CyberOptics Corporation

Good day and welcome to the CyberOptics first quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dr. Sibode Kulkarni. Please go ahead.

Thank you. Good morning and thanks for participating in CyberOptics earnings conference call for the first quarter of 2022. 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 morning's earnings release. These forward-looking statements reflect our outlook for future reserves, which is subject to a number of risks that are discussed in our Form 10-K for the year ended December 31, 2021, 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 strong sales and earnings in the first quarter of 2022. Each of our product groups, 3D and 2D sensors, semiconductor products, and inspection and metrology systems posted strong double-digit year-over-year sales growth in the first quarter of 2022. The competitive advantages of these products are allowing CyberOptics to further penetrate our targeted growth markets in the areas of Advanced Surface Mount Technology, or SMT, applications, and semiconductor capital equipment. This makes us confident about CyberOptic's second quarter and full year prospects. We reported sales of $24.2 million for the first quarter of 2022 ended March 31st, an increase of 37% from $17.7 million in the first quarter of 2021. Net income for the first quarter of 2022 was $3.6 million, or 47 cents per diluted share, an increase of 149% from earnings of $1.4 million or $0.19 per diluted share in the year-earlier quarter. These strong operating results are evidence that CyberOptics is continuing to perform at a high level. Now, for the next few minutes, I'll briefly review the performance of each of our product families. Sales of 3D and 2D sensors increased 27% year-over-year to $8.1 million in the first quarter of 2022. Within this category, sales of 3D MRS sensors rose 15% year-over-year to $4.9 million in the year's first quarter. Semiconductor inspection and metrology applications are continuing to generate demand for our 3D MRS-based sensors. Sales of 3D and 2D sensors are forecasted to pose solid growth on a year-over-year basis in the second quarter of 2022. Sales of semiconductor sensors, principally our wafer line of sensors, increased 34% year-over-year to $6.8 million in the first quarter of 2022. Strong global demand for semiconductors is in turn driving demand for semiconductor capital equipment where our wafer-sense products are utilized. Sales of semiconductor sensors are forecasted to post strong double-digit growth on a year-over-year basis in the second quarter of 2022. Sales of inspection and metrology systems rose 49% year-over-year in the first quarter of 2022 to $9.4 million. Driving this strong growth were sales of SQ3000 multifunction inspection systems, which increased 45% year-over-year to $5.9 million. This advanced product is continuing to gain traction among both existing and new customers. Total SQ3000 sales related to mini-LED applications came to 619,000 in this year's first quarter. In the first quarter of 2021, we did not book any mini-LED-related SQ sales. As the year progresses, we anticipate receiving new orders for mini-LED-related applications from both current as well as new customers scaling up production. We are confident many LED-related inspection and metrology applications will make another strong contribution to our full-year revenue stream. First quarter system sales benefited from customer acceptances of $1 million for 3D MX3000 final vision inspection systems and sensor kits for memory modules. New orders totaling $3.5 million for 3D MX3000 systems were received during the first quarter which brought our quarter-ending MX backlog to $5.9 million. Orders in the current backlog are scheduled to be recognized as revenue over the balance of 2022. We expect to receive additional MX orders as the year progresses. Given normal sales fluctuation of capital equipment, inspection and metrology system sales are forecasted to be relatively flat on a year-over-year basis in the second quarter of 2022. Cyberoptics backlog at the end of this year's first quarter totaled $47.4 million, up from $47.3 million at December 31st, 2021, and $32.4 million at the end of first quarter of 2021. We are forecasting sales of $25 to $28 million for the second quarter of 2022, ending June 30th, compared to $25.2 million reported in the second quarter of 2021. Our sales forecast for Q2 assumes roughly $1 million of MX-related revenue in the quarter. The lower end of our sales forecast assumes limited shipments of SQ systems to China in Q2 due to COVID-19. Our 3D MRS-based sensors and inspection systems and semiconductor sensors are enabling cyberoptics to capitalize upon significant growth opportunities in our targeted SMT and semiconductor capital equipment markets. For this reason, we see 2022 shaping up as another good year for cyber optics. Thank you. Now, Jeff Burdelson will review our first quarter performance in greater detail.

Thanks, Subodh. Our gross margin percentage in the first quarter of 2022 was 47.8%, up slightly from 47.3% in the first quarter of 2021. but down from 49.6% in the fourth quarter of 2021. The year-over-year improvement in gross margin percentage stem from a slightly better sales mix and related gross margins on inspection and metrology system sales. A slight sequential quarterly decline, which was previously anticipated and in line with our expectations heading into the quarter, was mainly attributable to lower price points on SQ3000 system sales. Our gross margin percentage for the second quarter of 2022 is expected to be down about one percentage point from this year's first quarter level, mainly due to revenue mix. Total operating expenses in the first quarter of 2022 increased 15% year over year to 7.6 million. The increase was due to higher third-party channel commissions resulting from the significantly higher year-over-year sales, along with higher compensation costs for new employees and higher spending for trade shows. Depreciation and amortization expense totaled $569,000 in the first quarter of 2022 and stock compensation expense came to $353,000. Total operating expenses in the second quarter of 2022 are forecasted to increase by a few percentage points on a sequential quarterly basis. Our effective income tax rate for the first quarter of 2022 was 11% and was favorably impacted by an increase in the amount of income eligible for FDII and GILTI benefits due to a change in US tax law requiring capitalization and subsequent amortization of R&D expenses. While the change is expected to have a favorable impact on our effective tax rate in 2022, it will most likely increase the amount of cash we expend for income taxes, particularly in 2023 and later years. Cash and marketable securities totaled $38.2 million at the end of this year's first quarter, down slightly from $38.3 million at December 31, 2021, and up from $32.3 million at the end of the first quarter of 2021. Given tight supply chains and extended lead times for certain key components needed to manufacture our products, we have deemed it prudent to keep additional inventories on hand so we can meet anticipated customer demands. particularly SQ systems for many LED-related applications. These extra inventories will be worked down to more normal levels as we progress through this year. I should also emphasize that to date, part shortages and shipping delays have not had a significant impact on our business, and at this time, we do not anticipate a major impact going forward. We believe our capital resources are adequate for achieving our growth objectives. Our lineup of MRS-enabled sensors and systems and wafer sense semiconductor products are enabling us to capitalize upon important growth opportunities in our targeted markets. Our progress at penetrating our markets make us believe that 2022 is shaping up as another good year for cyber optics. Thank you. We would now be happy to take your questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from the line of Greg Palm. Please go ahead.

Thanks, Simone, Jeff, Maureen. Congrats on the good results here.

Thanks, Greg.

Wanted to start off with maybe some high-level commentary. Subodh, maybe just talk about what you're seeing from an industry demand standpoint and just kind of remind us, you know, exposure to China. What are you seeing over there just given the lockdowns? Maybe just a little bit of color would be helpful.

Sure. So we play both in the semiconductor as well as in the electronics manufacturing market. On a total basis, this market continues to be very healthy and growing globally. in solid double digits right now. The growth rate seems to be a little bit, getting to be a little bit slower than 2021. I mean, 2021 was a great year for semiconductors and electronics. And the reports say that the total market grew 20 to 25% in 2021. At this point, it looks like the growth rate will slow down a little bit from 2021 rates, but still very healthy, solid double digit kind of a growth rate. Similarly, analysts are starting to project what will happen in 2023. Again, the growth rate is expected to slow down a little bit, but continue to be solid positive numbers. So China clearly and COVID issues in East Asia clearly are impacting all these numbers. That's why some slowdown is starting to happen. But despite all the factors concerned, COVID factors, the geopolitical factors, the Russia-Ukraine war situation. The overall industry, semi and electronics, continues to be extremely healthy, demand continues to be strong, and the markets continue to grow at a solid double-digit clip. So that's the overall macro backdrop commentary, if you will, from our perspective. Within that, we continue to do well. As you can clearly see, our Q1, we had a great growth rate of 37%. We continue to believe we will grow solid double-digits through the rest of the year. So we feel pretty good about our position, our technologies, our products in a healthy macro climate right now.

Okay, that's great. And specific to mini-LED, you mentioned that you still expect orders in 2022. What's your visibility at this point? And do you see any risk of stuff pushing just given What's going on with supply chain and the lockdowns over there in China?

There is some risk. I mean, clearly, the COVID situation in China, the chip shortage worldwide, and there are some specific chips that are needed for many LED applications. So some of those external factors may impact the scale-up rate. But directionally, we are pretty confident the scale-up is going on of different products, different consumer electronics companies are getting into the market. So exactly as we have been predicting, MiniLED will continue to grow. Exactly which quarter and how many systems, that's tough to forecast. So it is possible given what's going around. There may be a few months delay, but overall we feel pretty good that the MiniLED market will continue to grow at a healthy run rate and we will continue to benefit from that by selling SQ systems in that marketplace.

And to be clear, you're expecting both significant orders and significant revenue generation in 2022, correct? Correct. Okay, good. And then maybe just one last one, more of a housekeeping question. The $5.9 million of MX backlog, can you confirm whether that's all 3D? And how should we think about recognition of that full amount throughout the year? I think some in in Q2 based on the mix comment, but should we assume that maybe a third, third, third, or how should we kind of think about it at this point?

Yeah, so of the 5.9 million, 5.3 million of it is 3D. There's a little bit of 2D in it, but it's virtually all 3D. And then in terms of right now how we kind of see that laying out through the balance of the year, You know, certainly, you know, we're expecting $1 million in Q2. You know, right now, you know, just using round numbers, you know, I'm anticipating $3 million then in Q3, and then the balance in Q4 as we get closer, you know, to the end of the second quarter. There's a chance that the $2 million in Q4 could move into Q3, but we'll know more about that in the next few months.

And we will certainly get more orders that have potential to impact Q3 and Q4 numbers.

Okay, great.

All right. I'll hop in the queue. Thanks so much. Thanks, Greg.

Thank you.

We'll take our next question from Oren. Hi, Shireman. Please go ahead. Your line is now open.

Hi. How are you? Congratulations on the results. Just to follow up one or two questions from the last round of questions, in terms of the orders for micro lead inspection, does the China lockdown, does that affect that type of order flow or not so much because it's got to be done way in advance? And, you know, are you hopeful that there'll be more orders imminently? And has anything changed in the overall dynamic, positive or negative for micro lead type?

So, Oren, if I understand your question right, you're asking about the China lockdown and how does that impact the mini-LED overall business.

I'm sorry, the mini-LED, yes. Sorry, I micro-lit on my talk. I'm sorry.

That's okay. So, indeed, China lockdown, the unpredictability of how the lockdowns are being done is impacting how the scale-up is happening in China because, as of today, most of the manufacturing lines that are making mini-LED display are in China. So these lockdowns are impacting current production as well as investment plans. So it is a little uncertain on how things will go from here, given the uncertain nature of their lockdowns. There's also another impact, which is there are some custom chips that are needed for mini LED displays, and those chips are in short supply. So it's a combination of the China COVID lockdowns and chip supply. that are impacting the scale-up of MiniAD. Having said that, we still think it will continue to scale up. As I mentioned in the earlier question, there may be a delay of a month or two or three here, but nothing fundamentally changes. MiniAD will continue to get scaled up, and we still feel pretty confident that the business will be a solid growth generator for us in 2022 and beyond.

Now, let's assume that the lockdowns lift. Can you kind of recap in terms of, it's really been primarily one customer for you with interest from lots of other customers. With as much detail as you're comfortable providing, can you kind of give us the lay of the land on the inspection side in terms of one customer versus multiple customers, if any other in dynamics?

There are multiple customers who are getting involved in mini-LED right now. It's no longer just a single customer situation. And there are many projects that are going on. Many of them are in China, and that's why the lockdowns and what happens is important. But there are other countries that are starting to get into mini-LED as well. So it's no longer a one-customer, one-country situation. Certainly, China is important, and the primary consumer electronics company that started scaling up mini-LED is very important. But it is beginning to become more of an ecosystem now with more companies, more applications, more products. So we certainly expect growth to come from various different areas.

Have you actually, I apologize, I don't recall, have you actually shipped to more than one customer?

We actually, as we have previously disclosed, we have shipped many LED-related SQ systems to multiple customers. And some of them, many of them are contract manufacturers who service more than one or two consumer electronics companies. So yes, we are shipping many LED-related equipment to multiple applications, multiple customers right now.

And I guess just my question was, do those customers have multiple customers or still one huge customer?

They do have multiple customers. We are just not sure of the ratio of one customer to the other customer. They don't disclose those details. But if you just do a search on mini LED, micro LED right now, you can get a list of all the different kinds of projects that are going around in the world with mini and micro LED. And you will see a list of consumer electronics companies. And you may even see a list of contract manufacturers that support those consumer electronics companies. So the ecosystem is becoming broader than just a single customer and a couple of contract manufacturers.

And finally, my question is, One of the new businesses for you, the way for inspection, you know, you announced one big OSAT win. You know, are you hoping to announce, I guess, A, are you hoping to shift that system, you know, during this calendar year? And are you hoping to get other wins during this year? What's going on there? And has the lockdown affected that at all as well in terms of the progress getting the next customers?

Sure. So if I understand your question right, it is about the WX product and how that scale-up is going.

Yeah.

So as we have disclosed before, we have two major customers right now for our WX system. One is we are servicing through our Chinese system integrator. So we actually sell on the sensor and software in that case. The other major IDM, we sell the whole WX system. So we have two customers we are servicing. As of right now, we are talking to multiple other customers for WX. These are long evaluation processes, take a long time for selection. They have to make sure that they go through all their analysis, and sometimes it takes months, if not quarters, for them to come to that conclusion. As I mentioned before, in the semiconductor area, there is a significant concentration of customers, so there's only 30 to 40 customers that matter in this space. Once you go beyond that, the market becomes really small. So every win is a big win, but it takes a long time to win. But right now, we feel pretty good about the two wins we have, and one of them has started scaling up aggressively, so they are scaling up multiple systems right now. The other one, we still have to ship our first system, but we expect them to start buying more once they are happy with the performance. And we are talking to more, so we are pretty confident we'll get a couple more by the end of this year. But it does take a long time to go through their evaluation processes and qualifications.

And just to follow up on that, thank you for that clarification. That would be amazing if you could get more customers on the system side. So on that one large customer on the system side, any idea when you're going to ship that first system?

It is sometime in this quarter. Frankly, it would have happened had it not been for the lockdowns in China. That does impact us because we are building the final system in China right now. And the lockdowns did impact us in getting the product built and shipped. But it should still happen this quarter so long as the lockdowns become a little more reasonable.

And that is actually a bookable shipment in terms of the revenue comments?

Yeah, that particular shipment right now, what we're anticipating is it will ship in the second quarter, as Subodh said, and just given the customer acceptance on it mentally, we're assuming it will become revenue in Q3. Got it. Okay, that's my question.

And any guess, you know, I know it's truly a guess on your part, how long the valuation will be, you know, with that first system? I mean, obviously they've done a lot of valuations you know, with waivers, et cetera, to get to this point to pull the trigger. But do you think it's a six-month wait, a nine-month wait, or could it be shorter than that? Any clue?

It could be shorter, but our experience suggests that it will be in the order of six months or so. They will probably test the system in their production environment for the rest of this year, effectively, before they issue multiple orders for the next systems. Okay.

Okay. Thanks so much.

Thanks, Odette.

Once again, if you'd like to ask a question, please press star 1. We'll take our next question from the line of Greg Johnson.

Please go ahead. Your line is open.

Hey, Simone and Jeff. Congrats on a great quarter.

Thanks, Greg.

Yeah, hey, if you could just give any color. I know this is a ways off, but with the memory and semi... incentives and some of the production builds that are going here. What are you seeing there? How would you have us think about when that comes on and is there anything outside of those as far as maybe even some of the consumer side that might be a little bit more domestic oriented?

If I understand your question right, Greg, you're asking us to comment about the memory industry in general and U.S. production of memory. Is that correct?

Yeah. There's so many things that are building out here as far as production and there's been some incentive obviously for less dependence in China and outside of the U.S.

So the memory chip in market, if you will, I mean, it's dominated by three large manufacturers, Samsung, Hynix, and Micron. Most of the fabs that these three companies have are not in China. They are in places like Korea, some in the U.S., Japan, those kinds of places. So I don't think that the whole China-related discussion is becomes that important when it comes to memory chip manufacturing. Regarding your specific question about the U.S. production, I believe you're specifically referring to the CHIPS Act that is being discussed at Congress level right now. As far as I can tell, most of the discussion around that is centered around processor kind of chips. I haven't heard too much discussion about memory chips in that kind of discussion. And that's because of the significant exposure the world has when it comes to processor chips with respect to Taiwan and specifically TSMC. So that's where a lot of the discussion gets centered. I rarely see any discussion about memory manufacturing when it comes to the Chips Act. I think memory is a, just from our perspective, memory is a very healthy market right now. We believe it will continue to stay very healthy for all the reasons that we have discussed in the past. And I don't think the US Chips Act is going to significantly change where the chips are going to be made and those kinds of things. That may have more impact on the processor side and less on the memory side. Does that answer your question?

Yeah, and I'm just, you know, are you playing in anything there as far as benefiting from all the build that is, you know, being done here?

Certainly, I mean, we play in the front end of semiconductor fabs with our wafer sense product line. We certainly play in the back end area with our products like the memory module inspection system, MX or SQ, and some of the sensors we sell and so on. So we play across the whole spectrum, and clearly we have a big exposure to the memory manufacturers because of SQ and MX specifically. If more chips get made in the U.S., it's good for us Obviously, we are here in this region. But in all fairness, I mean, right now, more than 80 percent of our sales come from outside the US, and we have successfully penetrated the fabs, even though they are in Korea, Taiwan, and other countries. So that hasn't been a negative factor for us. Certainly, as US citizens and stationed here, we would love to see more fabs here in the US. It helps all of us as a country. but I don't think we can say that our business has been gated because we are not in the U.S. as a fab. We have done a pretty good job of penetrating fabs wherever they are in the world.

Did that answer your question, Greg, or do you have any further questions? No, I'm good. Thank you very much. Thanks, Greg.

Once again, if you'd like to ask a question, please press star one. We'll take our next question from the line of Eric Slade.

Please go ahead. Your line is open.

Hey, congratulations, Sibode. Jeff, another nice, solid quarter.

Thanks, Eric.

Yep. So since we're talking about memory, last gentleman, you're still working on the third You have the first two biggest memory guys, so that third one's still, I would say, hot and heavy, right?

Absolutely. We continue to work with the third large memory manufacturer. They are a customer of ours for our SQ systems, so they know us pretty well, and they are a customer of ours for WaferSense. So they know us pretty well, but so far we have not been able to convince them to start buying our MX systems yet.

Okay. Something to look forward to. Absolutely. Now back to the mini micro, it seems to be the topic today. So on that 25.2 to 20, wait, is it 25.2 to $28 million guide? I take it that you don't spec, you guys never speculate. So in that 25.2 to 28, is there any mini micro in that number in those revenues or no?

I mean, there's, You know, we aren't anticipating any new orders for Q2 for mini-LED in our Q2 guidance. There's a little bit of backlog left, and we're anticipating that, but no large orders are included in the guidance.

Okay. So, really, as we've talked before, Jeff, these orders come sort of out of the blue, don't they, that you don't really know the plan until the end, right?

I mean, we don't necessarily have great visibility, Eric. The customers don't go into a lot of details regarding their plans. So, you know, they do tend to show up when they show up.

So I guess my point is that 25.2 to 28, if we get a nice lumpy order like we've seen in the past, which probably should happen, at some point here, those numbers could be revised up quite nicely, right, if we got a nice lumpy order?

Sure, it's possible. I mean, if we get an unanticipated order, as you said, later in the quarter, I mean, it's possible. But again, we're not including anything or necessarily expecting anything in our guidance.

Well, that's the way to do it. So on the WX3000, we'll jump over there for a second. I think we've talked about this before. You would think by the fourth quarter we'll start maybe seeing, yeah, about six months, right, we'll start seeing the ramp happening.

Yeah, I think, you know, as we've said, as the year progresses, I think we'll get some more orders for that. And so, yeah, certainly, you know, over time we certainly would see that business increasing. You know, as we continue to show the product and do more evaluations with customers, you know, we anticipate more orders going forward.

Now, the other question I have, the one last one on the mini-micro, is my understanding the only way to really play it from a domestic side is on the back end, and that would be clicking Safa and then yourselves, right? There's no other public companies out there. I know Applied Materials, the big ones, aren't involved. Is that correct?

It's a little more complex than that, Eric. I mean, the mini LEDs themselves are made in different kinds of fabs. Right now, most of them are in Asia. Then the transfer process of the mini LED from your semiconductor substrates to whatever substrate you want to use, whether it's plastic or glass, that's where we get involved. And certainly, as you mentioned, Kulik and SOFA with their PIXELux system plays in it. We certainly, with our SQ system, play in it. There are a few other companies, like the ones who make R1s and pick and place machines and other things that play in it as well. Then there's the whole final packaging process that makes the finished display. There are a few other companies that get involved in it. So it's a... A little more complex than just one or two companies making the whole manufacturing line.

Oh, yeah. No, I realize that. I thought publicly traded companies, I guess that was my question. No, I know there's probably quite a few suppliers, but I don't know if they're publicly traded, but that's not that important. The other question is, you're downstream from Click and Software, right?

Well, actually, we are both upstream and downstream. I mean, we, there are, as we have discussed in the past, we have, there are six steps of inspection when that mini LED is transferred to whatever substrate of choice. And there is a step, there's a couple of steps, actually, incoming inspection and solder pad inspections that happen before the pick-and-place operation happens in a Kulik and Sofa pixel system or some other pick-and-place system. So a couple of our inspections happen before the picket place, and the other four inspection steps happen after the picket place. So we are both upstream and downstream.

I was going to make a point real quick. You know, I was looking through. You know, Mini Michael, it's hard to really get anything too concrete. You go to their site. But I did pull something up, and I might have forwarded it to you, Jeff. It mentions all these companies. I never really recognized Asian companies. It's got Qlik and Safa, but, uh, they don't even know you guys exist. I've never seen cyber optics in there. It just shows you how under followed. Um, so I don't know if you guys can do anything about that, but on some of the, I think on one chart in particular, they listed all the companies, not a chart, just the companies and there was Qlik and Safa, but, but no cyber optics just to point that out. But, uh, But great quarter, and I look forward to the next one.

Thanks, Eric. Thanks, Eric. Yeah.

Once again, if you'd like to ask a question, please press star 1.

There are no further questions at this time. Dr. Kulkarni, I'd like to turn the conference back over to you for any additional closing remarks.

Thanks. Thank you all for your questions and interest. We look forward to updating you after our results in Q2.

Thanks again.

This concludes today's call. Thank you for your participation. You may now disconnect.