Intevac Inc (IVAC) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Intevac's 2007 first quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and and answer session. (OPERATOR INSTRUCTIONS) Please note that this conference call is being recorded today, April 30th, 2007. Kevin Fairbairn, Intevac's President and Chief Executive Officer, is hosting the call today. I would now like to turn the call over to Mr. Fairbairn. Please go ahead, sir.

Good afternoon, and thank you for joining us today. With me are Charlie Eddy, our Chief Financial Officer, Luke Marusiak, our Chief Operating Officer and -- Joe Pietras, our Vice President and General Manager of our Imaging division. After Charlie reads the Safe Harbor statement, I will give a progress report on our first quarter activities and then Charlie will walk you through first quarter results and talk about expectations for 2007. We'll 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 performance of Intevac, including statements related to projected orders, production rate, shipments of our products, revenue, gross margin, operating expense, other income, profitability, tax rate, earnings per share, cash flow, capital expenditures, depreciation and stock-based compensation expense. We will discuss projected demand for hard drives, medium manufacturing systems and upgrades, the impact of upgrading legacy tools, the transition to perpendicular recording, the transfer of production to our Singapore production facility and product development plants. We will discuss our plans for military and commercial low-light imaging products, the expected market size for advanced night vision goggles and anticipated orders and shipments for our imaging 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 developed as quickly as projected, that we may not be able to develop and deliver new products and technology as planned, that orders and backlog mat be cancelled, delayed or rescheduled, we failed to achieve expected cost reductions, tax rates or financial results and other risk factors discussed 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 April 30 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 call, any redistribution of this call without our express written consent is strictly prohibited. Kevin?

Thank you, Charley. We are pleased to report our first quarter results, which were at the high end of our revenue guidance and above our gross margin and net income guidance. Revenues totaled $76 million, as we delivered 13 200 LEANs. We achieved GAAP net income of $9.8 million or $0.44 per diluted share, stock base compensation expense if $1.4 million, equivalent to $0.04 per share is included in our total -- is included in our results.

Our internal forecast for 2007 in the equipment business is relatively unchanged from last quarter. As in the last quarter's forecast, we continue to project limited business from our historically largest ACD customer. Accordingly, the recently announced capital spending reductions have had minimal impact on our internal projections for the balance of 2007 projects. Pricing concerns in the traditionally slower calendar first quarter have dampened the spurts of the HTD industry. So we are being cautious with our projections for the second half with the respect upside potential. We are driving the business with one foot on the accelerator and one on the brakes, so we can quickly respond to industry's dynamics.

In the equipment business, our operations team began executing the plan, shipping 13 200 LEANs on time. Upgrade orders for legacy systems and 200D perpendicular upgrades were strong and contributed significantly to our backlog. We expect further system orders shortly for Q3 based upon customer request quotations. We continue to see customers placing their buys through natural markets. The ramp of our Singapore manufacturing facility continued on schedule with additional 200 LEAN models assembled there during the quarter. We plan to continue increasing production levels in Singapore and focus our entire team on the introduction of new products.

While the sentiment of the hard-drive market has been mixed recently, the macrotrends for increased consumption of hard drives have not changed. Digital video recording, visceral related PC cells, expansion of emerging country markets, high-definition TV, back-up and archiving of personal content and other growing consumer related applications are all growth drivers for hard drives. Accordingly, forecasters continue to predict increasing demand for digital data and hard drives. This growth, along with the migration to perpendicular magnetic drives our equipment business today and indicates ongoing needs for more media deposition systems, like our 200 LEAN.

Some customers are extending the life of their legacy tools by using them for perpendicular production. However, this reduces the net output of the legacy tools and shrinks capacity, resulting in the need for more new tools. The impact to Intevac of these legacy upgrades is additional upgrade revenue and the lengthening of the upgrade cycle for new equipment. In aggregate, this leads to more revenue for Intevac, as the upgrades cost as much as $1 million a system. The activity has driven an increase in non-system orders for us this year.

Indications from some of our customers are that the extension of life will be limited to one generation, as more advanced perpendicular media designs require more process steps and than are available in these legacy tools. Our engineering team is busy developing new capabilities for the the 200 LEAN to support future media technology improvements, which cannot be accomplished, even at throughputs on our legacy systems.

Our engineering team has made good progress on development of our new semi-conductor equipment product. Our engagement with the leading semi-conductor manufacturer has been very beneficial. This manufacturer provided us with state-of-the-art test structures and product waivers to enable us to develop and optimize our new system in-house. As a result, a great deal of the learning that traditionally happens after the shipment of the first system has already occurred and we have been able to identify improvements needed to ensure this new system will have extendability for future device generations. We have chosen to make the modifications to our product now and to complete full testing of qualification of these modifications before shipment. This has delayed our first shipment, but will avoid costly retrofits in the future and is a more timely and cost-effective way to achieve our goal of completing customers qualifications for future business. We will continue to update you on our progress.

In our imaging business, we continue to execute our transition from a contract R&D based business to a product centric business. We received export approval and delivered an initial quantity of preproduction camera models to our NATO customers. We also received export approval for a shipment of remaining preproduction units but the approved performance limits are too low to meet the customers' needs. Accordingly, we submitted a request to increase the export performance limits on our camera module to a level similar to current exportables, U.S. night-vision sensors. Upon receipt of this approval, we will resume preproduction shipments.

Working with our partner, DRS technologies, we completed delivery of several prototypes of our next generation of night vision goals to the U.S. Army in March. This goggle combines the images from Intevac's low light night vision sensor with DRS's thermal imaging sensor. This goggle underwent several weeks of successful field testing by the U.S. Army. We submitted a proposal, with DRS Technologies, for the next phase of the development program, which we expect to be awarded in late Q2. In this phase, we plan to deliver goggle prototypes with enhanced performance. These will include further improvements in our night vision sensor for which we received initial funding of $1.5 million during the first quarter from other U.S. government sources.

First production award of the next generation digital night vision goggle for the U.S. Army is expected in 2010 and will represent about $150 million of business [Inaudible - background noise]. Within our commercial imaging markets, we delivered low volume production quantities of our near infrared MOSIR camera. We also plan to release a new MOSIR camera during Q2, which will operate in the ultraviolet and visible regions of the spectra, allowing our customers broad spectral coverage in their applications, using the MOSIR family of scientific cameras. We expect to deliver approximately 15 MOSIR cameras during 2007.

We experienced strong commercial sales of Raman system products at DeltaNu, which exceeded our initial expectations. Sales of existing sales were strong internationally, as a result of focus on increased product distribution. During Q2, we also expect to expand our domestic distribution by establishing a U.S. direct sales staff for Intevac commercial imaging products. Charley Eddy will now discuss the financial results.

Thank you, Kevin. Consolidated Q1 revenues totaled $76 million, included $1.4 million of flat-panel technology license fees and we're at the high-end of our beginning of quarter guidance. Imaging sales of $3.9 million were a new record and consisted of $2.8 million of contract research and development and $1.1 million of product shipments. The imaging results include revenue from our new DeltaNu subsidiary, which we acquired on January 31st. First quarters consolidated gross margin of 43% was a record and above our beginning of quarter guidance. The equipment gross margins increased to 43% from 35% in the year-ago period.

The flat-panel license fee accounted for 1.9% of the gross margin increase, along with cost reduction programs, increased volume and favorable product mix. In imaging, gross margins grew to 37% from 26% in the year-ago period. Imaging gross margins benefited from higher margins on R&D contracts and $176,000 of favorable adjustments related to the quick closeout of some government contracts. First quarter operating expense of $19.7 million equalled 26% of revenues, versus 11% -- $11 million, or 22% of revenues in the year-ago period. The increase in operating expense is mainly due to increased spending for new product development and market development and equipment, higher stock-based compensation expense, and the access lawsuits costs.

Expense prototype material is a significant portion of equipment R&D expenses during Q1. We're building multiple tools and, based on our conservative accounting rules, have written off most of the material to R&D expense. Most of the material will ultimately be used for product shipments and engineering systems. We expect material expense as a percentage of total R&D expense to decline as we go forward this year.

Our 2,007 estimated tax rate is 31.6%. This is an increase from 12% in 2006, which had the benefit of a substantial net operating loss carrying forward. Given that we get a relatively fixed benefit from our R&D tax credits, our tax range should scale over the, our guidance range, from 31.6% at the upper end to 28% at the lower end. Net income for the first quarter totaled $9.8 million, our -- or $0.44 per diluted share, and included $1.4 million of stock-based composition expense equivalent to $0.04 a share. Order backlog totaled $92.8 million at quarter end and includes orders for 14 200 LEAN systems. We're projecting consolidated revenues of $69 to $75 million in the second quarter, which includes 12 to 13 200 LEANs. We expect second quarter gross margin of 41% to 42%, operating expense of $18.5 to $19.5 million and other income of approximately $1.3 million.

In Q2, we're projecting earnings of $0.33 to $0.40 per diluted share, which includes and estimated $1.4 million of stock-based compensation expense, equivalent to $0.04 per share. For the full year, we're projecting revenues of $245 to $285 million and shipment of 35 to 45 200 LEANs. Our full-year projection reflects a more cautious approach Kevin mentioned, that we are taking to the second half. Our outlook for spares and upgrades revenues has improved and offsets, to some extent, the reduction in 200 LEAN shipments. We expect gross margins to average 42% to 43% through the full year. We expect operating expenses of $70 to $75 million. We expect other income, primarily interest income in our cash, of $5.5 to $6 million.

2007, we expect between $1.25 and $1.65 of cap earnings per share, which includes an estimated $6.7 million of stock-based compensation expense, equivalent to $0.20 per share. Cash and investments increased to $114 million from $103 million at the beginning of the quarter, as a result of strong profits, collections and a reduction in inventory. First quarter capital spending totalled $1.9 million, first quarter depreciation and amortization, including DeltaNu purchase accounting amortization, totaled $1.1 million. For 2007, we're projecting capital spending of approximately $14 million and depreciation and amortization of approximately $6 million.

Our head count at the end of the quarter totalled 525 employees, down from 540 at the beginning of the quarter. Twenty eight percent of our employees are based in Asia. Twenty two percent of our employees are contractors who primarily work in operations. This completes the formal part of our presentation. Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of David Bailey.

Great, thank you very much. Just a couple of quick questions, please. First, could you give us some idea of how many qualifications are underway on the semi cab equipment side and when do you expect the first customer shipment now?

Okay. We have ongoing customer demos with at least three customers and some more plans and we anticipate around mid-year before we do the first shipment, based on these product modifications and retesting that we're currently doing.

And do you have any change in your outlook of what the potential revenue in '08 might be from that equipment?

We originally set ourselves a '08 goal of $100 million. We haven't changed that goal, but it's obviously more challenging now.

Okay. And then on the hard drive side, can you talk about -- outside of what was traditionally your largest customer, could you talk a little bit about -- have you seen pushouts in orders yet or are you just being more cautious at this point?

Q1 it was about pulling some accelerations and in Q2 we're continuing to see people pushing hard to get their tools upgraded for perpendicular, so, what is the mood to the industry, recently I would say is relatively mixed. We still see that there is a strong desire to get perpendicular capability in. So, no, we have seen no pushouts.

Okay, I thought you had mentioned in your prepared comments there has been a shift with more upgrade revenue and less new systems. Did I misunderstand?

David, when you're talking about pushouts of stuff that's currently scheduled for the full year, we took some of the upside out of the systems, So, we reduced the full-year numbers. But, of all the orders we have, we haven't -- we haven't seen anything except people saying to deliver quickly.

Okay. Great. Thank you.

Your next question comes from the line of Kevin Hunt.

Hi, yes, thanks. A couple of questions. Could you give us a couple of breakdowns on the revenue? Can you tell us what DeltaNu was in the quarter? Also, a sense of what the mix of -- within that equipment number that you reported, what was -- I assume the flat-panel, $1.4 million was in there. But what was the mix of the actual tools versus the upgrade and spares.

Kevin, we're not going to continue breaking out DeltaNu numbers. It was -- I'll tell you it was less than half of the product revenue, which I said was a $1.1 in Imaging.

Okay.

So let's see, your question on equipment --

Yes just what the mix was of the various lines there.

Well, we had 13 200 LEANs and we had probably a typical level of non-system orders, but I would rather not say exactly what the level of non-system orders was. We typically haven't reported that.

Okay. And can I follow up on the other, I actually missed, Kevin, what you said on the product X. When, when would the first customer revenue then be and what ?

What was?

Sorry. What?

Sorry. Finish your question.

Yes. And just and then, what was actually delayed, I guess, is my question, because I kind of missed that.

Okay. We were working very closely with one of the leading edge customers and, as a result of doing a lot of work on their state-of-the-art product wafers and test wafers, they helped us identify some improvements they would like to see, so it would be much easier to qualify down the road to the future notes. And so we elected to make those changes rather than get the product out there and then change it down the road. And so that's delayed shipment by a quarter as we retest these changes.

Okay. All right. Thank you.

Your next question comes from the line of Jesse Pichel.

To follow up on Kevin's question there. Can you narrow it down when the first shipment might happen of product X and is that to just one customer or is it -- or what are the other two Beta customers, say?

Okay, so the first one, we will have further meetings to determine what the shipment date would be. And so, I said around mid-year. And so, I can't narrow it down anymore than that. With respect to the other customers, we're going through the initial phase of doing demos before we get to any commitments on base assessment shipments. But we would not expect that before Q3.

And what has the other two customers reaction been there to the delay?

They see no delay.

Because they don't need the improvements that Customer 1 is asking for?

Correct.

Okay. To Imaging. You know, you mentioned this $150 million potential program award there. What is your TAN out of the $150? You're total adjustable market.

I think if we're successful, we would look to get 50% of that. That's the, that's the deal we have with DRS and that would assume that the DRS/Intevac design wins. And then we would split the business 50/50.

What kind of margins would you see on that? Could they be as great as your equipment margins, or greater?

They would be on order of 40-plus percent.

Yes. And can you help me out in understanding how I should, how should we model the Imaging business going forward? Is this revenue and margin rate sustainable or are the development contracts fully recognized at this point?

I think the margin rate is sustainable, as we convert more into a product-based business.

Yes, but what about as it stands right now? I mean you recognize the -- it looks like you recognized an awful lot of product development products in the quarter?

Yes, and the ones that we did recognize had margins above typical average, I would say. So as we convert to more typical project-based revenue, but as the product revenue increases, the margins will be sustainable with the mix.

The product is what percent then of the Imaging?

For the year, it will be on the order of about 35%.

Where was it for the quarter?

It was $1.1 million out of the $3.9 million.

Yes.

And, Jesse, we said that we think that Imaging revenues will roughly double this year.

Yes.

Up from the base of $11 million last year.

And how about the margins on that?

I stand by what Joe just said is that we called the margins where we have.

So they come in a little bit, but as you get more product based, they should stabilize?

They should go up, Jesse. Our goal with our imaging products was to get gross margin per product about 50%, so as we increase the percentage of the business which is product based, you will see the margins come up. But for the projections for this year, the number is consistent with what Joe said.

I will have to come back. How much are your Op Exes for the semi cap opportunity? Is it over 50% still?

It's about a half our -- it's roughly half our Op Ex.

And now in of this kind of lack of visibility there with HTDs, any chance of trimming some of the HTD Op Ex?

I think, what you'll see us do, Jesse, is to the extent that the market softens a little bit, you'll probably see us align things within operations and the administrative areas.

Yes.

You might see us get slightly more focussed on the R&D and business development. But, we're going keep the pedal down in that area, because that's where the future lies.

Yes. And I'll let Kugele ask about the hard drive market, but let me -- last question is, you were talking about a Gen 2, if you would, hard disk drive tool? When -- ?

We continue to get develop new capabilities for the 200 LEAN, which address the next-generation technologies, as well as ensure that we stay competitive. So, that initial (inaudible) probably wouldn't be available until Q4 and we don't anticipate any revenue sales this year.

Got you. Thank you.

Your next question comes from the line of [Mick Seon] -- Mick, your line is open. Your next question comes from the line of Mark Miller.

I just wanted to try a little better feeling for the retrofits. Where are we at in terms -- are these halfway done, are we near the end of these or are there still, you're going to see revenues in X number of quarters.

Mark, we said that our orders and revenue expectations for spares and upgrades had gone up, quarter over quarter, so we still see a lot of that in front of us.

Okay, I'm just wondering, you know, just doing a quick math here. Lumpiness. I know you said orders would be lumpy, but certainly it looks like, from what you're now projecting for LEAN ships of orders this year, you're talking about 35 to 45 ships and you had a healthy backlog coming in. It looks like orders have gone down by at least 50% from where you were at last year, correct me if I'm wrong. What is the normalized thing we could think about for '07? I mean, is it too low and 2006 too high?

Well, I don't understand. We gave guidance for 2007. We said, we said 245 to 285.

In terms of total ships?

We said 35 to 45.

Right. And like I said, you had how many since the beginning of the year, three?

Orders? I'm talking about shipments.

Right.

I think we've had three since the beginning of the year.

Right, you entered with a backlog of how many, twenty four?

I think it was twenty five.

Okay.

I might be off by one.

So I'm just saying, it looks like the orders this year seem to be, you know, there is a lot of lumpiness there. I'm wondering what -- if this is too low to feel for 2008, and is the number you recorded, which was much higher, too high for 2006. What feeling give us if any?

Mark, this is Kevin here. So 2006 is what it is. Can't say whether it's too high or too low. And in my, in the call today, I said we were expecting some orders shortly for Q3. We don't anticipate getting orders for Q4 until July or early August. And so, at that point, that would give us better visibility on the whole year.

Okay. Let's just move on finally to semi-conductor tools. The first couple quarters of shipment in '05 of your LEAN tools, in fact, I think it was three quarters, margins improved. Are we going to take a margin hit the first couple of quarters on the shipments? Margins be higher or lower or the same? Will it affect your margins, what you're seeing now? Any feeling for that?

Well remember the 200 LEAN was unique. The first 10 200 LEAN tools were manufactured all before we'd ever delivered the first tool. So we did not have time to shake down our material costs or our operational efficiencies. This time, it's different, we've build a couple of tools. We're shaking them out operationally. So when it comes to make units for our customers, we'll be further up the learning curve.

But you wouldn't expect a big hit on the margins the first couple of quarters you're shipping the semi-conductor tools, from where you're at now?

Not to the extent we have for the 200 LEAN. The margin may be down some point, but not the number of points that we had down with the 200 LEAN.

Thank you.

You have a follow-up question from the line of Kevin Hunt.

All right, thanks. Can you actually give the breakdown of the stock option expense by the line items -- R&D, gross margins?

Oh, Kevin, the majority of the stock option expense occurs in Op Ac. Only very little, probably less than 10% hits cost-of-sales.

Okay. Is that more toward R&D or SG&A?

Probably a little more towards SG&A.

Okay. And what -- and then, what should we think about -- you mentioned there were some charges in there from product X into the R&D this quarter. It sounded like they might have been kind of more like one-time stuff thrown in there?

It's not one time. When you're -- we take a pretty conservative posture on all of the materials that the engineers buy for putting the things together. So we've written just about everything we've bought. A lot of that stuff that gets written off will show up in the initial shipments, will show up in some engineering tools. So I think that just the level of material expense will probably decline a bit as we go forward.

Okay, so this R&D number is an absolute dollar, should we, could be more like a high watermark for the year almost, is that the way to think about it?

I think it probably is.

Okay, thank you.

Your next question comes from Sean Hannenex.

Hi, this is Sean stepping in for Rich Kugele. If -- if I could ask regarding your semi-conductor product, are there specific benchmarks or statistics, that you could perhaps share with us for your product versus competing products and than how it is you're ultimately positioning the product in its context. Thank you.

Okay, that is not an easy question to answer, sir, but I'll take a stab at it. We developed this tool, really based on a lot of learning from the semi-conductor industry and the hard drive industry. And we believed we could create a tool which had a 30% cost advantage over the systems that were out there today. The tools that we developed, as you can see, has leading-edge capability, but it's also a cost player as well. So we can address both, kind of the high-end market or we can chose to remove parts of the system, lower it's cost and address the more cost-sensitive part of the market. And we'll probably be -- we will be approaching both aspects of that market.

So would it be correct to kind of characterize this as that, we're looking for a product standpoint to achieve parity?

No, no, superiority. A "me too" product from Intevac will not succeed. We have to have a better product both in terms of technology and in terms of cost. We've done that and the feedback we're getting from customers is positive, which would also suggest that we've achieved that part of our objective.

Okay, so there is cost advantage in terms of use by the customer, not necessarily in terms of pricing.

Correct.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay, well, thank you for opening us today. We look forward to updating on our next conference call on Q2 results and the outlook for the balance of 2007. Thank you. Goodbye.

This concludes today's teleconference, you may now disconnect.