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Edited Transcript of CYBE earnings conference call or presentation 25-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 CyberOptics Corp Earnings Call

MINNEAPOLIS Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of CyberOptics Corp earnings conference call or presentation Tuesday, April 25, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey A. Bertelsen

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

* Subodh K. Kulkarni

CyberOptics Corporation - CEO, President and Director

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Conference Call Participants

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* Ashwini Birla

Dougherty & Company LLC, Research Division - Research Analyst

* Gregory William Palm

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

* Jaeson Schmidt

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

* Martin Svanda

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Presentation

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Operator [1]

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Good day, and welcome to the CyberOptics First Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dr. Subodh Kulkarni. Please go ahead.

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

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Thank you. Good afternoon, and thanks for taking the time to participate in CyberOptics' First Quarter 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 available 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, 2016, and other filings with the Securities and Exchange Commission. We urge you to review these discussions of risk factors.

Turning now to CyberOptics' recent performance. Our first quarter results, which were consistent with our previously issued guidance for this period, reflect the timing of orders and acceptances for our 3D MRS-enabled systems as well as the difficult comparison with last year's strong first quarter. First quarter sales totaled $11.9 million compared to $19.1 million in the first quarter of 2016. Revenue in last year's first quarter was particularly strong driven by $2.5 million order of MX memory module inspection systems and a follow-on order of $4 million for SQ3000 3D MRS-enabled automated optical inspection system or AOI systems and robust orders for legacy and 3D MRS-enabled sensors.

We reported a net loss of $214,000 or $0.03 per share in the first quarter of 2017 compared to earnings of $2.3 million or $0.33 per diluted share in the year-earlier period.

Order activity for our portfolio of SQ3000 3D AOI system products was solid in the first quarter, and we are particularly encouraged by our growing pipeline of opportunities for large projects involving multiple SQ3000 systems. We believe some of these opportunities will generate significant revenues in the second quarter. As a result, we are reaffirming our previous guidance calling for second quarter sales of $16 million to $19 million.

Our growing pipeline of SQ3000 opportunities is driven by the competitive advantages of CyberOptics' disruptive 3D MRS technology platform, which is enabling the company to capitalize upon the growing demand for high-precision inspection. For this reason, we believe we can drive CyberOptics' percentage share of the rapidly growing worldwide 3D AOI market into the low double digits in 2017.

The second quarter and full year outlook for 3D MRS-enabled sensors is also promising. Sales generated by our long-term supply agreement with KLA-Tencor are expected to grow strongly, as our 3D sensors are now becoming standard on KLA-Tencor back-end semiconductor inspection systems utilizing 3D optical inspection. We are also optimistic about the second quarter outlook for our legacy 2D LaserAlign sensors for traditional OEM customers.

Although we continue to work with the consumer electronics company, we have no visibility as to whether or not a new order will be forthcoming. For this reason, we have not factored any orders from this customer into our second quarter and full year 2017 forecast.

As previously reported, we have made continued progress at advancing our MRS-enabled 3D sensor technology. Features of 50 microns, including devices with mirror-like finishes, are being measured consistently in the research lab, and progress has been made toward measuring sub 50-micron features. This progress is essential for making an MRS-enabled 3D sensor technology applicable to mid-end semiconductor inspection within 2 years and front-end inspection within 4 years. If this initiative proves to be commercially viable, the available market opportunity for CyberOptics could be significant.

First quarter sales of semiconductor products, primarily the WaferSense/ReticleSense product line, rose 9% year-over-year. In response to customer demand, we are developing additional product offerings to address other applications in semiconductor fabs and flat panel display manufacturing. We anticipate strong future sales growth for our WaferSense/ReticleSense product portfolio.

Based upon positive feedback from customer demonstrations and evaluations in such diverse areas as 3D printing, medical devices and cellphone components, we remain confident that our recently introduced CyberGage 360 3D Scanning System should become an important contributor to CyberOptics' long-term sales growth. Toward this end, we are continuing to strengthen our CyberGage sales channel and demonstrate the system at key industry trade shows. Consistent with previous statements that potential customers are taking longer than initially anticipated to evaluate the functionality and benefits of this general metrology inspection system, no CyberGage sales were recorded in the first quarter. Given the length of the evaluation and sales cycle, we are forecasting nominal CyberGage sales in the second quarter and steadily increasing sales growth during the latter stages of 2017.

Looking ahead, the majority of our first quarter-end backlog of $10.9 million is expected to ship in the second quarter and we have a promising pipeline of sales prospects for our SQ3000 3D AOI product. As a result, we are forecasting sales of $16 million to $19 million and a strong earnings rebound for the second quarter of 2017.

Moreover, we believe the sales momentum for our 3D MRS-enabled systems and sensors and suite of semiconductor products should continue building momentum towards the second half. For this reason, we are optimistic that 2017 should be another year of solid growth and profitability.

Thank you. Now Jeff Bertelsen will review our first quarter operating results in greater detail.

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

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Thanks, Subodh. To put a review of the sales performance of our product lines into context, it should be reiterated that our first quarter revenue reflects the timing of orders and acceptances for 3D MRS-enabled systems as well as a difficult comparison with last year's strong first quarter.

But despite the first quarter softness that we forecasted previously, we believe 2017 will be another year of solid growth and profitability. Sales of inspection systems totaled $4.7 million in the first quarter, down from $8.8 million in the first quarter last year. The first quarter of 2016 included a large $4 million follow-on order for SQ3000 3D AOI systems and $2.5 million of MX600 revenue. As Subodh noted, our order activity for our portfolio of 3D AOI system products was solid in the first quarter, and we have a growing pipeline of opportunities for large projects involving multiple SQ3000 systems.

As a result, we anticipate strongly improved system sales in this year's second quarter, both year-over-year and sequentially. Sales of electronic assembly sensors totaled $3.9 million in the first quarter, down from $6.2 million in the first quarter last year. Sales of both legacy and MRS sensors to our OEM partners were particularly strong in the first quarter of 2016. Order activity for 3D sensors is strengthening, and we are optimistic about the second quarter outlook for legacy 2D sensors. Given these factors, we are forecasting strongly improved sensor sales in the second quarter of 2017 on a sequential quarterly basis, although modestly below the level posted in the second quarter of 2016.

Sales of semiconductor products, primarily the WaferSense/ReticleSense product line, totaled $2.3 million in the first quarter, up 9% from $2.1 million in the first quarter last year. The WaferSense/ReticleSense product line is forecasted to post strongly improved second quarter sales on a sequential basis with sales at or near the level recorded in the second quarter of 2016.

Finally, sales of 3D scanners and scanning services totaled $1 million in the first quarter, down from $2 million in the first quarter last year, largely due to lower sales of x-ray systems. We anticipate that second quarter 2017 sales of 3D scanners and scanning services will be up significantly on a sequential basis, but still down on a year-over-year basis. The second quarter of 2016 included a large sale of x-ray systems to a single customer.

Moving down the P&L. CyberOptics' first quarter gross margin of 45% was up from 42% in the year-earlier period, primarily reflecting a more favorable product and geographic sales mix. We believe that our gross margin percentage in the second quarter of 2017 will be at or slightly above the first quarter level.

Operating expenses totaled $5.9 million in the first quarter compared to $5.7 million in the fourth quarter and $5.6 million in the first quarter of 2016. Higher SG&A -- G&A expenses in the first quarter were mainly driven by CyberGage sales and marketing initiatives and additional field sales engineers that were hired across our product lines to help drive sales.

SG&A expenses in the first quarter were slightly higher than originally anticipated due to the aforementioned additional hires and related recruitment fees, CyberGage marketing costs and higher channel commissions reflecting the mix of first quarter sales.

During the first quarter of 2017, depreciation and amortization expense totaled $550,000, and stock compensation expense totaled $188,000. We believe second quarter operating expenses will be at or near the first quarter level. The $413,000 income tax benefit we recorded in the first quarter of 2017 includes a $207,000 excess tax benefit from stock option exercises. Excluding excess tax benefits, the remaining income tax benefit in the quarter was booked at a 32% effective rate.

Finally, cash and marketable securities totaled $23.2 million at March 31, 2017 compared to $25.9 million at year-end 2016. The reduction in cash was due to payment of 2016 accrued incentive compensation and to support additional inventory needed for forecasted second quarter revenue and future CyberGage sales.

Thank you. I will now turn the call over to the conference call operator, who will poll you for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Ash Birla with Dougherty.

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Ashwini Birla, Dougherty & Company LLC, Research Division - Research Analyst [2]

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So decent quarter, quick question. Can you -- Jeff, can you describe the SG&A $3.97 million, how much of that portion is recruiting fees and audit fees and that stuff that is not recurring?

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

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Ash, good question. So I would say the recruiting fees were about $50,000. There were audit fees in the first quarter, they would be roughly in the $100,000 range. As I mentioned, those costs were a little bit higher than what we had originally anticipated. I think we started some of those folks a little earlier than what we had anticipated. We also spent some -- a little bit more money on some of the CyberGage sales and marketing initiatives.

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Ashwini Birla, Dougherty & Company LLC, Research Division - Research Analyst [4]

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Okay. Can you talk about CyberGage360 pipeline? One of the things is that you had talked about 100 customers, 25 major customers. Can you update us with that pipeline?

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

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Sure, Ash. So, yes, as you know, we're showing the unit in more trade shows just about every week or every other week right now. So the pipeline continues to increase. So right now, we are looking at more than 200 customer leads that we are generally following, and what we call the hot customer leads has increased over 30 right now. So those are the ones that are likely to purchase system in the near future. So that will continue to increase with more trade shows and so on.

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Ashwini Birla, Dougherty & Company LLC, Research Division - Research Analyst [6]

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Sure. And so obviously, you haven't -- you've said that you will not recognize revenue. But can you at least provide how many CyberGage360 units you have shipped?

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

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So totally, there are 15 units in the field right now. Many of them in various different trade shows in different parts of the world. Some at resellers, some at customers right now. We have the ability -- we have 10 more units being built in different stages right now. So we will ship them out in the next few months here. So we -- and we obviously will ramp up depending on the actual orders. We think this number is sufficient to all the activities we are doing right now.

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Ashwini Birla, Dougherty & Company LLC, Research Division - Research Analyst [8]

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Okay. And then one last one. Jeff, when you say solid growth, is that 4%, 5% above GDP? What is -- can you just quantify that a little bit? And how are you guys planning to achieve that because that would mean second half will probably grow 30%, 40% over first half?

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

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So maybe I can take it first, and then Jeff will chime in more, so. Fundamental reason we believe we are going to have solid growth this year is because of the SQ product line. We have a very solid pipeline of opportunities and I'll try to quantify the opportunities for you. That may give you a feel. So we have about 20 large projects all related primarily to SQ right now. And the total value of the projects comes to as much as about $40 million right now. Now not all of them -- and a couple of them have started materializing already, but not all of them have started yet. And some of them may move out into 2018. So it's -- they were quite clear, but we believe a big fraction of that is going to materialize this year, and that is going to be the primary growth driver for the company. So because we had -- MX revenues will come down this year, as you know, and maybe the CT revenues will come down, but those negative offsets will be -- they will be offset and more than that offset by SQ pipeline right now. Jeff will add.

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

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Yes, and so in addition to the SQ pipeline, which is the biggest driver, Ash, as we mentioned in the release today, we are expecting MRS revenues to ramp up here as we become standard on the ICOS tool. That will be a growth driver for us. And we are expecting CyberGage sales to pick up in the latter half of the year. So there are a number of drivers behind our second half growth in addition to WaferSense and ReticleSense, which...

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [11]

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That we continue to grow.

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [12]

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Which will continue to grow. I guess, to answer the latter part of your question or maybe it was the first part of your question, I mean, we haven't quantified our growth expectation for the full year. We haven't put a number on it, other than to say that we obviously do expect a strong second half and to have a good year here in 2017.

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Ashwini Birla, Dougherty & Company LLC, Research Division - Research Analyst [13]

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Sure. And -- sorry just one last one. Of the $11.9 million, how much was the 3D MRS driven revenue?

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [14]

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Sure. That was $2.3 million.

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Operator [15]

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We will take our next question from Jaeson Schmidt with Lake Street Capital Markets.

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [16]

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Just one to start with OpEx. I know it sounds like you guys continue to build out the CyberGage sales channel, and OpEx will remain relatively flat in Q2. How should we think about any potential ramp and continued build out of that channel in the second half?

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

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Yes, I mean, I think, in the second half we would expect to see a little bit of OpEx ramp. And that's really more tied to the revenue growth that we're seeing, and we do mainly sell through channels. So there will be some third-party commissions that would go with those sales. We did add a few field sales engineers here in the first quarter. And those mainly were added to support sales in the latter half of the year. And we're not talking about a big number. I mean, it was a small handful of people. And we did spend more on CyberGage marketing here in the first half, in the back half of the year it's just the number of shows will go down. So I think, as we look in the back half, I would see a little bit of increase in OpEx, mainly just driven by the higher revenue levels, but not a big increase -- not a big increase in the number of headcount or that type of thing.

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [18]

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Okay. That's helpful. And can you help us try figuring out where you currently are in your ramp with KLA? And when you think that will be fully ramped?

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

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Sure. So the equipment that they are shipping now, most of the new stuff that they are beginning to ship now is built in with our sensor today. But there are older platforms that they are trying to adapt our sensor to. So I would say we're halfway in the ramp right now, roughly speaking. And the ramp will be pretty much complete, we believe, by the end of this year. So 2018, we expect to be on all their tools that need optical inspection.

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [20]

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Okay. And then last one from me and I will jump back into queue. Looking at gross margin, how should we think about the drivers there? Is it mainly just going to be revenue and mix?

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [21]

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Yes, I think, the drivers there will be the MRS products and the WaferSense/ReticleSense products. I mean those products tend to have higher gross margins, and as we commented, as those will become -- as those become a bigger percentage of our overall revenue mix, we hope to see gross margins creep up here as time moves on. And so we're looking for a little bit of gross margin improvement here in the second quarter.

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

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But it's going to be a gradual flow.

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [23]

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Right.

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

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It is not going to be a quick jump up.

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [25]

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Exactly. It will be a kind of a slow gradual increase.

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Operator [26]

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(Operator Instructions) We would take our next question 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 [27]

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I wanted to first piggyback on a previous question on the pipeline as it relates to the SQ3000. I think you mentioned, if I heard you right, 20 large projects as much as $40 million. Anyway to sort of compare that where we were, maybe a year ago or even last quarter, just kind of curious how that pipeline has evolved here over time?

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [28]

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So when we compare to a year ago, Greg, the, number is a lot bigger. I don't know the exact number we were involved in at this time last year. But it's nowhere close to 20 projects and $40 million type number. Significantly smaller, I would say at that time. I don't know exactly what it was 3 months ago. But definitely smaller than what it is right now. Every -- with every month, we are securing more wins and that number continues to increase. But it's hard to know exactly where it was 3 months ago.

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

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Oh, sorry, Greg, I was just going to add and I would tag on to that. I think our pipeline of opportunities is firming up too, as we move forward. So we are getting better, better visibility, and that's allowing us to quantify the opportunities better. So some of the large projects that we were seeing a couple of months ago are materializing, and we're getting better visibility.

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

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And I guess, sort of where I am going with it is, let's -- if you put a number on it, let's say, it was maybe, $10 million or $15 million a year ago. How much of that would you have realized over time so I'm trying to get a sense of -- of that $40 million how much do you expect to realize this year versus next versus lose and I think you said, something like a major fraction, but any way to sort of quantify whether that's half of the $40 million or 3/4 of it or...

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

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Sure. So Greg, actually, in our press release we have tried to quantify it a little bit. What we have said is, the total 3D AOI market this year is going to be about $150 million globally, and we expect to be in low double-digit market share. So that would just -- the math would say we would be close to $18 million to $19 million this year, somewhere in that neighborhood. Okay? Now certainly if more projects materialize the number will be higher, less, it will be lower, but last year, for reference, in 2016, we sold $8.1 million of SQ. So we are expecting SQ to more than double this year.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

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Makes sense. In terms of the pipeline, how many of these 20 large projects are with new customers versus previous customers? And is most of the activity still within consumer electronics? Or any sort of outside that's becoming more significant?

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [33]

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Broad-based there are 3 sets of customers, if you think of it that way. There is the traditional SMT-type customers, like auto industry and just traditional electronics manufacturing. An increasing number, the second category is the semiconductor companies. We seem to be getting a lot of traction with the semiconductor companies. And the third and interesting area we seem to be getting into is companies that are interested in measuring things using 3D automated optical inspection systems and some of them are semiconductor, some are SMT, but it's almost different kind of an application and as the SQ, because of its MRS technology, is really well suited to do sophisticated measurements in addition to inspection. So I would say most of them are new customers. There's probably 2 or 3, I am looking at the list here in front of me, who have bought things from us in the past. But most of them are new. Many of them are Fortune 500 type companies. So very good quality customers to have long term. So we feel very good about the overall pipeline, the number, the size and that's why we're so bullish about second half and our future.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [34]

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Great. One last one on systems just before we shift gears. On the memory module side of things, any sort of update there? You had the one major customer last year, but anything new going on in that area?

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [35]

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Sure. So the one customer whose lines we populated, most of the lines we populated, we do believe they may order a couple more systems, so maybe $1 million-or-so sometime in the second half of this year, but that's uncertain right now. But a big opportunity we are dealing with is one of their larger competitors. So there are 3 large companies in the memory industry. We have one already with MX. So we are working with another large one right now. And clearly they understand that our system is far superior in performance compared to what they have today, and they're going through the internal ROI justification whether to basically junk the systems that they bought 3, 4 years ago and buy new MX system or continue to operate the inefficient system. So that is their decision, obviously. But we are pretty confident based on the fact that they are talking to us and they want us to do more demos and evals and stuff like that, that sometime in the next 12 months. We can't say it will be a 2017 project because these things take time, but sometime in the next 12 months, we do expect another large MX customer to sign up and some large orders to follow through after that. That's a big one. In addition, we're talking to second-tier companies like Kingstons and PNYs and those kinds of companies who are interested in MX-type product. And one of the more interesting things we have done is, we have enabled a 2D -- MX at the end of the day uses 2D AOI technology, and we have launched a product last year that we call QX250, which is also a 2D AOI technology. So same technology as MX, but it has a sensor on the top and sensor in the bottom. And effectively, it is a lower cost version of MX for people who don't have significant automation in their factories. So very suitable for tier 2 type of customers. So there is a good chance that instead of buying a complicated MX system, which is very good for high-end automated environments, they may choose multiple QX250s to read their applications. So it may get booked overall in the systems area, it may just not show up as MX, we may have reported as QX. But overall we feel very good about the whole memory industry opportunity and what we can do for inspection. Certainly, with 2D AOI like MX or QX, as I said earlier, but even long term for the 3D AOI and other opportunities that memory industry brings to us.

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

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Got it. Just shifting gears here. That the large consumer electronics customer who placed a pilot order last year, I think it was right around this time when you received that and I know you don't have perfect visibility, but assuming you do receive an order, would your expectation be that you will get one here shortly? Or has something maybe changed in terms of the time line shifting where that might sort of push out a little bit later than maybe what was initially done last year?

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

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What we do know is that they are using our sensors that we gave them last year as part of their manufacturing processes right now and collecting more data. So they like the technology, they like what the sensors are capable of doing. And frankly, I think they are -- based on the data, they are going to make their decisions in the next few weeks or few months and it's just impossible for us to be in their position and know what exactly issues they're having in their manufacturing process and how many sensors that is going to be as far as we are concerned. And that's why we chose to basically, take it off -- and take it out of our numbers for Q2 and the rest of the year. So our guidance that we are providing does not include anything from that customer. If they obviously make a large order, that's all additional to that.

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

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Got it. Okay. Last one from me on CyberGage. Just curious, any feedback since you made the improvement in the inspection accuracy? I'm just kind of wanting to know, I guess, if you're planning on making any additional changes to the hardware or software side of that? Or is it kind of finally at an optimal spot and now the challenge is kind of figuring out the best way to go-to-market with it and sell some of these things?

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

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Certainly, the majority of the challenge right now is finding the right customers for the right applications. So it's mostly sales and marketing. But having said that, we continue to improve the hardware and software. As you touched on earlier, we have improved the accuracy. That we did about 3 months ago. We came down from 25 micron accuracy that we started in October of last year to about 7 micron accuracy right now. But since then we have done some software changes and introduced some smoothing functions, which make the images in the scans look visibly better. They don't quite change the measurement numbers, but it does make the image very visually appealing by suppressing some of the noisy data points. So we are doing some minor improvements as time goes along based on customer feedback and what we think is the right thing -- are the right things to do. So we continue to improve, but the majority of the challenge is sales and marketing right now.

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Operator [40]

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And we'll take our next question from [ Miles Jennings ].

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Unidentified Participant, [41]

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My question is regarding your APSRQ and I realize that this was introduced some time ago. But I can't seem to visualize what the trend in activity there is with these very large companies that would use in their lithographic scanning machines? Could you give us sort of the potential market there? And where you stand as far as starting to capture some of that?

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [42]

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I will do my best here. It is tough to call. When you look at the size of the semi industry, all the numbers are very large, as you are familiar, Miles. So there are 170 to 180 active fabs worldwide right now. And on an average, I would say, each fab has 30 to 40 lithographic stations, if you will, you can multiply and that would be the size. And each lithographic station could use 1 APSRQ and 1 AMSRQ that kind of stuff. You can multiply those numbers and average selling price for APSRQ and AMSRQ is roughly $45,000. So they add up fairly quickly in terms of market size. Having said that, I mean, lithographic area is extremely sensitive to trying -- putting any foreign object in that environment. So we obviously have been selling APSRQ and now AMSRQ. Frankly, AMSRQ seems to be getting better traction than APSRQ from what we've seen so far, primarily because the humidity is something -- humidity measurement is something that lithographic customers seem to want to do. Particles, they definitely look at, but the systems are so clean that it's almost like an insurance check that they're looking at particles, whereas humidity they actually want to measure. So within that, AMSRQ seems to be getting better traction than APSRQ. But both numbers are relatively small compared to the WaferSense numbers. WaferSense dominates our current numbers right now. And that just shows lithographic people may be more reluctant to inject new foreign things in their systems. They're expensive systems and all the lithographic system costs anywhere from tens of millions of dollars to the latest UV systems cost $130 million or $140 million apiece. I can fully understand why lithographic engineers are very reluctant to change anything or inject any new foreign object in their system. Does that help?

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Unidentified Participant, [43]

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Yes. It does. I had just one further question. Sometime ago, you introduced a new version of the SQ, which was I think called the Ultra, it basically is the same SQ3000, but perhaps, slightly more accurate. And I just wondered, in these large projects, is some of that the Ultra? Or is it all mostly the original SQ?

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

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No, there's both. I mean, some of the large projects are definitely related to the Ultra. So just -- just so that we quantify. Our regular SQ, the resolution is what we call sub-10 micron, it's actually 9.9 micron and Ultra High-Resolution -- the resolution is 7 microns. So it's almost a 30% improvement over the regular SQ resolution (inaudible) as you can imagine. And definitely, some of the large projects that we touched on earlier, the 20-odd-or-so projects are because of the ultra high-resolution system that we have available now. But majority is still the regular SQ.

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Unidentified Participant, [45]

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Excellent. I find it very interesting to have you express your answer in terms of percentage going down from 9.9 microns, really that's pretty amazing.

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Operator [46]

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And we'll take our next question from Martin Svanda with Western International Securities.

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Martin Svanda, [47]

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I was curious, any 10% customers in the quarter?

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

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Just hang on for a sec. There were, yes, there was one 10% customer in the quarter.

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Martin Svanda, [49]

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And approximately what percent was that?

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

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That percent roughly would be about 13%, 14%.

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Martin Svanda, [51]

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Okay. A little bit of clarity on the CyberGage360. You'd previously mentioned that there were 15 units, I believe, that were being shown around and another 10 that were under construction? In the 10-K, it was mentioned that I think, only 2 units were sold last year and it said in the press release there were 0 units sold in the most previous quarter. Are those all just demonstration units? Or are they actually built for customers?

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Jeffrey A. Bertelsen, CyberOptics Corporation - COO, CFO, VP of Finance and Secretary [52]

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Well, the 15 units, those are really demonstration units. So they are used at trade shows, they are used at customer sites. They'll rotate around, and they'll spend time at different customer sites. They are mainly for demonstration and evaluation right now, although they certainly could be sold if the customer has one and wants to keep it, we would sell that as well.

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Martin Svanda, [53]

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Got you. And of the backlogs of the $10.9 million backlog or -- is any of that related to the CyberGage360?

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

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No, not right now.

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Martin Svanda, [55]

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Okay. And how much of the backlog -- you had mentioned strong order activity for the SQ3000 during the quarter. How much of the backlog is related to the SQ3000?

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

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Sure. So the SQ3000 backlog is roughly about $1.5 million.

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Operator [57]

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And it appears there are no further questions at this time. I would like to turn the conference back over to Dr. Kulkarni for any additional or closing remarks.

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Subodh K. Kulkarni, CyberOptics Corporation - CEO, President and Director [58]

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Well, thank you for your questions and interest in CyberOptics. We look forward to updating you with our Q2 results in July. Thank you.

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Operator [59]

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And once again, that does conclude today's presentation. We thank you all for your participation. And you may now disconnect.