Q3 2003 Electroglas, Inc. Earnings Conference Call
Boston, Oct 23, 2003 (CCBN StreetEvents) -- Event Transcript of Electroglas,
Inc. conference call, 23-Oct-03 2:00pm ET.
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Corporate Participants
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* Curtis Wozniak Electroglas, Inc. - CEO
* Thomas Brunton Electroglas, Inc. - CFO
Conference Call Participants
* Edward White Lehman Brothers - Analyst
* Mehdi Hosseini Soundview Technology Group -
* Eric Salzman DKR Capital - Analyst
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Presentation
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Curtis Wozniak, Electroglas, Inc. - CEO [2]
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Okay, thank you. Hello, everyone. This is Curt Wozniak, CEO of Electroglas. I
would like to welcome you to our third fiscal quarter of 2003 conference call.
Joining me on the call this morning is Tom Brunton, our Chief Financial Officer.
Our agenda for this morning is as follows. I'll start with an overview of the
past quarter and some comments on recent actions we have taken, Tom will follow
with some additional detailed financial comments, and then I'll close with an
update on operations and products. We'll then open up the line to questions you
might have. First, in line with the Safe Harbor rules, let me remind you that to
the extent that this conference call contains financial projections, information
or other expectations about our products or markets, or otherwise makes
statements about the future, our statements are forward-looking, and are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from statements made. These factors include, but are not limi
ted to, the overall economic environment, future capital expenditures for
semiconductor companies, timing of orders received, the timely availability and
acceptance of new hardware and software products, the costs associated with new
product introductions, enhancement of existing products, the introduction of
competitors' products having technological and/or pricing advantages, the
ability to close transactions when indicated and other risks detailed in the
Electroglas Form 10-K that has been filed in connection with the 2002 fiscal
year.
As you can see from our press release this morning, revenue for Q3 increased by
5 percent from Q2, to $10.8 million, in line with the guidance we provided last
quarter. Net loss under GAAP -- or generally accepted accounting principles --
for the quarter was $3.5 million or 16 cents per share. This was a significant
improvement from the $15.8 million net loss under GAAP in Q2. Now, both quarters
contained a number of one-time events, so we provide a non-GAAP measure to aid
in comparing the quarters. In particular, in Q3, we had both restructuring
charges and a gain on the sale of our software business to FEI during the
quarter. Tom will give you additional detail on these items later in the call.
Not including the one-time events, our net loss for the quarter was $7.6
million, or 36 cents per share. This is an improvement from Q2, as the cost
reductions we have completed began to have some effect. Of course, the biggest
impact of these reductions will be in Q4, the current quarter, as we get the
full benefi
t on the expense line.
Now, overall, business in the quarter continued to improve steadily but slowly.
Bookings in our ongoing prober business improved about 4 percent during the
quarter, as we continued to see improved business conditions in our customer
base. This does compare favorably with the 8 percent decline in bookings seen in
the semi express report for the overall test and assembly sector, so we seem to
be holding our own there. Overall, the semiconductor industry continues to
improve, in both unit volume and revenue, as the general economic recovery
continues to be sustained. Overall, I see unit volumes in our customers are now
at about 95 percent of peak volumes reached in the year 2000. We see customers
beginning to reach capacity limits, as their unit volumes approach their peak
volumes reached in the year 2000. In some cases, customers are already at those
peak volumes, but have made productivity improvements that allow them to produce
greater volume with the same installed capacity.
In previous cycles, customers would begin to add capacity prior to reaching
capacity limits, but I think this cycle is somewhat different. And the last
three years of downturn in the industry has caused companies to be companies to
be very cautious about adding additional capacity. They are definitely pushing
for greater productivity out of their installed assets, and are waiting to add
capacity until the last minute. Since this is also the fourth quarter, for many
companies, they are holding off until the beginning of the fiscal year to free
up capital money, unless they really must move forward to support revenue. So I
do see that the rubber band in our customer base is tightening, and we could see
many customers running out of capacity very soon, if economic conditions
continue to improve and unit volumes continue to grow.
During the quarter, we also made significant progress on the restructuring and
refocusing of Electroglas that we announced earlier in the year. On July 15th,
we announced the sale of our CAD navigation and fab-wide yield management
business to FEI for $6 million. We retained the software technology related to
the test floor that has become a critical part of our net prober product, which
was announced this last quarter at Semicon West. In addition, we made
significant reductions in our expense structure and headcount during the
quarter. We were able to reduce our overall headcount by about 27 percent,
exceeding the goal we set of 25 percent last quarter. Since much of that
reduction took place during the third quarter, we did not see the full benefit
on the expense line as of yet. But we will get significant benefit during the
fourth quarter. Operating expense in the fourth quarter should decline at
approximately an additional 15 percent from the third quarter prior to any
restructuring charges in the third
quarter. These reductions and actions will significantly reduce our cash usage
during the fourth quarter. We are still striving to reach a cash flow neutral
position by the end of the year. Our success will depend on the order rates and
delivery requirements from our customers. We do expect that cash usage in the
fourth quarter will be low at this point, and Tom will explain that in his
comments and projections.
At this point, let me turn the call over to Tom for a more detailed discussion
of the financials from last quarter and the outlook.
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Thomas Brunton, Electroglas, Inc. - CFO [3]
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Thank you, Curt. Now, a recap of the completed quarter's results. Revenues for
the third quarter were 10.8 million. This was up 5 percent from the second
quarter, and 8 percent down from the third quarter of last year. Revenues were
within the $10 to $13 million guidance range provided in the last call. The
geographic sales mix for the quarter showed improvement from Q2 levels in Asia
and North America, while Europe declined from the second quarter.
The geographic sales mix for the quarter was as follows -- 36 percent from
North America; Europe, 15 percent; and Asia/Pacific, 49 percent. As noted in
last quarter's call, the Company has restructured its business operations from a
divisional to a functional reporting structure, with a refocused business
strategy to our historical position of selling hardware and software software to
the test floor. Gross margins were at 3.0 million, or 27 percent for the
quarter, versus negative margins for the previous quarter.
Now, to operating expenses. Third-quarter R&D spending was 4.4 million, down
from 6.5 million in Q2. This was due to the continued headcount reductions
during the quarter and reduced outside service expenses. As I noted in last
quarter's call, and as Curt has also noted, we sold on July 15th certain
software product lines to FEI Corporation, and they assumed responsibility for
our India software engineering staff and our India leased facilities. This sale
was a big reason for the $2.1 million drop in R&D spending from the prior
quarter. SG&A expenses were 5.7 million for the quarter, down from 7.2 million
in Q2. This reduction was primarily due to reduced personnel costs and lower
outside service expenses.
In summary, for operations, the Company recorded a loss for the third quarter
of 3.5 million, or 16 cents per share, as compared to a loss of 15.8 million or
74 cents per share in Q2. Several unusual items occurred in the third quarter in
our P&L, as Curt mentioned -- the restructuring charges of 1 million associated
with headcount reductions, a gain of 6.4 million on the sale of software product
lines assets to FEI Corporation and a $1.3 million fixed asset write-down. The
operating loss, on a non-GAAP basis for the quarter, would have been 7.6
million, or 36 cents per share, without these items.
Some additional statistical information that we normally provide during the
call. Capital spending was negligible during the quarter. Depreciation and
amortization was 1.8 million. Our quarter-end headcount ended at 270; this is
down 102 people from 372 at the end of the second quarter..
Turning to the balance sheet, our cash decreased 4.7 million from Q2 levels.
Our cash investment balance at the end of the quarter was 32 million. In the
receivables area, trade receivables decreased 2 million from Q2 levels to 12
million at the end of the quarter. This was a result of improvement in DSOs in
Asia. Looking at inventory, balances reduced 1.4 million from Q2 levels to 22.1
million. Our shareholders' equity was 66.7 million at quarter end, or
approximately $3.13 per share.
Now, some notes about what we see in Q4. Before I make these forward-looking
statements, I'd like to call your attention once again to Curt's introductory
remarks on the Safe Harbor rules. Our Company policy is to provide guidance only
once per quarter, during the quarterly earnings call. We do not update guidance
until the next scheduled call. No one should assumed later in the quarter that
this guidance is still valid. Our current guidance for the fourth quarter -- we
expect order levels to improve over Q3 levels. We expect that revenue will in
the $11 to $13 million range. We expect cash to decrease 3 to 4 million in Q4
from Q3 levels. We expect to continue to reduce our operating expenses, as Curt
indicated, from Q3 levels. And also noting that we are continuing to seek
financing on our San Jose campus facility, and expect to conclude this project
during Q4.
This concludes by formal remarks, and now I'll turn it back to Curt.
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Curtis Wozniak, Electroglas, Inc. - CEO [4]
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Thanks, Tom. I'd like to make a few other comments for you on our operations
and products. You might remember that during the third quarter, we introduced
the net prober at Semicon West show in San Jose; this was in July. Net probing
takes the concept of automatic wafer probing to another level by incorporating
the software applications that run on the network of smart probers that are
designed to work with that network. The net probing applications allow customers
to more efficiently run their test floors, by providing information, analysis
and control to operators, engineers and managers running a test area. In an era
of continuing pressure to improve return on capital assets, these applications
have a lot of appeal to customers. The net probers make it easy for customers to
get this capability by providing this prober software, sort floor controllers,
network applications and installations to make all of this work. We have now
released the 200 mm and 300 mm versions of our net prober capability, and are
in the process of installing it at a number of customers. These floors have
anywhere from 1 to 100 probers. We have received very positive feedback on the
packaging of these concepts, the capability and the simplicity of ordering this
overall environment.
On the 300 mm front, we have continued to make good progress with the product
in the customer base. Since our last conference call, when we indicated we had
several new customers installing the product, we have completed the acceptance
process at a number of these. These occurred in Q4, so we will see revenue for
that this quarter. We now have over 15 customers for our 300 mm prober.
Now, last quarter, we also introduced our version of a new strip handler, based
on our 300 mm wafer probing platform, for testing package devices that are still
in strip form. This is before they've been cut apart or simulated (ph) in the
normal process for testing. This system provides significant throughput
improvements to customers moving to testing devices in this format. We
successfully completed a beta test with a customer in Europe; the product
performed as the customer expected, and we were very pleased with the results of
this. We still expect the product to be in production evaluations by the first
quarter of 2004. This market is estimated to grow at over 50 percent per year
for the next five years by VLSI research, fueled by the CSP, or chip scale
package technology, that's growing at over 25 percent per year.
In summary, we have made tremendous progress in our strategy to refocus and
restructure Electroglas. We are solidly focused on the wafer prober market, and
on additional opportunities on the test floor, with network applications like
net prober and the emerging test technologies in the strip test market. These
products are targeted at helping customers drive test costs lower. We have shed
the other businesses to allow us to focus and reduce our operating expense
structure. Now, as well, we have significantly reduced our headcount expenses to
allow us to reach cash flow breakeven and return to profitability. While we
don't think we will be able to achieve this in the current quarter, all signs
point to 2004 being a recovery year. We see tightening capacity at customers,
capital budgets increasing and a general recovery occurring. Given all this, we
do expect that 2004 will be a much better year than 2003. We are moving into a
time where we have the core technology and the new products in place to take
advant
age of this improving environment.
With that, let me stop and open the line to questions you might have.
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Questions and Answers
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Operator [1]
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(OPERATOR INSTRUCTIONS). Edward White, Lehman Brothers.
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Edward White, Lehman Brothers - Analyst [2]
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A two-part question. First, can you talk about what your outlook might be for
the gross margin for the fourth quarter?
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Thomas Brunton, Electroglas, Inc. - CFO [3]
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Sure, Ed. As I indicated before, our margins for Q3 were 27 percent. That
included some sales of the software business in the early part of the quarter,
which is really nonrecurring. But I think our current mix in our forecast is
more on the low 20's percent range and our volume levels that we've indicated in
the call.
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Edward White, Lehman Brothers - Analyst [4]
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And then, secondly, when you look at the net prober product, can you profile
the type of customer that can benefit from that the most? You've got sort floors
that are of all different varieties and all different scales. What's really the
target market here, in terms of the size of the sort floor?
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Thomas Brunton, Electroglas, Inc. - CFO [5]
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The type of customer, to be honest right now, is mostly our installed base of
people that have a lot of Electroglas probers, primarily of the 8-inch variety
or the 4090 vintage, as well as the new 300 mm test floors. As I indicated, we
have customers that are interested in these type of applications for anywhere
from one machine in the test lab, where they want to be able to remotely analyze
results that are going on with that prober, say, from another site or from home
or from their office, versus going into the lab, to one customer that has over
100 machines on their floor, 100 probers on their floor; they want to use it to
control wafer maps, drive the process and completely control the process and
continue to improve their productivity. I would say, on average, you'll see
installations of 40 to 50 machines is really the target market, where you can
have a single, very highly capable server or sort floor controller managing all
that data. These machines are all connected real-time to the database; they a
llow all wafer maps, which is the results format coming out of the machine, for
the yield to be stored and monitored and passed on to further down the
production process. So on average, I think they will be 40 to 50 unit type of
installations.
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Edward White, Lehman Brothers - Analyst [6]
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And when is the first time when you think you might be able to get production
revenues on Sidewinder? What sort of timeframe do you see for that?
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Thomas Brunton, Electroglas, Inc. - CFO [7]
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Right now, what we expect is that that will probably occur in the first half of
'04, probably toward the latter half. We have a number of customers queuing up
for evaluations and installations. But with any new product, in particular,
where they are moving into a new process methodology here, which some customers
have already gotten through that; some are moving into new processes with this.
It does take them some time to go through the evaluation and debugging process
of their production process. So conservatively, we're saying that many of these
customers will start their installations and process development either this
quarter or next quarter, and by the second quarter, we would expect that we can
turn some of those into revenue, and begin that ramp-up.
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Operator [8]
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Mehdi Hosseini, Soundview Technology Group.
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Mehdi Hosseini, Soundview Technology Group - Analyst [9]
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I have two questions. When you're talking to your customers, to what extent are
they building for a seasonal pickup? And based on that, and based on your
guidance for the fourth quarter, what is your impression, in terms of number of
shutdown days at customer sites?
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Curtis Wozniak, Electroglas, Inc. - CEO [10]
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Good question, Mehdi. What we're hearing from many of the customers is that
their fourth-quarter volumes are pretty solid, and their outlook going into Q1
next year is still pretty strong. I'm sure, embedded in that is some of a
seasonal pickup, but we are already pretty far along in the season in order for
that to be a Christmas type of impact. Much of that volume is either going on in
September or October, but I'm sure embedded in there is some seasonality.
Counter to that, on the other side, is financial pressure that they are seeing.
They went to make sure that their numbers look good for the fourth quarter; they
want to make sure they are not overextending themselves, in terms of capital and
return on net assets. So pushing the other way is holding off as long as they
can, in terms of capital assets. We have not heard of shutdowns at our customers
going on in the fourth quarter. Quite the opposite; they all seem to be running
at pretty high levels of utilization. So there's probably some seasonal picku
p in that, and therefore, potential for a Q1 dropoff, but again, there's a lot
of different factors going on in the market that make it a little tough to
crystal ball that too much.
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Mehdi Hosseini, Soundview Technology Group - Analyst [11]
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Sure. So if Q1 turns out to be better than historical, meaning that it becomes
(ph) flat for your customers, Q1 turns out to be a flat quarter, is that going
to be when your customers are going to come back to you and kind of accelerate
orders?
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Curtis Wozniak, Electroglas, Inc. - CEO [12]
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I think it would either be -- if that would be the scenario, that they remain
-- typically in semiconductors, as you know, Q1 is a seasonally down quarter,
and we would expect that there could be a flat quarter, plus or minus. And then
by -- as we move into that quarter, and they begin to see Q2 volume
requirements, that we would begin to see a pickup at that point, in that
scenario. So that's all, of course, dependent on the recovery continuing to take
hold and unit volume growing. But it has been pretty consistent for the last six
to nine months now.
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Operator [13]
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Eric Salzman (ph), DKR Capital.
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Eric Salzman, DKR Capital - Analyst [14]
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I'm sorry if you already went through this. I got on the call a little bit
late. Could you just lay out what the quarterly revenue breakeven level is with
the pro forma for the restructuring, and what gross margin assumption and OpEx
level that would would be implied in that? And similarly, what would be the cash
trough that you would reach at that point in time?
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Thomas Brunton, Electroglas, Inc. - CFO [15]
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Sure. Curt gave some general guidance about reduced spending from Q3 to Q4
levels in OpEx, and gave the percentage of 15 percent. On a non-cash basis, if
we model out the cash breakeven, if you will, it's somewhere between 18 to 20
million, given a gross margin in the mid-30's.
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Eric Salzman, DKR Capital - Analyst [16]
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The mid-30's? Okay. And do you have any sense of -- obviously it's a somewhat
crystal ball -- but when that might occur or, if it doesn't, what you think your
cash trough would reach, or at what point would you look to resize the business
more in order to preserve your cash?
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Curtis Wozniak, Electroglas, Inc. - CEO [17]
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Good question, Eric. Let me try to tackle that. As Tom indicated, giving what
we're seeing right now, and our expectations for Q4, the reductions in operating
expenses, the headcount reductions we've taken, his expectation that we would
use about 3 to 4 million in the current quarter, we are looking for, as I talked
before, that 2004 is beginning to shape up as a stronger year. As the economic
recovery takes hold and the unit volumes increase and our customers do hit these
capacity limits, that by the middle of next year, we should be able to get to
that cash flow breakeven, as volume begins to ramp up. That's all, again,
dependent on a lot of uncertainty about the economic environment, but if that
scenario plays through, that is what we would expect, that we will be able to
work through that during mid-2004. If that scenario doesn't take hold, and I
would say we will have a pretty good view on that in the first part of the year,
obviously, we would need to take additional actions to make sure that we don't
take cash down too much. So we'll react to that fairly quickly after the
beginning of the year, I would say. Obviously, if we get any more information
before that, we'll react then. But my belief is we really won't know too much
more about the outlook of the market until we get into the January timeframe.
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Eric Salzman, DKR Capital - Analyst [18]
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An then, just lastly, any plans with respect to the 5.75 '07 convert?
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Curtis Wozniak, Electroglas, Inc. - CEO [19]
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Not at this point, no.
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Eric Salzman, DKR Capital - Analyst [20]
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Okay. Either to restructure it, or to try to do something in order to alleviate
perhaps either some of the balance sheet pressure of it or the coupon pressure
of it, et cetera?
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Thomas Brunton, Electroglas, Inc. - CFO [21]
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That's something we talked about at the Board level, but at this point, I think
Curt characterized it correctly.
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Operator [22]
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(OPERATOR INSTRUCTIONS). Edward White, Lehman Brothers.
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Edward White, Lehman Brothers - Analyst [23]
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Looking at your prober customer base, clearly, one of the big trends is the
transition to 300 mm. But do you see any other trends among your customers that
are going to have an impact on your prober demand, as things start to pick up?
In other words, are there any other technical trends, things that they are
focusing on, that you can see that would have a favorable impact on your demand?
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Curtis Wozniak, Electroglas, Inc. - CEO [24]
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Yes. And as you pointed out, 300 mm is beginning to take hold. That's a lot
more activity in the front-end equipment on 300 mm right now than there is in
the back and. But we do expect, and we have heard from a number of major
customers, that by the end of '04, that they expect that transition to be in
full bloom. And we're expecting that by the time we get out into 2005 that we'll
begin to see a crossover point between 200 and 300 mm. Now, having said that,
there are a couple of trends that are going on in both, because people still are
continuing to push technology on the 200 mm front. That is far from dead or
over, and we're seeing people push finer pitches, pad pitches so they can make
the devices smaller. As they push the geometry of circuits smaller, they can get
more on these devices. They also need to push the pad pitches down. There are
more demands with regard to temperature testing, high-temperature and
low-temperature testing. So we're seeing continued demand on our 200 mm product
lines to suppo
rt higher accuracy, better customer temperature testing in the customer
environment. An in some cases, customers are in evaluating whether that would be
better served by a 300-mm-based platform. So I think also, as we get into '04,
we're going to see customers really trying to figure out what their next
technology buy is going to be between, say, our older 200 mm product lines and
newer 300 mm product lines.
The other big trend, and one of the reasons we're going into it, is that on the
package front, this move to strip testing is really beginning to take hold, and
it's an exciting new market. And we used our 300 mm platform; we modified it,
obviously, for handling different types of devices. But it's based on that same
platform, and we're using that as the basis for our strip handler -- or I like
to call it a strip prober, because it gives you the same accuracy, speed,
uptime, network capability and network applications that we've got on our
probing line. So we see that as one of the overall trends in test, as people
struggle to drive down test costs, that we're going to try to take advantage of.
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Operator [25]
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(OPERATOR INSTRUCTIONS). And there are no further questions at this time. So,
Mr. Wozniak, I'll turn the conference back over to you.
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Curtis Wozniak, Electroglas, Inc. - CEO [26]
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Thank you very much for joining us this morning on the conference call. We look
forward to having you all join us again next quarter, as we complete the fourth
quarter and give you an update on business. And again, we do think we have made
significant progress in the third quarter, continuing that in the fourth
quarter, and the are well-positioned for the recovery that seems to be taking
place. So thanks again. Have a great day. |
