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Edited Transcript of CYBE earnings conference call or presentation 23-Apr-20 8:30pm GMT

Q1 2020 CyberOptics Corp Earnings Call

MINNEAPOLIS May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of CyberOptics Corp earnings conference call or presentation Thursday, April 23, 2020 at 8:30:00pm 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

* Orin Zvi Hirschman

AIGH Investment Partners - CEO

* Richard Allen Ryan

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

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to today's CyberOptics First Quarter 2020 Earnings Call. As a reminder, today's conference is being recorded.

And at this time, and I'd like to turn the conference over to Dr. Subodh Kulkarni, President and CEO of Cyberoptics. Please go ahead.

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

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Thank you. Good afternoon, and thanks for participating in Cyberoptics First Quarter 2020 Earnings Conference Call. Joining me is Jeff Bertelsen, our CFO and Chief Operating Officer, who will review our operating results in some detail, following an 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, 2019, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.

We reported sales of $16.4 million for the first quarter of 2020 ended March 31, an increase of 10% from $15 million in the first quarter of 2019. CyberOptics first quarter sales were at the high end of our previously issued guidance for this period. Net income for this period was $844,000 or $0.11 per diluted share, up significantly from $495,000 or $0.07 per diluted share in the year-earlier quarter.

Our performance was generated by robust sales of 3D MRS-enabled SQ3000 multifunctional, automated optical inspection systems and 3D MRS sensors. We also recognized revenue from sales of both 2D and 3D MX memory module inspection systems. Having ended the first quarter with a record backlog of $24.8 million, we believe the second quarter of 2020 should be another strong period for CyberOptics.

I want to add that the COVID-19 pandemic has had a minimal impact on our business thus far despite the resulting difficulties with global travel and shipping. We are closely monitoring the situation and its impact on our business in coming months.

As an update, we are encouraged to report that we currently have 6 customers for our MRS-based sensors, including our NanoResolution sensor, for advanced packaging inspection applications. These customers are at various stages of integrating our sensors into their inspection systems. Some have started demonstrating their systems to end customers, making us believe these relationships will contribute to our revenue stream in a more significant way in 2021 and beyond. Interest among additional potential customers also remains strong. We believe our 3D NanoResolution sensor has positioned CyberOptics to capitalize upon numerous, extremely promising growth opportunities.

Turning now to our first quarter performance. Sales of sensors and inspection and metrology systems based on 3D MRS technology increased 66% year-over-year to $7.2 million in the first quarter of 2020. As of March 31, 2020, 150 customers have purchased our 3D MRS-enabled sensors and systems since their introduction. These MRS-based products, combined with semiconductor sensors, accounted for 68% of our total revenue in the first quarter of 2020 compared to 57% in the year-earlier period.

First quarter sales of inspection and metrology systems totaled $8.4 million, up 18% year-over-year from the first quarter of 2019. This increase was driven by sales of SQ3000 Multi-Function systems, which rose 34% year-over-year to $3.3 million in the first quarter of 2020. In addition, we recognized revenue of $1.4 million from the sale of memory module inspection systems, including the initial sale of our 3D MX3000 system to a new customer. Two of the world's 3 largest memory manufacturers have now deployed CyberOptics memory module inspection systems. Consistent with our belief that the market for memory module inspection systems represents an attractive, long-term opportunity, we received orders valued at $4.4 million for 2D MX600 systems in this year's first quarter. These orders are scheduled to ship in the second half of 2020.

Also during the first quarter, we received an order valued at $1.2 million for SQ3000 Multi-Function systems that will be used to scale up production of micro LED-based technology, a market we view as significant growth opportunity. This order is expected to revenue in this year's second quarter. We anticipate additional orders related to the micro LED market as we progress through 2020. Demand for our SQ3000 Multi-Function systems is forecasted to continue at a robust level in this year's second quarter.

Sales of 3D and 2D sensors increased 10% year-over-year to $4.1 million in the first quarter of 2020. Within this category, sales of 3D MRS-enabled sensors totaled $3.1 million in the first quarter of 2020, up 76% year-over-year from the year-earlier quarter. Demand for our 3D sensors is forecasted to remain strong in the second quarter.

Sales of semiconductor sensors in the first quarter of 2020 came to $3.9 million, down modestly on a year-over-year basis. The order backlog of semiconductor sensors remains strong, although a sequential sales decline is forecasted for the second quarter.

Our March 31 order backlog of $24.8 million was up significantly from $17.7 million at the end of fourth quarter of 2019. Given the strength of our backlog, we are forecasting sales of $15.5 million to $17.5 million for the second quarter of 2020 ending June 30.

We remain confident that our family of MRS-enabled products and suite of semiconductor sensors will continue driving CyberOptics' profitable growth over the long term.

Thank you. Now Jeff Bertelsen will review our first quarter numbers 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. Since our first quarter sales have been covered in some detail, I will provide information about other aspects of our performance for this period. Our gross margin percentage in the first quarter of 2020 was 44%, down from the year-earlier quarter when the WaferSense represented a larger percentage of our overall total revenue, but up from 43% in the fourth quarter of 2019. The sequential quarterly improvement in our gross margin percentage was attributable to an improvement in our sales mix. Our gross margin percentage in the second quarter of 2020 is expected to be at or near the level in this year's first quarter.

Total operating expenses of $6.6 million for the first quarter of 2020 were down slightly from the fourth quarter of 2019 and up nominally from the level in the year-earlier period. Our operating expense levels in the first quarter benefited from a reduction in travel cost and the cancellation of trade sales due to COVID-19. We are continuing to invest heavily in R&D to take maximum advantage of opportunities in our targeted markets with both our 3D MRS and WaferSense technologies.

Our second quarter operating expense levels will benefit from an employee wage support program implemented by the government of Singapore to help businesses combat COVID-19 disruptions. Depreciation and amortization expense totaled $664,000 in the first quarter, and stock compensation expense was $272,000. Total operating expenses in the second quarter of 2020 are expected to be roughly unchanged on a quarterly sequential basis.

Our effective tax rate was 15% in the first quarter of 2020, and we now anticipate an effective tax rate in the 15% to 20% range as we move through the year. Cash and marketable securities of $28.8 million at March 31, 2020, were up from $26.3 million at the end of last year.

No shares were purchased in the first quarter of 2020 under our existing $3 million share repurchase authorization that is effective through June 30, 2020. Our capital resources are adequate for achieving our growth objectives given our available balances of cash and marketable securities.

Thank you. We would 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 will come from Jaeson Schmidt with Lake Street Capital Markets.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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I just want to make sure I heard correctly that you now have all 3 of the top memory customers.

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

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That's not correct, Jaeson. This is Subodh here. We have 2 of the top 3 memory customers at this point. They have purchased either the 2D or the 3D MX systems.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Oh, okay. I guess, relatedly, you still anticipate to be able to add that third customer, though?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [5]

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Yes. We are actively pursuing the third customer at this time. They are a customer of ours for our SQ3000 AOI system, and we are optimistic that we should be able to get them, hopefully, this calendar year.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Okay. And then, obviously, a very impressive guidance given the environment. Just curious if you could share with us what sort of is implied in that outlook from a macro backdrop. Does it assume the current backdrop really remains unchanged between now and then your Q2? Or are you baking in an incremental improvement in the overall backdrop? Any additional color would be helpful.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [7]

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I'll answer the interest...

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [8]

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Yes. Go ahead, Subodh.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [9]

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Yes. I was going to say, Jaeson, that -- I mean it's tough to comment on the general macro economy and the impact of the COVID-19 virus on the general macro economy. What we definitely look carefully at is the semiconductor and the electronics markets, which is where most of our products get sold. And as we mentioned in our press release, so far, our markets have -- at least our business has had minimal impact because of the virus. And as you may have seen from some other companies in our market, particularly the semiconductor market, TSMC announced a fairly good report and gave good guidance for the current quarter, same from some memory manufacturers, like Micron and Samsung. Electronics is a little different, but they are still reporting somewhat similar things.

So despite the virus situation, our customers generally are still investing more, memory is still doing well. High-end chips going into data centers and servers, 5G, those kinds of things are going well. We definitely see the impact in semiconductor customers who are in the auto or in the general industrial area. But overall, where we sell our products, most of them seem to be, doing okay, and that's what our guidance is predicated on.

Jeff, you want to add something?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [10]

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Yes. The only thing I would add, then, is our guidance also is supported by the big backlog we had at March 31, 2020. So of course, that's another factor as well.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [11]

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Okay. No. That's helpful. And the last one for me, and I'll jump back in the queue. How have order patterns been tracking kind of this first month of the quarter?

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

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We -- I mean, we haven't seen any significant changes between February and March or April, if that's what you are trying to get at, Jaeson. I mean, the virus clearly -- the situation deteriorated externally as we are now as February rolled. But we really haven't seen any significant changes.

Now you do keep in mind that a lot of our business, more than 50% of our business comes from Asia and even the business that we report selling to OEMs in U.S. or Europe, meaning our stack product ends up in Asia, because that's where a lot of factories are. And if you look at countries over there, China, Taiwan, Korea, Singapore, they are generally doing better compared to the rest of the world right now when it comes to the virus situation. So we haven't really seen any noticeable deterioration or anything of that nature.

Jeff, you want to add?

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

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I think that's a good summary.

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Operator [14]

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We have a question from the line of Dick Ryan with Dougherty.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [15]

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Subodh, your comments on the customer demand, it's kind of consistent with other companies we're hearing out there. Can you talk about the supply side issues that maybe you've seen to date? Or how are you kind of focused on that to kind of make sure that you don't see any problems there? I know most of your sensors come out of Minneapolis, but can you talk a little bit on your supply chain?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [16]

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If you don't mind, Dick, I'm going to defer that to Jeff since he is more closer to the supply side of the equation. Jeff, do you want to take that? Yes.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [17]

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Yes, Dick so -- yes, I'll take that. So a couple of points. As you had indicated, our sensors do come out of our factory in Golden Valley. That factory is still up and running. Likewise, our factory in Singapore is still up and running. Both operations have been deemed essential by the respective governments.

In terms of the supply side, we haven't seen any significant disruptions yet. We did have one minor supply issue, but that has got -- been resolved, and we have adequate inventories on hand and in the supply chain to be able to absorb that. So thankfully, so far, we haven't experienced any significant COVID-related disruptions. I think a lot of the folks in our supply chain have been deemed either, a, they're in Asia where the virus situation isn't as bad right now or they're coming out of lockdowns or they've been deemed essential by their respective governments. So we've -- it hasn't been a serious impact for us so far.

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

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Okay. Jeff, how should we look at the backlog? How should that flow through the rest of the year?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [19]

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Yes. I mean, a good -- most of the backlog, virtually all the backlog will flow through by the end of the year. Definitely, over half of it is applicable to the current quarter in Q2. We -- part of that backlog are the memory module inspection systems, the 2D systems where we have $4.4 million worth of orders. They will flow right now. It looks like they'll flow mainly into the third quarter. And then absent that, there's some -- a few larger orders from our OEMs that will run out the -- kind of spread throughout the year, Q2 to Q4. And then some of our product lines, the semiconductor centers, that tends to be more of a book, ship type business, along with the few of the other things. So we got a pretty good chunk of backlog coming into Q2, and then we've got some stuff in Q3 and beyond.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [20]

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Okay. It's about the 6 customers on the Nano sensor was kind of stagnant, I think, in Q4 looks like it may have come to life. Now is that still -- are you marketing that in China? And can you give us a little more color? Is this pretty much all distributors? Or are there some end customers in that mix yet?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [21]

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So there's a mix here, Dick, for the Nano sensor, so we have some system integrators and some OEMS. It's a little bit of mix. All of them at this point are in Asia, and that's where a lot of activities of advanced packaging are going on. So of -- the 6 are for advanced packaging. Some are using our first-generation sensors. Some using Nano sensor, but they will mix -- they will use different sensors depending on their specific applications. But the mix includes both larger companies that are OEMs as well as some system integrators that are specific to some fabs in Asia.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [22]

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Okay, okay. Well, that's good to hear. Micro LED, that's something that looks like it could have some very nice potential, especially with the Rohinni relationship. Can you give us a sense of how that pipeline of opportunity looks?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [23]

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Certainly. So micro LED is an exciting new technology. It is -- the scaleup has started as you can see from our numbers and our announcements. The main value proposition of micro LED technology over conventional LCD or OLED technology is lower-power and better-quality images, brighter images, so it's got the best of all the worlds. Historically, the challenge with micro LED was always the cost compared to LCD or OLED, and that's where the Rohinni proprietary process comes in where they have been able to reduce the cost by using conventional SMT processes. We have been working with them for a couple -- more than a couple of years now. So SQ is qualified at various different points of inspection steps in the manufacturing process. So usually when a line is built, we get opportunities for multiple SQs to be sold on that line. And so far, a few lines have been installed worldwide and more continue to be installed. By the end of this year, we are definitely expecting larger numbers. Initial applications seem to be targeting the backlight applications, so the backlight of laptops or smartphone or watches kind of devices. The next thing they would -- they are going to tackle is the actual display itself. So there's plenty of -- I mean, the whole display industry is a huge industry. LCD and OLED and LED play a big role in that industry, and micro LED is poised to take a big chunk of that. So we're pretty excited about how we can benefit from this micro LED explosive growth and specifically for us SQ and how that plays into that market.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [24]

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Okay. I guess just one other. How is the price point of your SQ in the micro LED process? Is it in line with competitors? Or what do you have to do with your ASP there?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [25]

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Well, we have customized our SQ Multi-Function system, specifically for the micro LED area, so it allows us a really better price point than our conventional SQ in the generic SMT market. But even within the generic SMT market, there are customers who want higher end -- who have higher-end applications and do want better, higher-grade computer, if you will, more off-line work station. So the price point for SQ ranges from $120,000 or $110,000 sometimes to $200,000, depending on the options and application and stuff like that. Micro LED, certainly we get better-than-average price point given the unique nature of the application. We have -- one other company has been selling into the micro LED market for the less demanding applications. But for the more demanding ones, the measurements come into play and the critical steps on SQ so far seems to be unmatched, and we haven't seen any competitor compete in that area so far.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [26]

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Okay, great. And congratulations around continued, good execution.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [27]

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Thanks, Dick.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [28]

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Thanks, Dick.

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Operator [29]

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Next from Craig-Hallum, we have Greg Palm.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [30]

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Jeff, Subodh, nice quarter here. Seems like the core business is performing well. I know you've got some of these more growth areas that are starting to accelerate, so nice job here.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [31]

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Thank you.

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [32]

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Thank you.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33]

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I mean, given the backlog, where we are at quarter end and the expectation, at least specifically for increased contribution for MX in the second half versus the first half, is it fair to assume that second half revenue could be greater than the first half? I know you don't typically give full year guidance, but what would have to happen for you not to achieve revenues in the second half that weren't in excess of the first half?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [34]

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Well, Greg, certainly the whole virus situation and the impact on global economy and more specifically the impact on semiconductor and electronics market becomes very important before we can answer that question, what exactly is the effect going to be? So far based on what TSMC, Micron, Intel, those companies have been announcing, they don't foresee a drop-off of any nature in the second half, as I mentioned, because of data center, 5G and other areas. But at the same time, there are semiconductor companies like Texas Instruments, NXP and a few others, STMicro yesterday, they forecasted a significant drop-off in revenues because they do participate in the auto and industrial markets, which have significantly slowed down. So we are fortunate to be participating on the higher-end side with our customers. But certainly, what happens with the virus on the overall economy and specifically on semiconductor and electronics will matter for our overall results. Having said that, we generally are optimistic that we should continue our momentum here.

Jeff, you want to add something?

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

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I think -- I mean, I think you summed it up well. I mean, I think we've been fortunate in that we're participating in the right markets right now, but I think a lot will depend on the virus situation and what does happen with the overall economy as we get -- start moving ahead multiple months.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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How would you characterize your visibility at this point? I mean, obviously, you're pretty comfortable of what Q2 looks like. But how normal is, based on where we are today, the second half, how uncertain is it at this point? Can you give any sort of qualitative commentary on kind of how you're seeing things or at least as we sit today?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [37]

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One of the things that benefits us certainly this year is we have that large memory module orders, the $4.4 million order that most of it is going to get booked in Q3, we believe, so that helps -- definitely helps the second half and certainly Q3.

In general, as I said, the higher-end semiconductor companies that play in data center, 5G servers or memory, they all feel pretty good about the year despite the virus impact. Because of their confidence, we generally feel pretty good too. So our visibility is, obviously, for Q2, is very good with the backlog and everything. Q3, we have some visibility, particularly because of the memory customers who tend to project more longer term. But certainly with the virus situation, that changes by the day, and we watch everything because things could change quite radically.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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Okay. That's helpful. What about the competitive landscape? Any notable developments given all these sell-through in place mandates on a global level? And you are obviously operating as an essential business, not sure if all your competitors are in the same boat. Any notable changes there?

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

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So let's take the 2 key areas for us: MRS and WaferSense. So in WaferSense, no competitors because of the back-end positions we have. So there, we don't really worry about our competitive landscape at all. They depend on the fabs and their investments and wafer starts to drive that business, and we continue to increase the number of applications. So no competitive landscape to worry about on that side.

On the MRS side, certainly, we have competitors to worry about, particularly when it comes to the AOI market where we have more than a dozen competitors depending on the geography. We clearly standout because of our product performance, the multi functionality, the image quality because of MRS technology, the speed, the accuracy. So we have multiple differentiating factors that enables us to keep gaining share in the area where we have most competition.

As we are getting more into this advanced packaging and semiconductor area, our competition is changing, so what used to be historically your typical SMT-type companies used to compete with. Now as we go forward, in advanced packaging, the competitors are changing to companies like Camtech or Rudolph Technologies, so different types of competitors who are using different kinds of 3D technologies. But again, among (inaudible) gives us a huge advantage because of its speed and accuracy. So we are using our differentiated technology in -- not only in SMT, but we are continuing to do it in the semiconductor. But our competition is changing as we go into newer, more demanding applications. Does that answer your question?

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Got it. Yes. I mean, just as a follow-up, I mean, anything specific to highlight, whether the competitors that aren't deemed an essential business or whether they have their own supply chain disruptions. I'm just trying to get a sense for -- it doesn't sound like you're seeing anything yourself. You are an essential business. I don't know if that allows you to take share in this environment as not all your competitors are as fortunate.

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

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Well, we continue to remain convinced that MRS is a superior technology because of its speed and accuracy both at the same time. We have proven that in SMT, and we continue to gain share where we compete in AOI. And now we are planning on doing the same thing in the semiconductor advanced packaging area, and we feel pretty good that MRS allows us to get that kind of a share, even though the competitors are larger and more established companies. So at the end of the day, technology, it's a huge difference when it comes to customers' decision.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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Okay. That makes sense. Last one from me. Maybe this one for Jeff. Gross margins, looking back at 2017, even first half of '18, you were running pretty consistently above 45%. What would it take to get to those levels? I mean, how much is volume dependent versus mix versus something else?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [43]

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Well, good question. I mean, I think all of those things matter. So as we've said, our semiconductor sensors, those products have about a 70% gross margin. So those margins are better than our -- even our MRS-based products and some of our other products, just mainly due to the hardware content and then some mix matters.

I mean, volume, I think, certainly would help. I mean, there's -- we are heavily capital-intensive in our manufacturing operation, but there are some fixed costs there. So to the extent we can spread them out, that would help. And then I think to the extent we can continue to migrate to some of these higher-end applications, that will help as well. So I think it's all of those things matter. I would note that, particularly for the 3D memory module systems, those products, just because of the hardware content, the gross margins there do tend to be lower. Very, very high-end sales value and high gross margin contribution, but the percentage themselves tend to be lower. So I think mix, going forward, is going to play a part in this.

I don't know. Would you add anything, Subodh?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [44]

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No. It's a good summary.

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Operator [45]

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We have Orin Hirschman with AIGH Investment Partners.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [46]

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Congratulations on the progress. Can you just review with us -- sure. Just quickly, just in terms of some of the end applications that we should be looking for on the micro LED side which will drive demand for you, what are some of those end applications? And then I have one follow-up question on the memory side.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [47]

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Sure. So the end applications today for micro LED technology are laptops, PCs and smartphones and wearable devices, like the watch kind of devices. That's still -- so it is a consumer market, which is the end market that micro LED is getting scaled up for today.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [48]

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And what's important, though, for you? Is it -- -- in the near term. Is it just a ramp-up on backlighting, for example, which could drive multiple unit orders for you? What are the end products in the near term that drive orders?

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

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I sort of -- I mean, the immediate products that micro LED is getting scaled up for are the backlight applications, as I mentioned earlier, so the backlight for keyboards, backlight for wearable devices, those kinds of products. We have to be careful not to give out specific customer names or which areas, and it's fairly well-known if you go on Internet and see who are the large consumer electronics companies, who are planning on introducing micro LED-based backlights. It's pretty easy to find out from external reports. But there's a -- they're fairly large, reputable companies that are scaling up micro LED technology right now, and that's the ecosystem we play in.

Certainly, given the benefits of micro LED over conventional LED or LCD or OLED, that is being higher power and better footlight, and all of us always try to get maximum battery life, and the battery life continues to be a big issue, whether it's a laptop or it's a smartphone or a watch. And certainly, this helps that improvement of battery life significantly because a lot of the battery life is consumed today by the backlight itself. So that is the driving force behind micro LED scale-up right now. So we feel pretty good about why micro LED is getting scaled up by those consumer electronics companies, the value proposition. We don't see any reason why they won't continue that scale-up rapidly.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [50]

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Yes. No. Is that scale-up going to be like in -- more of a linear fashion? Or is it more like people have been testing, producing small quantities, have announced second half production? And at some point, you're going to get a slew of orders, meaning the orders were still small this quarter. You did whatever it was a couple of million last year. I mean, it's obviously -- it's nice for a product that's really not doing any huge commercial volume for the end product yet. It's actually incredible. But how do you see that type of ramp? Because there's been a lot of announced stuff in the press, as you said, and I would think that they're going to need your equipment at some point in a much larger quantity, unless you tell me they have enough right now to do the first leg of the journey. I'm not sure.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [51]

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No. Certainly, I mean, the current orders that we are fulfilling right now and what we are getting is all -- they are still very, very early in the scale-up cycle. I mean, if you take a big chunk of the display industry and say that we will go to micro LED, which is what everyone is forecasting, there's going to be a huge number of micro LED lines needed and certainly a lot of our 3D AOI-type systems or SQ product needed. So we -- this is still very early in the scale-up I would say. So I wouldn't use the word linear or anything like that at this point. It's still early. They are testing out right now the technology first, then they will test out the consumer acceptance and the value proposition. So we are pretty sure a few months from now some products -- some of these products will enter the consumer market. And that's where most of those consumer electronics companies are testing out, and then they'll turn on the volume knob, if you will. So it's hard to know exactly when all that stuff happens in the consumer landscape, particularly given what's going on externally right now, but we certainly expect significant growth over the next few years.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [52]

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If you -- is there any significant difference? And again, obviously, it depends on the size of panel for one. But assuming same panel size, theoretically, except it's kind of silly because it's not true in real life. But let's -- I guess when you ask in a broad sense, contrasting, let's say, a micro LED TV versus a laptop, what does that mean in terms of volume of production and test? And how does that filter down to you. And then one question again on the memory, I'm sorry.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [53]

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So as I mentioned, so far, right now, the first application micro LED is going after is backlight kind of applications, which are relatively simple compared to the actual display itself. I know the consumer electronics companies like Samsung have shown in the CES show earlier this year and even last year, and Sony as well, micro LED-based televisions, those kinds of things. But those are not the products that are actually getting into the mainstream at this point, just because it's so hard to make an actual display with every individual LED die and compete with established technologies, like LCD or OLED at this point. So the backlight application is relatively easy to go after right now, and it is a significant savior of battery life, and that's where it's going.

So as far as we are concerned, I mean, our -- the customers we sell our product to, they are the manufacturers of the actual micro LED panel itself. So they are buying LED from semiconductor companies that they're using pick-and-place machines, basically SMT equipment, and placing the LED dies on whatever substrate they want. Sometimes it's glass. Sometimes it's plastic or something like that. And maybe -- so the sizes can vary from very small sizes to fairly large sizes, like 70-by-70 centimeters. So we service that -- those manufacturers. I don't know if answered your question or not.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [54]

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Yes. No. That's good. And just a similar question on the memory side. The trend in memory, let's say, for stacked memory, if you go into just a drop more detail for a moment, will continue to really drive and make a big difference in the new 3D product, which, again, is getting nice, early orders on and have 2 out of the 3 biggies at this point.

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

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So memory -- where we play in the memory market is in the finished chips area, so this is where the chips are all built, and they are putting them on a module, and then they are circulating the module, and then they want to do a -- then they usually do an electrical check, and then they want to do a final optical inspection check, noncontact, which is before, they package the memory and send it out to their customers. So we have a key final step in the memory module build process. So we service both DRAM and ML-type memory, so multilayers or whatever. But the kind of defects we are looking for in memory module inspection system are tens of microns kind of defects. So we really don't go into the stacked memory, itself and look for defects at the transistor level. That's where they use your other kinds of technologies, e-beam technologies. Where we come in is in the final inspection of the finished DRAM or NAND module that they are shipping to their customers.

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Orin Zvi Hirschman, AIGH Investment Partners - CEO [56]

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So again, just -- if I may ask, what, in particular, is driving the demand of the new product right now for you? What -- are you doing any...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [57]

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So good question. So memory market has been -- they -- historically, they have been using either manual inspection as a final inspection or they're -- many of them bought 2D memory module inspection systems from one of our Korean competitors who was in this business, and they were not happy with the system because of its performance. So we entered this market with one of the customers about 4 years ago, and they are getting very good ROI with the kind of technology we deployed. And that's why we are getting traction with the next one now, and we are working on the third one.

So essentially, we are replacing either manual inspection or old 2D technology that they have deployed. So it's a significant ROI for them. And more than just the cost savings, one of the challenges they were having is for this high-end multi-stack memory chips and the modules that they are building, smallest of the defects can lead to failure. Essentially, what they're doing is that they're building the whole module, putting it -- the robot is picking the module and putting it in an I/O check. And then during the check itself, the robot is jamming it into a socket and pulling it out. You can imagine some of the chips actually get dislocated physically while the robot is doing that. And so even though I/O check looked okay while the robot is dislodging it from the I/O system, some chips have been displaced or some passive components have been displaced. And they were getting field returns because of those issues before they started implementing MX-like products. And's that's really the value of our MX system is it enables our customers to basically eliminate defects that they are shipping out. And on top of that, they can save on manual labor cost or the older 2D systems that they have bought which were getting high false call rates and that kind of stuff. So it's a good ROI for our customers by using our MX system.

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Operator [58]

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Moving on, from Tieton Capital, we have Bill Dezellem.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer [59]

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If I actually can ask a longer-term question, if I may. How are your products sold? And I recognize that you're not sending out an e-mail and blast or cold calling. And a week later, you have a sale. So what I'm trying to get at is with the lockdown and the inability to travel, to what degree or at what point does that interfere with the sales cycle? And I recognize this is not a Q2 phenomenon. I don't even know if it's a 2021 phenomenon. But would you talk through that, please?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [60]

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Sure. So fundamentally, we -- most of our products, they go through reps and -- independent reps and distributors that are local to that region. So we have roughly, correct me if I'm wrong, Jeff, about 85 independent reps and distributors that cumulatively service all our products in different regions. So our -- we have direct sales staff, and the primary role of that sales staff is to manage those independent reps and distributors. So in most countries in the world where we have -- we get traction, we have a rep or a distributor who are fairly knowledgeable about the local customers. So that's where most of the interaction is happening at the rep or distributor level, and then our sales folks get involved. And our -- we have engineers in most of the important geographies in the world to do the install and support those kinds of things.

This virus and lack of travel is impacting our productivity. I mean we are, in some cases, struggling, where our engineer cannot even go domestically anywhere, and we have to use all kinds of current tools. Thankfully, most of our systems are Ethernet-enabled, and we can run them remote. So we don't need to physically stand next to the system to run them, so we can even log in from a remote location and demonstrate the whole system as long as there is some kind of connectivity area around there. So we can do a lot of things with the modern tools we have. But still, it is a productivity hit. But to answer your question, we are primarily relying on independent reps, distributors and local engineers to do the sales, and that hasn't really been impacted that much, just because we cannot travel.

Jeff, you want to add something?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [61]

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No. I think that's a good summary.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO & Chief Compliance Officer [62]

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And so to make sure that I am clear then. So in China or in other Asian countries, as long as there's not a complete lockdown, your reps and distributors are in, in some cases, able to physically visit the customer or prospective customer. And really, I'm thinking more about the prospective customer because the existing customer, in theory, would have some better idea of what you're doing. And so what we're experiencing in the U.S. is less relevant than what's happening in each of the individual countries where the installation ultimately would take place. Is that the correct way to be thinking about it?

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

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Yes, generally, I mean, existing customers are already familiar with our sensor or system. And usually, it's just their capital cycle and how their ROI with our systems that enables the order. We don't need to physically meet them again and again.

We do introduce new features in our software periodically, and that is important periodic check with them and telling them what the new features are and so on, but it's not as critical.

Your point is right. If these travel bans continue for a long time, prospective customer shopping would be difficult. I mean, it will be harder to convince a new customer without meeting them in person or demonstrating a system to them. So -- but hopefully -- and one thing, Asia, for one practical purposes, is people are moving around. So even though there are travel restrictions in Asia from country to country, within a country, like Taiwan, it's pretty much normal right now. Even in China, people can go around a lot more easily. So some of our viewpoints right now about the virus are more U.S.-centric, and we see the pain we are all personally going through. But in Asia, when we talk to our people, many of them within the local geographies that they are, they can move around and meet customers and so on.

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Operator [64]

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The next question will come from [Eric Slade] with AKME Analytics.

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Unidentified Analyst, [65]

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So let's go -- on the third memory customer, obviously you're talking with them, right?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [66]

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Correct.

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Unidentified Analyst, [67]

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When do you think we might see that? I mean, hey, congratulations on getting number 2. Number 3, when do you envision that, if you could put any time to like parameters? Is it with the next year or 2?

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

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I mean, we are optimistic that's something -- they will accept our MX still sometime in this calendar year. But again, it depends on their capital cycle and so on. But right now, memory, customers are in the investment mode. They are not backing off because of the virus situation, so we are optimistic we will pick the third customer this year.

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Unidentified Analyst, [69]

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And then on the OEM side, I talked to Jeff numerous times about that. How is that starting out the year? Have they come back from their hiatus ?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [70]

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Some have. Some haven't. I mean, the legacy ones haven't come back as much, though. MRS ones have come back strong. As you can see from our numbers, MRS OEM business is growing very nicely right now. Our legacy customers, some haven't come back strong, but then the older technology as well.

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Unidentified Analyst, [71]

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Right. Now on a micro, mini LED, I guess the growth rate is going to be 80% per year. I think McKinsey, a couple of the outfits, talked about 80% per year until '25. So that's great compound growth. I got the impression that's really sort of a race to the starting line to get the lines, I guess, throughout Asia in there. Is that fair to say?

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

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I mean, there's a lot of activities going on right now. A few lines have already been installed. But as I mentioned to an earlier caller, we are still very early in the scale-up cycle. So we expect multiple lines to be installed by the end of the year, but it's still early applications, early scale-ups. So it's really at volume applications, even in 2020. So this is still very early stuff going on, but the number will continue to increase. I don't know the growth rate, but number will continue to increase, no doubt about that.

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Unidentified Analyst, [73]

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If you look at the first quarter -- I don't know if this is their first quarter, the last quarter of Kulicke & Soffa, KLIC, they -- if I read it right, they're expecting shipments of micro and mini LED, I guess, taking place for $30 million to $70 million. Are you aware of that?

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

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Yes. We have seen their earnings calls. They mentioned that number, yes.

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Unidentified Analyst, [75]

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So here's my question. Well, first of all, they have an exclusive with Rohinni. You guys don't. Is that correct?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [76]

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That is correct. Given the SQ is the preferred and qualified product, customer has a choice to try other AOI systems. They're not exclusive in that sense.

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Unidentified Analyst, [77]

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It's probably a good thing because whoever wins out. I guess is Rohinni is in the lead right now over Samsung or whomsoever the competition?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [78]

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Say that again. I didn't hear your question.

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Unidentified Analyst, [79]

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Is it your feeling that Rohinni is in the lead edge -- or they'll be the fast to market or they're in the best position right now compared to probably Samsung and -- I mean, Apple is trying to get in there, but they haven't been able to do that. But is that your feeling, Rohinni is the lead?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [80]

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I mean, Rohinni is a technology development company. Rohinni's plan is not to be the manufacturer themselves their plan is royalty basis. So they have scaled the technology. They have the technology package, and they are selling the package to different manufacturers, who, in turn, service the large consumer electronics companies. So Rohinni have been really already playing in the -- with a number of consumer electronics companies. But clearly, we don't have that much visibility to -- beyond a certain point.

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Unidentified Analyst, [81]

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I understand. So it's -- you guys are just -- as the lines go out, it's like any technology. I guess it'll just keep building. Now here's the other thing, back to Kulicke & Soffa, if they're modeling $30 million to $70 million for the second half of the year, do you know how much pick-and-place machines, 1, 2 or 3, that are on these lines that they're installing?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [82]

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We know, but I don't feel comfortable divulging that information that -- I believe that is confidential between Rohinni and Kulicke & Soffa. So we have a good feel for how many pick and place machines per line and how many -- we know there are 6 inspection machines per line. But even within that, [Eric], we have already seen some customers adapting to splitting the line at different points. So the number is going to change how many pick-and-place per line and how many inspection systems per line based on the individual customer and how they are going to consider the line.

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Unidentified Analyst, [83]

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So it would be sort of impossible for an investor like myself to figure that out based on the information that's public because KLIC, if they're -- obviously, if they're doing one per line, that's the best thing in the world, right, for you guys. If it's 3 per line, it's still good for you but not as good. Am I reading that right? So...

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [84]

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Yes. I mean, your general assumption is right, depends on how many per line. And I know they're planning to quantify it. We -- all we hear is multiple numbers right now. So if you take the optimistic numbers, all the numbers become fairly large. If you take the pessimistic numbers, they are not that impressive. So we really don't have that good a feel for exactly how many lines will be scaled up in the second half of this year.

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Unidentified Analyst, [85]

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And then you brought up a point a number of times. When we look at the chip space out there, you're unique in the idea -- that you're high end so that's probably why you haven't been as affected. Most people have pulled their guidance, even some of the big guys about a month ago as this virus was picking up. But I guess you guys are so uniquely positioned with a lot of your product, that it's really technology as opposed to capacity to a good degree. I guess how much in the cycle is capacity driven or new technology? Would you -- do you have that -- an estimate on that for you guys?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [86]

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That's a tough one for me to ballpark in that way. I mean, we -- as Jeff added to the earlier caller, Jeff, you can chime in, our confidence for Q2 guidance comes primarily from our interactions with our customers and the backlog that we have on hand. That's what gives us confidence to give Q2 guidance at this time. We haven't given Q3 or Q4 guidance precisely for those reasons. Our customers are high-end chip manufacturers particularly seem to be fairly optimistic. Particularly, the TSMC gave guidance for the whole year as mid-teens percent growth, and they know exactly what's going on with the virus and everything. So I was pretty impressed that they gave a full annual guidance of, let's say, 15% or so, which is pretty impressive. They are...

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Unidentified Analyst, [87]

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I would think -- with data centers, cloud, 5G, and of course, micro, mini LED, that's good demand. I guess one question I had is are you guys -- I know you guys are probably affected down the food chain when it comes to automotive, which is really in the -- in a tough situation. Did that maybe take a little bit off your revenues for the first quarter or 2? The reason -- or you can't really equate that?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [88]

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I mean, we have some auto customers that have bought SQ systems. We have heard some slowdown in some of them. But nothing -- I mean, our exposure to the semiconductor side, the memory customer is far bigger than our exposure to industrial or auto customers at this point. So we clearly -- the impact of virus is we are seeing that in some parts of our business, but the other side is healthy enough to offset and compensate for that.

Jeff, you want to add something?

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Jeffrey A. Bertelsen, CyberOptics Corporation - VP of Finance, CFO, COO & Secretary [89]

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Yes. I agree with that, and I would add. I mean, we did have one auto customer in Q1 who did buy some SQ systems. So -- and at least in that particular case, that instance, I would say we haven't seen an impact yet. We'll see down the line.

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Unidentified Analyst, [90]

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Okay. So if we look out, by the first of the year, will you say -- or do you have any idea how many lines are on the micro or no -- or any way to tell that, I mean, how many lines are getting laid out throughout Asia?

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [91]

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Well, I mean, our customers give us good visibility for the next 2 or 3 months, and we know more lines are being built in that time period. They give us a general idea of what they think will happen in the next 6 months, and all the numbers are increasing. We hear that all the time, so we are pretty confident micro LED will continue to grow. But trying to quantify like what KLIC has done that we don't wanted to do,[Eric]. I mean, it's just too many variables right now in the equation. So I can't quantify exactly how many SQs we will sell and the visibility.

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Operator [92]

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We'll move on to the next question we have from [Craig Froelich] with [First Allied].

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Unidentified Analyst, [93]

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My question has been answered. I'm good.

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Operator [94]

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In that case, we actually have no further questions remaining in the queue. Dr. Kulkarni, I'd like to turn the floor back to you for any additional or closing remarks, sir.

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Subodh K. Kulkarni, CyberOptics Corporation - President, CEO & Director [95]

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Okay. Thanks. Well, thank you all for your interest and questions. We look forward to updating you at the end of Q2. Thank you, again. Bye.,

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Operator [96]

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Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.