By Debora Tidwell (TMF Debit)
UNION CITY, CA (MAY 12, 1997)/FOOLWIRE/ --- HMT Technology reported their fourth quarter and year end 1997 results on April 22nd. HMT's net sales for the fourth quarter were $63.5 million, up from $61.2 million reported in the third quarter of 1997 and down from $65 million reported in the fourth quarter of 1996. During the quarter they shipped approximately 5.8 million disks. Net income available for common shareholders in the fourth quarter of 1997 was $16.2 million or $0.32 per fully diluted share on 51.7 million shares, compared with $13.1 million or $0.30 per share fully diluted in the prior quarter and $10.8 million or $0.30 per share fully diluted in the fourth quarter last year. This includes a one-time reversal of $3.8 million or $0.07 per fully diluted share previously accreted dividends resulting from the early redemption of their outstanding preferred stock. Without this, net income for the quarter would be $12.3 million or $0.25 per share fully diluted. With the repayment of the preferred stock, they will no longer have dividend accretion activity to report on.
MARGINS/OPERATING EXPENSES. Gross margin percentage for the quarter was 36.1%, down from 40.6% they reported last quarter and down from 41.8% a year ago. Total operating expenses for the quarter were $4.8 million, up from $4.5 million last quarter and up from $3.7 million last year.
RESEARCH & DEVELOPMENT EXPENSES. R&D expense was $1.6 million or 2.6% of revenue compared to 2.5% last quarter and 1.9% in the fourth quarter last year. HMT, in comparison to its competition, does things a little differently from an R&D standpoint. They do not have standalone R&D lines which would include a complete line of manufacturing starting from the aluminum all the way through to the final tested product. Many of their competitors have such facilities. What HMT does is focus on making sure that a product that is developed is also a manufacturable product. In order to do that, they do the development work and the sample production work using existing manufacturing equipment. It allows them to know that they have developed a manufacturable product and allows them to have a feel for what the yields will be on a product as they quickly ramp it up, and it also gives them a better idea what the cost will be as they go into the marketplace with it. If they had the standalone equipment as a fixed overhead to the R&D, their R&D percent would be in line with competitors. HMT's cost in R&D really represents people costs.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. SG&A was $3.1 million or 5% of revenue compared with 4.9% last quarter and 3.9% in the fourth quarter last year. Net interest reported in the quarter was $570,000 compared with $350,000 last quarter and $2.9 million a year ago. This is primarily due to the capitalization of interest expenses attributable to their facility expansion. Looking into the June quarter, they expect that net interest will be in the $2.2 million range. Income before taxes was $17.6 million compared with $20 million in the third quarter and $20.6 million in the fourth quarter a year ago. The tax rate for the quarter was 30%.
DEPRECIATION, CAP EX, CASH. Depreciation for the quarter was $5.6 million compared with $5.3 million last quarter. The depreciation was up quarter over quarter but they turned on the new production lines at the end of the quarter so the incremental depreciation was not for the full quarter, but the run rate on a go-forward basis will be above the level of depreciation we are currently seeing. They would expect depreciation next quarter would be in the range of $2 million above the current level. Capital spending for the quarter was $72.3 million compared with $66.1 million last quarter. Their cash position at the end of the December quarter was $55.1 million.
YIELD DIFFICULTIES. As they previously announced, unit shipments for the March quarter were impacted by yield difficulties. These yield issues were the result of a signficant number of new programs that they brought into production this past quarter. Specifically, they brought five new products into volume production during the quarter. While these five programs suffered from lower than standard yields during their introduction, HMT exited the quarter with yields at acceptable levels. Today their daily production rate and yields are where they believe they should be. The new products are going well, with no major difficulties. The new facility was laid out with the idea of what type of product they would be making 3-5 years from now. They put a lot of effort into asking those questions and removing the elements that create yield problems. They are putting those in place today trying to eliminate anything that would create a yield defect on a product from corrugated cardboard to human beings.
STATUS ON NEW CAPACITY. Also during the March quarter they installed the first four sputter lines in their new manufacturing facility. They are pleased to report that as of the end of the March quarter, these four lines are up and running at their expected levels. They don't have all the material handling between the process steps completely installed for the new lines. The sputter units are in. The texturizers are in. The lubricators are in. All the basic processes are there. The only thing that has had a little bit of a delay is the material handling system that goes between each of the processes. Once that is put in place they will be running at the full expected volumes. They are approaching those volumes today and making improvements every day as sections of that material handling comes in place. So, things are running well. They are already in step with the next two lines for the quarter that they will start preparing for the July/August/September quarter. The first of those two sputter machines is in the building and is being hooked up.
CHALLENGES THAT IMPACTED MARGINS/YIELDS. The March quarter posed several challenges for HMT -- new products, new manufacturing facilities both in Fremont California and Eugene Oregon, and the complexities of the latest technologies. The employees of HMT stepped up to these challenges and have worked to position the company for the future. While it took them longer than they expected to bring the new programs into volume production with acceptable yields, they are on schedule with their four new lines and on track to have two more additional lines installed and running by the end of the June quarter. They are also pleased to report that they are now 100% internally sourced on their nickel-plated substrates from their new Eugene Oregon facility.
CAPACITY PLANS. In the past they have discussed their existing capacities in terms of having 15 sputter lines. Today and for the future planning purposes, people with financial models should only include 14 lines from the original capacity as they have taken their last old inline sputter machine out of production. As a result, they have 18 lines running for the June quarter and plan to have 20 lines for the September quarter. They will be able to sell out capacity on the new lines. This change in the number of sputter lines should not cause any change in the unit output as they have weaned themselves off of the last inline sputter machine over the past two quarters.
CHANGE IN GROSS MARGIN MODEL. In the past they have shown their model to be based off of a gross margin range of 38-42%. For the quarter, it obviously has fallen below that range, due mostly to the yield issues they faced during the March quarter. Over the past two years, they believe HMT has demonstrated its technology capabilities while maintaining a low cost structure. Now, with their new manufacturing facility and additional capacity, they have an opportunity to do some things they have not been able to do in the past. Specifically, they can be more aggressive in pursuing new business opportunities. As a result, they are establishing a new gross margin model range of 33-38%. This should provide them with the flexibility necessary to take advantage of the new volume opportunities that may present themselves over time. As of now, they believe they are operating in the upper half of this range.
BREAKDOWN OF SALES BY CUSTOMER. The breakout by customers is as follows for the March quarter. Samsung was approximately 32% of revenues. Maxtor was around 29%. Iomega was 14%. Western Digital was just over 12%. Other customers include Micropolis and Quantum. They would like to get to a situation where their customer base is four or five customers that represent 20-25% of the product. They continue to try to balance their customer base out in terms of a percentage. That has been difficult for them to do in the past because of the capacity constraints they have had. With their new capacity coming online they are going to look for opportunities to enhance that customer base and move toward their ideal model. Iomega is strong this quarter. When Maxtor was up in the 45% range, HMT was criticized for letting them get too high. Now that they bring Maxtor down a little bit, they are asked what happened. The customers mentioned above will remain strong customers of HMT's going forward. We will see some growth in the Quantum numbers. Samsung is a very good customer. HMT is providing them with some very high-end technology products. Samsung didn't used to be as big of a drive company as they are today. They have done a good job of executing their growth plans.
IOMEGA. Iomega in the past has been a customer of HMT's except for a small transition period where they were considering outside manufacturing and now they brought in their own manufacturing of the Jaz cartridge and Jaz drives in house. HMT feels that Iomega is now positioned well in the marketplace for removeable products and will continue to be a customer of HMT. HMT believes they are providing not only the products of today for Iomega but also are working on future products with them. HMT believes that Iomega, especially with their recent announcements in terms of their own marketing position of Jaz cartridges and Jaz drives, are going to add strength to their products and consequently strength to HMT's business. They think that the business with Iomega will be more stable going forward. They believe there is a strengthening of the Jaz product in the marketplace. They think all of the things Iomega is doing to promote the product and the cost structure/selling price change is going to be positive. The market for removeable rotating magnetic storage has gained a lot of momentum and credibility lately. It has a good following in the market and is growing at a pretty good pace right now. The sales of cartridges are picking up. Things are looking pretty good for that business. With the cost of the product coming down, they become that much more desirable in the marketplace. HMT is feeling pretty good about that market as they think are a number of industry analysts.
SHIPMENT BY MEDIA TYPE. MR media shipments accounted for approximately 18% of revenue for the quarter, up from 15% in the December quarter. They brought on 5 new programs in the quarter and some of those programs were the MR programs. In the previous quarter they projected they would finish last quarter at about 20% of MR and they fell about 2% short of that. Some of the MR products were involved in the yield problems with the new lines. They are happy with where they are running today. Obviously the yields they expected didn't produce the volumes they expected, but they are happy with where things are running today. It was primarily a little shortfall based on the yield difficulties they had during the quarter, which has now been corrected moving forward. 2200 oersted shipments totaled a little over 50%. The demand environment remains quite healthy for high capacity disks. Their customers are continuing their area density increases with per platter capacities moving to 1.3 gigabyte and higher. The market for high technology advanced inductive and MR media continues to expand and they plan to continue to expand with this marketplace.
LASERZONE/DUOZONE. There was not any volume production of laserzone texture media shipped during the quarter. There are several programs with laserzone samples in significant size. Moderate size and significant size was sent out during the quarter. That number is going up as they bring on their laserzone texturing process. The new equipment will be coming online this month and next month. Duozone was one of the technology challenges they were in last quarter. Two of the five products they introduced last quarter were the duozone texture products and it did create some challenges for the technical community at HMT. They rose to that challenge and, as they exited the quarter, things were running very well and continue to run well now.
DEMAND STRONG. HMT's view on the industry is that they are doing everything they can to bring on the capacity they have planned for the facility now. The four lines that they are currently ramping up and improving the yields on and the two new lines. They have no reason to believe that they are going to slow down the capacity expansion they have currently planned. They think the volume requirements for their products and, in particular for those products in the 1.3 gigabyte and higher per platter are going to be increasing going forward -- and primarily in the MR side of the business which is why they are doing everything they can to ramp up the lasertexture process and other process techniques for tose particular products. They still see a very strong demand on the high end of the business.
IMPACT OF DVD-R. The company was asked to comment on the impact they see to their business of upcoming DVD-R technology. They responded that they think there will always be a strong demand for the traditional magnetic recording business. From what they have seen, the introduction of CD-ROM technology has helped the demand for traditional horizontal magnetic recording because more applications opened up. So, they see these as complementary technologies rather than competitive technologies at this point. As other storage technologies come to bear, they will actually enhance the market for traditional magnetic recording. There have always been technology challenges, and they have continued to drive down and place in front of these other technologies a moving target for cost per megabyte of storage and access and retrieval time. That is a target that has always gone down and it has gone down at a rapid rate. Previous years going at about 30% per year, today they are at about a 60% growth of technology per year which says that they are effectively driving costs down in all other elements of this industry at about 60%. That's a pretty fast moving target for anyone to catch, let alone overtake and displace. As they look at technologies like DVD-R, they believe they are complementary to disk drives. They believe they probably might have a larger impact on the archival storage business which has traditionally been held by tape because you can write larger quantities of data onto single devices.
* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.