fourth quarter due to normal sales variability, we see our MX line as one of CyberOptic's key long-term growth drivers. Sales of inspection and metrology systems are forecasted to post strong year-over-year growth in the fourth quarter of 2021. We received a new order for the MX3000 in October, raising our current backlog of MX3000 systems to $3.2 million. These orders are expected to be recognized as revenue in the first half of 2022. During this year's third quarter, we received our first purchase order for the WX3000 spectrology and inspection system from a large integrated device manufacturer. Incorporating our 3D nano resolution MRS sensor, the WX3000 was selected by this particular IDM due to its ability to perform 100% 3D inspection two to three times faster than alternative solutions. Delivery of the WX system and revenue are scheduled for the first quarter of 2022. I should add that customer demonstrations are continuing for both the WX system and nano resolution sensor for wafer and advanced packaging applications. We believe both products are positioning cyber optics to capitalize upon significant longer-term growth opportunities. Cyberoptics backlog at September 30th, 2021 totaled $44.2 million compared to $45.3 million at the end of this year's second quarter and $17.7 million at the end of third quarter of 2020. We are forecasting sales of $19 to $23 million for the fourth quarter of 2021 ending December 31st, reflecting strong year-over-year sales growth. Shipments of some SQ3000 systems will be deferred to the first quarter of 2022 due to customer delays in obtaining needed equipment from other suppliers for a complete full line solution. We expect to start 2022 with a strong first quarter performance based on the outlook for the continuation of favorable market conditions in our targeted SMT and semiconductor capital equipment markets. as well as our backlog of orders for SQ3000 and MX3000 systems. Thank you. Now, Jeff Bertelsen will review our third quarter performance in greater detail.

Thanks, Sibode. Our gross margin percentage in this year's third quarter was almost 46%, up from 42% in the year earlier period, and better than our original forecast at the start of the quarter. The improvement in gross margin percentage over the prior year and our forecast at the start of the quarter was mainly due to a more favorable sales mix. Record sales of high gross margin semiconductor sensors were a key driver behind the improvement in our gross margin percentage. Sales of semiconductor sensors represented a larger percentage of our revenue in the third quarter of 2021 on a year-over-year basis and were better than our forecast at the start of the quarter. Gross margins on SQ system products were also better than expected due to a more favorable mix of sales for demanding higher end applications. Gross margins for other inspection and metrology system sales also exceeded our expectations. Our gross margin percentage in the fourth quarter of 2021 is expected to be flat to up about one percentage point from the level in the third quarter of 2021, given that we are not expecting any sales of lower gross margin MX3000 systems in the quarter. Although we have largely avoided issues due to part shortages, limited availability of cargo space and delays in ocean freight have made it more difficult to move equipment around the globe. limitations resulting from the global freight situation have been factored into our q4 revenue guidance total operating expenses for the third quarter of 2021 increased 17 year-over-year to 7.6 million the increase was due to higher third-party channel commissions resulting from the significant year-over-year increase in sales higher accruals for incentive compensation given our improved financial performance and higher compensation costs for new and existing employees. Depreciation and amortization expense totaled $603,000 in the third quarter of 2021 and stock compensation came to $328,000. Total operating expenses in this year's fourth quarter are expected to be about $300,000 lower on a sequential quarterly basis when compared to the third quarter of 2021 due to reduced channel commissions and incentive compensation accruals. Our effective income tax rate for the third quarter of 2021 was 10%, which included about $400,000 of excess tax benefits from stock option exercises, investing of restricted shares. We are forecasting an effective income tax rate of about 15% for the fourth quarter of 2021. Cash and marketable securities totaled $33.5 million at the end of this year's third quarter, up from $32 million at the end of the second quarter and $30.6 million at the end of 2020. We believe our capital resources are adequate for achieving our growth objectives. Thank you. We would now be happy to take your questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question. You may do so by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star one for questions. We'll pause just a moment to assemble the phone queue.

We'll take our first question from Craig Palm with Craig Helium Capital Group.

Please go ahead.

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

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

So, you know, given that and some MX and it sounds like a little even WX recognition in Q1, do you want to even go out on a limb and tell us what you're sort of expecting? I'm guessing at the very least probably sequentially up versus Q4, but it sounds like you're going to at least start off fiscal 22 on a pretty high note.

Yeah, I mean, we – feel good about how about fiscal 22 and particularly how the first quarter is going to start out and you know certainly a good chunk reason for that is due to the backlog that we have with as you pointed out mx wx sx or sq rather and uh you know also some some good sensor backlog so you know we do feel you know very positive about the first quarter right now and and we do think we will see strong year-over-year growth in the first quarter.

That's great. And then on gross margin, obviously it's great to see that mix was a positive driver there, but it just kind of feels like looking back in the last three or four quarters, you've sort of kind of hit a new level, it seems like. And I'm not sure how much of that is just you know, due to mix versus, you know, obviously a higher top line. But, you know, it feels like that gross margin level has sort of crept up here. And I'm not sure what you're viewing sort of as the new level on a more normalized mix. But just curious how you're viewing that as we go into fiscal 22 as well.

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

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

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

That's great to hear.

I'll leave it there. Thanks for all the color.

Thanks, Greg. As a reminder, star one for questions. We'll go next to Dick Ryan with Colliers. Please go ahead.

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

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

Okay.

That's September 30th.

Obviously, WaferSense was a pretty significant contributor. You talk about year-over-year. Any sequential... Caller, you can provide us on wafer cents about.

Yeah, I can comment on that and just, you know, we had a, obviously had a terrific wafer cents quarter in Q3. You know, we do expect strong year over year growth in Q4, but it will be down sequentially, wafer cents will be.

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

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

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

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

Well, that's good to hear, and congratulations on the strong execution. Thank you.

Thanks, Dick. As a reminder, star 1 for questions or comments, please, star 1.

We'll take our next question from Jason Schmidt with Lake Street.

Please go ahead. Hey, guys. Thanks for taking my questions. I just want to clarify if the supply chain constraints caused any revenue to be pushed out of Q3.

You know, nothing of real significance, Jason. I mean, there were a few sensor sales that got pushed out, but largely we've avoided you know, any big push out due to our own supply issues. So there really wasn't anything of consequence.

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

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

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

Certainly, we continue to talk to them. They continue to buy our SQ systems for other applications, but so far, we haven't received any orders for MX. Otherwise, we would have disclosed it. But we believe long-term they will, given the great ROI, the existing two memory customers seem to be getting out of MX systems. And given how commoditish memory market is, where they all look at each other very carefully what their yields and productivities are, because it's such a competitive area, we do think long-term we will get the number three customer. But so far it hasn't happened.

But we are optimistic it will happen soon. Okay. Thanks a lot, guys. Thanks, Jason. Thanks, Jason. Star one for questions.

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

It's a boat, Jeff. Nice quarter. I like it. Under promise and over deliver. That's the game, right? So here's my question. When we look at 19 to 23 million for the fourth quarter, If you didn't have the issue with the cargo ships getting the stuff over, what would that have looked like, 21 to 25? Does that make sense?

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

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

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

Now, on the mini-micro, have you added any new customers, and what are your total customers in the mini-micro now?

Yeah, we have not added any new customers or not in the past quarter. So the total customer count stands at nine.

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

Well, yeah, most of the customers are subcons of a larger consumer electronics company. So I guess that's what I can tell you.

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

Okay. Thanks, Eric.

Don't want to rub it in, though. I'll talk to you. Ladies and gentlemen, as a reminder, star one for questions. We'll pause just a moment to reassemble the queue.

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

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

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