The worst is still to come. Orbotech (Nasdaq: ORBK) today reported a profit of $6.1 million on revenue of $76.5 million, in accordance with its profit warning of six weeks ago. Orbotech is the leading developer and manufacturer of testing systems for the printed circuit and flat panel display (FPD) market.
The results are bad compared with the previous quarter, in which the company earned $21 million on revenue of $104.9 million, but whoever thought things can only get better after such a low is in for a disappointment. The third quarter’s results will be far worse.
”In the past, we assessed that this year’s revenue would be 10% lower than the previous year’s,” CFO and Corporate VP Finance Amichai Steinberg said today. “But we were surprised by the intensity of the crisis and the depth of the weakness, especially in the printed circuit market. Since this situation is causing our customers to cut down system orders, we must scale back our work plans. This is more of a guess than a forecast, because it’s very difficult to make forecasts. Our ability to see ahead is very limited, but the company’s third quarter revenue may be $60 million. Revenue may even turn out to be a bit less, yet it could definitely turn out to be a bit more.”
”Globes”: And you’ll switch to a loss.
Amichai Steinberg: “At such a level of sales, it’s difficult not to post a loss, but we’re taking measures to adjust the company’s expenses to its revenues.”
Steinberg referred mainly to the dismissal of 200 employees, of whom 120 in Israel, and the rest in the company’s branches abroad. He was also referring to other measures prompted by the market situation and by the assumption that the present market conditions will not change in the coming months. The measures in question include relocating some operations and manufacturing activities to Israel, speeding up the outsourcing of these activities, merging operations in Israel, Europe and Japan, trimming variable expenses, and cutting senior executives’ wages by 10%.
”These measures, which include layoffs, are the last stage in cost reduction, but the process started several months ago. We stopped recruiting new staff, we put staff on leave, we cut down welfare expenses, we chopped overtime, and we scaled things down on many levels. In short, we’re trying to save wherever possible,” says Steinberg.
Which departments were affected by the layoffs?
”The layoffs affected the entire company, although most outgoing employees belong to manufacturing and operations. Their dismissal was part of the process of adjusting our outfit to the decline in orders. We did it in such a way that when orders pick up, and it’s only a question of when, we’ll be able to resume high-speed production.”
Orbotech’s cost cutting measures will lead to a one-time charge of $4 million in the third quarter, but save about $5 million per quarter. The company is nevertheless expected to lose $5 million in the next quarter, after seven years of growing profits.
Orbotech’s seven good years have provided it with a safety net. “We are financially strong,” Steinberg said today. “Cash and investment for the coming year totals $156 million. The market situation is problematic, but we’ll continue investing and developing products in accordance with our work plan, so that when the crisis is over, we’ll come out stronger on the other side. In addition, we’ll use cash to make further investments.”
At a faster pace than in the past?
”Yes. I thing this strategy will be speeded up. Orbotech bought technologies and companies in the past, and will continue to do so when something suitable that improves our capability comes up. In any case, there’s nothing concrete yet.”
Let’s go back to the second quarter. In which geographic regions was the slowdown more pronounced?
”A few months ago, the slowdown was in the US, but now it spans the entire globe. It’s a global disease by now, and no region is exempt.
”The weakness in the global electronics industry led to a fast fall in the production capacity usage among many Orbotech customers, notably printed circuit makers. Our sales mix has changed. Sophisticated system sales, especially to large and leading customers, have fallen more steeply than we had expected, due to cuts in investments by the customers. At the same time, the sales of less-sophisticated systems are picking up. Customers prefer to buy cheaper systems, and this affects Orbotech as well. But this is temporary. The industry can’t base itself on these products, and will require testing systems for complex circuits used in more advanced electronics products.”
Did you notice a slowdown in China as well?
”The slowdown is less perceptible in China. In China there’s a combination of companies that already have plants there, and major companies that are investing in that country and continuing to invest in plant construction.”
The FPD market is considered relatively stable even now.
”If there’s a ray of light it’s in this sector, in which we have better forecasting ability. There are already orders for 2002. This market is witnessing sustained technological improvement processes that work in our favor, because they require FPD in-process testing. Revenue from FPD testing systems in the second quarter were $15.5 million, compared with $14.2 million in the corresponding quarter last year.”
And what about testing system sales to the composite circuit market?
The sales of testing products for composite circuits are still low at about $5.9 million, compared with $5.5 million in the previous quarter. In fact, we grew in all areas, apart from printed circuits, but sales to the printed circuit market are still the most significant for the company.”
Will there be more layoffs, following the dismissal of the 200 employees?
”We decide which measures to take at any given moment on the basis of what we can forecast. Layoffs are terminated for the moment, and we hope it’s a one-time thing. But there’s no telling what the future will be like. Significant changes in the markets may lead to further measures.”
Is there pressure on prices apart from the fall in orders/
”It’s not so much a case of pressure on prices, but of stronger demand for better payment terms.”
Published by Israel's Business Arena on 2 August, 2001