Intevac Inc (IVAC) 2010 Q2 法說會逐字稿

Good day and welcome to Intevac's second quarter 2010 financial results conference call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions).

Please note that this conference call is being recorded today, August 2, 2010. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead.

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the second fiscal quarter of 2010 which ended on July 3. In addition to outlining the Company's financial results for the quarter, we will provide guidance for the third 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'd 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 the 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 August 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 over to Kevin Fairbairn. Kevin?

Good afternoon, and thank you for joining us today. Our results for the second quarter met the high end of our revenue guidance and exceeded our guidance on profitability. Revenues totaled $68.6 million which included 12 200 Lean systems. Net income was $12.3 million or $0.54 per share.

Today I will provide an update on our hard drive equipment business, provide an overview of our new products, as well as provide an brief update on our revenue outlook for 2010. Joe will provide an update on our Photonics business and Jeff will discuss our financial results and guidance. For Q2, we had guided 12 to 13 systems for the second quarter and recognized 12 for revenue. One system's delivery experienced and air freight delay for one module which pushed revenue recognition into the third quarter.

In the second quarter, we also saw accelerating demand for technology and cost reduction upgrades. As a result, we were able to deliver on our financial guidance with higher profitability on only 12 systems recognized for revenue. In the last three months, expectations for year-over-year peak quarter growth for hard drives has moderated from a range of 13% to 16% to 10% to 13% with similar growth expected in 2011.

The return to typical seasonality in the June quarter and somewhat moderated expectations for peak-to-peak growth are against the backdrop of strong operating performance being reported by hard drive companies. There should be [level data] but continued robustness of our sector nor to the continued investments being made to advanced media technology.

2009 demonstrates that the growth in digital storage was relatively immune to the macroeconomics as the world did not reduce their digital storage of music, pictures, videos and data. Increasing demand for storage capacity and the need for technology advancements for areal density and cost reduction continue to be positive drivers for our business.

Even though drive shipment forecasts have moderated since the first quarter of the year, we will remain on track to deliver our prior revenue and earnings guidance for the year. Our hard drive customers continue to conservatively manage their capacity additions with one foot on the brake and one on the accelerator.

During Q2, we were asked to both accelerate delivery systems and technology upgrades and deliver some systems in a more linear rate over the remainder of the year. Some of the deliveries originally planned for Q3 are now scheduled for the fourth quarter of 2010 and we expect two systems in backlog will ship in the first half of 2011.

Nonetheless, our full-year guidance has not changed and in fact the greater linearity of shipments will help us in manpower planning, factory loading and operating performance. If you recall on the last conference call, estimated that the industry was adding approximately 12% incremental capacity in 2010. We now believe this is likely to be about 10%. As a result, supply/demand dynamics continue to be in balance in 2010.

Looking forward, we continue to expect that 2011 will grow at a similar rate as 2010, so in the midst of the macro and hard drive concerns our outlook for 2010 is largely unchanged, and our outlook for our hard drive business in 2011 continues to be positive where we expect a similar magnitude of orders for incremental capacity, plus legacy [tool] retirements and continued investments in technology.

We also expect incremental revenue growth beyond hard drive in 2011, largely driven from our new equipment products and Photonics business. Intevac's business model is to lean, highly flexible and fast, both in operations and engineering. Our operations team demonstrates their prowess into, through and out of the recent recession. Likewise, our engineering team's product development flywheel continues to accelerate with multiple new products introduced over the last six quarters.

We developed and (inaudible) the first patent media production capable tool for the hard drive industry, developed and shipped our first photovoltaic [six] deposition tool, and most recently introduced the NanoVista Inspection System for photovoltaic cells, as well as the Continuum wafer handling system. We now have two major product offerings for the solar photovoltaic market. LEAN SOLAR is a high-productivity system derived from our industry-leading 200 Lean that can address both thin-film CIGS and crystalline silicon applications.

The market today is dominated by silicon solar cells with thin-film cells representing a small but growing portion of the market. Our LEAN SOLAR CIGS system with an annual capacity of 50-megawatts produces cells that are a direct low-cost substitute for silicon cells.

We believe LEAN SOLAR provides a compelling solution addressing the needs for high-productivity, repeatable, uniform and low-cost thin-film processing where modest market share gains can lead to significant upside for Intevac. Recently at the Intersolar Show in San Francisco, we exhibited our new solar cell inspection system called NanoVista using our proprietary camera technology from our Photonics business.

We'd already seen strong interest in the system and expect to start deliveries this year. We look forward to talking about our progress with NanoVista on our next conference call. In the semiconductor market, we have decided to stop selling our Lean Etch system in order to pursue the sale of the wafer handling platform.

As part of the Lean Etch product development, we created an innovative linear wafer handling platform, now called Continuum. We have taken up the recommendation from several large semiconductor customers that we sell this high-productivity platform to other semiconductor equipment companies.

The Continuum enables higher productivity, provides unique integration capabilities and is ideally suited for the eventual scale up to 450 millimeters in contrast to the existing cluster mainframes available today. We are very pleased to have already received Continuum orders from two equipment companies which will ship in 2010, and we are discussion with other potential customers and look forward to discussing our progress on the next conference call. I'll now turn the call over to Joe Pietras to talk about the strong momentum in our Photonics business. Joe?

Thank you, Kevin. I'm pleased to report that Intevac Photonics continues to achieve record levels of revenue and product shipments. Revenues of $8.6 million in Q2 grew 13% quarter-over-quarter and 37% as compared to second quarter 2009. Product shipments represented 46% of revenue.

We're experiencing strong demand for our products driven primarily by our military business and digital night vision and long-range target identification, or LIVAR. We are also seeing increasing demand for our handheld Raman instruments for materials identification particularly in the areas of chemical, biological and explosives threat detection.

We continue to expect the Photonics business to achieve at least $35 million in revenue this year. In our digital night vision business, we are maintaining our technology leadership and were awarded an additional multimillion dollar funding to extend our sensor and camera technology to 4 megapixels for the U.S. military.

We are well-positioned within the large U.S. military night vision market for first deployment of digital night vision both for ground and avionics applications. In ground applications, digital night vision is being led by rapid deployment special operations requirements. Earlier this year, we were awarded a multi-year contract for funding up to $7 million to develop various types of digital night vision goggles for these applications based on derivatives of our Night Port digital binocular.

Volume production for this deployment is expected to begin in 2012 and represents an opportunity of approximately $25 million in annual revenue. The DENVG program for the U.S. Army, for which we have been developing both sensor and goggle products, is expected to follow the special operations deployment.

We are well-positioned for our first deployment in avionics applications to our existing U.S. Army program to evaluate our digital night vision camera for integration onto the Apache helicopter. We are progressing well and if successful this application can represent approximately $25 million in revenue over the next six years.

We expect several other rotary ring and fixed wing avionic platforms will transition from analog to digital night vision over the next few years. Through our leadership position in digital camera technology, we remain well-positioned to capitalize on these opportunities which we estimate are approximately $20 million per year once deployed.

We delivered a record number of camera modules to our NATO customer during second quarter as we continue to ramp this production program. This strategic production program is serving us well as it is providing a yield pathfinder to both lower our manufacturing costs and verify our manufacturing processes for volume production of our digital sensor and camera module.

This will position us well to be the leading high-volume provider of digital night vision products in advance of the various U.S. military ground and avionic production awards. As we complete the initial volume ramp, we expect to see normalized margins on this product in the fourth quarter.

In our LIVAR camera business, we received a low-rate production order from an additional major defense contractor. This, combined with our existing business, represents a $45 million opportunity over the next ten years with the potential to add several new customers as this expands in both avionic and ground applications.

In our Raman instruments business we achieved record revenues. Our explosive detection units are currently being deployed abroad and continue to develop [due] applications in the chemical, biological and explosives detection area. We delivered prototypes of two new handheld stand-off Raman products that are capable of identifying materials from a distance of several feet.

The opportunities based on these new applications are expected to grow to approximately $10 million per year in revenue within the next two to three years. I will not turn it over to Jeff to discuss our financial results for the second quarter and our outlook for the third quarter and full-year 2010. Jeff?

Thanks, Joe. Consolidated first quarter revenues totaled $68.6 million and met the high end of our guidance of $64 million to $69 million. Equipment revenue totaled $60 million and included 12 200 Lean systems recognized in the quarter. Photonics sales of $8.6 million consisted of $4.6 million of contract, research and development and $4 million of product shipment.

Q2 consolidated gross margin of 42.3% exceeded our guidance of 40% due to the higher volume of technology upgrades within the quarter. As expected, equipment gross margins of 44.9% were lower than the first quarter due to a lower mix of technology upgrades, and Photonics gross margins were slightly lower than the first quarter reflecting the initial higher costs as we continue to ramp to high-volume production for our NATO customer.

Q2 operating expenses were $14.6 million and were slightly above the high end of our guidance of $14 million to $14.5 million. The sequential growth over Q1 is due to the higher legal costs related to our successfully resolved Auction Rate Securities arbitration and variable compensation.

Our Q2 net income was $12.3 million or $0.54 per share, exceeding the upper end of our guidance by $0.05 per share. Net income included $966,000 of stock-based compensation expense equivalent to $0.03 per share. Our backlog was $113.8 million at quarter end and includes a total of 14 200 Lean systems. As we expected, our backlog declined from Q1 levels and will continue to do so until our customers determine their spending plans for 2011.

I'll now discuss the balance sheet. We ended the quarter with cash and investments of $88.4 million or approximately $4 per share. The decrease of $24.5 million as compared to Q1 was the result of investments in working capital with accounts receivable of nearly $64 million the primary driver.

The arbitration case with Citigroup was completed in June and the Company received a favorable award requiring Citigroup to repurchase at par $54.8 million of outstanding Auction Rate Security investments. The repurchase of these securities was completed on July 27. With the repurchase completed, you can expect to see the addition to our cash balance as well as the reversal of the temporary impairment charge in our September results.

Capital expenditures totaled $1.6 million and depreciation and amortization totaled $1.4 million for the quarter. I'll now provide our guidance for the third quarter and the Company's current expectations for the full year 2010. We are projecting consolidated Q3 revenues of $60 million to $65 million which includes eight to nine 200 Lean systems.

We expect third quarter gross margins to be in the range of 41% to 42%. Operating expenses are expected to be in the range of $14.3 million to $14.8 million. Other income and expense will be approximately $100,000 and excludes any impact associated with changes in the valuation of our investments or foreign exchange.

For Q3, we are projecting net income in the range of $0.40 to $0.47 per share which includes an estimated $900,000 of pre-tax stock-based compensation expense, equivalent to $0.03 per share. I'll now provide the Company's current expectations and guidance for the full year 2010. We expect to ship a total of 25 to 26 200 Lean systems in 2010 which reflects the reduction of two 200 Lean shipments now expected for the first half of 2011.

Despite the lower system shipments, we are maintaining our prior guidance for the year for both revenue and earnings per share given accelerating demand for technology upgrades. Our consolidated revenues are forecast to be in the range of $198 million to $208 million. Intevac Photonics will be approximately $35 million and we expect to generate up to $4 million in new product revenue for 2010.

As we look at the rest of the P&L for the full year, we expect gross margins of 42% to 42.5% and operating expenses to be in the range of $55.5 million to $56.5 million. We expect other income to be approximately $600,000, and our tax rate to be approximately 16%. We are projecting our full year net income to between $1.05 and $1.20 per share.

Capital expenditures for the full year will be in the range of $8 million to $9 million as we are planning to invest in incremental capacity to support our growth in our Photonics business. And depreciation and amortization will be approximately $6 million.

We expect to add between $35 million and $40 million to our cash and investment balance by year end, on top of the $90 million in cash and investment at the end of 2009. This completes the formal part of our presentation. Operator, we are ready for questions.

Thank you. (Operator Instructions) One moment, please. Our first question comes from Kevin Hunt with Hapoalim Securities. Please go ahead.

Hi, thank you. I had a couple of questions. First, in terms of the solar tool you shipped, it sounds like you shipped this quarter, could you maybe talk about how that gets recognized and when that gets recognized in revenue? It sounds like it was a little early from what I heard you say in the past, I just wanted to verify if that is correct as well?

Yes, hey, Kevin, it's Jeff. Yes, we shipped in the second quarter and in the second half of the second quarter, it has a qualification period that may extend in Q4 and maybe beyond. It has a development program tied to it where we have to upgrade the tool at some point in the third or early fourth quarter and then requalify the tool again. So we're more than likely looking for this in the 2011 timeframe.

Okay, and then in terms of the disk drives, it seems like you had some better margins on the equipment, or, sorry, on the actual tools than I would've expected. Is that an accurate statement or was it really just all due to the upgrades?

No, that's an accurate statement. I think if you look at the back to the last time we were kind of at these peak levels which was back to 2006 and early 2007, I'd say we probably are up about 300 basis points in margins on our systems.

Okay, and one last question, on the CapEx, it seems like it was lower in the first half and more investment in the second half, is that the way that's going to roll out on the --?

Yes. We're in the midst of increasing the capacity for Joe's Photonics business and we will see the bulk of that spending in the second half.

Okay. Thank you.

Kevin, we should add that we don't expect to see that as an ongoing continuous investment in the Photonics. It's very much a kind of one-time deal as we double the capacity for manufacturing sensors.

Okay, thanks.

Our next question comes from Rich Kugele with Needham & Company.

Thank you, good afternoon. Just to get a little deeper on the visibility, so was it just one customer that pushed out some tools to, did you say, the first half for first quarter of 2011?

No, we said two tools got moved to the first half of 2011 and it was just one customer.

Okay. Would you expect more towards the middle of the year?

Rich, I think it's too early to say and I think, given some of the uncertainties, if tools were to [put into the year] I wouldn't be surprised either. Put back into 2010.

Sure. And from an overall year growth rate standpoint, you talked about peak-to-peak of 10%, but what do you think that will put the year, the full year growth rate at?

Rich, I think, the 10% was in capacity that we're seeing added into the industry. But I think peak-to-peak we're still looking in the 15% to 20% range, I believe. We're modeling 175 million to 180 million drives in the fourth quarter. So that's kind of somewhere in that 650 million to 670 million range that I think some others have quoted.

Yes, that's actually been the range all year. Okay, and then on the semiconductor process -- so what you're talking about is you decided to stop selling through your partners the full system and there's one module that seems to attract a lot of attention and so that one you are going to split off and sell yourselves?

Yes, that is correct. We've already taken orders from two customers and we're working with other customers, and what we're selling is the wafer handling platform. This is where the process chambers would attach to and it can be used in any vacuum application, whether it be etch or deposition.

You had already reduced your OpEx on that side, allowing your partner to kind of handle that, are you going to need to scale up any SG&A to support now selling it again?

Limited this year. If we're successful with this product line then it would grow -- the profitability would be growing faster than any increase in OpEx to support that business line.

And can you give us a sense on how much you'd be charging for this module?

It's measured in hundreds of thousands of dollars.

Okay. I'll stop there. I'll get back in the queue if I've got more.

Our next question comes from Bill Ong with Merriman and Company.

Good afternoon, gentlemen. So I have a question about your additional insight on the positive outlook for (inaudible) capital spending. The results have been fairly mixed and your largest disk drive customer may be losing market share to disk drive maker that you may have little presence with. So can you talk about this dynamic and how that's built into your forecast?

Okay, so I don't know where to start there, Bill, because I'm not sure which one of our customers is losing market share. I saw some numbers the other day and the aggregate of the customers we serve were actually gaining market share. So I'm a little puzzled there.

I guess I'm referring to Seagate maybe losing market share to Western Digital, but maybe that's within the noise.

What I saw was less than 1% and I would say that is in the noise and there was a recent results from Hitachi which suggested they had gained a couple of points. So that's what I'm saying, in aggregate I think our customers are doing well.

Okay, and my other question is on the Continuum product. I understand that since it's primarily a wafer handling tool, what is your plan on your process engineers since that will be less needed in the semi- group. Is that being diverted more toward solar cells? Maybe you could you talk about how you're changing your resources in light of the change in the overall business?

It hasn't changed our process engineering because we stopped our Etch development some time ago. We moved the team to, first of all, develop patent media and now that patent media is developed they are working on solar. So we complete a project and move our resources on to the next opportunity.

Okay, thanks very much, gentlemen.

Thanks, Bill.

Thanks.

Our next question comes from Mark Miller with Noble Financial.

I just wanted to follow-up on that idea where that discussion of the Lean Etch [toll] being phased out, so there's going to be no charges, you basically transitioned to this a while ago. There is no inventory overhang or anything like that involved?

No, no, there's no charges that you are going to see.

Okay, and my other question, you talk about normalized margins for the Photonics segment by the fourth quarter, is that 35% or 40% or higher?

We said it was mid- to high-30s.

Okay. Thank you.

Okay.

(Operator Instructions) Our next question comes from [Neil Chosky] with [Technology Inside.]

Hi. So I just wanted to get your update on your view on where heat assisted magnetic recording is relative to the sweep track recording in terms of where you think the industry is going? Do you believe that cameras can be the main way to go now initially?

You're really getting a secondhand view here because really the drive companies can comment better there. We continue to hear feedback from our customers that they're making positive progress both on patent media as well as HAMR.

Okay.

And for HAMR, the opportunity that presents to us is potentially extra process steps and, therefore, one more module incorporated into the system plus technology upgrades.

You also get an extra process (inaudible) for the sweep track, though, right? With the Etch?

For patent media that wouldn't be an extra module, it would be an extra system.

I see.

Patent media has a much bigger impact on us when that moves to production. That will instantly double our [surge] market.

Right, right. Okay. The gross margin for your equipment business is up 300 basis points relative to last peak. Can you talk about why that is, what is structurally different now?

Yes, well, I think in 2006 was the last real high point, in early 2007, we had just began the transition to our operation in Singapore. That's nearly complete now as well as a whole bunch of supply chain work that's been done in low-cost regions, so that's what's driven that up.

Okay. Are there any concerns that you are going to have to give that back as the hard drive makers are hitting a, some difficulty in margins right now?

We certainly hope not. We continue to focus on providing value both in terms of productivity and technology, and we expect to continue to add capability to the tool to justify its price and value.

Okay. And then, so it looks like you're getting a little bit of trade-off between new systems being shipped and technology upgrades. Can you talk about how you think that impacts industry output and why are they even doing the technology upgrades?

The majority of the technology upgrades relate to new source designs we have which actually provides lower-cost for our customers because if they can get more expense target materials onto the disk that saves them money and for that they're willing to spend money to invest.

Okay.

It doesn't have a big impact on the net productivity.

Got it. All right, thank you.

Our next question comes from Mark Miller with Noble Financial.

I just wanted to follow up on that last comment, these new sputtering cathodes, is that involving some of the technology you bought from Oerlikon or a derivative of it?

No, this is all internally developed.

And then, if you could just do me kind of your feeling for formatted media, the [pollip] systems, there's none in your guidance for the rest the year, is that correct in terms of shipments or orders?

Can you say that again? What type of technology?

Well, the patent media tools.

No, we have no additional patent media tools expected for the remainder of the year.

All right, thank you. Bye-bye.

There are no further questions at this time.

Well, thank you for joining us today, and we look forward to updating you in our next call on our Q3 results. Good-bye.

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