Q2 2019 Earnings Call
[noise].
Please standby.
Good day and welcome to the Cyberoptics second quarter 2019 earnings call.
Today's conference is being recorded.
At this time I'd like to turn the conference over to Dr. set bode Kulkarni, President and CEO of Cyberoptics. Please go ahead Sir.
Thank you.
Good afternoon, and thanks for taking the time to participate in Cyberoptics second quarter 2019 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.
He 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 afternoons 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 31st Wendy.
And other filings with the Securities and Exchange Commission.
We urge you to review these discussions offers collectors.
Cyberoptics recent performance like that of many companies serving this empty in semiconductor capital equipment space has been affected by a cyclical market slowdown as well as uncertainty surrounding the global trade environment.
The current market cycle is expected to persist.
During the second half of 2019 before strengthening in 2020 . According to many industry observers.
Despite near term headwinds, we will continue investing in research and development.
To further strengthen cyberoptics ability to capitalize on strong growth opportunities.
For our premium audio Sellable sensors inspection and metrology systems and Wafersense semiconductor products.
This means that our confidence in cyberoptics future is undiminished.
Turning now to our second quarter results.
Sales of 15 million, but down 5% from $15.9 million in the year over year period.
This was at the low end of our previously issued guidance for this period.
Our second quarter earnings totaled $464000 or six cents per diluted share compared to 740000 or 10 cents per diluted share in last year's second quarter.
Sales of sensors inspection and metrology systems based on our PD MRF technology.
Totaled $6 million in the second quarter operating 19 up 38% from $4.2 million in the year earlier period.
This increase was driven by strong sales growth of three D. Mrls based S Q3 000, AI inspection systems in the second quarter.
A modest based startups together with our semiconductor sensors, consisting primarily of the Wafersense product line accounted for 60% of our total second quarter revenue up from 52% in the Euro DLP here.
Now I will briefly review, our second quarter performance by product line.
Second quarter sales of inspection and metrology systems increased 49% year over year to $9.9 million.
This growth was paced by 75% increase in year over year sales growth of S Q3 000, PD one systems.
Sales for our fiscal 2000, and S Q3 000, CLM systems totaled $4.6 million in the second quarter.
The competitive advantage of our three year modest technology platform is allowing us to capitalize upon growing worldwide acceptance and demand for high precision inspection with Elpida why systems.
Reflecting this progress over 100 customers worldwide are now using our PD S Q3 000 systems.
Cyberoptics received customer acceptances totaling 1.1 million dollar in the second quarter for MX 600 memory module inspection systems, and we expect to revenue our remaining MX backlog in the third quarter.
Given the proven benefits of the Amex six Hundredd, we are actively pursuing opportunities for this system with additional customers.
Multiple customers are now expressing interest in a three d. and modest version of MX 600.
For memory module inspection.
Looking ahead sales of inspection and metrology systems are forecasted to decline in the third quarter on both a sequential and year over year basis.
Sales of PD and to be censored fell 62% year over year in the second quarter of 2000 $19 million to $2 million.
Within this category sales of PGM Rs enabled sensors were down 30% year over year to $1.1 million.
Again this pattern reflects overall weakness in the global 70 and semiconductor markets.
Although sensor sales are forecasted to rebound modestly in the third quarter of 2019 on a sequential basis.
Soft market conditions are expected to persist, resulting in lower year over year sales.
Sales of semiconductor sensors finally, the Wafersense product line.
Fell 21% year over year in the second quarter of 2000 $19 million to $3.1 million.
Sales of semiconductor sensors are forecasted to be flat to down slightly in the third quarter of 2019 on both a sequential and year over year basis.
Additional wafersense products are under development and we believe this suite of high margin products will be an important growth and profitability driver going forward.
Our modest based national resolution central for semiconductor wafer level and advanced packaging inspection and metrology applications.
Recently won the 2019 best of the Best Award at the Semicon West Trade show earlier in July .
Interest in the National resolution sensor was higher the Semicon West trade show.
And many potential customers are evaluating this product given its high resolution and industry best inspection speeds.
We believe inspection and metrology for semiconductor wafer level and advanced packaging applications.
At the present compelling long term growth opportunities.
Cyberoptics ended the second quarter of 2019 middle order backlog of $13 million up from $11.6 million at the end of first quarter.
The June 32019 backlog includes a large order for threed modest sensors from an existing OEM.
Which are primarily scheduled for delivery in periods after 2019.
We are forecasting sales of $12 million to $13.5 million for the third quarter of 2019 ending September thirtyth.
We'll go through this period of cyclical market weakness without jeopardizing, our market positions and the ability to pursue a range of promising growth opportunities.
In all we remain highly optimistic about cyberoptics future.
Thank you now Jeff Bertelsen will review, our second quarter operating results in greater detail.
Thanks about since the board has already covered our our sales results in some detail I will provide additional information regarding other aspects of our second quarter performance.
Our gross margin in the second quarter of 2019 fell to 44%.
From 46% in the year earlier period.
This decline resulted principally from lower volumes of high margin Wafersense products, and Threed Amref sensors, and our second quarter sales mix our revenue in the second quarter also included a low lower margin X Ray system sale.
We expect our gross margin percentage in the third quarter of 2019 to increase by two to three percentage points.
Due to a shift in our sales mix toward higher margin wafersense products and three D. MRF sensors.
The absence of X Ray system sales.
As well as fewer sales of S Q3 000 systems and to the general purpose S&P market is also expected to benefit our third quarter gross margin percentage.
Total operating expenses in the second quarter of 2019 were down from the level in the year earlier period.
That the dig deep the decrease was due to lower compensation costs, including bonus accruals, which were impacted by our financial performance in the second quarter of 2019.
Investment in R&D will continue reflecting our confidence in cyberoptics future as we work to further strengthen our ability to pursue growth opportunities for our threet MRI technology and Wafersense semiconductor products.
Depreciation and amortization amortization expense totaled 690, $695000 in the second quarter and stock compensation expense was $249000.
Total operating expenses in the third quarter of 2019 are expected to be flat to up modestly when compared to the level in the second quarter of 2019.
We concluded our ongoing Singapore income tax audits in July and anticipate recognizing an approximate 200000 dollar noncash income tax benefit in the third quarter of 2019 in connection with completion of these audits.
Excluding the impact of the discrete $200000 noncash income tax benefit we anticipate that our effective tax rate for the remainder of 2019 will be approximately 25%.
Roughly equal to our effective tax rate in the first six months of 2019.
Cash and marketable securities of 25.8 million at June 30 were virtually unchanged from the level at the end of this years first quarter.
Earlier today, we announced a $3 million share repurchase program through June 2020, reflecting our confidence in cyberoptics future.
We have the necessary capital resources to achieve our growth objectives, given our available available balances of cash and marketable securities.
Thank you we would now be happy to take your questions.
Well thank you.
If you would like to signal with a question. Please press star one your Touchtone telephone if you are joining us today using a speaker phone. Please make sure you function is turned off to allow your signal to reach our equipment again that will be star one if youd like to ask questions.
We'll pause for just a moment.
And our first question today will come from <expletive> Ryan with Dougherty.
Thank you.
The phase the board on the new.
No resolution sensor in the release I didn't hear it in your commentary, but you said you had two orders from OEM customers can you elaborate a little bit on that and.
Kind of what the applications are they're looking at.
Sure so.
This wasn't the sort of level.
Everyone's packaging kind of applications on the overall market global market from what we have seen people seems to be roughly $400 million to $500 million.
Going at about 20% to 25% CAGR to make no. That's one of the factors spots of the semiconductor industry, which is seeing some good growth even in the rest of the industry is seeing some declines.
So we are definitely going into that market to dismantle disillusioned since the main advantage of this and so as we have said is the speed we can put it within the accuracy repeatability dilutions compared to some conventional technologies that exist I think no debt, but our speed is a factor at all at least do and sometimes that pretty afford higher than conventional technologies. So that is the main differentiating advantage we have.
The value of it is right now because of speed and the cost of equipment. Most customers are doing sampling inspection.
And with the speed that we can and then little bit done and resolution sensor. We believe many of those customers who are interested in doing 100% inspection would gravitate towards our offering. So we are pretty excited about what we are what we have developed and have launched.
Regarding specifically the two customers.
We have signed signed up to Oems, who are more like system integrators.
So they are they are both Asia based so the plan is they will or they are to have taken our sensodyne. They are integrating it in their system and then they will sell it to.
Fabs are also factor in the Asian market.
And that's our primary go to market model right. Now is we plan to sell the sensor to multiple system integrators or Oems, we do not plan to give exclusivity to anyone although we get sequestered all the time.
Our plan is to give it to multiple system integrators, and Oems and commercialize the technology that way.
We feel pretty good about the potential as a set of market size the growth rate the differentiation and we have the IPO we have around it. So we are pretty excited about what this product line will do for us in the next five to 10 years here.
Does that answer your question, yes, yes.
Moving to the Amex 600, how much revenue is left from those orders that's going to be recognized in Q3.
About $500000.
Okay and just about your commentary there that you started I think you said, you're starting to get interest.
And other memory guys for Threepi.
[noise] capabilities today.
That is correct.
We have been talking to.
I mean, as we have disclosed before.
It makes 600 that we have sold in the last three years is primarily to one of the launch three memory manufacturers.
We have been talking to the other two large memory manufacturers as well as tier two that are geared lives in annuity as.
And the current thinking for the other two large players is to grow that modest based MX 600, which would be a treaty.
In Mexico, and today, and Thats really interested and Thats, what we are working with them right now.
Our existing customer is also interested in either upgrading their current mixing centers with three d. and orders are buying new ones. So we'll continue this discussion, but overall, we feel pretty bullish about.
The MX 600, offering we have and what we will do in the next few years.
Is there an upgrade path for the existing customer to go to three d. or do they have to buy a brand new system.
We would we would prefer obviously, if the new systems sort of upgrade.
But in order for the customer to see what makes sense from this endpoint ended ROI standpoint.
Okay. One last one on the semiconductor side of the business that you touch.
Has there been any change in your visibility or Samsung the the market for the second half of the year.
In the last month since you pre released.
I'm sure you're following the general announcements I mean, there is a little bit of optimism that is growing in the last couple of weeks.
In the whole semiconductor sector.
Driven primarily by a few announcements I think TSMC was a very positive announcement that they saw some growth in June and what you had to say about the second half.
Yesterday, Texas instruments side of fairly bullish looking outlook for 2020 . So there's some positive news that have gone from the fab side.
And Thats, certainly took some enthusiasm and optimism in the whole sector.
Having said that and I haven't seen any formal reports coming from Gartner ITC on anyone yet.
Oh actually changing the numbers so the at least the discussion at Semicon West.
Oh was though optimists expecting a significant growth like 20 plus percent growth in semi cap in 2020 . The pessimists on still talking about a flattish even slight decline into integrating.
So thats the package if you will.
Somewhere in that range is what everyone's expecting right now any gaps to do but you haven't heard anything concrete.
Within even saying second half of this year is going to be better than last last year second half or anything along those lines.
Okay, great. Thank you.
Thanks <expletive> .
And as a reminder, if you would like to signal with questions. Please press star one.
Again that is star one if youd like to signal for questions.
Our next question will come from Greg Palm with Craig Hallum Capital Group.
Yes. Thanks, good afternoon, I guess, just starting on kind of the all macro environment I'm curious any specific areas or end markets that really stood out as being significantly worse or.
I guess vice versa anything that held up better than what you would have thought.
If you don't get direct exposure to the end markets, so semi custom orders and electronics customers, but in general from what we're hearing from our customers clearly slowdown in smartphones would only onto those with some of the drivers for those sort on the annuity like now.
And clearly the optimism on enthusiasm is coming because of things like fiveg.
And cloud computing data that does.
That seems to be the general macro dynamics going on there.
Understood.
And you know at this point I know you have youve guided for for Q3's, specifically I'm not I didn't hear you mention anything about the year, but should we expect another you know it was seasonal bump in Q4 versus Q3 or whats kind of your current expectation I think you are expecting a rebound and in early 2020, but specifically for Q4 or what do you thinking.
Our visibility for Q4 is fairly limited right now you know I think.
You know it looks like you know in general the market's going to.
Ill stay sluggish for key for sure in Q3 and.
You know very possibly into <unk> and into Q4.
So hopefully we'll get that rebound in 2020, but visibility into Q4 is limited today.
Okay fair enough.
And then last one are you know congrats on the award for for the downturn resolutions resolution sensor I mean in terms of our expectations. How should we be thinking about you know sort of a bull case for revenue recognition I know you're expecting just a modest amount in this year, but you know if successful would you expect that this could wrap up you know in a material way next year or would it be farther out.
And for some of the tanks, yeah as I mentioned today the market is a sizable market for the full level everyone's packaging inspection.
$4 million to $500 million at the system level.
Looking at about 20% to 25% CAGR, that's the best indication be have you seen from external reports.
Now our plan is to monetize the technology by sitting sensors to Oems and system integrators, so that reduces the market booking that we live in market for us by about 15, 10% to 15% of the system level. The market. So we have a small though to lease the plane on but on the other hand.
Because of our differentiated sensor technology, the highway little chance of getting a sizable market share of the sensor market. So clearly we are starting now you can get some can be are getting some traction.
And usually these things take time getting unfortunately, they don't ample very quickly I mean people have designed their systems. Then you have to get select fabs and osats to accept their systems with a new technology site experience with Geely on the backend if you will.
To close the solidarity you're going to use to see see some steady growth coming from that area. So I expect the mid end on our loans packaging 80 or at least some is so I think we are just starting right now we'll see you on the Bam going on through next year as next year goes on and do you need to start immediately contributing in a big way beyond that.
If the top right and that obviously, we learned of it but it does things do take time.
Yep understood sounds like a great opportunity I'll hop back in the queue. Thanks.
Thanks, Greg.
And again star one for questions, we'll pause for just a moment.
Well go and take next question from Jason Smith with Lake Street.
Hi, guys. Thanks for taking my questions I, just want to confirm I. There was no cyber Gage your revenue in Q2 and can you just update us on sort of the expectations for that product line for the rest of this year.
Yeah. They are just regarding cyber Gage really quick yeah. There there was a couple of cyber Gage is sold in the quarter. So you know, what we'll say roughly around $250000 of cyber Gage revenue in Q2.
And then regarding the middle part of the question, Jason as we have said before we seem to be selling roughly one them. One 201 every other month kind of put it in that 85% I know the low.
In the Big scheme of things and obviously, we are not happy with that on the radio side when he says but in all fairness, though and you saw it is skewing to skew see MMC will grow very rapidly cybergage is a great lead generator for Sq cm and many many customers starting to cyber Gage delayed the concept.
But then the limitations of cyber Gage or as you know dissolution and accuracy and Sq cm is almost an order of magnitude better into solution and accuracy because of the way we designed optics at all of it.
And even though sq CNN as limitation that will be one site. They end up closing sq cm.
So he likes I wouldn't gauges alluded to that in Florida, and as I mentioned, a few customers keep buying it. So we'll continue to develop it and keep investing to some level, but really the focus is all and they skew and discuss the m- now.
Okay that makes sense.
And I know you guys never really our competing based solely on price, but just given the macro backdrop have you seen your customers in any of your product lines become a bit more price sensitive.
In the traditionally in this market, there's always price sensitivity and we always have to if we are setting a skew or even sq cm in the tradition of the emmis.
There's always price pressure is because they have a dozen other competitors because the home.
But more and more of our business case for Sq cm them is coming from this very unique advanced applications. The competition phase of the Andy can or do what we can do.
And then the price competition is not at all.
Yes, so it depends on which customers we are going for.
Okay. Thanks, a lot.
Thanks, Jason Thanks, Jason.
And our next question comes from Eric Slate with ACMI analytics.
Yes, a question on your last buyback.
Not this one not the one you just announced what was what was the amount that you authorized last time.
Uh huh.
I think it was a it was it was two or $3 million, Eric if I if I recall.
Now what.
We offer.
How much did you guys buy back.
How much you guys buy back then.
Yeah. So that was that was the one now we had authorized in the the third fourth quarter of 2017, we bought back about $250000 worth on that buyback.
Okay elsewhere, Simon get more aggressive in space therapies crisis.
I guess the questions where subone.
One thing I don't.
I guess, just as I follow these cycles over the years.
How come teradyne's up nine points today, and why I'm, new highs I guess I am Alan their lives.
Rudolphs Optum strong and yes, basically I think of all the equipment stocks you guys had been the worst performer now so I don't I just don't get hobbyist ratings. These things must be stepping out a better 2020, I don't know if they actually just been parabolic really.
A couple of points I mean, the names that you mentioned much larger than VR, AR and VR definitely a micro cap compared to some of the.
Non standpoint at least mid cap companies that you were talking about that makes a big difference I think in terms of perception, but if you will I cant comment on stock price and I. Just also doing rapidly, but what I can say is if you look at that June sales numbers and the growth and.
Thats stuff, we had actually outperforming just have already we have the semi cap companies themselves Steve cooled. Okay, Q1, we delivered 6% growth Q2.
Despite the headwinds, we ideally would be delivered 5% decline.
That as if you look at just about any of the names that you mentioned they are talking about plenti already when 30% decline year over year.
So in terms of actual sales numbers, we oughta outperforming the broader semi cap companies I wont come into the stock price of so many other factors that going to stock price and why their stocks at an all time high.
Okay.
And that leads me to another question.
Yeah.
We take the pessimistic.
Whoever.
Good sales will be flat next year.
Can you grow.
And that kind of environment, because we're seeing also some I just I think you know thats what semi equipment.
I'm going to be down sequentially.
Over your I. I know they are guesstimates, but.
Oh, what do you guys have as far as the equipment itself across cross.
Yes.
Because of football and motorists NVS was intended differentiation began it we feel pretty good that we will be able to outperform the broader semicap sector.
Okay. This year right. Unfortunately, the semi cap and electronics is down as I said about 20% year over year that's why.
Looking at it right now, but its semicap as a whole and electronics as a whole is roughly flat next year index the pessimistic scenario.
I think we will be able to cool.
We will be able to perform that auto sector because of and what doesn't make sense.
Yeah, and I know you guys are.
You have a lot of irons in the fire.
Are there are still quite possible because we haven't seen any big multiple order.
As far as dollar about for some time now.
Do you see that changing in the next call.
12 months, because you guys octagon.
Quite a few people you're talking here.
Well I mean, a number of as we disclosed we have number of customers bought on a modest technology.
Politically they skew product line.
Has exceeded 100, right now and many of them want to large customers fortune 100, or at least fortune 500 companies.
So anyone of them at any time in order to move people use systems and the number would be the other large for us it's always possible, but literally what we have noticed as many of the customers who buy one duty at a time and then that's why we don't we don't disclose those kinds of orders obviously.
Right right.
Right.
And I guess the other question is as low although im sure.
Are you.
Yeah. It seems like you are making very good inroads to those the next you already have one memory customer.
Do you have a second or third one third one going or just the one right now and your spill.
Doing evaluation towards the second sorry.
The big memory players.
More than that so we currently all of our mix has been sort of a one large memory customers. We are going to those that are too and as well as the theater to do that our tier two players that Matt.
Launched three obviously more than 80 or 85% market share, but the remaining is in the theaters. So we are talking we feel pretty confident that we will be able to get some.
And make 600, particularly the TD version of it makes 600 scenes going.
Absolutely.
So really.
With everything you have out there.
And we get a better market environment, the floodgates could open for for you guys right.
To be obviously want them to open but.
We all here.
We are very well I mean, if we have if we have like Uh huh.
If we had a 15% to 20% growth year next year looks like you're optimistic you.
Yes, so we started seeing a lot more activity as far as bigger orders, if we see real growth in the industry, Yeah, we're adding capacity.
Of course, they can help everyone that I think that is good for all the other players in the market.
Okay, all right well I think that does it for me.
Thanks for answering my questions.
Hi, guys. Thanks, Eric.
And next we'll be miles Jennings, a private investor.
I'd like to know if you are now offering.
The new nano resolution sensor.
In.
And two version system.
You mentioned, the OEM orders for the sensors themselves.
I just want to know if you are now offering a regular sq system equipped with the nano sensor.
No my is unfortunately, since the lentils and sort of in dealing with microphones and then we'll meet notice as the name suggests.
And it needs to be a station that he says.
You cannot move that since.
To get those kinds of accuracies into solutions, Okay, and as you will fundamentally is designed with the sensor is leading the scandal in Florida.
So that is an architectural change that we can work with national census in the Sq theme.
Previous diligently to viewed in the big scheme of things. So what we are doing to ignore audit integrators are doing is in our off the shelf.
Before the stages, so the sincerity stationary and to the flu stage is moving to the foot in and when you turn around.
Since it is getting all the pictures.
So thats what the system would look like.
We don't plan to put the nuns answer it is skewed.
Excuse primarily as you know.
Targeting.
It's empty and that really backend of semiconductor of kind of market, some everyone's packaging that Louisiana targeting stacking.
Those kinds of applications span in fan out type applications.
So we think it's best to keep national vetoes stationary sensor and so we flew stage right now.
Thanks for the clarification you you said that you have these.
These two new Oems for the now sensor and did I hear you correctly that one is a systems integrator and one is a.
A manufacturer.
Well quarter more or less system integrators slash OEM, it's hard to differentiate a system integrator and OEM disartic typically.
Yes, as I said, they're mostly in Asia on the servicing you are for customers that in order to really the.
Usually the customers are all Fabs and also affects those names out of bundle.
So usually those.
He was smaller companies indicators were suspicious who specialize in servicing.
A few fabs and all sides.
Good I I can.
I understand the distinction now and I guess, one more thing, which seems obvious but I just want to.
Nail it down.
You said that you received.
You know a large order for delivery.
And after 2019.
And that's for a traditional MRF.
A three d. sensors, it's not for the nano sensor.
That's correct, it's forget our existing Oems for our older MRF sensors.
No not the nano sensor.
Right.
Good.
Thank you very much congratulations on this new.
Nanotech sensor.
[laughter] core idea of inspecting and measuring level, which is lower than what you can.
I can see.
[laughter] hired to wrap your head around this.
[laughter] well, it's hard for me to visualize how this is at all possible. So.
My hats off for your performance.
Thank you. Thanks, guys appreciate your support.
And at this time there are no further questions I'd now turn the conference back over to you for any additional remarks.
Well. Thank you all for your interest in Cyberoptics and we look forward to updating you after Q3.
Thank you.
Well. Thank you that does conclude today's conference. We do thank you for your participation have a wonderful day.