Intevac Inc (IVAC) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Intevac's 2008 fourth quarter and full year results conference call. (Operator Instructions). After the speaker's remarks. there will be a question and answer session. (Operator Instructions). Please note that this conference call is being recorded today, February 3, 2009.

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

Thank you. Good afternoon. Thank you for joining us today. With me are Jeff Andreson, our Chief Financial Officer, and Joe Pietras, our Vice President and General Manager of Intervac Photonics.

After Jeff reads the Safe Harbor statement, I will give an update on our business and drivers of future growth. Joe will provide an update on Intevac Photonics, and then Jeff will discuss our financial results and outlook. We'll then open up 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 cash flow, orders, revenue, gross margin, operating expense, other income, profitability, taxes, earnings per share and stock based compensation expense. We will discuss projected demand for hard drives, our 200 Lean systems and upgrades, the impact of upgrading [mivasy] tools, the transition to pattern media recording, the status of our lien and semi conductor manufacturing product and our alliance with TES. We will discuss our plans for the Photonics 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 related to these comments 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 10Q.

The contents of this February 3 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.

Thanks. Today we report our results for the fourth quarter with revenues exceeding guidance and operating expenses loathe in guidance. Revenues totaled $16.4 million with one 200 Lean shipment in the quarter. Our net loss was $12.6 million, or $0.58 per share and included $10.5 million of goodwill and intangible asset impairment charges equivalent to $0.34 per share. An equity based compensation expense equivalent to $0.04 per share. Excluding the impairment, our net loss came in slightly below the low end of guidance, primarily as a result of our tax provision, which Jeff sill discuss in more detail later.

We will not be providing 2009 annual guidance today, given the limited visibility from our harddrive customers who are in the midst of restructuring their businesses to cope with the dramatic change in their own markets. Jeff will provide our Q1 guidance later in the call.

In the absence of annual guidance, I will explain where we see revenue opportunities for 2009 and how we have sized our cost structure accordingly to manage the business in these uncertain times.

Let me start with the resizing of the business. We reacted quickly to the rapid economic deterioration in the fourth quarter and in November announced and executed a global cost reduction plan that reduces our cost structure and minimizes our cash burn while still enabling us to invest in products that will drive future growth. With our current cost structure, we expect to break even on a cash base with revenues of approximately $115 million.

I will now explain where we see revenue opportunities to support this break-even point. We believe our Photonics business revenues will continue to expand chiefly driven by government spending on development and deployment of digital night vision technology. Our goal is to achieve at least $30 million in revenue. And Joe will provide more detail later.

In our equipment business, we do not expect any capacity buys in 2009. We do expect ongoing spending on non-system orders such as spares, service and technology upgrades to our large installed base. This is expected to be in the range of $30 million. That leaves the balance of revenue coming from system sales driven by technology needs.

We expect spending to be back-end loaded until our ACD customers complete their business restructurings, we do not expect any significant bookings. While nobody at this point can actually predict harddrive demand in the short term or when the market will begin to recover, the one thing that remains constant is the driving force for more digital storage. Once the economy removers, we expect to see a significant snap back in demand for harddrives. We do not believe people will be cutting back on the number of videos, photos, or music they store during the downturn. We are also encouraged by the dramatic reductions in notebook pricing and the emergence of ultracheap and portable notebooks which will spur greater sales of harddrives. We have the shortest delivery time for new systems as compared to our competition, and can help our customers respond to their eventual upturn.

Our customers commented publicly they will continue to invest in technology. The hard drive industry is very competitive, and nobody can afford to fall behind on technology. We have witnessed how market shares and profitability can be significantly impacted for hard drive companies that do not stay competitive.

We expect two types of hard drive technology system investments to be made in 2009, those for patent media and those for legacy tool replacements. We continue to make progress on our new 200 Lean process modules which will support the low cost production requirements of path and media, and we expect that the major drive manufacturers will begin to transition their R&D efforts into pilot production which requires production type edge equipment in the second half of 2009. Half of media manufacturing effectively doubles the size of our market, because each 200 Lean deposition tool in production will require one 200 Lean Etch tool running at similar throughputs. To date, the R&D efforts on path and media have utilized equipment from the head, handle the semi conductor industry with throughputs of 50 to 100 wafers per hour at best compared to the 1,000 disk per hour productivity level demanded by the media manufacturing environments. With our leading market position in media deposition as well as our internal expertise on etch process technology, we have a strong position entering this market and we expect initial orders will be placed during 2009.

The second type of capital investment for technology change is legacy core retirement. Today, most hard drives use either 2.5 inch disks, typically used in notebook computers, and 3.5 inch disks, typically used in desktop PCs. In 2008, we saw 2.5 inch disk production exceed 3.5 inch for the first time. The extent of legacy tool replacements or retirements during 2009 will be driven by the increasing mix shift towards notebook computers and 2.5 inch disks. Notebook computers with the notebook segment expected to show strong growth are expected to outnumber desktop computers by a substantial margin in 2009.

The legacy tools currently producing 3.5 inch media struggle and in some cases cannot produce the most advanced 2.5 inch media technology. Though for a while, the industry has plenty of excess capacity right now. The majority of excess capacity exists for the declining 3.5 inch market and investments will be needed to be made by our customers in order to protect or grow their share of the notebook markets.

In our Lean Etch business, we're encouraged by initial progress with our working relationship with TES, our Korean alliance partner. We shipped our first Lean Etch to TES in the fourth quarter, are making good progress toward placing that tool with a customer and achieving qualification in 2009. We are currently in the midst of a deep recession in the semiconductor industry, so the business is not expected to contribute revenue this year. However, our alliance provides with a strong market position to benefit in the future once spending does resume.

I have outlined our revenue opportunities and cost structure for 2009. And before I turn over the call to Joe, I will summarize the drivers for significant future growth for 2010 and beyond.

The underlying drive is a demand for increased storage capacity are intact and even expanding as the economy recovers, we expect hard drive unit growth will resume, and more system capacity bytes will be needed. New media technology such as patent media will expand the amount of capital investment and our own production equipment required to produce disk media, resulting in a doubling nibbler total available market in the next three to five years. We have taken the ground breaking approach towards penetrating the semi conductor industry in our alliance with TES, and are encouraged by the growth prospects for our Lean Etch products. We are introducing a number of new Photonics products that are seeing strong demand today in which together encompass a multi-hundred million dollar market opportunity within the next several years.

I now turn the call over to Joe, and then Jeff will comment on our financial results and outlook. Joe?

Thank you, Kevin.

Intevac Photonics achieved revenues of $4.5 million in Q4, down approximately 20% from our Q3 revenues of $5.7 million. This was primarily due to the completion of current phases of several contracts and also reflected lower product sales as a result of the current economic climate.

Despite the worsening economy, 2008 was a growth year for Photonics, achieving revenues of nearly $23 million, a 19% increase over 2007 sales. Notably, product sales grew 60% in 2008 to more than $8 million, and comprised 37% of total Photonics revenues for the year. Today, we are well positioned to continue growing our Photonics business through increased product sales, which we expect will contribute at least half of Photonics revenues in 2009.

In our military digital night vision business, productization of our digital sensor technology is continuing at a brisk pace. In Q4, we received approval by the US export agencies and resumed production deliveries of higher performance digital camera modules to [shahzam], our NATO customer.

Domestically, we are pleased to report that we received our first production order for a US military application of our digital camera module and began a low rate production deliveries in the fourth quarter. Revenues for this US avionics application is estimated at over $25 million for the next seven years. We are also nearly complete with the development of a next generation digital night vision sensor, which has been funded by multiple branches of the US military. During Q4, field tests of this sensor with the US army demonstrated that the sensor is successfully meeting the performance requirements of the US military.

As evidence of the US military's interest in fielding this next generation sensor, we received a development contract in Q4 to provide a digital camera module for an existing avionics application, which represents an opportunity of about $20 million in sales over the next six to seven years. Additionally, we received an invitation by the Department of Defense to participate with our next generation sensor and the defense acquisition challenge. This is the DOD program intended to accelerate fielding of new technologies.

Given our current programs to deliver digital camera modules to a growing number of ground and avionic night vision applications, we estimate our total revenue opportunity to be in excess of $150 million over the next ten years. In Q4, we also made good progress in the development of head mounted digital night vision system products. With our partner DRS Technologies, we are on track to deliver to the US Army in Q1 enhanced performance prototypes of our Digital Enhanced Night Vision Goggle or DDNVG, which digitally combines night vision and thermal imaging. The US Army is currently evaluating DDNVG prototypes from two other competitors, one of which incorporates our own digital night vision sensor. We expect that by 2012 the army will award one of these three potential suppliers with initial production contracts which will likely be valued at over $150 million over three years.

We are also completing first units for customer deliveries of our new Night Port product. Night Port is a compact monocular system that provides full digital night vision viewing and recording capabilities. Night Port is described as a direct replacement for legacy night vision goggles, the market for which is in excess of $400 million annually.

Our LiveWire camera business is also making a significant transition from contract R&D to product demands. We received an order from a major defense contractor for low-level production with deliveries to begin in early Q1. We expect to see follow-on orders for this application, ranging from $2 million to $3 million during 2009. In addition over the past several months, we have received small quantity orders from nine additional customers who are evaluating our LiveWire camera in their applications. We continue to estimate the LiveWire business opportunities to be around $100 million over the next ten years.

In our commercial business, we reported last quarter that we are refocusing our sales efforts toward product opportunities with volume based end user or OEM applications in target markets. Leading our growth in this area are DeltaNu handheld Raman instruments, which provide portable, real-time materials identification. In 2008, revenues from our handheld Raman instruments increased nearly four-fold over 2007. Through our focus on law enforcement, industrial inspection and military markets, we believe revenues from our hand held Raman instruments could increase another two-fold in 2009.

I will now turn it over to Jeff to discuss our financial results for the fourth quarter and full year 2008 and our outlook for the first quarter of 2009. Jeff?

Thank you, Joe. Consolidated fourth quarter revenues totaled $16.4 million and included one 200 lean system. Photonic sales were $4.5 million and that consisted of $2.9 million of contract research and development and $1.6 million in product shipments.

Fourth quarter consolidated gross margin of 35% was slightly below the beginning of quarter guidance. Equipment gross margins increased to 42%, as compared to 32% in the prior quarter, due to the higher mix of upgrades and spares, as well as savings from our global cost reduction plan. Gross margin was down compared to 47% in the year ago period due to the lower volume of upgrade business in the fourth quarter. Photonics gross margins decreased to 19% from 32% in the third quarter, and from 47% in the year-ago period, as a result of the lower level of product revenues, lower factory utilization and higher warranty expense.

Q4 operating expenses were $25.6 million and included good will and intangible asset and impairment charges of $10.5 million to write off the carrying amount of the good will honor equipment segment and write down certain intangible assets. The company's market capitalization was adversely impacted by the current macroeconomic business environment which triggered impairment tests on its good will and intangible assets. These tests resulted in impairment charges totaling $9.7 million for good will and $800,000 for intangible assets.

Intevac will not be required to make any current or future cash expenditures as a result of these impairments. Excluding the impact of the impairment charges, operating results were $15.1 million, or $900,000 below our guidance and 6% lower than Q3 as we began realizing the impact of our global cost reduction plan in the quarter. Our 2008 tax rate resulted in a net tax benefit for the year, and this quarter resulted in a net tax benefit of $6.3 million. Our beginning of quarter guidance assumed a higher level of available R&D tax credits than we were able to utilize, impacting our EPS by $0.05 per share in the quarter. Q4 net loss totaled $12.6 million, or $0.58 per share. The net loss included $1.6 million of pretax stock based compensation expense, equivalent to $0.04 cents per share, and $0.34 per share associated with the good will and intangible asset impairment.

Our backlog increased to $20.2 million at quarter end, up from $18.5 million at the end of Q3. Backlog included one 200Lean system as of our quarter end.

Now I will discuss the balance sheet. Cash in investments are $106 million or approximately $4.84 per share and includes a valuation allowance of $8 million associated with our auction rate security investments. Cash and investments excluding the impact of the additional valuation allowance decreased by $2.6 million from Q3 as we continue to aggressively manage our cash, cash flow in light of our current business environment.

Our investment portfolio at the end of Q4 included $66 million in student loan backed auction rate securities. In Q4 we recorded an additional impairment charge of $6.6 million for a total unrealized loss of $8 million. All of our investments continue to be rated AAA. We continue to have liquidity access to these assets through our existing line of credit that can also be expanded if needed. We 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 for a long downturn if that should occur.

Capital spending totaled $1 million in Q4. And Q4 non-cash good will and intangible impairment charges were $10.5 million and depreciation and amortization totaled $1.4 million.

I will now provide our guidance for the first quarter 2009 and discuss the impact of our global cost reduction plan.

Our global cost reduction plan resized the Company to break even at approximately $120 million in revenue and approximately $115 million on a cash basis. We sized the Company at this revenue level in order to continue to be able to continue to invest in key development programs that will drive revenue growth in the future as Kevin discussed earlier. We are projecting Q1 consolidated revenues of $9 million to $12 million which does not include any 200 Lean systems.

Our hard drive customers have put on hold most noncritical purchases as they continue to determine their plans for 2009. Our customers have stated that they will continue to invest in technology and areas that affect manufacturing efficiencies and costs. We anticipate they will begin to place orders for these purposes once their plans are finalized. This lower level of revenue impacts our ability to absorb our fixed factory overheads, and as a result we expect first quarter gross margins in the range of 20% to 25%.

Operating expenses are expected to decline to approximately $14 million for the quarter reflecting the impact of our global cost reduction plan. We will continue to aggressively manage expenses while ensuring completion of key programs that support our fiscal year 2009 and beyond technology based sales. Other income will be approximately $500,000. For Q1, we are projecting a loss in the range of $0.30 to $0.35 per share which includes an estimated $1.4 million of pretax stock based compensation expense equivalent to $0.04 per share as well as anticipated net tax benefit.

This completes the formal part of our presentation. Operator, we're ready for questions. Operator?

(Operator Instructions). Now our first question will come from the line of Hongyu Cai, with Goldman Sachs.

Thank you. Just a couple questions. First, both your contract R&D and product sales dropped notably in your imaging business. Could you please provide some more color about the decline and how long will this trend persist going forward?

Sure. Hi this is Joe. During the fourth quarter, we had several contracts, which came to completions of current phases, and so we're expecting the funding to resume in the first quarter and be back with some of those contracts.

Some of the product sales had to do with just economical conditions and some of the scientific research markets which we were participating in mainly through 2008, but as we mentioned, we're refocusing that business on to OEM businesses in the industrial sector and we expect some rebound to that, even beginning in first quarter.

Okay. Thank you. And then second, if we rank the factors that drove the sharp decline of the gross margin in your imaging business, which one will you rank on top among the three factors that you mentioned in your press release?

Hi, Hongyu, it's Jeff. We had a warranty expense that was larger than normal due to a technical issue that we had discovered and replaced prior shipped sensors, and then factory utilization, and then products.

Okay. So this warranty expense, would that continue into next quarter?

No. This is Joe again. We had some early manufactured sensors, which we realize had to be replaced, and so we completely executed that in the fourth quarter, and are now past that issue.

Okay. And given the culture stance of the FDC vendors in their capacity addition, will you consider further restructuring actions going forward?

As I said, we kind of structured for a $150 million break-even on the cash basis. If we were to see further deterioration in the business, and we're already planning for no capacity additions, then clearly if it was further deterioration in the outlook here, we will continue to relook at our cost structure.

Okay. And just one last question. Could you provide a bit more update on your Lean Etch qualification and when should we expect to see the first shipment?

Okay. Well we shipped the first tool to Korea in December. That tool is now being reassembled and set up for doing customer demos in Korea. The plan is that that system will then ship on to a customer around mid-year for qualification, and we would not expect revenue until 2010.

Okay. Thank you very much.

(Operator Instructions). And we have a question from the line of Rich Kugele with Needham.

Thank you. Good afternoon, gentlemen. A few questions. I guess first on the Lean Etch, can you give us a sense of the $14 million OpEx quarterly run rate is actually associated with that now, and as if we actually go out to 2010 for additional revenue opportunities to kind of emerge, does the tool require any changes based on whatever technology road map happens that could impact that quarterly OpEx run rate?

Rich, it's Jeff. I'll take the OpEx question. We're running just below 20% of our OpEx on that at this particular point in time, I'll let Kevin answer the technology question.

Rich, that number will probably go lower. Now we ship the tool to Korea, there's been a request for very simple modifications and software additions. We expect that quantity of requests will go down.

In terms of any major engineering efforts on the tool, we don't expect any. We believe the tool is largely done apart from some minor tweaks for customer specials.

Okay. So as we go -- because we'll probably have to put out a 2010 number, and as we go on to 2010, we shouldn't assume, as if TES is able to go and sell some, that your OpEx goes up as a result, we shouldn't have to make that correlation?

No, there's no correlation at all.

Perfect. And then in terms of the installed base at 250Bs. This is kind of a tough question, and I don't even know directionally what the answer is. How much of the installed base is today being devoted to 2.5 inch or is it at any or is it all on 3.5 inch?

To my best knowledge and it's not 100%, but I believe that 250Bs are all doing 3.5 inch.

Okay. And how many, can you remind us again how many of those tools are out there?

There's around 100 give or take, ten.

Okay. And then when it comes to the, I believe that there was a tool that was shipped as an R&D type tool that you were hoping to recognize revenue on at some point in early '09, what's the status of that tool?

Okay. That's a tool that will probably ship around mid-year and we don't have a final delivery date, but that's our expectation right now.

But that was not for pattern media? That was something, that was just a 200 Lean plus type?

It was a tool for a nonmedia application.

Okay. And then as people do look at pattern media, do people typically with these next generation technologies, do they typically buy one for R&D or is it two? How many does the average customer type buy for a NextGen development?

If we go by media deposition, it's usually two tools. Initially one to begin with and then later on a second one as they devote one tool to more R&D applications and the second tool to more pilot line preproduction qualification.

And should we assume similar pricing to your 200 Lean?

The initial pools may be a little more expensive because of the R&D nature of the tools.

Okay. All right. Thank you very much.

And we have no further questions at this time.

Okay, well, thank you for joining us today. We look forward to updating you in our next call in our Q1 results. Good-bye.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.