Tegal Corporation (TGAL)
F4Q08 Earnings Call
June 16, 2008 5:00 pm ET
Thomas Mika – Chairman, Chief Executive Officer, President
Christine Hergenrother – Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Treasurer
Steve Selbrede – Chief Technology Officer, Vice President
Al Shans – MidSouth Capital
Good day ladies and gentlemen and welcome to Tegal Corporation’s fourth quarter 2008 earnings conference call. My name is Jahina 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.
I would now like to turn the presentation over to your host for today’s call, Ms. Christine Hergenrother, Chief Financial Officer. Please proceed.
Thank you. Good afternoon and welcome to Tegal’s investor conference call for the fourth quarter and fiscal year 2008 which ended March 31, 2008.
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 will be made available two hours after the completion of the conference call and it will be accessible through midnight on Monday, June 23, 2008. To access, investors should dial (888) 286-8010 or (617) 801-6888 and enter passcode 25258540. 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 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 the result of these factors or unanticipated events. Specifically, we refer you to the risks and uncertainties as set forth in the Company’s period filings with the Securities and Exchange Commission.
Following my review of the financial performance for the quarter and the year I will introduce Tom Mike, President, Chairman 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 fourth quarter were $7.4 million, an increase of 19.5% from $6.2 million for the fourth quarter of fiscal 2007. For the full year revenues were $32.9 million, an increase of almost 48% from $22.3 million in the prior fiscal year.
Gross margins for the fourth quarter were 50.6% compared to 31.5% in the same quarter a year ago. For the full year gross margins were 42.6% compared to 24.8% in fiscal 2007. Fourth quarter margins included a year-end adjustment of approximately $500,000. Without this adjustment our gross margins for the quarter would have been about 44%.
Total operating expenses for the fourth quarter were $3 million, a decrease of $1 million from the fourth quarter of fiscal 2007. In the prior year’s fourth quarter there were expenses of approximately $600,000 for non-recurring expenses for litigation and the closing of our Japan operations. The remaining $400,000 decrease in operating expenses was related to non-recurring engineering development work.
In the fourth quarter of fiscal 2008 approximately $400,000 of non-cash expenses for depreciation and stock compensation was included in the $3 million of operating expenses. Looking at the quarter’s expenses and working capital, R&D spending decreased to $1.1 million in the fourth quarter compared to $1.5 million in the fourth quarter 2007 and $800,000 in the third quarter 2008. We expect that R&D spending will remain at the current level for fiscal year 2009.
Sales and marketing expense at just under $1 million was in line with last quarter and the same quarter last year. We expect sales and marketing expenses to remain at about $1-1.2 million level per quarter going forward depending on the level of sales commissions paid.
G&A expense of $1 million came at the same level as last quarter and $500,000 less than the fourth quarter 2007. G&A expenses will continue to vary depending on the amount and timing of stock compensation charges but are expected to be between $1-1.2 million per quarter going forward.
For the year total operating expenses were $12.4 million compared to operating expenses of $18.9 million in fiscal 2007. Non-cash expenses for the year included $1 million of stock compensation expense and $600,000 of depreciation and amortization. Without such expenses operating income for the year would have been approximately $2.4 million.
The company’s reported net income of $15.2 million or $2.18 per diluted share for the fourth quarter compared to a net loss of $2 million or $0.28 per share in a comparable quarter one year ago. Net income for the quarter without the non-recurring portion was about $500,000 or $0.14 per diluted share. The net income for the fiscal year was $18.1 million or $2.48 per diluted share compared to a net loss of $13.2 million or $1.87 per share in fiscal 2007.
For the fiscal year net income without the non-recurring portion was $3.4 million. Cash at the end of the fourth quarter was $19.3 million, down from $6.5 million from the same quarter one year ago and about $500,000 from the end of fiscal Q3. Receivables remained flat from last year. Inventories increased from $5.6 million to $11.1 million year to year. We expect the large majority of this inventory increase to be burned off in sales in the next few quarters.
The remainder is needed for a compact project in which some have long lead-time inventories. Notes payable were negligible and accounts payable decreased by $500,000 from fiscal 2007. Taxes payable for the year were $500,000. Past NOL’s fully covered our net income for the year but the $500,000 covered our ANT for federal and state agencies.
Our current backlog is $3.5 million.
I would now like to introduce Tom Mika, our Chairman, President and CEO.
Thanks Christine. Needless to say we are very pleased with our results for fiscal 2008. Over the past three years I believe we have laid the groundwork for both a successful turn around for the company as well as a strong foundation for our future growth. The positive financial results for the year were very satisfying.
It is not always easy to explain to shareholders why it takes so long to turn a company around or to employees why profitability is so important and why they must do so much more with so much less in order to be successful. The remarkable thing is that everyone understands once you get there and achieving that goal provides the energy and focus that we need to take on the next opportunities and challenges.
The next challenges and opportunities are already upon us. First and foremost is the launch of our first new product in over 10 years, the Compact 360 NLD system which has long been under development and which we are shipping in beta at the end of July.
We believe that this technology is applicable to several emerging device markets including high-K capacitor dieletrics and barrier layers for a range of novel devices from advanced high brightness LED’s to barrier and seed layers for through [inaudible] and three dimensional wafer level packaging schemes.
I would like to remind you that our NLD system is very different technically and commercially from the ALD systems available on the market. It is an extremely flexible tool in terms of the types of films it can deposit and the temperature range at which it operates. As a result, this tool can address a broad range of novel applications.
We were very pleased to be selected by the world’s leading high brightness LED manufacturer for a key application as our first beta site for this tool. Other opportunities for beta sites include both Planar and 3-D capacitors as well as memory devices.
Maintaining our revenues in the face of a strong headwind in a declining semi-conductor capital equipment buying environment was a major challenge. This is more acute given the dominance of ST Micro in our revenue line over the past three years. Although we are not in mainstream devices our customers are all semi-conductor device manufacturers and their caution ultimately guides all of their capital purchasing decisions including high growth programs. As a result, the first half of fiscal 2009 will be challenging since our plan includes no additional tools for ST micro. However, we have been able to fill the voice with additional customer opportunities so our second half actually looks quite strong which should balance the year.
Our next challenge is to grow beyond what we have been able to do in the past. I believe this can be done in three ways. First, improve our position in our current action PVD offerings. Second, put more beta systems into the market in order to see follow-on orders next year for our NLD product. Third, look opportunistically at acquisitions.
Regarding our current product offerings, I believe that we will be able to maintain and even improve our position in our current etch and PVD application areas. We have seen increasing interest in new alternative non-volatile memory where we believe we have several distinct advantages in hardware, process, intellectual property and experience. This is evidenced by the recent selection of our tool by SVTC. With this order we will soon have three advanced etch tools, each with different chamber configurations, each dedicated to the novel, new, alternative non-volatile memory developments at this site.
The material that we know well as led zirconium titanate or PVD which I have mentioned many times in past conference calls principally in connection with the Ipad project for ST micro. Our expertise in etching this material generated an order from the Penn State Nano Fabrication Laboratory for the development of PVD Mems and other complex oxide patterning applications. Our tool will be exposed to a variety of academic and industrial users in this national science foundation funded center for nano fabrication.
Our PVD tools are also breaking ground in new areas with break through results in uniformities for aluminum nitride based FBAR and Bulk Acoustic Wave devices in the RF Mems arena and the continued pursuit of thinner wafers by more and more power device manufacturers around the world.
Another reason I believe we can expand our current etch and PVD market position is the startling weakness evident among our direct competitors. Either distracted by the lure of the solar equipment business or just financially weakened by the mainstream semi-conductor business, our competitors are behaving in a way that makes me more confident about Tegal’s ability to improve its relative market share position in some key markets.
Outside of our current addressable markets, and the market expansion related to NLD, we are looking at a number of potential acquisition opportunities both large and small that I believe are worthy of careful consideration. It pays to be healthy at a time when others are not.
Before I conclude I would like to thank our customers and employees for their continued support and commitment to Tegal.
This concludes our prepared remarks so I will now turn the call back over to the operator so we can take your questions.
Your first question comes from the line of Al Shans – MidSouth Capital.
Al Shans – MidSouth Capital
I have just a few quick questions to throw at you. Number one, do you see the need for more capital? I mean, you know borrowing…I’m talking outside of an acquisition?
No I don’t. In fact with some of the acquisitions I don’t think any additional capital would be required even for those.
Al Shans – MidSouth Capital
Number two. Can you give us any kind of a feel for what you are looking at for revenues for 2009? Fiscal year 2009?
Not really yet. I think you know that we are in a pretty challenging environment along with pretty much everybody else that is in the capital equipment industry. I have said before we are somewhat immune to that because of the fact that we are not in mainstream devices. We are mainly in wireless devices. But as I said in my prepared remarks, ultimately these are semi-conductor customers that we have. I think that overall Q1 and Q2 look pretty challenging but Q3 and Q4 we are gaining visibility on and they look actually pretty strong. I think also that one or two of our bigger competitors commented about them seeing some improvement in the second half as well. So I am optimistic but I would rather not give any guidance at this stage.
Al Shans – MidSouth Capital
It sounds like a lot of cash went into the build up of inventory. Is that pretty much correct?
Yes we did. We spent $5 or $6 million on inventory as compared to a year ago. I would say that a year ago was a period in time in which we had just taken a major write down both against our gross margin and against our ENO and we are looking at our inventory as a strategic investment. Number one because we are building compact NLD tools and compact etch tools and number two in this environment we found that building to order with a 6 month turnaround after receipt of order is just not competitive and we were leaving some orders on the table that we wanted not to do. So we are making selective strategic investments in the long-term on long lead time inventories.
Al Shans – MidSouth Capital
One last question and I’ll let somebody else on. This large income recognition item, I’m sure that is a non-cash item. Kind of can your CFO kind of explain to me what the accounting treatment of that was? I’m guessing it was probably expensed in the prior period and has come back as a revenue item in this period.
In the prior period we had a liability account called “litigation suspense” which was the payment of the settlement from the litigation we had against AMS, Avago and Agilent. So that $19.5 million went into cash and then it was in a liability account until we reached a settlement with the attorneys in that case. That settlement came in January of this year so the liability account went down to other income in the fourth quarter and the cash has been in the balance sheet this entire time.
We have a follow-up question from the line of Al Shans – MidSouth Capital.
Al Shans – MidSouth Capital
I just wanted to recognize you guys have done a great job in a difficult environment and I know you have been at it for a good while. So I am appreciative of your efforts. I guess I don’t really need to say it, but I guess I kind of feel compelled that whatever acquisitions we do let’s look at them very, very closely. We have worked too hard to get where we are to get involved in a sticky situation to regress from this point.
I agree with you 100% Al. I think that whatever we would look at I would not want to be of a size that would be life-threatening. I think that our view is that not only is the semi-conductor capital equipment market down but the environment for micro caps is really quite horrible. So we are cautious about our ability to raise additional capital and we know that with a stock price where our stock price is it would be quite expensive capital so please be assured that anything we are looking at we would look at very carefully.
What I’m surprised about and I’ve said this to other people is how much is available and this is more than I’ve ever seen before and I don’t know whether it is because in the past we weren’t seen as a credible alternative for some of these companies or it is just the fact as I stated that there is a lot of distraction out there and there is a lot of distress. There is distraction among the major industrial companies and interest in the solar arena and among the smaller companies many are just far worse off than we are…or worse off period I should say. So, we are looking at it carefully but we are not going to do anything that would threaten the health of the company.
At this time we do not have any questions in queue. I would like to thank you all for your participation in today’s conference. This concludes the presentation. Have a great day.
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