Matt Petkun, DA Davidson & Company - Analyst [85]
--------------------
Good afternoon. Mike, really quickly could you break out again the costs and
operating expenses that you saw as kind of one time associated with
restructuring, also, legal expenses?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Yes, over the last two quarters, we have incurred approximately $3 million, in
each of the quarters, associated with first some reduction in workforce, we have
some severance, related costs, also the additional accounting, legal costs that
we have incurred.
--------------------
Matt Petkun, DA Davidson & Company - Analyst [87]
--------------------
Okay. Looking at your revenue run rates, assuming that you look to sustain
them, this will be the first time you have run R&D sustainable really below $6
million. You haven't really done that since the 96-'s 97 time frame. Is that
enough going forward, Barry, if you could help us understand what some of the
new R&D projects are in the works or at least new product developments that you
are excited about, want the street to be excited about as well?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Sure. Well, first of all, we really do believe that the amount of aggregate
investment we have in R&D makes sense given our expectations about revenue and
margin in the future, and the project that we are undertaking. I am sure you
guys would like to add a few more resources, but given the overall balance here,
some of the head count reductions we have made in the last four-months, I
believe that the R&D investment makes a lot of sense here. We are really working
on product development. Some evolutionary, some new areas, in every one of our
business areas. So there is no one product that I think is, you know, that I
mentioned to you as something that is going to be significant, sort of like the
pharmaceutical industry, where you have a particular drug. I think the most
important thing I could say, every one of our business areas have new
development projects going on, they are all prioritized. We are trying to work
them in priority order. I feel like at the end of this fiscal year, we will
really be in very
good shape in terms of our product offerings in every one of our businesses.
--------------------
Matt Petkun, DA Davidson & Company - Analyst [89]
--------------------
Okay. Then one more question. You guys have clearly spent a lot of time looking
over kind of your revenue recognition processes. I don't want to belabor it, but
can you help me understand, are all of your deferred revenues shipped or, I
could also ask the question, when do you typically collect? Only after shipment?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Okay, let me kind of give you an overview. When all of our deferred revenue
represents shipments that have been made.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
So look at our balance sheet. We see $22 million of deferred revenue. That
represents tools that are at our customer site, going through a process of
acceptance. Once we receive acceptance, then we will recognize revenue. The cash
piece of it, accounts receivable piece, for example, at $22 million, we have
collected well over $10 million on that, those receivables already. So, there
are two different streams, revenue, actual cash.
--------------------
Matt Petkun, DA Davidson & Company - Analyst [93]
--------------------
Okay, okay. That makes sense. But how often would you collect ahead of
shipment, what portion? Really, when we are thinking of kind of a time line of
these systems, once these systems, especially in the semiconductor market, have
been shipped, you know, accepted once by a customer, what would be your goal for
revenue recognition on another order?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Well, I think our activity in the last few quarters been--has been centered on
new products. It is a little bit of an anomaly, the time frame we are in
currently. We believe this deferred revenue is a bit of a bubble. We would
expect that it would settle down by the end of the fiscal year. Although it is
material to our operations today, on a go-forward basis, once we have an
acceptable track record, a track record of acceptances, we get more into the
mode of recognizing the revenue upon shipment, because we have true and tried
products. Before we ship them, we run all the tests here, the customers sign off
on them. So at this current stage, when you look at deferred revenue, these are
new products that the customer is trying, testing in the field. So it is kind of
a--it is a different time for the company, it is reflected in our large deferred
revenue balances.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
The other sub point, in terms of one of your questions, when do we receive
cash? Do we ever receive cash before we ship a product? There are times in the
business cycle where people will put down deposits, usually that is towards the
peak, in very rare circumstances we will ask the customer for a deposit
depending on the nature of the product they are ordering. So it is a rare thing.
I don't believe our customer deposit balance is a material number at this stage.
James Ricchiuti, Needham & Company - Analyst [99]
--------------------
Yes, thank you, just another question on the professional expenses that you are
incurring. Mike, I wasn't sure if you have any comments about what to expect
going forward in that area.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes, that's a tough one, it depends on the litigation process. What might they
transpire there. I feel comfortable in saying that, you know, $3 million figure
is probably the top end of what we might expect to incur this quarter. It could
be considerably less than that. We have resolved all of our accounting, special
accounting kind of charges, all of the forensic accounting work is done now, so
that has gone away. There is some on going litigation and regulatory body work
that we are doing. It is at a much lower pace than we incurred during the
summer. Then we will have a bit of residue from the head count reductions,
severance pay in this quarter. So I would say probably $2 to $3 million is a
pretty good range there.
--------------------
James Ricchiuti, Needham & Company - Analyst [101]
--------------------
Thanks. One other question, I wonder if you can comment on what you are seeing
in terms of is--pricing across your product lines?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes, I tell you, that is a great question. I think we are seeing sort of A to Z
in terms of experience in some places, where we have very good relationships,
very good products, while we are always getting pressure, I think the
environment is very, very healthy from a relationship of our material cost, the
engineering effort, it took to build our products to the AOCs, the semiconductor
industry right now is probably our strongest product market situation. In the
passive components area, the products that are leading edge have new capability
in them, have good margins, we are not--capability, not pricing, in more of the
commodity product or product that--where we don't have strong capability or
features, we are getting some pressure. That--same true for the electronic
interconnect group. But as I said, I think we are in a major refresh mode in
terms of all of our products, in all our business areas. I think by the end of
this fiscal year, we are going to have strong market positions. So I think we
have been
in pretty good shape, actually.
--------------------
David Duley, Wells Fargo Securities - Analyst [105]
--------------------
Could you give the geographic break down of your revenue and your orders?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Sure. Mike gave you just a shipment summary. I don't know if you want to file
through with your data.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
The revenue -- let me see here.
--------------------
David Duley, Wells Fargo Securities - Analyst [108]
--------------------
You know, if you just gave shipments, why don't you just go over the shipment
numbers again. The number I am most interested in, frankly, is the order number.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Well, let me try to triangulate this for you. When we-- an increase in
shipments as far as the semiconductor, in interconnect markets. Then when we
describe the increase, the geographic split of the shipments, you could pretty
much overlay that with the orders as well. What we said about the shipments, 2/3
of our shipment, geographic basis went to Asia over the last two quarters with
the increases primarily in China and Korea.
--------------------
David Duley, Wells Fargo Securities - Analyst [110]
--------------------
I guess, what I was trying to figure out was a question that was asked some
time ago, you have major D ram expansion taking place in Taiwan with INSINION,
in fact, you have a couple of going on there, major expansion in fact in Japan.
I frankly haven't heard you guys talk about that in markets, you brought out
your strength in shipments, in China, Korea, China I imagine is mainly the drill
business. I am just trying to figure out are there other orders to come out of
Taiwan, Japan, that would, you know, increase your memory repair side of
orderings?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
We are certainly aware of the opportunities that you are alluding to, but those
orders have not been let yet.
--------------------
David Duley, Wells Fargo Securities - Analyst [112]
--------------------
That's what I was trying to figure out. Did they go to somebody else? They
haven't been given to anybody. Your guess is you would get your fair share
whatever your percentage of the D ram share is of those customers?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
I would say unfair share.
--------------------
David Duley, Wells Fargo Securities - Analyst [114]
--------------------
Ok , great. The last share numbers that, you know, we all had, just to clarify
this. There was some speculation that GSI Lumonics had taken some share of the D
ram business, and that your share went from $80% to 70%. Would a number around
75 to 80% be comfortable for you.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
It is hard to say, Dave- I have not seen anybody's independent market share
information for this year. I don't know that it exists on an interim basis, if
we will be doing it at year end. I think we have a very high market share in
this business. Certainly very strong major relationship with major player
spending money this year. It will be a significant market share. I don't know if
it is 75, 80 or 83%.
--------------------
David Duley, Wells Fargo Securities - Analyst [116]
--------------------
Let me ask this slightly difference way. Has your--are you confident your order
rates are going to grow again must be in part because you have pretty good and
two or three expansion projects have not hit your order book yet?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Yes.
--------------------
Mike Loden, Merrill Lynch - Analyst [120]
--------------------
This is actually Mike Loden for Brett Hodess. Couple of follow up questions on
the semiconductor segment. Could you talk about the transition to DDR 2? How
that will play out on the products that you offer. Second question, just a
cleanup if you could talk about what your Cap Ex was for the quarter and what
your predictions are for the rest of the year. Thank you.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Tell--let me deal with the Cap Ex quickly, it was $510,000 this quarter. We
have one pro that is going to incur, second quarter may spill into the third
quarter. I expect our numbers to go up to $1.5 million, potential $2 million in
this quarter. Then they will go back down to 500 to 750,000 for the third and
fourth quarter, unless there is something that comes up that has not been
approved yet. In terms of, you know, specific memory devices that people are
producing, I'm sorry, I don't have any specific information on DDR 2. I know our
products are capable of dealing with all of of the--of the current and next
generation designs that people have and otherwise people, companies wouldn't be
starting additional facilities and ordering our equipment.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [126]
--------------------
Sorry, I am traveling this week, I am in Denver, I got in the call late, I
apologize if I cover something you repeated earlier. Did you mention what
percentage of your revenue in the quarter came from what you would consider new
products?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
We didn't. We are in a situation, Bob, where most of our new products are in
deferred revenue.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
So very few of our sales this quarter would be qualified as new products from
that perspective. Deferred revenue grew substantially from $13 to $22 million,
it is safe to say that all of that is new.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [130]
--------------------
Are those some of the new products, Barry, that you were alluding to earlier in
the call where you are not--you feel--you are not ready to book as revenue yet?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [132]
--------------------
Okay. Most of that is new product?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [134]
--------------------
Okay. The orders in the quarter, you mention a number in the press release
here, 67--67% increase in orders. Again, I apologize for not being on the call
earlier. Can you give a little bit of color about what was really driving that?
Was it mostly semi, interconnect as you mentioned in the press release?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes, both of those groups were really strong for us.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [136]
--------------------
Why do you think that is the case?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Well, some of the discussion of the call has transpired, we have key customers,
particularly in the semiconductor area, that are making substantial investments,
some of which have been announced, some of which have not been announced as of
yet.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Then the interconnect business seems to be heating uptick in the flex market
for small VIA sizes. The passive components business is very steady. However,
there is still some overcapacity in the I can capacitor business.
Therefore--ceramic capacitor business, hasn't shown a lot of growth
sequentially.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [140]
--------------------
With respect to the passive business, is there anything new there with respect
to your competitive position, do you feel that the investments that you are
making in the passive business is going to keep you in technology, market share
leadership there?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Yes, we have been, the passive business end, really is our old circuit fine
tuning group, the ceramic capacitor termination and test systems, as well as
consumables, it is a real mixed bag in terms of applications, product positions.
I would say that we have tried to focus, we prioritized our engineering efforts
on the areas that need attention, testing, particularly for ceramic capacitors,
as well as visual inspection equipment for our ceramic capacitor business. Those
two areas are very exciting for us. I think we are doing quite well there. So,
it is a combination of trying to hit, you know, amass your resources,
priorities, to the markets that seem to be strong.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [142]
--------------------
Great. One last housekeeping question. Do you know what depreciation and
amortization will be for the full year?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
It will be about $10 million.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
The number was $2.4 million for this quarter. It shouldn't--it will increase in
the second half but not much.
--------------------
David Duley, Wells Fargo Securities - Analyst [149]
--------------------
Do you expect your deferred revenue balance to go up or down in the November
quarter?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
At this point, we probably expect that balance to go up.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Just to add, Mike, mentioned it, but I want to emphasize it. In the third,
fourth quarter, we would expect that balance to go down.
--------------------
David Duley, Wells Fargo Securities - Analyst [152]
--------------------
Okay. So, your revenue guidance in the November quarter, I guess, like mid 30,
what--you said. I guess in your thinking you are not expecting a lot of that
deferred revenue to shake loose. Is one way to say it you will go from $20
million to $35 million mostly with shipping old products with new products still
going into a deferred revenue balance?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Yes. If we believe that our deferred revenue will increase, then shipments will
drive our revenue for the quarter.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Shipments of product that is have qualified for immediate recognition.
--------------------
David Duley, Wells Fargo Securities - Analyst [156]
--------------------
I guess what I am trying to figure out. You have just guided us to a pretty
significant top line increase but that is without the deferred revenue starting
to really hit that top line increase.
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Correct.
--------------------
David Duley, Wells Fargo Securities - Analyst [158]
--------------------
So in the near term, it is just selling older products, top line, soon you will
be selling older products plus some of the new products that are in the deferred
revenue balance?
--------------------
Michael Dodson, Electro Scientific Industries, Inc. - Chief Financial Officer
--------------------
Yes, older doesn't mean bad, it just means that we have qualified them for
immediate recognition for SAB 101 purposes.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [162]
--------------------------------------------------------------------------------
Yes, one other question. I know--you addressed the cost issues with respect to
the questions on the break even. But I wondered if you could comment with look
at your gross margin, to get back to, you know, the low to mid 50s on that, if
so, how would you do that. Or, I will put it another way. What do you think will
be the most important factors in allowing you to improve your gross margin?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Well, first of all, I think the most important factors are are increased
volume. We have done a good job of managing our factory overhead, spending to a
level that we think is prudent, given the sort of expectations for business over
the next three quarters. So the increase in volume that we have been talking
about, in orders, deferred revenue, will drive increased gross margin as we just
put more assistance through our factory floor on I fixed overhead base. So that
is one. In terms of our goals, at the moment, you have got to realize where we
came from, our fourth quarter of last year, we had gross margin of 3%, this
quarter was 23%. I am focused on, you know, getting it to about double where it
is today. Then be able to comfortably talk about where we want to take it in the
future, but--I think we have a very, you know, a very defined path to get it
from 23 to low to mid 40% in terms of growth in the business, maintaining our
factory overhead spending at about where it is today.
--------------------
Robert Toomey, RBC Dain Rauscher - Analyst [164]
--------------------
How about mixed--how does mix factor into that?
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
We would expect--this quarter had sort of a negative mix from a margin
perspective. We would expect as semiconductor tools become a higher percentage
of total sales that we would have an increased margin based on just mix.
--------------------
Barry Harmon, Electro Scientific Industries, Inc. - President, CEO, Director
--------------------
Thank you very much. We are very pleased that you guys were able to join us
today. We welcome any further inquiries that you may have. Operator. You could
read the recall or replay information for us. |
