Q3 2007 Tegal Corporation Earnings
Conference Call
Participants
Christine
Hergenrother
Tegal
Corporation - CFO
Tom
Mika
Tegal
Corporation - President and CEO
Operator
Good
day,
ladies and gentlemen, and welcome to the third quarter 2007 Tegal Corporation
earnings conference call. At this time (OPERATOR INSTRUCTIONS). As a reminder,
this conference is being recorded for replay purposes.
I
would
now like to turn the presentation over to Ms. Christine Hergenrother, Chief
Financial Officer. Please proceed, ma'am.
Christine
Hergenrother -
Tegal Corporation - CFO
Thank
you. Good afternoon and happy Valentine's Day. Welcome to Tegal's investor
conference call for the third quarter of fiscal 2007, which ended December
31,
2006. Before I review the financial results for the quarter and the year,
I have
two housekeeping items.
The
first
is a reminder that a digital recording of this call will be made available
one
hour after its completion. The recording will be accessible through midnight
on
Wednesday, February 21, 2007. To access, investors should dial 888-286-8010
or
617-801-6888 and enter passcode 59-91-1039. An online replay of the call,
along
with the Company's earnings release will also be available on the Company's
website.
The
second housekeeping item is a reminder about the Safe Harbor statement that
should be taken into consideration when listening to comments that are made
on
this call. Except for historical information, matters discussed on this call
are
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, including but not limited to, industry
conditions, economic conditions, acceptance of new technology, the growth
of
target markets as well as other risks. Actual operations and financial results
may differ materially from Tegal's expectations as a result of these factors
or
unanticipated events. Specifically, we refer you to the risks and uncertainties
as set forth in the Company's periodic filings with the Securities and Exchange
Commission.
Following
my review of the financial performance for the quarter, I will introduce
Tom
Mika, Chairman, President and Chief Executive Officer of Tegal, who will
have
some additional comments. After that we will entertain questions from the
dial-in audience.
As
announced in our press release, revenues for the fiscal third quarter were
$4.4
million, a decrease of 30% from $6.2 million recorded in the same period
last
year, and a decrease of 14% from the $5.1 million recorded for the second
quarter of fiscal 2007. Gross profits declined to negative 30% for the current
quarter as a result of an inventory adjustment of $1.7 million and certain
other
charges and deferrals. Gross profits were 27% in the same period last year
and
47% in the second quarter of fiscal 2007.
Operating
expenses for the third quarter of fiscal 2007 were $5.1 million, an increase
of
$2.2 million reported for the same period last year. Litigation expense of
$1.2
million and stock compensation expense of $800,000 accounted for almost all
of
this increase. Compared to the second quarter of this fiscal year, operating
expenses actually declined by $500,000.
The
resulting operating losses for the third quarter were $6.4 million, which
included approximately $2.7 million of non-cash charges. This compares to
a $1.2
million loss in the same period last year and a loss of $3.1 million last
quarter, each of which included $300,000 and $500,000 in non-cash charges
respectively.
Litigation
expenses for the quarter amounted to $1.2 million. Excluding the non-cash
and
litigation expenses in Q3, Tegal would have reported an operating loss of
$2.5
million for the quarter. G&A expense at $3.1 million was about $2 million
more than the same quarter last fiscal year, but about $400,000 lower than
last
quarter. This quarter's G&A expense included litigation expenses of $1.2
million and $800,000 of non-cash stock compensation expenses.
Going
forward, we expect G&A expenses to stabilize to a range of $1 million to
$1.5 million per quarter, which is lower than our previous estimate. Sales
and
marketing expense at just under $1 million is the same as last quarter but
an
increase over the same quarter last year. This is due to a reclassification
of
some service overhead expenses compared to last year. We expect sales and
marketing expenses to remain at about $1 million to $1.2 million per quarter
level going forward, depending on the level of sales commissions
paid.
R&D
spending has been stable at just over $1 million for the quarter for the
past
several quarters, going back to last year. We expect that R&D spending will
remain at about $1 million to $1.2 million per quarter level going forward.
Our
reported net loss for the third quarter was $6.1 million, or $0.86 per share
compared to a net loss of $1.9 million, or $0.27 per share in the same period
last year, and a net loss of $3.3 million, or $0.47 per share, for the second
quarter of fiscal 2007.
All
of
the per share numbers reflect a one 1-for-12 reverse split in Tegal's common
stock which became effective on July [25], 2006. There are a few significant
changes in the balance sheet accounts since the end of last fiscal year.
Cash at
the end of the third quarter was $29.5 million, an increase of $15.7 million
since March 31, 2006, and $19 million higher than at the end of the second
quarter, when cash stood at $10.5 million. Accounts receivable were down
$3
million and now stand at $2.3 million. Inventories are down by $1.8 million,
reflecting the write-off of the 300 mm PVD inventory.
We
created a litigation suspense liability account for $19.5 million. This will
remain in suspense until we resolve our key dispute with our litigation
attorney. The Company's book-to-bill ratio was one to one during the quarter;
our backlog as of today is approximately $5 million. Total shares outstanding
as
of December 31, 2006 were 7,106,867, taking into account the 1-for-12 reverse
split which became effective July 25.
I
would
now like to introduce Tom Mika, our President and Chief Executive
Officer.
Tom
Mika -
Tegal Corporation - President and CEO
Thanks,
Christine. As I've said in the past, our quarterly performance continues
to be
affected by the timing of single advanced system orders. The slip of just
one
order outside the quarter impacts both revenues and operating profits. We
will
not emerge from this situation until our revenues are substantially higher,
which I believe will depend both on our success in broadening our sales coverage
and on the acceptance of our new products that we are introducing this
year.
Despite
this current lumpiness in our business, I believe that recently, especially
after putting behind the costs and distractions associated with three years
of
litigation, we are succeeding with new initiatives that are improving our
business and positioning us well for long-term growth.
The
December quarter included the final shipment of a four-tool order to ST Micro
in
Singapore. ST uses our systems, both in Singapore and France, to make a unique
integrated active passive device for cellphone applications. This has been
an
extremely successful project for Tegal on many levels, and we look forward
to
continuing to support ST's high-volume manufacturing of these devices. In
addition, we shipped a repeat order for a 900 series etch tool to a
California-based optical networking company.
New
order
flow during the quarter was very good. We received two purchase orders for
Endeavor PVD systems. One of the tools is a repeat order for high-volume
manufacturing from a global leader in power management producing devices
on
ultra-thin wafers.
The
second order from another global leader in power conversion device manufacturing
will be used to deposit various metals, including some new materials
incorporating a mixture of silicon and chromium. We also received an order
for a
6500 advanced etch system from Skyworks Solutions, the global leader in
high-performance analog and mixed signal semiconductors, enabling mobile
connectivity. The Tegal 6500 etch system will be used by Skyworks to etch
silicon nitride and other critical films, thin films, on gallium arsenide
substrates. According to analysts, Skyworks is a leading supplier for front
end
modules for Apple's new iPhone.
In
terms
of introducing new products, our recent settlement has expanded our product
portfolio. We recently began the process of integrating the AMS deposition
tool
into our sales efforts and into our operations overall. We have begun to
provide
field support to former AMS customers, including an installation that is
taking
place right now in Japan. We believe that this addition to our product portfolio
will help Tegal consolidate the dominant position in the RF MEMS arena, which
includes important new devices for advanced cellphone and wireless
applications.
We
continue to make very good progress in NLD, especially in the LED applications
that I mentioned in the last conference call, and importing our etch chamber
technology to our new compact platform. We believe that we are very close
to
beta site orders for both of these new tools.
In
addition to growing our product portfolio, we continue to expand our sales
channels to improve sales in our core etch and PVD products. Recently, we
have
made significant strides in Asia, the world's largest semiconductor market.
This
represents a significant growth opportunity for us as we currently derive
just a
small percentage of sales from this region.
During
our last conference call, I spoke about our agreement with Noah Corporation,
which is off to a very good start in Japan. In addition, we just announced
an
agreement with Westpac in Korea. Westpac has a very good reputation, and
we know
them well, since they were most recently the AMS rep in Korea, where there
are
two installations of AMS tools. And they were at one time the rep for Sputtered
Films, our PVD subsidiary.
There
are
some very good signs of life for our specialized systems in Korea, so we
look
forward to actively selling in this market once again after a long hiatus.
I am
also working to expand our presence in mainland China, about which I hope
to be
able to say something very positive over the coming months. All this continues
to give me confidence that our sales trend is up despite the quarterly
fluctuations.
As
Christine mentioned, our gross margins took several hits this quarter, ending
up
in negative territory. We anticipated a lower than normal level, since we
shipped the last tool of a four system order to ST Micro that was significantly
below our target margins when we signed the deal over 18 months
ago.
In
addition, we had some higher than expected service costs, which we do not
expect
to reoccur, and we decided to write off inventory related to our 300 mm PVD
system development. The inventory commitment that we made to our 300 mm PVD
system was reasonable at the time, since it was related to a specific
European-based customer, and substantial government funds had been approved
for
the project. Regrettably, this customer abruptly ended its evaluation of
new 300
mm tools.
As
a
reasonable period for finding its substitute home for this specific tool
has
passed, we have taken the appropriate accounting measure and taken the
write-off. We have definitely not abandoned the 300 mm PVD development program.
Indeed, we now see that project moving forward in a completely different
environment, which I hope to be able to report on in subsequent
calls.
Regarding
the suspension of the proceeds of the settlement agreement into a contingent
liability account, my only comment is that I am confident that our dispute
with
our litigation council will be resolved soon. Until it is, we will not recognize
any income from the settlement.
So
to
recap, this quarter presented challenges for us in terms of the timing of
our
sales -- a large one-time inventory charge and high legal expenses. However,
we
should be back on track again next quarter. In addition, by midyear, we should
be able to announce some significant progress from our sales channel development
and new products that will become available to the market.
I'll
now
turn the call over to our listeners for any questions that you may
have.
QUESTION
AND ANSWER
Operator
(OPERATOR
INSTRUCTIONS). There are no questions in queue at this time.
Tom
Mika -
Tegal Corporation - President and CEO
Operator,
let's give it another 30 seconds or so to see if there are any questions.
I'm,
again, surprised.
Operator
(OPERATOR
INSTRUCTIONS). There are no questions in queue.
Tom
Mika -
Tegal Corporation - President and CEO
All
right, operator, then I'll take it from here. Again, our quarter presented
significant challenges, but I really do think that as a company we're on
track
with executing our strategy as we've outlined over the past two years.
We've
made some very significant progress that hasn't been reflected in our revenues
or our earnings, but I am very confident that we will get back on
track.
Thank
you
for your time and attention, and thank you for joining us today. This concludes
today's conference call.
Operator
Thank
you
for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.