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ESI posts loss, details China plans

29 Jan 2015

Laser micromachining equipment firm recently acquired Wuhan Topwin Optoelectronics.

Electro Scientific Industries (ESI), the Portland, Oregon, developer of laser systems for precision micromachining applications, has posted an increase in sales but also a wider loss in its latest financial results.

For the three months that ended December 27, the company recorded revenues of $43.7  million, up 14 per cent on the same period a year ago. But higher sales costs saw ESI’s operating loss grow from $4.6 million to $6 million over the same time.

Nevertheless, CEO Ed Grady told investors that he was pleased with a “solid” quarter, highlighting the progress that the company has made on its growth initiatives. A key part of that was the recent acquisition of Topwin Optoelectronics, a laser systems company based in China’s important photonics location of Wuhan.

Grady said of the $18 million deal: “This acquisition will accelerate our China strategy. First, it gives us a solid portfolio of performance systems addressing lower-cost applications. Second, it provides a springboard to address new applications within China. Third, it gives us access to very efficient and low-cost China-based supply chain. And fourth, its systems and platforms, when incremented with ESI technology, will open up many new applications and markets for both inside and outside of China.”

Shanghai development center
That isn’t the company’s only activity in the country: Grady added that ESI has now completed the build-out of its new “advanced development” center in Shanghai and is adding applications and engineering expertise to complement the Topwin team.

Responding to investor questions, the CEO said that Topwin was able to deliver systems to customers very quickly, using commercial off-the-shelf (COTS) parts. “It's very typical in China to have a customer come in and want to have an operation tested on a machine, and want machines a week and a half later,” he explained. “[Topwin] has a few common platforms, a lot of COTS parts, and a very quick turn time.”

Grady sees an added bonus for the company in Topwin’s base platform, saying: “We believe we can put some of the ESI intellectual property and optics and laser control technology on that, [and] leverage into other higher-end parts of the market, but with a lower-cost platform where we can compete again.”

Another key part of ESI’s “revitalization” effort is the development of its internally developed lasers for use in the systems that it sells, which should boost profit margins once complete. ESI acquired the Bordeaux, France, based fiber laser firm EOLITE for $10 million back in 2012.

“During [the latest quarter] we qualified a second internal laser platform into one of our key systems,” Grady said. “The new laser is unique in that it delivers more power to the material surface, which gives the system dramatically higher throughput.”

Breakeven plan
While that revitalization is ongoing, the CEO told investors that it was too early to have had any impact on the company’s financial results as yet. But he added: “We are already seeing early indications from customers that we are on the right track.”

With the various recent changes to the business, ESI’s executives predicted that sales in the current quarter could come in anywhere between $32 million and $40 million.

They are planning for the company to be able to break even on quarterly sales of $50 million in the future – once a slew of new products are fully launched.

ESI also announced that it has agreed in principle a new three-year revolving line of credit for up to $30 million with Silicon Valley Bank. “We believe this facility and relationship with Silicon Valley Bank will give us more financial flexibility as we transition the company and execute our growth initiatives,” said Grady, who expects the agreement to be finalized within the next two weeks.

• The latest update appeared to have little impact on ESI's market sentiment, with the firm's stock price remaining stuck close to long-term lows on the Nasdaq exchange. Trading at around $7.40 currently, ESI has a market capitalization in the region of $225 million.

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