Intevac Inc (IVAC) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Intevac's 2009 first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Please know that this conference call is being recorded today, April 27th, 2009.

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.

Thank you. Good afternoon, and thank you for joining us today. With me are Jeff Andreson, our Chief Financial Officer, and Joe Pietras, our General Manager of Intevac Photonics. After Jeff reads the Safe Harbor statement, I will provide an update on our business activities. Joe will discuss our Photonics business and then Jeff will discuss our first quarter results and provide our outlook for the second quarter. I'll then summarize before opening up the call for questions.

Jeff?

During the course of this conference call, we will comment upon future events and make projections about future financial performance of Intevac including statements related to projected cash flow, orders, revenue, gross margin, operating expense, other income, taxes, earnings per share 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 pattern media, the status of our Lean Etch semiconductor product and our alliance with TES. We will discuss our plans for our 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 10-Q.

The contents of this April 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?

Thank you. Our results for the first quarter included revenues exceeding guidance and operating expenses coming in lower than guidance. As expected, it was a difficult quarter for our equipment business. However, we are pleased to report strong momentum building in our Photonics business. Our revenues totaled $12.3 million, and while we did not ship any 200 Lean Systems during the quarter, our hard disc customers did take to their technology upgrades.

Our net loss was $5.8 million or $0.26 per share, and included equity based compensation expense equivalent to $0.05 per share. Our net loss per share came in better than the high end of our guidance.

We have just experienced a nearly complete freeze in the capital equipment environment triggered by the rapid deterioration in the global economy resulting in minimal to no visibility in our equipment business in the short term. That being said, industry conditions are beginning to stabilize and we are encouraged by some positive signs. Ordering activity is emerging from the deep freeze, evidenced by today's announcement of a purchase order from a new 200 Lean customer. Hard drive customers are now actively engaged with us in new equipment purchase negotiations. Discussions we are having with our customers are focused on technology buys and not capacity additions. And our latest purchase order is no exception. This system which incorporates both etch and deposition process modules is a major milestone for Intevac as it represents our first Patterned Media 200 Lean System order. We expect other customers will also begin placing orders during the second quarter.

We are hearing positive signals from some of the leading drive manufacturers that demand has not dropped as deeply as expected. We are encouraged by reports of continued growth in 2.5-inch media for mobile applications and the ongoing mix shift to 2.5-inch from 3.5-inch. As this mix shift continues, we think the industry may see tightness in manufacturing capacity for mobile applications in spite of the current levels of overall media capacity. The rapid mix shift away from desktop and towards mobile computing will in the short-term lead to unutilization of legacy tools and in the longer term will drive their retirement as they are incapable of producing competitive 2.5-inch media mobile (inaudible) applications.

As I mentioned last quarter, our customers cannot afford to fall behind on technology and the next major technology change rapidly approaching is the shift to Patterned Media. The last major technology shift, perpendicular media, drove our business to record levels in 2006. We believe our opportunity in Patterned Media could exceed even those record levels as Patterned Media requires disc to pass through two separate 200 Lean process tools, effectively doubling the served market for our systems. We have been working closely with our customers and are very pleased with our progress in developing the industry's first high productivity solution for Patterned Media which is based on the industry leading 200 Lean platform. The adoption of Patterned Media is dependent on the achievement of technology as well as cost targets. Today we feel confident our systems are uniquely capable of meeting both of these requirements. We expect to ship our first 200 Lean system for Patterned Media mid-year.

As for our Lean Etch, our progress with our alliance partner in Korea, TES, is continuing on schedule. TES is now working with the Korean semiconductor manufacturers demonstrating state-of-the-art etch technology. We are targeting customer qualification in 2009. As this product is largely complete, we have been able to reduce our expenditures on the Lean Etch program by 75% in the peak without hindering our ability to achieve success in the semiconductor industry. We have leveraged our world class etch technology capability to rapidly develop high productivity Patterned Media solutions for our hard drive customers.

I am pleased to report that our Photonics business saw very strong revenue growth in the first quarter with record product sales. Our unique digital low light sensors and cameras continue to proliferate into multiple programs. Our night vision products are gaining traction with a number of production programs underway. We are seeing success with our strategy to increase commercial sales. Joe will provide more details in a moment on our Photonics in a few moments.

This will be a back-ended loaded year for our equipment business, and the second quarter will be as challenging as the first. As a result, in the first quarter we completed a second phase of our global cost reduction plan. We are intensely focused on managing cash while preserving our ability to introduce new products and continue the rapid growth in our Photonics business. In the first quarter we realized the full benefits of our November 2008 cost reductions and in the second quarter we will realize the benefits of the continued cost reductions implemented so far this year.

I'll now turn the call over to Joe. Joe?

Thank you, Kevin. Intevac Photonics revenues were $6.2 million in Q1, a 37% increase over the fourth quarter. We achieved record product sales of $2.6 million which represented 42% of revenues, and we are well on a path to achieve our 2009 goal of product sales contributing 50% of our revenues. Contract R&D or program revenues increased 25% in the quarter as several new programs were launched. These include the development of a next generation low light digital sensor, a new Raman instrument operating in the near infrared, and an initiative to deploy our digital night vision camera module in a large volume existing airborne platform.

As I discussed on our Q4 call, we are now delivering higher performance night vision modules to Sagem, our NATO customer. This program is expected to ramp up to production quantities in the second half of 2009, and is anticipated to contribute over $20 million in revenues over the next five years. We also continued shipping low rate quantities of our digital night vision camera module in support of our first US military production order for an avionics application. We expect follow-on orders in 2009 with this business opportunity estimated at over $25 million in the next seven years.

We completed the development of our new 2 megapixel digital night vision sensor, and delivered cameras using the sensor to multiple branches of the US military for evaluation in a number of ground and avionics applications. We also received initial funding for a next generation 4 megapixel digital low light sensor for panoramic night vision viewing applications.

In the area of military digital night vision systems products we are pursuing two major product trusts. With our partner, DRS Technologies, we are working with the US Army to develop a digital enhanced night vision goggle or, DENVG, which electronically combines night vision images using our digital sensor with thermal images from a DRS sensor. DENVG is the US Army's major program for deploying a fully digital goggle for situational soldier awareness. And is expected to enter initial large volume production valued at $150 million over three years, beginning in 2012. In April we delivered prototypes of our latest design for field evaluation. The US Army is evaluating prototypes from two other competitors, one of which also incorporates our own digital night vision sensor.

Our second major thrust in night vision systems products is our Night Port, a compact digital monocular that provides full night vision viewing and recording capabilities. Night port has the potential to be a direct replacement for legacy night vision goggles, the market for which is in excess of $400 million annually. Recently we completed an initial prototype of our Night Port and demonstrated it to many key military customers where it was well-received for applications in ground and avionics night vision.

During Q1, we received our first Night Port based contract award where the Night Port product platform will be incorporated into a fully digital binocular for ground soldier use. This product opportunity is expected to enter production in 2011, valued at $10 million over four years.

We are pleased to report that we received our first full scale production order for our LIVAR camera to be used in an airborne application. We delivered low level production quantities for this application as well as small quantities of units for several other customer applications in the quarter. We continue to estimate our LIVAR business opportunity to be $100 million over the next 10 years.

In our Commercial business, we are seeing increased momentum in our handheld Raman instrument business, especially in key market areas with volume based end user or OEM customers. We received our first OEM production order for our handheld Raman instrument for an explosives detection application with anticipated quantities of 150 units in 2009. We are in discussions with several other potential customers for volume based production applications. We are on a path to double our Raman instrument business this year.

In all, we are pleased with our progress in the first quarter and are on track towards meeting our objective of $30 million in revenue from Photonics in 2009.

I will now turn it over to Jeff to discuss our financial results for the first quarter and our outlook for the second quarter of 2009.

Thank you, Joe. Consolidated first quarter revenues totaled $12.3 million. Equipment revenues for the quarter totaled $6.1 million with no 200 Lean Systems shipped in the quarter. Photonics sales were $6.2 million, that consisted of $3.6 million of contract research and development and a record level of $2.6 million in product shipments. Q1 consolidated gross margins of 35% was above our beginning of quarter guidance as we aggressively implemented a series of actions to reduce our manufacturing costs. With nearly a 50% decrease in revenues, equipment gross margins decreased from 41% to 30% sequentially due to lower factory absorption, offset by the savings from our cost reduction plans.

Photonics gross margins improved to 39% from 19% in the fourth quarter due to higher factory absorption and lower warranty expenses. Q1 operating expenses declined to $13.7 million or $300,000 below our guidance as we continue to realize the impact of our global cost reduction plan which I will update when I provide our Q2 guidance. Overall, operating expenses for the first quarter represented a 30% decrease compared to our peak levels in the first quarter of 2007 and a 14% decrease since Q3 2008, the quarter prior to the implementation of the global cost reduction plan. We recognized a tax benefit in the quarter of $3.3 million.

Q1 net loss totaled $5.8 million, or $0.26 per share, compared to our guidance of a loss of $0.30 to $0.35 per share. The net loss included $1.4 million of pretax stock-based compensation expense equivalent to $0.05 per share. Our backlog was $17 million at quarter end, down from $20 million at the end of the fourth quarter and included one 200 Lean System. As of this call, backlog includes two 200 Lean Systems.

Now I will discuss the balance sheet. Cash and investment s are $101 million, or approximately $4.60 per share, and include a valuation allowance of $7 million associated with our auction rate security investments. Cash and investments excluding the impact of the valuation allowance adjustments decrease $5 million from Q4 and included the final $2 million payment related to our 2007 acquisition of DeltaNu. We continue to closely manage our cash flow in light of the current business environment. Our investment portfolio at the end of Q1 included $67 million in student loan backed auction rate securities. The increase of $1 million versus the Q4 balance is a result of a reduction in the valuation allowance for these securities and is driven by an improvement in the long-term interest rate spreads.

In April, we had $3.3 million of our auction rate securities called at par. We continue to have liquidity access to these assets through our existing line of credit with Citibank. We currently do not anticipate borrowing as we have adequate cash to support our business. Our balance sheet is debt free and has a cash position that we believe can sustain a prolonged downturn if that should occur.

In early April the FASB approved changes to financial accounting standards 115 and 157. The change will require companies to expense credit related losses through the P&L on securities held. We are assessing the impact of this change as it relates to our investments and have not included any impact in our guidance.

In the first quarter, capital expenditures totaled $780,000 and depreciation and amortization totaled $1.3 million.

I will now provide our guidance for the second quarter of 2009 and discuss the impact of our global cost reduction plan. In the fourth quarter of 2008, we implemented our global cost reduction plan and resized the Company to break even at approximately $120 million in revenue and $115 million in revenue on a cash basis. In Q1, we implemented additional cost reductions that increased our annualized cost savings from the $10 million to $12 million range to over $15 million annually. These additional cost reductions will further lower our cash breakeven to approximately $100 million to $105 million. Our objective continues to be to size the Company at a revenue level that allows Intevac to continue to invest in key development programs which will drive our future revenue growth .

We are projecting consolidated Q2 revenues to remain in the range of $9 million to $12 million, which does not includes any 200 Lean Systems. We expect second quarter gross margins to be 33% to 37% depending on product mix. Our operating expenses are expected to decline to approximately $13 million for the quarter, reflecting the latest improvements to our cost structure. The cost reductions implemented to date are expected to result in further reductions to our operating expenses in the second half of the year. 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 $400,000.

For Q2, we are projecting a loss in the range of $0.19 to $0.26 per share which includes an estimated $1.4 million of pretax stock-based compensation expense equivalent to $0.05 per share, as well as an anticipated net tax benefit.

Kevin will now summarize our

In summary, the underlying drivers of demand for increased storage capacity are intact. As the economy recovers we expect hard drive unit growth will resume and lead to new system orders. Our hard drive customers are today in active talks with us on technology buys, as evidenced by our recent new order. The rapid mix shift away from desktop and towards mobile computing will help to drive the retirement of legacy systems over the next couple of years.

Patterned Media is now within site and offers us a significant future business opportunity. Business momentum is strong in our Photonics business driven by multiple military programs moving into production, further program awards will lead to production down the road, and the increasing traction in product sales into commercial markets. We have aggressively trimmed our cost structure which in the short term will help us manage our cash, and when the equipment business recovers will drive greater levels of operational efficiency and profitability.

This completes the formal part of our presentation. Operator, we are ready for questions.

(Operator Instructions). Your next question comes from the line of Rich Kugele with Needham & Company.

Thank you. Good afternoon. I've got a few questions. First, just on the equipment margins, usually when there's a lot of spares and upgrades as a percentage of the total for that side, the margins are higher. I understand that there was an under-utilization factor here, but have you seen any degradation to the margins you get on those products? Was it just the underutilization?

Rich, it's Jeff. The answer is yes, utilization was the biggest factor that drove the margins down. But included in the quarter we also had some accu lubers that carry a little bit lower margin than other upgrade type products.

Do you expect to see the spares and upgrades business increase or remain at this type of level over the balance of the year?

Spares, specifically?

Just the non-equipment, non-tool sales.

Yes, we actually think that it will remain at similar levels. It might bob up and down a little bit but it should remain about that level.

Okay. Kevin, as you start to roll out Patterned Media here, what have you seen from Anelva? I know that they had some type of solution but is it also starting to see any traction. If you can talk about the competitive differences between the products.

Okay. So very early on we made a decision that we were not going to bring out R&D tools for R&D's sake, that we were going to focus on tools which could be moved eventually into production. Anelva's approach was to take technology from their head business, where productivity is measured in 10 or 20 wafers an hour and try and use that technology for media R&D. Whilst you can get results on the disc, it is nowhere close to being a solution for manufacturing so we took a different approach. We believed we needed to have productivity similar to what we do on our media deposition and we developed an etch technology which is comparable with that. To date, to our knowledge, Anelva has not done that.

And this is a new customer, you wrote in there that it was new for 200 Leans. Is it new for 250 Bs, as well? Is this an outright new customer?

No, this customer already had some of our legacy tools.

Okay. And then the industry's facing potentially some conflicting priorities here where if we're right about the 2.5-inch tightness later this year, early next year, happening, then at, I guess, the same time as Patterned Media, is there a way of doing both this way, or do you expect them to run on separate CapEx plans?

For Patterned Media you'll need two systems. You'll have one system that puts all the magnetic layers down. You'll then go through the focal [freeze] that will come back into a second system where you'll both have etching of the resist and the layers and then subsequent deposition to planerize that surface. So there will be two systems required.

Have the customers indicated concerns about industry tightness on media?

We haven't had that feedback. That observation is coming from the fact that we see our legacy tools are unde-utilized and that all the newer tools are fully utilized.

Okay. And then just lastly, Jeff, on the breakeven at this new cash level that you're talking about, what would be, in a straight line format, what would be the type of gross margin you would expect on a quarterly basis to get to that breakeven?

On a straight line basis?

Yes.

Probably high 30s.

Okay. All right. Thank you very much.

(Operator Instructions). Your next question comes from the line of [JB Arbichar] with CRT Capital.

Hi, guys. First question is on the Patterned Media system. What is a typical qualification cycle for that and would revenue be recognized this year? Is that something that could take a while?

Hey, JD. It's Jeff. Yes, it probably will take about a quarter, we think right now. So it could, certainly it will revenue in '09.

Then the second question is on the semi etch tools that have been out there and you talked about qualification this year. Those are currently still carried in inventory; is that correct?

That's correct.

And because they're sort of R&D/qualification tools, are we going to take a hit on the gross margin on those?

We've always said the very first tools that come out will be lower gross margin than our goal of being 45 to 50, so yes.

And to your mind, once we get qualification here, does that lead to orders, or given the disastrous semicap equipment market, they're going to continue to play with them for a while until the economy gets better?

Well, we assumed all along that we would get no revenue from that system until 2010 and a lot of people are predicting that the recovery will start in 2010 and so the goal has been to get qualified in '09.

Okay. So really it's not going to -- it will be late this year where we'll have to make a determination where the state of cap equipment spending is?

Correct.

Okay. Great. Thanks, guys.

(Operator Instructions). It appears that there are no questions at this time.

Okay. Well, thank you for joining us today and we look forward to updating you in our next call on our Q2 results. Good-bye.

That concludes today's conference call. You may now disconnect.