By Trevor Shackelford November 29, 2006 -- Presstek Inc. (NASDAQ: PRST) announced their third quarter 2006 earnings recently. The company’s consolidated revenue for the third quarter was $64.8 million for the third quarter, compared to $64.7 million in the same quarter a year ago. The company suffered a net loss of $423,000, or $0.01 per diluted share. Operating expenses for the third quarter were $17.9 million, down slightly from $18.1 million a year ago, and up from $17.3 million in the previous quarter. The increase was due primarily to increased general and administrative expenses. Contents of this Summary • Quarter Highlights • Segment Performance • Guidance • Raine Radar • Q & A Quarter Highlights • Presstek stated consolidated equipment revenue of $20.8 million in the third quarter, compared to $18.2 million in Q3 of 2005. • The company stated consolidated consumable revenue of $33.1 million for the third quarter, compared to $35.0 million in Q3 of 2005. • The company stated consolidated service revenue of $10.8 million in the third quarter, compared to $11.5 million in Q3 of 2005. • Digital products made up 72% of product revenue compared with 65% in Q3 of last year. • External revenue from the company's Lasertel subsidiary was $1.8 million, up 73% from $1.0 million in Q3 of 2005. • Moosa E. Moosa, executive vice president and CFO, stated, "Operationally, gross margin for Q3 was 27.4%, down from 30.3% a year ago and down from 28.4% in the previous quarter. Gross margins were unfavorably impacted by CtP quality related issues and an unfavorable product mix.” • The company reported cash and equivalents of $6.3 million in the third quarter of 2006, compared to $8.6 million in the previous quarter. Inventories were up by $4 million due primarily to an increase in purchases to support higher planned sales. Receivables were down $2.4 million in the third quarter. • Total debt at the end of the quarter was $33.3 million, down from $33.5 million at the end of Q2. Debt-net-of-cash at the end of the quarter was $26.9 million, up from $24.9 million at the end of the second quarter. Segment Performance Equipment Segment Equipment revenue for the third quarter was $20.8 million, up 14.9%, from $18.1 million in the same quarter a year ago. Gross margin in the third quarter was 9.2%, down 16.3% from the 11% margin in the third quarter of 2005. The third quarter also brought a shift of some less profitable analog service contracts to a time and materials model which in the short term will impact the steady annuity-type revenue of the normal service contract. This is believed to be in the best interest of the company as it frees up valuable customer service resources for digital service requirements and results in a more profitable model for the long run. The company’s Lasertel subsidiary reported sales of $1.8 million to external customers in the third quarter of 2006. This is up 80% from the $1.0 million reported in the third quarter 2005. Consumables Segment Consumables revenue for the third quarter was $33.1 million, down 5.4%, from $35.0 million in the same quarter a year ago. Gross margin in the third quarter was 42.4%, down 2.0%, from the 43.3% margin in Q3 2005. Service Segment Service revenue for the third quarter was $10.8 million, down 5.9%, from $11.5 million in the same quarter a year ago. Gross margin in the third quarter was 25.3%, down 17.8%, from the 30.8% margin in Q3 2005. Guidance The company did not give any specific guidance, but president and CEO Edward J. Marino said, "Looking ahead, we expect to see increased placements of DI presses, including the new 52DI, and increased placements of CtP systems beginning in the fourth quarter and into 2007. We are anticipating a decline in analog-related consumable and service revenues in the fourth quarter as a result of the actions outlined above. We are projecting revenue in the range of $68 to $71 million for Q4 2006, along with margin improvement, and a return to profitability, excluding any restructuring related costs." Raine Radar The third quarter was challenging for Presstek. Equipment sales were up from last year, but profitability was sharply down. Consumable sales saw a 5.4% fall, and services saw almost a 6% decrease. This combination of soft sales performance and execution failures driving down profit really hurt the company this quarter. The company is hopeful that it can put these failures behind them, place more presses, and continue to grow in the Q4. Q & A 1. The margin on the service side is down currently while changes in current service structure move to their new service management system. The gross margins should increase for the service side and be more in line by Q4 and even more so by the first quarter of 2007. 2. Presstek’s strategy of digital penetration is working and growth of digital sales has lifted the top line; they are on track with the June layout and will continue to move forward in impacting the new digital technologies. 3. Moosa stated, "We began a new operating model in our business in the middle of 2005 when the major elements of the ABDick integration took effect. These included a shift to more of a direct sales model, and expanded product and service offerings. To provide better transparency into our business and the trends that drive it, we have included supplemental financial information, which will be updated on a quarterly basis." 4. Presstek said that they are still making progress and they have gotten their arms around the CtP quality issues and expect production to be back on track by the end of 2006. The slowdown in North America appears to have been largely a result of customers waiting for Graph Expo, where Presstek generated over 500 qualified sales leads and got customer commitments for 14 DI units. On the analog front, the company is implementing new business practices to increase profitability and improve service levels. 4. The company stated that while they were very disappointed with the third quarter results and the issues that created them, they are taking swift and decisive actions to correct them. Among these are leadership changes and improved quality processes in manufacturing; product portfolio changes, cost reductions, price adjustments and improved business practices in their analog consumables and service business; and improving profitability through further workforce reductions and a general realignment of overall costs.