Why Electro Scientific Industries Shares Plummeted

Why Electro Scientific Industries Shares Plummeted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Electro Scientific Industries dropped more than 18% Friday after the laser-based manufacturing solutions specialist beat expectations with its fiscal second-quarter 2014 results, but issued troubling forward guidance.

So what: Quarterly revenue fell nearly 26% year over year to $59.6 million, which translated to non-generally accepted accounting principles net income of $2.6 million, or $0.09 per share. Both numbers beat analysts' expectations, which called for earnings of $0.06 per share and sales of just $58.67 million.

However, Electro Scientific CEO Nick Konidaris also said second-quarter orders were just $46.2 million, compared to $58.3 million in the fiscal first quarter, as "the demand environment was challenging this quarter, due to a lull in advanced microfabrication demand, delays in the adoption of next-generation strengthened glass, and the absorption of capacity ordered earlier in the year."

As a result, Electro Scientific expects orders during its fiscal third quarter 2014 to be in "the low $40 million range," which should translate to a non-GAAP loss per share of $0.05-$0.09. Analysts were anticipating an adjusted third-quarter net income of $0.17 per share.

Worse yet, management also expects full fiscal 2014 revenue to be down approximately 10% from fiscal 2013. Based on ESI's fiscal 2013 sales of $217 million -- which itself fell 15% from the previous year -- that puts the company's new fiscal 2014 revenue estimate at roughly $195.3 million, or well below expectations for sales of $243.36 million.

Now what: While this quarter's results weren't all that bad, it's worth noting the company is already unprofitable on a GAAP basis. As a result, and given its dismal forward outlook, I can't blame investors for bowing out until Electro Scientific proves it can stop the bleeding.

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