Q1 2004 Electro Scientific Industries, Inc. Earnings Conference Call
Boston, Oct 10, 2003 (CCBN StreetEvents) -- Event Transcript of Electro
Scientific Industries, Inc. conference call, 9-Oct-03 4:45pm ET.
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Corporate Participants
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* Wendy Stalman (ph)
Electro Scientific Industries, Inc. - Manager of Corporate Communications
* Barry Harmon
Electro Scientific Industries, Inc. - President, CEO, Director
* Michael Dodson
Electro Scientific Industries, Inc. - Chief Financial Officer
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Conference Call Participants
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* David Duley
Wells Fargo Securities - Analyst
* James Ricchiuti
Needham & Company - Analyst
* Brian Chin
Credit Suisse First Boston - Analyst
* Matt Petkun
DA Davidson & Company - Analyst
* Mike Loden (ph)
Merrill Lynch - Analyst
* Robert Toomey
RBC Dain Rauscher - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen. Thank you for standing by. Welcome to the ESI first
quarter earnings release conference call. At this time all participants are in a
listen only mode. Later we will conduct a question and answer session. The
instructions will be given at that time. If you should require assistance during
the call please press star, then 0. As a reminder this conference is being
recorded.
I would now like to turn the conference over to our host, Manager of Corporate
Communications, Ms. Wendy Stalman. Please go ahead.
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Wendy Stalman, Electro Scientific Industries, Inc. - Manager of Corporate
Communications [2]
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Thank you, good afternoon, everyone. With me today are Barry Harmon, President,
Chief Executive Officer and Director for ESI. And Michael Dodson, Chief
Financial Officer. This conference call will cover our first quarter 2004
financial results. Before we go into details of the call we will take care of
administrative items. You should have received a copy of our press release
including income statement, balance sheet and cash flow statements that go with
it. If you did not get it please refer to the investor relations section of our
website at www.esi.com.
I also need to give you the required Safe Harbor language for this call. Some
of what we may say will include forward looking statements concerning customer
orders, shipments, revenues, gross margin and operating expenses. These
statements are subject to the Safe Harbor provisions of the Private Litigation
Reform Act of 1995. These statements include a number of risks and uncertainties
that are dicussed in more detail in today's press release and our filings with
the SEC. Actual results may differ materially from those forward-looking
statements. This call also contains time sensitive information that we believe
to be accurate today, October 9th, 2003, and which could change in the future.
This call is the property of ESI.
I will now turn the call over to Barry Harmon for some opening remarks.
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[3]
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Thank you, Wendy. Welcome every one to our first quarter conference call. Last
August I spoke to you about the Board's efforts to establish direction, and
leadership for the company.
Today, I am pleased to announce promotions for three individuals to officer
positions. Gary Delvecchio, as Vice President of Operations, Steve Harris as
Vice President of our Semiconductor Group. Steve Vickers as Vice President of
our Electronic Interconnect Group. Kerry Musto also joined ESI as Corporate
Controller and Chief Accounting Officer a key position in the Finance
Department. The board also promoted J. Michael Dodson to Senior Vice President,
Bob Chamberlain to Vice President of Customer Operations. Keith Taft continues
his job as Vice President for our Passive Components Group. Edward Swenson
continues as Senior Vice President of Research and Development.
The tone of our business dramatically improved during the quarter, particularly
in the semiconductor and electronic connect group. The passive component group
business was steady compared to the prior quarterer. Mike will discuss our
financial results in detail, but I would like to draw your attention to our
increased order growth of 67% over the fourth quarter. Shipments grew by 29%,
the deferred revenue balance on August 30th increased to almost 22 million.
I will now turn the call over to Mike Dodson to discuss our financial results.
After Mike's comments I will discuss the future guidance and business
environment.
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[4]
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Good afternoon. Thank you, Barry.
I would like to summarize the key financial points for the first quarter of
fiscal 2004. The highlight for the quarter was a significant increase in orders.
For the first quarter, orders were $43 million, which represent an increase of
67% over the prior quarter, and an increase of 36% over the first quarter of
last year. We believe this momentum in order growth will continue during the
second quarter. The significant growth in orders resulted in backlog of $24
million at the end of the first quarter compared to $11 million at the end of
the prior quarter. Over 75% of the ending backlog is expected to ship next
quarter. Revenues for the first quarter were $21 million, compared to $23
million in the prior quarter. $39 million in the same quarter of the prior year.
Although revenues declined by 7% sequentially, shipments were $31 million and
represent an increase of 29% over the shipments in the prior quarter. Similar to
the increase in orders, the increase in shipments can be primarily attributed to
the semi
conductor and electronic interconnect groups.
On a geographic basis, just over 2/3 of our shipments went to Asia over the
last two quarters and the increase in the current quarter can be primarily
attributed to greater China and Korea. The difference between the third quarter
shipments in revenues represents deferred revenue. As a result the deferred
revenue account on the balance sheet increased to $22 million at the end of the
quarter compared to $13 million at the end of the prior quarter. The increase in
the deferred revenue during the quarter was primarily due to shipments of new
products to a few of our largest semiconductor customers. Revenue is deferred on
shipments of new products until acceptance has been received. It is important to
note that we expect the majority of the deferred revenue to be recognized by the
end of our current fiscal year. Approximately 85% of a deferred revenue balance
at the end of the quarter represents semiconductor group shipments.
Gross margin increased during the third quarter from 23% to 3% in the prior
quarter but was lower than the 40% in the same quarter of the prior year. Gross
margin in the third the prior year. Gross margin in the third quarter although
improved from the prior quarter is still well below historical levels primarily
due to reduced production levels to absorb factory overhead and product mix.
Historically the semiconductor group has contributed strong margins because
semiconductor revenues were less than usual, there was a negative impact on
margin.
In the area of operating expenses, we are beginning to realize the benefits of
our cost containment programs. Excluding the $10 million asset impairment
recorded in the prior quarter, operating expenses declined nearly $3 million to
$20 million in the current quarter compared to $23 in the prior quarter.
Severance costs with head count reductions as well as professional fees related
to incremental accounting and legal costs of $3 million were incurred in each of
the last two quarters, excluding these special charges, we believe we've reached
a normalized operating expense run rate. This assumes there will be no
significant change in the operating levels of the company. Prospectively, we
expect to continue to incur additional professional fees associated with the on
going securities litigation activities.
Our balance sheet continues to remain strong. Our cash and investments have
decreased from a total of $308 million at the end of the prior quarter to $298
million at the end of the current quarter. This decrease was primarily due to
the net loss we recorded.
In summary, we enjoyed a healthy increase of orders and shipments during the
current quarter and expect these positive trends to continue during the second
quarter. We believe we have taken the required actions to size the company
appropriately and take advantage of the upward trends in the business
environment. In addition, as business levels improve, we believe we will return
to more historical gross margin levels as well as profitability.
I will now turn the call over to Barry to give you an update on ESI's business
environment.
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[5]
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Thank you, Mike. As Mike has outlined, the order environment is strong. It is
clear there is a widespread recovery. We have geared our expense ratio so that
we will be profitable at about $165 million in annualized sales. We expect
revenue to be in the mid $30 million range in the second quarter, with
significant increases possible in the third and the fourth quarter as we
recognize previously-deferred revenue.
The timing of delivery and customer acceptances will affect revenue recognized
over the next three quarters. Historically, gross margin at ESI has been much
higher than the 23% we reported this quarter. Factory overhead as a percentage
of sales remained higher than normal. However, given a typical product mix,
quarterly sales in the low to mid $50 million range will generate a gross margin
in the low mid to 40% range. That is current operating expense levels excluding
severance and incremental legal costs, combined with sales in the low $40
million range, should generate break even results. We expect cash to decrease as
we build receivables and inventory during this period of recovery.
Finally, I want to comment on the search for my successor. The search has just
begun. There is no meaningful information to report to you today. The Board
search committee expects to be active during November and December.
Our next conference call will be in mid-January, 2004. This concludes our
prepared remarks. We are now ready for questions, Lori.
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Questions and Answers
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Operator [1]
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Thank you. Ladies and gentlemen, at this time. If you would like to ask a
question, please press star, then 1 on your touchtone phone. You will hear a
tone indicating you have been placed in queue. You may remove yourself from the
queue by pressing the pound key. If you are using a speakerphone, please pick up
your hand set before pressing the numbers. Once again, if you do have a
question, please press star 1 at this time. Our first question is from the line
of David Duley with Wells Fargo. Please go ahead.
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David Duley, Wells Fargo Securities - Analyst [2]
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Good afternoon. I was wondering, could you just address a little bit on the
revenue recognition issues. I understand, you know, you kind of look at the
deferred revenue balance, increase there plus your revenue probably gets us to
where the street models were. Help us understand kind of what the revenue
recognition issues are. You know, why the deferred revenue balance went up so
much this quarter.
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[3]
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Well, Dave, the deferred revenue increase during the current quarter is
primarily related to the shipment of new products to our semiconductor
customers. These new products, until they are at the customer site currently,
until they are accepted by the customer, we will defer the revenue. The mix
right now is weighted towards the new products. So we have incurred more
deferred revenue during this period than you would typically expect.
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[4]
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Dave, this is Barry, just to add a little bit. Our policy is to wait until we
have a pattern of acceptance on new products. We are trying to follow that
faithfully.
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David Duley, Wells Fargo Securities - Analyst [5]
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So, with the experience of revenue recognition on some of the products get
better in future periods than it is currently? --in other words, as you get more
experience in what it is customers want, to sign off on acceptance, will the
time it takes to accept them and products shrink?
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[6]
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Absolutely.
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David Duley, Wells Fargo Securities - Analyst [7]
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Great. One other thing, I just want agents explanation on the balance sheet,
line item called ship systems pending.
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[8]
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Yes.
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David Duley, Wells Fargo Securities - Analyst [9]
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What exactly is that?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[10]
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That is basically the inventory piece of the deferred revenue.
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David Duley, Wells Fargo Securities - Analyst [11]
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So that is the cost of the deferred revenue?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[12]
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Yes.
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David Duley, Wells Fargo Securities - Analyst [13]
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So I could take deferred revenue, subtract that, get like mid-40% gross margin
over the last three quarters, that kind of tells you what margin levels deferred
revenue is holding when it is recognized?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[14]
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That is exactly correct.
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David Duley, Wells Fargo Securities - Analyst [15]
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So you have 33 million of --deferred revenue to be booked that has an average
gross margin of 44%?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[16]
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That's correct.
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David Duley, Wells Fargo Securities - Analyst [17]
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Could you give us a little more clarity, you know, you gave lots of things in
your prepared remarks, I was writing so fast I didn't get to think about them as
much as I like. Orders being up 67%, that is truly a break out quarter. What was
the strength, I know you don't break it out as far as business segments. What
segments, you only have three segments now, can you rank them as far as the
increases go?
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[18]
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The semiconductor has the strongest interest.
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David Duley, Wells Fargo Securities - Analyst [19]
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Okay. That would be followed by drill, then capacitor?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[20]
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Yes.
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[21]
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Yes.
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David Duley, Wells Fargo Securities - Analyst [22]
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Could you repeat your comments about break even levels of revenue, I am
assuming that is in the low $40 million range?
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Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
[23]
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Yes.
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David Duley, Wells Fargo Securities - Analyst [24]
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What was the margin you associated with the break even level of revenue?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[25]
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In the very low 40% kind of range.
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David Duley, Wells Fargo Securities - Analyst [26]
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Okay. So low 40% margins along with low $40 million revenues get you to break
even?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[27]
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Right.
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David Duley, Wells Fargo Securities - Analyst [28]
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Okay. If you had to guess, final question from me, I will give it to somebody
else, I know there is probably a lot. When you talk about order momentum
continues, I imagine that means that you expect orders to grow sequentially once
again. Can you take a guess, is it going to be flat, up 5, up 10? Is there any
sort of range there?
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Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
[29]
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I feel reluctant to give you a specific number. We feel very comfortable that
there will be an increase.
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David Duley, Wells Fargo Securities - Analyst [30]
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Okay, great. Thank you. |
