CyberOptics Corporation

Hey, and welcome to the CyberOptics Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Dr. Subodh Korkarni, President and CEO. Please go ahead.

Thank you. Good afternoon, and thanks for participating in CyberOptics Earnings Conference Call for the second 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 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, 2021, and other filings to 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 operating results in the second quarter of 2022. Sales were at the upper end of our previously announced financial guidance for this period. Our performance benefited from the robust double-digit sales growth of our high-margin wafers and semiconductor sensors as manufacturers continue to recognize significant value in this unique yield and process improvement products. Sales of 3D and 2D sensors and inspection systems were largely consistent with the strong levels recorded in last year's second quarter. Looking ahead, we are anticipating record operating results for the full year 2022. Driving our performance is the steadily growing acceptance of our 3D MRS-based sensors and inspection systems and semiconductor sensors. The competitive advantages of these advanced products are enabling CyberOptics to build leadership positions in our targeted semiconductor and high-end SMT capital equipment markets. This ongoing development also bodes well for our long-term operating results. We reported sales of $27.6 million in the second quarter of 2022, an increase of 9% from $25.2 million in the second quarter of 2021. Net income for the second quarter of 2022 was $4.4 million, or $58 cents per diluted share, an increase of 41% from the earnings of $3.1 million, or 41 cents per diluted share in the year earlier quarter. As Jeff will be discussing in a few minutes, our strong earnings growth was driven in part by the increase in our gross margin stemming from an improved sales mix. Now for the next few minutes, I'll briefly review the performance of each of our product families. Sales of 3D and 2D sensors declined 4% year-over-year to $6.8 million in the second quarter of 2022, reflecting normal fluctuations in demand from OEM customers. Within this category, sales of 3D MRS sensors increased 11% year-over-year to $4.8 million. Sales of semiconductor sensors, principally the wafer sense line of products, increased 35% year-over-year in the second quarter of 2022, to a record $7.4 million. Increasing customer awareness combined with global demand for semiconductors is driving the growth in WaferSense sales. Within the last week, we received a new $1.3 million order for WaferSense products that is expected to ship in the fourth quarter. We expect WaferSense sales to remain strong throughout the balance of 2022. Sales of inspection and metrology systems rose 6% in the second quarter of 2022 to $13.3 million, up from the robust level of $12.6 million posted in the year-earlier period. This growth was driven by record sales of SQ3000 multifunction inspection systems, which increased 33% year-over-year to $8.3 million. Record SQ sales were achieved without a significant contribution from many LED-related applications, which have been pushed out to the second half of 2022. Based upon discussions with current and prospective customers, we anticipate receiving new orders for mini-LED-related SQ systems in late Q3 or early Q4. Second quarter system sales also included $1.7 million of 3D MX3000 final vision inspection systems. During this year's second quarter, we received $5.4 million of 3D MX orders from recurring customers that increased our MX backlog to $9.3 million at June 30th. Our MX backlog is presently expected to be recognized as revenue in this year's third and fourth quarters. We have agreed to ship a demonstration MX3000 system to the remaining large memory manufacturer that currently does not use our MX products. We are hopeful that a successful demonstration, which will take place in early 2023, will lead to additional MX sales in future periods. Cyberoptics backlog at June 30, 2022, reached a record $55.5 million, up from $47.4 million at the end of this year's first quarter, and $45.3 million at June 30, 2021. Approximately $38 million of our June 30 backlog is applicable to 2022 sales. We are forecasting sales of $26 to $29 million for the third quarter of 2022, ending September 30th, compared to the record sales of $27.8 million reported in the third quarter of 2021. Looking ahead, we expect to wrap up the second half of 2022 with strong revenue growth and profitability, leading to record operating reserves for full year 2022. Thank you. Now, Jeff Burdensen will review our second quarter performance in greater detail.

Thanks, Subodh. Our gross margin percentage in the second quarter of 2022 was 48.6%, up from 47.8% in this year's first quarter, and up from 44% in the second quarter of 2021. The year-over-year improvement in our gross margin percentage was due in large part to higher margin wafer sensors representing a larger proportion of our total sales mix. Margins on SQ system sales were also up due to an increase in ASP reflecting more demanding applications in our SQ sales mix and more sales through third-party sales representatives in the U.S. Our growth margin percentage for the third quarter of 2022 is expected to decrease by roughly 100 to 150 basis points from this year's second quarter due to a higher mix of MX system sales. Total operating expenses in the second quarter of 2022 increased to 8.4 million. The increase was due in part to higher third party channel commissions reflecting the higher level of overall sales and particularly the increase in sales through third-party sales reps. R&D expenditures were up due to investments in new 2D and 3D MRS sensor and system products and new wafer sensors. Depreciation and amortization expense totaled $582,000 in the second quarter of 2022, and stock compensation expense came to $373,000. Total operating expenses in the third quarter of 2022 are forecasted to be flat on a sequential quarterly basis. Our effective income tax rate for the first six months of 2022 was 12% 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 $36.8 million at June 30, 2022, compared to $38.2 million at the end of this year's first quarter. and $38.3 million at December 31, 2021. We expect cash to increase as the year progresses. Park shortages and shipping delays have not had a significant impact on our business to date, 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. We feel very good about our actual results for the first six months of 2022 and expect the second half to be another good period for cyber optics, leading to record operating results for full year 2022. We remain very optimistic about our long term growth potential. Thank you. We would now be happy to take your questions.

Thank you. If you would like to signal with questions, please press star one on your touch tone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to ask questions, star 1. And our first question will come from Greg Palm with Craig Hallam.

Yeah, thanks. Congrats on the good results here, Subodh and Jeff. Thanks, Greg.

Thanks, Greg.

I guess just kind of starting with maybe a broader picture on the landscape, you know, really good quarter, really good guide. Doesn't suggest that you're, you know, really good orders too. Doesn't suggest that you're seeing much, if any of a slowdown. So help us understand what you're seeing out there. What's how much contribution from just the general industry growth versus maybe potential share gains.

Sure. So, um, At a high level, both the semiconductor and electronics CapEx markets seem to be slowing down but still growing. So the growth rate has come down from last year, but it's still positive and a healthy growth rate. I think the latest reports we are seeing still seem to suggest that the overall semiconductor and electronics capital market will grow somewhere in the 5% to 10% rate in this calendar year, 2022. So that's at a broader macro level. Within that, obviously, in the first half of 2022, our sales grew 21%. So clearly, we seem to be outperforming the market. That would indicate a share gain where we compete or better market penetration in products like wafer sense where we don't compete with anyone effectively. So we feel pretty good about our numbers. As you can see, the backlog is at a record level. orders continue to be very healthy, order stream continues to look very healthy. So, so far we have not seen any significant slowdown, at least in our business, but we realize the macro conditions will dominate the future results, and there is definitely some slowdown, but we still are expecting the broader market to deliver five to 10% growth. Hopefully that answers your macro question.

Yeah, I think that's good. We can maybe dig into some of the other kind of more company specific categories. What's your visibility into Q4 at this point? Just trying to think about how that looks versus Q3 given backlog levels.

Maybe it also depends on when or how many LED orders you get if you're expecting that at the end of Q3.

Yeah, I mean, certainly we're starting to get some visibility into Q4. We do have some orders on the books for Q4. So, you know, I think Q4 is starting to shape up nicely. We did get the wafer sense order that Subodh mentioned, which is a very nice order for Q4. So we're definitely starting to get some visibility, and that's, you know, making us feel good about how the year is going to wrap up.

And as it relates specifically to mini-LED and sort of the resumption of those orders, what you talked about expecting some in late Q3, what is the visibility into those and any concerns that those could continue to get pushed into next year?

There's always a risk that they may get pushed out because it's being controlled by lockdowns in China and other external factors that are completely outside our control. So assuming things continue to improve on the supply side and the China lockdown side, lockdown because of COVID situation, our customers are telling us that orders will resume towards the tail end of Q3 or early Q4. But again, many of the factors that we just talked about are outside even their control. So there's always a possibility things may slip further. But Our overall high-level commentary that we feel good about 2022 and growing at a healthy run rate in 2022 is based on orders that have nothing to do with mini LED. So even without any mini LED orders this year, we feel pretty good about delivering a very healthy year at this point.

And just to clarify, if you were to receive those orders in late Q3 or early Q4, those would likely be for Q4 revenue recognition or would the rev rec be in calendar 23 at some point?

Assuming we get orders towards the tail end of Q3 or early Q4, we should be able to recognize most of that order in Q4. But it depends on exactly how many systems they want. And usually they come with a timeline on them too. So sometimes because it's not practical for them to install multiple systems at the same time either. So usually there is going to be some kind of a lag over there. We'll try to articulate it the best we can when the orders start coming in.

Okay, makes sense. And then just last one, your commentary on MX in the demo to that other large memory customer. Just remind us, Have you been talking to that customer before, and have they ever demoed anything, or is this what you would call a new development?

We would definitely call this a new development. The customer is a large memory manufacturer. They are using our SQ systems for their applications. They also obviously use our Wayfair Sense products, so they know us fairly well. So we have been talking to them for a while, So far, they had not shown any interest in 3D memory model inspection systems, but that has shifted. They are interested now. So that is a positive development as far as we can tell. So that was why we agreed to a demo system to show them that they will get good return on their investment. And as I mentioned in my comments, usually these things take a long time. So this will impact 2023 and beyond results. We are not expecting any sales to that customer in 2022.

Understood. Okay. I'll leave it there. Thanks, and good luck going forward. Thanks, Greg.

And once again, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, that is star 1 if you would like to signal with questions. And our next question will come from Oren Hirschman with AIGH Investment Partners.

Hi. Congratulations on the results of the bookings as well.

Thanks, Oren.

So you've often said that in wafer sense, there's a lag between the announcement on the builds, on the new fab builds, versus when wafer sense really picks up more steam. Are we at the point now where the builds that were announced enough months ago so that now wafer sense is picking up that steam?

We have, you're correct, we have seen some lag in wafer sense orders. in the past, and we will only know in due course of time if WaferSense will slow down next year. But interestingly, like this latest order, I talked about the $1.3 million order. That's a fab that is still being built, so we were pleasantly surprised to see that some customers are starting to accept WaferSense in the early part of fab construction process. Now, as you know, there are many fabs that are being built as we speak, in different parts of the world, including the U.S. right now. So customers seem to be understanding that the value proposition of WaferSense is good enough to start having it on hands even on day one when they start processing some wafers. But you're right. Historically, we have seen a lag in WaferSense compared to when the fab started building. But at least in this case, we are seeing WaferSense being a leading product as opposed to a lagging product.

Just in terms of the wafer sense product, I believe, for the goes along with the ASML EUV steppers, how's that product coming along? I know it's still very small, but it's very profitable and very proprietary.

So I believe, Oren, you're referring to our IPS product, the internal particle sensor, which goes into the pumping systems for EUV. So we are... testing the, we have multiple customers who have purchased the product, still very small volumes, but the two large customers are using EUV systems in production right now. Again, early production. They have collected enough data to make themselves feel comfortable that the particle count we are reporting seems to be correlating well with the events in the EUV chamber that become very critical for their maintenance operation. They are continuing to collect that data because this is going into an extremely sensitive part of their process. This is the most expensive piece of equipment they have in their fab, and every hour of downtime is a significant deal for those customers. So before they change their downtime and maintenance procedures in EUV, they want to be 100% sure that we are reporting accurate data. So that data collection process and correlating with their performance is continuing. So far, all the results suggest that our particle count is accurate and they are getting good value out of it. So we are optimistic that this is going to lead to a significant opportunity in late 2022, maybe, or at least in 2023 and 2024. But overall, it looks very promising. Does that answer your question?

Yes, just one follow-up on that. Are we going to see like one or two placements of orders that would be an announceable event for that, or it's going to be more gradual?

Don't know yet, but historically, typical wafer sense orders come in smaller chunks. This was one of the rare times when we got a $1.3 million order from one customer, which is why we disclosed it in our earnings release commentary. But historically, they're usually smaller, so we are not quite sure how they will order IPS. whether it's one big chunk or smaller chunks.

And just a last question on the system for the mini lead inspection, eventually micro lead inspection. Do you have, is there been any change in the end customer programs? There's delays because of lockdowns and wide delays. Is there any change in the actual programs that they want to put forward for the amount of time as opposed to any change in their roadmap?

Not that we know of. From what they are telling us, the plan is still very much what they had told us earlier this year. So they are continuing to expand the product lineup that has many LED. The only thing that has been delayed, obviously, we were expecting from their initial input to us late last year that the orders would have already come in a long time ago. Clearly, they haven't. So they're telling us that the lockdown in China, parts availability issues have delayed some of the newer product launches. But as far as they are telling us, nothing has changed. It's just the timeline has been delayed on that front.

Okay. Okay. Thank you for that.

Thanks, Oret.

As a reminder, if you would like to signal with questions, please press star 1. Again, star 1. The next question will come from Eric Slade with Acme.

Yes. Nice quarter, fellas. Subodh, Jeff.

Thanks, Eric.

So let's start out with mini micro LED. I've heard the call perfectly, but the one part when you talked about it in the presentation, I think, Subodh, you were saying, Have you booked – how much in mini micro LED have you booked since January?

Are you talking – I assume you're talking revenue, Eric?

Yes, yes.

Not a ton. The revenue value is about $600,000. Got it.

So really it's been delayed because of parts and also – is it mainly parts or the fact China's locked down or a combination of both?

What they tell us is it's a combination of both.

Okay. And Subodh, you can probably answer this. Of many micro-LED, my understanding is that's mostly the assembly lines are in China. Do you know what percentage? Is it all in China, or is there some in Taiwan or what have you?

There are pilot production lines in Taiwan, but all the volume production that is going on right now is in, and there's roughly about 50 lines that we have populated so far. They're all in China.

Okay. And, you know, on the Mini Micro, my understanding was a very large consumer company that I guess people could figure out, looked to do a launch in June of this product. And because of the delays, now they talked October. And I think, Jeff, you might have pointed this out. To get your inspection equipment, let's say they want to get this product out by December 1st. Is it like within two months that they need to get your inspection equipment in place? What's the lag time?

Our lead time right now is about four to six weeks for a new order. So long as the order is reasonable size, we can fulfill for a standard SQ system, which is, I mean, the mini ADD SQ system is close to a standard SQ system, that we feel pretty good that within four weeks of receiving the order, we should be able to fulfill that order.

So really, just thinking about this, the floodgates could open pretty big on this product, which is the big one in December, or excuse me, the end of this year, fourth quarter, and also the first quarter next year. It's all built up or pent up, I would think.

I mean, we certainly would like to see a huge demand come in Q4, obviously. We just don't know, as I mentioned earlier, supply challenges, this China COVID lockdowns. They're so far outside our control and even our customers' control that if those things continue to delay launches, then obviously it may not happen. We obviously still think that those things come under control.

Well, we know the growth's going to go ballistic. It's just a matter of when, but, yeah, you can't control that. The other question I had for you was on the WX3000. I don't know if that was covered yet, but how much – I know you placed one big order earlier in the year. Is that correct?

Yeah, we have one order for the finished WX system, but also keep in mind, we have disclosed before that we have a partner in China that basically sells the WX system under their name, but in that case, we only book the sensor and software sales. So they are getting traction with one large Chinese customer, and they have a couple others in the pipeline right now. We have to fulfill the one order that we have from a large IDM in this quarter, and then we are talking to two or three other customers right now we feel pretty good about potentially getting some orders from them in the next few months.

And, you know, the way I think about this, and I think talking with you guys, is you guys are very bullish on this. And as we get out maybe into 24, isn't this device used for mini micro LED as we get out to the smartphones, which is the biggest market, obviously, out in 24 or so? This will be big for the WX3000.

Yeah, I mean, as time evolves, you know, we will need to use our higher-end new nanotype sensor for that product and for mini LEDs. So as time evolves, yes.

I mean, the current mini LED product we fulfill with regular SQ, the next-gen mini LED product, which would be smaller LEDs and on potentially reflective surfaces, that's... One of the main reasons we developed and launched SQ+, that will be able to handle the next-gen mini-LED. Eventually, your question is right, by the time we reach micro-LED, which is when the LEDs become 30 to 50 microns, spaced 30 to 50 microns apart from each other, that's when we plan to use our nano-MRS sensor technology that we already have in the lab and in WX product. So we need to figure out how to take our nano MRS sensor in the WX system, but put it in an SQ-like system. And the main difference being we don't move our nano MRS sensor in the WX product. We move our sensor, MRS sensor in the SQ product. So we need to figure out how to take that complex and very accurate nano MRS sensor and physically move it around.

Is calendar year 24 a decent estimate for seeing mini, well actually micro LED at that point? and the smartphones, once again, that's the biggest consumer market. Is that timeframe reasonable if, you know, if China's not locked down two years from now?

I would say that may be a little aggressive given the delays we have seen this year.

Right.

I think for micro LED, which is what, like the 50 micron LED directly on a piece of glass that becomes your final display in your smartphone or other devices, I think, 24 may be a bit too aggressive a timeline. I think we are looking at more beyond that, like 2025 may be more realistic right now.

Okay. And then I think the last one I have for you guys is I think, Jeff, we spoke about this once, probably more than once, but on the memory side, like the memory modules you guys are selling, my understanding this is a lot of replacement as opposed to capacity. Would that be a fair assumption?

I think it's a combination of both, really, Eric.

That's what you said. Can you break that down to what percentage, 50-50, 70-30?

I would say it's more 70-30, 70 towards capacity and 30 towards replacement. But we have to go through the exact numbers and figure out. And sometimes they don't give us all the visibility that we need to know to answer that question precisely.

And one more, back to the mini-micro LED, did you pick up a number of new customers, you know, actually in any of the lines, you know, how many new customers from the last quarter, maybe on the mini-micro side, the WX? In the memory, we know you're just waiting for the third big player.

Yeah, I mean, I would say on both accounts, you know, there haven't been, you know, certainly this year we've only booked, you know, $600,000 of mini micro revenue. So there really haven't been any new customer ads there yet. On WX, you know, there have probably been one or two customer ads. Really more, and I should say with the nano sensor, not the WX, in terms of actual orders received, you know, we are starting to get traction there. And there are some very exciting customer evaluations going on. So, you know, we do – hopefully we'll get some more customers before the end of the year for WX.

And on the cash, you have – and on the cash, you have $36 million in cash. And I guess that's probably – and that's because you were building inventory. Since you said you're going to be raising – or raising – you'll be generating cash to go on the balance sheet for between now and the end of the year. Is there any way you can model it? Like, if it's close to $37 million now, do you think, you know, you'd be up over $40 or $45, that kind of thing?

Yeah, I mean, when you look at our June balance sheet, really most of the, you know, where you really see the increase is around accounts receivable. We actually did start to reduce inventories a little bit in Q2. And certainly, you know, tight inventory management is a goal of ours, obviously. taking into consideration the supply chain situation. But I do think in the back half here, as we start to collect some of these June 30 receivables, you will see cash grow and certainly expect it to be north of $40 million by, you know, certainly by the time the year wraps up.

So to wrap it up for me, basically, this year's been great considering many micros have been shut down. So we're looking at You guys have pretty much gave us a good guide, and we can get some very nice surprises we get later in the year due to the mini micro LED, obviously. It's been delayed.

Yeah, I mean, at a high level, I would say that we feel pretty good about delivering double-digit growth this year, even without any mini LED contribution. Certainly, if mini LED comes, and we hope it does, it will be over and above that double-digit growth. So we feel pretty good about the year.

Well, we know it's coming. It's just a matter of does it come end of this year, early, whatever. As I said, we have no control over that. But once again, great progress. Yeah, great progress.

Keep it up.

Thanks, Eric. Thanks, Eric. And that does conclude the question and answer session. I'll now turn the conference back over to you for any additional remarks.

Thank you for your interest and questions. We look forward to updating you after our Q3 results. Thanks again.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.