From SSB:
Electro Scientific Industries (ESIO)
ESIO: In-Line Earnings--Orders 3H (Underperform, High Risk)
Decline Substantially in the Quarter Stock ratings are relative to analyst's
industry coverage universe
Mkt Cap: $477.8 mil.
September 17, 2002 SUMMARY
* Reported 1Q03(Aug) revenues of $43.0M and EPS of
SEMICONDUCTOR $0.01 versus consensus estimates of $43.6M and $0.01
EQUIPMENT * Net orders were $31.3M, down 37% from 4Q02(May)
Glen Yeung levels of $49.8M. Backlog accordingly declined to
$15.5M, from $27.2M, tempering likelihood for
meaningful revenue growth in coming quarters.
Karen Wang * Guidance for flat revenues, EPS in the range of
$0.02-0.04 and order growth of ~30%. We are revising
our estimates for FY03 to $0.09 and introducing FY04
estimates of $0.56. We retain our 3H rating.
* Our sector rating is Overweight although we expect
bad news to dominate the near-term landscape keeping
stocks under pressure throughout earnings season.
FUNDAMENTALS
P/E (5/03E) 191.7x
P/E (5/04E) 30.8x
TEV/EBITDA (5/03E) NA
TEV/EBITDA (5/04E) NA
Book Value/Share (5/03E) NA
Price/Book Value NA
Dividend/Yield (5/03E) NA/NA
Revenue (5/03E) $171.0 mil.
Proj. Long-Term EPS Growth 20%
ROE (5/03E) NA
Long-Term Debt to Capital(a) NA
ESIO is in the Russell 2000(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (9/16/02) $17.25 Current Rating 3H
52-Week Range $38.25-$16.50 Prior Rating 3H
Shares Outstanding(a) 27.7 mil. Current Target Price $28.00
Convertible No Previous Target Price $28.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
5/02A Actual ($0.10)A ($0.01)A ($0.08)A ($0.03)A ($0.23)A
5/03E Current $0.01A $0.02E $0.03E $0.03E $0.09E
Previous $0.03E $0.10E $0.16E $0.23E $0.52E
5/04E Current $0.05E $0.11E $0.17E $0.23E $0.56E
Previous $0.31E $0.34E NA NA NA
5/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 5/03E $0.38; 5/04E $1.09; 5/05E NA
Calendar Year EPS: 12/02E $1.32; 12/03E ($0.09); 12/04E $0.22; 12/05E NA
OPINION
Results in line with Consensus. Electro Scientific Industries reported
1Q03(Aug) revenues of $43.0M and EPS of $0.01 versus consensus estimates of
$43.6M and $0.01. Three of five business lines showed sequential growth but
large declines in the company's capacitor business (-34%) caused overall
revenues to grow a modest 5%.
Electro Scientific
Industries
Rating: 3H
(M except EPS) 1Q03 (Aug) A 1Q03 (Aug) E Street 1Q02 (Aug) A 4Q02 (May)
A
Revenue $43.0 $44.0 $43.6 $50.0 $41.1
Gross Margin 46.5% 50.0% 50.9% 47.7%
Net income $0.2 $0.8 ($2.8) ($0.9)
Diluted Shares 27.9 27.7 27.2 27.6
EPS $0.01 $0.03 $0.01 ($0.10) ($0.03)
Source: Company reports, SSB estimates, FirstCall
Geographically, the company saw continued strength in Asia, which made up 62%
of revenues, versus 60% the previous quarter. Europe showed seasonal
weakness at 5% of revenues, down from 12% in 4Q02(May) while both North
America and Japan were relatively flat at 23% and 10% (versus 19% and 9%)
respectively.
1Q03 4Q02
Revenue
US $9,881 19% $7,800 19%
Asia $26,636 60% $24,631 60%
Japan $4,296 9% $3,695 9%
Europe $2,148 12% $4,926 12%
Total $42,961 100% $41,051 100%
Sequential
US 27% -7%
Asia 8% 33%
Japan 16% -22%
Europe -56% 4%
Total 5% 13%
Source: Company reports
Orders Down Meaningfully. Net orders were $31.3M, down 37% from 4Q02(May)
levels of $49.8M, and are at the levels reached in mid-2001. Gross orders
were $32.7M and the company received some cancellations for consumables in
the ECS group and a debooking of an order on the books from Hynix. Backlog
accordingly declined to $15.5M, from $27.2M, tempering likelihood for
meaningful revenue growth in coming quarters.
Revenue in $M
1Q03(Aug) 4Q02(May) 1Q02(Aug) YoY Sequential
Mem Repair $17 $15 $23 -27% 12%
Trim $7 $5 $6 17% 56%
Capacitor $8 $12 $14 -40% -34%
Vision $4 $4 $3 43% -3%
ElecPkg $7 $5 $4 57% 34%
- TOTAL - $43 $41 $50 -14% 5%
% of Total
Mem Repair 40% 37% 47%
Trim 17% 11% 12%
Capacitor 19% 30% 27%
Vision 9% 10% 5%
ElecPkg 16% 12% 8%
- TOTAL - 100% 100% 100%
Source: Company reports
Cost Reductions Carry to the Bottom Line. The company continues to control
expenses, with a 9% headcount reduction in the current quarter, bringing
remaining headcount to 800 employees. These actions are expected to result
in annualized savings of ~$5M. The company continues to control
discretionary expenses as well, resulting in SG&A of 30.5% of revenues, down
from 35.5% in the previous quarter (which included a $700K bad debt expense,
or 1.7% of revenues). Margins showed some decline as a result of a higher
percentage of circuit fine tuning sales.
We take a closer look at the individual segments below:
Semiconductor Yield Improvement
* Continues to hold up in the quarter with revenues of $17.1M.
* Orders came from Samsung and SMIC during the quarter. No orders were
received in Europe this quarter.
* Non-traditional DRAM applications accounted for 20% of revenues and the
9820 accounted for ~66% of revenues.
* Company expects to see multi-unit orders in the second quarter.
* Continued transition to 300mm will drive the business, implying that the
company expects to see further orders from Samsung in 2Q02(Nov).
Capacitor
* Consumables business (plates, belts) continues to drive this segment,
accounting for more than 50% of revenues, up from over 40% in the previous
quarter.
* The company did not receive repeat capacity orders in Taiwan.
* Weak market conditions are leading the company to examine ways to reduce
its cost structure in this segment.
Packaging
* The company received an order for CO2 laser drills from China for high
density PCBs and some smaller orders from other customers.
* ESI indicated that utilization rates at its customers vary from 50-80%
depending on the customer; while customers with long term contracts are in
good shape, there is still significant underutilization in the industry.
* The company believes its market share in the CO2 part of the market is
showing some improvement.
Vision
* Major customer KNS has been downbeat with respect to outlook for the
quarter despite an order for 350 ball bonders received from ASE.
* ESI indicated that order guidance reflects KNS orders; however caution
expressed by ESI implies that there are no other major orders pending and
vision is expected to remain relatively flat at this point.
Circuit Fine Tuning
* Saw 56% revenue growth in the quarter with some continuing orders for
resistor trip equipment in addition to thick film trimming systems
Guidance is Surprisingly Upbeat. The company guided revenues to $42-44M,
flat with current quarter levels. EPS is expected to be in the range of
$0.02-0.04 and book-to-bill is expected to be around 1.0x. This implies
order growth in excess of 29% next quarter. ESI believes that an order run-
rate of ~40% is where the business is stabilizing. F3Q03 and F4Q03 are
likely to show continued EPS improvement due to restructuring activities.
Reducing Estimates. As a result of continued weakening in the end market
environment and lowered order expectations, we are revising our estimates as
indicated below. Our revised expectations also reflect cost savings expected
from restructuring in 1Q03(Aug) and beyond.
* FY03 revenues to $171.0M from $209.0M; EPS to $0.09 from $0.52
* Introducing FY04 estimates for revenues of $210M and EPS of $0.56.
BALANCE SHEET
ESI had cash and long-term securities at quarter end of $235.5M, or $8.44 per
share, an increase from the previous quarter. Cash flow from operations
benefited from a tax credit for research and development. ESI's current
ratio was 18.6x and its quick ratio was 14.41, versus the previous quarter of
17.08x and 12.83x. Book value declined slightly from the previous quarter to
$12.86 from $13.00.
Inventories days were at 250 down from 271 in the quarter prior as inventory
balances remained relatively flat. DSOs continued to decline, and were 122
days versus 133 in the previous quarter. The company indicated that most of
its receivables have dropped to under 180 days, with an aggregate of $7M in
revenues associated with extended credit terms beyond 30 days.
TAKE AWAYS
* In-line earnings combined with lower orders in the quarter resulted in
meaningful shipments out of backlog, limiting near term upside in
revenues. We believe that in a weak environment for the technology
industry, cost reductions will however sustain bottom line performance
at this juncture.
* Company's guidance indicates expectations of continuing orders from
Samsung in its upcoming quarter. We note that Samsung is the
remaining chipmaker with plans to place sizeable orders in FY2002. We
continue to believe that as industry conditions deteriorate, Samsung
will reduce its capex plans for 2002.
* ESIO is trading 1.24x book and 2.75x sales. Valuation is at 1996
trough levels and nearing 1998 levels, consistent with other equipment
stocks. However, given our expecations for continued negative
newsflow in the upcoming earnings season, we continue to believe
equipment stocks will be under pressure through earnings season.
VALUATION
At $15.98 ESIO is trading at 1.24 book, at its 1996 trough level and
nearing its 1998 trough level, versus its historical range of 0.4--7.4x.
Our target of $28 reflects a 2.2x multiple to book value of $13 per share.
This multiple of book value is the historical (1990-2002) average price to
book for ESIO. The stock is trading at 2.75x sales.
RISKS
* Cyclicality in the semiconductor equipment business is a function of
the long lead times to build a fab (18 to 24 months) and the commodity
nature of certain devices. Fab projects are often begun without a
clear picture of future profitability due to device price
fluctuations. As a result, periods of high investment are often
followed by periods of extremely low investment as chipmakers are
forced to reassess spending patterns against changes in expected
profitability.
* Capital investment patterns of semiconductor makers are highly
dependent on pricing and demand. Significant near term issues include
weak demand for semiconductors and goods that consume semiconductors,
in particular PCs (which account for half of all semiconductors
produced). Overall health of the economy will also factor into the
decision as a poor economic outlook will cause corporate IT spending
to be pushed out.
* While several chipmakers have committed to capital spending budgets
for the year and have ordered based on these budgets, there exists a
risk that budgets are reduced and orders cancelled as slower demand
results in less of a need to add capacity
* ESI, in particular, derives its revenue from 5 different businesses.
While the company has leading market share in many of these areas, the
small size of these markets (making the achievement of critical mass
difficult) does not always help to offset potential market volatility.
This creates the risk of misses in any given division in any given
quarter.
INVESTMENT THESIS
ESI has large and defensible market shares in three core markets--DRAM repair
(85% share), laser trimming systems (50%), and capacitor test and termination
equipment (60%). As such, ESI is exposed to the dramatic upside potential
inherent in these cyclical end markets. In addition to these strong
positions ESI is also targeting the market for high density interconnect
solutions. The ability to more closely pack electronics devices on a printed
circuit board is a critical enabler to smaller, enhanced-functionality
products. ESI's microvia drilling, miniature capacitor production equipment,
laser trim, and machine vision businesses are all beneficiaries of the trend
to smaller and denser PCB interconnects. ESI has successfully leveraged the
company's core competencies and global infrastructure to enter new growth
markets through acquisition or internal development. These include:
capacitor manufacturing equipment, video pattern and optical character
recognition.
COMPANY DESCRIPTION
Electro Scientific Industries, based in Portland, Oregon, is a manufacturer
of precision production equipment to the broad electronics industry. ESI is
the leading supplier of advanced laser systems used to adjust (trim)
electronic circuitry and improve the yield of semiconductor memory devices.
The company also produces high-speed test and termination equipment used in
high-volume production of miniature capacitors. Additionally, ESI produces
machine vision products and electronic packaging systems for manufacturers of
printed circuit boards, electronics and other products. |
