Intevac Inc (IVAC) 2011 Q1 法說會逐字稿

Good day and welcome to Intevac's first quarter 2011 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and Instructions will be given at that time. (Operator Instructions) Please note that this conference call is being recorded today, May 2, 2011. At this time I would like to turn the call over to Claire McAdams Intevac's Investor Relations Council.

Thank you and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the first quarter of 2011, which ended on April 2. In addition to outlining the Company's financial results, we will provide guidance for the second quarter. 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'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 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 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 call.

I'll now turn the call over to Kevin Fairbairn Kevin?

Thank you. Good afternoon and thank you for joining us today.

Our first quarter revenues were $17.4 million and our net loss per share was $0.31, both ahead of our guidance. We did not recognized revenue on any 200 Lean systems in the quarter. We had two 200 Lean's in backlog at the end of Q1 and recently announced a new capacity order which we expect to ship midyear.

Today I will provide an overview of the hard drive business and update you on the progress we are making on our equipment diversification strategy, Joe will provide an update on our Photonics business and Jeff will discuss our financial results and guidance for the second quarter.

These are certainly interesting times in the hard drive industry, After years of steady consolidation, we are approaching the final end-states. We see this consolidation as a long time positive for the industry, consumers and Intevac, as I will explain later. However, as you would expect, this is causing some short-term uncertainties and an increased level of prudence regarding capacity additions. This near-term uncertainty has been compounded by concerns over demand, the hiccup in the PC supply chain due to the Intel chip issues in early Q1, and then the tragic Japanese earthquake with it's potential impact on the technology related supply chain.

As a result, we are seeing a big divergence amongst analysts and companies over anticipated year-over-year hard drive growth. From slight growth, at the low end to 10% at the high end. This divergence results in a wide range of outcomes for the fourth quarter peak-to-peak hard drive units. From the potential low of 170 million drives to 200 million drives at the high end. Which is the primary metric driving capacity additions and therefore our own media process equipment business.

As a result, our visibility in the hard drive business is considerably less clear than we would expect at this time of the year when we would typically have booked a majority of system orders or have a clear view of the timing of expected orders, which has not occurred this year due to the current state of flux. We believe that this has led to our customers being more cautious towards the timing of their next capacity additions, pending the outcome of their integration planning for the recently announced acquisitions.

At the low end of the range, the industry may have their media capacity requirements covered with the installed base and current industry backlog. At the high level of forecasted growth we estimate the industry would need incremental systems or be in a situation similar to the fourth quarter of 2009, where they were not able to meet all product demand. Because of this increase in uncertainty, we will not be some providing full annual guidance until we are in a better position to estimate the outlook for the second half of the year.

As we look at the longer-term, we are encouraged by the evolving industry dynamics and ongoing storage drivers for growth in the hard drive industry. The annual digital storage growth rate has been growing greater than 50% whilst the aerial density growing is slowing from about 40% in recent years to the 30% range, which suggests the underlying growth in hard drive unit should be double-digits.

The consolidation of the industry bodes well for the resulting larger companies to fund the development and production deployment of the new media technologies required to continue to lower the cost of digital storage and keep the hard drive industry competitive. We have developed and shipped product solutions for the two next generations of magnetic media, heat assisted recording and pattern media. These solutions are already in our customers development facilities. We believe we continue to be the equipment technology leader for new media technologies.

The pending acquisitions provide us with the opportunity for significant market share gains within the hard drive industry. And believe we are well positioned to succeed in increasing our share. We estimate that we will have system market share leadership in the installed base of the eventual two largest vertically integrated companies. Assuming these two companies complete their acquisitions, we expect their next up will be to focus on operational alignment which will present us with business opportunities given our fast and flexible operational model to respond to their capacity and upgrade needs. In conclusion, we remain optimistic about the growth prospects for our hard drive business after this period of near-term uncertainty.

Now I'll summarize our progress on our equipment diversification strategy. We are targeting the photovoltaic and solar cell markets with our Lean solar system. This system addresses the industries requirement for very high throughput platforms with a vacuum processors needed to support increased cell conversion efficiencies for both crystalline, silicon and thin-film fixed. We shipped our first Lean solar system for crystalline silicon application in April. This is a major milestone for us. This first silicone system is designed to deposit three separate films and can process either side of the cell. Last year we shipped our first six Lean solar system and we are continuing to work closely with our customer on the final qualification of the system. The system is producing cells and we expect our customer to increase capacity in late 2011.

We believe the solar market represents a very large opportunity for us, as the traditional cell manufacturing methods are replaced with vacuum processors that can improve the solar cell conversion efficiencies and thus lower the cost of solar generated electricity.

Cost is the key driver to the ongoing growth of the solar industry. To date the industry's growth has been driven primarily by government subsidies, which has helped the industry grow by more than tenfold over the last five years. This growth has enabled photovoltaic cell manufacturers to lower their prices to a point approaching the levels where subsidies are no longer required to compete with some of the traditional methods of electricity generation. Cost reductions over the last 35 years have been driven by volume where costs have followed a solar Moore's Law curve of 22% reduction for each doubling of cumulative outputs. The next wave of cost reductions that will enable group parity will be driven by improvements in cell conversion efficiency.

Vacuum processing has been shown to improve these conversion efficiencies. There's nothing new about these vacuum processors. But some of the technology had been initially demonstrated as early as the late 1950's. For example, William Shockley of Bell Labs gained the first patent for using ion implants in masks in 1957 for producing a PN junction, which is the basic of a silicon solar cell.

When the initial solar cell industry took off 35 years ago, there was no readily available commercial vacuum processing equipment. So the early solar manufacturers had to utilize atmospheric furnaces and work chemistry for processing cells. Which are still used today to manufacture the majority of solar cells currently in the market.

Over this time period, a very large vacuum based processing equipment industry developed, mainly focused on the semiconductor and display industries. This equipment has much lower throughput than what is needed for solar cell manufacturing. Making it very expensive relative to their needs for low cost, high throughput solutions. It is this need that Intevac is addressing with their Lean Solar product line, which is based upon a simple, high productivity platform with a suite of innovative, cost effective process solutions, tailored to enable higher cell efficiencies and lower processing costs.

We have developed the deposition modules for metals and transparent conductive oxides and are now developing edge and ion implant process modules to complete our product offerings. Our development programs are progressing as planned, with the goal of completing these modules by the end of 2011 through early 2012. We are working very closely with leading cell manufacturers to ensure our products meet the industry's needs.

In 2011, we are focused on completing the product development and initial product qualifications for 2012 expected to be the year of ramping revenues once these products meet qualification. We continue to estimate that the cell development market will be $1 billion in 2013 increasing to $3 billion in 2015.

We are also addressing the solar markets need for solar cell inspection and process monitoring with our Nanovista photoluminescence inspection system. This system is based upon our unique lowlight camera technology developed in our Photonics business. The Nanovista produces a conversion efficiency map for each cell, highlighting defects in the cell pre and post-processing, which can be used to improve quality and reduce costs. We continue to refine the product in conjunction with our customers and expect to ship additional systems later this quarter.

I'll now turn the call over to Joe Pietras to provide a further update on our Photonics business. Joe?

Thank you, Kevin. Intevac Photonics revenues were $7.2 million, and as expected declined from the fourth quarter due to two factors. First, we completed several development contracts in the first quarter that will now begin to transition to initial phases of production. And second, the delay in the approval of a defense project postponed the release of contract funding for several large, new programs, which we now expect to see within the next three to four months. That being said, in the first quarter we achieved record product revenues of $5.3 million, which comprised 73% of Photonics revenues. As we continue the execution of our strategy to migrate the business from primarily contract R&D based to a product-driven business.

In our digital night vision business, we delivered a record number of camera modules during the quarter to our NATO customer, as they continue their field deployment to additional troops. In first quarter, we improved our sensor yields, lowering the overall cost per unit, as compared to the fourth quarter and expect to continue this progress as we increase delivery volumes during the remainder of this year.

In the US night vision market, we completed two successful field demonstrations of the night vision camera that we are developing for the Apache helicopter. As a result, we received additional funding to complete the qualification of the camera and are on track to receive funding for the manufacturing start-up phase in late 2011. Low volume production is expected to begin in late 2012. This represents a $32 million opportunity in the first three years of volume production. We continue to pursue opportunities in ground soldier applications for US special operations. One of our key customers was awarded a contract to develop a night vision binocular that will utilize our industry-leading digital night vision Sensor. The development and low rate procurement phase for the special operations application are scheduled to occur over the next few years.

During the quarter, we were also awarded a contract to develop a night port based helmet-mounted fused binoculars system that incorporates our digital night vision sensor with a thermal sensor for use in fixed wing avionic applications. This is our first binoculars system for a fixed wing avionics application, which we are developing for a leading defense contractor in this market.

In the first quarter, we again shipped a record number of our LIVAR cameras. These cameras are being deployed for a major defense contractor on a long-range target avionic application. We expect to receive the final release of funding in the second quarter against the $7 million follow-on order, which will provide for deliveries extending into early 2012. As we continue to make progress towards achieving our estimated $45 million in the LIVAR opportunity over the next 10 years.

In our hand-held Raman Instruments business, our focus continues to be on opportunities in the chemical, biological and explosive detection market for both the domestic and foreign military markets. We continue to develop our standoff Raman detection systems, where we believe we have a technology advantage over other hand held devices in this market. I will now turn the call over to Jeff to discuss our financial results and outlook. Jeff?

Thank you, Joe. Consolidated first quarter revenues totaled $17.4 million exceeding our guidance of $13.5 million to $16.5 million. Equipment revenue totaled $10.2 million and did not include any 200 Lean systems recognized in the quarter. Photonic sales of $7.2 million consisted of $5.3 million in product shipments and $1.9 million of contract research and development.

Q1 consolidated gross margin of 36.6% was slightly below our guidance. Equipment gross margin of 45.3% was slightly lower than the fourth quarter, due primarily to lower factory utilization. Photonics gross margin of 24.5% improved from the fourth quarter, reflecting the higher mix of product shipments and improved manufacturing costs on our digital night vision camera module. Q1 operating expenses were $15.9 million, slightly above our guidance and reflect the increased level of investment related to the development of our new equipment products for the photovoltaic market.

Our Q1 net loss was $7 million or $0.31 per share. The net loss included $962,000 of stock based compensation, equivalent $0.03 per share.

Our backlog was $41.7 million at quarter end, and included two 200 Lean's and two Lean Solar systems. Our 200 Lean backlog has increased to three systems since our quarter end.

I will now discuss the balance sheet. We ended the quarter with cash and investments of $128.4 million, or approximately $5.63 per share. The decline from the fourth quarter was due primarily to the payment of our variable compensation programs in the first-quarter. Capital expenditures totaled $2.6 million and depreciation and amortization totaled $1.4 million for the quarter.

I'll now provide guidance for the second quarter of 2011. We are projecting consolidated Q2 revenues of $21 million to $26.5 million, which includes two to three 200 Lean's and no Solar systems recognized in the quarter. We expect second quarter gross margins to remain essentially flat and be in the range of 37.5% to 38%. Operating expenses are expected to be in the range of $15.5 million to $16 million, approximately flat to Q1. These operating expenses do not include any adjustments to the fair value estimates of contingent consideration payments related to our recent acquisition. Other income will be approximately $200,000 and excludes any impact with changes to the valuation of our investments or foreign exchange.

For Q2 we are projecting a net loss in the range of $0.19 to $0.24 per share. As Kevin discussed earlier, the visibility for our hard drive business remains limited. And as a result, we will not be providing annual guidance on this call. That being said, we continue to expect revenue from equipment service and upgrades to be in the range of $30 million to $35 million, and Photonics revenues to be roughly flat year-over-year. At this point we see revenues from new products in the range of $10 million to $15 million, because of shifts in timings of our customers capacity expansions and the timing of revenue recognition.

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

(Operator Instructions) Richard Kugele, Needham & Co.

Thank you, good afternoon. Just a few questions. Jeff, first if you could get into a little bit more detail about the R&D? Going forward, do you think that this quarter represents your go forward rate? Or do you think that you'll need to continue to invest incrementally over the next few quarters?

I think this quarter is probably the going rate, for at least another quarter. And then I think we'll see some modulation down in the second half.

Oh going down okay. In terms of Photonics, since your now expecting it to be flat year over year, would you still expect it to be breakeven for the year? Or should we expect a loss in that business?

We've targeted a $8.5 million dollars a quarter as our breakeven. So flat that's about the range. So breakeven to maybe slightly positive.

Okay. And as you have discussions with some of the Companies who have gone and bought others and drive land, do you anticipate any changes to their previous purchasing preferences? Or do you think that opportunities with some of these guys are more for next generation tools?

Hi Richard this is Kevin here. I think in one customers case, obviously we hope to continue with their previous pattern. The other big customer would now have a majority of our systems in their total install base. And given the IBM technology legacy, in terms of being an innovator, we would hope a lot of that media technology that's been developed on our tools will now be bought as production systems moving forward.

Okay then. Just lastly, given the uncertainty that's out there and your utilization, do you think that there's any restructuring that's necessary over the next few quarters? Or are you just expecting business to come back later in the year and it would be too distracting or inappropriate to do so?

Richard, it's Kevin here. So the business is still fundamentally at the restructured level from 2 years ago. And so apart from some incremental spending related to iron implant acquisitions in the solar space, we're continuing to run very lean. We do believe that if this year turns out to be like 2009, there will be a snap back in terms of capacity orders in 2012. So that's our current view of the market.

Okay, great, thank you very much.

Mark Millar, Noble Financial Capital.

Good afternoon. I'm just trying to break down a little that more in terms of granularity in terms of the proposed consolidation moves in the industry. I believe Samsung sources most of its media from Shoden Co and you are a supplier of equivalent to them, is that correct?

Well we don't normally talk about our customers, but that particular customer does have our legacy tools. As to Fuji's business, I believe that they supply both Samsung and Seagate. And I'm not sure that the majority of Samsung's business goes of Shoden Co.

Okay. And I guess would the Western Digital acquisition of Hitachi be in a net opportunity or a liability for you?

We see it as a very positive opportunity.

Okay thank you.

(Operator Instructions) Bill Ong, Merriman Capital.

Yes, hi, good afternoon, gentlemen. Just an additional follow-up on the R&D. Can you maybe talk about the R&D allocation strategy, just given the consolidation we're seeing in the disk drive industry? Could you did in fact-- you did have a meaningful investment in the semiconductor industry, which due to changes in market didn't get realized. So how would you manage all the investment risk in solar? And what type of base level investment do you expect to have in the disk drive and the Photonics industry, over the longer term?

Hi, Bill, it's Jeff. Maybe I'll answer the question around disk drive. I think when you look at our OpEx, I would say that, that's kind of in the 15% range of our OpEx. Maybe a little bit higher than that. I'd say that we always invest in new products in our R&D. And the business model that we had talked about previously, last year, the only real reason we're off of that now is really related to our incremental investments above that model, related to our ion implant investments. Which is going to take -- it's pulling us off probably in the neighborhood of $6 million to $8 million. From our model. But then that's also so we can address an opportunity out 3 or 4 years. It's going to be in excess of $0.5 billion market.

So, Bill, in Photonics, obviously the majority of the development money comes from the government. Our R&D spending there is to generate our own IT for patent protection. And that model will continue. So the R&D spending there is a much smaller percentage. And the biggest proportion of our spending this year is around our entry into the solar market. Unlike the semiconductor activity a few years ago, we're engage with a lot more customers. We've obviously shipped systems and we see a very significant opportunity there.

That sounds like -- so maybe another way of saying it you do have sufficient cash. The $76 million and change to be able to fund the solar industry as a grows, gets through it's early infancy stage. So it sounds you'd be able to make your commitment over the next several years out as it starts to mature. Is that a fair way of capitalizing it?

Yes. We don't see that we're going to be starved for capital to expand that business. As you know, we have a very short lead time and fast operational model. Which can help us turn system around very system very quickly and get back cash to invest in incremental production capabilities.

Thanks so much gentlemen.

Thanks, Bill.

(Operator Instructions) There are no further questions at this time. I will now turn the call back over to Kevin Fairbairn.

Well thank you for joining us today. We look forward to updating you on our next call on the second quarter results. Goodbye.

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