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Industry woes haunt Etec in 3Q

Maybe other chip manufacturing vendors saw a comeback in the first few months of this year -- but Etec Systems Inc. (Nasdaq: ETEC) didn't, judging by third-quarter earnings that fell a penny shy of analysts' estimates.

In fiscal third quarter results released after market close Wednesday, the maker of wafer pattern equipment posted net income of $1.9 million, or 9 cents a share, not counting one-time charges. First Call's survey of 12 analysts had predicted a profit of 10 cents a share for the quarter ended April 30.

Third quarter sales were down 18 percent year-over-year, to $57 million from $70 million. Etec blamed industrywide trends, including consolidation among manufacturers of wafer masks, lower capital investment in Japan, overcapacity in Taiwan and falling prices in Europe. The printed circuit board business was even worse -- Etec recorded revenue from just one DigiRite 2000, which etches circuit patterns.

Etec took $12.2 million in non-recurring charges during the third quarter, to pay for cost-cutting moves, including 100 job cuts. Other costs covered write-offs, and the merger of European operations into one facility in Germany. If those costs are factored into quarterly results, Etec lost $6.2 million, or 29 cents a share.

Gross margin in the third quarter was 30 percent, or 44 percent if one-time events are excluded. Etec posted a gross margin of 51 percent in the third quarter of fiscal 1998.

Look for even lower revenue in the current quarter. The company expects fourth quarter sales to range between $45 million and $50 million, and break-even results for the full fiscal year, including one-time charges, said Steve Cooper, chairman and CEO.

"While some of our customers are reporting a better business environment, we have yet to see a broad-based order pattern that would signal an improved business outlook for Etec," he said. "We may incur losses through the first quarter of next fiscal year. In the meantime, we are carefully managing through this challenging time by controlling and reducing worldwide expenses."

Etec's quarterly report comes just a day after Applied Materials Inc. (Nasdaq: AMAT), the largest chip capital equipment maker, reported quarterly earnings far exceeding Wall Street expectations. Applied's good news may have ratcheted up investors' expectations for Etec as well, since the latter's shares rose 14 percent to 36, a gain of 4 11/16, in Wednesday's trading prior to the quarterly report.

Of 13 analysts polled by Zack's Investment Research, five rate Etec a "hold", four maintain "moderate buy" ratings on the stock, and four recommend it as a "strong buy".>