CyberOptics Corporation (NASDAQ:CYBE) Q2 2022 Earnings Conference Call July 27, 2022 4:30 PM ET
Company Participants
Dr. Subodh Kulkarni – President and CEO
Jeff Bertelsen – Chief Operating Officer and CFO
Conference Call Participants
Greg Palm – Craig-Hallum
Orin Hirschman – AIGH Investment Partners
Eric Slade – Acme
Operator
Please standby. Good day. 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 Kulkarni, President and CEO. Please go ahead.
Dr. Subodh Kulkarni
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 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 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 $0.58 per diluted share, an increase of 41% from earnings of $3.1 million or $0.41 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. There’s our 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 are 3D MRS sensors increased 11% year-over-year to $4.8 million.
Sales of semiconductor sensors principally the WaferSense 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 Multi-Function inspection systems, which increased 33% year-over-year to $8.3 million.
Record SQ sales were achieved without a significant contribution from mini-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, second quarter we received $5.4 million of 3D MX orders from recurring customers that are — 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 quarter and fourth quarter.
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 30th backlog is applicable to 2022 sales. We are forecasting sales of $26 million 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 results for full year 2022.
Thank you. Now Jeff Bertelsen will review our second quarter performance in greater detail.
Jeff Bertelsen
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 WaferSense 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 gross margin percentage for the third quarter of 2022 is expected to decrease by roughly 100 basis points 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 WaferSense 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 increasing amount of income eligible for FDII and GILTI benefits due to a change in U.S. 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 Jun 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.
Part 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 CyberOptics, leading the 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question will come from Greg Palm with Craig-Hallum.
Greg Palm
Yeah. Thanks. Congrats on the good results here, Subodh and Jeff.
Dr. Subodh Kulkarni
Thanks, Greg.
Jeff Bertelsen
Thanks, Greg.
Greg Palm
I guess just kind of starting with maybe a broader picture on the landscape, really good quarter, a really good guide, doesn’t suggest that you’re — really good orders to doesn’t suggest that you’re seeing much if any of a slowdown. So…
Dr. Subodh Kulkarni
Yeah.
Greg Palm
… 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?
Dr. Subodh Kulkarni
Sure. So, at a high level, the both the semiconductor and electronics CapEx market seems to be slowing down, but still growing. So the growth rate has come down from last year, but it’s a positive and 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 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 will indicate our share gain will be compete or better market penetration in products like WaferSense 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. Orders still continues to look very healthy. So, so far, we have not seen any significant slowdown at least in our business.
But we realized the macro conditions will dominate future results and there is definitely some slowdown, but we still are expecting the broader market to deliver 5% to 10% growth. Hopefully that answers your macro question.
Greg Palm
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 much — how mini-LED orders you get, if you’re expecting that at the end of Q3?
Jeff Bertelsen
I mean, it’s, certainly, we’re starting to get some visibility into Q4. We do have some orders on the books for Q4. So, I think, Q4 is starting to shape up nicely. We didn’t get the WaferSense order that Subodh mentioned, which is a very nice order for Q4. So we’re definitely starting to get some visibility and that’s making us feel good about how the year is going to wrap up.
Greg Palm
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?
Dr. Subodh Kulkarni
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 Q4.
But again, many of the factors that you 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 has 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.
Greg Palm
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 whether would the rev rec be in calendar 2023 at some point?
Dr. Subodh Kulkarni
So assuming we get those towards the tail end of Q3 or early Q4, we should be able to recognize most of that orders 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 order comes — when the orders start coming in.
Greg Palm
Okay. Makes sense. And then just last one, your commentary on MX in the demo to that other large memory customer. I have — 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?
Dr. Subodh Kulkarni
New — definitely, first of all, this is new development. The customer is a large memory manufacturer. They are using SQ systems for their applications. They also obviously use our every person’s product. So they know us fairly well. So we are talking to them for a while.
So far, they have not shown any — they had not shown any interest in 3D memory model inspection systems, but that has shifted, they are interested in 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 long time. So this will impact 2023 and beyond results. We are not expecting any sales to that customer in 2022.
Greg Palm
Understood. Okay. I’ll leave it there. Thanks and good luck going forward.
Jeff Bertelsen
Thanks, Greg.
Dr. Subodh Kulkarni
Thanks, Greg.
Operator
[Operator Instructions] And our next question will come from Orin Hirschman with AIGH Investment Partners.
Orin Hirschman
Hi. Congratulations on the results and bookings as well.
Dr. Subodh Kulkarni
Thanks, Orin.
Orin Hirschman
So we’ve often said that in WaferSense there’s a lag between the announcement on the build, on the new fab build versus when WaferSense really picks up more steam. Are we at the point now where the builds that were announced enough months ago. So that now WaferSense is picking up that steam?
Dr. Subodh Kulkarni
We have — you are correct. We have seen some lag in WaferSense 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, Orin, 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 and just start processing some wafers. But you’re right, historically, we have seen a lag in WaferSenses 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.
Orin Hirschman
And just in terms of the WaferSense product, I believe for or that goes along with that AS Mill, UB Steppers [ph]. How’s that product coming along? I know it’s still very small, but very profitable and very proprietary?
Dr. Subodh Kulkarni
So I believe Orin you’re referring to our IPS product, our internal particle sensor, which…
Orin Hirschman
Yeah.
Dr. Subodh Kulkarni
… into the pumping systems for EUV. So we are testing. 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?
Orin Hirschman
Yeah. Just one follow-on that, are we going to see, like, one or two placements of orders that would be an announceable event for them or it’s going to be more gradual?
Dr. Subodh Kulkarni
I don’t know yet. But, historically, typical WaferSense orders are small — come in smaller chunks. This was one of the rare times when we got $1.2 million order from one customer, which is why we disclosed that in our earnings release commentary. But historically, they’re usually smaller. So we are not quite sure how they will order IPS. That is…
Orin Hirschman
Okay.
Dr. Subodh Kulkarni
…one big chunk or smaller chunks.
Orin Hirschman
And just the last question on the system for the mini-LED inspection, eventually micro-LED inspection, are you — do you have — is there been any change in the end customer programs, I mean, is delays because of lockdowns and the wide delays. Is there any change in the actual programs that they want to put forward for that amount of time as opposed to any change in their roadmap?
Dr. Subodh Kulkarni
Not that we know of. From what they’re telling us, plan is still very much what they had told us earlier this year. So they are continuing to expand our product lineup that has mini-LED. The only thing has been delayed, obviously, we were expecting from their initial input to us late last year that orders would have already come in a long time ago. Clearly they haven’t.
So they’re telling us that locked down 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 just the timeline has been delayed on that front.
Orin Hirschman
Okay. Okay. Thank you, Subodh.
Dr. Subodh Kulkarni
Thanks, Orin.
Operator
[Operator Instructions] The next question comes from Eric Slade with Acme.
Eric Slade
Yes. Nice quarter fellas, Subodh, Jeff. Nice…
Dr. Subodh Kulkarni
Thanks.
Jeff Bertelsen
Thanks, Eric.
Eric Slade
So let’s start out with mini micro-LED. I — I’ve heard the call perfectly. But the one part when you talked about in the presentation, I think, Subodh, your, have you booked — how much in many micro-LED, have you booked since January?
Jeff Bertelsen
Are you talking — I assume you’re talking about revenue, Eric?
Eric Slade
Yes. Yes.
Jeff Bertelsen
That’s not a ton. The revenue value is about $600,000.
Eric Slade
Got it. So really it’s been delayed because of parts and also. Is it mostly — is it mainly parts or the fact China’s lockdown or a combination of both?
Dr. Subodh Kulkarni
What they tell us is it’s a combination of both.
Eric Slade
Okay. And Subodh, you could probably answer this. Of micro — mini micro-LED, my understanding is that’s mostly the assembly lines are in China, do you know what percentage of that all in China or is there some in Taiwan or what have you?
Dr. Subodh Kulkarni
There are final production lines in Taiwan. But all the volume production that is going on right now is in — and there is roughly about 50 lines that we have populated so far. They’re all in China.
Eric Slade
Okay. And on the mini micro, my understanding was a very large consumer company that I guess people could figure out, look 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 the — 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?
Dr. Subodh Kulkarni
Our lead time right now is about four weeks to six weeks for a new order. So long as the order is reasonable size we can fulfill for the standard SQ system, which is, I mean, the mini-LED 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.
Eric Slade
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, that’s — the end of this year, fourth quarter, and also the first quarter next year when once it’s all dumped up by or pent-up I would think?
Dr. Subodh Kulkarni
I mean, we certainly would like to see a huge demand come in Q4, obviously. We just don’t know. I mentioned earlier, supply challenges, this China COVID lockdown. So far…
Eric Slade
Right.
Dr. Subodh Kulkarni
… outside our control and even our customers control that if those things continue to delay launches, then obviously it will not happen. We obviously…
Eric Slade
Right. Well…
Dr. Subodh Kulkarni
…think that when things come under control.
Eric Slade
Well, you know the gross, like, 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 to how much — I know you have — you placed one big order earlier in the year, is that correct?
Dr. Subodh Kulkarni
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 booked the sensor and software sales. So they are getting traction with one large Chinese customer and they are — we have a couple of those in the pipeline right now.
We have two full 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.
Eric Slade
And the way I think about this, I think, to talk with you guys is, you guys are very bullish on this and as we get out maybe in 2024 when — isn’t this device used for mini micro-LED as we get out to the smartphones, which is the biggest market, obviously, out in 2024, so this is the — this is will be big for the WX3000. I get that right?
Jeff Bertelsen
Yeah. I think as — yeah. I mean, as time evolves, we will need to use our higher end new Nano type sensor for that product and for mini-LEDs. So as time evolves, yes.
Dr. Subodh Kulkarni
I mean, the current…
Eric Slade
And…
Dr. Subodh Kulkarni
…mini-LED product, we fulfilled with regular SQ, the next-gen mini-LED product, which will 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 microns to 50 microns space, 30 microns 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 a SQ like system. And the main difference being, we don’t move on 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 very accurate…
Eric Slade
Yeah.
Dr. Subodh Kulkarni
Nano MRS sensor has physically moved out.
Eric Slade
Is calendar year 2024 a decent estimate for seeing mini, well, actually, micro-LED at that point and the smartphones once again have the biggest consumer market? Is that timeframe reasonable, if China is not locked down two years from now?
Dr. Subodh Kulkarni
I would say that may be you are a little aggressive given the delays we have seen this year.
Eric Slade
Right. That’s why I figured. Yeah.
Dr. Subodh Kulkarni
I think for micro-LED, which is what like a 50 micron LED directly on a piece of glass that becomes your final display in your smartphone or other devices. I think 2024 may be a bit too aggressive timeline. I think it’s — we’re looking at more beyond that like 2025 maybe more realistic right now.
Eric Slade
Okay. And then I think the last one I have for you guys is, I think, Jeff, we spoke about this once on the, 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?
Jeff Bertelsen
I think it’s a combination of both really, Eric.
Eric Slade
That’s what you said. Can you break that down to what percentage, 50-50, 70-30?
Dr. Subodh Kulkarni
I would say it’s more 70-30, 70 towards capacity and 30 towards replacement. But…
Eric Slade
Okay.
Dr. Subodh Kulkarni
… 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.
Eric Slade
And one more back to the mini micro LED. Did you pick up a number of new customers? Actually in any of the lines, how many new customers in the last quarter maybe on the mini micro side, the WX, in the memory we know, just waiting for the third big player?
Jeff Bertelsen
Yeah. I mean, I would say, on both accounts, there haven’t been, certainly, this year we’ve only booked $600 in a mini micro revenue, so there really haven’t been any customer — new customer adds there yet.
On WX, there probably been a one or two customer adds, really more than I should say, with the nano sensor, not the WX. In terms of actual orders received, we are starting to get traction there and there are some very exciting customer evaluation going on. So, we do — hopefully, we’ll get some more customers before the end of the year for WX.
Eric Slade
Yeah. On the cash. Yeah. 36 — oh! On the cash you have $36 million in cash. And I guess that products…
Dr. Subodh Kulkarni
We made…
Eric Slade
And that’s because you were building inventory. Did you say you’d be raising — not raising, you’ll be generating cash to go in on the balance sheet between now and the end of the year? Is there any way where we can model it, like, if it’s close to $37 million now. Do you think you’d be up over $40 million or $45 million, that kind of thing, probably, $45 million is progressive?
Jeff Bertelsen
Yeah. I mean, when you look at our June balance sheet, really most of the — where you really see the increase is around accounts receivable, we actually did start to reduce inventories a little bit in Q2. And certainly, 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 receivable, as you will see cash grow and certainly expect it to be north of $40 million by — certainly by the time the year wraps up.
Eric Slade
So to wrap it up for me, basically, this year has been great considering mini micro has been shutdown. So we’re looking at, you guys are pretty much gave us a good guide and we could get some very nice surprises, we get later in the year due to the mini micro-LED, obviously, it’s been delayed?
Dr. Subodh Kulkarni
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.
Eric Slade
Well, we know it’s coming, just a matter it will come this year — end of this year, early, whatever. So, as I said, we have no control over that. But once, again, great progress on — yeah, great progress. Keep it up.
Dr. Subodh Kulkarni
Thanks, Eric.
Jeff Bertelsen
Thanks, Eric.
Operator
And that does conclude the question-and-answer session. I’ll now turn the conference back over to you for any additional remarks.
Dr. Subodh Kulkarni
So thank you for your interest in questions. We look forward to updating you after our Q3 results. Thanks again.
Operator
Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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