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Edited Transcript of CYBE earnings conference call or presentation 19-Feb-19 9:30pm GMT

Q4 2018 CyberOptics Corp Earnings Call

MINNEAPOLIS Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of CyberOptics Corp earnings conference call or presentation Tuesday, February 19, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey A. Bertelsen

CyberOptics Corporation - VP of Finance, CFO, COO & Secretary

* Subodh K. Kulkarni

CyberOptics Corporation - President, CEO & Director

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Conference Call Participants

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* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Richard Allen Ryan

Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials

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Presentation

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Operator [1]

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Good day, and welcome to the CyberOptics Fourth Quarter 2018 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dr. Subodh Kulkarni, President and CEO of CyberOptics. Please go ahead, sir.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [2]

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Thank you. Good afternoon, and thanks for taking the time to participate in CyberOptics' Fourth Quarter 2018 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. We 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 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, 2017, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.

Turning now to CyberOptics' fourth quarter performance. Sales for this period increased 37% to $18.1 million, up from $13.2 million in the fourth quarter of 2017. As mentioned in this afternoon's earnings release, systems revenue in the fourth quarter benefited from customer acceptances for $1.1 million of MX600 memory model inspection systems that were initially expected to be accepted in early 2019.

Fourth quarter earnings were $1.2 million or $0.16 per diluted share, up substantially from $503,000 or $0.07 per diluted share in the fourth quarter of 2017. And for full year 2018, sales totaled $64.7 million, an increase of 21% from $53.3 million in 2017.

Earnings in 2018 came to $2.8 million or $0.39 per diluted share or more than doubled the earnings of $1.3 million or $0.19 per diluted share in 2017.

CyberOptics' improved fourth quarter and full year operating results were driven in large part by significantly higher sales of 3D Multi-Reflection Suppression or MRS-enabled sensors and system products.

Total sales of sensors and inspection systems based on 3D MRS technology increased 61% year-over-year in the fourth quarter of 2018 to $6.1 million and increased by 47% year-over-year to $21.1 million for all of 2018. Although WaferSense sales declined in the fourth quarter due to overall softness in the semiconductor capital equipment market, sales for WaferSense sensors increased by 23% year-over-year to $13.6 million for all of 2018. Given the growth in MRS and WaferSense sales in 2018, we believe it is clear this technologically advanced products have given CyberOptics a true competitive advantage in our targeted markets.

And in an important milestone, initial purchase orders have been received for MRS-enabled 3D sensors and subsystems for mid-end semiconductor inspection applications. Many potential customers, including OEMs and system integrators, are actively evaluating our mid-end sensor given its high-resolution and inspection times that are 2 to 3x faster than competing sensors now on the market. Sales of mid-end 3D MRS-enabled sensors and subsystems are expected to ramp up gradually in 2019 and gain steadily increasing momentum in 2020 and beyond. We believe semiconductor mid-end and advanced packaging inspection applications represent important long-term growth opportunities for CyberOptics.

Now I'll briefly review our fourth quarter performance by product lines. Sales of OEM sensors rose 66% year-over-year in the fourth quarter to $5.8 million. This increase was paced by sales of 3D MRS-enabled sensors, which grew 151% year-over-year to $2.3 million. OEM sensor sales are forecasted to decline in the first quarter of 2019 on a year-over-year basis due to sluggish near-term conditions in the global electronics and semiconductor markets.

Fourth quarter sales of inspection and metrology systems increased 46% year-over-year to $9.2 million. Within this category, sales of 3D MRS-enabled SQ3000 automated optical inspection, or AOI, systems, including the SQ3000 CMM that incorporates AOI with metrology functionality, rose 40% year-over-year to $3.7 million. The steadily growing acceptance of the SQ3000 is being generated by competitive advantages of disruptive 3D MRS technology platform, which is enabling us to capitalize upon strong worldwide demand for high-precision inspection.

System revenues also benefited from several sales of x-ray inspection machines during the fourth quarter as well as sales of MX600 memory module systems that I referenced earlier. We expect to recognize revenue of $2.7 million of our MX600 backlog in the first quarter of 2019.

We also anticipate solid year-over-year sales growth of the SQ3000 system products in the first quarter of 2019. Sales of the WaferSense product line declined 9% year-over-year in the fourth quarter due to normal fluctuations in quarterly sales flows. WaferSense sales are forecasted to rebound strongly in the first quarter of 2019, given strong order activity early in the quarter.

Additional WaferSense applications are under development, and we believe our family of high-margin WaferSense products will figure prominently in CyberOptics' growth and profitability going forward.

We ended the fourth quarter of 2018 with an order backlog of $13.6 million compared to $19.7 million at the end of third quarter. The current backlog was affected by the sluggish market conditions that emerged late in the fourth quarter of 2018. Our backlog exiting 2018 and our first quarter outlook were also impacted by fourth quarter acceptances for $1.1 million of MX600 systems that were initially expected to be accepted in early 2019. As a result, we are forecasting sales of $14 million to $15.25 million for the first quarter of 2019 ending March 31. We believe 2019 should be another year of sales and earnings growth for CyberOptics. Thank you.

Now Jeff Bertelsen will review our fourth quarter operating results in greater detail.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [3]

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Thanks, Subodh. I will start off by making a few general comments about our fourth quarter performance and first quarter outlook. The fourth quarter of 2018 was a strong period for CyberOptics, driven by robust demand for our 3D MRS-enabled sensors and inspection systems. Our fourth quarter sales benefited from $1.1 million of acceptances for MX600 memory module inspection systems that were initially expected to be accepted in early 2019. Sluggish market conditions started to emerge late in the fourth quarter, impacting our backlog and causing us to forecast weak sales of OEM sensors in the first quarter of 2019. However, we are forecasting strong year-over-year sales growth for the WaferSense product line in the first quarter of 2019 given strong order activity early in the quarter. We are also forecasting strong year-over-year sales growth for our SQ3000 products in the first quarter of 2019.

Turning now to other operating metrics, CyberOptics' fourth quarter gross margin declined to 43% from 46% in the year-earlier period, largely the result of product mix that decreased them from increased sales of lower-margin x-ray systems and dual lane SQ3000 systems for the broader SMT market, which carry lower gross margins than SQ systems sold into the semiconductor market. The lower sales of high-margin WaferSense products also contributed to the decline in gross margin percentage.

Our gross margin percentage is expected to rebound in the first quarter of 2019, given strong sales of WaferSense products and also given that no sales of x-ray systems are expected in the first quarter of 2019.

Total operating expenses in the fourth quarter of 2018 rose a modest 4% year-over-year on 37% year-over-year sales growth in the fourth quarter of 2018. These results reflect the type of operating leverage we hope to see in the future as our sales continue to scale up. Depreciation and amortization expense totaled $623,000 in this year's fourth quarter, and stock compensation expense was $235,000.

Total operating expenses in the first quarter of 2018 are expected to be modestly higher on a quarterly sequential basis, as trade show expenses are typically higher in the first quarter. In addition, other costs also tend to go up in the first quarter every year.

Our full year 2018 tax rate was 21% and for 2019, we are forecasting a tax rate in the range of 20% to 25% depending upon the level of tax benefits from stock option exercises. Cash and marketable securities rose $1.5 million to $25.3 million at December 31, 2018, up from $23.8 million at the end of the third quarter. Thank you.

We will now be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Greg Palm with Craig-Hallum Capital Group.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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So I guess, let's start with the macro outlook, which will probably be on top of mind. Just kind of curious what sort of end markets, verticals that maybe you're seeing most of the slowdown here?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [3]

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Well, as we mentioned in our press release, we are seeing sluggish market conditions both in the semiconductor as well as electronics market that emerged towards the end of 2018, and we definitely see that impacting mostly our OEM revenues. As we said, both SQ3000 and WaferSense are continuing to grow solid in Q1 and then first half. But definitely, we see those sluggish market conditions reflected in our OEM demand right now. As you know, overall everyone is expecting the second half of this year to be much stronger than the first half in the macro environment, semiconductor as well as electronics. But our numbers -- our OEM numbers seem to agree with that general statement, but SQ3000 and WaferSense continue to grow despite the macro dynamics.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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And I guess that was going to be my next question is, what's your visibility like in the commentary of 2019 be in another year of sales and earnings growth? It implies that sales will rebound or recover from these Q1 levels at some point this year. So maybe just if you could explain a little bit what your thoughts are there?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [5]

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Yes, I mean, I think when you -- when we look at Q1 and last year, we posted $14.1 million, so at the midpoint of our guidance, we would be starting new year off with growth. We did see and are seeing good growth in WaferSense and SQ. We do have some sluggishness in the OEMs, and I think they may be just adjusting inventories. But when we look at our key growth drivers, being the MRS products, also WaferSense products, and then as we get into the back end of the year, a little bit more contribution even from the mid-end sensor won't be huge, but that will kick in. We feel like there are multiple vectors there that will help drive our growth in 2019.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Great. Okay. And I guess, last one. In terms of gross margin, you alluded a little bit to mix with the x-ray product and there has been a cause of the weakness. Maybe you can just update us what you're seeing on the pricing landscape. I know that's impacted you in the past, but any issues on the pricing as things have slowed down a little bit here in the recent past?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [7]

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Yes. I mean, I think we're really -- when it comes to the 3D AOI products, we're really seeing a stratification in the market, if you will. For higher-end applications where there's unique and demand in features on a printed circuit board or for some of these semiconductor applications, and that's really where our MRS sensor technology shines, we're able to get decent prices and those prices are hanging in. I think there -- where there is more of a general-type PCB without demanding features as we had said in some of the prior quarters, we've seen some price pressure in that segment of the market and that, I think, continues. This particular quarter, we sold some of these dual lane SQ systems and those just because of the hardware configuration tend to have a little bit lower gross margin. So I don't think in overall -- from an overall perspective, it really hasn't changed from what we have reported the last couple of quarters.

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Operator [8]

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(Operator Instructions) And our next question comes from Dick Ryan with Dougherty Financial Markets.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [9]

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Subodh, you talked about a pretty strong rebound in WaferSense in Q1. And I -- generally speaking, you don't really see any unit volume wiggles to the upside until after Chinese New Year or so. So what are you seeing different for maybe the Wafer start story? Are you getting new customers or getting deeper into some other -- some of your key customers there?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [10]

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A little bit of both, Dick. Some -- one of our larger existing fab customer they commissioned a new fab towards the end of last year and they need WaferSense to improve their yield and productivity. So we definitely are getting some benefit from an existing large customer of WaferSense. We are also getting some new customers, particularly in China right now, and that is also benefiting the strong growth that we are seeing in Q1 right now. So it's a little bit of both.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [11]

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And what level is China of total revenue roughly?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [12]

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As a whole company, we still are at, I think, the 10% range.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [13]

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Yes, I would say it's a little higher. It might be around the 20% range. One of our -- one of the features we have is we have an OEM where they build some product there, but then it gets shipped elsewhere, so -- and we don't have visibility for that.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [14]

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Yes, yes, yes. How about the applications that you've introduced -- newer applications for WaferSense? Are they gaining traction?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [15]

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Yes. The one application we launched last year was the -- what we call the APS3 with flat panel that is one area where the China factor is contributing. The display customers are some of the new ones that we are adding. Although I would say that that's not a big driver, the big driver are still the regular WaferSense, the gapping sensor, teach-in customer, existing large customer and new Chinese customers, but still buying the older products of gapping sensor and teach-in sensor, but new applications are contributing. We definitely will be seeing growth from the new applications this year.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [16]

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So would you expect the WaferSense to be kind of be in that double-digit growth year-over-year for 2019?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [17]

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I mean think if you look at the last 5 years, Dick, on an average, WaferSense has grown 20%, 21% compounded annual growth rate for 5 years now. And that includes one downturn in semiconductor industry. And right now there is softness again going on in the semiconductor industry as you well know, and we seem to be having not much of an issue. We saw a little decline in Q4 year-over-year. You saw that, but we are coming back strong, rebounding in Q1. So overall, we still think going forward, 2019 should be a solid double-digit growth here for WaferSense.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [18]

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Okay. One last one. You mentioned -- you kind of put a plural in the initial purchase orders for your mid-end sensor. Can you give us a little more color as to kind of the dynamic behind that? If it's more than one customer or kind of what's the volume?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [19]

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Sure. We won't give you the price or anything like that, but yes, it is more than one customer. So the plural, I'm glad you noticed it. We are getting a lot of good traction with multiple customers, like now in addition to the ones that have placed the purchase orders. It is -- we are now really excited to get those sensors going. We have working prototypes in our lab. We are getting orders. The big differentiator, obviously, is the high resolution and accuracy that the industry needs. But really it's the speed. We are going to be faster, significantly faster than anything out there in the marketplace. And of all the areas in the semiconductor industry despite the sluggishness in the overall semiconductor market, the one area that seems to be growing very fast right now is the mid-end and advanced packaging area. Companies that purely play in that space if you notice, they are posting fairly robust numbers right now. And we definitely feel good about entering that area with a differentiated technology. So overall, we are counting on, as Jeff mentioned, some contribution from the mid-end sensors and subsystems using mid-end sensors in the second half of 2019, and then ramping up from there on.

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Operator [20]

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(Operator Instructions) And our next question comes from [Miles Jennings].

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Unidentified Participant, [21]

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You mentioned the mid-end and the speed increasing 2 to 3x, and you also mentioned that the accuracy is increasing. In the same sense as you speak to the speed increase, can you give us some idea of how much higher accuracy there is? Or is it about the same or less because of the higher speed?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [22]

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Good question, [Miles]. So what we are trying to do is match the accuracy and resolution that the existing technologies have, but give a significantly higher speed. If we drop the speed, we will be able to go higher resolution and accuracy, but I think, what the industry wants right now is comparable resolution with accuracies to the current systems, but higher speed because right now they want 100% inspection. Volumes are increasing in this area because of stacking and other advanced packaging applications. So speed is a critical factor right now.

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Unidentified Participant, [23]

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Excellent. There is one issue which you discussed, I think it was in a conference that you had on your website. I think it may have been the Needham conference. But you made a comment saying that in the future, CyberOptics will not have such a high emphasis on the refrigerators. The large 2,000-pound boxes, you'll be focusing more on the sensors, and that struck me as being a fairly significant statement. And I just wondered if you could go into that a little bit for our better understanding of what CyberOptics looks like 2 or 3 years from now.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [24]

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Sure. I mean, what I meant and at least the gist of it and it's clearly stated in our strategy statement, as we focus on sensor technology as a differentiator. So the box, if you will, it's not that we won't be selling boxes, we will be selling boxes, if you will, several years from now. But the real differentiating part comes in the sensing technology that we use on boxes more or less comparable to other boxes that you can find in the marketplace from our competitors. We all use similar kinds of gantries and motions and basics of the hardware. But where we differentiate is our sensing technology, which is the brains of the inspection system. So that's what I...

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Unidentified Participant, [25]

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Oh, good. Yes, that makes sense. The possibility of large increases in those mechanical aspects of the boxes are not what you're focusing on, but of the sensors.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [26]

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Yes, that's exactly what we meant.

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Operator [27]

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And our next question comes from [Eric Slade] with ACME.

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Unidentified Analyst, [28]

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Question, I'm a little confused on the memory orders. So you -- it was $4.4 million total, right, on the memory?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [29]

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Yes.

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Unidentified Analyst, [30]

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Okay. So you guys booked of $1.1 million in?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [31]

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Correct.

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Unidentified Analyst, [32]

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And the other $3.3 million comes in the first quarter? Or is that spread over the first -- the next 2 quarters?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [33]

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Yes, we said there'd be $2.7 million in the first quarter with the balance really in the second. So $2.7 million of the $3.3 million in the first quarter and the balance in the second.

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Unidentified Analyst, [34]

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So how much would the balance be then?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [35]

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Roughly $0.6 million.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [36]

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$0.6 million. Yes.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [37]

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$600,000.

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Unidentified Analyst, [38]

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It's okay. Now what I'd ascertain in reading everything about the memory stuff, you have 2 other potential memory players besides the one you describe. How is that going?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [39]

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Well, we have been talking to the other 2 large-memory fabs as well as the Tier 2. I mean, the Tier 2s, even though the largely dominate the memory market, Tier 2s combined together still have 10% to 20% of the memory market. So we are talking to the other 2 and the Tier 2 players. We -- these things take a long time and it has taken a long time. But we do expect to get more customers in this area and such large impactful events that when we get them, they will be open and transparent and disclose that we have received PO from these customers. But we are definitely talking to them, we are getting good traction. We expect to get some of these customers soon.

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Unidentified Analyst, [40]

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What does soon means? Does that mean maybe the first half of the year?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [41]

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I would rather not get into the exact time line because these things do take time. These are long-term decisions. Once they have chosen us, usually, like you can see with our current existing large customer, the deployment happens over a 2- or 3-year time period to populate all their [events] and everything. So this...

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Unidentified Analyst, [42]

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Are you confident maybe not the first half or over the course of the year [and there may be more opportunity for your guys]?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [43]

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You're breaking up here, [Eric]. Can you repeat the question?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [44]

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Yes, we couldn't hear you.

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Unidentified Analyst, [45]

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Oh, can you hear me now?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [46]

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Barely, but go ahead.

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Unidentified Analyst, [47]

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Let me try something here. Let me take care of this at my end, sorry about that.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [48]

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Yes, that's better.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [49]

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Yes, this is better.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [50]

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Much better.

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Unidentified Analyst, [51]

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Okay, okay. So I know you can't get the exact timing down, but do you think we might see an advance this year in '19 about the memory plate or a couple?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [52]

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We will certainly try, obviously. We are trying hard to get some things going with other customers. Hopefully, this year, but we cannot pinpoint their timing.

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Unidentified Analyst, [53]

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Yes, right. The other thing is you guys came in at the $64.7 million. I think 3 analysts out there have you around 73 for '19, given the slowness in, I guess, you saw late in the fourth quarter, do you think 73 is doable? Because I know this year was -- '18 was sort of -- it's sort of ramped up throughout the year. I think the first quarter was the weakest quarter in '18. Is that correct?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [54]

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Yes, I mean -- I guess, we're not going to give...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [55]

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Annual guidance.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [56]

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Quantify a full year outlook. I think we feel good with the growth factors that we've got and the products that we got, WaferSense, SQ and the MRS sensors, which is why we believe 2019 will be another year of growth and profitability, but we're not going to quantify full year outlook. But we have a lot of good growth drivers and feel good about where we're going.

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Unidentified Analyst, [57]

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Good. Now the softness in the fourth quarter, when did you start seeing that, of course the time line of that.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [58]

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It was very late in the fourth quarter. I would say throughout -- and this is really on the OEMs' sensor category that you're talking about, I would say throughout virtually all of the fourth quarter. There -- we were getting pushed for product deliveries and then very late in the quarter really in the December time frame even the latter part of this December, we started to see the sluggishness sort of kick in. If you recall back at that time, there is a lot of our uncertainty about what was going to happen with the trade war and tariffs and that may have just created some general uncertainty amongst the customers and their capital-spending plans.

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Unidentified Analyst, [59]

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Got you. Now if you -- so essentially you saw some pushouts towards the end or pushouts to deliveries or something...

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [60]

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Yes, I would say more in the -- again, when we're looking at our OEM customers, I think, they're more -- given the sluggishness, they are seeing with their customers, they are more, I would say, maybe adjusting their inventory levels here in the first quarter, which is why we're seeing slow or soft OEM sales in the first quarter this year.

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Unidentified Analyst, [61]

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Got you. Now if things didn't slow down for you in, like the quarter stuff and what have you, what do you think first quarter revenues roughly could have been if you didn't -- some stuff didn't look like it got pushed out? Could have been another couple of millions effectively?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [62]

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Yes, I mean I -- yes, I think that's really something we can't really quantify other than, obviously, relative to the MX600 that got pulled in. I mean, it really had been our thinking all along that, that $1.1 million would be a first quarter event, that got pulled in. Trying to -- we don't have really good visibility to our OEMs' inventory levels, and...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [63]

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Their demand, like...

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [64]

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Yes, I mean, we're really a component supplier, so it gets difficult from that perspective.

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Unidentified Analyst, [65]

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All right. Now do you see anything -- any of signs and things -- I mean, the group, I mean no one has really reported outstanding numbers -- slower numbers. But the stocks actually reacted quite good. Like you anticipating things in the second half or later in the year get better, do you see that at all or not really, you don't see it from your end?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [66]

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Well, I mean, if we look at what we are saying for Q1, I mean, we're seeing good growth for SQ3000, which is one of our key growth drivers, good growth for WaferSense, which is a key growth driver for us. Memory is, that's an important product for us now. So we're going to get good revenue from memory. It's just really this one product area where we are seeing some slowness and obviously, we would expect that to rebound as the year progresses.

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Unidentified Analyst, [67]

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I see. So really it was just the one -- that the OEM stuff that was the disappointment, everything else is pretty much on track?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [68]

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That's a good summary, yes.

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Unidentified Analyst, [69]

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Okay. I guess, I'm trying to think if I have any other question. No, I think that -- oh did you sell any CyberGage for the quarter?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [70]

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We did not sell any CyberGage in Q4. We are expecting to sell a couple units in Q1, though. I would add that.

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Unidentified Analyst, [71]

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Okay. And how many do you have on the field there on the CyberGage?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [72]

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Probably 15-ish or something like that right now. I don't actually recall the exact number. Yes, about 15 units in the field. It's about 15...

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Unidentified Analyst, [73]

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And where it gets -- where you get critical mass is when you get how many? 100?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [74]

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What's the question?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [75]

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I mean, with the [number]. I think what Eric is asking is you at what point do you get critical math in terms of the install base? And I would say, at a minimum of 50 to 100 would be our estimate there, [Eric].

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Unidentified Analyst, [76]

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Okay. And then of course the SQ right now what you're selling is kind of a low-hanging fruit, right?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [77]

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Yes, I'm not sure what you mean by low-hanging fruit. I mean, we think there's a lot of opportunity with the SQ3000. It's clearly, I think a differentiated product, differentiated technology that we think will play very well in a couple of high-growth markets, 3D AOI and then definitely has applicability in when we look at the semiconductor back-end, mid-end and advanced packaging. I mean, the MRS sensor is well suited for those markets and those are high growth markets. Certainly, something our -- I think we feel like we're pretty well situated.

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Unidentified Analyst, [78]

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And now on this OEM since they have slowed down, can they come back in and ramp up to where it gets a lot stronger within a quarter or so? Or it's hard to say?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [79]

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Sure. Yes. I mean, they can order fairly quickly. So yes.

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Unidentified Analyst, [80]

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And I guess, the other question. I was confused about was on China. Is it 10% or 20%? But what was it for the year? How much of your business came from China?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [81]

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Yes, I actually, after that question came through, I looked and you can kind of split the difference between me and Subodh. It looks like we'll get all 15 is what we're going to report for China, so.

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Unidentified Analyst, [82]

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Yes. But you saw no hesitation there or you didn't have to like discount product because of the tariffs or anything like that, didn't you?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [83]

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No, no, I don't think that's not an issue for us. I don't think we're seeing that.

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Operator [84]

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And our next question comes from Jaeson Schmidt with Lake Street Capital Partners (sic) [Lake Street Capital Markets].

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [85]

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Just want to drill down sort of on the pricing environment. Are you guys seeing anything out of the ordinary across any of your product lines, given the macro backdrop?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [86]

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No, I don't think so. No. I don't know, I'm not. Have you...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [87]

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No. I mean, as Jeff mentioned, it really comes down to applications, Jaeson, more than anything in macro. I mean, if the application is demanding as is the case in semiconductor advanced packaging or even high-end SMT, prices continue to be healthy, margins continue to be healthy. And if the application is generic PCB inspection for mass SMT, prices are under pressure and margins are under pressure. That continues. So nothing has changed because of the macro conditions. And WaferSense continues to generate healthy margins. We haven't seen any pressure on that front.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [88]

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Okay. That's helpful. And looking at the CyberGage product line, have you seen any significant change in the length of customer evaluations? Or is it -- is the evaluation period still pretty lengthy at this point?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [89]

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In general, I would say all of our products tend to go through long evaluation cycles just because it's inspection technology, demanding areas, so they want to make sure all the data is accurate. But specifically with respect to CyberGage, I mean, lately, frankly, our attention is much more towards SQCMM, which is doing far better in the marketplace than CyberGage is in terms of volumes. And that's really where we are focused on, but evaluations continue to be lengthy. Sometimes you wonder why it takes that long, but they do take several weeks to several months and sometimes even longer, surprisingly so. But certainly, our focus has shifted more to SQCMM and then CyberGage.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [90]

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Okay. And the last one for me, and I'll jump back in the queue. I apologize if I missed it, but how should we think about the tax rate in 2019?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [91]

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Yes. So in 2019, we think that the tax rate will be in the 20% to 25% range. It depends on what type of benefits we see from stock option exercises. For full year 2018, it was 21%.

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Operator [92]

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And our next question comes from [Ross Strehlow] with -- private investors.

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Unidentified Participant, [93]

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So you said your backlog at the end of the year was a little over $13 million, right?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [94]

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Correct.

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Unidentified Participant, [95]

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What is it now?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [96]

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I guess, [Ross], in terms of backlog today, I don't know that we want to get into specifics of where our backlog is here in the middle of a quarter. I would say, again, in terms of -- if we look at our product categories, I think our SQ3000 orders have continued to come in strong, and WaferSense had really helped the orders earlier in the quarter. It's really the OEM category where we have seen some softness. So really everything is clicking along nicely. But don't want to get into giving a backlog number or an update as of today. And a lot of times that can get into, particularly for our OEMs, what quarter they're going to take deliveries in and customer acceptances, and there's just so many variables that go into it.

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Unidentified Participant, [97]

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Yes. No problem. I'm just trying to get a sense of how your activity level is and if things have gotten better. Can you make this comment? Has your backlog gone up a little bit or down a little bit or about the flat -- about flat? Can you at least give us some kind of a context?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [98]

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Yes. I would say, our backlog's probably gone up a little bit, [Ross]. And again, just to give you a flavor for it, I would say, following the completion of Chinese New Year, we saw some good order activity on the inspection system side, on the SQ3000 side. We have commented on the WaferSense order activity. So I think, backlog certainly has probably gone up a little bit, but those orders are factored into the guidance that we gave today. If they're going to revenue in Q1. Some of them require acceptance and they would land in Q2.

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Unidentified Participant, [99]

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Okay. That's great, Jeff. And I think that's really kind of helpful for everybody to have a sense of what's going on. And then one further comment, if you guys can. I think it'd be helpful a little bit, too, to get kind of a sense in terms of the pipeline of the deals that you see out there? I mean, is that looking positive, et cetera? So can you make a little comment on that for us?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [100]

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In general, [Ross], as clearly we stated, we feel very good about both MRS and WaferSense, including the pipeline of what in the past we have described as large projects. Some of them are materializing. Obviously, the MX order from the large memory customer was part of that pipeline that we are executing as we speak. The same customer is ordering other things, including SQ and some other things too. But same with many other customers. So overall, we feel pretty good about MRS and WaferSense, specifically SQ and WaferSense, this year, and we will get some -- we are already landing some of those larger customers. And that's why we are confident this year should be a good sales growth and operating income growth year.

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Operator [101]

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And our next question, we have a follow-up from [Miles Jennings].

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Unidentified Participant, [102]

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Sorry to keep talking about this mid-end, but I remember onetime you describe -- Subodh, I remember you were discussing what you thought the mid-end was and the front-end and the back-end as far as the level of accuracy that the environment requires. And as I remember, you said that you hope to sort of get in the back-end of the mid-end, sort of to start in the mid-end. And what I'm trying to get from you is, if you could just review the -- let's say, the micron environment, the degree of size in the 3 areas and then regarding this order that you received in the mid-end and where -- you said is 2 or 3x the speed, I'm just wondering if you achieved that 2 or 3x level of speed at a fairly -- very small, I think you says cracks or you can't even see the size, but could you give us a sense of where this achievement was made? Was it made closer to the front-end? Was it made closer to the back-end? And just give us a little context of this achievement because it's exciting.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [103]

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Thanks, [Miles]. I mean, it is -- the whole area is exciting right now. And if you go through the details of mid-end, there are a lot of applications that are kind of falling in mid-end right now. I mean, you look at reports that are coming out and the various processes that are generally encompassed in this mid-end/advanced packaging area, there's a plethora of activities going on right now between wire bonding, stacking, TSVs, pillars, bumps, I mean, all these activities are part of this "mid-end" or advanced packaging. And different companies have used different definitions. There is no standardized definition. I wish there was. But as of today, there is no external report that we can point to, which specifically calls out for mid-end inspection system report. Having said that, what we have said in the past, and I'll stick with those definitions, we have said, features that are larger than 100 microns, we typically see them in the back-end area. Features that are sub-1 micron, we typically see them in the front-end area. And everything in the middle is generally referred to as this broad, vague mid-end area. And where our currently sensor that we have received multiple orders for right now in the mid-end inspection area, we use a 3-micron pixel, 2D as well as 3D. And typically, you keep a factor of 10 to 1, Miles . So if we are using a 3-micron pixel detector, you usually say that is good to give you solid accuracy and resolution for features that are 30 micron or above. Okay? And so that's really what that sensor is targeted for is. Anything larger than 30 micron, we feel very confident we can measure it and inspect it very accurately. Anything under 30, you still get good data. It's just that the accuracy and repeatability starts becoming a little looser. So we can still see 25 micron and even 20-micron features, but at some point your accuracy and resolution and repeatability is just not worth it to collect that data. So that's what we are launching right now. That's what we are getting the orders for right now. And we have -- we think there are plenty of applications that need a sensor like that, the 3-micron pixel. Going forward, we will, obviously, continue to improve the pixel size. There are various knobs we can go after the camera, the CMOS detector itself that we are using as well as the optics that we design. And this is where the whole MRS algorithms come in and how we get effectively better accuracy and resolution with our MRS proprietary algorithms than conventional techniques. So we have multiple knobs to go after. So we will obviously continue to advance. So if you think about it, in 2015, when we launched MRS for the first time in the SQ product, our pixel was 18 microns, okay? So from 18 micron, now we have come down to 3 micron. And we will continue to -- so you can get a feel for it. In 4 years roughly, we went by a factor of 6. And I don't know, if we will go another factor of 6 in the next 4 years, but we will, obviously, give it a good shot to keep bringing it lower. I'm sure we will go lower. So at some point, when we come sub-1 micron resolution and features that are sub-5 micron, we start approaching the front-end area. But there is no hard and fast barrier, if you will. The number of applications keeps increasing. Okay? Does that make sense?

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Unidentified Participant, [104]

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That's very, very helpful. It sounds like a great accomplishment because I thought that you were just sort of starting lab work. I wasn't aware that you actually had advanced to accepting orders in that area. So...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [105]

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Yes, we absolutely have. Yes, we -- go ahead.

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Unidentified Participant, [106]

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There's no product information on that mid-end product line. Is there?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [107]

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So we do give product specifications once a customer, a potential customer has signed a nondisclosure agreement. We are being very careful not to disclose it to the general public at this point.

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Operator [108]

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(Operator Instructions) I'm currently showing no questioners in the queue.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [109]

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Well, thank you for your interest and questions. We look forward to updating you after our Q1 results. Thanks, again.

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Operator [110]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.