Intevac Inc (IVAC) 2005 Q4 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to Intevac's 2005 Fourth Quarter and Year End Results Teleconference.

(Operator Instructions)

Kevin Fairbairn, Intevac's President and Chief Executive Officer is hosting the call today. I would now like to turn the conference over to Mr. Fairbairn. Please go ahead sir.

Good afternoon and thank you for joining us today. With me are Charley Eddy, our Chief Financial Officer; Luke Marusiak, our Chief Operating Officer and Verle Aebi, President of our Photonics Technology Division. After Charley reads the Safe Harbor statement I will deliver a progress report on our fourth quarter activities and then Charley will walk you through fourth quarter results and talk about our expectations for the first quarter and 2006. We will then open up the call for questions. Charley?

During the course of this conference call we will comment upon future events and make projections about the future financial performance of Intevac including statements related to projected system shipments, revenue, gross margin, operating expense, other income, profitability, tax rate, earnings per share, cash flow, capital expenditures, depreciation and stock compensation expense. We will diskuss the impact of perpendicular recording and other factors on demand for our equipment. We will diskuss our plans for military and commercial low-light imaging products and the projected applications and market sizes for those products.

These forward looking statements are based upon our current expectations, and actual results could differ materially as a result of various risks and uncertainties, including, without limitation, the possibility: that markets for our products may not be as large, or develop as quickly as projected; that we may not be able to develop and deliver new products and technologies as planned; that orders in backlog may be cancelled, delayed or rescheduled; that we fail to achieve the expected financial results, and other risk factors diskussed in documents filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The contents of this February 7th call include time-sensitive forward-looking statements that represent our projections as of the date of the call. We undertake no obligation to update the forward-looking statements made during this conference call. Any redistribution of the call without our express written consent is strictly prohibited. Kevin?

We are pleased to report excellent fourth quarter results, which are a record for us in terms of both revenue and profitability. Revenue has increased to $52.7 million from $43.5 million in the previous quarter as we delivered 11 systems to 4 different customers in 6 different locations and recognized 13 systems for revenue. This is a terrific accomplishment by our factory and field operations group and resulted in $9.9 million of net income, or $0.46 per diluted share, which is ahead of our prior guidance.

In our equipment business we set the new record in 2005 for orders and revenues. Orders for the 200 Lean continued on strong from the previous two quarters. We exited the year with $84.5 million in backlog setting us up for a flying start to 2006. Last year we started 2005 with only $10.5 million in backlog and went on to achieve record revenues of $137 million.

In Q4, we demonstrated continuing progress on our product cost reduction activities, which led to higher gross margins and improved financial performance relative to the prior year and prior quarter. Our initiatives continue, aimed at further reducing our product costs in 2006, including Asia sourcing and manufacturing and further improvements to our business processes.

The demand for hard drives continues to increase, driven by emerging consumer applications and the proliferation of PCs into the emerging markets of Asia and Eastern Europe. The recent Consumer Electronics Show in Las Vegas introduced and highlighted the many new consumer applications using hard drives. Seagate recently cited the growth in consumer related products, such as the X-box and digital video recorders were significant drivers in its positive business results.

A major milestone for the hard drive industry was Seagate's introduction of the first major hard disk drive utilizing perpendicular media, a 160Gigabyte drive for laptops. Perpendicular media enables higher memory densities relative to the longitudinal technology, which the industry has used for years. Analysts project the complete transition to perpendicular to occur over the next 3 to 5 years. This is an important transition for Intevac because the large installed base of our legacy 250B medium manufacturing systems is not well suited to economically manufacture this new media technology. Our latest product, the 200 Lean, was specifically designed to address the technology and economics required for perpendicular media manufacturing.

Our legacy 250Bs are limited to a maximum of 12 process steps, which is adequate for most longitudinal media. Efficient perpendicular media manufacturing can require as many as 20 process steps. The 200 Lean's modular architecture can support as many process steps as necessary for efficient perpendicular media manufacturing. In the last two years, the majority of 200 Leans shipped were configured with 20 process stations, but with only two-thirds of those process stations populated with process hardware. These tools are currently in production producing advanced longitudinal media. We expect these tools to be upgraded with additional process hardware to enable perpendicular production over the next year or so.

Our outlook for 2006 continues to be positive. We have excellent visibility on the first half due to our $84.5 million backlog. All of our 200 Lean customers have informed us of their plans to add additional perpendicular capable capacity in the second half 2006. We expect they will buy more systems in aggregate in 2006 than in 2005. The transition to perpendicular technology and its increased capacity needs are the prime drivers for growing our business in 2006. Today, we have a backlog of 19 200 Leans for delivery in the first half. By contrast, we shipped a total 23 200 Leans and 6 legacy 250Bs during all of 2005.

Our internal modeling suggests there will be continuing significant demand for our systems over the next 3 to 5 years as the end market for hard drives continues to grow and the industry transitions to perpendicular media technology. We expect the majority of system replacement business to occur in 2007 and 2008. In 2006, we expect system shipments will generally be configured for perpendicular production.

The recent announcement of Seagate's acquisition of Maxtor is expected to have a neutral to positive benefit to Intevac as both companies use our systems. On one side, the conventional wisdom is that the final market share of the combined companies will be less than the sum of their prior market shares. On the other hand, Seagate has perpendicular technology already released to production and has the capital to invest in new equipment enabling the combined company to rapidly transition to perpendicular media products for its enlarged base of customers.

Work continues on the sale of further Flat Panel Equipment IP licenses with active negotiations continuing with a second potential licensee.

In Imaging we continue to make significant progress on development and positioning of Intevac products for next generation digital headmounted night vision systems for the US Army. The Army is following its product development roadmap with procurement of interim night vision products on the path to a digital solution. The estimated size of the US Army night vision business continues at over $400 million per year for today's legacy night vision goggles and is representative of the expected market size after transitioning to digital video based night vision products.

As reported last quarter, Intevac has completed development of a low light level digital video sensor optimized for night vision use. The development program, partially funded by the Army was completed in November when we delivered cameras incorporating the new sensor to the Army.

We also teamed with a major defense contractor in Q4 to develop a headmounted fused digital night vision system. In this system we plan to “fuse” imagery from Intevac's low light camera will be fused with imagery from our partner's thermal camera and display it in front of the soldier's eye. This system development leverages Intevac's investment in sensor technology, our expertise in digital electronics, and will provide a complete product to the military end user. This program continues our transition in Imaging from a technology development focus to an end user product focus.

Two major defense contractors developing other digital headmounted night vision demonstrated products have also selected Intevac's sensor. These wins are the next step in our strategy to position the Intevac sensor as the solution of choice for digital headmounted night vision products and are a direct result of field test results with our military customers that confirm the performance of this new sensor.

In previous calls, we discussed our contract to supply night vision cameras for use by a major NATO country in head-mounted systems. Our challenge on this program is no longer technical, rather it is related to timely export approval. Our night vision technology is leading edge and is subject to US export control. In the next two quarters we will be continuing our activity with the Department of Defense and the State Department to obtain the required export approval to ship product to NATO. In the meantime, we will continue to supply reduced specification product to our customer to enable ongoing system development.

MOSIR, our near infrared commercial camera, was introduced at the Photonics West trade show in January with great interest from prospective customers. The MOSIR camera leverages our military imaging technology with a version of our LIVAR sensor, customized to meet the needs of the scientific imaging market. MOSIR will be distributed through Value Added Resellers and OEMs. The trade show and customer response confirms our estimate of a $30 million annual market size for MOSIR and its derivative products.

As we complete product rollout of the MOSIR camera, we plan to transition our camera engineering team to the development of additional products for the commercial market based on our low light level night vision sensor. These new commercial products will help create a business balance between commercial and government markets.

Charley Eddy will now diskuss the financial results. Charley?

Thank you Kevin. As I talk through the highlights of the fourth quarter, I will also comment on expected first quarter financial results and our expectations for 2006. Our expectations will include projections on both a GAAP basis and a pro forma basis that excludes projected non-cash stock based compensation expense related to our employee stock option and stock purchase plans.

Consolidated Q4 revenues totaled $52.7 million. Equipment sales of $50.9 million included 9 200 Lean systems, 4 legacy MDP 250 systems, and 2 disk lubrication systems. Revenues for the 12 months of 2005 grew by 97% to $137 million from $70 million in 2004. 2005 revenues included $124 million of memory equipment sales and $8 million of imaging sales and $5 million of flat panel equipment and license sales.

For the first quarter we are projecting consolidated revenues of $37 to $42 million. This estimate assumes that we recognize 7 to 8 200 Lean systems for revenue.

For 2006 we expect revenues in the range of $160 to $180 million. This forecast is consistent with the delivery of 32 to 36 200 Leans and assumes that Imaging contributes $10 to $12 million of revenue.

We expect Q2 to be our busiest quarter with the balance of the year's revenue spread fairly evenly across the other 3 quarters. All of the 19 systems in backlog are scheduled for revenue recognition during the first half. These projections exclude any revenue that we may realize from further licensing of intellectual property related to our flat panel equipment.

Gross margin increased from 23% in 2004 to 32% in 2005. Q4 consolidated gross margin was 35%, which included a 36% gross margin in Equipment and a 10% margin in Imaging. The 36% gross margin in Equipment included the effect of the final high cost 200 Lean that we carried in inventory for some time.

We are projecting consolidated GAAP gross margins of 34% to 36% for the first quarter and also for the balance of 2006. These projected GAAP gross margins include approximately $100,000 of non-cash stock based compensation expense in Q1 and approximately $600,000 of non-cash stock based compensation expense for the full year of 2006.

Fourth-quarter operating expense of $8.7 million, was lower than our beginning of quarter expectations due to lower than forecast R&D spending and Equipment. We were not able to hire engineers as quickly as planned, nor did we spend as much as forecast on prototype materials. We've recently recruited a number of key hires for our engineering and business development teams and expect first quarter GAAP operating expense of $10.0 to $10.4 million. We are continuing to increase our worldwide field operations staff to support growth in system shipments and customer sites. We use Singapore as the hub of our Asian field operations and expect to further expand there in 2006 with the addition of some manufacturing and engineering capabilities. The projected range of GAAP operating expense includes approximately 500,000 of non-cash stock based compensation expense. Accordingly, pro forma operating expense, including the effect of non-cash stock based compensation is expected to be $9.5 to $9.9 million.

For the full year of 2006, we expect GAAP operating expenses in the range of $41 to $43 million, which includes approximately $2.9 million of non-cash stock based compensation expense. Accordingly, pro forma 2006 OpEx, excluding the effect of non-cash stock based compensation is expected to be $38.1 to $40.1 million.

Net income for the 12 months of 2005 totaled $16.1 million or $0.76 per share. This represents a nice turnaround from the net loss of $4.3 million or $0.22 per share incurred in 2004.

Our Q4 net income of $9.9 million, or $0.46 per share was above our beginning of quarter expectations. The $9.9 million net profit consisted of an $11.2 million operating profit in equipment, a $1.9 million operating loss in imaging, a $309,000 operating profit in corporate, $554,000 of other income, plus $253,000 for income taxes.

We expect other income of about $600,000 in Q1 as we benefit from increased cash balances and rising average yields in our investment portfolio. We expect other income of $2.5 to $3 million for the full year.

For Q1, we are projecting GAAP earnings of $0.16 to $0.24 per diluted share. Pro forma earnings including non-cash stock based compensation expense are expected to be about $0.03 higher, or $0.19 to $0.27 per diluted share.

Our 2005 tax rate was 2.5%. The low tax rate resulted from utilization of our net operating loss carry forward. We are entering 2006 with $15 million of fully reserved, deferred tax assets, which include the effect of our remaining net operating loss carry forward. Accordingly, we are projecting a tax rate of 3% for 2006.

Capital spending and depreciation for the year totaled $3.6 million and $2.1 million respectively. 2006, we are projecting capital spending of approximately $8 million and depreciation of approximately $3.6 million. The majority of the capital spending is in the equipment business and for IT infrastructure. Cash and investments increased slightly to $50 million from $49 million at the beginning of the year. We are pleased that we were able to grow the business by 97% during 2005 without taking on any debt, raising any new equity or consuming any cash.

Accounts receivable grew to $43 million and are turning over in a timely fashion. The growth in accounts receivable this quarter related to the high level of revenue and deposits billed related to the equipment orders received late in the quarter. With this cash level, no debt, good profits and modest capital needs, we remain well capitalized to execute our business plans and expect that cash and short-term investments will continue to increase in 2006.

Our headcount at the end of the quarter totaled 362 employees, up slightly from 357 at the beginning of the quarter and up substantially from 191 employees at the beginning of the year. 91 of the 357 employees are contractors. The majority of these contractors work in operations as part of our strategy to maintain a flexible workforce that can respond to rapid changes in demand.

Operator, this completes the formal part of our presentation and we're now ready for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from Rich Kugele with Needham and Company.

Thank you and congratulations on a great quarter. And thank you also for breaking out the option expense by line item. That's helpful. The new semiconductor equipment product that you've discussedpreviously, can you just update us on when we might be hearing more about how the initial quals are going, or initial product roll out?

Hi Rich, this is Kevin here. We really have no additional news and the development continues on track and we're very happy with the progress and when we're ready to announce, which we think may be later this year, we will do.

Okay. And then, I guess secondly, obviously your '06 estimates for unit shipments are significantly up from '05, should we interpret your comments on the replacement of equipment for perpendicular for the rest of the industry to suggest that you expect to see solid shipments as well in '07?

Our internal modeling suggests that '07 and '08 will be bigger than '06 because we see a steady increase in capacity and on top of that, at some point, people are going to have to either start upgrading the legacy cores to 200 Leans or the equivalent or they're going to have reduced output if they try and run perpendicular on those older 12 station systems. So that's why we think there will be a growth in '07 and '08.

Great, and I guess just lastly, as we try and get our hands more around the imaging side, can you repeat what you were saying about the NATO customer and then in terms of the shipments because of customs or the approval from the government allowing you to ship, and then how much are you invested to-date in the imaging business if we wanted to go and try and assign a value based on your investment to-date?

Okay so, Verle will answer the first question concerning exports and this particular customer.

Rich, our technology is leading edge and subject to export approval as a military product. That's not under our control, but we are actively working with the DOD, which is the cognizant part of the government, to obtain timely export approval for these products for our NATO customer. We have not included any significant revenue in our guidance for products that we have not yet received export approval on. So we're working that. We'll report more on that in the future in '06.

And you thought it was going to take another 1 to 2 quarters? Is that right?

I think it will be mid-year before we have a firm answer on this.

Okay.

Rich, your question on investment? I'd say we've probably put, out of our pocket, we've probably got about $30 million invested in the imaging business since we've started it, since we started that activity. If you added in the revenue that we've received from customers to do contract R&D, it's probably more on the order of $75 to $100 million that we've put into it so far.

Okay, great. Thank you very much.

Your next question comes from Jesse Pichel with Piper Jaffrey.

Congratulations also Kevin and Charley. How many production Leans were shipped perpendicular ready to-date and how many Leans in your guidance are perpendicular configured and I have a follow up.

Hey Jessie, this is Luke. Of the 34 200 Leans that we've talked about over the last 2 years, approximately a third of those are configured for perpendicular either in the development or production side. And as far as ongoing guidance, we would expect the total percentage of systems to ultimately grow from in the 10% range, or correction, in the 30% range to the 50% range.

Okay so half of this year's Leans will be perpendicular shipped and then of the 34 you've already shipped, one third were perpendicular but probably most of those were for R&D purposes, is that right?

It's a mix, probably half of those were for development and the other half were production.

Okay, fair enough. And how much is the upgrade from 12 to 20 stations? And what would the associated gross margins be on that?

Jessie, the upgrade, it's a function of what's the original configuration. I think we'd estimate it's typically anywhere from 3 to 600,000 depending on what they already have.

It's 3 to 600,000 from 12 to 20.

Yes, most people, they may not only have 12, it just depends what they've got and how much they've added to it in their original configuration. So it would just depend on the system, so I'd guess anywhere from 3 to 600,000 per system.

And so on the high end of that, that's what? That's carbon to diamond and what would be at the low end?

It more relates to how many stations they would remove and how many new ones they would add so it's not a straight 12 plus 8 equals 20. In some cases, they have to remove stations.

And another questions is, can you give us any granularity on your new semi-cap tool and I understand most of your R&D this year is for that new tool, what happens to that R&D in 2007? Does it go away if the tool is successful or will you have to keep this level of R&D spending?

We'll continue to drive our equipment business on a very straight forward business model where we'll spend anywhere from 10 to 15% on RD&E and that will be either extending the capability of the tools we already have or developing new tools.

And can you give us any granularity there on the new tool and - or at least when we'll hear more information about it? Or who the beta customer is?

To provide that level of granularity would be to hand too much information to potential competitors. I'm sorry for that, I've been in that position for a while now. And the other thing is it's not a traditional semi-cap product as I've explained before.

All right, okay. Thanks very much.

Your next question comes from Chris Cook with Zazove.

Hi, thanks for taking my question. Just a quick question on what plans you have if any for the cash that's starting to accumulate on the balance sheet.

Chris, this is Charley Eddy. It's nice to hear from you again.

Nice to talk to you.

We have about $50 million in cash now. Our plan is to maintain a high rate of profitable growth for the company, our kind of our internal goal is to maintain 30% year-over-year growth and if we continue to do that I think we'll need the cash we have, we'll need to continue generating cash so I'd say we're going to hang on to it and we think it will be useful as we grow the company.

Does that imply that some of that cash will be used for acquisitions or you need that liquidity to fund working capital?

No, I think you're going to see us follow more of an organic growth path.

Okay. Okay thanks.

Your next question comes from Mark Miller with Hoefer & Arnett.

Congratulations on your record quarter. Just wanted to talk about Maxtor a little bit, there's a lot of speculation about - I have to say there's speculation about the relative share gain Western Digital might see. Western Digital, as you probably know, announced an extension of an agreement with Komag to extend their capacity. Have you had any indication from Maxtor as seeing it about affecting any possible orders because of this new agreement with Komag and do you still feel confident that you'll see the level of orders from Maxtor that you were expecting before the merger announcement?

Well, first of all we're not privy to any contracts that may exist between Maxtor and Komag. Clearly until this acquisition is resolved we're not clear what Maxtor's plans would be for the second half of the year. That's really all we can say at this point.

So, you also said, during the conference call, that you expect '07 and '08 to be stronger. From what you've revealed so far today, it looks like by the end of this year we'll have [7] of these Lean tools in the field. So one just approximating, it looks like you're insinuating that by the end of '08 we could have 150 of these Lean tools out there. Are you still counting on just 4 customers between these - or actually 3 customers now between these 150 tools if the CA merger goes through or is my math wrong?

We've been taking a fairly conservative approach, so we've been using some of - we agree with some of the projections from Tom [Kaufman] where he estimated - by 2010 there will be a need for about 300, 200 Lean equivalents, that's the total market. And just based on the market share of our customers that would imply that 200, 200 Leans, we've shipped less than 20% of those to date so there's still a long way to go.

Okay, so you're saying by 2010 there'd be roughly, if you still stick with 3 customers and CA is successful merging, that'd be roughly 60, 70 tools per customer. Is that correct?

200 total, obviously it's going to depend on what the market share exposed between those customers.

All right. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Mark Gomez with Pipeline Data.

Hi guys, great quarter. Can you do me a favor and repeat the unit sales? You mentioned 2 lubers I caught, I didn't catch the rest, sorry.

For 2 lubers there were 9 200 Lean and there were 4 of the legacy 250B systems in Q4.

Okay, and do you have any data with regard to what kind of price per megabyte efficiencies the perpendicular equipment that you guys are providing is supplying to the end customers?

I think well - it's probably enabling in the short time a roughly 50% jump in aerial density if you look at what people were doing per platter previously and now what they project to do. Obviously the customers will continue to enhance their processes that they use in our tools and we'll take that even further.

So that would imply that the price per megabyte efficiency would be somewhere on the order of 33 to 30%. Is that correct?

Correct, assuming that our customers don't use the higher aerial density to improve their pricing.

Great. And one other question, have you heard since the Canon acquisition any competitive rumblings out of Anelva?

Sorry, can you repeat the first part of your question?

Wondering since the acquisition of Anelva, it seems that that company was acquired not for their sputtering systems and I'm wondering if you've experienced any competitive advantage since that acquisition?

No, I'd say since the acquisition there's been no change in the marketplace. I think one positive piece of news though is quite recently I was reading an article on the guy who runs Canon and it is very much like a Western CEO and believes in good profitability and good gross margins so that would be good for us if Anelva had much better pricing in future.

Great, thanks a lot guys and congratulations.

Your next question comes from Steve Spence with UBS Financial Services.

Can you tell us a little bit more about the capacity in Singapore, is it R&D? I believe you mentioned there was some reference to manufacturing and if so, what all product lines do you anticipate manufacturing there?

We plan to expand our manufacturing in Singapore with starting sub assemblies and the sub modules that go in the 200 Lean, so it's kind of a walk before you run strategy. This enables us to further develop the local suppliers, increase our efficiency and as we build that expertise, then we'll see how far we can increase the ops and the capacity over in Singapore.

Understanding there's a ramp up phase in it, do you have any idea, at the end of the year, with a reasonable set of expectations as to what amount of capacity addition that will essentially permit?

Yes, we expect to be still at the modular level so we wouldn't be doing an entire 200 Lean in Singapore at that time, but we do plan to have roughly 20% of our people there and we expect a good chunk of the manufacturing hours to be transferred over there to that lower cost area.

If you take a look at your current shipment rate it doesn't -- it appears that you're operating at capacity in the present environment, I'm just trying to put these 2 concepts together.

No, I see.

To help with the model here a little bit.

Yes, we believe that we're well sized for the 2006 growth rate and we could easily handle another double from that rate with our current facilities and our expansion plan. Does that answer your question?

Yes it does. Thank you. And then just the last question I've got for you, while your full year shipment rate in '06 will appear to be in the ballpark, what you're able to ship in Q4, plus or minus a few unit, might have hoped for just a touch more gross margin expansion, you folks being understandably conservative or any light you might be able to shed there?

We guided to gross margin of 34 to 36% in '06 for the full year. And that's, as you pointed out, that's about what we -- that's what we already have achieved in Q4. We have a whole host of cost reductions programs going on, probably 80% of the cost is purchased material and the rest of it is the cost of putting it together and installing it and assembling it.

Initiatives we have are working on reducing the cost of all the purchase materials, that's where most of the leverage is. The other initiative which Luke talked about is starting to transition some of the production from Santa Clara to Singapore and that's really thinking ahead to the next product or you can think of our Santa Clara plant as kind of our pilot and initial manufacturing. By the time we're ramping up the new product we want to have Singapore doing most of the work on the old product.

So, you're right, we're a little conservative. I think before I see the contracts from the vendors and I've got the really clear path for gross margin going up I'm not going to guide to it. So I hope we'll be able to improve it somewhat as we pass through the year, but I want to see it before I talk about it.

Fair enough. Thank you very much.

Your next question comes from Matt Bryson with Avian Securities.

Hey Charley, can you just repeat the unit counts for '06 again?

Yes Matt, we said $160 to $180 million in revenue.

Yes.

Which is equivalent to 32 to 36, 200 Leans.

Got you. In terms of going back to your last call, I think you talked in the mid to high 30s there with slightly lower revenue, I think the midpoint was 10 million below the 160 to 180. Are you just -- are you getting more fully configured systems or is the spares number going up or should we expect a bit more on the imaging side?

No, in the last call --

Yes.

I threw out a number off the top of my head and I was wrong.

Got you. No that's --

The number consistent with the last call, I should have said 31 to 35.

Okay.

It's really just, we're adding more systems in.

Okay. Thank you.

At this time there are no further questions.

Okay, well thank you for joining us today, we look forward to updating you next quarter. Good-bye.

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