Final
Transcript
|
Nov.
06. 2007 / 5:00 PM EST, TGAL - Q2 2008 Tegal Corporation
Earnings
Conference Call
|
CORPORATE
PARTICIPANTS
Christine
Hergenrother
Tegal
Corporation - CFO
Tom
Mika
Tegal
Corporation - President, CEO
CONFERENCE
CALL PARTICIPANTS
Glenn
Mattson
GTK
Capital Partners - Analyst
Steve
Sullivan
Horizon
Financial Group - Analyst
PRESENTATION
Good
day, ladies and gentlemen, and welcome to the third quarter 2008 Tegal
Corporation earnings conference call. My name is Shaun and I will be your
coordinator for today. At this time all participants are in a listen-only
mode.
We will be facilitating a question-and-answer session towards the end of
this
conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation
over to your host for today's call, Ms. Christine Hergenrother, Chief Financial
Officer. Please proceed.
Christine
Hergenrother - Tegal Corporation - CFO
Thank
you. Good afternoon and welcome to Tegal's investor conference call for the
second quarter of fiscal 2008, which ended September 30, 2007. 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 conference
call
will be available two hours after the completion of the call, and it will
be
available through midnight on Tuesday, November 13, 2007. To access, investors
should dial 888-286-8010 or 617-801-6888 and enter pass code 31764338. An
online
replay of the call along with a copy of the Company's earnings release will
be
available on the Company's website as well.
The
second housekeeping item is a reminder about the all-important Safe Harbor
statement that should be taken into consideration when listening to comments
that will be 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, President and Chief Executive Officer of Tegal, who will have some
additional comments. After that, we will entertain questions from the dial-in
audience.
Revenues
for the fiscal second quarter were $10.8 million, a sequential increase of
135%
from $4.6 million in the fiscal first quarter of 2007 and an increase of
111%
from the $5.1 million recorded for the same quarter one year ago.
Our
recorded net income for the second quarter is $693,000 or $0.10 per share
compared to a net loss of $3.3 million or $0.47 per share in the comparable
quarter one year ago. Last quarter, Tegal reported a loss of $638,000 or
$0.09
per share.
Gross
profits for the second quarter came in at 39.3% compared to 38% in the
comparable quarter one year ago and 35.3% in Q1 of this fiscal year. The
improvement in gross profits was mainly attributable to a favorable product
mix
and increased revenue during the quarter.
Overall
operating expenses for the second quarter were $3.8 million, a decrease of
about
$1.8 million from the same quarter last year and an increase of $800,000
compared to last quarter.
Sales
and
marketing expense increased from last quarter by approximately $300,000,
largely
due to sales commissions on the increased revenue. Overall R&D spending was
flat from the same quarter last year, coming in at just over $1 million for
the
quarter and an increase of $200,000 from the previous quarter. The previous
quarter included payments from customers for non-reoccurring development
work.
The increase of $300,000 in G&A expense from last quarter was largely due to
an executive compensation study conducted during the quarter and legal fees
related to our recent arbitration.
Nonoperating
expenses netted out to a gain for the quarter of $237,000, including net
interest income of $263,000, offset by other expense of $26,000. The resulting
operating income for the second quarter was $456,000 compared to a loss of
$3.1
million in the same quarter one year ago and a negative $1.4 million in the
first quarter of this fiscal year.
Included
in operating income were non-cash charges of approximately $600,000, which
included $400,000 of stock compensation expense for options vesting during
the
quarter. The remaining non-cash expenses were depreciation, amortization
and
warrant expenses. Excluding these non-cash charges, operating income for
the
second quarter was $1.1 million.
Now
moving to the balance sheet. Cash at the end of the second quarter was $20.3
million, a decrease of $3 million from last quarter. The cash decrease was
due
primarily to changes in working capital and a cash settlement payment to
Gonzalez & Leigh, one of our former litigation attorneys.
Accounts
receivable increased by $1.2 million from last quarter, coming in at $8.1
million. Inventories increased by $2.5 million from $8.6 million to $11.1
million. PP&E, intangibles and other assets increased a combined $91,000,
mainly consisting of other current assets.
Total
current liabilities decreased by $417,000 over the last quarter, resulting
from
increases in accounts payable and product warranty, and offset by the $995,000
payment made in the settlement of Gonzalez & Leigh. The company had no
long-term liabilities at the end of the quarter.
Regarding
the dispute with our other litigation attorneys on the remaining fees owed
for
the settlement of a litigation with AMS, Agilent and Avago, we plead our
case
with the Bar Association of San Francisco in a nonbinding arbitration proceeding
on September 10th and 11th. We expect to receive their ruling any day
now.
The
company's book to bill ratio was less than 1 during the quarter and the backlog
as of today stands at $10.3 million. Total shares outstanding as of September
30, 2007, were 7,126,912.
I
would
now like to introduce Tom Mika, our President and Chief Executive
Officer.
Tom
Mika - Tegal Corporation - President, CEO
Thanks,
Christine. We are very pleased with our second quarter results. We reached
our
first quarterly profit since December 2000 and our margin reached 39.3%,
which
is very close to our corporate target of 40%, and as Christine mentioned,
our
operating income, excluding non-cash charges, was a solid $1.1
million.
We
believe this quarter's results demonstrate our hard work and success in the
strategic restructuring of our business over the last several years. However,
while we are encouraged by our accomplishments, we believe that we can still
drive more improvements in our business and continue to deliver improved
operating results.
I
thought
it would be useful today to review our progress over the past couple of years,
to give you some insight as to where we are currently and perhaps to set
the
stage for what might lie ahead.
In
2004,
when I was CFO, we began in earnest to make some changes in the management
of
the company and began to review the structure of the company and the new
technologies that we had acquired in 2002 and 2003. I became CEO in mid-2005
and
at this time we set out some goals for a turnaround, which we stated at the
time
would take two years to achieve. But we thought some goals would come earlier,
as they have.
The
goals
were threefold. To achieve cash breakeven. Second, to achieve significant
increases in revenues. And third, change the business model in order to turn
the
company into a profitable growing technology company. I'm very pleased that
we
have delivered on each of these objectives.
Our
success was driven by our focus on four main areas; management, existing
product
strategies, new products, and infrastructure. I'd like to review each of
these
areas as I did two years ago, with updates on what we are doing today to
drive
continued success.
Area
one,
management. Over the past two years we have made several new hires in senior
positions and promoted several individuals internally to key positions. For
the
most part, these appointments have worked out very well and I believe that
we
have a strong cohesive team of experienced managers.
While
we
are pleased with the results, we are now working on two important new efforts
to
further improve our management structure. The first is to upgrade our Human
Resources program and policies through the revision of job descriptions,
benchmarking and performance appraisals and all the other efforts that should
be
expected of a leading company.
The
second, which is more of a continuous program, is to improve the communication
and cohesiveness among all our employees and Management in order to achieve
our
agreed upon goals and objectives.
Secondary
is in existing product strategies. The essence and the success of our existing
product strategy lies in the etching and deposition of so-called new materials.
We do not serve mainstream device markets with the old materials such as
silicon, silicon dioxide, silicon nitride, aluminum and copper are commonly
used. Old materials are common, elemental, inexpensive and relatively easy
to
deposit and etch. They are used in microprocessors, ICs, Flash memory and
DRAM.
These are markets where Moore's Law applies and in which competitors who
are
vastly larger than we are compete.
Instead,
we have focused on new materials where Moore's Law generally doesn't apply
and
where the markets are today considerably smaller, but growing rapidly. Included
in our list of new materials are four categories of materials, including
high-K
materials, such as PZT, hafnium oxides, zirconium oxide and BST; noble metals
that include platinum, iridium, ruthenium and gold; piezoelectrics -- aluminum
nitride, PZT, zirconium oxide; and compound semiconductors or 3-5 materials,
generally known by their substrates, which are gallium arsenide, indium
phosphide, gallium nitride and silicon carbide.
These
materials are uncommon compound materials which are expensive and difficult
to
deposit and etch. I often use the term difficult to etch and deposit without
really defining it, since it is very technical. Basically, it has to do with
how
the chemistries, energies and surfaces within the reactors affect and are
affected by the new materials. In addition, it has to do with the active
control
of [SSO] morphology and measures of cost of ownership, such as throughput
repeatability and time to clean the reactors. In other words, the difficult
task
has to be done over and over again in a production environment
economically.
Despite
the challenges, new materials have uses in some of the most sought after
applications in the market today, such as advanced nonvolatile memories,
systems
on chips, tunable capacitors, power management devices, high-speed computing,
LEDs, acoustic filters, MEMS, sensors and actuators. Such devices are behind
the
higher functionality and smaller size of your wireless devices, portability
of
laptops and other electronic appliances, the force feedback of the gaming
console, sensors on your cars, and the power management devices on everything
from your iPod to your Prius hybrid car.
We
understood years ago that despite the challenges of working with new materials,
we needed to develop solutions focused on these growing end markets. We knew
that competing successfully in these markets required a willingness to make
significant investments and accept risk, both on the part of Tegal and on
the
part of our customers. The risks and investments we have made have paid off,
as
these end markets are now flourishing and our existing product line is
positioned extremely well. This has led to recent new order momentum and
our
improved financial performance.
Now
with
our financial turnaround, stronger balance sheet and the competence and skill
of
our engineering process development and field support teams, we are all working
to further improve our competitive positions and continue our recent new
order
momentum.
On
the
topic of new orders, I was very pleased to be able to announce today a new
order
by Skyworks Solutions of an additional advanced etch system to this very
prominent and extremely successful innovator of high-performance analog and
mixed signal semiconductors, enabling mobile connectivity. Skyworks' power
amplifiers, front-end modules and direct conversion radios are at the heart
of
many of today's leading edge multimedia handsets.
The
system will be shipped to Skyworks' fab in Southern California, where it
will be
used to etch silicon nitride and other critical thin films on gallium arsenide
substrates, supporting Skyworks business expansion in the multimode and
multimedia handset market.
The
compound semiconductor market is one to which we are firmly committed and
we are
striving to offer new cost-effective processes and system solutions to companies
in this market.
The
third
area is new products. While we have been focused on improving our results
through our current product offering, we have also remained focused on
introducing new products in order to continue growing in the future. We have
also learned that this process takes patience. Two years ago, I confessed
our
mistake of talking in conference calls about an expected short timeline for
delivering our Nano-Layer Deposition product, while it was still very much
under
development. I have tried to readjust the timeline and lower expectations
about
early revenues from this project and continue to in subsequent calls to talk
only about beta systems.
What
I
have learned is that you just can't make a baby in less than nine months
and you
can't launch a major new piece of capital equipment in less than about three
to
five years, period. Having said all that, given the substantial time and
investment we have now spent, I believe we are making good progress and I
am
still very optimistic that I will have something positive to say about NLD
soon,
so please stay tuned.
The
fourth area is infrastructure. This is an area in which we have made remarkable
progress in a relatively short period of time. We have significantly improved
our cost structure over the last two years through consolidation and other
initiatives. We completed the integration of Sputtered Films and closed all
of
our operations in Santa Barbara. Over the course of the last year, we have
revised our plan for San Jose, which currently houses our PVD operations,
including process development and allows people in both PVD and etch who
live in
the area to work out of that office, rather than commuting to
Petaluma.
We
will
eventually display our Compact NLD and Compact etch tools there, but we'll
do
limited demos and no manufacturing from that facility. We will continue to
manufacture in Petaluma, which will remain our administrative location and
our
headquarters. The key to our position in the facilities area is low-cost
and
flexibility. We have reduced our overhead by several million dollars, cutting
our burden rate by 50% and have not committed to any long-term
leases.
We
have
not made much progress on outsourcing manufacturing and will not until we
formally launch the Compact platform. We have however made substantial progress
in our distribution infrastructure by recruiting reps in Singapore, Japan
and
Korea. We are still working on China.
In
summary, Q2 '08 was a milestone event for Tegal. The first profitable quarter
in
seven years. We demonstrated good progress toward our stated objectives.
Despite
our success, we are increasing our intensity to drive further improvements
into
our business and deliver continued growth.
Looking
forward to the remainder of the year, we believe that next quarter we will
likely see a drop-off in some end sales from the very strong second quarter,
but
we should still demonstrate a good year-over-year growth. In addition, the
fourth quarter should improve over Q3 and depending on our performance, we
have
good potential for it being profitable for the entire fiscal year.
Thanks
for your attention and now I'll be happy to answer any questions that you
may
have.
Final
Transcript
|
Nov.
06. 2007 / 5:00 PM EST, TGAL - Q2 2008 Tegal Corporation
Earnings
Conference Call
|
QUESTION
AND
ANSWER
(OPERATOR
INSTRUCTIONS) Glenn Mattson from GTK.
Glenn
Mattson - GTK Capital Partners - Analyst
Congratulations
on a great quarter. Just calling about the industry potential for the existing
and future products, could you give me some information on that? Thank
you.
Tom
Mika - Tegal Corporation - President, CEO
As
far as our market potential is concerned, as I said in previous calls, Tegal
participates in kind of a broad set of niche markets, all of which are growing
pretty rapidly, but tend to be markets in which multiple system sales are
sometimes difficult to achieve and difficult to predict. When you get a wildly
successful product like the IPAD from STMicroelectronics, then we have some
predictability to our sales. We're working on a pretty broad front and we
think
it represents a lot of potential.
I
think
in general, in order to miniaturize devices and to increase functionality,
companies are going to have to continue to adopt new materials. So I think
in
that respect our strategy is on target.
As
far as
future products are concerned, we're really staying within the new materials
area. Our Nano-Layer Deposition product, our first applications are in the
areas
of depositing tinitride films, very thin films on highly conformal structures
that are attempting to increase functionality or decrease size of devices.
So
we're staying with new materials in both our existing product lines and in
our
new product lines.
Glenn
Mattson - GTK Capital Partners - Analyst
It
sounds like, Tom, you have a good patent protection position as
well?
Tom
Mika - Tegal Corporation - President, CEO
Tegal
has a lot of patents, as a matter of fact and we continue to add patents.
We
also continue, by the way, to lose patents, in the sense that we're not pursuing
some patent protection in some markets for patents that we don't think are
of
extreme value. It turns out that the cost of administering our patents and
filing in countries allover the world is extremely expensive, so we have
to
focus on those things that we think are key patents. But yes, virtually all
of
our technology is protected by patents one way or another.
Glenn
Mattson - GTK Capital Partners - Analyst
Tom,
the
last question I have is on the backlog. You said it was up to 10.3 as of
today.
Is that net of sales you've made so far in the quarter as well? In other
words,
you started at 8.9 and then you've had some sales in this quarter as well
and do
I assume that this 10.3 is after the current sales in this quarter?
Tom
Mika - Tegal Corporation - President, CEO
No,
since we haven't reported any sales in this quarter yet, it is not net of
that
number.
Glenn
Mattson - GTK Capital Partners - Analyst
Okay,
so it's 10.3 as of 9-30 as well?
Christine
Hergenrother - Tegal Corporation - CFO
It
was 8.9 million as of the end of September.
Tom
Mika - Tegal Corporation - President, CEO
And
then between September 30th and today we booked some additional
business.
Glenn
Mattson - GTK Capital Partners - Analyst
Well
again, Tom, congratulations on a great quarter and it sounds like you're
on the
right track, especially with your unique technology and products.
Steve
Sullivan with Horizon Financial Group.
Steve
Sullivan - Horizon Financial Group - Analyst
Tom,
congratulations. It's been a lot of work, I know. And first question, Tom,
what's the headcount now and where was it say a year ago and where do you
think
it's going to go in the next six to nine months?
Tom
Mika - Tegal Corporation - President, CEO
That's
a good question. I think we reported last quarter that our headcount was
as low
as it has been in several years. Christine is reminding me that it's around
85.
I think we added -- that would be about 4 up from what we reported last quarter.
And I don't really see it increasing by very much at all. What I said last
quarter was that I thought that there were a few engineering positions that
we
needed to fill and we have done so, but I don't see anything beyond
that.
Steve
Sullivan - Horizon Financial Group - Analyst
Going
forward in the next couple of quarters, Tom, the gross margin, how sustainable
do you think it is?
Tom
Mika - Tegal Corporation - President, CEO
I
think it's very sustainable. Two things help our gross margin. One is the
product mix. I think the product mix has been pretty good. The other is the
amount of absorption of overhead and when we get above about $8 million per
quarter, we're pretty much fully absorbed.
One
of
the challenges that we have on the gross margin side, is that we've gotten
some
opportunities to sell tools to university environments that are operating
in
areas that are of extreme interest to us. And if we're able to deliver tools
that are at a reasonable price with a relatively low gross margin, we get
the
subsequent benefit of some collaboration on development activities in those
university environments. We haven't traditionally done that as a company
and
we're attempting to do more of that.
We
did so
recently with a sale that we inherited from AMS to University of Pennsylvania
for an AMS tool. We have some other opportunities that I have a great deal
of
interest in and I know my team does, so we have to figure out how to make
those
happen, even though they might involve some downward pressure on gross
margins.
Steve
Sullivan - Horizon Financial Group - Analyst
Two
quick ones. The operating margin, can you give me a sense on the revenues
go up
2 or 3 million, how much leverage is still in the operating margins relative
to
what we achieved last quarter? Year-over-year, I'm sorry Tom, not sequentially,
but year-over-year, the quarter rundown.
Tom
Mika - Tegal Corporation - President, CEO
Well,
we had a substantial -- the problem is that we had a couple of things going
on.
If you look year-over-year, we have substantial reductions in our legal fees
and
OpEx. I think the way to look at this is that I think the high 30s to 40%
gross
margins are achievable and then what you're seeing in terms of our operating
expenses are not really likely to change. They're likely to remain
flat.
Steve
Sullivan - Horizon Financial Group - Analyst
So
in actual dollars, Tom?
Tom
Mika - Tegal Corporation - President, CEO
In
actual dollars, yes, that's correct. So since we're not increasing operating
expenses by very much quarter to quarter, you can expect most of those sales
increases or the gross margin to drop to the operating income line.
Steve
Sullivan - Horizon Financial Group - Analyst
Last,
then I'll let someone else get on. The $300,000 in other expenses, can I
get a
little more clarification there? Was that more one-time than
ongoing?
Christine
Hergenrother - Tegal Corporation - CFO
You
mean in other income?
Steve
Sullivan - Horizon Financial Group - Analyst
Christine,
I thought you mentioned in G&A there was a $300,000--?
Christine
Hergenrother - Tegal Corporation - CFO
Oh,
in G&A, not other income. No, those are one-time for this quarter
expenses.
Steve
Sullivan - Horizon Financial Group - Analyst
Okay,
what exactly was involved there again?
Christine
Hergenrother - Tegal Corporation - CFO
One
was a compensation study and the other was legal fees related to the arbitration
that we just went through in September.
Steve
Sullivan - Horizon Financial Group - Analyst
Okay.
So that will go virtually -- I gather the study will go to zero, but the
legal
fees can linger on?
Tom
Mika - Tegal Corporation - President, CEO
Assuming
that there's any activity past the arbitration. That activity really ended
as
far as legal fees are concerned, on September 11th at about 5:00. Actually
no,
there was a small subsequent brief requested. But those have dropped
substantially and it just depends on what we decide to do after we hear from
the
Bar Association in terms of what their ultimate decision is.
Steve
Sullivan - Horizon Financial Group - Analyst
Well
congratulations again.
(OPERATOR
INSTRUCTIONS) Follow-up question from Glenn Mattson.
Glenn
Mattson - GTK Capital Partners - Analyst
Tom,
speaking of the arbitration, I guess what's the next step if this is nonbinding?
And a follow-up question after that.
Tom
Mika - Tegal Corporation - President, CEO
Well,
the next step is that each side decides whether or not whatever we hear from
the
Bar Association is acceptable and if it's not -- you know, if it's not
acceptable to the litigation attorneys, then they will continue their lawsuit
and we'll see them in court. And if it's not acceptable to us, we will see
them
in court.
Glenn
Mattson - GTK Capital Partners - Analyst
Right.
You won't be booking that income until this is all settled then, I
guess?
Tom
Mika - Tegal Corporation - President, CEO
That's
correct.
Glenn
Mattson - GTK Capital Partners - Analyst
And
lastly, on the balance sheet, inventories are up considerably. Can we expect
that to level off here, pending the sale and completion and placement of
new
orders, new equipment?
Tom
Mika - Tegal Corporation - President, CEO
Yes.
We had a pretty big upsurge to cover the backlog that we had. Remember as
of
last quarter we had about a $20 million backlog.
Glenn
Mattson - GTK Capital Partners - Analyst
Right.
Of which you shifted about 10, so I'm surprised inventory is still this
high.
Tom
Mika - Tegal Corporation - President, CEO
We've
got that systems inventory and I think we're keeping -- remember, a good
chunk
of that inventory involves Compact and NLD tools that we hold in inventory
because we expect to move those as beta systems.
Glenn
Mattson - GTK Capital Partners - Analyst
Okay,
good. So that's encouraging on the NLD side. So that inventory will basically
stay the same or decline slightly then I guess?
Tom
Mika - Tegal Corporation - President, CEO
Yes.
Glenn
Mattson - GTK Capital Partners - Analyst
Okay,
great. Again, congratulations and good luck.
Follow-up
question from Steve Sullivan.
Steve
Sullivan - Horizon Financial Group - Analyst
Two
quick ones then I'll let you go. What is the total NOLs, roughly,
now?
Tom
Mika - Tegal Corporation - President, CEO
We're
just conferring. 14 million.
Christine
Hergenrother - Tegal Corporation - CFO
Somewhere
between 14 and 16, cumulative.
Tom
Mika - Tegal Corporation - President, CEO
But
Steve, I'd like to caution you on the NOLs, you know, as you probably know,
you
only study whether you've got the NOLs when you actually think you're going
to
use them and you lose some based on certain equity events that occur. But
even
going back to our last equity event, which I think is what Christine is doing,
we think we have plenty to cover any of the income that may come in as a
result
of the resolution of the lawsuit.
Steve
Sullivan - Horizon Financial Group - Analyst
So
basically that should fall to the bottom line?
Tom
Mika - Tegal Corporation - President, CEO
Yes.
You
have no other questions at this time.
Tom
Mika - Tegal Corporation - President, CEO
Okay.
Well, thank you very much, gentlemen, thanks for your attention. Ladies and
gentlemen, this concludes today's conference call and I look forward to seeing
you next quarter.
Thank
you for your participation in today's conference. This concludes the
presentation. You may now disconnect. Good day.
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