Intevac Inc (IVAC) 2009 Q3 法說會逐字稿

Good day and welcome to the Intevac third quarter financial results conference call. Please note that this conference call is being recorded today October 26, 2009. At this time, I would like to turn the call over to Claire Adams, Intevac's Investor Relations Counsel. Please go ahead, Ma'am.

Thank you and good afternoon everyone. Thank you for joining us today to discuss Intevac's financial results for the third quarter of fiscal 2009, which ended September 26th. In addition to outlining the Company's financial results for the quarter, we will provide guidance for the fourth quarter and full year fiscal 2009. On today's call are Kevin Fairbairn, President and CEO, Jeff Andreson, CFO, and Dr. Joseph Pietras, Vice President and 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 events 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 October 26th 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?

Good afternoon and thank you for joining us today. Our results for the third quarter exceeded our guidance in revenue gross margin and earnings per share. Revenues totaled $19.2 million, which included one 200 Lean system. Net loss was $1.8 million or $0.08 per share and included equity-based compensation expense equivalent to $0.03 per share. Our results exceeded guidance for a number of reasons. In addition to recognizing revenue on our first 200 Lean high productivity patterned media, we saw a significant upgrade business during the quarter driven by our customers growing need to convert a portion of existing media capacity from 3.5 inch to 2.5 inch. These conversions required upgrades to the 200 Lean systems already in the field, with additional features such as rotation stations, enabling processing of media on glass substrates.

These upgrades, along with the improved factory efficiencies and a growing photonics business also helped us to exceed gross margin guidance by 330 basis points above the high end of the range. These achievements coupled with our lower operating expenses improved our bottom line with loss per share $0.05 better than the high end of our guidance. We are very encouraged by the numerous positive signs of recovery in the hard drive market. Demand for the hard drives has surpassed expectations going in to 2009. An example of this recovery is our recently announced order for two, 200 Lean systems represent the first capacity driven orders of the year. Still everyone listening to the call today would like to know when the industry would need to add more capacity, and how quickly our revenues will ramp during this recovery. We are not yet in a position to answer that question.

While our customers are beginning to talk about capacity additions in 2010, they've also stated their continued caution pending validation of the recovery sustained through December. As a result, it is likely that our customers will hold off until the fist first quarter of 2010 before placing new orders for capacity. So our visibility on new orders remains limited. We are seeing a number of positive market dynamics which in the near term include year-over-year hard drive unit growth turning positive, the PC market proven to be elastic as the lower prices of computers, in particular net books are driving PC unit growth even in these challenging economic times. Constraints in 2.5 inch disk manufacturing capacity for advanced mobile applications, retirements of legacy media manufacturing systems of several customers, a corporate refresh cycle in on the horizon expected to be driven by Windows 7. And of course, the on going proliferation of digital content in the consumer world. All of these signs indicate that needs of 2.5 inch should require additional media capacity systems like the 200 Lean and 2010.

We are also seeing additional positive indicators for the longer term, such as the corporate mix shift towards mobile PC's leading to shorter refresh cycles and hence increased hard drive demand over time. The increasing benefits of 2.5 inch drives, such as reduced space and power, leading to a mix shift away from 3.5 for the desktop enterprise in consumer electronics markets, significantly reduced expectations for the penetration of solid state drives in to the hard drive market. Growing G3 wireless coverage especially in the large emerging markets combined with the aggressive progressional fans from wireless carriers will drive mobile unit growth. A significant number of Lexi tools in the field that will is have to be replaced over the next few years. And the fact that the patterned media is on every hard drive company's technology road map with initial deployment to production systems to begin as early as 2012.

As we look back upon the year, 2009 has been a challenging year for all equipment companies. Still, we are pleased with our progress this year. Our goals during this downturn were to significantly our lower breakeven points so as to protect strong balance sheet in the event of a protracted downturn, continue to improve our operational effectiveness. And lastly, to ensure we strengthened our product portfolio so we emerge with better prospects for revenue and earnings growth than any time in our past. We have reduced our operating expenses by over 20% over the last year. And we believe we have sustained our gross margins better than many other public capital equipment companies due in large part to our continued focus on lean business practices.

In the hard drive market, we developed and shipped the first high productivity patterned media system in Q2, achieving sign up in Q3,. Our second patterned media system shipped in early Q4. We expect additional orders of patterned media R&D tools in both new and existing customers in 2010. Will be shipping R&D media deposition system with new enabling capabilities this quarter. We believe these new systems represent significant opportunities for us in the future when the technologies ramp in to production. We have continued to fine tune our Lean semiconductor product with our alliance partner, TESS as they demo the system to local large customers in the South Korea market. While the semi conductor equipment market declined to record low levels in 2009, we are hopeful that in conjunction with TESS we can benefit from the semiconductor market recovery.

Lastly, we have developed during the process of developing new manufacturing solutions to further market, derived from our 200 Lean as well as our semi conductor high productivity mainframe. We have been approached by a number of solar companies who are aware of our reputation in the hard drive industry for providing high productivity, precise and uniform film deposition capability at a very low cost. One such customer, XsunX recently announced their partnership with Intevac, where we will work together to develop a new breed of thin film photovoltaic manufacturing techniques to produce six solar cells. For our other PV customer, we have removed from our initial back order for 200 Lean tool as we do not have defined delivery date for this system. At the end of the day the solar market is a cost driven business. Various technologies can be employed to improve efficiency,p but the solution that provides the lowest cost per watt, or reasonable efficiencies will be successful. Initial customer results on our lab tools show positive results on our efficiencies and projected costs. I will now turn the call over to Joe Pietras to talk about another growth quarter for our Photonics business. Joe?

Thank you, Kevin. Intevac Photonics revenues were $6.9 million in the third quarter, growing 10% quarter-over-quarter and 20% year-over-year. We received a record amount of order and exited the third quarter with a record level of backlog. This growth is driven by our military digital night vision business, or military long range target identification or LIVAR camera business and continued momentum in our hand-held Raman instruments business. In our military digital night vision we reported receiving export approval for digital camera module at higher levels of performance to satisfy the requirements of Sagem, our NATO customer. As a result, we executed plans in the third quarter to increase production capacity and are on target to begin higher volume shipments in the fourth quarter with increased shipment rates continuing in to 2010.

In the domestic military night vision market, we experienced the number of important developments related to core digital sensor technology, and our night vision system products. As we announced last week we received a subcontract award of $7 million to develop a new large format night vision sensor based on Intevac's patented digital sensor design. This new sensor which we expect to be available in 2011, will expand our family of digital night vision sensors into field of view applications for avionics and ground use. With regard to our night vision system products, we are seeing strong business traction around our recently released Night Port product. Night Port is a fully digital monocular that provides night vision viewing and recording capabilities utilizing our expertise in digital sensors and micro display viewers. Night Port has the potential to replace tradition analog night vision goggles which represents as $400 million market annually.

You may recall during the second quarter, we completed a number of successful demonstrations of our Night Port product to key military customers. These demonstrations led to funding of two important development programs launched in third quarter for separate binocular type products based on the Night Port design for ground and avionic US military applications. The production opportunity for these two products, which we expect will develop over the next few years represents approximately $45 million over ten years. In our LIVAR camera business we continue to see increased momentum, delivering in the third quarter a record number of LIVAR cameras against a multi-million production order for an airborne application.

We expect to receive follow on orders,which would provide backlog throughout 2010. The opportunity represented by this airborne application alone, is estimated at approximately $37 million over the next ten years. In our Raman instrument business, where our focus is on hand-held portable instruments for materials identification, the order pipeline continues to grow within our target markets. During third quarter, we were awarded a US government contract in excess of $1 million, to develop a portable standoff Raman technology for remote detection of chemical biological hazards. To sum up, in our military business we continue to make significant progress in winning orders that demonstrate penetration of our digital night vision products and LIVAR cameras on major military platforms that have significant growth potential. In our commercial business, we continue to see growth if our hand-held Raman instruments in our target markets. I will turn it over to Jeff to discuss our financial results for the third quarter and our outlook for fourth quarter and full-year 2009. Jeff?

Thank you, Joe. Consolidated third quarter revenues totaled $19.2 million exceeding our guidance of $13 million to $18 million. Equipment revenue totaled $12.3 million, with one, 200 Lean system recognized in the quarter. Photonic sales of $6.9 million consisted of $4.5 million of contract research and development, and $2.3 million in product shipments. Consolidated gross margins of 45% exceeded the high end of our guidance of 42%. Equipment gross margins improved from 39% to 48% sequentially, due to a higher mix of technology upgrades and spares, as well as improved factory utilization to support our fourth quarter revenues. Photonics gross margins improved to 40% from 34% in the second quarter, due to a higher margin -- due to higher margin development contracts and lower product manufacturing costs.

Q3 operating expenses declined from Q2 to $12.4 million, and were slightly below our guidance. Overall operating expenses for the third quarter represented a 22% decrease since Q3 2008, the quarter prior to the implementation of our global cost reduction plan. We recognized d tax benefit for the quarter of $1.8 million. Our Q3 net loss was $1.8 million, or $0.08 per share compared to guidance of the loss of $0.13 to $0.22 per share. Net loss included $1 million of pretax stock based compensation expense, equivalent to $0.03 cents per share. Our backlog was $52 million at quarter-end. increase of $8 million compared to $44 million at the end of Q2. And included a total of five 200 Lean systems. As Kevin explained we have debooked one, 200 Lean for a PV application as we do not have a defined delivery date from the customer.

Now I will discuss the balance sheet. We ended the quarter with cash and investments of $97.7 million, or approximately $4.43 per share, which included a valuation allowance of $4.4 million associated with our option rate security investments. Excluding impact of this adjustment, cash and investments, increased by $1.3 million from Q2, and included a $2.5 million dollars tax refund related to a carry back of our 2008 losses. We continue to closely manage our cash flow in light of the current business environment. Our investment portfolio at the end of Q3, included $66 million in student loan-backed option rate securities. In third quarter $500,000 of securities were called at par. We continue to have liquidity access to these assets through our existing line of credit, and do not anticipate borrowing as we have adequate cash to support the business. In the third quarter capital expenditures totaled $556,000. And depreciation and amortization totalled $1.4 million.

I'll now provide our guidance for the fourth quarter and full-year. We are projecting consolidated Q4 revenues of $34 million to $36 million, which includes four 200 Lean systems. We expect fourth quarter gross margins in the range of 40% to 41.5%. The decrease in gross margin percentage from the third quarter is a result of a higher mix of system shipments in the equipment business, and reduction of Photonics as we begin to deliver the first high volume night vision modules to Sagem.. We expect the gross margins for this product to normalize in the second quarter of 2010, as volumes increase and yields improve to expected levels. Our fourth quarter has additional four days, as compared to the prior quarter due to our December 31st year-end. As a result, why we continue to reduce cost operating expenses expected to be flat at approximately $12.5 million for the quarter.

Other income and expense will be approximately $200,000, excluding any impact associated with changes to the credit ratings of our option rate securities or foreign exchange. For Q4, we are projecting net income in breakeven to $0.03 per share, which includes an estimated $1 million of pretax stock based compensation expense equivalent to $0.03 per share,as as well as anticipated net tax benefit -- net tax expense. While the EPS at the low end of guidance is breakeven, the Company expects pretax profitability at both ends of the revenue guidance. Income tax expense for the fourth quarter will range from approximately $1.8 million to $2.1 million, due to required year-to-date adjustment of net tax benefits from prior quarters. Our tax rate on a cash basis will be zero for the year.

To summarize guidance for the full year, we are projecting consolidated revenues in the range of $78 million to $80 million, which includes five, 200 Leans. We expect Intevac Photonics revenues to be approximately $27 million for the 2009. We expect loss for the year in range of $0.52 to $0.55 per share, which includes an estimated $4.5 million dollars of stock-based compensation expense equivalent to $0.15 per share. This completes the formal part of our presentation. Operator, we are ready for questions.

(Operator Instructions). We will take our first question from Bill Ong with Merriman.

Good afternoon, gentlemen. I understand that your visibility is limited in 2010, but can you offer some color on what type of seasonality we can expect in 2010, maybe go through some potential scenarios on the Lean tools as well as Photonics?

Okay, hi, Bill. So let me start with the equipment side, we would expect majority of orders and deliveries to be in the first half capacity systems. Because people typically want to get production in place for the last two quarters. In terms of incremental R&D systems, they can occur any time during the year. From our Photonics business, we continue see that business growing so overall we expect quarter upon quarter growth through the year, and maybe occasional flat quarter-to quarter, but in general it will be up and to the right.

And then on the solar business on the high level, do you have expectation on when you can start recognize revenues? Either over the next year or two, if you can just give us a sense of time periods when you can get some revenue recognition there?

We would expect any systems that we ship in 2010 to get revenue recognition within one to two quarters. because the basic tools are 200 Leans or our semi mainframes are well proven. And we would expect whatever specifications we sold to, to be achieved fairly quickly. At once customer starts using the tool for which was sold R&D or production, then our revenue recognition would enable us to recognize that tool as revenue worthy.

That's great, thanks for the insight.

(Operator Instructions). And we will go next to Richard Kugele with Needham & Company.

Thank you and good afternoon. Couple of questions, when it comes to the upgrade business you saw in the quarter, that really is all 200 Leans, there is no upgrades occurring on the 250B's anymore, right?

In the quarter, it was all 200 Leans. In the future, we wouldn't rule out that the customers are trying to prolong the use of legacy systems, might not do some upgrades which could be reused on 200 Leans.

The upgrade could be.

Yes. For instance, the sources we use on the 250b's, we use on the 200 Leans. And we continue to do upgrade business where we improve efficiency in the processing and we reduce the cost of say, patterned targets and so -- they are fairly fast pay backs. So people will often buy sources knowing full well that they can be used later in 200 Leans.

Okay. And then in terms of the 2.5 inch upgrades specifically, that doesn't actually improve throughput, it just tailors it a little more to 2.5 inch?

Right, for those -- for the 2.5 inch upgrades, that was normal 200 Lean, and you are right, it has no impact on the throughputs.

Okay. Then I guess just lastly when it comes to the composition of the five Leans that are in backlog, can you give us a sense for what types or so. We know obviously two of those are for capacity, but the composition of the rest, and what general timing we should be thinking about the revenue recognition of those?

Rich, it's Jeff. So two are for capacity. Two other ones are Gen 2 for planner. One we said is for R&D application for advanced planner media, and then we have one DTR as well. Obviously there is five in backlog, and four in our revenue forecast. So one of those is likely to slip in to Q1. So we guided it as such.

Okay. One last question, when it comes to discussions that you are having with the -- in particular the drive customers, do you get the sense they are still in the planning stages for capacity additions, do they recognize the lead times involved now for you to be able to deliver the tools in time?

Yes. You are absolutely right. They are doing the scenario planning. We are telling them to be careful -- they can't suddenly turn the equipment industry on. It's all the other sub component suppliers turned on by the semi conductor and solar industries. I think everyone is aware that they need to move quickly.

Is there any sense that -- on how your primary competitor has weathered the downturn?

It's hard to tell, they are a subsidiary of a much larger Japanese company and in certainly in the past P&L issues never seem to affect them in the way say a public Company like Intevac.

Thank you very much.

Rich, just one other thing to add on, they still have a much longer cycle time than we have from order to delivery. So as far as we know, they haven't improved on that.

We will take our next question from Aaron Rakers with Stifel Nicolaus.

Hey, thanks guys, thank you for taking the question. I guess, just to build on that, can you guys explicitly say what your lead times are right now from order to ship?

We typically quote 17 weeks. Quite often if a customer is thinking of placing orders. they give us a few weeks warning as they get our paper work in place. So that kind of helps us with some of our suppliers.

Fair enough. And that's in line with your historical normal lead times?

Correct.

Okay.

And just in case people missed Jeff's point earlier, we continue to believe our lead time is almost half that of our competitor which could be important in this next cycle as people need to respond to a growing market.

And as you add I think you mentioned two systems that come on for capacity in this next quarter or so. Is is there anyway to think -- about how much capacity that will leave us within the industry in terms of hard drives, any way you tends to look at that on a drive perspective.

Those two systems won't produce media in Q4, so they will come on line -- probably running production later in Q1.

Let's say that once they come on to production, where does that leave the industry from a capacity standpoint in your point of view.?

It's a little difficult to say in this particular customers case because they've been taking legacy capacity offline. I'm not sure if it's a true -- how big the addition is. Jeff?

I would say that they're retiring legacy tools which produce some where around 50% to 60% of the same output of the two new tools. So it's a net one tool add in to the marketplace, which is maybe a half a percent of growth and total media output. So it's a very small amount.

Okay. Fair enough. I think last quarter you mentioned you started to see the patterned media stuff come in to production in 2011. Today you said 2012. Have you seen that stretch out a bit when you start to see that stuff come on?

When we talk to customers, I think the consensus is kind of productions may be moved out one year, what will be unclear is the initial introduction will be longer than say perpendicular media. Learning curve is a lot more difficult. So we may well ship early production systems in late 2011, but may not actually produce any significant amounts until later in 2012.

And final question for me, with that said, do you see the industry moving to an increased platters per drive dynamic as kind of the aerial density growth slows, and that impacting your business looking in next year and into 2011?

If aerial density slows, then suddenly that will maintain, if not increase the number of disks for hard drive which is good for your business.

Thanks, fair enough. Thanks guys.

(Operator Instructions). We will take our next question from Michael Needleman with Preservation Asset Management.

Good afternoon, gentleman. Just a couple of questions. I came on late and so maybe I did not hear, where are you with your new equipment from the standpoint of heading in to the semi cap side of the business, where is that, just a quick update?

We are currently working with TESS, which is our alliance partner in Korea, who is working with their customers -- their memory customers to get the tool demo'd and qualified. We hoped to ship the tool in to a customer before the end of the year, but it's probably going to be early next year now.

So do you actually have one in beta?

We have -- what we call a production configuration tool currently in test, which that will eventually go to a customer site. So you might call that beta, but it's not a actual customer yet.

We are delayed there. The second question is, just to come back I think I heard the last individual ask lead times were 17 weeks. I thought the lead times for your equipment was a little quicker from the standpoint of purchase to be able to fill, maybe I'm thinking back you were able to some times ship a product within a quarter. Am I wrong by saying that?

You are correct. In some cases customers tell us they are going to order systems, but they are getting paper work in line. And sometimes they give us advance ordering to get long lead items and reduce the overall lead time for the equipment. You are right, we have delivered equipment want quarter in the past.

So in other words that 17 weeks is if no one has given you any kinds of go ahead to order any new equipment, is that correct?

That's correct. And assuming that the equipment industry in general is in normal times, and none of the components sub suppliers kind of lost their capacity.

And I am going to switch real quick, the night vision product, where is that? What's on the government docket there as far as timing and everything else/ We are ramping up our shipments to Sagem, our NATO customer. That production will continue over the next few years and we are continuing to win lots of programs where our system level products, our Night Port that we came out with recently is starting to gain traction. And we won two binocular style products that have very big revenue potential I've the next ten years.

And how about the big product, I believe was going to come up this year or coming in to next year, 2010, 2011 time frame, where is --

That is our digital enhancement vision goggle, that will be out there in the 2013 time frame.

You're still, the bidding process is still on going for that?

It is still on going and the technical development is still on going and so competitors are working the technical issues. We see other opportunities in avionics and in some special ops applications which will come on sooner.

It's fair so say our technology is qualified or deployed practically in every advance night vision application.

I want just to be sure I heard a question that was asked. A couple of the hard disk drive players come out and stated publicly they may be raising CapEx, one has, one stated they are going to be at least looking at the aspects of raising CapEx. If in fact you're having discussions with them, I will go ahead and ask the questions, have they given you any preliminary PO's for that leads time products?

Not today.

Okay. Thank you so much gentlemen, and have a good afternoon.

Thank you.

And there 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 on Q4, and 2009 results. Good-bye.

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