Intevac Inc (IVAC) 2010 Q4 法說會逐字稿

Good day and welcome to Intevac's Fourth Quarter and full year 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 and instructions will follow at that time. Please note that this conference call is being recorded today, February 1, 2011. 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 fourth quarter and full year 2010 which ended on December 31. In addition to outlining the Company's financial results, we will provide guidance for the first quarter and our current outlook for 2011. On today's call are Kevin Fairbairn, President and Chief Executive Officer; Jeff Andreson, Chief Financial Officer and Joe Pietras, Executive 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 February 1 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 call. I will now turn the call over to Kevin Fairbairn. Kevin?

Thank you. Good afternoon and thank you for joining us today. Our fourth quarter revenues were $36.2 million, within our guidance. And net income per share was $0.05, exceeding our guidance. For the full year, revenues totaled $202.5 million and we earned $1.22 per share. We recognized revenue on four 200 Lean systems in the fourth quarter and 26 systems for the year.

Today I will provide an overview of the Company's key strategic initiatives and progress. Joe will provide a more detailed update of our Photonics business and Jeff will discuss our financial results and guidance. Our strategic growth initiatives continue to be; maintain our leadership position in providing leading-edge manufacturing systems for the production of magnetic media and the hard drive industry, grow our significant Photonics business based on our technology leadership in digital low light sensors, and lastly, diversify and significantly grow our equipment business by addressing the needs of solar cell manufacturers to produce higher conversion efficiency cells while lowering their manufacturing costs. We saw positive progress in each of these initiatives which I will discuss in detail. But first I would like to highlight some of the key achievements for the Company in 2010.

Our hard drive customers invested in the capacity and technology at a level we had not seen since 2007, which resulted in a steep delivery ramp for Intevac.The operations team prides itself on having the shortest lead times in the industry, which enabled us to rapidly ramp our factories to meet customer demand, over essentially a five-month period, crossing Q2 and Q3 we accelerated from a near standstill for the delivery of the vast majority of 2010 systems. In support of our equipment diversification strategy, we instituted three new products in 2010. The LEAN SOLAR system for crystalline and silicon applications, the NanoVista for solar cell inspection, and the Continuum semiconductor mainframe. These new products followed on the heels of our LEAN SOLAR for thin-film CIGS, introduced in 2009.

During the year, we shipped our first Lean Solar for thin-film CIGS cell, our first NanoVista beta unit and Continuum mainframes for our memory application. Finally, in our Photonics business, revenues grew 29% in 2009 as we continue to solidify our technology leading position for digital night vision and deliver the first production units that were deployed by our NATO customer to soldiers in the field.

On the financial side, we achieved record gross margins of 47.2% for the year, generated $47.5 million in cash, lowered our tax rate to 12.4% and won our arbitration case against Citibank, freeing up $55 million of our auction rate security investments.

Now, turning to our view of the hard drive market. 2010 starts our very bullish following the strong second half of 2009 which saw our customers chasing market demand. The our initial 2010 drive shipments forecast were as high as 670 million units, or a 20% annual increase. Given the situation, our customers began placing orders in December 2009. However, by midyear, the 2010 forecasters annual growth for drive shipments was reduced to 15% which lowered the expected peak-to-peak fourth quarter growth. In response to this change, our customers modified their delivery schedules to manage their capacity. Four systems were delayed by quarter to Q4 with two systems deliveries moved 2011.

The hard drive industry ended up the year shipping an estimated 655 million drives or 70% annual growth. Going into 2011, the outlook for the hard drive growth is still firming up. Recent conference calls from public hard drive companies have provided some initial estimates of about 700 million drives in 2011, or year-over-year growth of around 7%. Much of which is expected in the second half of the year.

This projected growth will drive additional capacity requirements for our customers. If we assume normal seasonality and relatively flat unit volume in the first half of the year, the implied unit volume for the second half of 2011 is approximately 390 million drives with Q4 shipments possibly reaching as high as 200 million. That kind of back-handed loaded year would equate to peak-to-peak growth of 15% to 20% over the approximately 168 million drives shipped in the fourth quarter of 2010.

Peak-to-peak growth is a metric that largely drives incremental capacity needs. Another important metric impacting the need for additional capacity systems is the average number of disks per drive. We are assuming this remains unchanged at 1.7 for 2011 due to the continuing proliferation of high capacity multi-terabyte drives, the desire for high-capacity drives on laptops and the ongoing move to smaller disks and enterprise drives, offset by magnetic areal density increases. In addition to capacity systems, to support the anticipated growth, additional systems may be required to replace Legacy systems.

Our customers still have over 60 Legacy systems in production, manufacturing principally 3 1/2 inch aluminum disks. There are industry estimates that media growth in 2011 will be dominated by 2 1/2 inch. The amount of Legacy systems retired is somewhat of a wild card to predict on a short-term, year-to-year basis. In 2010, approximately half the production systems we shipped replaced Legacy systems. We believe that all of these Legacy systems will eventually replace the technology and factory productivity reasons. The incremental capacity needs of our customers in 2011 will be partially met by the four systems we shipped late in 2010.

Taking all these factors into account, we did not expect to ship as many hard drive manufacturing systems in 2011 as we did in 2010. Legacy tool replacements offers upside potential, just as they did in 2010. Our customers can wait until the end of the first quarter and even into Q2 to place orders for their peak capacity requirements given our lead times and their likely timing needs for Q3 installations.

In 2010, we made significant progress on both product development and expanding our market share. On the product development side, we continue to fine-tune our product offerings in conjunction with our customers to support their technology and cost reduction road maps for large magnetic, media films and patent media. We made steady progress on increasing market share by placing new products for advanced media deposition as well as our [endeavor] into customers who have not bought production systems from us in the last five years.

Turning to Photonics, 2010 was a strong growth year and notably product revenues grew 52% year-over-year and comprised 40% of total Photonics revenue for the year. The transition from primary contract development revenue to product revenue is a key strategic goal which drives both long-term revenue growth and improved profitability. Our unique lowlight sensor technology continue to gain new applications and to our knowledge is incorporated into the majority of digital lowlight imaging programs for the US military.

For 2011 we expect an ongoing ramp in our product revenue, however contract development revenues will likely be lower. There are two factors that impact this potential production. First, we have completed some of our development contracts and will now transition to the initial production phase, which in the short term may negatively impact some revenue, but in the long term, is positive. The second factor is the delay in the Feds budget approval spurring the lease of contract funding by at least a quarter for several large programs. Overall, we expect to be at least be flat or year-over-year with additional upside dependent on how quickly some of the delayed funding comes through. Our focus in 2011 will be getting this business profitable at current business levels.

Our third key, strategic initiative is to diversify our equipment business into the solar cell equipment market made significant progress in 2010. Our initial focus was within the area of thin-film CIGS with our first Lean Solar system, derived from our 200 Lean in the hard drive industry. Our first customer to take delivery of a system, AQT is now producing cells and recently announced plans for a production facility in South Carolina with the goal of installing 30 to 40 megawatts of capacity this year. This level of production will require three or four Lean Solar systems, which we are hopeful to ship this year.

While the manufacturing in film, photovoltaic cells are expected to be an important growing, low cost segment of the market. The majority of the market is set by certain cell manufacturers whose cells have higher efficiencies and higher costs than thin-film cells. We believe the silicon solar market will continue to be a large and growing market with multiple cell technologies.

Improving the conversion efficiency of silicon cells is the biggest lever for reducing solar marginal costs. Today's least expensive silicon-based modules cost $1.20 per watt. Which is comprised of approximately $0.65 for the silicon, $0.20 to process the silicon and $0.30 to marginalize the cells. The 25% improvement in conversion efficiency, assuming no change in absolute costs would lower the cost of the watt to less than $1.00 with parity price target. This should enable a growing industry that does not require subsidies for success. We believe our solutions, in addition to providing improvements in cell efficiency, will lower the processing cost of manufacturing of solar cells, thus further helping silicon manufacturers increase their profit margins.

It's not a mystery on how to improve the efficiency of solar cells. SunPower and Sanyo already produce the highest efficiency silicon cells. The challenge is to lower the cost of producing higher efficiency cells. Today, all but one of the process steps used in manufacturing of typical cells are non-vacuum processes. Technology road maps include new potential vacuum process steps to lower the cost and increase efficiencies.

There are three basic vacuum process applications. Deposition, etch and doping by ion implant. With our acquisition of solar implant technologies, we now have all the required expertise in the Company to develop a complete set of vacuum process modules to support the industry's technology and cost reduction road maps.In 2011, we will deliver new process modules beyond our current sputtering deposition model and hope to begin customer qualification later this year with the goal of significant revenue growth in 2012. In addition to these vacuum process modules, silicon cell manufacturers require systems of up to 3000 cells per hour in order to meet their cost objectives or three times higher than our 200 Lean. The silicon cells can be nearly as thin as paper making the cells difficult to handle vertically.

Accordingly, 2010, we morphed our existing platform into a horizontal batch processing system with triple the through put. We call this new platform Lean Solar [2]. It is modular just like the 200 Lean and will be and will be capable of supporting all the process module applications. We will ship our first Lean Solar 2 later this quarter. This customer has also announced a second manufacturing plant in Asia which will require systems by early 2012 and potentially at the end of this year. In summary, our newest Lean Solar system combined with our intended set of process modular extensions will address an estimated $1 billion equipment market by 2013 growing to $3 billion market in 2015, as these new vacuum process applications are adopted.

Another new product, is our NanoVista, photoluminescence inspection system, which we developed and introduced in 2010 for the silicon cell market.We leveraged our unique lowlight camera technology from our Photonics business, developed what we believe is the highest speed photoluminescence inspection system available. NanoVista produces a conversion efficiency map for each cell which can highlight defects in the cell, pre- and post-processing. Results by initial beta site have been positive and we expect to begin shipping additional units for 2011, now that we have feedback that we will begin to export this product.

In total, we have significant opportunities ahead of us for these new products, positioning Intevac for strong growth going into 2012 and beyond. We look forward to providing you with updates on our progress each quarter. I will now turn the call over to Joe Pietras to provide further updates on our Photonics business.

Thank you, Kevin. Intevac Photonics revenues of $9.4 million grew for the eighth consecutive quarter. Revenues were up 7% from third quarter and 28% as compared to fourth quarter 2009. We ended the year with $34.3 million in revenue, a 29% increase from 2009. Additionally, we continue to execute our strategy to migrate the business from primarily contract R&D-based to a product driven business, with products accounting for 70% of our 2010 bookings. Compared to 33% in 2009.

In our digital night vision business, we delivered a record number of camera modules during the fourth quarter to our NATO customer, who continues to deploy this weapon mounted application to military forces in the field. This represents the first, high-volume deployment of digital night vision to military forces in the market today. In 2010, our first full year of production for this application, we delivered in excess of 1000 camera modules. In 2011, we expect to double this number of deliveries.

In Q4 our manufacturing costs decreased over Q3, but remained higher than the levels we are targeting at these volumes. In the US night vision market, we continue to pursue key applications for our digital night vision products that have high-volume production opportunities. As an example in Q4, we received an order from a major defense contractor for approximately 100 camera modules to be delivered in 2011 for a helmet mounted, avionics application. This application represents an opportunity in excess $25 million over the next seven years. We are also making progress on our US army contract to develop a night vision camera for integration onto the Apache helicopter.

During first quarter, prototypes of our camera which contain our market leading digital night vision sensor will undergo performance evaluations with the US army. This opportunity could lead to an initial three-year, $32 million manufacturing phase beginning in late 2012. We also are continuing to pursue opportunities in ground soldier applications which is being led by US special operations.

We believe that our night-port based system products, such as our fully digital night-port binocular offer performance advantages that are well suited to meet special operations requirements. Development and low rate procurement phases for special operations applications are scheduled to occur over the next few years. Followed by high-volume deployment beginning in 2014, which represents an opportunity of approximately $25 million in annual revenue.

In our LIVAR camera business, we delivered a record number of units in Q4 to our primary customer, a major defense contractor who is using the camera for long-range target identification in an avionics application. Additionally, we received a first phase of funding against a new $6 million order for deliveries extending into early 2012. We continue to make very good progress toward achieving our estimated $45 million LIVAR opportunity over the next 10 years. And expect our LIVAR product revenue to grow significantly in 2011.

In our handheld Raman instruments business, we continue to focus on opportunities in a chemical, biological and explosive detection markets. For example, our explosive units have been deployed abroad for a customer who is a global leader in this market, from whom we expect to receive increasing order quantities.

I will now turn the call over to Jeff to discuss our financial results and outlook. Jeff?

Thank you, Joe. Consolidated fourth quarter revenues totaled $36.2 million within our guidance of $36 million to $37.5 million. Equipment revenue totaled $26.8 million and included four 200 Lean systems recognized in the quarter. Photonics sales of $9.4 million consisted of $4.2 million of contract research and development and $5.2 million of product shipments.

Q4 consolidated gross margin of 40.3% met our guidance. Equipment gross margin of 47.7% was slightly lower in the third quarter, due primarily to lower factory utilization. Photonics gross margin of 19% declined from the third quarter, reflecting lower margins on the final milestones of our firm fixed price contracts that concluded in the fourth quarter. Excluding this impact, Photonics margins would have remained roughly flat to the third quarter.

Q4 operating expenses were $14.5 million, meeting our guidance and included approximately $650,000 related to the acquisition of Solar Implant Technologies. Our Q4 net income was $1.1 million or $0.05 per share, exceeding the upper end of our guidance by $0.02 per share, primarily as a result of the reinstatement of R&D tax credits for 2010.

Net income included $903,000 of stock-based compensation expense, equivalent to $0.03 per share. Our backlog was $46.7 million at quarter end and included to two 200 Leans and two Lean Solar systems. As expected, our backlog declined in the fourth quarter as our hard drive customers typically placed orders once they have developed their capital plans for the coming year. I will now discuss the balance sheet.

We ended the quarter with cash and investments of $137.4 million or approximately $6.00 per share. Capital expenditures totaled $1.7 million and depreciation and amortization totaled $1.3 million for the quarter. I will now provide our guidance for the first quarter and the Company's current outlook and primary assumptions for 2011.

We are projecting consolidated Q1 revenues of $13.5 million to $16.5 million, which includes no 200 Lean or Solar systems recognized in the quarter. We expect first-quarter gross margin to be approximately 37% to 37.5%. Reflecting the lower factory absorption expected at that these revenue levels. Operating expenses are expected to be in the range of $15.2 to $15.5 million, an increase over the fourth quarter due to the incremental development spending for our recent acquisition Solar Implant Technologies as well as the associated adjustments to the fair value estimates of the contingent consideration payments which must now be revalued each quarter for the new business combination and accounting guidelines.

Our other income and expense will be approximately $150,000 and excludes any impact associated with changes to the valuation of our investments or foreign exchange. For Q1 we are projecting a net loss in the range of $0.32 to $0.36 per share, which includes an estimated $900,000 of pre-tax, stock based compensation expense, equivalent to $0.03 per share.

The full-year visibility for our hard drive business remains very limited at this stage. As Kevin noted, 2011 is expected to be highly backend loaded year for hard drive units. With initial forecasts having the first half flat to down from Q4 2010. We shipped four 200 Leans in the fourth quarter, which will address a portion of the 2011 capacity needs of our customers. This means orders for capacity and Legacy tool retirements in 2011 can be made a few months later than typical seasonality would indicate.

Given this level of uncertainty, will not be providing full P&L guidance on this call, but will provide ranges for revenue, gross margin and operating expense as well as the key assumptions for these ranges. Once our order visibility and backlog firm up, we will provide a more detailed outlook for the year on future conference calls.

While some forecasts call for peak-to-peak growth as high as 15% to 20%, if we assume a more conservative outlook of 10% to 15%, the number of 200 Lean gen 2 systems needed to support that growth would range from 8 to 16 systems. This range assumes our late 2010 shipments address 2011 demand and the disk per drive remains flat at approximately 1.7. We expect revenues from service and upgrades to be approximately $30 million to $35 million. Photonics is expected to be approximately flat year-over-year with upside driven by the early release of program funding once the detailed defense budget is finalized.

For our new equipment products, we expect revenue in the range of $20 million to $30 million for 2011. This level of revenue is dependent on the timing of our customers' financing as well as the timing of revenue recognition, which will require final acceptance on these initial shipments. In total, at this point of the year we will believe revenues could range from $125 million at the low end to $175 million at the high end. Given these revenue ranges, we would expect gross margins to be 40% to 42% and full year operating expenses to be in the range of $58.5 million to $61.5 million. Our tax rate would increase to approximately 20%. This concludes the formal part of our presentation. Operator, we are ready for questions.

Thank you, ladies and gentlemen.

(Operator Instructions).

Our first question comes from Bill Ong with Merriman Capital. Please go ahead.

Good afternoon, gentlemen. You may not have seen this press release, but Antech Systems just announced, after the close, a controlling interest of the Hong Kong base by an implant company called Kingston Technology. I just wanted to see -- are you familiar with this company? And, also some of the thoughts of how this could change your strategy on the solar implant acquisition that you made. Particularly with Antech having a pretty sizable installed base with their solar business.

It's Kevin. I'm not familiar with this company. I don't think it changes what we are doing one bit. In the implant field, early in this market, establishing this technology. I can tell you we're in discussion with many customers and they all believe we have a very competitive proposed product offering. So, no, I am not worried about it.

Can you share more color in terms of the timeline, as far as when you think you can have a product where you can start doing beta placing, any kind of color you can offer?

The earliest would be Q4 or most likely early 2012.

Okay. Just a quick update on your other solar product lines, the inspection tools?

Inspection tools, we have one base unit out there and as we mentioned in previous conference calls, the concern we've had is the majority of the market is overseas. We just heard that the commerce and state departments are going license our product so we can sell it overseas. This is very positive news for us and now it stands to our business development people to get those orders.

Thank you very much, gentlemen.

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

Good afternoon. Just a couple of questions. First, I was interested in your comment that you thought you would have $20 million to $30 million from new products in 2011 which is more than I was expecting. Jeff, can you give me a sense of how many tools that is -- is that the right way to think about it? Or, maybe even among the different areas whether it's solar or even a semiconductor product -- where do you expect those revenues to come from?

So, for starts, it's going to -- it includes our solar products as well as our semiconductor products. There's an assumption in there -- the tools, the six tools, there's an assumption in there that we talked about the range with the expansion of the customer, so that could be three or four orders. How many revenue in the quarter is probably the biggest range between the high and the low. We have some inspection, semiconductors and, of course, we have other tool in backlog for a crystalline silicon customers, as well. But, it would require at the high end, getting some new additional backlog, obviously, in addition to the six customer.

Okay. And, then, to the revenue recognition perspective, you would probably be able to recognize on shipments at some point in the year, if you were to hit the high-end tool number right?

It will depend on the configuration of the tools for each customers. So, we typically would like to do at least two or three installations before we can consider them as perfunctory and then take revenue on them. So, most of these will be driven by the acceptance, which could also have an impact, as well, on the revenue, at the end of the year.

Okay. And, then, back to the drive side, the industry forecast, even for the drive guys themselves, for 2011, is really kind of based on current conditions. When Intel's really talking about much higher PC units, as an example, for the year. I was wondering, your supply chain, are you geared for a pretty significant ramp if it was to materialize in the September quarter, for example?

This is Kevin here. In 2010, we demonstrated our ability to go from standstill to delivering most of our systems over a very short period of time. So, we have a very agile operations group here.

Okay, then, the last question, should we assume that the majority of the incremental OpEx is tied to the acquisition, or for the year, how much would you expect the acquisition to actually be pushing up your OpEx?

The easiest thing to point out is being incremental to our operating model that we have used before and it'll be, probably in the range of $6 million for the year.

Okay. Thanks. Thank you very much.

Our next question comes from Mark Miller with Noble Capital. Please go ahead.

In your projections of 8 to 16 lean tools for this year, does that incorporate the four that you just shipped?I think there's two more in backlog or was that in addition to those?

It incorporates the four that were shipped in the fourth quarter but not the backlog.

And, you're not shipping any this quarter. Is that backlog now pushed out? Can you tell us when is that is going to be second quarter or beyond?

Perhaps we should clarify there. Maybe, just to be clear, the 8 to 16 range includes our assumption for the last four tools we shipped, addressing some of the capacity needs. So, now the two in backlog, we're not going to give you specific guidance but certainly it will be Q2 or Q3, we expect.

So, those two in backlog are part of that eight to 16 tools.

In terms of orders -- are talking just 2 to 10? Is that correct or am I off?

No, we're talking 6 to 14.

6 to 14 potential orders.

Right. Do we make ourselves clear?

Yes. Just curious, too, about the Photonics margins. They actually went down and I'm just wondering -- I guess I was expecting, from earlier comments, that they would trend higher this year and you mentioned there was some contractual, how the contract to set up, your margins were fixed and I am just wondering for the future.

For the future, I said if we took out the impact of some of our final milestones contracts, which had lower margins than we expected at the beginning of the contract. You take those out, we would have been about flat on the prior quarter and, with the mix changing more towards products, we would see those increasing year-over-year, as a percentage.

And, you are projecting for 2011 the Photonics revenues will be flat, and that principally due to research contracts being lower as production comes up?

I think it's being driven in the early part of the year by this delay in the defense budget. Where some of the contracts that we were expecting in the first quarter are going to be delayed a quarter and with this type of program, you can't make it up because they're multi-month programs and sometimes cross years and, so, the revenue would dip down and then come back up on that. It's kind of the impact we are seeing in the first half of the year.

These are research technology development contracts or production?

Research and development contracts.

They're development contracts.

Okay, thank you.

I'm not showing any other questions in the queue at this time. I'd like to turn it back over for closing comments.

Thank you for joining us today and we look forward to updating you on our next call on our first quarter results, and, goodbye.

Thank you. Ladies and gentlemen this does conclude your conference. You may now disconnect.