Intevac Inc (IVAC) 2009 Q2 法說會逐字稿

Good day and welcome to the Intevac second-quarter financial results conference call. Please note that this conference call is being recorded today, July 27, 2009. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations counsel. Please go ahead.

Good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the second quarter of fiscal 2009, which ended June 27. In addition to outlining the Company's financial results for the quarter, we will also provide guidance for the third quarter of fiscal 2009.

On today's call are Kevin Fairbairn, President and Chief Executive Officer; Jeff Andreson, Chief Financial Officer; and Joe Pietras, General Manager of Intevac Photonics.

Before turning the call over to Kevin, I would like to remind everyone that information provided in today's conference call contains forward-looking statements. During the course of this conference call, we will comment upon future event and make projections about the future financial performance of Intevac.

These forward-looking statements are based upon our current expectations, and actual results could differ materially as a result of various risks and uncertainties relating 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 July 27 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. I will now turn the call over to Kevin Fairbairn. Kevin?

Thank you. Good afternoon and thank you for joining us today. Our results for a challenging second quarter included revenues and gross margin at the high end of guidance and operating expenses lower than guidance.

Our revenues totaled $12.3 million, and while we did not ship any 200 Lean systems during the quarter, our hard disk customers did take delivery of technology upgrades. Backlog improved significantly and more than doubled over the prior quarter to $44 million.

Our net loss was $4.5 million, or $0.20 per share, and included equity-based compensation expense equivalent to $0.04 per share. Our net loss came in at the high end of our guidance.

After experiencing a nearly complete freeze in capital-equipment spending in the hard-drive industry, we received a total of four new orders for 200 Lean systems in the second quarter. Two of these are the first 200 Lean etch and deposition systems for patterned media development, one of which has shipped to our new 200 Lean customer. The other two orders were for advanced media technology developments.

As I mentioned last quarter, our customers are actively embarking on the next major technology change, which is patterned media. The last major technology shift to 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 disks 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 that our systems are uniquely capable of meeting both of these requirements.

Our first 200 Lean system for patterned media is in the process of being installed. Our second patterned media system will ship in the fourth quarter of 2009 to an existing customer.

We continue to hear positive signals from some of the leading drive manufacturers that demand is ahead of their earlier expectations. Recent announcements have indicated stronger-than-expected demand in the first half and upwardly revised forecasts for the second half of 2009 with inventories of minimum levels.

Overall demand for storage has proven to be relatively resilient in the current economic climate. Mobile applications using 2.5-inch disks continue to grow faster than the overall market, with 27% unit growth sequentially and 23% year-over-year reported, representing the ongoing mix shift from 3.5-inch 2.5-inch.

We expect this trend may lead to some tightness in capacity for mobile applications, as the current installed base of legacy media deposition tools are incapable of processing mobile 2.5-inch state-of-the-art media. These legacy tools are being slowly taken offline and we expect these retirements to accelerate in the next year or two, driven by a combination of mobile growth and new-media technologies.

We are carefully monitoring our customers' utilization of our systems. Historically the second half of our year is when capacity utilization is highest, driven by back-to-school and holiday season. If capacity is tight in the second half, this will be a positive leading indicator for capacity additions in 2010, assuming the world economies continue to recover.

Our 200 Lean is well known in the industry to be the state of the art in delivering high-productivity, precise, multi-film depositions at the lowest cost per disk. The growing solar industry has the same requirements for producing high-efficiency cells at a low cost per watt in order to achieve grid parity.

We've been approached by a number of early-stage companies who are interested in exploiting the capabilities of our 200 Lean system for producing high-efficiency, low-cost server cells based upon six thin-film technology. While there are a lot of companies out there that are pursuing six, no one to date has been able to replicate in volume manufacturing the high efficiencies achieved in the R&D labs.

We believe there are two main reasons for this shortfall. Firstly, companies have tried to leap from processors running on very small cells in the R&D lab to large panels and manufacturing. As a result, they have run into significant process-equipment scaling issues.

Secondly, many of the start-up six companies are starting from scratch and developing their own equipment in parallel with process developments. Our 200 Lean platform addresses these two issues. Process scale-up is greatly simplified if you limit the size of the cell to less than six inches. Such cells can be processed on the 200 Lean with relatively simple modifications. These cells can be substituted for more expensive poly and crystalline silicon solar cells.

The 200 Lean is well suited for these applications and has proven in volume manufacturing through the production of over 1 billion hard-drive disks.

Bottom's-up estimates indicate the six cells produced on the 200 Lean will be very cost competitive and the customer capital investment will be much lower on a dollar-per-watt basis compared to benchmarks out there today.

In the short term, 200 Lean order growth for server applications is dependent on funding being available for our potential customers. In the long term, the opportunity could be significant, based upon analyst projections for solar installations and assuming our prospective customers are successful in meeting their cost-per-watt goals.

On our Lean Etch, our progress with our alliance partner in Korea, TES, is continuing on schedule. We expect TES to place an evaluation system at a customer site by the year end.

In our Photonics business, I am pleased to report that we achieved a record level of product sales and backlog, positioning us to achieve our goal of $30 million in revenue for the year. Our night-vision and long-range target-identification cameras and our handheld Raman instruments continue to gain traction and have achieved new milestones for proliferation into multiple military and commercial applications, positioning us for strong growth in the second half of the year.

Joe now will provide more details on the momentum in our Photonics business. Joe?

Thank you, Kevin. Intevac Photonics revenues were $6.3 million in Q2, including record product sales of $2.9 million, which, at 47% of sales, puts us on track toward our goal of achieving product sales contributing approximately 50% of our revenues for the full year.

We have grown our Photonics backlogs significantly in the first half of the year and we are well positioned to achieve our total revenue goal of $30 million for 2009. Our performance and outlook for Photonics is largely driven by our defense business in digital night-vision cameras and goggle systems; long-range target-identification, or LIVAR, cameras; and increasingly by our handheld Raman instrument business in the commercial markets.

In the area of our digital night-vision cameras, we have recently received export approval for our digital camera module at an increased level of performance, which well satisfies our European customer Sagem's requirements. We are in the planning phase with Sagem to ramp our production to support higher-volume shipments beginning in the fourth quarter. This program represents a 200 -- a $20 million opportunity over the next eight years.

We also completely delivered our first U.S. military low-rate production order for digital night-vision camera modules used in an avionics application. This program represents an estimated $25 million opportunity over the next seven years.

Additionally, we completed an initial evaluation contract with the U.S. military to replace analog technology with our digital-camera module in an existing avionics platform. This opportunity can represent approximately $20 million over the next five years. Together, these two U.S. military opportunities represent nearly $45 million in revenues over the next five to seven years.

In the second quarter, we made significant progress in our night-vision system products, which include two major initiatives. The first initiative is our digital enhanced night-vision goggle program, or DENVG, for the U.S. Army, where we are working with our partner, DRS Technologies, to develop a fully digital goggle to electronically combine digital night vision and thermal imaging.

We completed a field trial of our second-generation prototype goggle that contains our latest generation night-vision sensor and our partner DRS' latest generation thermal sensor. We also began contract development of a final version of the goggle, which will be a candidate for field deployment and high-volume production. DENVG is expected to enter initial large volume production, valued at $150 million over three years, beginning in 2012.

The U.S. Army is evaluating units from two other competitors, one of which is a customer of ours, to which we delivered multiple units of our night-vision camera modules in the second quarter.

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 -- which is in excess of $400 million annually.

In the second quarter, we completed a final design prototype and conducted product demonstrations to multiple branches of the U.S. military. The success of these demos has led to consideration of derivatives of the Night Port product for use in multiple programs.

We are pleased to report that we received a multimillion dollar production order for our LIVAR camera to be used in an airborne application, with shipments commencing in the second half of 2009. 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, including volume-based end-user, or OEM, customer opportunities. In the second quarter, we completed the shipment of our first OEM production order for an explosive detection application. We expect follow-on orders in the second half of this year, with total deliveries reaching approximately 150 units between 2009 and early 2010.

We are in discussions with several other potential customers for volume-based production applications, such as our newest product, RAPID-ID, aimed at the plastics market.

We also received an initial order for our standoff Raman system, the ObserveR, for an OEM security application. We are on a path to double our Raman instrument business this year.

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

Thank you, Joe. Consolidated second-quarter revenues totaled $12.3 million.

Equipment revenue for the quarter totaled $6.1 million, with no 200 Lean systems shipped in the quarter.

Photonic sales were $6.3 million. That consisted of $3.3 million of contract research and development and $2.9 million in product shipments.

Q2 consolidated gross margins of 36.6% was at the high end of our guidance, as we continued to implement actions to reduce our manufacturing costs. Equipment gross margins improved from 30% to 39% sequentially, due to a higher mix of technology upgrades and spares. Photonics' gross margins decreased to 34% from 39% in the first quarter, due to higher manufacturing and contract R&D costs.

Q2 operating expenses declined to $12.8 million, or $200,000 below our guidance, as we continue to realize the impact of our global cost-reduction plan. Overall, operating expenses for the second quarter represented a 20% decrease since Q3 2008, the quarter prior to the implementation of the global cost-reduction plan.

We recognized a tax benefit for the quarter of $3.6 million.

Q2 net loss totaled $4.5 million, or $0.20 per share, compared to our guidance of a loss of $0.19 to $0.26 per share. The net loss included $1.3 million of pretax stock-based compensation expense equivalent to $0.04 per share.

Our backlog was $44 million at the quarter end, up from $17 million at the end of Q1 and includes five 200 Lean systems.

Now I will discuss the balance sheet. Cash and investments are $96 million, or approximately $4.40 per share, and include a valuation allowance of $4.7 million associated with our auction-rate securities investments. Cash and investments, excluding the impact of valuation-allowance adjustments, decreased by $7.3 million from Q1, reflecting our operating loss and inventory purchases to support the system orders received this quarter.

We continue to closely manage our cash flow in light of the current business economics.

Our investment portfolio at the end of Q2 included $66.2 million in student loan-backed auction-rate securities. The decrease of $800,000 versus a Q1 balance is a result of the redemption of $3.4 million of these securities, which were called at par, offset in part by a reduction in the valuation allowance for these securities.

We continue to have liquidity access to these assets through our existing line of credit. We currently do not anticipate borrowing as we have adequate cash to support the 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 the second quarter, capital expenditures totaled $674,000, and depreciation and amortization totaled $1.2 million.

I will now provide guidance for the third quarter of 2009 and discuss the status of our global cost-reduction plan. We have met our goal of $15 million in annualized cost reductions for the year, lowering our revenue cash breakeven to approximately $100 million to $105 million. We are projecting consolidated Q3 revenues to be in the range of $13 million to $18 million, which includes one 200 Lean system at the high end of the range and no 200 Leans at the low end of the range.

Revenue for our initial 200 Lean patterned media systems will be recognized upon acceptance. Our first patterned media order was shipped in June with acceptance scheduled by September.

We expect third-quarter gross margins to be 39% to 42%, depending on the product mix and revenue levels. Operating expenses are expected to decline to approximately $12.5 million for the quarter, reflecting the latest improvements to our cost structure. 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 and expense will be approximately $200,000, excluding any impact associated with changes to the credit ratings of our auction-rate securities.

For Q3, we are projecting a loss in the range of $0.13 to $0.22 per share, which includes an estimated $1 million of pretax stock-based compensation expense equivalent to $0.03 per share, as well as an anticipated net tax benefit. While we are not providing annual guidance, we are expecting to be profitable in the fourth quarter.

Kevin will now summarize our business. Kevin?

Thank you. In summary, the underlying drivers of demand for increased storage capacity are intact. In fact, expectations for 2009 are exceeding projections going into the year.

Our hard-drive customers are committed to advanced technology investments, as evidenced by our last four new orders. The rapid mix towards mobile computing will help to drive the new 200 Leans over the next few years.

Momentum is strong enough [at] Photonics business, driven by multiple military programs moving into production; further program awards, which will lead to production down the road; and increasing traction in commercial product sales.

Patterned media is an opportunity now and away, and offers significant growth potential for our Equipment business. Our solutions for server and semiconductor manufacturing hold promising opportunities for market expansion and future revenue growth.

We have aggressively trimmed our cost structure, which in the short term will help 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). Rich Kugele, Needham & Company.

Thank you. Good afternoon. Can you give us a sense on how much actually was the spares and upgrades piece in the quarter?

Rich, we typically don't break it out quarter for quarter, but we said that we expected it to be kind of in the $10 million to $12 million range for the year, and so, if you just kind of assume a fairly linear run rate with some improvement in the back half, that should give you kind of a range.

Okay, and then, in terms of additional Lean orders, obviously none of these are capacity-driven yet. When do you expect you think you might see, based on your discussions with OEMs, an actual capacity order?

Okay, I will answer that. The -- we may still see some additional orders this year and possible shipments for tools, which would be effectively replacement for legacy tools. So it's a substitution capacity. So, it'd enable a customer to make more 2.5-inch media.

Okay.

Kevin Fairbairn In terms of true incremental capacity going into the industry, we are really looking for 2010 for that to happen, in terms of revenue shipments.

And how much lead time do you need to be able to ship -- or, asked another way, how late in the year can you get an order and still ship it for revenue in 2009?

We would have to have the order in house in early August.

Okay. Are you seeing any difficulties within your own supply chain, getting parts?

No, our operations group has done a good job ensuring that the supply chain is intact and, if we've seen any suppliers that might be problematic, making sure that we have good back-ups.

Okay, then I guess just lastly, Jeff, does -- there is [not] obviously a lot we can all do with the model, putting in or whatever we think is a normalized earnings -- normalized pull level for equipment. What do you think is the business model today, given the restructuring you've done in a normal year? So if a normal year is 15 or 20 tools type area, what should we expect on that type of business model for gross margins and kind of a run rate on OpEx?

Now you're going to make me quickly do my model based on tools. So (multiple speakers)

I could've said 17 tools.

Yes, you could have. So at 15 tools, 20 -- that probably put us safe -- just say that range might be 120 to 150, and that's for Equipment only. 15 tools times five -- right.

So I guess, Rich, maybe I should follow up on this one. But if it's around 150, we would expect to see kind of low 40% margin and operating expense. Obviously, we'll start to come down as a percentage of revenue and be, maybe, in the high 30s by that level, if the companywide was 150, for example, with a pretax profit in the neighborhood of 5%. So not different than our published models.

Okay. That's very helpful. Thank you very much.

(Operator Instructions). Matt Bryson, Avian Securities.

Just wondering on the backlog number. That obviously grew nicely. What's your expectation for that backlog turning into revenue, given it feels like -- I guess that is basically my question.

You're talking about -- Matt, it's Jeff -- revenue this year?

Exactly.

Obviously, most of that backlog is scheduled for revenue in this calendar year.

Okay. And I guess the one other question is, in terms of looking at your customer upgrades, buying new equipment versus upgrading tools, is there any feel for, as customers need to add capacity, whether they will prefer upgrading the 200 Leans or will they move more towards buying new equipment or has your view on that changed at all?

Well, and maybe Kevin can add color, but what I would say is it's the capacity. The 200 Leans can do 3.5- and 2.5-, obviously. So those can be converted between the two.

But once they need capacity beyond what they have, and either are able to convert or upgrade and look to the legacy tools that we have out there, they would end up having to add tools.

And can you give us a feel for kind of what of the 200 Lean base consists of upgraded 200 Leans at this point, versus just the plain old 200 Leans you started shipping initially?

I will add to that. The initial tools we shipped, probably the first 20, 25 tools, they initially went out configured for longitudinal. It was probably two or three years ago they got upgraded to perpendicular.

So, the upgrades we are getting on the 200 Leans these days are to perhaps add some new deposition stations with higher efficiencies, reconfigure and therefore they need some different modules. So there is not a major adding components to the 200 Leans these days.

Aaron Rakers, Stifel Nicolaus.

Thanks, guys, for taking the questions. A couple of questions on my end. When you talk about patterned media and understanding that you are starting to see some shipments and, actually, deployments start to take place over the next couple of quarters, when is your assumption that we start to see the industry kind of -- if you think about it to PMR, kind of move into production? Any thoughts on when we could see the industry actually really start to adopt the patterned media from a technology standpoint?

This is Kevin here. So, first of all, I think patterned media is going to be slower to get going than perpendicular because this is a very, very different type of manufacturing from -- just going from longitudinal to perpendicular.

We've been assuming that people will start taking tools that will be running production in 2011, that the initial ramp might be a little cautious. But once they get their manufacturing under control, then there will be a very rapid ramp, and then over the course of four or five years, the industry would make that conversion.

Very helpful. When you guys look at your -- basically, your installed base as it stands today, and you kind of look at what these hard-drive vendors are saying, and obviously Western Digital tomorrow night, what is your sense in terms of the utilization of your equipment out there? Any feeling for how highly utilized your systems are being right now?

The feedback we get from our field service organization is that all our customers are running very hard now and there doesn't seem to be any spare capacity.

Okay, so just to go back to the earlier question, if you guys were to have to see your customers add incremental capacity at this point, those orders would have to be in place by August, or -- would it be fair to assume that as we get into the seasonal build pattern, there is definitely setting up for some tightness in the industry?

It's too late for people to put capacity in for 2009. If they were to order tools now, by the time they were delivered, it would be December. It takes several weeks to install the tool. It takes the customers some more time to qualify the tool. So no tools have been shipped this year that would meet any production needs for 2009.

So, to answer your question, there may be some tightness in 2.5-inch media. That's our kind of view on the situation.

(Operator Instructions). There are no further questions at this time.

Thank you for joining us today. We look forward to updating you in our next call on our Q3 results.

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