Intevac Inc (IVAC) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Intevac fourth quarter and full year 2009 financial results conference call. Please note that this conference call is being recorded today, February 2, 2010. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relation Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full year 2009 which ended December 31. In addition to outlining the Company's financial results for the quarter, we will provide guidance for the first quarter and an overview of our current expectations for 2010. On today's call, are Kevin Fairbairn, President and Chief Executive Officer; Jeff Andreson, Chief Financial Officer; and Joe 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 & Exchange Commission including our annual report on Form 10-K and quarterly reports on Form 10-Q. The contents of this February 2, 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'll now turn the conference call over to Kevin Fairbairn. Kevin?

Thank you. Good afternoon and thank you for joining us today. Our results for the fourth quarter met our guidance in revenue and exceeded guidance on gross margin and earnings per share. Revenues totaled $34.2 million which included three 200 Lean systems. Net income was $2 million or $0.09 per share and included equity-based compensation expense equivalent to $0.02 per share. For the full year, revenues totaled $78 million and our net loss was $10.1 million or $0.46 per share and included equity-based compensation expense equivalent to $0.14 per share.

As we discuss our results for the fourth quarter and outlook for 2010, we are in a dramatically different position than we were at this time last year. 2009 started out as one of the most challenging environments the hard drive industry had seen in its history, yet demand for hard drives rapidly recovered exceeding all estimates for the year.

As we look back on 2009, we are pleased with the positive progress we achieved in a number of areas. First, we took early and rapid steps to resize our cost structure ahead of the industry's standard. We significantly cut expenses and minimized losses and cash burn while creating incremental revenue opportunities and maintaining a steadfast focus on bringing new products to market that will drive future growth. Importantly, we continue to establish our Company as equipment technology leader in the hard drive media market. While also expanding our served markets in the photonics and solar photovoltaic markets. We shipped the industry's first high productivity tools for patent media development as well as an R&D system featuring our latest deposition technology for advanced planar media.

We launched our Lean Solar tool in mid 2009 and began working with multiple customers for high efficiency low cost Solar Six solutions. We began initial production ramps for two significant photonics programs and won several key contract awards for our digital night vision products as well as continued to expand and grow our Raman instrumentation business.

In the fourth quarter, we once again demonstrated our operational capabilities as we continued our discipline in managing costs and expenses. This led to our return to profitability on revenues of $34.2 million which was within guidance that included just three 200 Lean systems. The recognition of revenue expected on the fourth system was delayed to current quarter, as Jeff will discuss in his remarks.

As we look forward to 2010, we see numerous drivers from ongrowing growth in our hard drive business. The market demand for hard drives is robust. Strong growth is expected in 2010, estimated in the neighborhood of 15%. There is continued strong demand from the consumer sector driven by attractively-priced PCs and increased demand from emerging economies. There is also increasing demand in the commercial sector driven by enterprise storage and a corporate PC fresh cycle driven by Windows 7. This growth in hard drive shipments cannot happen without more media manufacturing capacity coming online.

Media manufacturing capacity in the second half of 2009 was severely constrained. Our customers struggled to keep up with demand and effectively had no buffer stock. In recent conference calls, we heard capacity utilization rates above 95% which are problematic levels for our customers. The pressures on capacity in 2009 were caused by a combination of factors. There was very limited investment for new systems, there were a significant number of legacy tools taken off-line either permanently or cannibalized to rebuild systems with more process chambers. The industry will have to add capacity 2010. Firstly, they would need systems to bring capacity utilization rates to more sustainable yet still quite high levels. There will be ongoing retirements of legacy systems that cannot support competitive magnetic media technologies. And lastly, they need more systems to support the growth forecast for hard drive shipments. We estimate our customers will have to add over 20 production systems with additional upside dependent on how many legacy tools are retired.

At this point, we have a backlog of 16 production systems with eight announced today. Some systems are fuel capacity adds and some are replacements for legacy tools. Additionally, R&D systems will be incremental and we currently have two systems in backlog. In spite of the positive indicators for hard drive shipments, caution has remained a norm for our customers consistent with our comments through 2009. Our customers are determined to limit their capacity additions to what will be just enough to support drive demand this year and bring this new capacity online just in time. Customers need to have new capacity online to support the traditional Christmas season as well as the first quarter Chinese new year season. This means that we expect to ship the majority of systems in Q2 and Q3 making for a very lumpy year in terms of equipment revenues.

While recent order confident has been primarily driven by our hard drive customers, we are also seeing further growth opportunities in our emerging equipment and photonics businesses. Luke Marusiak rejoined the Company in January and will be the EVP and General Manager for our emerging equipment business. We are pleased to have Luke back on the team and look forward to him driving these new opportunities.

In the solar voltaic industry, we introduced in 2009, a high productivity solution (inaudible) the Lean server, and are working with multiple customers to address the industry's need for high efficiency modules at a lower cost per watt than what is currently available on the market. We are working towards shipping our first solar system within the next couple of quarters and hope to recognize revenue on at least one system in 2010. There is some risk here as we are still optimizing the process hardware and some of our customers are still raising capital.

We have continued to fine tune our Lean semiconductor product with our alliance partner, TES, as they're actively demonstrating the system to both large customers in the South Korean market.

I now turn the call over to Joe Pietras to talk about another growth quarter for our photonics business. Joe?

Thank you, Kevin. Intevac's photonics revenues were $7.3 million in fourth quarter, growing 6% quarter over quarter and 61% year over year. We matched the record level of orders achieved in Q3 and exited the fourth quarter with a record level of backlog. This growth is being driven primarily by our military digital night vision business, our military long-range target identification or LIVAR camera business, and our hand-held Raman instruments business. In our military digital night vision business, we began initial production deliveries of our digital camera module to Sagem, our NATO customer. During 2010, we expect to receive higher volume production orders and will continue to ramp our production capacity to meet Sagem's growing needs.

In the domestic military night vision market, we're very pleased to announce the award of a new key contract we received during the fourth quarter. This contract is for the evaluation of our digital night vision camera as a replacement for analog night vision sensors within an existing US military avionics application. We were awarded this contract in head to head competition and if our camera is deployed, this application can represent approximately $25 million in revenue over the next six years. This contract is a prime example of the growing interest we're experiencing for our digital night vision products and of our business strategy to obtain entry onto major military platforms.

In our LIVAR camera business, we continue to deliver production quantities during the fourth quarter against a multi-million dollar order for an airborne application. We also received initial funding for a multi-million dollar follow-on production order which will extend our backlog for this application well into 2010. In addition, we received an order for our LIVAR camera for a second airborne application which we expect to lead to an initial production order during the latter part of 2010. The opportunity represented by these two applications is estimated at over $45 million over the next ten years.

In our Raman instruments business, where our focus is on hand-held portable instruments for materials identification, the order pipeline continues to grow within our target markets. In particular, in the chemical, biological and explosives threat detection market, we were awarded two contract awards over a major competitor for the development of hand-held Raman instruments that incorporate our core near infrared sensors to enable the detection of critical threat materials.

To sum up, in our military business, we continue to make significant progress in winning orders and new contract awards that demonstrate penetration of our digital night vision products and LIVAR cameras on major military platforms that have significant potential. In our commercial business, we continue to see growth in our hand-held Raman instrument target markets. In all, we expect our photonics business to grow approximately 30% in 2010.

I will now turn it over to Jeff to discuss our financial results for the fourth quarter and our outlook for the first quarter and full year 2010. Jeff?

Thank you, Joe. Consolidated fourth quarter revenues totaled $34.2 million within our guidance of $34 million to $36 million. Equipment revenue totaled $26.9 million and included three 200 Lean systems recognized in the quarter. The remaining system included in our guidance was scheduled for acceptance late in Q4 and has been delayed until Q1 of this year with the shortfall in system revenue being mostly offset by increased revenue from technology upgrades. Photonics sales of $7.3 million consisted of $4.6 million of contract research and development and $2.7 million in product shipments.

Q4 consolidated gross margin of 44.6% exceeded the high end of our guidance of 41.5%. Equipment gross margins improved from 48% to 49% sequentially due to higher sales volume, partially offset by a higher mix of system revenues, and exceeded our guidance as a result of the increased shipments of technology upgrades in the quarter. As anticipated, photonics gross margins decreased to 29%, reflecting the initial higher cost as we begin to ramp to high volume production for our NATO customer.

Q4 operating expenses declined to $11.2 million and were below our guidance of $12.5 million, driven primarily through our actions to tightly manage expenses in light of the revenue risk within the quarter. We recognize a tax expense for the quarter of $2.6 million. Our Q4 net income was $2 million or $0.09 per share compared to our guidance of break even to $0.03 per share. That income included $546,000 of pretax stock-based compensation expense equivalent to $0.02 per share. Our backlog was $73.8 million at quarter end, an increase of $21.6 million compared to $52.2 million at the end of Q3 and included a total of ten 200 Lean systems. As of today's call, our backlog includes 18, 200 Lean systems.

Now I will discuss the balance sheet. We ended the quarter with cash and investments of $89.8 million or approximately $4 per share which included a valuation allowance of $3.7 million associated with our auction rate securities investments. Excluding the impact of this adjustment, cash and investments decreased by $8.5 million from Q3 as a result of an increase in working capital to support our revenue growth. Our investment portfolio at the end of the year included $66 million in student loan backed auction rate securities. In Q4, $450,000 of the 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 increased business levels expected in 2010. In the fourth quarter, capital expenditures totaled $606,000 and depreciation and amortization totaled $1.5 million.

I will now provide guidance for the first quarter and the Company's current expectations for 2010. I would like to remind you that historically, our revenues from quarter to quarter can be very lumpy as our customers typically plan to install new systems in the second and third calendar quarter of the year to support the peak levels of shipments in calendar quarters three and four. We are projecting consolidated Q1 revenues in the range of $26 million to $33 million which includes a range of one to two 200 Lean systems. We expect first quarter gross margins in the range of 41% to 42.5%. The decrease in gross margin percentage from the fourth quarter is a result of a lower mix of technology upgrades expected in the equipment business. Photonics margins will remain relatively flat to the fourth quarter as we continue to ramp volume and lower the cost of our high volume night vision modules for Sagem through the first two quarters of 2010.

Operating expenses are expected to be in the range of $13 million to $13.5 million. The increase from Q4 is related to reinstatement of variable compensation programs and the normal seasonality of employee taxes in the first half of the year. Additionally, our fourth quarter results included short term actions to reduce expenses which will not reoccur in the first quarter. Other income and expense will be approximately $200,000 excluding any impact associated with any changes in the credit ratings of our auction rate securities or foreign exchange. For Q1, we're projecting net income in the range of a loss of $0.08 to a profit of $0.03 per share which includes an estimated $600,000 of pretax stock-based compensation expense equivalent to $0.02 per share.

I will now provide the Company's current expectations for the full year 2010. At the levels forecasted by our customers and given the amount of legacy capacity that was taken off-line during 2009 and expected retirements in 2010, we estimate that 20 to 25 200 Lean systems will be required to provide enough capacity to support unit growth, maintain sustainable utilization levels and include a limited number of R&D tools. Additional legacy tool retirements could potentially increase this number. We expect revenues from service and upgrades to be approximately $25 million. Intevac photonics to be approximately $35 million. And our new equipment products to generate up to $5 million in revenue for 2010. In total, we're projecting consolidated revenues to be in the range of $155 million to $185 million for the year. As we look at the rest of the P&L, we expect gross margin to be in the range of 41% to 42% and full year operating expenses to be in the range of $53 million to $55 million. Our tax rate will range from 15% to 20%.

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

Thank you. (Operator Instructions) We'll take our first question from Bill Ong with Merriman.

Yes, hi, congratulations on recent multi orders. My question is on the solar business. Given the recent subsidy cuts you're seeing from Germany and Italian governments, has that been factored into your forecast to ship one tool this year? Have you seen any slowing down of business activities as a result of subsidy changes?

Hi, Bill. This is Kevin here. First of all, before we embarked on solar, we wanted to make sure our solution wasn't dependent on government subsidies. So, I don't think this change affects that. And no, we haven't seen any impact on our customers in terms of their willingness to move forward.

Any sense of what number tools you can anticipate to ship in 2011, given the type of momentum and interest level you're seeing right now?

If our customers are successful, then it could be a reasonable number of tools but I think it is too early -- it would be speculation at this point.

Okay, thanks so much.

(Operator Instructions). We'll move to Rich Kugele with Needham & Company.

Thank you, good afternoon. Can you just update us on what you see today, given the legacy retirements in 2009 on what the install base is of 250Bs?

We know that some 250Bs have been taken off-line. We don't really want to talk specifically about customers but I would say it is probably in the neighborhood of five to ten for sure.

Five to ten in 2009? I meant the entire install base.

Rich, this is Kevin here. This 250B install base is sometimes a challenge to predict especially with some of our Asian customers because, in some cases, they cannibalize the tools to try and make more tools that have more process chambers, but those tools haven't necessarily gone into production or been successful. And in other cases, we believe some of our legacy tools are being cannibalized for spare parts to keep other legacy tools going. So, it has been difficult for us to get a handle on some of those tools in terms of total numbers.

Okay. And the dispatch of eight orders that you got today, does this now mean that all of your three customers have ordered or is some of this is a repeat from the first batch?

Rich, we generally don't comment on our customers specifically. So, we can't say. We did say that it was from two manufacturers.

Okay. And then just a question on the quarter. The spares and upgrades, that run rate that you posted here in the December quarter, is that something that you expect to bop around, or should we just split it up evenly among the quarters to get to your guidance?

I think what we said is our service and spares portion of those numbers for the year is around $10 million to $12 million pretty consistently. That would be ratably. But I would say the upgrade business can be lumpy and at this point, you can back into the first quarter guidance. But I wouldn't say you could say it is just linear at this point. It is the toughest visibility thing we have to predict.

Okay. Then just lastly, what are your lead times now on equipment? If you were to get an order today, how quickly could it go out?

The earliest 17 weeks. But in some cases, we're having to add a few more weeks to that depending on where it falls in our schedule so that we have an adequate people and can get materials online in time. So, the range is 17 to 19 weeks.

Okay, great. Thank you very much.

(Operator Instructions) We'll take Kevin Hunt with Hapoalim Securities.

Thanks, guys. I just had a quick question for you. If you can't take the eight you got today in terms or order, and the eight you go earlier and the two, it looks like that's pushing from backlog from earlier in the year I guess. That would leave it with two to seven incremental machines. In the guidance you just said there, Jeff. Would that be more of 250B replacements, R&D machines or capacity additions that you would think? Is it incremental?

I think capacity driven, primarily.

Okay. And then the other question is so in terms of the two, it seems like there have been a couple that have been pushed out. You said one was late in the quarter acceptance but it seems like you've had the one in backlog for awhile. Any reason why that's not being recognized?

It hasn't shipped. This is a customer placed an order with us, I think at the end of June or maybe early July and just has elected to take their shipment in the first quarter. So, yes, we have had it in backlog.

Okay. Then the last question is in terms of follow up on Rich's question a little bit, in the fourth quarter, it seems like you had much better spare part revenue. Was there something in there that made that spike up so much?

I would say that what we've been seeing in the last two quarters is just additional technology upgrades to support the higher capacity drives out there in the 2.5 inch demand. So, that's been robust for us in the last two quarters for sure.

Okay. All right, thanks, guys.

We'll move next to Aaron Rakers with Stifel Nicolaus.

Thanks, guys, for taking the question. The industry, there's been some recent third party research out there suggesting that the industry would get into a situation where they overbuilt capacity possibly in the back half of the year. Can you help us understand the 20 to 25 number that you guys have thrown out there, what your assumption is in terms of the industry capacity as we look into the second half of calendar 2010, mainly from a shipment level basis for hard drives?

We've obviously looked at this very carefully. We've certainly seen no sense from the customer base that they're looking to have excess capacity. And as we did our bottoms up numbers, that's how we came up with our estimate on systems, assuming there was small improvements in utilization rates to make them a little more sustainable, and that the capacity tools were needed to support what our customers are seeing in terms of estimated demand for 2010. And based on our current input from our customers, we see nothing that supports any third party reports that the industry is trying to overbuild.

Right. And then also, there's been some things around, it looks like aerial density is actually, for the industry, going to slow here as perpendicular magnetic recording hits the maturity phases. What are you guys seeing right now in terms of, for you guys, media or platters per drive and what that trend looks like over the coming year or maybe the next couple of years?

We typically rely on other people for their projections. When we do our analysis, we assumed 1.65. Now, in terms of media technology, our customers' engineers always prove to be very ingenious and come up with new ways of extending aerial density. There was a question earlier about our upgrade business. Obviously that was supporting some of that technology development needed for the current mode. But as we look forward to 2010, we see most of our business mainly around putting back some additional capacity into the industry. But as we move forward, we would expect that there will be more technology upgrades. Not sure if it will hit in 2010 or 2011 where you will see retrofits to the existing systems to improve the media technology. Which obviously would be incremental business for us.

Right. So, you're referring to that being bit pattern media, I would assume?

No. I'm referring to some of the advances that are being proposed for planar media.

When do you see bit pattern media? I think you've talked about that being more 2012. Is that still fair?

Yes, we really haven't changed our assumptions there. We always said we thought the earliest would be late 2011 with a low volume. And that this would be a very difficult ramp for the industry. It's a new technology. And so we never saw anything really meaningful until beyond 2012.

Great. Thank you, guys.

(Operator Instructions) You have a question from [JD Abuchar] with DRT Capital.

Hi, guys, just had a question on the tax rate. It was really high in the quarter. You guided to 15% to 20% next year. We have a big tax asset on the balance sheet. Can you just walk me through the whole tax mess?

Sure, JD, it is Jeff. Last year, the effective rate was about 37% and it was a net tax benefit. And so this year, with profitability, we see it being in the range of 15% to 20%. And you might say why is that rate so different. It is really just a mix between our profitability in the US versus our foreign subsidiaries which are taxed at a lower rate. We had higher losses in the US and essentially limited profitability on our foreign subs in 2009. Next year, we should be about profitable external and a little bit profitable in the US. Our tax asset we review all the time so we're comfortable with our evaluation of that.

Okay. So, we can use 15% to 20% for the next year or two?

Yes.

Okay, great. And then just to back up, what should we be using or how much does the ASP vary on the Leans on the new generation that we're shipping now versus the old one? What's an average ASP for backlog?

We've said between 4.5 and 5.

Okay, great. Thank you, guys.

That does conclude our question-and-answer session. At this time, I'll turn the call back over to our speakers for any final or additional remarks.

I would like to thank you for joining us today. We look forward to updating you in our next call on our Q1 results. Good-bye.

That does conclude today's conference call, everyone. Thank you all for your participation.