I had a "good news/bad news" reaction to the announcement. Beating the consensus estimates is a nice positive. The prospect of a $0.10 to $0.15 hit next quarter didn't make my day, but giving it a second look I realize that it reflects the combination of a 10-15% revenue reduction and increased capital expenses. I think management is taking an aggressive approach to increase its dominance in DUV, which in the long run will pay off big. It is the basic INTC/AMAT strategy: increase relative strength during weak periods to be ready for the eventual upturn. Since CYMI is the only company in production, spending the money to create a dominant service position will make it that much more attractive to DUV customers. With spares and services at 9% of revenues and perhaps increasing to 15%, you get a sense of a double, mutually reinforcing benefit from these expenditures. They will improve sales based on better support and reliability, and they will increase revenues from spares and service.
The other thing about the deferred but not cancelled backlog is that revenues will quickly increase once CYMI's customers start clamoring for their lasers "now!". Akins's emphasis on having the production capacity ready to go should not be ignored, since sometime later this year they will be accelerating their production levels to fill some of the currently delayed backlog. I'm sure it makes it difficult to forecast for A&A, and the possibility of accelerated DUV deployment could increase the number of lasers they actually end up shipping in the next quarter or two. A corollary of not wanting to get bumped to the back of the line is that once deliveries start accelerating, CYMI's customers will want as many lasers as they can get as fast as they can get them. Being in a favorable position to get lasers later may have some impact on decisions to take and stock lasers now.
The announcement of a stock buyback is great news. If management is smart, they can use their buyback program strategically. While one possibility is to buy enough shares to trigger a major short squeeze, there are other approaches that can also be advantageous. Starting tomorrow, they could begin selling puts, pocketing the premium and using it to increase income and/or decrease the effective cost of any shares they purchase. The more volatile and negative CYMI stock appears, the higher the option prices and the more profitable this strategy can be. I hope someone at CYMI is option-savvy or open to work with someone who is in order to explore this possibility. Bottom line is that the stock buyback can be worth much more than retiring debt, particularly if management is looking toward a rapidly expanding market later in the year.
One last consideration is that CYMI has already gone through substantial analyst downgrades. That suggests to me that the likelihood for upgrades is greater than the likelihood of downgrades. While earnings estimates may be lowered for the next quarter, that will have the effect of creating more positive earnings comparisons down the road. The positive trend toward DUV deployment plus CYMI's increasingly strong position as the dominant laser supplier should warrant some upgrades.
We'll see how it plays tomorrow,
Baird |
