Intevac Inc (IVAC) 2008 Q3 法說會逐字稿

Welcome to Intevac's 2008 third quarter results conference call. Please note that this conference call is being recorded today, October 27, 2008. 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. Thank you for joining us today. With me are Jeff Andsreson, our Chief Financial Officer, and Joe Pietras, our Vice President and General Manager of Intervac Photonics. After Jeffrey reads the Safe Harbor statement I will give an update on our recent activities. Joe will provide an update on Intevac Photonics and then Jeff will discuss third quarter results and provide our guidance for the fourth quarter and full year 2008. We will then open the call for questions. Jeff?

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 orders, production rates, shipment of our products, revenue, gross margin, operating expense, other income, tax rates, earnings per share, cash flow, capital expenditures, depreciation and stock-based compensation expense. We will discuss projected demand for hard drives, our 200 Lean system and upgrades. The impact of upgrading legacy tools, the transition to bit pattern media, the status of our Lean match semiconductor manufacturing product and our alliance with [TES]. We will discuss our plans for our photonic's business. Projected applications and the status of our products and programs.

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 technologies as planned, that orders and back log maybe canceled delayed or rescheduled. That we may fail to achieve expect cost reductions, tax rates or financial results. That the auction rates securities market recovery is delayed. 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 October 27th 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 this call without our express written consent is strictly prohibited. Kevin?

We are pleased to report better than expected results for the third quarter. Revenues totaled $28.6 million, with four 200 Lean shipments in the quarter. Our net loss was $3.4 million or $0.15 per share, which was $0.05 better than the high end of our guidance. Our results include stock option expenses, of $1.8 million, or $0.05 per share. Our highlights for the third quarter include entering into an alliance with the Korean equipment company, TES and completing the acquisition of the [Elecon] Group's- magnetic media deposition business. Our alliance with TES covers product development, manufacturing and sales of Intevac's Lean Etch and career in China, and TES's CBD semiconductor equipment products in the rest of the world. During the quarter we also shift two, 200 Lean Gen Two systems as well as our first lipo prime evaluation system for pattern media. As Joe will expand upon later despite the sequential quarterly revenue decline.

Intevac Photonics made significant progress on new products for ongoing business growth.. These highlights of the quarter stand out against the backdrop of weakening outlook for the hard drive industry, overall sentiment for the dry sector eroded significantly towards the end of the third quarter and is declined further in the past few weeks. The negative bias has also been reflected in worsening projections for drive company revenues and CapEx projects for 2009. Industry reports show world wide hard drive shipments up 10 to 15% year-over-year for the third quarter of 2008, with fourth quarter expectations in the flat to up 5% range versus normal seasonality of 6 to 9%. The earnings reports last week from leading hard drive companies revealed the opportunities as well as the challenges facing our industry. On one hand, ACD storage remains one of the few markets demonstrating significant year-over-year growth in a weakened economy. On the other hand, the hard drive companies are moderating their capacity expansion plans in response to the uncertain demand environment.

As a result of this increasingly short term pessimism, we expect to come in below our full year 2008 guidance provided in our last conference call. due to the pushout of upgrades and some R & D system orders to 2009. While we will not be providing guidance for 2009, until our next conference call, I would like to briefly discuss the three drivers of 200 Lean sales in the coming year. Which are, capacity additions, legacy tool retirements, and technology transitions. The projected product mix in 2009 for instance, the mix of 3.5 aluminum for desk top vs. 2.5 inch glass for mobile also impacts our business as I will explain later. The first driver of 200 Lean sales is the addition of media manufacturing capacity. Capacity additions are driven by the overall growth in hard drives and the average number of disk factors per drive. Our share of those capacity additions depends on our market share and our customer's market share.

In 2008 we saw the majority of growth occurring in mobile, which on the media basis is projected to increase 25 to 30% over 2007 with desk top growing only a modest amount. The reduced full cost for 2009, brought upon by these difficult times still include a sizeable-- as much as 20% year-over-year growth for mobile, even though overall growth is forecast to be in the range of 5 or 10%. Pricing is way down for lap tops right now. Plus we have the emergence of $300 net books with hard drives. Time will tell how these lower price offerings will impact the growth in the market. We heard positively, especially in the back half of 2009, as macro economic conditions begin to recover. We expect the growth in mobile to have some impact on capacity additions with even more impact on retirement of legacy systems. Let me explain. Customers have been successful in developing advanced processes with a limited number of stations on legacy tools that work on aluminum substraights in the desk top market. However, for mobile plus media an additional process that is required that makes legacy tools unsuitable. The 200 Lean has no such limitation. Given the limited growth in desk top media it would likely be an excess capacity on the legacy systems. Example of this legacy capacity would include last months announced shut down of one or our customer's US plants.

The other factor impacting retirement legacy systems is they constrain the output of media plants when space is limited. Throughout 2008 one of our customers has been retiring legacy systems in favor of 200 Leans a stretch (inaudible) which frees up floor space and enables manufacturing of advanced media and also delays the need to build new factories. We have been in active discussion with all of our customers with aggressive proposals to (inaudible) components on legacy systems and replace them with 200 Leans. We believe Lexi tool replacements could be a substantial opportunity for our hard drive business in 2009. The third major drive demand is technology change. Even in last week's conference calls you heard the capital budgets will be targeted technology advancements. As we have discussed in our last two conference calls, the transition to pattern and media has begun to take shape. We delivered our first litho prime evaluation system in the third quarter for use with a photography pattern processor. We're now developing etch and strip sources for pattern media and are working toward shipping our first 200 Lean media patterning systems in 2009. In the past, times of macro economic weakness have been a fertile ground for technology investment thus, the opportunity for increasing cells for pattern media development systems could become significant in 2009.

While the uncertainty of the end market continues to dampen expectations for the hard drive market we can only see our opportunity in 2009 to be a combination of conservative capacity additions, retirement of legacy systems with 200 Leans to support the continued growth in mobile drives and the first shipments of pattern media development systems. Intevac has the shortest delivery lead times in the industry and we remain poised to deliver tools to the industry if the market quickly turns. Turning to our semiconductor business, in the third quarter we announced the ground-breaking alliance with TES, a creative equipment company. In our ongoing (inaudible) at the major Korean semiconductor companies it became apparent that the Korean initiative to foster and support local equipment was an impediment to penetrating our target customers in that region. These same customers strongly encouraged us to establish an equipment partnership in Korea and in the past few months we have met with several Korean equipment providers. We chose to partner with TES due to the strength of their relationships, their successful track record in the market, their existing CVD capability and their enthusiasm in marketing and selling our Lean edge.

This alliance represents a win for both companies in that we will both share development, manufacturing and selling efforts of both the Lean edge and TES CVD product line. TES has exclusive rights to market the Lean edge in Korea and China and we have exclusive rights to market their CVD equipment to the rest of the world. We're getting our first Lean edge tool ready for shipment to TES after which we expect it to go to onto a customer site. In the future TES will be responsible for final assembly and test of DNX systems for the Korean and Chinese markets. We are in the midst of one of the most challenging semiconductor capital equipment sales downturns on record, where endless forecasting recoveries begin no earlier than the back half of 2009. In the meantime we are optimistic that this alliance will accelerate the market penetration of our Lean edge tool while also expanding our dressable market into CVD much more quickly than we had planned. If by setting us up for business expansion when the market recovers. Before I turn the call over to Joe, I would like to comment briefly on Intevac's photonics. There are macro economic issues we're all currently facing resulting in the slow down of the growth of the scientific market. This has affected our revenue growth in the third quarter and we expect the current environment will persist through the end of the this year.

That being said our photonic's business continues to introduce new products that we will expect to need to continued growth in our photonic's business. I now turn the call over to Joe to discuss the business in more detail, after which Jeff will comment on our financial results for the third quarter, and outlook for the fourth quarter and full year 2008. Joe

Thank you Kevin. Intevac photonic's achieved revenues of $5.7 million in Q3 down approximately 10% from our Q2 record revenues of $6.4 million. While our Q3 revenues were down as a result of several programs drawing to completion, our product revenues remain strong at $2.4 million or 42% of our revenues. In the first nine months of 2008, our product revenues have doubled, over the same period last year. As we continue to grow our photonics business through increasing product sales. In our military, digital night vision business we have experienced a delay in production deliveries, of our digital camera module [Shazem], our NATO customer. As a result of their desire for higher performance exportable camera modules. .

Working with the U.S. Departments of State and Defense, we have now received initial approval to export our digital night vision camera module at higher levels of performance and expect to resume production deliveries to Shazem by the outset of 2009. We continue to deliver our digital camera modules to a growing number of U.S. military customers, for the development of various ground and avionic digital night vision applications. We expect to be awarded our first low rate production order for a U.S. military avionics application in Q4. Revenue for this application is estimated at over $25 million for the next 10 years. Judging from the level of customer interest we believe that our digit night vision camera products are in excellent position to capture a large portion of the U.S. military digital night vision market. which we estimate will grow to $150 million annually within the next five years. We're also making progress in the development of new digital night vision products, both at the sensor level and at the systems level goggle. During Q3, we successfully completed initial prototypes of our next generation digital night vision sensor being funded for use by multiple branches of the U.S. military.

We have incorporated the sensor in our digital enhanced night vision goggle or DENPG along with the next generation thermal sensor from our partner [Deerest] technologies. And expect to deliver prototypes of this enhanced performance design, to the U.S. army in early first quarter of 2009. The US army expects to deploy this technology in 2012 with deliveries valued at $150 million over three years. We're also on track to complete in late 2008, the initial prototype of our new night court product from Intevac vision systems. Night court is a compact monocular system that provides full digital night vision viewing and recording capabilities which we expect will have broad use in multiple ground and avionic applications. Interest in our LIVAR camera product continues to be strong. We just received funding from a major defense contractor to begin low level production in early 2009.

Due to the multiple platform applicability of our camera we continue to estimate the LIVAR business opportunities to be around $100 million over the next 10 years. In our commercial business, the majority of our sales of imaging cameras and [DeltaNu Ramen] instruments are made within the scientific research market where sales have been flat during 2008 due to tightening of research funding. We are refocusing our sales strategy on product opportunities with volume-based end user or OEM customers and target markets. We are developing opportunities within the inspection market, both with our imaging cameras and with our DeltaNu hand held Ramen instruments which provide portable materials identification. We are also pursuing new opportunities with our hand held Ramen instruments and law enforcement and military applications including chemical detection at remote distances. We estimate these opportunities will provide at least $3 million in initial year product sales in 2009. I will now turn it over to Jeff to discuss our financial results for the third quarter, and our outlook for the fourth quarter and full year

Thank you, Joe. Consolidated third quarter revenues total $28.6 million. That included four 200 lean systems. Photonic sales were $5.7 million that consisted of $3.3 million of contract research and development and $2.4 million in product shipments. Q3 consolidated gross margins of 32% was within the beginning of quarter guidance. Equipment gross margins decreased to 32%, as compared to 42% in the prior quarter, due to the lower mix of upgrades and spares as well as lower factory utilization. Gross margin was down compared to 49% in the year-ago period as the mix of upgrades was far lower.

Photonic's gross margins decreased to 32% from 35% in the second quarter, and 45% in the year ago period. As a result of lower research and development contract revenues. In Q3, margins improved and our vision systems and DeltaNu businesses. Q3 operating expenses of $16 million were within guidance and 3% lower than the year-ago period as we continue to manage our expenses and response to the current business environment. Our 2008 tax rate is forecast to result in a net tax benefit for the year and for this quarter, resulting in a net tax benefit of $2.6 million. Q3 net loss totaled $3.4 million, or $0.15 per share. The net loss included $1.8 million of pretax stock-based compensation expense, equivalent to $0.05 per share. Our backlog decreased to $18.5 million at quarter end down from $27.7 million at the end of quarter two. Back log included one, 200 Lean system as of our quarter end.

Now I will discuss the balance sheet. Cash and investments are $115 million, or approximately $5.28 per share. Cash and equivalents remain flat from Q2 as improvements in working capital offset our cost of acquiring the [Whirlacon] hard disk business. Our investment portfolio at the end of Q3 included $73 million in student loan backed oxygen rate securities down $3.2 million from Q2, and that of an unrealized loss of $1.5 million. All of our investments continued to be rated AAA. We continue to expect the market will recover, over the next 18 months. And as such concluded the impairment is temporary. We have a line of credit in place to borrow against these securities if needed but currently do not anticipate borrowing as we have adequate cash to support the business. We continue to have a strong balance sheet with little debt and a cash position, that we believe can sustain the prolonged downturn if that should occur. We continue to aggressively manage our cash. Capital spending totaled $879,000 in quarter three. Depreciation and amortization including purchase accounting amortization totaled $1.5 million in Q3. The increase in amortization associated with the purchase of the [Orlacon Hartness] business.

I now will provide our guidance for the fourth quarter and full year 2008. We are projecting consolidated Q4 revenues of 12 to $16 million. Which includes one, 200 Lean system. We expect fourth quarter gross margins in the range of 36 to 38%. The increase in gross margin is a result of the higher mix of technology upgrades, vs. systems as compared to quarter 3. Operating expenses are expected to be approximately flat at $16 million for the quarter. Our fourth quarter has four additional days as compared to the prior quarter, due to our December 31st year end. We continue to aggressively manage our expenses while insuring completion of key programs that support our fiscal year 2009 technology-based sales. Other income and expense will be approximately $800,000. Per Q4 we're projecting a loss in the range of $0.16 to $0.20 per share which includes an estimated $1.3 million of pretax based compensation expense. Equivalent to $0.04 per share as well as an anticipated net tax benefit. For the full year, we will revenue 11, 200 Lean system shipments. We expect Intevac photonic's revenues to be in the range of 22 to $24 million for 2008.

Our projected full year consolidated revenue will be in the range of 106 to $110 million reflecting the pushout of hard disk drive upgrades and R & D systems, system orders to 2009, and the tightening in the scientific research market as mentioned by Kevin and Joe. We expect gross margins to average 39 to 40% for the full year. We expect operating expenses will be approximately $64 million, and other income primarily interest income from our cash to be approximately $4 million. Our forecasted 2008 tax rate will result in a net tax benefit for the year. The net tax benefit for the year will be approximately $11 million, and that is increased from prior guidance with the extension of the R & D tax credit by Congress. For the full year we expect a loss in the range of $0.29 to $0.33 per share which includes an estimated $6.3 million of stock-based compensation expense. Equivalent to $0.18 per share. This completes the formal part of our presentation. Operator, we are ready for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Bill Ong with American Tech Research.

Yes, good afternoon. So just two questions. What is your ending back log for the quarter. And also if you can also some color on 2009. I know you're not prepared to give formal guidance but with the weakened CapEx, it looks like you will be shipping very low volumes of equipment, maybe one or two machines. In your conversations with your disk drive makers what do you think your spares and systems up upgrade business going to be in the first half of '09 and just some general color on numbers would be helpful, thanks.

Okay. I will let Jeff comment on the backlog then I will talk to where we see the business in 2009 without getting into any specific guidance.

Bill, the backlog is $18.5 million it is about a third Photonics and the rest is equipment.

So Bill, on the business outlook, I was trying to explain during my presentation here, that, while we see that there may be a modest amount of capacity additions we do see significant opportunities for legacy tool replacements. This would be taking two 50Bs or the surfaces and replacing with 200 Leans. Not that there would be net capacity additions but now these tools will be much better able to support the very significant growth in mobile.

The other aspect of the business, that we feel could be strong in 2009, is technology, in particular systems of pattern media. At this point, no one has a R&D pilot line system that could be used in manufacturing-- potentially used in manufacturing. We're working towards developing the X Modules to go on the 200 Lean to provide that capability and we know there is a strong customer call to get tools like that in 2009 Great, thank you very much.

Our next question comes from [Hong U Guy] with Goldman Sachs.

Hi. In your previous call you were fairly positive on your 2009 demand forecast. With the weakening macro environment. Could you talk about how your expectation has changed?

Well, right now, we're in the midst of doing a whole bunch of scenario planning because the -- the drive numbers could be down, on the other hand there are some factors which could increase them. There's a significant decline in the selling prices of lap tops and the emergence of net books, this could all have a very positive impact on the growth of mobile, and therefore, media for that. I think, given the market situation right now, talking in general, I think until we get past this very difficult month of October and things begin to settle down, it will be very difficult to project the -- what 's going to happen in '09. If the people are correct that we may begin to see recovery in the latter part of '09 that could be positive for us and that is why we're maintaining our ability to respond very quickly to customers who need capacity systems, say, rather than the middle of '09 to support the back end.

Thank you. And a follow-up if I may. Seeing cut CapEX by about 25% and that would be although not your customer, also announce a cut of about 8%. How do you view this.

We're not surprised, given the current situation. But if both customers emphasize the fact that they will continue to invest in technology, and the retirement to legacy tools, and replacement of them by 200 Leans is considered the technology upgrade as is pattern media, so there is still a lot of CapEx dollars there to support our business.

Thank you, very much.

Our next question comes from Rich Kugele with Needham.

Thank you, good afternoon. A couple questions. Just conceptually as you look at '09, if we assume that the budgets that have been set by Seagate and others, actually stand at those levels, what does that imply for upgrades, is there -- is there any way to calibrate whether we're talking about a low single digit number or a -- is it more of a typical year? Any -- any way of understanding just the upgrade business?

Rich, it is Jeff. Upgrade business as in nonsystems business.

Well, -- I guess -- I guess that's a fair point. In -- I am actually talking about replacement of tools.

Right. Okay.

Okay, well, we look at it as people would replace three legacy tools for two 200 Leans. That way the net capacity in the market wouldn't be changed but now they are a lot more capable of producing mobile and next generation technologies. I think there is still probably close to 100 of our Lexi tools out there and this -- probably more than 20 -- maybe 25 of the surplus tools out there so there is a significant opportunity. It is really going to come down to how many of those tools need to be converted to support this growth in mobile, plus what people want to do to lower their-- or improve their technology. So, we really see 2009 as being a technology-driven year not a capacity driven year.

Okay that is a helpful ratio. And then, in the past you have been working on moving more of your manufacturing to Asia, can you update us on that progress, and, how -- how that may have helped or -- how it can help in the future?

Well, in the second half of '08, we slowed down that transition because of the limited number of system builds. But as we look at this transition, of turning say, 250Bs into 200 Leans, it makes sense to do that in Asia. We don't want to be 'bringing back these old tools and stripping them down in the states. So we will look at accelerating our capabilities in Asia to support that legacy tool replacement.

And any sense on when you think you can get most of that done? Is that a first half event?

I -- we think it will start in the first half. We certainly people would want to get these tools back online for the Q3, Q4 next year, but it maybe that some of our customers take a steady approach in general to some of this legacy tool replacement because there is quite a bit of logistics in their factories, they have to sort through.

Then lastly as you look at your outbacks both by divisions and overall, if we don't see a resurgence in demand or at least some level -- low level of ordering until maybe the second half, is it -- are there any further actions you think you can take without naming them, that can pull in outbacks or do you think that is the level you're at now is the way we should be thinking about the business until demand returns.

Rich, it is Jeff. We're doing a number of scenario plans in light of what we're hearing from our customers as well, so we will develop a number of scenarios of which we will have actions associated with them to look at OpEx If you noted -- we throw our OpEx (inaudible) OpEx even beginning in 2007. We have seen a 5 or 6% decline from a year-ago when you normalize our quarter four. But there is still more actions we could do if we see a very long-term kind of downturn here.

Okay. Thank you, very much.

There are no further questions at this time.

Okay. Well, thank you for joining us today, and we look forward to update thing you in our next call on our Q4 and 2008 results. Goodbye.

This concludes today's teleconference. You may now disconnect.