Intevac Inc (IVAC) 2010 Q1 法說會逐字稿

Good day and welcome to the Intevac first quarter 2010 financial results conference call. Please note, this conference call is being recorded today, May 3rd, 2010. At this time, I would now like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead, Claire.

Thank you and good afternoon everyone, thank you for joining today today to discuss Intevac's financial results for the first fiscal quarter of 2010 which ended on April 3rd. In addition to outlining the Company's financial results for the quarter, we will provide guidance for the second 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 contained 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 on our current expectations and actual results may 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 May 3rd call include time sensitive forward-looking statements that represent our projections as of the date of the call. We undertake no obligation to up gate the forward-looking statements made during this conference call. I'll now turn the conference call over to Kevin Fairbairn. Kevin?

Good afternoon and thank you for joining us today. We are pleased to report results for the first quarter that met the high end of our revenue guidance and exceeded guidance on profitability. Revenues totals $33.1 million which includes two, 200 Lean systems. Net income was $1.4 million or $0.06 per share. In the first quarter, we received orders for 18 200 Lean systems adding to the eight systems ordered at the end of fiscal 2009. This resulted in a record level of backlog for our equipment business which at quarter end totaled $130 million. The number of systems in backlog now exceeds our previous guidance for the year of 20 to 25 systems and therefore we are increasing our revenue guidance for the full year which Jeff will provide later.

Consistent with our comments from last quarter, our customers remain cautious in their capacity to bring this new capacity on time just to time to report the strong growth expectance in the second half of this year. This means we expect to ship up production systems during the second and third quarters making for a lucky year in term of equipment revenues. We expect equipment backlog to decline over the next few quarter until customers determine their capacity needs for 2011 which I'll talk about later. I'm going to share our view on the amount of net media manufacturing capacity being added in 2010 relative to the estimated growth in hard drive shipments. In thinking about the amount of capacity being brought online, it is important to know that our orders are coming from multiple customers each of which has ordered systems in different configurations and running at various through-puts. Some totals are for new capacity, some are for replacement of legacy systems and three systems are for R&D. More than half of our production systems are for our first generation 200 Lean systems, whose through put is approximately 800 disks per hour compared to the 1,000 disk per hour by the Gen 2 systems.

Our Gen 2 is not yet qualified at all customer sites or for all media products and in the current shortage situation the urgency of adding capacity superceded the desire for higher production rates. Further, slightly less than half of the systems in backlog will replace legacy systems so that the net capacity for the systems is one-half of the amount added by (inaudible). Overall we estimate that the industry is adding up to 12% incremental media manufacturing capacity in 2010. Which is lower than the projected year-over-year peak growth of 13% to 16%. The supply situation will continue to remain tight while customers manage their product mix and possibly adjust the ratios of disks per hard drive to meet demand. While it is too early to be giving detailed guidance for 2011, there are already several positive drivers evident for our hard drive business next year. First, peak to peak hard drive growth projections for 2011 are similar to the growth expected this year, averaging around 12% to 15%. Given that we expect capacity to be very tight in 2010, we believe the industry will need to add a significant number of systems in 2011. We also expect to see more legacy tool retirements as the media technology evolves.

Now on to progress in our other businesses. We are very excited to be shipping our first Lean service system this quarter, our customer AQT recently announced a partnership with Intevac where they plan to leverage the high productivity, production proven 200 Lean platform to produce high efficiency and low cost six cells for the solar voltaic market. Up to this point we've been making progress of running demos with AQT and we expect our progress will accelerate once the system is installed and AQT continue to proprietary sensors. AQT's pilot line success with these multiple production systems will be starting in 2011. Our Lean Solar system is based upon the 200 Lean platform modified for photovoltaic cell production. In addition to AQT, we are currently working with multiple customers for address to their need for depositing precise films at high throughput and low costs. Our activities support both circumbased photovoltaic cells as well as thin film six. The market potential opportunity for the solar is significantly larger than our surge hard drive media market. Progress in our Photonic business continues to be positive and achieves yet another record revenue quarter. We have an opportunity to exceed our prior 2010 guidance of $35 million in revenue.

Before turning the call over to Joe, I will make a few final points. First, 2010 is creating a very strong revenue growth year for our Company and we expect to deliver substantial earning per share growth as well as generate a significant amount of cash this year. Second, the new capacity being added in the hard drive industry appears to be unlimited to limit the timeless and needing supply leading to the need to support the forecasted growth. And lastly, our new equipment products and Photonics businesses are well positioned for significant growth going into next year, adjusting new market opportunities that exceed the size of the hard drive markets we serve. I'll now turn the call over to Joe Pietras to talk about the strong momentum in our Photonic business. Joe.

Thank you, Kevin. I'm pleased to report that Intevac Photonic achieved record levels of revenue, product shipments and bookings in first quarter. Revenues were $7.6 million, growing 4% quarter over quarter and 23% year-over-year with product shipments representing 44% of revenue. We received $13.5 million in bookings, of which over three quarters was for products. We exited first quarter with a record level of backlog of over $22 million. Our strong bookings growth is being driven primarily by our military business in digital night vision and long range target identification or LIVAR where we received multi-million dollar production orders for our cameras. We're also seeing increased demand for our handheld Raman instruments for materials identification, particularly in the area of chemical, biological and explosives threat detection. We believe that the strong momentum will result in revenue growth exceeding 30% in 2010, with similar growth expected into 2011.

In our digital night vision business, we recently announced a multi-year $18 million purchasing agreement for our camera module from a NATO customer. Initial production orders of $5 million were released for deliveries that will extend into early 2011. In first quarter, we shipped a record number of camera modules and we will continue to ramp our production capacity to meet our customers' growing demand. In the domestic night vision market, we recently announced the award of another key contract for $3.5 million, which we received from the US Army for the deployment of a 2 megapixel camera that will be evaluated for integration on to the Apache helicopter. If successful this application can represent approximately $25 million in revenue over the next six years. We also received an important contract award based on our night port product. Night port is a fully digital monocular that has the potential to replace analog night vision goggles. We received initial funding against a $6.9 million award from the US Navy to develop various night port configurations including monoculars, binoculars and goggles for special operations applications. These awards are prime example of the growing interest we're experiencing for our digital night vision product and reflect the execution of our business strategy to gain entry into major military applications.

In our LIVAR camera business we received a $4.5 million production award from a major US defense contractor for an airborne application with deliveries through 2010. We also received an additional production order for our LIVAR camera from another major defense contractor for a second airborne application and expect this will lead to a larger order this year. We estimate the opportunity represented by these two applications at over $45 million over the next ten years. In our Raman instruments business, where our focus is on handheld portable instruments for materials identification, the order pipeline continues to grow. Over the past two quarters we've received orders for 110 units from a major customer for use in both military and civil markets for chemical and explosives threat detection. We're also on track for delivering prototypes of new two handheld Raman instruments over the next several months. These new products will incorporate our core near infrared sensors to enable detention of more expansive chemical and explosive threat materials. I will now turn to over to Jeff to discuss our financial results for the first quarter and our outlook for the second quarter and full year 2010. Jeff.

Thanks, Joe. Consolidated first quarter revenues totaled $33.1 million and met the high end of our guidance of $26 million to $33 million. Equipment revenue totaled $25.6 million and included two, 200 Lean systems recognized in the quarter. Photonic sales of $7.6 million consisted of $4.2 million of contract, research development and $3.4 million in product shipments. Q1 consolidated gross margin of 43.7% exceeded the high end of our guide ASP of 41% to 42.5% due to improved factory absorption within the quarter. Equipment gross margins remain flat with the fourth quarter at 48%. As anticipated Photonic gross margins decreased to 27%, reflecting the initial higher cost as we begin to ramp for high volume production for our NATO customer.

First quarter operating expenses were $13.1 million and at the low end of our guidance of $13 million to $13.5 million. The sequential growth over Q4 is a result of the reinstatement of our variable compensation programs and the seasonality of our employee taxes in the first half of the year. Our Q1 net income was $1.4 million or $0.06 per share, exceeding the high end of our guidance by $0.03 per share. Net income included $600,000 of stock-based compensation expense equivalent to $0.02 per share. Our backlog was $152.3 million at the quarter end, an increase of $78.5 million compared to $73.8 million at the end of Q4. And includes a total of 26 200 Lean systems.

I'll now discuss the balance sheet. We ended the quarter with cash and investments of $112.7 million or approximately $5 per share which included a valuation allowance of $4.4 million associated with our auction rate security investments. Excluding the impact of this adjustment, cash in investments increased by $23.5 million from Q4 as a result of customer deposits on new orders and the collection of our systems receivables. Our investment portfolio at the end of the quarter included $65 million in student loan backed auction rate securities, the Company is currently preparing for arbitration in a case with one of our investment firms scheduled to begin in late May. In the first quarter, capital expenditure totaled $791,000 and depreciation and amortization totaled $1.5 million.

I'll now provide our guidance for the second quarter and the Company's current expectations for the full year 2010. As Kevin discussed earlier, our revenue new from quarter to quarter have historically been lumpy and this year is no exemption as our customers plan to install new production systems in the second and third calendar quarters of the year to support the peak levels expected in the back half of the year. We're projected consolidated Q2 revenues of $64 million to $69 million which includes 12 to 13, 200 Lean systems. We expect second quarter margins to be 40%. The reduction in gross margin from the first quarter is due to a much lower mix of technology upgrades expected in the equipment business and flat gross margins for our Photonic business. We are continuing to lower the cost of our night vision modules over the course of 2010. Operating expenses are expected to be in the range of $14 million to $14.5 million. Other income and expense will be approximately $300,000 and excludes any impact associated with changes to the valuation of our auction rate securities or foreign exchange. For Q2 we are projected in the range of $0.24 to $0.49 per share which includes an estimated of $900,000 of pre-tax stock-based compensation equivalent to $0.03 per share.

I'll now provide the Company's current expectations and revised guidance for the full year 2010. Given the current level of backlog, we expect to ship a total of 28 200 Lean system in the 2010 and recognize revenue on 27 to 28. This is an increase from our prior guidance of 20 to 25 systems as a result of continued strong demand for hard drives and industry capacity constraints. We now expect revenues from service and upgrades to be approximately $35 million, Intevac Photonics to be at least $35 million, and our new equipment products to generate up to $4 million in revenue in 2010. In total we are projecting consolidated revenues to be in the range of $198 million to $208 million for the year, an increase from our previous guidance of $155 million to $185 million for the year.

As we look at the rest of the P&L for the full year, we expect gross margins of 41.5% to 42% and our operating expenses to be in the range of $55 million to $56 million. We expect other income to be $1.2 million to $1.5 million and our tax rate to be approximately 17.5%. We are projecting our full year net income to be between $1 and $1.20 per share. Capital expenditures for the year will be in the range of $8 million to $9 million as we're planning to investment in incremental capacity to support the growth in our Photonic business and depreciation and amortization will be approximately $6 million.

I'm going to add to our outlook for the full year by talking about the cash flow generation we expect as a result of the backlog that begun building at the end of 2009 and the strength of our hard drive equipment business in 2010. During the downturn we've made a number of structural cost reductions that limited our cash burn during 2009 and provide substantial positive cash flow for this year. We have also made some investments in working capital in 2009 that will convert to cash in 2010. As a result, we expect to add between $35 million and $45 million to our cash and investment balance at year end, on top of the $90 million cash and investment balance at year end 2009.

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

(Operator Instructions). Okay. I do show a couple of questions in the queue. Our first is coming from Rich Kugele from Needham & Company. Rich, please go ahead.

Thank you. Good afternoon, gentlemen. A couple of questions. I guess first, when we come to the balance of 2010, what trend do you expect to see for the Leans, let's look first at the March quarter. How much of the Lean revenues can we attract from the equipment 25.6 versus the other service and upgrade business and then how would you expect that to trend over the balance of the year?

Rich, are you talking about 2010?

Yes. So I guess what I'm trying to do is call out the -- from the 25.6, the Lean business from the nonLean business and also separate out what could have been a tool that wasn't a Lean.

Okay. In quarter one for the March quarter we had two systems. So typical ASP between 4.5 and 5. Photonics was 7.6 so the difference was upgrades, service and spares. Does that help?

I understand. And then we can take what your guidance was and back it out from the year as well?

Correct.

And that still works? Okay. And then obviously one of the big pieces of recent news was WD taking out the sputtering business of [Jolla.] I know that Jolla had traditionally been a [Novemberel] customer, correct, but do you think that there is any opportunity to indirectly benefit? Are you seeing any changes in behavior from some of the other vendors who may want to go and pick up some business that will have to go elsewhere?

It's kind of too early to say. Right now we see it as kind of neutral to slightly positive for us. But it's really too early to say. We expect there will be some redistribution amongst the two remaining merchant media providers as companies have to find someone other than Jolla.

Okay. And then just lastly, the Lean Solar initiative seems very encouraging. I just want to make sure the way I understand to think about it. When you are talking about 4 million dollars for the year, that's more than just being an all-in other tool number, right?

Correct. That's a combination of all of our new products.

There any way to size what the TAM is, any way to think of it in that market?

It's difficult because people should just say how many 200 Leans would it take to support the photovaltiac market and it would be thousands of systems so the reality is there have been thousands of margins in the Photonic market and it's a big and growing market.

Okay. Do you have any other customers that are exploring the product at the same level of seriousness as AQT.

Yes. We have multiple customers.

Great. Well thanks. Well done.

Thanks, Rich.

We'll go with our next question from Bill Ong. Bill, go ahead.

Hi. Congratulations. Nice quarter. I know it's too early to talk about 2011 guidance to determine the number of tools you are going to ship, whether it will be up or down from 2010 levels, but make you can talk about history. In 2004 through 2006, you had three consecutive years of growth in the Lean business to maybe contrast and compare how 2010 to 2012 can play out if demand is good to have a sense of what could potentially drive the market for the next 2-3 years out.

Hi, Bill. This is Kevin here. So what we were trying to convey in the call is that we see a similar number of capacity tools needed for 2011 as needed in 2010. We believe they'll be on going legacy retirements and there are quite a few Legacy cells still to be retired in the industry. And on top of that we'll have the incremental on solar specs. And so we're very hopeful that next year will be more systems shipped than this year.

Okay. I was actually getting at -- at doing 2004-2006 there was a shipment technology toward PMR and embedded in that outlook, [ inaudible ] media having similar type of dynamics that you experienced several years back?

We're [Passive] media hitch production and we'll have a much, much bigger impact because there every tool that is already in the industry doing deposition will have to eventually paired up with a tools that doing the etching and planarization. So if that represents an opportunity, depending on how you size it, between $1 billion and $2 billion, that would be a huge opportunity. Much bigger than the transition to perpendicular.

Great. That's insightful. And then my last question is on the six solar mark. What do you think between the six polar technique versus the dunbar approach and the pros and cons of sputtering technology, which is what you are offering.

Well there are two approaches used today -- well actually there are multiple approaches to put six down but the two main ones are sputtering and evaporation. They both have their launches and both have their challenges. In the case of sputtering, it's a physical process and it's much easier to monitor. But then the challenge is target composition. In evaporation, it started off as pure elements, the feed material is much easier to deal with, on the other hand, the evaporation process is difficult to control, four separate elements simultaneously. So we'll see. Right now we're working the customers on both approaches and in the end of the day we believe we'll find the winning solution. But right now based on the bottoms up analysis that people like AQT have done I believe that sputtering on the 200 Lean platform can lead to very attractive economics.

Great. That's helpful. Nice job, gentlemen.

Thanks, Bill.

Thank you. And our next question comes from Kevin Hunt.

Thank you. Thanks for taking the question. I just had a question on your spare upgrade business, which seemed to be pretty high in the quarter and then seemed to be, given the guidance for the year, coming down pretty dramatically so there was some kind of unusual stuff in there that you didn't expect for the March quarter?

No. I would say for the March quarter there was nothing that we didn't expect. I think it's the second quarter where customers are pretty much focused on bringing in tools and stuff that its lower than normal and think it's going to bounce back up in the back half of the year.

Okay. And then --

- - at level, I said.

Were those shipped, the R&D tools that were in order, obviously they were in backlog last year.

Right. They were the R&D tools.

So in the 26 backlog, is there any R&D tools or is that either just new capacity or replacement tools?

Yes, there is one R&D tool left and the rest are then for production tools, capacity.

Okay. And then my final question, kind of following up a little bit on Rich's question about, those R&D tools were for -- some of them were for western dig and you can argue they're double downing on their Ova platform if they're buying Jolla and what are the prospects of them coming in the customer at some point and what was the option of buying R&D tools if they weren't going to consider you at some point.

Kevin, this is Kevin here, we cannot comment on the specifics of customers. Clearly WD is a very significant player and we would very much like to have their business.

Okay. All right. Well thanks, guys.

Thanks, Kevin.

Okay. Thank you. And our next question is coming from Nehal Chokshi .

Hi guys, nice quarter and nice guidance. You talk about your expecting 12% media growth and then you talk about 13% to 16% industry growth, could you just reconsult where there is a miss match between supply and demand from your perspective.

Okay. I was talking peak to peak, so I want to make sures that clear. So let's talk about the industry peak to peak resulting in 16%. When we look at the capacity being added we have a pretty good idea of who is adding new tools. I think people are just very cautious. I think our customers are very keen to avoid a over supply situation and so they would rather error on the side of caution and then deal with the business afterwards. Another factor which may have impacted it, but we have no proof that it impacted it, is that our competitor has very long lead times and so if you think back a year ago, I don't think people yet had the confidence to order tools for 2010 and so some of their customers may have held off and missed the opportunity for capacity in 2010.

Okay. So when you talk about the 12% industry growth, that's with from perspective of orders on hand basically and not necessarily what could be additional orders that could come on hand for the given year?

No. It's not so much orders, it's the capacity we know will get installed this year. So -- and that's the industry wide and it's -- and all of the orders are more or less in in order for that capacity to be available for the second half of this year.

Okay. And then you talked about the good deal of the business in the current quarter was upgrade business and that some customers have not qualified in the Gen 2 product for certain products. You can talk about the ability to move into the Gen 2 and also what is the customers' negative affect of not being able to qualify that in immediately, if there is any?

Well there is no negative impact for us. It's just our customers have a whole range of hard drive products in different technology generations and yes, they make decisions of which product they're going to put on which machine and it so happened that with the capacity needed this year, they just didn't have the time to get the -- all of the product qualified on our Gen 2s. Now if somebody already has a Gen 1, in the future they can upgrade it to Gen 2. We have an upgrade that will enable them to improve the through put from 800 to 1,000 disks per hour and the upgrade kit is a little over a million dollars.

But the TCO and going to the upgrade packet is clearly more than going straight to Gen 2, if they could.

Can you repeat that question?

The total cost of ownership to go through an upgrade pack rather than going to a Gen 2 is clearly more, if they could?

I think it varies by customer.

Okay.

Most people consider there is a good ROI to upgrade the Gen 1 and the Gen 2 is a very productive product.

Thank you.

And our next question is coming from Rich Kugele.

Just one quick follow-up. So in looking at your guidance for the full year, should we assume that virtually nothing should ship in the fourth quarter that should be basically just a Photonics spares and upgrades quarter?

And possibly some business associated with some of our new businesses and equipment.

Okay.

But there will still be one -- one tool planned for the fourth quarter, Rich, the R&D tool.

Okay. Helpful. Thank you very much.

You bet.

(Operator Instructions). And at the moment I'm showing no further questions.

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

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect and have a great day.